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Published: 2013-11-07 15:30:00 CET
Quarterly report

2013 III quarter and nine months consolidated interim report (unaudited)

Nordecon publishes 2013 III quarter and nine months consolidated unaudited interim report

Tallinn, Estonia, 2013-11-07 15:30 CET -- Announcement includes Nordecon AS’s consolidated financial statements for the third quarter and nine months of 2013 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

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


Condensed consolidated interim statement of financial position

EUR '000 30 September 2013 31 December 2012
Current assets    
Cash and cash equivalents 9,140 10,231
Trade and other receivables 66,876 42,896
Prepayments 1,723 1,840
Inventories 23,932 26,243
Total current assets 101,671 81,210
Non-current assets
Investments in equity-accounted investees 667 202
Other investments 26 26
Trade and other receivables 380 1,554
Investment property 4,930 4,930
Property, plant and equipment 9,196 8,851
Intangible assets 14,848 14,857
Total non-current assets 30,047 30,420
TOTAL ASSETS 131,718 111,630
Current liabilities    
Loans and borrowings 38,618 27,185
Trade payables 40,435 31,968
Other payables 6,047 5,014
Deferred income 5,523 11,404
Provisions 279 521
Total current liabilities 90,902 76,092
Non-current liabilities
Loans and borrowings 3,911 3,671
Trade payables 259 259
Other payables 96 96
Provisions 1,011 1,210
Total non-current liabilities 5,277 5,236
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -355 -404
Retained earnings 11,176 6,039
Total equity attributable to owners of the parent 33,032 27,846
Non-controlling interests 2,507 2,456
TOTAL EQUITY 35,539 30,302


Condensed consolidated interim statement of comprehensive income

EUR '000 Q3 2013 Q3 2012 9M  2013 9M  2012 2012
Revenue 59,236 54,134 134,733 117,054 159,422
Cost of sales -53,083 -50,296 -125,307 -111,028 -151,205
Gross profit 6,153 3,838 9,426 6,026 8,217
Marketing and distribution expenses -142 -63 -281 -253 -389
Administrative expenses -1,240 -1,437 -3,567 -3,941 -5,385
Other operating income 154 254 360 620 810
Other operating expenses -292 -289 -351 -346 -566
Operating profit 4,633 2,303 5,587 2,106 2,687
Finance income 124 118 507 459 622
Finance costs -329 -133 -887 -672 -1,248
Net finance costs -205 -15 -380 -213 -626
Share of profit/loss of equity-accounted investees 120 90 197 139 -79
Profit before income tax 4,548 2,378 5,404 2,032 1,982
Income tax expense -51 0 -95 -44 -56
Profit for the period 4,497 2,378 5,309 1,988 1,926
Other comprehensive income:          
Exchange differences on translating foreign operations 82 55 49 2 59
Total other comprehensive income for the period 82 55 49 2 59
Profit attributable to:          
- Owners of the parent 4,409 2,121 5,137 1,630 1,477
- Non-controlling interests 88 257 172 358 449
Profit for the period 4,497 2,378 5,309 1,988 1,926
Total comprehensive income attributable to:          
- Owners of the parent 4,491 2,176 5,186 1,632 1,536
- Non-controlling interests 88 257 172 358 449
Total comprehensive income 4,579 2,433 5,358 1,990 1,985
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.14 0.07 0.17 0.05 0.05
Diluted earnings per share (EUR) 0.14 0.07 0.17 0.05 0.05


Condensed consolidated interim statement of cash flows

EUR '000 9M  2013 9M  2012
Cash flows from operating activities    
Cash receipts from customers1 136,517 131,577
Cash paid to suppliers2 -125,826 -113,048
VAT paid -2,419 -4,500
Cash paid to and for employees -13,403 -12,212
Income tax paid -2 -55
Net cash used in/from operating activities -5,133 1,762
Cash flows from investing activities    
Purchase of property, plant and equipment -315 -1,758
Proceeds from sale of property, plant and equipment and intangible assets 191 363
Acquisition of associates -350 0
Loans provided -377 -1,007
Repayment of loans provided 202 94
Dividends received 4 0
Interest received 359 0
Net cash used in investing activities -286 -2,308
Cash flows from financing activities    
Proceeds from loans received 10,243 4,329
Repayment of loans received -3,760 -2,146
Dividends paid -107 -80
Payment of finance lease liabilities -1,310 -1,542
Interest paid -736 -859
Net cash from/used in financing activities 4,330 -298
Net cash flow -1,089 -844
Cash and cash equivalents at beginning of period 10,231 9,908
Effect of exchange rate fluctuations on cash and cash equivalents -2 2
Decrease  in cash and cash equivalents -1,089 -844
Cash and cash equivalents at end of period 9,140 9,066

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

2 Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon group’s gross profit for the first nine months of 2013 amounted to 9,426 thousand euros (9M 2012: 6,026 thousand euros) and gross margin was 7.0% (9M 2012: 5.1%).

