Nordecon
Quarterly report

2010 IV quarter and 12 month consolidated interim report (unaudited)

Nordecon Group publishes its 2010 IV quarter and 12 month consolidated unaudited interim report

Tallinn, Estonia, 2011-02-21 16:00 CET --  

Correction to the disclosed amounts in preliminary financial results published on 10 February 2011

Cash and cash equivalents and short term interest bearing liabilities contained sums form one of Nordecon Group’s unused credit line. The unused facility of 9,793 thousand kroons (626 thousand euros) should not be recognised as a balance sheet item. The correct cash and cash equivalents and short term interest bearing liabilities are 91,018 thousand kroons (5,818 thousand euros) and 272,053 thousand kroons (17,388 thousand euros) respectively.

Directors’ report

The Group’s strategy and objectives

The Group’s revised strategy for 2010-2013

In July 2010 the board of Nordecon AS (from 1 January 2010, the business name of the Group’s parent company is Nordecon AS) submitted its proposals for revising the Group’s strategy for review and approval by the council. The council approved the suggested changes at a meeting held on 10 September 2010.

The board is of the opinion that in forthcoming years, the Group should focus on its core business in its main market, Estonia, where Nordecon is represented in almost all construction segments and can rely on extensive local experience. In order to adapt to changes in the external environment, the Group will have to continue restructuring its operations, improving profitability by effective cost management, and creating opportunities for successfully entering the growth phase of the construction market (also in its target foreign markets).

According to the board’s proposal, until 2013 (inclusive) the Group will focus on achieving the above. The strategy for the next three years will have to support the Group’s recovery from the slump and prepare ground for seizing the opportunities provided by the growth of the construction market that is anticipated to emerge in 2012.

In the next few years, revenue growth will not be a priority for the Group because this would assume taking unjustified risks at margins that are unnaturally low for the construction market.

Nordecon Group’s main strategic objectives until 2013

• To complete adjustments to the Group’s structure and governance that were launched in 2009 in order to secure profitable and rapid growth in the rise phase of the market
• To operate in Latvia, Lithuania and Belarus on a project basis, assuming that this is profitable
• To continue buildings construction operations in Ukraine in line with the former strategy but to decide the need for revising the strategy in light of the current downturn in the Ukrainian construction sector in the first quarter of 2011 at the latest
• To maintain preparedness for re-launching more active operations in foreign markets (as a general contractor) as soon as the situation in the construction market has become sufficiently supportive
• To penetrate the Finnish concrete works market (as a contractor) through a subsidiary in order to support development of the business line
• To become the leading construction group in Estonia that earns half of its revenue from infrastructure and the other half from buildings construction by the end of 2013

The key theme of the strategy for 2010-2013 is “To respond to market change swiftly and flexibly and to enter the next economic growth cycle successfully”

Significant changes in the Group’s structure in 2010 and 2011

In a meeting held on 10 September 2010, the council of Nordecon AS resolved to approve the board’s proposal for combining Nordecon AS (at the date of the decision Nordecon International AS), Nordecon Infra AS and Nordecon Ehitus AS by signing a corresponding merger agreement.

The board of Nordecon AS made the merger proposal based on its vision of the changes required in the Group’s strategy for 2010-2013. According to the board’s vision, in a situation of declining business volumes the Group should also redesign and streamline its management model. The merger of the three companies will provide a shorter and more flexible chain of command and should yield cost savings of at least 15.6 million kroons (1 million euros) in 2011. 

The companies signed the merger agreement on 4 October 2010. The merger was approved by the shareholders of Nordecon AS at an extraordinary general meeting that convened on 19 November 2010. Among other matters, the general meeting decided to change the company’s business name. The new name, Nordecon AS, took effect as from the entry of the merger in the commercial registry. The merger entries were made on 31 December 2010.

After the registration of the merger, Nordecon Infra AS and Nordecon Ehitus AS were deemed dissolved. As from 2011 their investments in their stand-alone subsidiaries are held by the combined entity Nordecon AS. The merger did not change the business profile of the Nordecon construction group that will continue operating in all its previous operating segments.

