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Pealkiri

2014 first quarter consolidated interim report (unaudited)

Teade

Tallinn, Estonia, 2014-05-08 15:30 CEST (GLOBE NEWSWIRE) --
This announcement includes Nordecon AS’s consolidated financial statements for
the first quarter of 2014 (unaudited), overview of the key events influencing
the period’s financial result, outlook for the market and description of the
main risks. 

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

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



Condensed consolidated interim statement of financial position

EUR '000                                         31 March 2014  31 December 2013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                4,702            12,575
Trade and other receivables                             21,293            28,101
Prepayments                                              1,716             1,923
Inventories                                             23,464            23,785
Total current assets                                    51,175            66,384
Non-current assets                                                              
Investments in equity-accounted investees                  505               566
Other investments                                           26                26
Trade and other receivables                             10,765            10,645
Investment property                                      3,553             3,549
Property, plant and equipment                            9,146             9,030
Intangible assets                                       14,589            14,494
Total non-current assets                                38,584            38,310
TOTAL ASSETS                                            89,759           104,694
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    19,845            23,875
Trade payables                                          18,157            26,372
Other payables                                           6,043             7,982
Deferred income                                          6,029             6,102
Provisions                                                 751               913
Total current liabilities                               50,825            65,244
Non-current liabilities                                                         
Loans and borrowings                                     3,108             3,303
Trade payables                                             155               156
Other payables                                              96                96
Provisions                                               1,036               969
Total non-current liabilities                            4,395             4,524
TOTAL LIABILITIES                                       55,220            69,768
                                                                                
EQUITY                                                                          
Share capital                                           19,657            19,657
Statutory capital reserve                                2,554             2,554
Translation reserve                                        423              -298
Retained earnings                                        9,607            10,681
Total equity attributable to owners of the              32,241            32,594
 parent                                                                         
Non-controlling interests                                2,298             2,332
TOTAL EQUITY                                            34,539            34,926
TOTAL LIABILITIES AND EQUITY                            89,759           104,694



Condensed consolidated interim statement of comprehensive income

EUR '000                                              Q1 2014  Q1 2013      2013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                                23,544   27,081   173,651
Cost of sales                                         -22,374  -26,488  -162,342
Gross profit                                            1,170      593    11,309
                                                                                
Marketing and distribution expenses                      -249      -62      -452
Administrative expenses                                -1,124   -1,236    -4,922
Other operating income                                     65      200       464
Other operating expenses                                  -29      -37    -1,096
Operating profit/loss                                    -167     -542     5,303
                                                                                
Finance income                                            164      201       668
Finance costs                                            -961     -301    -1,027
Net finance costs                                        -797     -100      -359
                                                                                
Share of loss of equity-accounted investees               -61       -9      -170
                                                                                
Profit/loss before income tax                          -1,025     -651     4,774
Income tax expense                                         -1       -1      -135
Profit/loss for the period                             -1,026     -652     4,639
                                                                                
Other comprehensive income/expense                                              
Items that may be reclassified subsequently to                                  
 profit or loss                                                                 
Exchange differences on translating foreign               721      -53       106
 operations                                                                     
Total other comprehensive income/expense                  721      -53       106
TOTAL COMPREHENSIVE INCOME/EXPENSE                       -305     -705     4,745
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                                 -1,074     -673     4,642
- Non-controlling interests                                48       21        -3
Profit/loss for the period                             -1,026     -652     4,639
                                                                                
                                                      
- Owners of the parent                                   -353     -726     4,748
- Non-controlling interests                                48       21        -3
Total comprehensive income/expense for the period        -305     -705     4,745
                                                                                
Earnings per share attributable to owners of the                                
 parent:                                                                        
Basic earnings per share (EUR)                          -0.03    -0.02      0.15
Diluted earnings per share (EUR)                        -0.03    -0.02      0.15
                                                                                

Condensed consolidated interim statement of cash flows

EUR '000                                                        Q1 2014  Q1 2013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Cash flows from operating activities                                            
Cash receipts from customers1                                    33,370   33,379
Cash paid to suppliers2                                         -32,404  -32,499
VAT paid                                                         -1,488     -907
Cash paid to and for employees                                   -4,659   -4,151
Income tax paid                                                       0       -3
Net cash used in operating activities                            -5,181   -4,181
                                                                                
