Börsiteade

Pealkiri

2015 fourth quarter and twelve months consolidated interim report (unaudited)

Teade

This announcement includes Nordecon AS’s consolidated financial statements for
the fourth quarter and 12 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                                       31 December 2015  31 December 2014
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                6,332             8,802
Trade and other receivables                             19,078            23,235
Prepayments                                              1,579             1,201
Inventories                                             24,983            24,788
Total current assets                                    51,972            58,026
Non-current assets                                                              
Investments in equity-accounted investees                1,178               694
Other investments                                           26                26
Trade and other receivables                              8,940            11,211
Investment property                                      3,549             3,549
Property, plant and equipment                            9,654             9,319
Intangible assets                                       14,609            14,633
Total non-current assets                                37,956            39,432
TOTAL ASSETS                                            89,928            97,458
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                    15,715            20,588
Trade payables                                          20,715            26,267
Other payables                                           7,309             7,542
Deferred income                                          3,233             1,786
Provisions                                                 825               799
Total current liabilities                               47,797            56,982
Non-current liabilities                                                         
Loans and borrowings                                     5,098             3,145
Trade payables                                             104               109
Other payables                                              96                96
Provisions                                                 768               759
Total non-current liabilities                            6,066             4,109
TOTAL LIABILITIES                                       53,863            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                                      1,355               771
Retained earnings                                       10,960            11,714
Total equity attributable to owners of the              34,526            34,696
 parent                                                                         
Non-controlling interests                                1,539             1,671
TOTAL EQUITY                                            36,065            36,367
TOTAL LIABILITIES AND EQUITY                            89,928            97,458



Condensed consolidated interim statement of comprehensive income

EUR’000                                       Q4     Q4 2014   FY 2015   FY 2014
                                            2015                                
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue                                      31,962   40,353   145,515   161,289
Cost of sales                               -29,232  -39,331  -136,484  -151,476
Gross profit                                  2,730    1,022     9,031     9,813
                                                                                
Marketing and distribution expenses            -138     -138      -412      -558
Administrative expenses                      -1,608   -1,650    -5,026    -5,656
Other operating income                          175      489       464       792
Other operating expenses                        -41      -87      -124      -376
Operating profit/loss                         1,118     -364     3,933     4,015
                                                                                
Finance income                                  164      252       655       738
Finance costs                                -3,418     -720    -4,383    -2,301
Net finance costs                            -3,254     -468    -3,728    -1,563
                                                                                
Share of profit/loss of equity-accounted         -8     -123       225        85
 investees                                                                      
                                                                                
Profit/loss before income tax                -2,144     -955       430     2,537
Income tax                                        0        3      -257      -239
Profit/loss for the period                   -2,144     -952       173     2,298
                                                                                
Other comprehensive income                                                      
Items that may be reclassified                                                  
 subsequently to profit or loss                                                 
Exchange differences on translating             197      348       584     1,069
 foreign operations                                                             
Total other comprehensive income                197      348       584     1,069
TOTAL COMPREHENSIVE INCOME/EXPENSE           -1,947     -604       757     3,367
                                                                                
Profit/loss attributable to:                                                    
- Owners of the parent                       -2,315     -651       167     1,956
- Non-controlling interests                     171     -301         6       342
Profit/loss for the period                   -2,144     -952       173     2,298
                                                                                
Total comprehensive income/expense                                              
 attributable to:                                                               
- Owners of the parent                       -2,118     -303       751     3,025
- Non-controlling interests                     171     -301         6       342
Total comprehensive income/expense for       -1,947     -604       757     3,367
 the period                                                                     
                                                                                
Earnings per share attributable to                                              
 owners of the parent:                                                          
Basic earnings per share (EUR)                -0.08    -0.02      0.01      0.06
Diluted earnings per share (EUR)              -0.08    -0.02      0.01      0.06
                                                                                



Condensed consolidated interim statement of cash flows

EUR’000                                                       FY 2015   FY 2014
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Cash flows from operating activities                                           
Cash receipts from customers1                                 179,119   192,701
Cash paid to suppliers2                                      -151,033  -163,690
VAT paid                                                       -5,407    -5,429
Cash paid to and for employees                                -19,921   -19,384
Income tax paid                                                  -103      -184
Net cash from operating activities                              2,655     4,014
                                                                               
