Börsiteade

Pealkiri

2015 III quarter and nine months consolidated interim report (unaudited)

Teade

This announcement includes Nordecon AS’s consolidated financial statements for
the third quarter and nine months of 2015 (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                                            30 September      31 December
                                                           2015             2014
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 6,558            8,802
Trade and other receivables                              31,941           23,235
Prepayments                                               1,861            1,201
Inventories                                              24,753           24,788
Total current assets                                     65,113           58,026
Non-current assets                                                              
Investments in equity-accounted investees                   830              694
Other investments                                            26               26
Trade and other receivables                              11,788           11,211
Investment property                                       3,549            3,549
Property, plant and equipment                             9,814            9,319
Intangible assets                                        14,648           14,633
Total non-current assets                                 40,655           39,432
TOTAL ASSETS                                            105,768           97,458
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     23,566           20,588
Trade payables                                           29,260           26,267
Other payables                                            6,137            7,542
Deferred income                                           1,606            1,786
Provisions                                                  415              799
Total current liabilities                                60,984           56,982
Non-current liabilities                                                         
Loans and borrowings                                      5,308            3,145
Trade payables                                              109              109
Other payables                                              108               96
Provisions                                                1,247              759
Total non-current liabilities                             6,772            4,109
TOTAL LIABILITIES                                        67,756           61,091
                                                                                
EQUITY                                                                          
Share capital                                            20,692           20,692
Own (treasury) shares                                    -1,582           -1,582
Share premium                                               547              547
Statutory capital reserve                                 2,554            2,554
Translation reserve                                       1,160              771
Retained earnings                                        13,273           11,714
Total equity attributable to owners of the               36,644           34,696
 parent                                                                         
Non-controlling interests                                 1,368            1,671
TOTAL EQUITY                                             38,012           36,367
TOTAL LIABILITIES AND EQUITY                            105,768           97,458



Condensed consolidated interim statement of comprehensive income

EUR’000                              9M     Q3 2015   9M 2014  Q3 2014      2014
                                   2015                                         
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                            113,553   44,342   120,936   53,492   161,289
Cost of sales                     -107,252  -41,112  -112,145  -48,913  -151,476
Gross profit                         6,301    3,230     8,791    4,579     9,813
                                                                                
Marketing and distribution            -274      -52      -420      -76      -558
 expenses                                                                       
Administrative expenses             -3,418   -1,203    -4,006   -1,535    -5,656
Other operating income                 289       36       270      129       792
Other operating expenses               -83        0      -256     -225      -376
Operating profit                     2,815    2,011     4,379    2,872     4,015
                                                                                
Finance income                         491     166,       486      160       738
Finance costs                         -965     -303    -1,581     -359    -2,301
Net finance costs                     -474     -137    -1,095     -199    -1,563
                                                                                
Share of profit of                     233      200       208      186        85
 equity-accounted investees                                                     
                                                                                
Profit before income tax             2,574    2,074     3,492    2,859     2,537
Income tax                            -257        0      -242      -63      -239
Profit for the period                2,317    2,074     3,250    2,796     2,298
                                                                                
Other comprehensive income                                                      
Items that may be reclassified                                                  
 subsequently to profit or loss                                                 
Exchange differences on                389       58       721      -89     1,069
 translating foreign operations                                                 
Total other comprehensive              389       58       721      -89     1,069
 income/expense                                                                 
TOTAL COMPREHENSIVE INCOME           2,706    2,132     3,971    2,707     3,367
                                                                                
Profit attributable to:                                                         
- Owners of the parent               2,482    2,085     2,607    2,386     1,956
- Non-controlling interests           -165      -11       643      410       342
Profit for the period                2,317    2,074     3,250    2,796     2,298
                                                                                
Total comprehensive income                                                      
 attributable to:                                                               
- Owners of the parent               2,871    2,143     3,328    2,297     3,025
- Non-controlling interests           -165      -11       643      410       342
Total comprehensive income for       2,706    2,132     3,971    2,707     3,367
 the period                                                                     
                                                                                
Earnings per share attributable                                                 
 to owners of the parent:                                                       
Basic earnings per share (EUR)        0.08     0.07      0.08     0.08      0.06
Diluted earnings per share            0.08     0.07      0.08     0.08      0.06
 (EUR)                                                                          
                                                                                