Cash flows from investing activities                                            
Paid on acquisition of property, plant and equipment                -12     -127
Proceeds from sale of property, plant and equipment                  22       48
Acquisition of a subsidiary                                        -180        0
Loans provided                                                      -13     -322
Repayment of loans provided                                          95      196
Dividends received                                                    4        4
Interest received                                                     0        6
Net cash used in investing activities                               -84     -195
                                                                                
Cash flows from financing activities                                            
Proceeds from loans received                                          8    3,318
Repayment of loans received                                      -2,056   -1,969
Payment of finance lease liabilities                               -356     -476
Interest paid                                                      -202     -253
Net cash used in/from financing activities                       -2,606      620
                                                                                
Net cash flow                                                    -7,871   -3,756
                                                                                
Cash and cash equivalents at beginning of period                 12,575   10,231
Effect of exchange rate fluctuations on cash and cash                -2       -1
 equivalents                                                                    
Decrease  in cash and cash equivalents                           -7,871   -3,756
Cash and cash equivalents at end of period                        4,702    6,474

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

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon group’s gross profit for the first quarter of 2014 amounted to 1,170
thousand euros (Q1 2013: 593 thousand euros) and gross margin was 5% (Q1 2013:
2.2%). The year-over-year rise in gross profit stems from growth in the
revenues of the Buildings segment where profitability is less affected by the
weather, particularly when the projects are in a stage where the proportion of
outdoor work is small.  Moreover, a mild winter allowed the Infrastructure
segment to more or less break even while in previous years the first quarter
has been characterised by a large share of uncovered fixed costs. 

Most of the first-quarter revenue typically results from contracts started in
the previous year. In light of the rise in profitability that was achieved in
2013 the relatively strong beginning of the year was in line with expectations. 

In the following quarters, revenue will be increasingly impacted by contracts
secured in the current market and competitive environment. The Group’s
management highlighted the probability that declining demand would increase
competitive pressure already in previous periods (see also the chapters Order
book, Description of the main risks, and Outlooks of the Group’s geographical
markets) and has adopted measures for maintaining and, possibly, improving
profitability in a situation where volumes decrease. We remain aware that rises
in input prices pose a risk for long-term contracts and continue to prioritize
profitability over revenue growth or retention. 

The Group’s administrative expenses for the first quarter of 2014 totalled
1,124 thousand euros, a 9% decrease compared with a year ago (Q1 2013: 1,236
thousand euros). The ratio of administrative expenses to revenue (12 months
rolling) was 2.9% (Q1 2013: 3.3%). Our cost-control measures continue to yield
strong results – administrative expenses remain below the target ceiling, i.e.
4% of revenue. 

The first quarter of 2014 ended in an operating loss of 167 thousand euros (Q1
2013: an operating loss of 542 thousand euros) while EBITDA was positive at 297
thousand euros (Q1 2013: EBITDA was negative at 35 thousand euros). 

Adverse movements in the euro/hryvna exchange rate gave rise to exchange losses
that were significantly larger than those of previous periods. The Ukrainian
hryvna weakened by around 27%, which meant that Group entities whose functional
currency is the hryvna had to re-measure their euro-denominated liabilities.
The Group’s exchange losses, which are reported within finance costs, totalled
776 thousand euros (Q1 2013: an exchange gain of 41 thousand euros). The same
exchange loss gave rise to a positive 721 thousand-euro change in the
translation reserve in equity (Q1 2013: a negative change of 53 thousand euros)
and the net effect of the exchange loss on the Group’s net assets was 55
thousand euros (Q1 2013: a negative effect of 12 thousand euros). 

As a result, the Group’s net loss amounted to 1,026 thousand euros (Q1 2013: a
net loss of 652 thousand euros) of which the loss attributable to owners of the
parent, Nordecon AS, was 1,074 thousand euros (Q1 2013: a loss of 673 thousand
euros). 

Cash flows

Operating activities for the first quarter of 2014 resulted in a net cash
outflow of 5,181 thousand euros (Q1 2013: a net outflow of 4,181 thousand
euros). Negative operating cash flow is typical of the first quarter and stems
from the cyclical nature of the construction business. Higher fixed costs and
preparations made for more active construction operations in the second quarter
cause outflows to exceed inflows. Moreover, as many projects completed in 2013
generated higher than expected profit we paid larger performance bonuses that
were accompanied by bigger tax charges. Similarly to previous periods,
operating cash flows were influenced by a mismatch in settlement terms: the
ones agreed with customers are long and in the case of public procurement
mostly extend from 45 to 56 days while subcontractors generally have to be paid
within 21 to 45 days. 

