Börsiteade

Pealkiri

2012 IV quarter and 12 months consolidated interim report (unaudited)

Teade

Nordecon AS publishes its 2012 IV quarter and 12 months consolidated interim
report (unaudited) 

Tallinn, Estonia, 2013-02-13 15:30 CET (GLOBE NEWSWIRE) --
Announcement includes Nordecon AS’s consolidated financial statements for the
fourth quarter and twelve months of 2012, overview of the key events
influencing the period’s financial result, outlook for the market and
description of the main risks. 

Interim report is attached to the announcement and is also published on NASDAQ
OMX Tallinn and Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/financial-reports/interim-reports)
. 

Period’s investor presentation are attached to the announcement and are also
published on Nordecon’s web page
(http://www.nordecon.com/root/en/for-investor/investor-presentations). 



Condensed consolidated interim statement of financial position

EUR '000                                                      2012     2011
As at 31 December                                                          
---------------------------------------------------------------------------
---------------------------------------------------------------------------
ASSETS                                                                     
Current assets                                                             
Cash and cash equivalents                                   10,231    9,908
Trade and other receivables                                 44,133   34,645
Prepayments                                                  1,840    2,610
Inventories                                                 26,235   24,120
Non-current assets held for sale                                 0      242
Total current assets                                        82,439   71,525
Non-current assets                                                         
Investments in equity-accounted investees                      202      199
Other investments                                               26       26
Trade and other receivables                                    503    2,504
Investment property                                          4,930    4,930
Property, plant and equipment                                8,851    7,437
Intangible assets                                           14,857   14,960
Total non-current assets                                    29,369   30,056
TOTAL ASSETS                                               111,808  101,581
                                                                           
LIABILITIES                                                                
Current liabilities                                                        
Loans and borrowings                                        27,185   19,130
Trade payables                                              32,134   27,403
Other payables                                               5,022    4,930
Deferred income                                             11,404   10,587
Provisions                                                     521      485
Total current liabilities                                   76,266   62,535
Non-current liabilities                                                    
Loans and borrowings                                         3,671    9,513
Trade payables                                                 259      199
Other payables                                                  96       96
Provisions                                                   1,210      841
Total non-current liabilities                                5,236   10,649
TOTAL LIABILITIES                                           81,502   73,184
                                                                           
EQUITY                                                                     
Share capital                                               19,657   19,657
Statutory capital reserve                                    2,554    2,554
Translation reserve                                           -404     -463
Retained earnings                                            6,042    4,563
Total equity attributable to equity holders of the parent   27,849   26,311
Non-controlling interests                                    2,457    2,086
TOTAL EQUITY                                                30,306   28,397
TOTAL LIABILITIES AND EQUITY                               111,808  101,581



Condensed consolidated interim statement of comprehensive income

EUR '000                                    Q4 2012  Q4 2011  12M 2012  12M 2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                      42,554   44,542   159,608   147,802
Cost of sales                               -40,358  -43,630  -151,386  -147,608
Gross profit                                  2,196      912     8,222       194
                                                                                
Marketing and distribution expenses            -136      -79      -389      -317
Administrative expenses                      -1,444   -1,357    -5,385    -4,641
Other operating income                          190       60       810       806
Other operating expenses                       -220     -521      -566      -672
Operating profit/loss                           586     -986     2,692    -4,630
                                                                                
Finance income                                  163      444       622       938
Finance costs                                  -576     -202    -1,248    -1,086
Net finance costs                              -413      242      -626      -148
                                                                                
Share of profit/loss of equity-accounted       -218       -4       -79       100
 investees                                                                      
                                                                                
Profit/loss before income tax                   -45     -748     1,987    -4,678
Income tax expense                              -12      -14       -56       -30
Profit/loss for the period                      -57     -762     1,931    -4,708
                                                                                