Cash flows from investing activities                                           
Acquisition of property, plant and equipment                     -480      -355
Acquisition of intangible assets                                    0       -13
Proceeds from sale of property, plant and equipment               337       189
Acquisition of a subsidiary                                         0      -737
Acquisition of investments in associates                         -355       -44
Cash received from liquidation of investments in associates         0         1
Loans provided                                                   -291      -292
Repayment of loans provided                                       124       227
Dividends received                                                108         4
Interest received                                                 366         7
Net cash used in investing activities                            -191    -1,013
                                                                               
Cash flows from financing activities                                           
Proceeds from loans received                                    2,099     7,815
Repayment of loans received                                    -3,449   -11,194
Payment of finance lease liabilities                           -1,726    -1,432
Interest paid                                                    -767      -852
Dividends paid                                                 -1,091      -940
Other payments made                                                 0      -168
Net cash used in financing activities                          -4,934    -6,771
                                                                               
Net cash flow                                                  -2,470    -3,770
                                                                               
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                         -2,470    -3,770
Cash and cash equivalents at end of period                      6,332     8,802

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 year 2015 with a gross profit of 9,031 thousand euros
(2014: 9,813 thousand euros) and a gross margin of 6.2% (2014: 6.1%). Despite
increasing competition, we were able to maintain our gross margin at the level
of 2014. Compared with the preceding year, the gross margin of the
Infrastructure segment strengthened noticeably: from 6.8% to 8.6%. Most of the
profit was earned in road construction and maintenance where margin improvement
was underpinned by operational streamlining as well as a decline in certain
input prices (materials such as bitumen). The profitability of the Buildings
segment declined somewhat, largely due to strong competitive pressure that
affected the margins of new contracts secured in 2015. However, we would like
to highlight the fourth quarter where the Group’s gross margin rose to 9.3%
compared with 3.6% a year earlier and both of our main operating segments
delivered margin improvement. 

The Group’s administrative expenses for 2015 totalled 5,026 thousand euros, a
decrease of around 11% from a year earlier (2014: 5,656  thousand euros). The
ratio of administrative expenses to revenue was 3.5% (2014: 3.5%). Our
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 2015 with an operating profit of 3,933 thousand euros (2014:
4,015 thousand euros) and EBITDA of 5,769 thousand euros (2014: 5,585 thousand
euros). 

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange
losses that were smaller than a year earlier. In 2015, the Ukrainian currency
weakened by around 27%, 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 574 thousand euros
(2014: 1,299 thousand euros). The same movements in the exchange rate increased
the translation reserve reported in equity by 584 thousand euros (2014: 1,069 
thousand euros) and the net effect of exchange differences on the Group’s net
assets was a gain of 10 thousand euros (2014: a loss of 230 thousand euros). 

Net profit for 2015 was strongly influenced by the fourth-quarter write-down of
loans provided for two real estate development projects in Ukraine. The
write-down of 2,977 thousand euros, which was recognised in finance costs, is
attributable to Ukraine’s continuing economic difficulties and the weakening of
the hryvnia, which have lowered the prices of commercial real estate and
relevant demand. 

Nordecon group’s net profit for 2015 amounted to 173 thousand euros (2014:
2,298 thousand euros), of which net profit attributable to owners of the
parent, Nordecon AS, was 167 thousand euros (2014: 1,956 thousand euros). 

Cash flows

In 2015, operating activities generated a net cash inflow of 2,655 thousand
euros (2014:  an inflow of 4,014 thousand euros). Cash flows continue to be
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 construction companies’ cash flows. Cash inflow is also
reduced by retentions, which generally 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. We use factoring to counteract the cyclical nature of the
construction business and overdraft facilities to raise additional working
capital. The slight increase in payments to employees results from bonuses paid
for projects completed in the prior year with higher than expected profit
margins. 