Condensed consolidated interim statement of cash flows

EUR’000                                               9M 2015   9M 2014
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Cash flows from operating activities                                   
Cash receipts from customers1                         127,440   131,291
Cash paid to suppliers2                              -112,650  -118,250
VAT paid                                               -2,990    -3,907
Cash paid to and for employees                        -15,373   -14,618
Income tax paid                                          -109      -177
Net cash used in operating activities                  -3,682    -5,661
                                                                       
Cash flows from investing activities                                   
Acquisition of property, plant and equipment             -414      -284
Acquisition of intangible assets                            0       -14
Proceeds from sale of property, plant and equipment       238       185
Acquisition of a subsidiary                                -8      -719
Cash acquired on acquisition of a subsidiary                9         0
Acquisition of investments in associates                   -1         0
Cash from liquidation of investments in associates          0         1
Loans provided                                            -97      -275
Repayment of loans provided                                67       106
Dividends received                                        108         4
Interest received                                           7         4
Net cash used in investing activities                     -91      -992
                                                                       
Cash flows from financing activities                                   
Proceeds from loans received                            7,124    10,551
Repayment of loans received                            -2,615    -5,887
Payment of finance lease liabilities                   -1,309    -1,110
Interest paid                                            -580      -654
Dividends paid                                         -1,091      -940
Other payments made                                         0      -175
Net cash from financing activities                      1,529     1,785
                                                                       
Net cash flow                                          -2,244    -4,868
                                                                       
Cash and cash equivalents at beginning of period        8,802    12,575
Effect of movements in foreign exchange rates               0        -3
Decrease  in cash and cash equivalents                 -2,244    -4,868
Cash and cash equivalents at end of period              6,558     7,704



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

2 Line item Cash paid to suppliers includes VAT paid.



Financial review

Financial performance

Nordecon group ended the first nine months of 2015 with a gross profit of 6,301
thousand euros (9M 2014: 8,791 thousand euros) and a gross margin of 5.5% (9M
2014: 7.3%). Compared with a year earlier, gross margin weakened in the
Buildings segment and improved slightly in the Infrastructure segment where the
main sources of profit were road construction and road maintenance. Our third
quarter result was strongly affected by the continuing year-on-year decline in
the profitability of the Buildings segment. A key factor of the current year is
the lower profitability of new construction contracts that have been secured in
an environment of stiffer competition. 

Nordecon’s leadership has noted the stagnation and the resulting strong
competitive pressures in the construction market already in earlier periods
(see also the chapters Order book, Description of the main risks and Outlooks
of the Group’s geographical markets) and has enforced measures for maintaining
the Group’s profitability. In the current year, the infrastructure market has
not recovered as expected and new project launches have mostly been postponed.
In the buildings market, bidding activity is relatively high but the prices of
most new contracts do not cover the risks involved and instigate caution. In
entering into long-term contracts, we remain aware of the risks inherent in the
changes taking place in our operating environment and uphold the policy that no
contract may be signed to simply grow the portfolio and no new project may
cause a significant rise in our operational risks. 

The Group’s administrative expenses for the first nine months of 2015 totalled
3,418 thousand euros, a decrease of around 15% from a year ago (9M 2014: 4,006
thousand euros). The ratio of administrative expenses to revenue (12 months
rolling) was 3.3% (9M 2014: 3.4%). The Group’s cost-control measures continue
to yield strong results: we have been able to keep administrative expenses
below the target ceiling, i.e., 4% of revenue. 

The Group ended the first nine months of 2015 with an operating profit of 2,815
thousand euros (9M 2014: 4,379 thousand euros) and an EBITDA of 4,187 thousand
euros (9M 2014: 5,743 thousand euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than a year ago. During the period, the Ukrainian
currency weakened by around 20%, which meant that Group companies whose
functional currency is the hryvnia had to restate their euro-denominated
liabilities. Exchange losses reported within finance costs totalled 375
thousand euros (9M 2014: 817 thousand euros). The same movements in the
exchange rate gave rise to a positive change of 389 thousand euros in the
translation reserve recognised in equity (9M 2014: 721 thousand euros) and the
net effect of the exchange loss on the Group’s net assets was a gain of 14
thousand euros (9M 2014: a loss of 96 thousand euros). 

Net profit for the period amounted to 2,317 thousand euros (9M 2014: 3,250
thousand euros), of which net profit attributable to owners of the parent,
Nordecon AS, was 2,482 thousand euros (9M 2014: 2,607 thousand euros). 