Other comprehensive income/expense:                                             
Exchange differences on translating              57     -484        59      -329
 foreign operations                                                             
Total other comprehensive income/expense         57     -484        59      -329
 for the period                                                                 
TOTAL COMPREHENSIVE INCOME/EXPENSE FOR THE        0   -1,246     1,990    -5,037
 PERIOD                                                                         
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                         -151   -1,147     1,479    -5,304
- Non-controlling interests                      94      385       452       596
Profit/loss for the period                      -57     -762     1,931    -4,708
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                          -94   -1,865     1,538    -5,924
- Non-controlling interests                      94      619       452       887
Total comprehensive income/expense                0   -1,246     1,990    -5,037
                                                                                
Earnings per share attributable to owners                                       
 of the parent:                                                                 
Basic earnings per share (EUR)                 0.00    -0.04      0.05     -0.17
Diluted earnings per share (EUR)               0.00    -0.04      0.05     -0.17



Condensed consolidated interim statement of cash flows

EUR '000                                                      12M 2012  12M 2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                  193,524   185,147
Cash paid to suppliers2                                       -161,447  -160,805
VAT paid                                                        -6,192    -2,384
Cash paid to and for employees                                 -16,888   -13,476
Income tax paid/recovered                                          -56        41
Net cash from operating activities                               8,941     8,523
                                                                                
Cash flows from investing activities                                            
Acquisition of property, plant and equipment                    -1,792       -58
Proceeds from sale of property, plant and equipment and            379       340
 intangible assets                                                              
Loans granted                                                   -1,709      -213
Repayment of loans granted                                         399     1,745
Dividends received                                                   0         4
Interest received                                                   18       204
Net cash used in/from investing activities                      -2,705     2,022
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                     3,190     1,925
Repayment of loans received                                     -5,950    -4,907
Dividends paid                                                     -80         0
Payment of finance lease liabilities                            -1,967    -1,921
Interest paid                                                   -1,106    -1,089
Other payments                                                       0        -4
Net cash used in financing activities                           -5,913    -5,996
                                                                                
Net cash flow                                                      323     4,549
                                                                                
Cash and cash equivalents at beginning of period                 9,908     5,818
Effect of exchange rate fluctuations                                 0      -459
Increase  in cash and cash equivalents                             323     4,549
Cash and cash equivalents at end of period                      10,231     9,908

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

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



Financial review

Financial performance

Nordecon Group’s unaudited gross profit for 2012 was 8,222 thousand euros
(2011: 194 thousand euros). The upswing in gross profit and gross margin (2012:
5.2% compared with 2011: 0.1%) was underpinned by the absence of
loss-generating contracts, which weakened our performance in 2011. 

The key factors that helped improve the margins were Group-wide austerity
measures enforced in 2010 in response to market slump and internal
restructuring and streamlining. Although volume growth, which emerged in 2011,
has clearly improved the situation in the Estonian construction market, we will
have sustain our efforts to maintain and enhance the results achieved. It
should be kept in mind that the profits of long-term construction contracts are
earned based on the stage of completion of contract activity, which means that
profit is recorded gradually over the contract term. 

The rise in profitability was facilitated by changes in the external
environment. Thanks to the investments made by the public sector as well as the
private sector whose activity increased notably in 2012, the Estonian
construction market sustained growth through the year. At the same time, the
prices of construction inputs and subcontracting services remained relatively
stable. The combination of those factors created a sound basis for a rise in
construction contracts’ average profit margin.  Although competition in the
construction market continues to be fierce, in certain segments (e.g. road
construction and construction of water and wastewater networks) the number of
players has stabilised, alleviating pressure on the bidders’ profit margins.
Unfortunately, there is still no indication of a decrease in competitive
pricing pressure in building construction, where lack of private sector
customers has rendered the market too small for all general contractors.
Nordecon continues to acknowledge the fact that long-term construction
contracts involve the risk of growth in input prices and remains committed to
prioritizing the profitability of contracts secured over increasing or
maintaining the revenue figures. 

Administrative expenses for 2012 totalled 5,385 thousand euros (2011: 4,641
thousand euros). The figure for 2012 includes non-recurring consulting fees
incurred for adjusting the Group’s operating and financial strategy in the
changing environment and the provisions made for performance bonuses. The ratio
of administrative expenses to revenue was 3.4% (2011: 3.1%). Our cost-control
measures continue to yield strong results allowing us to maintain
administrative expenses below the target ceiling, i.e. 5% of revenue. 