Investing activities resulted in a net outflow of 191 thousand euros (2014: a
net outflow of 1,013 thousand euros). Cash flows from investing activities were
mainly influenced by acquisitions of property, plant and equipment of 480
thousand euros (2014: 355 thousand euros) and sales of used property, plant and
equipment for 337 thousand euros (2014: 189 thousand euros). In 2015, the Group
restored an associate’s negative share capital by making a capital contribution
of 355 thousand euros. Through the same transaction, the associate settled its
loan interest liabilities to the Group. Dividends received amounted to 108
thousand euros (2014: 4 thousand euros). 

Financing activities resulted in a net cash outflow of 4,934 thousand euros
(2014: a net outflow of 6,771 thousand euros). Financing cash flows are
strongly influenced by loan and finance lease payments. The Group continued to
repay long-term investment loans; loan repayments exceeded loan receipts by
1,350 thousand euros (2014: by 3,379 thousand euros). Investments made in new
road construction and maintenance equipment increased finance lease payments,
which amounted to 1,726 thousand euros (2014: 1,432 thousand euros). Dividends
distributed in 2015 totalled 1,091 thousand euros (2014: 940 thousand euros). 

At 31 December 2015, the Group’s cash and cash equivalents totalled 6,332
thousand euros (31 December 2014: 8,802 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                                        2015        2014        2013
--------------------------------------------------------------------------------
Revenue (EUR’000)                                145,515     161,289     173,651
Revenue change                                     -9.8%       -7.1%        8.9%
Net profit (EUR’000)                                 173       2,298       4,639
Net profit attributable to owners of the             167       1,956       4,642
 parent (EUR’000)                                                               
Weighted average number of shares             30,756,728  30,756,728  30,756,728
Earnings per share (EUR)                            0.01        0.06        0.15
                                                                                
Administrative expenses to revenue                  3.5%        3.5%        2.8%
                                                                                
EBITDA (EUR’000)                                   5,769       5,585       7,639
EBITDA margin                                       4.0%        3.5%        4.4%
Gross margin                                        6.2%        6.1%        6.5%
Operating margin                                    2.7%        2.5%        3.1%
Operating margin excluding gain on asset            2.4%        2.3%        2.9%
 sales                                                                          
Net margin                                          0.1%        1.4%        2.7%
Return on invested capital                          2.1%        5.8%        9.5%
Return on equity                                    0.5%        6.4%       14.2%
Equity ratio                                       40.1%       37.3%       33.4%
Return on assets                                    0.2%        2.3%        4.3%
Gearing                                            25.5%       24.8%       23.5%
Current ratio                                       1.09        1.02        1.02
As at 31 December                                   2015        2014        2013
--------------------------------------------------------------------------------
Order book (EUR’000)                             125,698      83,544      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              period’s average (interest-bearing  
 parent/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                   
EBITDA = operating profit + depreciation   Equity ratio = (total equity/total   
 and amortisation + impairment losses on    liabilities and equity)*100         
 goodwill                                  Return on assets = (net profit for   
EBITDA margin = (EBITDA/revenue)*100        the period/the period’s average     
Gross margin = (gross profit/revenue)*100   total assets)*100                   
Operating margin = (operating              Gearing = ((interest-bearing         
 profit/revenue)*100                        liabilities – cash and cash         
Operating margin excluding gain on asset    equivalents)/ (interest-bearing     
 sales = ((operating profit – gain on       liabilities + equity))*100          
 sales of non-current assets – gain on     Current ratio = total current        
 sales of real estate)/revenue) *100        assets/total current liabilities    
--------------------------------------------------------------------------------



Performance by geographical market

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

         2015  2014  2013
-------------------------
-------------------------
Estonia   96%   94%   95%
Ukraine    3%    2%    0%
Finland    1%    4%    5%

Finnish revenues resulted from concrete works in the building construction
segment. The contribution of the Ukrainian market, where we mainly continued to
perform one building construction contract, 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, economic conditions in our chosen foreign markets are
also volatile and have a strong impact on our current results. Increasing the
contribution of foreign markets is on Nordecon’s longer-term strategic agenda.
The Group’s vision of its foreign operations is described in the chapter
Outlooks of the Group’s geographical markets. 



Performance by business line

Segment revenues

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

Nordecon’s revenues for 2015 totalled 145,515 thousand euros, 9.8% down from
the 161,289 thousand euros generated 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. The revenues of Infrastructure segment continued
to be supported by the road construction sub-segment whose volumes grew
somewhat compared with 2014. In other sub-segments, revenue declined sharply. 