Investing activities resulted in a net cash outflow of 84 thousand euros (Q1
2013: a net outflow of 195 thousand euros). The largest one-off outflow was a
payment of 180 thousand euros made to purchase the remaining shares in the
subsidiary AS Eston Ehitus from the non-controlling shareholders (see note 15). 

Financing activities resulted in a net cash outflow of 2,606 thousand euros (Q1
2013: a net inflow of 620 thousand euros). Loan repayments exceeded loan
receipts by 2,048 thousand euros whereas a year ago loan receipts exceeded loan
repayments by 1,349 thousand euros. The changes are mainly attributable to
changes in the Group’s overdraft balances. Finance lease payments declined
slightly compared with a year ago. 

At 31 March 2014, the Group’s cash and cash equivalents totalled 4,702 thousand
euros (31 March 2013: 6,474 thousand euros). Management’s comments on liquidity
risks are presented in the chapter Description of the main risks. 



Key financial figures and ratios

   Figure/ratio                      Q1 2014     Q1 2013     Q1 2012        2013
  ------------------------------------------------------------------------------
   Revenue (EUR’000)                  23,544      27,081      22,475     173,651
   Revenue change                     -13.1%       20.5%       26.8%        8.9%
   Net profit/loss (EUR’000)          -1,026        -652      -1,408       4,639
   Profit/loss attributable to        -1,074        -673      -1,364       4,642
    owners of the parent (EUR’000)                                              
   Weighted average number of        30,756,  30,756,727  30,756,728  30,756,728
    shares                               726                                    
   Earnings per share (EUR)            -0.03       -0.02       -0.04        0.15
                                                                                
   Administrative expenses to           4.8%        4.6%        5.5%        2.8%
    revenue                                                                     
   Administrative expenses to           2.9%        3.3%        3.1%        2.8%
    revenue (rolling)                                                           
                                                                                
   EBITDA (EUR’000)                      297         -35        -647       7,639
   EBITDA margin                        1.3%       -0.1%       -2.9%        4.4%
   Gross margin                         5.0%        2.2%        0.2%        6.5%
   Operating margin                    -0.7%       -2.0%       -5.5%        3.1%
   Operating margin excluding gains    -0.8%       -2.3%       -6.0%        2.9%
    on sale of real estate                                                      
   Net margin                          -4.4%       -2.4%       -6.3%        2.7%
   Return on invested capital          -1.4%       -0.7%       -2.1%        9.5%
   Return on equity                    -3.0%       -2.2%       -5.1%       14.2%
   Equity ratio                        38.5%       29.5%       29.9%       33.4%
   Return on assets                    -1.1%       -0.6%       -1.5%        4.3%
   Gearing                             31.7%       39.4%       42.2%       23.5%
   Current ratio                        1.01        1.08        1.07        1.02
   As at                                  31    31 March    31 March      31 Dec
                                       March        2013        2012        2013
                                        2014                                    
  ------------------------------------------------------------------------------
   Order book (EUR’000)               83,864     126,740     136,235      64,286
--------------------------------------------------------------------------------
Revenue change = (revenue for the          Net margin = (net profit for the     
 reporting period/revenue for the           period/revenue)*100                 
 previous period) – 1*100                  Return on invested capital = ((profit
Earnings per share (EPS) = net profit       before tax + interest expense)/ the 
 attributable to owners of the parent /     period’s average (interest-bearing  
 weighted average number of shares          liabilities + equity))*100          
 outstanding                               Return on equity = (net profit for   
Administrative expenses to revenue =        the period/ the period’s average    
 (administrative expenses/ revenue)*100     total equity)*100                   
Administrative expenses to revenue         Equity ratio = (total equity/ total  
 (rolling) = (past four quarters’           liabilities and equity)*100         
 administrative expenses/past four         Return on assets = (net profit for   
 quarters’ revenue)*100                     the period/ the period’s average    
EBITDA = operating profit + depreciation    total assets)*100                   
 and amortisation + impairment losses on   Gearing = ((interest-bearing         
 goodwill                                   liabilities – cash and cash         
EBITDA margin = (EBITDA/revenue)*100        equivalents)/ (interest-bearing     
Gross margin = (gross profit/revenue)*100   liabilities + equity))*100          
Operating margin = (operating              Current ratio = total current assets/
 profit/revenue)*100                        total current liabilities           
Operating margin excluding gains on sale                                        
 of real estate = ((operating profit -                                          
 gains on sale of non-current assets –                                          
 gains on sale of real estate)/revenue)                                         
 *100                                                                           
--------------------------------------------------------------------------------
                                                                                

Performance by geographical market

In the first quarter of 2014, around 8% of the Group’s revenue was generated
outside Estonia compared with 3% in the first quarter of 2013. 