The Group’s operating profit for 2012 was 2,692 thousand euros (2011: an
operating loss of 4,630 thousand euros). EBITDA was positive at 4,837 thousand
euros (2011: negative at 1,819 thousand euros). 

The Group ended the year with a net profit of 1,931 thousand euros (2011: a net
loss of 4,708 thousand euros). The profit attributable to owners of the parent,
Nordecon AS, was 1,479 thousand euros (2011: a loss of 5,304 thousand euros). 

Cash flows

Operating activities generated a net cash inflow of 8,941 thousand euros (2011:
8,523 thousand euros). Operating cash flow was strongly influenced by cyclical
fluctuations in project-related cash flows. The settlement terms granted to
customers are unreasonably long and in the case of public procurement generally
extend from 45 to 100 days while subcontractors ordinarily have to be paid
within 21 to 45 days. In 2012 the difference between the settlement terms
agreed with customers and those agreed with subcontractors continued to
increase. We counteract the mismatch between cash inflows and outflows with
factoring and overdraft facilities for meeting working capital requirements. 

VAT and labour-related payments grew. In 2012, a significant amount of building
materials was purchased from abroad without the possibility to recover input
VAT but on the sale of services in Estonia VAT had to be paid. The sum of VAT
payments was also influenced by the fact that we generated considerably more
gross profit. In 2011, completion of loss-making contracts resulted in prepaid
VAT, which was used, among other things, to offset labour tax liabilities. In
2012 we did not have such offsetting opportunities. Moreover, labour related
payments increased because of performance pay, which was introduced thanks to
generation of profit. 

Cash flows from investing activities resulted in a net outflow of 2,705
thousand euros (2011: a net inflow of 2,022 thousand euros). The main reasons
for the net outflow were loans to associates including a loan given for
privatising the plot of a real estate project in Ukraine. Payments for
property, plant and equipment (including a new and more productive asphalt
plant acquired through a sale and leaseback transaction) accounted for a
similar proportion as loans granted. In the comparative period, net cash flow
was positive on account of settlement of loans granted. 

Financing activities resulted in a net cash outflow of 5,913 thousand euros
(2011: a net outflow of 5,996 thousand euros). The net amount of loan receipts
and repayments was negative at 2,760 thousand euros (2011: negative at 2,982
thousand euros). The volume of loans received was increased by the acquisition
of a new asphalt plant through a sale and leaseback transaction. Dividends paid
comprise profit distributions to a subsidiary’s non-controlling shareholders. 

At 31 December 2012, the Group’s cash and cash equivalents totalled 10,231
thousand euros (31 December 2011: 9,908 thousand euros).  Management’s comments
on potential liquidity risks are presented in the chapter Description of the
main risks. 



Key financial figures and ratios

Figure/ratio                                    12M 2012    12M 2011    12M 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue (EUR’000)                                159,608     147,802      99,312
Revenue growth/decrease, %                          8.0%       48.8%      -35.8%
Net profit/loss (EUR’000)                          1,931      -4,708     -12,738
Profit/loss attributable to owners of the          1,479      -5,304     -11,810
 parent (EUR’000)                                                               
Weighted average number of shares             30,756,728  30,756,728  30,756,728
Earnings per share (EUR)                            0.05       -0.17       -0.38
                                                                                
Administrative expenses to revenue, %               3.4%        3.1%        4.9%
Administrative expenses to revenue (rolling)        3.4%        3.1%        4.9%
                                                                                
EBITDA (EUR’000)                                   4,837      -1,819      -5,375
EBITDA margin, %                                    3.0%       -1.2%       -5.4%
Gross margin, %                                     5.2%        0.1%       -0.7%
Operating margin, %                                 1.7%       -3.1%       -9.0%
Operating margin excluding gains on asset           1.4%       -3.5%       -9.4%
 sales, %                                                                       
Net margin, %                                       1.2%       -3.2%      -12.8%
Return on invested capital, %                       5.2%       -5.9%      -15.8%
Return on equity, %                                 6.6%      -15.2%      -32.6%
Equity ratio, %                                    27.1%       28.0%       35.1%
Gearing, %                                         33.7%       32.8%       42.3%
Current ratio                                       1.08        1.14        1.39
                                                                                