The segments’ revenues for 2015 were 94,341 thousand euros for Buildings and
47,628 thousand euros for Infrastructure. The corresponding figures for 2014
were 105,145 thousand euros and 51,585 thousand euros (see note 8). 

Operating segments*  2015  2014  2013
-------------------------------------
-------------------------------------
Buildings             64%   65%   41%
Infrastructure        36%   35%   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

Compared with 2014, 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 revenue source continues to be the
commercial buildings sub-segment. 

The largest project in progress in the commercial buildings sub-segment is the
Arsenal Centre in Tallinn. The construction of the Veerenni business building
in Tallinn has reached the final phase. In 2015, we completed the
reconstruction of the Estonia Spa in Pärnu and the construction of an office
building in Lõõtsa street in Tallinn and the Viimsi Centre in Viimsi. In recent
years, the commercial buildings sub-segment has generated around half of the
revenue of the Buildings segment. It is not likely that investment in
commercial properties will continue at the same rate. Thus, we expect the
revenues of the commercial buildings sub-segment to decline in 2016. 

Most of the revenue of the apartment buildings sub-segment resulted from
general contracting. A substantial share of the work was done in Tallinn and
the main revenue contributors were phases II and III of the Tondi residential
quarter and phases I and II of the Pikksilma homes in Kadriorg. We are proud to
report that the residential quarter we are completing in Lepse street in Kiev,
the capital of Ukraine, was selected as one of the city’s three best housing
development projects of the year. Work on all those projects will continue in
2016. We expect the contribution of the apartment buildings sub-segment to
continue growing also in the current year. The contribution of our own
development projects in Tartu and Tallinn continues to increase as well. 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
year-end, 52 of the 55 apartments had been sold. In phase III, which is still
under construction, 9 of the 20 apartments have been sold (www.tammelinn.ee).
By the year-end, we had also sold 9 of the 20 apartment ownerships in the first
three phases of our Magasini 29 development project in Tallinn
(www.magasini.ee). While carrying out our own development projects, we monitor
with due care potential risks in the housing development market which may
result from rapid growth in the supply of new housing and a comparative price
increase. 

The volumes of the public buildings sub-segment have grown mainly through the
state’s increasing investment in national defence. In 2015, we completed and
delivered on time the buildings of the Võru state secondary school and the
Lasva kindergarten and the work done on the premises of the Kuperjanov infantry
battalion. We will continue building the Piusa border guard station, a building
complex at the Ämari air base, and a barracks at the Tapa military base and
have started with the design and construction of a warehouse complex at Lintsi. 

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 the EU support, and  warehouse and
logistics projects. The industrial and warehouse facilities sub-segment is not
expected to grow significantly in 2016. 

Revenue distribution in Buildings segment  2015  2014  2013
-----------------------------------------------------------
-----------------------------------------------------------
Commercial buildings                        50%   42%   45%
Apartment buildings                         22%   18%    5%
Public buildings                            16%    7%   21%
Industrial and warehouse facilities         12%   33%   29%

Similarly to the two previous years, in 2015 the main revenue source in the
Infrastructure segment was road construction. We completed the work started in
2014 on two major road construction projects: one in Tartu (construction
package 5 of the Tartu western bypass) and the other in Keila (Keila-Valkse
section of national road no. 8 Tallinn-Paldiski, km 24.9-29.5). In addition, we
performed numerous smaller road repair projects whose total volume was
substantial. The more important ones included surface dressing in Võru and
Põlva counties and the reconstruction of the Tartu-Märja road. Compared with
2014, the volume of road construction for the private sector increased (e.g.,
ETK logistics centre).  In addition, Nordecon continues to deliver road
maintenance services in the Järva and Hiiu counties and the Keila and Kose
maintenance areas in Harju county. We expect that road construction will remain
the main revenue source in the Infrastructure segment also in 2016 and that
similarly to 2015 most of the work will be done under small or medium-sized
reconstruction and repair contracts. 

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. 

In specialist engineering, we did small-scale port construction work on the
island of Hiiumaa. Investments in hydraulic engineering as well as the Group’s
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. 