Changes in the Group’s business operations in 2010

Changes in the Group’s Estonian operations

In 2010, the Group’s Estonian operations did not change significantly compared with 2009. From the beginning of 2010 the Group conducted its core business through two subgroups - Nordecon Ehitus AS and Nordecon Infra AS - specialising in buildings and infrastructure construction respectively. No new operating segments were created. The Group’s parent Nordecon AS (formerly Nordecon International AS) acted mostly as a holding company, providing the Group with strategic management and intra-Group support services. At the end of 2010, Nordecon Ehitus AS and Nordecon Infra AS were merged with the parent Nordecon AS (for further information, refer to the chapter Significant changes in the Group’s structure in 2010 and 2011). The merger did not cause any changes in the operating segments of Nordecon Group.  

Changes in the Group’s foreign operations

Latvia

The Group entered the Latvian market at the beginning of 2007 when the acquisition of the subsidiary OÜ Kaurits provided it with a stake in a Latvian associate, SIA Abagars (later renamed Nordecon Infra SIA). In order to avoid subsequent conflicts of interest, the Group acquired the majority shareholding in the Latvian entity in May 2008. The core business of the Latvian company was construction of water and wastewater networks. Business volumes in Latvia grew swiftly and the company secured and delivered several large public procurement projects. However, over-rapid growth resulted in an accumulation of operational risks which in combination with drastic changes in the economic environment caused the company to incur losses in the second half of 2009. The overall deterioration in the Latvian economy caused difficulties in collecting payments from customers including counter-parties related to the state and local government.

As a result, in February 2010 the board of Nordecon AS resolved to divest the Group’s entire 56% interest in Nordecon Infra SIA because it was evident that in the next few years the entity would be operating with a loss. The stake was sold to an individual (a non-controlling shareholder). After the transaction, the Group does not have any ownership interests in companies domiciled in Latvia. The financial aspects of the transaction are described in more detail in note 4 to the interim financial statements.

In the forthcoming years, the Group will continue operating in Latvia on a project basis through its Estonian entities, involving partners where necessary. However, this assumes the availability of profitable projects.

Belarus

The Group has signed a contract with a Finnish food industry company for the construction of a factory in Belarus. The project is performed through the Group’s wholly-held Belarusian subsidiary Eurocon Stroi IOOO whose establishment was completed in January 2010. At the moment, this is the Group’s only project in Belarus. The Group used a similar strategy, i.e. contracts tendered by well-known Nordic or Baltic companies, for penetrating the Ukrainian market more than twelve years ago. The Group is not holding any negotiations regarding other projects and according to the development strategy penetrating the Belarusian market more extensively in 2011 is not a priority. The current year and the above project will serve as a basis for getting to know the market and conducting further analyses. 

Ukraine

There were no significant changes in the Group’s Ukrainian operations compared with the end of 2009. The Group continued operating in the buildings segment with a focus on private sector customers. The Group’s Ukrainian operations may change in 2011 because in the first quarter the Group will decide how it will respond to the slump prevailing in the Ukrainian market.

Finland

The Group’s subsidiary Nordecon Betoon OÜ has been seeking opportunities for winning concrete works contracts in Finland since the end of 2009. For this, in the first half of 2010 a Finnish subsidiary, Estcon OY, was acquired from the parent. The Group undertook the transaction to support the development of its concrete works business line.

Financial review

Margins

Nordecon Group ended 2010 with a gross loss of 8.2 million kroons (0.5 million euros) compared with a gross profit of 136.3 million kroons (8.7 million euros) earned in 2009. The loss from the Group’s operating activities resulted mainly from the recognition of losses incurred on projects secured before the input prices started rising as well as adverse weather conditions at the beginning and end of the year, which had a strong impact on the performance of the road maintenance units.

According to management’s assessment, continuously fierce competition in the construction market is keeping the gross margins of secured and new contracts lower than they would be in a stable market. A slow but steady rise in input prices means that long-term contracts signed in the previous period will remain exposed to the risk of loss. The Group recognised all known construction contract losses in the first half-year and, following a specification of estimates, some losses also in the fourth quarter. In the second and third quarter the Group’s operating activities generated a profit. Although the figures did not meet to the Group’s profit targets, management believes that the Group is moving in the right direction for restoring its operational profitability in 2011 as a whole. Considering the contracts in the Group’s uncompleted portfolio, i.e. the order book figures, the overall trend has become distinctly positive.