As at 31 December                                   2012        2011        2010
--------------------------------------------------------------------------------
Order book (EUR’000)                             127,259     134,043      85,607
--------------------------------------------------------------------------------



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



Performance by geographical market

In 2012, roughly 2% of the Group’s revenue was generated outside Estonia. In
2011, foreign operations accounted for 3% of the Group’s revenue. 

         12M 2012  12M 2011  12M 2010
-------------------------------------
-------------------------------------
Estonia       98%       97%       94%
Ukraine        0%        0%        2%
Belarus        0%        1%        3%
Finland        2%        2%        1%

The decline in foreign revenues results from discontinuance of operations in
Belarus (see also the chapter Changes in the Group’s business operations in the
reporting period). Finnish revenues comprise revenue from concrete works. We
expect the contribution of foreign markets to remain at a similar level in
2013. 

Geographical diversification of the revenue base has been a consciously
deployed strategy by which the Group mitigates the risks resulting from
excessive reliance on a single market. Although in the long term our strategy
foresees increasing foreign operations, in the short term the Group will focus
on the Estonian market and seizing opportunities in an environment that it
knows best and which entails fewer known market risks. The Group’s vision of
the future of its foreign operations is described in the chapter Outlooks of
the Group’s geographical markets. 



Performance by business line

The core business of Nordecon Group is general contracting and project
management in the field of building and infrastructure construction. The Group
is involved in the construction of commercial and industrial buildings and
facilities, road construction and maintenance, environmental engineering,
concrete works and real estate development. 

The Group’s unaudited revenue for 2012 was 159,608 thousand euros, 8% up on the
147,802 thousand euros generated in 2011. The foundation for revenue growth was
laid in 2011 when the Estonian construction market began recovering and the
Group secured a number of major new contracts lasting for over 12 months. The
first half of 2012 was also successful in terms of winning new contracts. 

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

Segment revenue

In 2012, the revenues of our Infrastructure segment were expectedly larger than
those of our Buildings segment, the unaudited figures for the two segments
being 89,184 thousand euros and 66,922 thousand euros respectively. The
corresponding figures for 2011 were 72,735 thousand euros and 70,357 thousand
euros (see note 8). Compared with 2011, the Infrastructure segment has
increased revenue, mostly in the road construction sub-segment. The revenues of
the Buildings segment have declined because most of the work under some major
public procurement contracts (e.g. the construction of the Exhibition Building
of the Estonian Maritime Museum) was done in 2011. 

For a long time, the bulk of the work in the construction market has been
related to infrastructure assets (mostly projects financed with the support of
the state and the EU structural funds) and a major proportion (65%) of
contracts in the Group’s order book belongs to the Infrastructure segment.
Despite this, in previous periods the segments’ revenues have been more or less
equal because building construction contracts have a shorter term than those of
infrastructure construction. Infrastructure contracts have a longer term (e.g.
road maintenance contracts) and their contribution to realised revenue is
therefore comparatively smaller. 

Revenue distribution between segments2  12M 2012  12M 2011  12M 2010
--------------------------------------------------------------------
--------------------------------------------------------------------
Buildings                                    42%       48%       48%
Infrastructure                               58%       52%       52%

2 In connection with the entry into force of IFRS 8 Operating Segments, the
Group has changed segment reporting in its financial statements. In Directors’
report the Ukrainian and Belarusian buildings segment and the EU buildings
segment, which are disclosed separately in the financial statements, are
presented as a single segment. In addition, the segment information presented
in Directors’ report does not include the disclosures on “other segments” that
are presented in the financial statements. 