Cash flows

Operating activities of the period generated a net cash outflow of 3,682
thousand euros (9M 2014:  an outflow of 5,661 thousand euros). The negative
operating cash flow is mainly attributable to a mismatch between the projects’
actual stage of completion (recognised revenue) and the amounts billed to
customers. Cash flows are also strongly affected by the fact that neither
public nor private sector customers are required to make advance payments while
the Group has to make prepayments to sub-contractors, materials suppliers, etc.
In the current market situation, a prepayment from a customer is an exception
rather than a rule, which puts additional pressure on the cash flows of
construction companies. Moreover, cash inflow is reduced by retentions, which
extend from 5 to 10% of the contract price and are released only at the end of
the construction period. In addition, cash flow is influenced by a mismatch
between settlement terms: the ones agreed with customers are relatively long
and in the case of public procurement mostly extend from 30 to 56 days while
subcontractors generally have to be paid within 21 to 45 days. During the
period, there was also a slight increase in payments to employees that resulted
from performance bonuses paid for projects completed in the previous year with
higher than expected profit margins. 

Investing activities resulted in a net outflow of 91 thousand euros (9M 2014: a
net outflow of 992 thousand euros). Cash flows from investing activities were
mainly influenced by acquisitions of property, plant and equipment of 414
thousand euros (9M 2014: 284 thousand euros) and sales of used property, plant
and equipment for 238 thousand euros (9M 2014: 185 thousand euros). In the
first nine months of 2014, the Group invested 719 thousand euros to acquire
additional ownership interest in subsidiaries; in the current year, investments
of a similar scale have not been made. Dividends received amounted to 108
thousand euros (9M 2014: 4 thousand euros). 

Financing activities resulted in a net cash inflow of 1,529 thousand euros (9M
2014: a net inflow of 1,785 thousand euros). Loan receipts exceeded repayments
by 4,509 thousand euros (9M 2014: by 4,664 thousand euros). A major share of
cash inflow from financing activities resulted from use of overdraft facilities
designed for raising working capital for operating activities and bank loans
for partial financing of own development projects. Finance lease payments
totalled 1,309 thousand euros (9M 2014: 1,110 thousand euros). Dividends
distributed in the first nine months of 2015 totalled 1,091 thousand euros (9M
2014: 940 thousand euros). 

As at 30 September 2015, the Group’s cash and cash equivalents totalled 6,558
thousand euros (30 September 2014: 7,704 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                         9M 2015     9M 2014     9M 2013        2014
--------------------------------------------------------------------------------
Revenue (EUR’000)                    113,553     120,936     134,733     161,289
Revenue change                         -6.1%      -10.2%       15.1%       -7.1%
Net profit (EUR’000)                   2,317       3,250       5,309       2,298
Net profit attributable to             2,482       2,607       5,137       1,956
 owners of the parent (EUR’000)                                                 
Weighted average number of        30,756,728  30,756,728  30,756,728  30,756,728
 shares                                                                         
Earnings per share (EUR)                0.08        0.08        0.17        0.06
                                                                                
Administrative expenses to              3.0%        3.3%        2.6%        3.5%
 revenue                                                                        
Administrative expenses to              3.3%        3.4%        2.8%        3.5%
 revenue (rolling)                                                              
                                                                                
EBITDA (EUR’000)                       4,187       5,871       7,088       5,585
EBITDA margin                           3.7%        4.9%        5.3%        3.5%
Gross margin                            5.5%        7.3%        7.0%        6.1%
Operating margin                        2.5%        3.6%        4.1%        2.5%
Operating margin excluding gain         2.3%        3.5%        4.0%        2.3%
 on asset sales                                                                 
Net margin                              2.0%        2.7%        3.9%        1.4%
Return on invested capital              5.0%        6.5%        8.9%        5.8%
Return on equity                        6.2%        9.0%       16.1%        6.4%
Equity ratio                           35.9%       34.2%       27.0%       37.3%
Return on assets                        2.3%        3.0%        4.4%        2.3%
Gearing                                33.4%       33.4%       42.8%       24.8%
Current ratio                           1.07        1.05        1.12        1.02
As at                                30 Sept     30 Sept     30 Sept      31 Dec
                                        2015        2014        2013        2014
--------------------------------------------------------------------------------
Order book (EUR’000)                  76,261      92,455      85,765      83,544
--------------------------------------------------------------------------------

                                        

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



Performance by geographical market

In the first nine months of 2015, around 4% of the Group’s revenue was
generated outside Estonia compared with 6% in the same period in 2014. The
contribution of foreign markets has decline due to lower sales in Finland. 