Unfavourable weather conditions had a two-fold impact on the Group’s operations. On the one hand, during the months of heavy snow it was not possible to do outdoor work (road and outdoor network construction, etc), which affected mainly the infrastructure segment, and although there was a kind of technological standstill the Group continued to incur its fixed costs. On the other hand, extreme snow conditions affected the results of the road maintenance contracts because the costs incurred exceeded those of previous years while underlying revenue remained fixed. For instance, in 2010 the costs of fuel and road spraying salt were three times larger than those of milder winters (2006-2007).

The Group’s administrative expenses totalled 76.5 million kroons (4.9 million euros). Compared with 2009, the Group has cut its administrative expenses by 39%, clearly surpassing the 30% target. As at the reporting date, the ratio of administrative expenses to revenue was 4.9% (2009: 5.2%). We are pleased to report that cost-saving measures have yielded good results – despite decreasing volumes we have been able to maintain the level of administrative expenses below the target for normal market conditions, i.e. 5% of revenue.

In the fourth quarter the Group recognised and reported in other operating expenses exceptional losses from the impairment of trade receivables and goodwill. Group company Eston Ehitus AS’ receivables from counterparties that had commissioned the construction of Pärnu Keskus (Pärnu Centre) were written down by 42.4 million kroons (2.7 million euros) because the debtors’ rehabilitation plans were not carried out and bankruptcy proceedings were instituted against one of the debtors. After the write-down (including the losses recognised in finance expenses in the third quarter), the Group’s balance sheet includes no more receivables from counterparties to the construction of Pärnu Keskus or companies related to them. In addition, goodwill of 4.7 million kroons (0.3 million euros) that had been recorded on the acquisition of the subsidiary Magasini 29 OÜ was written down in full because the expected profitability of the entity’s real estate development project had declined compared with the original projections.

As a result, the Group’s operating loss for 2010 amounted to 137.5 million kroons (8.8 million euros) compared with a loss of 171.3 million kroons (10.9 million euros) for 2009.

In the third quarter, the Group recognised and reported in finance expenses an impairment loss of 40.2 million kroons (2.6 million euros) on loans to legal persons. The write-down concerned loans provided by Eston Ehitus AS to owners of the companies that had commissioned the construction of Pärnu Keskus. By the third quarter it had become clear that it was not reasonable to expect that the persons would regain their solvency.

In the fourth quarter the Group also recognised and reported in other finance expenses losses of 26.7 million kroons (1.7 million euros) that resulted from the realisation of the commitments of the former Latvian subsidiary Nordecon Infra SIA that were guaranteed by the Group. In combination with other gains and losses from the sale of the subsidiary in the first quarter of 2010 (sales gain of 32.6 million kroons/2.1 million euros and write-down of loans, receivables and goodwill by a total of 16.2 million kroons/1.0 million euros), the net result of exiting the investment in the Latvian subsidiary was a loss of 10.3 million kroons (0.7 million euros).

The Group’s net loss for 2010 was 195.7 million kroons (12.5 million euros). The loss attributable to owners of the parent Nordecon AS amounted to 182.5 million kroons (11.7 million euros).

Cash flows

In 2010, the Group’s operating activities resulted in a net cash outflow of 58.4 million kroons (3.7 million euros) while the comparative period ended in a net cash inflow of 90.9 million kroons (5.8 million euros). Compared with 2009, operating cash inflow has been replaced by operating cash outflow. This is mainly attributable to cyclical fluctuations in project-related cash flows and the impact of unprofitable projects. The customers’ contractual settlement terms have lengthened (to approx. 60 days) and in the case of some projects payments have been deferred until 2011. On the other hand, the Group completed some major projects whose warranty and similar retentions were paid after the signature of the final delivery documents. In the second half of the year, operating cash flow was influenced by unprofitable projects whose effect may also be felt in 2011. To some extent, the negative cash flow may also be attributed to the Group’s decision to pay employee salaries for December 2010 in the same month although usually this is done at the beginning of the next. Thus payroll expenses for 2010 actually include the remuneration for 13 months. This was done to mitigate the risks related to the switch-over to the euro, for example to prevent a situation where owing to a system failure the Group would not have been able to pay out employee salaries by the date agreed in the employment contracts.