         Q1 2014  Q1 2013  Q1 2012  2013
----------------------------------------
----------------------------------------
Estonia      92%      97%      98%   95%
Finland       7%       3%       2%    5%
Ukraine       1%       0%       0%    0%

Finnish revenues comprise revenue from concrete works. The contribution of the
Finnish market has increased year over year through growth in Finnish revenues,
which was amplified by a decrease in the Group’s total revenue. Still, foreign
revenues for the year as a whole will probably not exceed the level of 2013 and
the annual contributions of the markets are not likely to change. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive concentration
on a single market. Our strategy foresees increasing foreign operations in the
longer term; for further information, see the chapter Strategic agenda for
2014-2017. Our vision of the Group’s operations in foreign markets is described
in the chapter Outlooks of the Group’s geographical markets. 



Performance by business line

Segment revenues

The Group strives 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’s revenue for the first quarter of 2014 amounted to 23,544 thousand
euros, a 13% decrease from the 27,081 thousand euros generated in the first
quarter of 2013. A year ago, we were working on three large road construction
projects of around 70 million euros whose contribution to first-quarter revenue
was considerable. Also, a year ago the volume of projects supported by the EU
structural funds was larger. We drew attention to the fact that the volume
would decline already last year. The revenues of the Buildings segment
increased as expected through a rise in both the number of contracts secured
and their average cost. 

Consequently, the first-quarter revenues of the two main operating segments,
Buildings and Infrastructure, amounted to 18,826 thousand euros and 4,314
thousand euros respectively. The corresponding figures for the first quarter of
2013 were 12,703 thousand euros and 13,157 thousand euros (see note 8). The
change in the revenue structure is also reflected in our order book where at
period-end 72% of the contracts (in terms of value) belonged to the Buildings
segment (Q1 2013: 44%). 

Operating segments*  Q1 2014  Q1 2013  Q1 2012  2013
----------------------------------------------------
----------------------------------------------------
Buildings                80%      46%      54%   41%
Infrastructure           20%      54%      46%   59%

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

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

Sub-segment revenues

Revenue growth did not cause any significant changes in the revenue structure
of the Buildings segment. The largest contributors were contracts of the
commercial buildings sub-segment under which work was done in Tallinn (e.g.
construction of the Stroomi shopping centre) and Narva (construction of an
extension to the ASTRI shopping centre). Reconstruction of Estonia Spa in Pärnu
is awaiting commencement. We expect the investment activity of private sector
customers to remain robust and the contribution of the sub-segment to remain at
a similar or even higher level throughout the year. 

In the industrial and warehouse facilities sub-segment there was a structural
shift. In previous years, on account of EU investment support, most of the
revenue resulted from contracts secured from the agricultural sector. By the
first quarter of 2014 the proportion of EU-supported projects had decreased
visibly and the main contributors were warehouse facilities and logistics
centres (e.g. the Smarten logistics centre). The work done for companies
engaged in heavy industry increased as well. Estonia’s economic growth is
slowing but this has not yet had a negative impact on long-cycle investment
plans launched by companies in 2012 and 2013. Accordingly, we expect the
revenues of this sub-segment to remain stable. 

The competitive situation in the public buildings sub-segment is particularly
challenging: it is hard to win a contract without taking excessive risks but
our current policy is to avoid such risks. The largest projects of the period
were the construction of the Translational Medicine Centre of the University of
Tartu, the academic building of the NCO School of the Estonian National Defence
College, and Phase V of St Paul’s Church in Tartu. The first two were
substantially completed by the end of the first quarter. If competition remains
fierce, the contribution of the sub-segment is likely to decline. 

Our apartment building revenues resulted mostly from general contracting. The
main contributor was the contract for the construction of an apartment building
at Pirita tee 26 in Tallinn which we won last year. In 2014 we secured and
began building Phase I in the construction of the Tondi residential quarter in
Tallinn. We have also been successful in selling the last apartments and office
premises in our own Tigutorn development project. Only one Tigutorn apartment
is still for sale. Phase I in our Magasini 29 development project
(www.magasini.ee), which was launched in 2013, will be completed in 2014 and we
have started building Phase II. We have also re-launched real estate
development in Tartu where two new buildings with a total of 35 apartments will
be completed in Tammelinn by the end of 2014 (www.tammelinn.ee). 