         9M 2015  9M 2014  9M 2013  2014
----------------------------------------
----------------------------------------
Estonia      96%      94%      98%   94%
Finland       1%       4%       2%    2%
Ukraine       3%       2%       0%    4%

Finnish revenue comprised revenue from concrete works in the building
construction segment. The contribution of the Finnish market has decreased
because major projects have been completed. The relative importance of the
Ukrainian market, where we mainly continue to perform one building construction
contract, has increased. 

Geographical diversification of the revenue base is a consciously deployed
strategy by which we mitigate the risks resulting from excessive reliance on a
single market. However, conditions in our chosen foreign markets are also
volatile and have a strong impact on our current results. Our strategy foresees
increasing foreign operations in the longer term; for further information, see
the chapter Strategic agenda for 2014-2017. Our vision for our operations in
foreign markets is described in the chapter Outlooks of the Group’s
geographical markets. 



Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and
Infrastructure) in balance as this helps disperse risks and provides better
opportunities for continuing construction operations also in stressed
circumstances where one segment experiences noticeable shrinkage. 

Nordecon’s revenues for the first nine months of 2015 totalled 113,553 thousand
euros, 6.1% down from the 120,936 thousand euros generated in the same period
in 2014. Revenue declined in both of the main operating segments. In the
Buildings segment, the decrease resulted from lower volumes in the industrial
and warehouse facilities sub-segment. In other sub-segments, revenues grew. In
the Infrastructure segment, revenue continued to be supported by slight year on
year growth in road construction volumes. Unfortunately, our engineering
sub-segments have not seen the growth that was anticipated. 

The segments’ revenues for the first nine months of 2015 were 70,944 thousand
euros for Buildings and 39,789 thousand euros for Infrastructure. The
corresponding figures for the first nine months of 2014 were 76,690 thousand
euros and 40,951 thousand euros (see note 8). The Group’s order book has a
similar structure: at the end of the nine-month period 73% of contracts secured
but not yet performed (in terms of value) were in the portfolio of the
Buildings segment (9M 2014: 70%). 



Operating segments*  9M 2015  9M 2014  9M 2013  2014
----------------------------------------------------
----------------------------------------------------
Buildings                61%      63%      38%   65%
Infrastructure           39%      37%      62%   35%



* 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

Compared with the same period last year, the revenue structure of the Buildings
segment has changed considerably. The contribution of the industrial and
warehouse facilities sub-segment has contracted sharply while the contributions
of other sub-segments have increased. The largest contributor is still the
commercial buildings sub-segment. 

The largest ongoing projects of the commercial buildings sub-segment are the
Veerenni office building and the Arsenal Centre in Tallinn. Construction of the
Lõõtsa and Eesti Loto business buildings has reached the final phase. In June,
we completed the reconstruction of Estonia Spa in Pärnu and in August the
construction of Viimsi Centre. We expect the private sector’s investment
activity to continue and the contribution of the sub-segment to remain at a
similar or higher level throughout the year. 

In the industrial and warehouse facilities sub-segment volumes have declined
due to a decrease in both agricultural projects, which used to dominate the
sub-segment for a long time thanks to EU support, and  warehouse and logistics
facility projects. We do not expect the revenues of the sub-segment to increase
substantially in the current year. 

The volumes of the public buildings sub-segment have grown mainly through the
state’s increasing investment in national defence. During the period, we
completed and delivered on time the building of the Võru state secondary school
and the work done on the premises of the Kuperjanov infantry battalion. In
addition, we continued building the Piusa border guard station and a building
complex at the Ämari air base, and began the design and construction of a
barracks at the Tapa military base. 

We earned most of our apartment building revenue as a general contractor. The
period’s main revenue contributors were the apartment building at Kentmanni
põik 3 and phase II of the Tondi residential quarter in Tallinn whose
construction started last year. In the current year, we began building phase
III of the Tondi residential quarter and phases I and II of Pikksilma homes in
Kadriorg, Tallinn. The contribution of our own development projects in Tartu
and Tallinn continues to increase. In the first two development phases of the
Tammelinn project in Tartu we have completed 3 apartment buildings.  Sales have
been very successful: by the end of the reporting period, 45 of the 55
apartments had been either sold or reserved. We have started preparations for
phase III that comprises a building with 20 apartments (www.tammelinn.ee). In
Tallinn, we continue to sell apartment ownerships in phases I and II and build
phase III of our Magasini 29 development project (www.magasini.ee). By the end
of the period, 7 of the 13 apartment ownerships in phases I and II had been
sold. 