Investing activities generated a net inflow of 10.0 million kroons (0.6 million euros) compared with a net outflow of 54.0 million kroons (3.5 million euros) for 2009. A significant proportion of cash outflows from investing activities (9.6 million kroons/0.6 million euros) is attributable to the disposal of the subsidiary Nordecon Infra SIA and the discontinuance of its consolidation. A significant proportion of cash inflows resulted from the disposal of property, plant and equipment and investment properties that generated receipts of 24.4 million kroons (1.6 million euros).

Financing activities resulted in a net cash outflow of 85.9 million kroons (5.5 million euros) compared with an outflow of 116.9 million kroons (7.5 million euros) in 2009. The internal structure of financing cash flows has remained stable. The Group is raising slightly less debt capital than is required for settling its existing loan liabilities on a timely basis.

Key financial figures and ratios

¹ On calculating EBITDA, non-cash expenses include depreciation and amortisation as well as impairment losses on goodwill.

Performance by geographical market

In 2010, revenues earned outside Estonia accounted for around 6% of the Group’s total revenue. In 2009, the contribution of foreign markets was around 14%. The decrease results from the Group’s decision to sell its Latvian operations in 2010. In addition, in contrast to 2009 in 2010 the Group did not earn any revenue in Lithuania. The proportion of the Group’s Ukrainian revenues has remained stable compared with the previous year.

In the reporting period, the Group started performing a project-based construction contract in Belarus whose revenues accounted for around 3% of the Group’s total revenue. The project in Belarus will continue until the end of the first half of 2011. Finnish revenues result from subcontracts for the delivery of concrete works.

Revenue distribution between different geographical segments is a consciously deployed strategy by which the Group avoids excessive reliance on a single market. Although in the long-term perspective the Group’s strategy foresees increasing foreign operations, in the short-term perspective the Group will focus on the Estonian market and seizing opportunities in an environment that it knows best and that entails comparatively fewer identified market risks. The Group’s vision of its future activities in foreign markets is described in the chapter Outlooks of the Group’s geographical markets.

Performance by business line

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

Consolidated revenue for 2010 amounted to 1,557.0 million kroons (99.5 million euros), a 36% decrease from the 2,418.9 million kroons (154.6 million euros) generated in 2009. Above all, the downturn is attributable to a significant decline in the demand for construction services in all of the Group’s markets and, in the first quarter, an exceptionally snowy and cold winter that had the strongest impact on the Infrastructure segment where most of the work is done outdoors. In addition, the absolute revenue figure was influenced by stiff competition that continues to lower prices in the construction market where the Group has been trying to avoid going along with underbidding aimed at winning major but excessively risky long-term contracts.

The Group aims to maintain the revenues generated by its business segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides a more solid foundation under stressed circumstances when one segment experiences shrinkage. In view of estimated demand for apartments, in subsequent years the proportion of housing construction revenue will remain within the strategic 20% limit.

Segment revenue

In 2010, the Group’s infrastructure construction revenues exceeded those of buildings construction. Considering that for some time most of the construction market tenders have been related to infrastructure (primarily projects financed with the support of the state and the EU structural funds) and that the majority of contracts in the Group’s order book belong to the Infrastructure segment, this was to be expected. However, the revenues of the segments are practically equal because the Group’s active buildings construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is relatively smaller. It is quite clear that in the near future the contribution of the Infrastructure segment will exceed that of Buildings.

In 2010 the Buildings and Infrastructure segments generated revenue of 715.5 million kroons (45.7 million euros) and 810.8 million kroons (51.8 million euros) respectively. The corresponding figures for 2009 were 1,055.4 million kroons (67.4 million euros) and 1,339.2 million kroons (85.6 million euros).