Revenue distribution in Infrastructure segment            2015  2014  2013
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Road construction and maintenance                          81%   72%   54%
Other engineering                                          14%   19%   26%
Environmental engineering                                   4%    7%   12%
Specialist engineering (including hydraulic engineering)    1%    2%    8%



Order book

At 31 December 2015, the Group’s order book (backlog of contracts signed but
not yet performed) stood at 125,698 thousand euros, a roughly 50% increase on
the previous year-end. Order books grew in both the Buildings and the
Infrastructure segment. In the fourth quarter of 2015, we secured new contracts
of 56 million euros, which is recent years’ largest quarterly order book
growth. 

As at 31 December        2015    2014    2013
---------------------------------------------
Order book (EUR’000)  125,698  83,544  64,286

At the reporting date, contracts secured by the Buildings segment and the
Infrastructure segment accounted for 72% and 28% of the Group’s order book
respectively (31 December 2014: 73% and 27% respectively). It is likely that
the Buildings segment will continue to dominate the order book in the next few
years. 

Compared with a year earlier, the order book of the Buildings segment grew by
around 48%. Major growth was posted in all sub-segments except commercial
buildings whose order book contracted by over 60%. The order book of the
apartment buildings sub-segment grew mostly through contracts signed at the end
of 2015 for the construction of the Meerhof 2.0 building complex at Pirita tee
20a and an apartment building at Virbi 8/10 in Tallinn, Estonia, and five
apartment buildings in the city of Brovary in the Kiev region in Ukraine (the
contracts were secured under a frame agreement signed in autumn 2015). It
should also be noted that in October 2015 we signed a contract for the
construction of a five-storey apartment building in Stockholm, Sweden, where
most of the construction work will be done in 2016. Growth in the order book of
the public buildings sub-segment is attributable to the design and construction
of the Järveküla school and the Lintsi warehouse complex that started at the
end of 2015. A substantial share of work under those contracts will be
performed in 2016. Slight growth in the order book of the industrial and
warehouse facilities sub-segment results from the construction of  a warehouse
for Riigiressursside Keskus and the South Terminal (a cereals storage and
handling complex) for farmers’ cooperative KEVILI. 

Compared with a year earlier, the order book of the Infrastructure segment grew
by around 57%. The rise was mainly underpinned by growth in the road
construction sub-segment, which was supported by the contracts secured for the
performance of road maintenance services in the Järva, Hiiu, and Kose road
maintenance areas in the period 2016-2021. The order books of the environmental
engineering sub-segment, which signed a contract for the design and
construction of an extension to the Kohtla-Järve wastewater treatment plant,
and other engineering sub-segment also grew somewhat. However, due to the small
size of their contracts, this did not have a strong impact on the segment’s
overall portfolio growth. According to our estimates, in 2016 the volume of
public sector investments will not increase substantially compared with 2015
and the new EU budget period (2014-2020) will not have any significant impact
on the construction sector before the second half of the year. Hence, we do not
expect the revenues of the Infrastructure segment to increase in 2016 (for
further information, see the Business risks section of the chapter Description
of the main risks). 

In the light of order book growth and the developments reported in our chosen
markets, we forecast probable volume growth for 2016. In an environment of
stiff competition, we pursue the policy of avoiding unjustified risks that
could realize on the execution of contracts and have an adverse impact on our
performance.  Instead, we prefer to keep costs under control and focus on
projects with positive prospects. 

Between the reporting date (31 December 2015) and the date of release of this
report, Group companies have secured additional construction contracts in the
region of 12 125 thousand euros. 



People

Staff and personnel expenses

In 2015, the Group (the parent and the subsidiaries) employed, on average, 690
people including 356 engineers and technical personnel (ETP). 

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

               2015  2014  2013
-------------------------------
-------------------------------
ETP             356   357   357
Workers         334   375   400
Total average   690   732   757

Compared with a year earlier, headcount decreased by around 6% through a
decline in the number of workers, which resulted from shrinkage in the work
performed with own resources. Personnel expenses dropped by around 9%, year
over year, through a smaller headcount and a decrease in performance bonuses
paid. The Group’s personnel expenses for 2015 including all taxes totalled
18,248 thousand euros (2014: 20,099 thousand euros). 