Revenue distribution in Buildings segment  9M 2015  9M 2014  9M 2013  2014
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Commercial buildings                           56%      43%      47%   42%
Industrial and warehouse facilities            11%      37%      29%   33%
Public buildings                               13%       6%      20%    7%
Apartment buildings                            20%      14%       4%   18%

Similarly to the two previous years, in the first nine months of 2015 the main
revenue source in the Infrastructure segment was road construction. We
continued work on two major road construction projects in Tartu (construction
package 5 of the Tartu western bypass) and Keila (Keila-Valkse section of
national road no. 8 Tallinn-Paldiski, km 24.9-29.5) and started numerous
smaller road repair projects whose total volume is substantial. The more
important ones include surface dressing in Võru and Põlva counties and
reconstruction of the Tartu-Märja road. Compared with the previous year, the
volume of road construction for the private sector has increased (e.g., ETK
logistics centre).  In addition, Nordecon continues to deliver road maintenance
services in the Järva and Hiiu counties and the Keila maintenance area. We
expect that road construction will remain the main revenue source in the
Infrastructure segment through 2015 and that similarly to last year most of the
work will be done under small or medium-sized reconstruction and repair
contracts. 

In specialist engineering, we did small-scale port construction work on the
island of Hiiumaa. Investments in hydraulic engineering as well as our relevant
revenue have declined in recent years and we do not expect to secure any large
hydraulic engineering projects in the near term. The revenues of the
sub-segment may increase through other complex engineering projects but their
addition is likely to be irregular. 

Shrinkage in support granted from the EU structural funds continues to have a
strong impact on environmental engineering whose volumes have decreased more
rapidly than those of other sub-segments. The contracts secured by other
engineering sub-segment (utility network construction) are small and growth of
the sub-segment is unlikely. 

Revenue distribution in Infrastructure segment   9M 2015  9M 2014  9M 2013  2014
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Road construction and maintenance                    82%      74%      56%   72%
Specialist engineering (including hydraulic           1%       3%       8%    2%
 engineering)                                                                   
Other engineering                                    13%      15%      24%   19%
Environmental engineering                             4%       8%      12%    7%



Order book

At 30 September 2015, the Group’s order book (backlog of contracts signed but
not yet performed) stood at 76,261 thousand euros. In the third quarter, a
substantial volume of new construction contracts was secured and the order book
grew slightly compared with 30 June 2015 but declined by 18% compared with a
year earlier. The order book decreased in both the Buildings and the
Infrastructure segment. 

                      9M 2015  9M 2014  9M 2013    2014
-------------------------------------------------------
Order book (EUR’000)   76,261   92,455   85,765  83,544

The order book of the commercial buildings sub-segment contracted by around 64%
compared with a year ago. Growth in the order books of the public buildings and
apartment buildings sub-segments could not counterbalance that shrinkage.
Additions to the order book of the public buildings sub-segment include a
number of national defence assets whereas the order book of the apartment
buildings sub-segment is influenced by the construction of phases I and II of
the Pikksilma homes project. 

In the Infrastructure segment, the order book of other engineering sub-segment
grew slightly but due to the small size of the contracts this did not have a
significant impact on the segment’s total order book.  In other sub-segments
order books decreased. Order book weakened the most in the road construction
sub-segment where in recent years we have been working on two major road
construction projects (construction package 5 of the Tartu western bypass and
Keila-Valkse road). We have currently not been able to secure new contracts of
a similar size.  Investments made with the support of the EU structural funds
have not increased to the expected level and it is evident that the new EU
budget period (2014-2020) will not have any significant impact on the
construction sector in the current year. Hence, we expect that the revenues of
the Infrastructure segment will decline in 2015 (for further information, see
the Business risks section of the chapter Description of the main risks). 

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 73% and 27% of the Group’s order book
respectively (30 September 2014: 70% and 30% respectively). The domination of
the Buildings segment is typical of the past two years and not likely to change
in the near term. 