Revenue distribution between segments *

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

Revenue distribution within segments

Distribution of projects within the Buildings segment has changed significantly compared with a year ago as well as with historical annual averages. There are two main reasons for this. The scarcity of projects forces companies to compete in all market segments and the number of contracts awarded is small compared with bids made. Such a situation does not allow concentrating on a specific business area. Another important factor is the general economic environment. During the past year, private companies’ investments in commercial and industrial buildings and facilities have been almost nonexistent while local governments’ investments in schools, nursery schools and public buildings have increased, partly thanks to the support received from the EU structural funds. The proportion of industrial buildings in the Group’s portfolio is large mainly because of the ongoing construction of the Ahtme peak load boiler plant. The Group builds apartment buildings for external customers as a general contractor, not a developer.                                                                       

As anticipated, in 2010 almost two thirds of the revenue generated by the Infrastructure segment is attributable to road construction and maintenance. The construction of other engineering facilities (mostly water and wastewater networks) is an area where the Group has won many tenders and their proportion is expected to remain relatively large also next year. The contribution of environmental engineering projects (e.g. the closure of landfills) has remained stable compared with 2009. However, hydraulic engineering that depends heavily on Estonian ports’ investment policies plummeted to an all-time low in 2010.

Order book

At 31 December 2010, the Group’s order book stood at 1,382.1 million kroons (88.3 million euros), 10% down from the 1,530.7 million kroons (97.8 million euros) posted a year ago. Over the past quarters, the decline in the Group’s order book has notably decelerated and the forward order book has levelled off at around 1,350 to 1,500 million kroons (86 to 95 million euros).

At 75% the Infrastructure segment continues to account for a major proportion of the Group’s total order book (2009: 74%).

The value of the order portfolio has decreased due to the downturn in the construction market. In a situation where the decrease in input prices has ceased or turned to a rise in almost all areas of the construction sector, the Group’s management continues to focus on improving the profitability of the contract portfolio rather than increasing its size or growth rate.

Between the reporting date (31 December 2010) and the date of release of this report, Group companies have been awarded additional construction contracts of approximately 101.8 million kroons (6.5 million euros).

People

Staff and personnel expenses

At the end of 2010, the Group (including the parent and the subsidiaries) employed, on average, 726 people including around 345 engineers and technical personnel (ETP). A significant one-off decrease in the number of staff is attributable to the divestment of the Latvian subsidiary Nordecon Infra SIA in the first quarter of 2010. At the beginning of 2010, the Nordecon Infra SIA subgroup employed over 160 people. In addition to disposals of companies, the number of staff has decreased on account of downsizing (lay-offs and termination of contracts). The decrease in personnel has decelerated and the Group’s management believes that in 2011 there will be no need for any major staffing cuts. Headcount should remain stable although it will be influenced by additional seasonal labour hired for the second and third quarters and the size of new contracts secured by the Group.

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

The Group’s personnel expenses for 2010 including all associated taxes totalled 226.8 million kroons (14.5 million euros), a 38% decrease compared with the 363.5 million kroons (23.2 million euros) incurred in 2009.

Personnel expenses have declined on account of downsizing and the cutting of basic salaries. In 2009, employee salaries were lowered at all Group entities; the average pay-cut for engineers and technical personnel was 15%. The performance pay of project staff that is linked to the projects’ profit margins has also dropped.

In 2010, the remuneration of the members of the council of Nordecon AS including associated social security charges amounted to 1,436 thousand kroons (92 thousand euros). The corresponding figure for 2009 was also 1,436 thousand kroons (92 thousand euros). The remuneration of the members of the board of Nordecon AS including social security charges totalled 3,120 thousand kroons (199 thousand euros) compared with 3,254 thousand kroons (208 thousand euros) for 2009. The remuneration of the board has decreased because in the comparative period the board had more members, on average, than in the reporting period. 

Changes on the board of Nordecon AS

Due to the contraction of the Group’s foreign operations, Priit Tiru who was responsible for coordinating the Group’s foreign operations and strategic management of the buildings construction division was recalled from the board of Nordecon AS early based on a council resolution effective as of 1 November 2010.