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

Revenue distribution within segments

The Buildings segment continued to earn most of its revenue from the
construction of public buildings financed by the public sector although volumes
shrank compared with the previous year. In terms of work performed, the largest
projects of 2012 were the construction of the Ämari Air Base and the Estonian
embassy in Kiev. During the year, group entities built several family and care
home complexes across Estonia in the framework of the national social welfare
program. The largest ongoing construction project is the design and build of
the translational medicine centre of the University of Tartu. 

Improvements in the economic environment encouraged private sector investments
in the commercial buildings sub-segment. During the year, we began building
five new commercial buildings – three in Tallinn, one in Tartu and one in
Narva.  Although private sector investments grew visibly year over year, their
relative scarcity compared with public sector investments remains a problem for
the entire construction market. 

In the industrial and warehouse facilities sub-segment private sector
investments grew slightly but most of the revenue still resulted from contracts
performed for the agricultural sector. Compared with 2011, their contribution
declined because the support allocated from the EU structural funds that
co-finance the projects decreased. 

Apartment buildings were built for non-Group customers, the Group acting as a
general contractor, not a developer. 

Revenue distribution within the Buildings segment  12M 2012  12M 2011  12M 2010
-------------------------------------------------------------------------------
Commercial buildings                                    26%       12%       19%
Industrial and warehouse facilities                     35%       40%       36%
Public buildings                                        36%       45%       35%
Apartment buildings                                      3%        3%       10%



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

In specialist engineering, growth was underpinned by the construction of
Sillamäe port, which commenced in the second half of 2011, and Kärdla guest
harbour, which began in summer 2012. 

Similarly to previous years, a major share of the revenue of the Infrastructure
segment resulted from other engineering, i.e. the construction of water and
wastewater networks financed with the support of the EU structural funds across
Estonia. The sub-segment’s turnover remained stable but its contribution
dropped because the revenues of other sub-segments increased. 

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

Revenue distribution within the Infrastructure      12M 2012  12M 2011  12M 2010
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                        51%       47%       62%
Specialist engineering (including hydraulic              16%       10%        1%
 engineering)                                                                   
Other engineering                                        27%       35%       28%
Environmental engineering                                 6%        8%        9%



Order book

At 31 December 2012, our order book stood at 127,259 thousand euros, being 5%
smaller than a year ago. 

Partly, the order book has decreased in connection with the performance of
major contracts secured in 2011 (e.g. the design and build of the Aruvalla-Kose
road section and construction of berths at Sillamäe port). Addition of large
contracts is irregular. Initially new contracts increase the order book
considerably (positive impact on order book), but as they are performed, their
balance declines (negative impact on order book). 

Some of the decline may also be attributed to changes taking place in the
construction market. Due to market shrinkage, competition in the public
buildings sub-segment has intensified, reducing the proportion of such
contracts in our portfolio. 

On the other hand, we have been able to increase our order book in the
commercial and apartment buildings sub-segments (Buildings segment) and in
other engineering (construction of water and wastewater networks) and
environmental engineering sub-segments (Infrastructure segment). The order book
used to include the outstanding balance of the Tivoli housing development
project in Tallinn city centre of 12,814 thousand euros. On 4 February 2013,
Tivoli Arendus OÜ sent us a notice of termination of the contract, which in our
opinion is baseless. Accordingly, as at the date of release of this report
Nordecon AS considers the notice of termination unfounded and the contract
still effective. However, in light of the circumstances, we believe that it is
unlikely that construction work can continue under the same contract. 

As at 31 December        2012     2011    2010
----------------------------------------------
Order book (EUR’000)  127,259  134,043  85,607

At 65% the Infrastructure segment continues to account for a major share of the
total order book (31 December 2011: 80%). 

Between the reporting date (31 December 2012) and the date of release of this
report, Group companies have been awarded construction contracts of
approximately 3,108 thousand euros. 



People

Staff and personnel expenses

At the end of 2012, the Group (the parent and the subsidiaries) employed, on
average, 764 people including 367 engineers and technical personnel (ETP). In
connection with growth in the Group’s operating volumes, both the number ETP
and workers have increased year over year. 