In a situation of stiff competition, we have avoided taking unjustified risks
that could realize on the execution of contracts and have an adverse impact on
our performance. We prefer to keep costs under control and focus on projects
with positive prospects. According to our assessment, in the present situation
it is difficult to maintain revenue and profit margins at the level of 2014
without taking unreasonable risks. Therefore, a decline in the second half-year
is likely. 

Between the reporting date (30 September 2015) and the date of release of this
report, Group companies secured additional construction contracts in the region
of 14,333 thousand euros. Among other wins, we made successful bids for three
road maintenance contracts. In the next five years (2016-2021,) we will
continue to provide national road maintenance services in Järva and Hiiu
counties and will start delivering the same services also in the Kose
maintenance area. 



People

Staff and personnel expenses

In the first nine months of 2015, the Group (the parent and the subsidiaries)
employed, on average, 699 people including 357 engineers and technical
personnel (ETP). 

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

               9M 2015  9M 2014  9M 2013  2014
----------------------------------------------
----------------------------------------------
ETP                357      353      361   357
Workers            342      378      405   375
Total average      699      731      766   732



Compared with a year ago, headcount decreased by around 4% through a decline in
the number of workers, which resulted from shrinkage in the volume of work
performed with own resources. Personnel expenses dropped by around 9%, year
over year, through a smaller headcount and lower profitability which reduced
performance bonuses. The Group’s personnel expenses for the first nine months
of 2015 including all taxes totalled 13,056 thousand euros (9M 2014: 14,357
thousand euros). 

The service fees of members of the council of Nordecon AS for the first nine
months of 2015 amounted to 120 thousand euros and associated social security
charges totalled 39 thousand euros (9M 2014: 166 thousand euros and 55 thousand
euros respectively). 

The service fees of members of the board of Nordecon AS for the first nine
months of 2015 amounted to 329 thousand euros and associated social security
charges totalled 109 thousand euros (9M 2014: 411 thousand euros and 136
thousand euros respectively). 

The fees (also for the comparative period) include the provisions made in the
third quarter for performance bonuses that may be paid based on the Group’s
performance indicators. 



Labour productivity and labour cost efficiency

The rise in nominal labour cost efficiency, relative to the same period last
year, is attributable to a decrease in headcount and a resulting decline in
personnel expenses. 

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

                                                9M 2015  9M 2014  9M 2013   2014
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            217.5    218.8    231.6  220.4
 (EUR’000)                                                                      
Change against the comparative period             -0.6%    -5.5%     8.7%  -4.0%
                                                                                
Nominal labour cost efficiency (rolling),           8.2      7.5      9.5    8.0
 (EUR)                                                                          
Change against the comparative period              9.8%   -21.9%    -8.3%  -4.8%



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



Description of the main risks

Business risks

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

Competition is fierce in all segments of the construction market. In 2015
public sector investment is not likely to grow substantially compared with 2014
as was expected in the comparative period. There is strong competitive pressure
on builders’ bid prices in a situation where input prices have not decreased
noticeably. Competition is particularly aggressive in general building and
utility network construction. 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 significantly and competition is
fierce is risky because negative developments in the economy may quickly render
the contract onerous. Thus, in price-setting we currently prioritize a
reasonable balance of contract performance risks and tight cost control over
plain revenue growth. 

Demand for construction services continues to be strongly influenced by the
volume of public sector investment, which in turn depends on the co-financing
received from the EU structural funds. Total support allocated to Estonia
during the current EU budget period (2014-2020) amounts to 5.9 billion euros,
exceeding the figure of the previous financial framework, but the amounts
earmarked for construction work are substantially smaller. The reporting period
shows unequivocally that these allocations are not going to have an impact on
the construction sector in 2015. Instead, their effect is going to emerge
later. 

In the light of the above factors, we do not expect year-over-year business
growth in 2015. It is probable that the volumes of the Infrastructure segment
will shrink but the decline should be counterbalanced by increasing activity in
the Buildings segment. Our action plan foresees redirecting our resources
(including some of the labour of the Infrastructure segment) to increasing the
share 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 one narrow
(and in the current market situation particularly some infrastructure) segment. 

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, our long-term
goal is 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 also 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 30 September 2015, the Group’s
warranty provisions (including current and non-current ones) totalled 880
thousand euros. The figure for the comparative period was 1,096 thousand euros. 