In connection with the merger of Nordecon AS with its subsidiaries Nordecon Infra AS and Nordecon Ehitus AS, the council appointed to the board of the merged entity new members who took office in January 2011. Jaano Vink continues as chairman of the board. The new board members are Avo Ambur, Marko Raudsik and Erkki Suurorg who all have long-term experience in the construction sector as well as in Nordecon Group.

Outlooks of the Group’s geographical markets

Estonia

According to the assessment of the Group’s management, in 2011 the Estonian construction market will be influenced by the following factors:

• Total demand in the construction market will remain heavily dependent on public procurement tenders and projects performed with the support of the European Union funds. Project initiation success depends on the administrative capabilities of the central and local government which have improved compared with previous periods but are still of unreliable quality. The construction market has bottomed out, the sharpest downturn having ended with 2010. In 2011 construction volumes will remain comparable to the previous year, particularly in the field of infrastructure construction. There are opportunities for growth in the buildings construction segment through the return of private sector customers (including foreign investors). However, this is not yet an indication of demand recovering to a level where all currently operating construction companies could secure sufficient business. 
• Market consolidation will continue owing to the contraction in volumes in 2008-2010. In the past two years, the construction market has been deserted by many medium-sized and small real estate development and buildings construction companies that were unable to respond to market changes sufficiently quickly or had taken excessive real estate risks. In 2011, the number of construction companies will continue decreasing primarily because rising input prices are rendering the performance of contracts in the portfolios of companies that have survived a fall in market and construction prices too unprofitable for those that have not noticed the trend or have deliberately ignored it due to cash flow problems. In that context, the greatest risk will be the liquidity risk.
• Both active projects and those secured in 2011 will be significantly influenced by various terms and conditions including long settlement terms dictated by customers.
• Construction contracts’ profit margins will remain under pressure from continuously fierce competition and rising input prices. In addition, companies will continue challenging the results of poorly prepared public procurement tenders, which will cause time and financial costs for all involved. It will be increasingly important to meet all the requirements outlined in the public procurement tenders. 
• The situation in the labour market has stabilised and construction workers’ outflow to the Scandinavian countries will not increase significantly. Companies have adapted to the situation and in 2011 the base wages paid by construction companies that have to maintain a cost-saving regime are not expected to increase.
• The post-depression macroeconomic and construction market indicators will continue to improve. As a result, the banks will be increasingly ready to grant private-sector customers new investment loans and, in the case of a suitable risk profile, also funding for real estate development. The investments made with the involvement of banks are not going to trigger major growth in market volumes but they will give a much-needed signal of the stabilisation of the investment climate, creating a basis for more visible market growth in 2012. 

Nordecon Group’s main operational objectives for 2011

In 2011 Nordecon Group will focus on raising profitability compared with 2010 by:

• Vigorously improving the efficiency of the various aspects of the Group’s core operations
• Maintaining strict control over fixed costs in order to be able to face an extended recession if necessary
• Keeping up the team spirit and dedication of the Nordecon people

Latvia and Lithuania

In February 2010, the Group sold its stake in the loss-generating Latvian entity Nordecon Infra SIA whose core business was construction of water and sewerage networks. According to the Group’s assessment, the Latvian construction market will continue to be hampered by abrupt adjustment to the recessionary environment also in 2011. Therefore, in the next few years the Group will continue operating in Latvia on a project basis, through its Estonian entities, involving partners where necessary. Continuation of project-based business assumes the availability of profitable projects. The decision does not change the Group’s strategic objectives in the Latvian construction market, i.e. the objective of conducting future operations in the Latvian market through local subsidiaries.

Recent economic developments in Lithuania have been similar to the ones in the other Baltic countries. Slowdown in investment, both in the public and private sectors, and similar factors have had a direct impact on the construction market. The commercial and residential construction markets (the Group as a general contractor not a developer) have contracted visibly and the launch of any new private sector projects in the near future is unlikely.

In response to this, the operations of the Lithuanian-based Nordecon Statyba UAB have been essentially suspended and the Group is monitoring the market situation. The temporary suspension of operations does not cause any major costs for the Group. The Group’s management does not exclude the possibility that the Lithuanian operations will remain suspended through 2011. The decision does not change the Group’s strategic objectives in the Lithuanian construction market, i.e. the objective of conducting future operations in the Lithuanian market through local subsidiaries.