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

               12M 2012  12M 2011  12M 2010
-------------------------------------------
-------------------------------------------
ETP                 367       351       362
Workers             397       380       412
Total average       764       731       774

The Group’s personnel expenses for 2012 including all taxes totalled 16,803
thousand euros, 18% up on 2011 when personnel expenses were 14,225 thousand
euros. The growth in personnel expenses is mainly attributable to performance
pay provided to project staff and recognition of provisions for performance
bonuses payable to our management and support staff. Selective salary increases
had less impact. 

The remuneration of the members of the council of Nordecon AS for 2012,
including social security charges, amounted to 256 thousand euros (2011: 92
thousand euros). The amount has increased in connection with the decision of
Nordecon AS’s annual general meeting to increase the council’s remuneration as
from 2012. The remuneration of the members of the board of Nordecon AS,
including social security charges, totalled 597 thousand euros (2011: 316
thousand euros). The figure includes the termination benefits paid to the
member of the board who left the Group in spring 2012. The remuneration
expenses of both the council and the board include the provisions made for
their performance bonuses, which are calculated based on the Group’s
consolidated financial results (in 2011 no bonus provisions were made). 

Labour productivity and labour cost efficiency

In 2012 nominal labour productivity grew by 3.3%, lagging somewhat behind
revenue growth (8%). Management has acknowledged this. Improving labour
productivity remains a priority and we see untapped resources in both general
and daily construction management (including IT development). Nominal labour
cost efficiency has decreased due to the provision of performance bonuses,
which were not paid in 2011. 

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



                                                    12M 2012  12M 2011  12M 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR’000)       208.9     202.3     128.3
Change against the comparative period, %                3.3%     57.7%     -6.3%
                                                                                
Nominal labour cost efficiency (rolling),                9.5      10.4       6.9
 (EUR’000)                                                                      
Change against the comparative period, %               -8.6%     51.6%      3.0%



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




Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2013 

  -- The bulk of construction work will be done in the infrastructure segment
     but the segment’s lead over building construction will diminish at an
     increasing pace. Private sector investments, which will grow compared with
     2012, will mostly be channelled into the buildings segment. Moreover, the
     public sector will contribute to building construction through two major
     contracts - the construction of a new main building for the Estonian
     National Museum and the Maarjamõisa medical campus for Tartu University
     Hospital. The turnover of the infrastructure segment, on the other hand,
     will be undermined by the depletion of funds allocated from the EU budget
     for the period 2007-2013.
  -- The construction market will remain disproportionately reliant on public
     procurement and projects executed with the support of the EU structural
     funds. In the last year of the EU budget period, the volume of new
     procurements will decrease because most funds have already been allocated. 
     Co-financing terms generally require that a project should be completed
     during the budget period. Thus, most of the remaining procurements will be
     announced in the first half of 2013. On the positive side, the EU
     multi-annual financial framework for 2014-2020 is ultimately being
     finalised. If swift and decisive action is taken, preparations for
     construction tenders to be announced in 2014 may already commence in the
     second half of 2013.
  -- The industry will see further consolidation, particularly in the field of
     general contracting in building construction where the number of
     medium-sized operators (annual turnover of around 15-40 million euros) is
     too large. Based on the past three years’ experience it is likely that
     stiff competition and insufficient demand will induce some general
     contractors to go slowly out of business rather than merge with another or
     exit from the market. We will see more and more frequently that three or
     four smaller players will form a consortium to bid for major procurement
     contracts, meet stringent tendering conditions and secure the required
     funding.

  -- Competition will intensify in all segments of the construction market. The
     average number of bidders for a contract has increased and there is already
     a notable gap between the lowest bids made by the winners and the average
     bids. The situation is somewhat similar to 2009 when anticipation of a fall
     in demand triggered a rapid fall in construction prices, which caused a
     decline in the prices of many construction inputs. However, currently the
     prices of construction inputs seem unaffected and companies that are
     banking on their decrease in the bidding phase may run into difficulty.
     Competition is exerting strong pressure on profit margins but many
     companies have learned from past mistakes and are trying to maintain their
     margins at least at the level of 2012.