In addition to managing the 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

During the period, the Group did not incur any credit losses. The credit risk
exposure of the Group’s receivables continued to be low because the share of
public sector customers is significant and the customers’ settlement behaviour
is monitored on an ongoing basis. 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 nine months of 2015, the Group did not incur any impairment losses
on receivables (9M 2014: 10 thousand euros). 

Liquidity risk

The Group remains exposed to higher than usual liquidity risk resulting from a
mismatch between the long settlement terms demanded by customers (mostly 30 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 1.07-fold (30 September 2014: 1.05-fold). The key factors which
influence the current ratio are classification of the Group’s loans to its
Ukrainian associates as non-current assets and the banks’ general policy not to
refinance interest-bearing liabilities for a period exceeding twelve months. 

The political situation in Ukraine remains tense and we believe that
realization of our Ukrainian investment properties may take longer than
originally expected. Accordingly, at the reporting date the Group’s loan
receivables from its Ukrainian associates of 11,148 thousand euros were
classified as non-current assets. 

At period-end, interest-bearing liabilities accounted for a significant share
of our current liabilities. In accordance with IFRS EU, loan commitments have
to be classified into current and non-current liabilities based on contract
terms in force at the reporting date. To date, banks have generally refinanced
the Group’s liabilities for periods not exceeding 12 months, which is why a
substantial portion of loans are classified as current liabilities although it
is probable that some borrowings (particularly overdraft facilities) will be
refinanced again when the 12 months have passed. 

At the reporting date, the Group’s cash and cash equivalents totalled 6,558
thousand euros (30 September 2014: 7,704 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. The Group’s
interest-bearing liabilities have decreased by 1,498 thousand compared with the
same period last year. Current and non-current bank loans have decreased by
3,284 thousand euros while factoring and finance lease liabilities have
increased. The Group uses factoring to counteract the difference in settlement
terms agreed with customers and subcontractors (see also the chapter Liquidity
risk).  At 30 September 2015, the Group’s interest-bearing loans and borrowings
totalled 28,874 thousand euros (30 September 2014: 30,372 thousand euros).
Interest expense for the first nine months of 2015 amounted to 585 thousand
euros, a decrease of 177 thousand euros compared with the same period in 2014. 

The main source of the Group’s interest rate risk is a possible rise in the
base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base
rate). In the light of the Group’s relatively heavy loan burden this would
cause a significant 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. As
regards 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 derivatives 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 hryvnias
(UAH). 

The hryvnia has been weakening because the political and economic environment
in Ukraine continues to be strained due to the differences between Ukraine and
Russia which emerged at the beginning of 2014 and at the beginning of 2015 the
National Bank of Ukraine decided to discontinue determination of the national
currency’s indicative exchange rate. In the first nine months of 2015, the
hryvnia weakened against the euro by around 20%. For the Group’s Ukrainian
subsidiaries, this meant additional foreign exchange losses on the translation
of their euro-denominated loan commitments into the local currency. Relevant
exchange losses totalled 375 thousand euros (9M 2014: 817 thousand euros).
Exchange gains and losses on financial instruments are reported within Finance
income and Finance costs in the statement of comprehensive income. Translation
of receivables and liabilities from operating activities did not give rise to
any exchange gains or losses. 

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

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



Outlooks of the Group’s geographical markets

Estonia

Processes and developments characterising the Estonian construction market

·   In 2015, public sector investments will not grow significantly and the
extent to which they can be realised is still unclear. Although in the
2014-2020 EU budget period the support allocated to Estonia will increase to
5.9 billion euros (2007-2013: 4.6 billion euros), the share of support that
will influence the construction market will not increase. Instead, compared
with the previous period, there will be a rise in allocations to intangible
areas. 

·   Investments made by the largest public sector customers (e.g., state-owned
real estate company Riigi Kinnisvara AS and National Road Administration) that
reach signature of a construction contract in 2015 will not increase
significantly and may be postponed to 2016. As a result, the Estonian
construction market (particularly infrastructure construction segments) will
remain in relative stagnation. To some extent, the situation will be improved
by the positive level of private sector investment in building construction. 

·   The long and painful construction market consolidation will continue,
although slowly. In particular, this applies to 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 recent years’ experience it
is likely that stiff competition and insufficient demand will cause some
general contractors to go slowly out of business or shrink in size rather than
merge or exit the market. According to our assessment, in recent years the
process has been slowed down by the customers’ (particularly public sector
customers’) increasing desire to apply less stringent tendering requirements to
increase competition and lower the price even though this increases the risks
related to collateral, quality, adherence to deadlines and builder’s liability. 