Revenue distribution within Buildings segment  Q1 2014  Q1 2013  Q1 2012  2013
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Commercial buildings                               45%      47%      19%   45%
Industrial and warehouse facilities                26%      28%      32%   29%
Public buildings                                   18%      18%      42%   21%
Apartment buildings                                11%       7%       7%    5%



In the first quarter, the main revenue source in the Infrastructure segment was
road construction. A relatively warm and snowless winter allowed doing work
that needs to be done before asphalt-laying. The average cost of the
sub-segment’s contracts has fallen and operating volumes are not going to rise
to the level of the previous year. Still, the contribution of the sub-segment
will remain the strongest, partly thanks to road maintenance services delivered
under long-term contracts in the Järva and Hiiu counties and the Keila
maintenance area. 

In specialist engineering, a noteworthy project was the construction of the
Sõpruse bridge boat harbour in Tartu. There currently is no information about
any major projects that might require hydraulic engineering work in 2014. The
revenues of the sub-segment may increase through other complex engineering work
but such revenue flows are likely to be irregular. 

The decline in EU support due to transition from one budget period to another
reduced our environmental engineering and utility network construction (other
engineering) revenues, which decreased at the same pace as the revenues of
other sub-segments. It is likely that the contributions of the two sub-segments
will see further contraction because a relatively large portion of their
first-quarter revenues resulted from long-term contracts secured in the
previous period. 

Revenue distribution within Infrastructure       Q1 2014  Q1 2013  Q1 2012  2013
 segment                                                                        
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    46%      44%      36%   54%
Specialist engineering (including hydraulic          10%      10%      19%    8%
 engineering)                                                                   
Other engineering                                    12%      32%      41%   26%
Environmental engineering                            32%      14%       4%   12%



Order book

At 31 March 2014, our order book stood at 83,864 thousand euros, a 26% decrease
compared with a year ago. 

The largest decrease in our order book (backlog of contracts signed but not yet
performed) occurred in road construction (approx. 61%) where in 2013 the Group
was involved in three major public procurement projects that were substantially
completed by the year-end. The new national road management plan reflects a
change in the structure of road construction investments. In particular, the
proportion of large-scale projects is going to diminish. This means that
companies engaged in road construction have to face a new reality – the average
cost of road construction contracts is going to decrease, which will inevitably
intensify competition. 

The order books for the construction of utility networks (other engineering
sub-segment) and environmental engineering also shrank significantly because in
the last year of the EU 2007-2013 budget period  allocations of relevant
investment support were expectedly smaller. 

On the other hand, the order books of the industrial and warehouse facilities
and apartment buildings sub-segments increased significantly, mostly through
growth in private sector investments (the order book of the apartment buildings
sub-segment does not include the revenue expected from our own development
projects). 

                      Q1 2014  Q1 2013  Q1 2012    2013
-------------------------------------------------------
Order book (EUR’000)   83,864  113,983  136,235  64,286

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 72% and 28% of the order book
respectively. This is a radical change: compared with recent years the figures
for the two segments have reversed (31 March 2013: 44% and 56% respectively).
It is likely that building construction contracts will continue to dominate the
order book for the next few years. In the current EU budget period (2014-2020)
investments in infrastructure construction, which to date have mostly been made
with the support of the EU structural funds, will not be as large as they were
in 2007-2013. In particular, this applies to 2014 because the national
investment plan has not yet been finalised. Hence, we expect the revenues of
the Infrastructure segment to decline in 2014 (for further information, see the
Business risks section of the chapter Description of the main risks). 

We believe that in a situation where the market is expected to shrink, our
priority cannot be increasing the Group’s revenue or maintaining it at the
level of 2013. Instead, the main focus must be on improving profitability. We
do not consider the present decline in the Group’s order book to be critical.
Based on our historical experience, it is quite typical that a significant
portion of budgeted operating volumes is secured through new contracts signed
during the year. The beginning of the year has already partly confirmed this:
from the end of 2013 until the reporting date our order book grew by 30%. 

Between the reporting date (31 March 2014) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 5,432 thousand euros. 