  -- In new housing development, the success of a project will depend on the
     developer’s ability to control the input prices included in its business
     plan and thus to set an affordable sales price. The offering of new
     residential real estate cannot be significantly increased because the
     prices of new apartments are relatively high compared with the standard of
     living and the banks’ lending terms remain strict.  Developers that can
     create or find an unexploited niche are more likely to succeed.

  -- The contracts signed with public sector customers will continue to impose
     tough conditions, including extensive obligations, strict sanctions,
     different financial guarantees, extremely long settlement terms, etc.
     Contractors cannot implement more optimal solutions identified in the
     construction phase that would reduce the construction or operating costs of
     the procured asset without sanctions because procurement terms do not allow
     this. In a situation where public procurement is based on underbidding, the
     above factors increase the risks of all market participants.
  -- The prices of construction inputs will remain stable. Local subcontracting
     prices may decrease due to weakening demand but considering the
     subcontractors’ financial and human resources, the decline could not be
     substantial or long-lasting. In some areas, price fluctuations will
     continue to be unpredictable and notably greater and hard or even
     impossible to influence (petroleum and metal products, some materials and
     equipment). On the whole, input prices will remain at a level that
     constitutes a major obstacle to private customers’ investment decisions.
  -- The situation in the labour market will be relatively stable but not
     encouraging. There will be a shortage of qualified labour (including
     project and site managers). In 2013 there will not be any overall rise in
     the base wage paid by construction companies, which have to maintain tight
     cost control, but pressure for a wage increase will remain strong. Labour
     migration to the Nordic countries will remain steady and despite certain
     market shrinkage (particularly in Finland), the number of job seekers is
     not likely to increase.

Latvia and Lithuania

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

In the next few years we may undertake some projects in Latvia through our
Estonian entities, involving partners where necessary. Execution of
project-based business assumes that the projects can be performed profitably.
The decision does not change our strategy for the future, i.e. the objective of
operating in our neighbouring construction markets through local subsidiaries. 

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba
UAB. We are monitoring market developments and may resume our Lithuanian
operations in the coming years on a project basis. Temporary suspension of
operations does not cause any major costs for the Group and does not change our
strategy for the future, i.e. the objective of operating in the Lithuanian
construction market through local subsidiaries. 

Ukraine

The Group operates in Ukraine as a general contractor and project manager in
the segment of commercial buildings and production facilities, offering its
services primarily to foreign private sector customers. In the past three
years, there have been practically no private sector customers in that segment.
Regardless of this, we will continue our business in Ukraine in 2013. There are
some signs that investment activity in Ukraine may pick up in 2013 although the
economic and political risks do not allow us to expect any rapid changes. We
will monitor the situation in the Ukrainian construction market closely and
will be ready to carry out additional restructuring at the companies involved.
We will continue seeking opportunities for exiting the conserved real estate
projects or signing a construction contract with a potential new owner. 

Finland

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


Description of the main risks

Business risks

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

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

In the coming years, the Estonian construction market will be heavily dependent
on public sector investments. A significant proportion of those investments
will be funded with the assistance of the EU structural funds. The availability
of EU support is relatively certain until the end of the current budget period
(2007-2013). According to financing terms, a supported project has to be
completed by the end of the budget period. This means that in 2013 the number
of new projects will decrease significantly. We do not yet know the
expenditures of the EU financial framework for 2014-2020 that will be
designated for investments involving construction work. Although the amounts
allocated to Estonia under the cohesion policy programmes have increased, the
national priorities in utilising those amounts may have changed. However, the
planned investments will have a significant and direct impact on the business
volumes of construction companies. 

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

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

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

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

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



Operational risks

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
contracts are used. In addition, as a rule, subcontractors are required to
secure the performance of their obligations with a bank guarantee provided to a
Group company. To remedy builder-caused deficiencies, which may be detected
during the warranty period, Group companies create warranties provisions based
on their historical experience. At 31 December 2012, the Group’s warranties
provisions (including current and non-current ones) totalled 1,407 thousand
euros. At 31 December 2011, the corresponding figure was 1,192 thousand euros. 