In previous interim reports we have described the work done to increase the Group’s profitability. The measures applied, including extensive internal restructuring and cost cutting, have been effective. However, they have their limits and the rate of internally generated growth in profitability cannot be maintained indefinitely. 

The profit from long-term construction contracts is recorded gradually over the contract term, based on the stage of completion of contract activity. During the life of a contract, our estimates of the profitability of the contract may change. If this happens, the proportionate share of contract profit already recognised in the financial statements is adjusted to reflect the new estimate. In the reporting period (particularly in the third quarter), a substantial share of our construction projects reached the stage of completion and their actual outcomes could be specified. Many of the projects were highly complex, involving construction risks whose potential costs were considered in making the profitability estimates. Thanks to effective performance, the costs were not incurred. In particular, revision of outcomes increased profit on projects for the construction of utility networks and environmental engineering. Although the projects were won by making the lowest bids in public tenders, the experience our people have gained in those segments over the years allowed us to benefit from strong improvements in productivity.    

Margin improvements have also been supported by the external environment. Market growth in the previous year, relative stability in materials and subcontracting prices, and a slight decline in competitive pressure in certain segments have created conditions that favour a rise in the projects’ average profit margin.

The Group’s administrative expenses for the first nine months of 2013 totalled 3,567 thousand euros, reflecting a certain decrease compared with a year ago (9M 2012: 3,941 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 2.8% (9M 2012: 3.3%). Our cost-control measures continue to yield strong results, allowing us to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

Operating profit for the first nine months of 2013 was 5,587 thousand euros (9M 2012: 2,106 thousand euros) and EBITDA was positive at 7,088 thousand euros (9M 2012: 3,735 thousand euros).

The Group ended the reporting period with a net profit of 5,309 thousand euros (9M 2012: 1,988 thousand euros). The profit attributable to owners of the parent, Nordecon AS, was 5,137 thousand euros (9M 2012: 1,630 thousand euros).

In the last quarter of the year we are going to complete many projects (including road construction ones) whose total volume is significant. The probability of realisation of their performance risks is higher than that of the projects, which reached the stage of completion in the third quarter. Moreover, by the date of release of the preliminary annual results, the court will probably have ruled in the matter concerning the action brought against the Estonian Maritime Museum (for further information, see the Credit risk section of the chapter Description of the main risks in the directors’ report).  

Cash flows

Operating activities of the first nine months of 2013 resulted in a net cash outflow of 5,133 thousand euros (9M 2012: a net cash inflow of 1,762 thousand euros). When the Group operates with a profit, negative operating cash flow results primarily from a mismatch between the projects’ actual stage of completion (recognised revenue) and the amounts billed to customers. Cash inflow is also reduced by the amounts retained under the terms of construction contracts, which are released when construction activity ends. Retentions extend from 5% to 10% of the volume of a contract, being comparable to its profit margin. In addition, we have launched a housing development project. In the comparative period, we did not have such projects and before we start selling the apartments, the project’s cash flow will be negative.

Besides the above, our operating cash flows continued to be influenced by differences in settlement terms: the payment terms agreed with customers are long and in the case of public procurement generally extend from 45 to 56 days while subcontracts ordinarily have to be paid within 21 to 45 days. We use factoring to counteract the impacts of cyclicality and overdraft facilities to raise working capital.

Cash flows from investing activities resulted in a net outflow of 286 thousand euros (9M 2012: a net outflow of 2,308 thousand euros). We continued to invest in property, plant and equipment although not as extensively as a year ago. The volume of loans provided to associates decreased considerably and we received more loan repayments. In addition, we made a contribution of 350 thousand euros to restore an associate’s negative equity.

Financing activities resulted in a net cash inflow of 4,330 thousand euros (9M 2012: a net outflow 298 thousand euros). Loan receipts exceeded loan repayments by 6,483 thousand euros compared with 2,183 thousand euros in the first nine months of 2012. We borrowed more working capital to meet the needs of growing business volumes and to cover negative operating cash flow. On the other hand, loan repayments, which were made to meet commitments under refinancing agreements, were larger too.

At 30 September 2013, the Group’s cash and cash equivalents totalled 9,140 thousand euros (30 September 2012: 9,066 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks in the directors’ report.