Ukraine

In Ukraine, the Group will continue mainly as a general contractor and project manager in the construction of commercial buildings and production facilities. In 2009, the number of projects started in the buildings construction segment decreased substantially. In 2010 the market did not recover. This implies, above all, the need for tight cost control in 2011.

Activities on development projects that require major investment have been suspended to minimise the risks until the situation in the Ukrainian and global financial markets eases up (the Group has currently an interest in two development projects that have been conserved).

The main risks in the Ukrainian market are connected with the low administrative efficiency of the central and local government and the judicial system, inflation, and the availability of quality construction inputs. Demand is mainly undermined by the customers’ lack of financing. To date, the fluctuation of the local currency against the euro has stabilised and the Group’s exposure to market-based currency risk has decreased considerably. It is also clear that the political climate has stabilised after the important presidential elections, which might pave the way for an improvement in the general economic climate. This, in turn, would revive investment by local and foreign companies who account for a significant proportion of the Group’s customers in the Ukrainian market. Still, the political situation has not stabilised as rapidly as anticipated and private sector customers have not started investing in projects where the Group has competitive advantages. Therefore, the Group is planning to make a decision regarding its further activities in Ukraine in the first quarter of 2011. If the prospects of the local construction market and the Group’s target customer groups are not clear by that time, the operations of the Ukrainian entity may be suspended for 2011 and the Group will continue to monitor the situation with minimal costs. There is currently no scenario under which the Group would exit the Ukrainian market for good.

The construction market of a country with a population of around 46 million will offer excellent business opportunities also in the future. The Group’s key success factor is relatively little competition among project management companies (the Group offers flexible construction management in combination with European practices and competencies) compared with the real needs of a normally functioning construction market. The Group’s management is confident that the current crisis in the Ukrainian construction market and economy as a whole will transform local understanding and expectations of general contracting and project management in the construction business. In the long-term perspective, the new thinking will improve also the Group’s position.

Belarus

The Belarusian business environment has some similarities to the Ukrainian one but with a discernible temporal shift. Conducting business is undermined by bureaucracy, complex taxation principles and various constraints on the provision of cross-border services. However, the potential of the Belarusian construction market is comparable to the Ukrainian one. There is demand for new buildings, the state has started to permit more direct foreign investment and there are no contemporarily managed construction companies in the market. Despite this, in 2011 the Group intends to do business in Belarus on a project basis (particularly through the ongoing project) in order to learn about local construction and post-construction requirements, regulations and practices. If the outcomes of the active project do not outweigh the risks, the Group does not rule out the possibility of discontinuing its Belarusian operations.

Finland

In Finland, the Group provides only subcontracting services in the field of concrete works. This is an area where Estonian companies still have an edge over local entities thanks to lower labour costs. The Finnish concrete works market allows the Group to compete for selected projects (the main criteria are location and duration of the project). In 2011 demand for subcontracted concrete works should remain stable. Nevertheless, the Group will maintain a rational approach and will avoid taking excessive risks in Finland. The Group is not planning to expand its operations into other segments of the Finnish construction services market (general contracting, project management, etc).

Description of the main risks

Business risks

Management believes that in the near future the main business risk will be stiff competition that induces construction companies to bid unreasonably low prices in a situation where input prices have started rising and may cause steep losses. The situation is aggravated by the fact that the need for winning contracts that would cover fixed costs and overheads at a level ensuring normal operating capacities is increasing. The Group’s management expects to mitigate the risks by tight cost control and effective cost cutting as well as thorough analyses of new projects.

To mitigate the risks arising from the seasonal nature of the construction business (primarily the weather conditions during the winter months), the Group has acquired road maintenance contracts that generate year-round business. In addition, Group companies are constantly seeking new technical solutions that would allow working more efficiently under changeable weather conditions.

To manage their daily construction risks, Group companies purchase Contractors’ All Risks insurance. Depending on the nature of the project, both general frame agreements and special project-specific contracts are used. In addition, as a rule, subcontractors are required to secure the performance of their obligations with a bank guarantee issued for the benefit of a Group company. To remedy builder-caused deficiencies which may be detected during the warranty period, all Group companies create warranties provisions. At 31 December 2010, the provisions (including current and non-current ones) totalled 20.8 million kroons (1.3 million euros). At 31 December 2009, the corresponding figure was 17.4 million kroons (1.1 million euros).