The service fees of members of the council of Nordecon AS for 2015 amounted to
139 thousand euros and associated social security charges totalled 46 thousand
euros (2014: 141 thousand euros and 47 thousand euros respectively). The
provision for the council’s performance bonuses, made based on the Group’s
performance indicators, amounted to 37 thousand euros and the provision for
associated social security charges totalled 12 thousand euros (2014: 113
thousand euros and 37 thousand euros respectively). 

The service fees of members of the board of Nordecon AS for 2015 amounted to
322 thousand euros and associated social security charges totalled 106 thousand
euros (2014: 262 thousand euros and 87 thousand euros respectively). The
provision for the board’s performance bonuses, made based on the Group’s
performance indicators, amounted to 188 thousand euros and the provision for
associated social security charges totalled 62 thousand euros (2014: 387
thousand euros and 128 thousand euros respectively). 



Labour productivity and labour cost efficiency

Nominal labour productivity dropped compared with 2014 because revenue decrease
outstripped the decline in workforce. 

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: 

                                                   2015   2014    2013
----------------------------------------------------------------------
----------------------------------------------------------------------
Nominal labour productivity (rolling), (EUR’000)  210.9  220.4   229.4
Change against the comparative period             -4.3%  -4.0%    9.9%
                                                                      
Nominal labour cost efficiency (rolling), (EUR)     8.0    8.0     8.4
Change against the comparative period             -0.6%  -4.8%  -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. 

Competition continues to be fierce in all segments of the construction market.
In 2016, public sector investment is not likely to grow substantially compared
with 2015. 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 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 tough is risky because negative developments
in the economy may quickly render the contract onerous. Thus, in price-setting
we currently prioritise a reasonable balance of contract performance risks and
tight cost control over 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. Moreover, these
allocations are not expected to have an impact on the construction sector
before the second half of 2016. 

In the light of the above factors, we see opportunities for business growth
compared with 2015 mostly in our chosen foreign markets. We expect that in
Estonia infrastructure construction volumes will remain at the level of 2015
while investment in building construction may grow slightly. Our action plan
foresees directing our resources (including some of the labour of the
Infrastructure segment) to increasing the share of contracts secured from the
private sector. According to its business model, Nordecon operates in all
segments of the construction market. Therefore, we are somewhat better
positioned than companies that operate in one narrow (and in the current market
situation particularly some infrastructure) segment. 

The Group’s business is also influenced the seasonal nature of construction
operations. Seasonality is the strongest in infrastructure construction, which
is more exposed to changes in weather conditions (road and port construction,
earthwork, etc.). To disperse the risk, we secure road maintenance contracts
that generate year-round business. Our strategy is to counteract the
seasonality of infrastructure operations with building construction that is
less exposed to seasonal fluctuations. Thus, our long-term goal is to be
flexible and keep our two operating segments in relative balance (see also the
chapter Performance by business line). In addition, where possible, our
entities 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
insurance contracts are used. In addition, as a rule, subcontractors are
required to secure performance of their obligations with a bank guarantee
provided to a Group company or the Group retains part of the amount 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 December 2015,
the Group’s warranty provisions (including current and non-current ones)
totalled 1,184 thousand euros (31 December 2014: 1,162 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

In 2015, the Group did not incur any significant credit losses. The credit risk
exposure of the Group’s receivables is low because the solvency of all
prospective customers is assessed, the share of public sector customers is
large and the customers’ settlement behaviour is monitored on a continuous
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 2015, impairment losses on receivables totalled 17 thousand euros (2014: 14
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 1.09-fold (31 December 2014: 1.02-fold). The key factors which
influence the current ratio are the classification of the Group’s loans to its
Ukrainian associates as non-current assets and the banks’ general policy not to
refinance interest-bearing liabilities for a period exceeding twelve months. 

The political situation in Ukraine remains tense and we believe that the
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 8,302 thousand euros were
classified as non-current assets. 