People

Staff and personnel expenses

In the first quarter of 2014, the Group (the parent and the subsidiaries)
employed, on average, 700 people including 341 engineers and technical
personnel (ETP). Workforce has decreased compared with a year ago due to
shrinkage in operating volumes. When operating volumes grew in 2013, we signed
fixed-term (project-based) contracts with the people that were additionally
hired. This allowed us to respond flexibly in a situation where it was clear
that the work flows of some sub-segments would decrease also in the future. 

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

               Q1 2014  Q1 2013  Q1 2012  2013
----------------------------------------------
----------------------------------------------
ETP                341      361      362   357
Workers            359      379      372   400
Total average      700      739      734   757

The Group’s personnel expenses for the first quarter of 2014 including all
taxes totalled 3,741 thousand euros, 8% down from the comparative period when
the figure was 4,056 thousand euros. The decline is mostly attributable to a
decrease in the number of staff. 

In the first quarter of 2014, the service fees of the members of the council of
Nordecon AS amounted to 35 thousand euros and associated social security
charges totalled 12 thousand euros (Q1 2013: 37 thousand euros and 12 thousand
euros respectively). 

The service fees of the members of the board of Nordecon AS amounted to 69
thousand euros and associated social security charges totalled 23 thousand
euros (Q1 2013: 51 thousand euros and 17 thousand euros respectively). 

Labour productivity and labour cost efficiency

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

                                               Q1 2014  Q1 2013  Q1 2012    2013
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),           227.7    214.3    206.4   229.4
 (EUR’000)                                                                      
Change against the comparative period             6.3%     3.9%    48.8%    9.9%
                                                                                
Nominal labour cost efficiency (rolling),          8.4      9.3     10.7     8.4
 (EUR’000)                                                                      
Change against the comparative period            -9.7%   -13.2%    43.6%  -11.6%



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



Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins,
are competition in the construction market and changes in the demand for
construction services. 

Compared with a year ago, competition for public sector contracts has
intensified visibly. The volume of public sector investments decreased in 2013
and the prospects of maintaining volumes in 2014 are not good. There is strong
competitive pressure on builders’ bid prices although input prices continue to
climb. Competition is particularly fierce in the building construction segment.
We acknowledge the risks inherent in the execution of contracts concluded in an
environment of stiff competition. Securing a long-term construction contract at
an unreasonably low price in a situation where input prices cannot be lowered
noticeably and competition is fierce involves high risk, because the contract
may quickly start generating a loss. Thus, in price-setting we currently
prioritize profitability over increasing or retaining the revenue figure. 

In the next periods, demand for construction services will be driven by public
sector investments. In recent years, a major share of investments was made with
the assistance of allocations from the EU structural funds that were
determined, both in terms of size and timing, by the EU financial framework
2007-2013. In general, the amounts that will be allocated to Estonia during the
next EU financial framework (2014-2020) are known (5.9 billion euros of which
4.3 billion euros will be distributed via the EU structural and investment
funds) but the volume and schedule of investments involving construction work
have not yet been finalised. According to information released to date, the
overall volume of construction-related investments is going to decline compared
with the previous budget period and 2014 may become a so-called ‘gap’ year
between the two budget periods, where most efforts are directed at preparatory
administrative activities required for enabling the investments. 

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

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

The Group’s business is also influenced by the fact that construction
operations are seasonal. The impacts of seasonal fluctuations are the strongest
in the Infrastructure segment where a lot of work is done outdoors (road and
port construction, earthwork, etc). To disperse the risk, we secure road
maintenance contracts that generate year-round business. Our business strategy
is to counteract seasonal fluctuations in infrastructure operations with
building construction that is less exposed to seasonality. Thus, we endeavour
to keep the two segments in balance (see also the chapter Performance by
business line). In addition, where possible, our companies implement
appropriate technical solutions that allow working efficiently even in
changeable weather conditions. 

Operational risks

To manage their daily construction risks, Group companies purchase contractors’
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
contracts are used. In addition, as a rule, subcontractors are required to
secure performance of their obligations with a bank guarantee provided to a
Group company or the Group retains part of the amount payable until the
completion of the contract. To remedy builder-caused deficiencies, which may be
detected during the warranty period, Group companies create warranty provisions
based on their historical experience. At 31 March 2014, the Group’s warranty
provisions (including current and non-current ones) totalled 1,416 thousand
euros. The comparative figure for a year ago was 1,377 thousand euros. 