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



Financial risks

Credit risk

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

In 2012, credit losses on the write-down of receivables totalled 239 thousand
euros (2011: gain on the reversal of prior write-downs totalled 8 thousand
euros). 

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

Liquidity risk

The Group remains exposed to higher than average liquidity risk resulting from
a mismatch between the long settlement terms demanded by customers (mostly 45
to 56 days but sometimes up to 100 days) and increasingly shorter settlement
terms negotiated by subcontractors (mostly 21 to 45 days). The Group
counteracts the differences in settlement terms by using factoring where
possible. 

The Group continued to work with the banks in implementing its financing
program for 2011-2014, which was developed with the assistance of one of the
world’s leading consulting firms, Roland Berger Strategy Consultants. In line
with the program, in 2012 the banks supported the Group’s liquidity position by
refinancing long-term loans and by granting repayment holidays for loan
principal. In addition, the banks granted the Group additional short-term
overdraft facilities of approximately 6.2 million euros for meeting working
capital requirements. The Group repaid the loans received under the financing
program by the year-end, which increases the probability that relevant limits
will be made available again in 2013.  We will begin negotiating the current
year’s financing program with the banks in the first quarter of the year. 

At 31 December 2012, the Group’s current assets exceeded its current
liabilities 1.08-fold (31 December 2011: 1.14-fold). Bank loans made up a
significant proportion of current liabilities. In accordance with IFRS EU, loan
commitments have to be classified into current and non-current liabilities
based on the contractual conditions effective at the reporting date. Although
management believes that it is likely that the Group’s overdraft liabilities
and other short-term bank loans will be refinanced for another 12 months,
relevant decisions will be made in 2013 when the loans fall due. Therefore, at
the reporting date the loan commitments constituted short-term liabilities.
According to the Group’s estimates, current liabilities include loans of 11,501
thousand euros that will probably be refinanced. If the items were reported as
long-term liabilities, the current ratio would be 1.27. 

At the reporting date, the Group’s cash and cash equivalents totalled 10,231
thousand euros (31 December 2011: 9,908 thousand euros). 

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating
interest rates. Finance lease liabilities have mainly floating interest rates.
The base rate for floating interest rates is mostly Euribor. At 31 December
2012, the Group’s interest-bearing loans and borrowings totalled 30,855
thousand euros, an increase of 2,213 thousand euros year over year. Interest
expense for 2012 amounted to 1,097 thousand euros. Compared with 2011, interest
expense increased by 104 thousand euros. The Group’s interest rate risk is
currently influenced by two factors: a rise in the base rate for floating
interest rates (Euribor/EONIA) and a low interest coverage ratio caused by
operating cash flow. The first risk factor is mitigated by fixing, where
possible, the interest rates of liabilities during the period of low market
interest rates. Realisation of the second risk factor depends on the success of
operating activities. 

The Group has not acquired any derivatives for hedging the risks arising from
instruments with a floating interest rate. 

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in
the currency of the host country, i.e. in euros (EUR) and in Ukrainian hryvnas
(UAH). From the beginning of 2012 the Group was not exposed to currency risks
related to the Belarusian ruble (BYR) because the Group then practically
discontinued its operations in Belarus. The exchange rate of the Ukrainian
hryvna against the euro has been stable since 2010. In 2012, fluctuations in
the euro-hryvna exchange rate remained below 10%. The Group’s net foreign
exchange loss for 2012 was 95 thousand euros (2011: a net foreign exchange gain
of 168 thousand euros). 

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

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



Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructures segment. Geographically the Group operates in Estonia, Ukraine
and Finland. The parent of the Group is Nordecon AS, a company registered and
located in Tallinn, Estonia. In addition to the parent company, there are more
than 10 subsidiaries in the Group. The consolidated revenue of the Group in
2011 was 147.8 million euros. Currently Nordecon Group employs more than 700
people. Since 18 May 2006 the company's shares have been quoted in the main
list of the NASDAQ OMX Tallinn Stock Exchange. 


         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: [email protected]
         www.nordecon.com