Interest-bearing liabilities account for a significant share of our current
liabilities. Under IFRS EU, loan commitments have to be classified into current
and non-current items based on contract terms in force at the reporting date.
So far, banks have generally refinanced liabilities for periods not exceeding
12 months, which is why a substantial portion of loans is classified as current
although it is probable that some borrowings, particularly overdraft facilities
which account for around a half of current loan liabilities, will be refinanced
when the 12 months have passed. 

At the reporting date, the Group’s cash and cash equivalents totalled 6,332
thousand euros (31 December 2014: 8,802 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. In 2015, the Group’s
interest-bearing liabilities decreased by 2,920 thousand euros compared with
the year before. Current and non-current bank loans decreased by 2,614 thousand
euros and factoring liabilities by 710 thousand euros. Finance lease
liabilities grew slightly. The Group uses factoring to counteract the
difference in the settlement terms agreed with customers and subcontractors
(see also the chapter Liquidity risk).  At 31 December 2015, the Group’s
interest-bearing loans and borrowings totalled 20,813 thousand euros (31
December 2014: 23,733 thousand euros). Interest expense for 2015 amounted to
770 thousand euros, a decrease of 231 thousand euros compared with 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 rise in interest expense, which would have an adverse
impact on profit. We mitigate the risk by pursuing a policy of entering, where
possible, into fixed-rate contracts when the market interest rates are low. As
regards loan products offered by banks, observance of the policy has proved
difficult and most new contracts have a floating interest rate. In 2015, the
Group did 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), Ukrainian hryvnias
(UAH) and Swedish kronas (SEK). 

The hryvnia has been weakening because the political and economic environment
in Ukraine continues to be strained due to the conflict between Ukraine and
Russia which broke out at the beginning of 2014 and at the beginning of 2015
the National Bank of Ukraine decided to discontinue determination of the
national currency’s indicative exchange rate. 

In 2015, the hryvnia weakened against the euro by around 27%. 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 574 thousand euros (2014: 1,299 thousand
euros). Exchange gains and losses on financial instruments have been recognised
in 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 2016, 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 2016 will not increase significantly.
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 investments
in building construction. 

·   The long and painful process of construction market consolidation will
continue, albeit slowly. In particular, this applies to general contracting in
building construction where the number of medium-sized construction service
intermediaries (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 security, quality,
adherence to deadlines and the 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 the 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. Aggressive competition is putting visible 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 sales prices that are affordable for prospective buyers. The
prices of new apartments are relatively high compared to the standard of living
and the banks’ lending terms are strict. This has held back rapid growth of the
housing market but in the second half of 2015 the supply of new apartments grew
significantly, slowing down the sale of apartments with relatively high sales
prices. 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 require the builder to agree to 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 but growth
in housing development has made it unlikely that the prices charged by local
building construction subcontractors would decline any further. Certainly there
are areas where major changes in the environment may trigger more abrupt price
changes. 

·   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. Labour migration to the
Nordic countries will remain steady and even though construction volumes
(particularly in Finland) will decline, the number of job seekers that will
return to the Estonian construction market will not increase considerably. In
combination with the above, this will sustain pressure for a wage increase. 

Latvia and Lithuania

It is not likely that the Group will enter the Latvian construction market in
2016. However, we do not rule out the possibility of carrying out certain
projects in Latvia through our Estonian entities, with the involvement of
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 market through local subsidiaries. 

The operations of the Group’s Lithuanian subsidiary, Nordecon Statyba UAB, have
been suspended. We continue to monitor developments in the Lithuanian
construction market that 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 provide general contracting and project management services to
private sector customers in the segment of building construction. The unstable
political and economic situation hinders adoption of business decisions but
construction activity in Kiev and its vicinity has not halted. In 2016, 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 considerably 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 (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 have provided mainly subcontracting services in the concrete
segment but based on experience gained, we are ready to start performing 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. 

Sweden

In July 2015, Nordecon acquired 100% ownership interest in SWENCN AB, a company
registered in the Kingdom of Sweden, and entered the Swedish market. We intend
to offer mainly construction of residential and non-residential buildings,
particularly in central Sweden. In October 2015, the first contract for the
construction of a five-storey apartment building in Stockholm was concluded.
The cost of the work amounts to around 8.4 million euros. We will continue the
work aimed at increasing our business volumes in Sweden. 





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