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

Financial risks

Credit risk

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

In the first quarter of 2014, the Group had no impairment losses on receivables
(Q1 2013: a gain of 9 thousand euros on reversal of prior period impairment
losses). 

Liquidity risk

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

At the reporting date, the Group’s current assets exceeded its current
liabilities 1.02-fold (31 March 2013: 1.08-fold). The figure has dropped
compared with the previous year due to the reclassification of loans provided
to the Group’s Ukrainian associates to non-current assets. The ratio also
continues to be influenced by the fact that banks do not refinance
interest-bearing liabilities for a period exceeding twelve months. 

The political situation in Ukraine has aggravated and we believe that
realization of our Ukrainian investment properties may take longer than
originally expected. Accordingly, at the reporting date loan receivables from
our Ukrainian associates of 10,389 thousand euros were classified as
non-current assets. 

Interest-bearing liabilities account for a significant proportion of our
current liabilities. In accordance with IFRS EU, loan commitments have to be
classified into current and non-current liabilities based on the contractual
conditions effective at the reporting date. To date, banks have refinanced the
Group’s liabilities for periods not exceeding 12 months, which is why a
substantial portion of loans are classified as current liabilities although it
is probable that some borrowings (particularly overdraft facilities) will be
refinanced again when the 12 months have passed. During the first quarter and,
partly, after the reporting date, we refinanced (or obtained binding
confirmations that in 2014 we can refinance) loans of 18,203 thousand euros
which at 31 December 2013 were classified as current liabilities. Out of that
amount, repayment of loans of 15,003 thousand was (or is going to be) deferred
to 2015. At 31 March 2014 relevant balances amounted to 16,511 thousand euros
and 14,867 thousand euros. 

At the reporting date, the Group’s cash and cash equivalents totalled 4,702
thousand euros (31 March 2013: 6,474 thousand euros). 

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating
interest rates. Finance lease liabilities have mainly floating interest rates.
The base rate for most floating-rate contracts is EURIBOR. At 31 March 2014,
the Group’s interest-bearing loans and borrowings totalled 22,953 thousand
euros, a decrease of 6,931 thousand euros year over year. Interest expense for
the period amounted to 183 thousand euros, 62 thousand euros down from a year
ago. 

The main source of the Group’s interest rate risk is the possibility of a rapid
upsurge in the base rate of floating interest rates (EURIBOR, EONIA or the
creditor’s own base rate). In light of the Group’s relatively heavy loan burden
this would cause a significant increase 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. However, as regards the loan products offered by banks,
observance of the policy has proved difficult and most new contracts have a
floating interest rate. The Group does not use derivative financial instruments
to hedge its interest rate risk. 

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 Ukrainian hryvnas
(UAH). The total foreign exchange loss on the translation of receivables and
liabilities related to operating activities (reported within Other operating
expenses in the statement of comprehensive income) amounted to 6 thousand euros
(Q1 2013: an exchange gain of 48 thousand euros, was reported within Other
operating income). 

The change in Ukraine’s political leadership at the beginning of 2014, economic
difficulties and dispute with Russia over the autonomous region of Crimea
caused the exchange rate of the hryvna to tumble. By the reporting date, the
hryvna had weakened against the euro by around 27%. For the Group’s Ukrainian
subsidiaries, this meant additional exchange losses on the translation of
euro-denominated loan commitments into the local currency. Relevant losses
(reported within Finance costs in the statement of comprehensive income)
totalled 776 thousand euros (Q1 2013: an exchange gain of 41 thousand euros,
was reported within Finance income). 

The reciprocal receivables and payables of the Group’s Ukrainian and
non-Ukrainian entities (items connected with the construction business) do not
give rise to any material exchange losses. Nor do the loans provided to the
Group’s Ukrainian associates in euros give rise to exchange losses that ought
to be recognised in the Group’s financial statements. 