Credit risk

For credit risk management, a potential customer’s settlement behaviour and creditworthiness are analysed already in the tendering stage. Subsequent to the signature of a contract, the customer’s settlement behaviour is monitored on an ongoing basis from the making of an advance payment to adherence to the contractual settlement schedule, which usually depends on the documentation of the delivery of work performed. We believe that the system in place allows us to respond to customers’ settlement difficulties with sufficient speed. At the end of the reporting period, our customers’ settlement behaviour was good in the current economic situation; however, there were also some large problem customers. The proportion of overdue receivables has increased, which heightens the risk of future credit losses. In accordance with the Group’s accounting policies, all receivables that are more than 180 days overdue or in respect of which no additional settlement agreements have been reached are recognised as an expense.

In 2010, expenses from write-down of receivables totalled 41.5 million kroons (2.7 million euros) compared with 42.0 million kroons (2.7 million euros) in 2009. 99% of the figure is attributable to the impairment of receivables related to the Pärnu Keskus project. There were practically no write-downs involving other projects. In addition, in connection with the problems of the Pärnu Keskus project, loans to legal persons were written down by 40.2 million kroons (2.6 million euros). After the above write-downs, the Group has no more receivables related to the Pärnu Keskus project.

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the largest banks in the markets where the Group operates. To ensure timely settlement of liabilities, approximately two weeks’ working capital is kept in current accounts or overnight deposits. Where necessary, overdraft facilities are used. At the reporting date, the Group’s current assets exceeded its current liabilities 1.45-fold (31 December 2009: 1.47-fold) and available cash funds totalled 91.0 million kroons (5.8 million euros) (31 December 2009: 225.3 million kroons / 14.4 million euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have mainly fixed interest rates. Finance lease liabilities have floating interest rates and are linked to EURIBOR. At 31 December 2010, the Group’s interest-bearing loans and borrowings totalled 541.6 million kroons (34.6 million euros), a 15.7 million kroon (1 million euro) decrease year-over-year. Interest expense for 2010 amounted to 15.6 million kroons (1 million euros). Compared with 2009, interest expense has contracted by 11 million kroons (0.7 million euros), primarily on account of a decrease in loans and borrowings.

The Group’s interest rate risk results mainly from two factors: an increase in the base rate for floating interest rates (EURIBOR) and insufficient operating cash flow that may render the Group unable to settle its interest expense. The first factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. The realisation of the cash flow risk depends on the success of operating activities. The Group does not use derivatives to hedge the interest rate risk.

Currency risk

As a rule, construction contracts and subcontractors’ service contracts are made in the currency of the host country: in euros (EUR), in Ukrainian hryvnas (UAH) and in Belarusian rubles (BYR). In connection with shrinkage in operations in Latvia and Lithuania, the currency risks of those countries are no longer relevant. Services purchased from other countries are mostly priced in euros, which does not constitute a currency risk for the Group’s Estonian entities.

The Group’s foreign exchange gains and losses result mainly from its Ukrainian and Belarusian operations because the Ukrainian and Belarusian national currency float against the euro. To date, the weakening of the Ukrainian hryvna against the euro that began in the last quarter of 2008 has ceased. In 2010 the exchange rate of the Belarusian ruble did not fluctuate significantly.

The Group’s exchange gains and losses for 2010 resulted in a net exchange loss of 6.2 million kroons (0.4 million euros). In the comparative period, exchange differences resulted in a net exchange loss of 0.7 million kroons (0 million euros).

 Condensed consolidated interim statement of financial position

Condensed consolidated interim statement of comprehensive income

Condensed consolidated interim statement of cash flows

Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructure 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, the Group includes more than 10 subsidiaries. The Group’s consolidated revenue for 2009 was €155 million. Currently Nordecon Group employs nearly 700 people. Since 18 May 2006, the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: raimo.talviste@nordecon.com
         www.nordecon.com