·   Competition will increase in all segments of the construction market. The
average number of bidders for a contract has increased and there is a wide gap
between the lowest bids made by winners and the average bids. The situation is
somewhat similar to 2009 when expectations of shrinkage in demand prompted a
fall in construction prices, which triggered a slide in the prices of many
construction inputs. However, currently we do not see any noticeable downshift
in input prices and companies that are banking on this in the bidding phase may
run into difficulty. Stiff competition is putting pressure on contract prices
and, thus, also profit margins. 

·   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, set affordable sales prices. 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 to 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. 

·   There is an increasing contrast between the stringent terms of public
sector contracts, which impose on the builder extensive obligations, strict
sanctions, various financial guarantees, long settlement terms, etc., and
modest tendering requirements. Low qualification requirements and the
precondition of making a low bid have made it easier for builders to win a
contract but have heightened the risks taken by customers in respect of
contract performance and delivery. 

·   The prices of construction inputs will remain relatively stable. For a
short term, shrinkage in demand may lower local subcontracting prices. However,
taking into account subcontractors’ financial and human resources, the decline
cannot be large or long-lasting. In some areas, price fluctuations will be
unpredictable and may, thus, be 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 but this will weaken the quality of the construction process/service
rather than the companies’ performance capabilities. Shrinkage in the Estonian
construction volumes may increase labour supply but not substantially. Labour
migration to the Nordic countries will remain steady and even though Nordic
construction volumes (particularly in Finland) will decline as well, the number
of job seekers that will return will not increase considerably. This sustains
pressure for a wage increase. 

Latvia and Lithuania

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 2015 it will probably be adversely affected by a slowdown in public
sector demand. Accordingly, it is unlikely that we will enter the Latvian
construction market permanently in 2015. 

In the near term 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 goal to operate in our neighbouring construction
markets through local subsidiaries. 

The operations of the Group’s Lithuanian subsidiary, Nordecon Statyba UAB, have
been suspended. We monitor the market situation and may resume operations in
the next few years because developments in the Lithuanian construction market
have been quite positive in the Baltic context. 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 goal to operate in the Lithuanian
construction market through local subsidiaries. 

Ukraine

In Ukraine, we prefer to provide general contracting and project management
services to foreign private sector customers in the segment of building
construction. However, due to the market situation, we have also signed
contracts with local investors where the terms have not involved any
unreasonable or uncontrollable risks. The unstable political and economic
situation hinders adoption of business decisions but construction activity in
Kiev has not halted. In 2015, the Group will continue its business in the Kiev
region and our current Ukrainian order book is larger than a year ago. Despite
the armed conflict in eastern Ukraine, for Nordecon the market situation in
Kiev has not deteriorated compared with a year or two ago. Hard times have
reduced the number of inefficient local (construction) companies and when the
economy normalises we will have much better prospects for increasing our
operations and profitability. We monitor the situation in the Ukrainian
construction market closely and consistently and are ready to restructure our
operations as and when necessary. Should the crisis spread to Kiev (currently
highly unlikely), we can suspend our operations immediately. We continue to
seek opportunities for exiting our two real estate projects that have been put
on hold or signing a construction contract with a prospective new owner. 

Finland

In Finland, we offer mainly subcontracting services in the concrete works
segment but based on experience gained, have also started to perform some more
complex works. The local concrete works market allows competing for projects
where the customer wishes to source all concrete works from one reliable
partner. Our policy is to maintain a rational approach and avoid taking
excessive risks. At present, we are not planning to penetrate any other
segments of the Finnish construction market (general contracting, project
management, etc.). 

Sweden

In 2015, Nordecon started preparations for potential expansion into the Swedish
market. We are planning to offer construction of residential and
non-residential buildings, particularly in central Sweden. To begin
construction activity, in July 2015 we acquired 100% of ownership interest in
SWENCN AB, a company registered in the Kingdom of Sweden. In October, the first
contract for construction of a five-storey apartment building in Stockholm was
concluded. The cost of the work amounts to around 8.4 million euros. 



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
2014 was 161 million euros and net profit 2.3 million euros. Currently Nordecon
Group employs close to 700 people. Since 18 May 2006 the company's shares have
been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange. 


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