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



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

  -- In 2014 public investment will decrease in connection with the change of
     the EU budget periods because implementation of measures requires time.
     Although during the 2014-2020 financial framework allocations to Estonia
     will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), support
     payments from the structural funds that influence the construction market
     will not increase. Instead, compared with the previous budget period, there
     will be an increase in allocations to projects not related to tangible
     assets.
  -- Investments made by the largest public sector customers (state-owned real
     estate company Riigi Kinnisvara AS and the National Road Administration),
     which will reach the stage of conclusion of a construction contract in 2014
     will either not increase significantly or may even decrease. As a result,
     the Estonian construction market (particularly those segments that are
     related to infrastructure construction) will shrink. The situation may be
     somewhat alleviated by private customers’ increasing investment in building
     construction.
  -- The construction market will see further consolidation, particularly in the
     field of general contracting in building construction where the number of
     medium-sized operators (annual turnover of around 15-40 million euros) is
     still too large, but the process will be slower than expected. Based on the
     past three years’ experience it is likely that stiff competition and
     insufficient demand will induce some general contractors to go slowly out
     of business or shrink in size rather than merge with another or exit the
     market. However, it is also increasingly common that two to four smaller
     players that are seeking ways to remain in business will form a consortium
     to bid for major procurement contracts, meet tendering terms and secure the
     required funding.
  -- Competition will increase in all segments of the construction market. We
     see a rise in the average number of bidders for a contract and there is
     already a notable gap between the lowest bids made by the winners and the
     average bids. The situation is somewhat similar to 2009 when anticipation
     of a fall in demand caused a rapid decline in construction prices, which
     triggered a slide in the prices of many construction inputs. However, there
     are currently no massive decreases in input prices and companies that are
     banking on this in the bidding phase may run into difficulty. Construction
     prices and thus also profit margins are under strong competitive pressure.
  -- In new housing development, the success of a project depends on the
     developer’s ability to control the input prices included in the business
     plan and thus to set an affordable sales price. Although the overall
     situation is improving steadily, the offering of new residential real
     estate cannot be increased dramatically because the prices of new
     apartments are relatively high compared with the standard of living and the
     banks’ lending terms remain strict.  Similarly to previous periods,
     successful projects include those that create or fill a niche.
  -- The contracts signed with public sector customers continue to impose tough
     conditions on construction companies: extensive obligations, strict
     sanctions, various financial guarantees, long settlement terms, etc.
     Contractors cannot implement more optimal solutions identified in the
     construction phase that would reduce the construction or operating costs of
     the asset without sanctions because procurement terms do not allow this. In
     a situation where public procurement is based on underbidding, the above
     factors increase the risks of all market participants. Still, compared to
     two or three years ago, the situation has improved and in some respects
     procurement terms have become more reasonable for construction companies.
  -- The prices of construction inputs will remain relatively stable. In the
     short term, weakening demand may lower local subcontracting prices.
     However, taking into account the subcontractors’ financial and human
     resources, the decline cannot be substantial or long-lasting. In some
     areas, price fluctuations are be unpredictable and, thus, notably greater
     and hard or even impossible to influence (oil and metal products, certain
     materials and equipment).
  -- Shortage of skilled labour (including project and site managers) will
     persist. This will undermine not so much the companies’ performance
     capabilities as the quality of carrying out the construction process, i.e.
     delivering the service. Shrinkage in construction volumes in Estonia may
     increase labour supply but not substantially. Labour migration to the
     Nordic countries will remain steady and although those markets
     (particularly Finland) may also shrink, the number of job seekers that will
     return will not increase considerably. Accordingly, the basic wage of
     construction-sector employees will not decrease. Instead, the rise in the
     cost of living is creating pressure for a wage increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe
downturn a few years ago, has not regained sufficient stability and similarly
to the Estonian market in 2014 it will probably see shrinkage in public sector
demand. Accordingly, it is unlikely that we will enter the Latvian construction
market permanently in 2014. 

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

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

Ukraine

The Group operates in Ukraine as a general contractor and project manager in
the segment of commercial buildings and production facilities, offering its
services primarily to foreign private sector customers. In the past three
years, there have been practically no private sector customers in that segment.
The political situation in Ukraine is worrying and undoubtedly affects adoption
of business decisions by construction market participants. Regardless of this,
we will continue our business in Ukraine in 2014. Compared with the previous
year, our current Ukrainian order book is somewhat larger. We continue to
monitor the situation in the Ukrainian construction market closely and will
restructure our operations as appropriate. We also continue to seek
opportunities for exiting our two conserved real estate projects or signing a
construction contract with a potential new owner. 

Finland

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



Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructures segment. Geographically the Group operates in Estonia, Ukraine
and Finland. The parent of the Group is Nordecon AS, a company registered and
located in Tallinn, Estonia. In addition to the parent company, there are more
than 10 subsidiaries in the Group. The consolidated revenue of the Group in
2013 was 174 million euros and net profit 4.6 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