Key financial figures and ratios

Figure/ratio 9M  2013 9M  2012 9M  2011 2012
Revenue (EUR’000) 134,733 117,054 103,260 159,422
Revenue growth 15.1% 13.4% 37.2% 7.9%
Net profit/loss (EUR’000) 5,309 1,988 -4,039 1,926
Profit/loss attributable to owners of the parent (EUR’000) 5,137 1,630 -4,250 1,477
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.17 0.05 -0.14 0.05
Administrative expenses to revenue 2.6% 3.4% 3.2% 3.4%
Administrative expenses to revenue (rolling) 2.8% 3.3% 3.8% 3.4%
EBITDA (EUR’000) 7,088 3,735 -1,846 4,833
EBITDA margin 5.3% 3.2% -1.8% 3.0%
Gross margin 7.0% 5.1% -0.7% 5.2%
Operating margin 4.1% 1.8% -3.5% 1.7%
Operating margin excluding gains on asset sales 4.0% 1.4% -3.9% 1.4%
Net margin 3.9% 1.7% -3.9% 1.2%
Return on invested capital 8.9% 4.6% -5.1% 5.2%
Return on equity 16.1% 6.8% -12.8% 6.6%
Equity ratio 27.0% 25.7% 27.6% 27.1%
Gearing 42.8% 41.1% 37.6% 33.7%
Current ratio 1.12 1.08 1.18 1.08
  30 Sept 2013 30 Sept 2012 30 Sept 2011 31 Dec 2012
Order book (EUR’000) 85,765 146,070 155,421 127,259


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


Performance by geographical market

In the first nine months of 2013, around 2% of the Group’s revenue was generated outside Estonia compared with 1% in the same period in 2012.

  9M  2013 9M  2012 9M  2011 2012
Estonia 98% 99% 96% 98%
Finland 2% 1% 2% 2%
Belarus 0% 0% 2% 0%

Finnish revenues comprise revenue from concrete works. We expect the contribution of foreign markets to remain at a similar level throughout the year.

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


Performance by business line

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

The Group’s revenue for the first nine months of 2013 amounted to 134,733 thousand euros, a 15% improvement on the 117,054 thousand euros generated in the comparative period.

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

Segment revenues

In the first nine months of 2013, our two main operating segments, Buildings and Infrastructure, generated revenue of 52,294 thousand euros and 79,587 thousand euros respectively. The corresponding figures for the same period in 2012 were 49,747 thousand euros and 64,674 thousand euros (see note 8). The larger contribution and absolute figures of the Infrastructure segment (also in the previous year) are mostly attributable to the performance of major road construction projects.

Operating segments* 9M  2013 9M  2012 9M  2011 2012
Buildings 38% 42% 48% 42%
Infrastructure 62% 58% 52% 58%

* 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 have been allocated in both parts of the interim report based on the nature of the work.


Sub-segment revenues

Last year’s rise in private sector investments laid the foundation for rapid revenue growth in the commercial buildings sub-segment. We continued work under previously secured contracts for the construction of commercial buildings in Tallinn and Tartu and secured a contract of over 15 million euros for building an extension to the ASTRI shopping centre in Narva and a contract of over 9 million euros for building the Stroomi shopping centre. We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain substantial.

The revenues of the public buildings sub-segment decreased because we did not have any major projects comparable to those performed a year ago. The competitive situation in this market segment is particularly challenging: it is hard to win a contract without taking excessive risks but our current policy is to avoid such risks. No major procurement tenders are expected to be announced in this sub-segment in 2013 and, thus, volumes will probably not expand. Our largest ongoing projects included the construction of the Translational Medicine Centre of the University of Tartu, Phase V in the project of St Paul’s Church in Tartu and an academic building for the NCO School of the Estonian National Defence College.

In the industrial and warehouse facilities sub-segment most of the revenue resulted from the construction of buildings procured by the agricultural sector. However, the volume of such work was smaller than in the previous years because the current EU budget period is coming to an end and thus allocations from the EU structural funds that co-finance the projects are decreasing. Shrinkage in the sub-segment’s revenues has been counterbalanced by private sector investments in new industrial and production buildings. For example, in the reporting period, we won a contract of over 9 million euros for building a dairy farm complex at Väätsa.

The revenues of the apartment buildings sub-segment resulted mostly from general contracting. On a whole-year basis, the contribution of the sub-segment should increase because in May we won a contract of around 10 million euros for the construction of an apartment building at Pirita tee 26 in Tallinn (our recent years’ largest apartment building contract). The year has also been successful in the sale of the last apartments and office premises in the Tigutorn development project. At period-end, only 4 Tigutorn apartments were still on sale. Phase I in our Magasini 29 development project (www.magasini.ee), which was launched this year, will be completed in 2014.

Revenue distribution within Buildings segment 9M  2013 9M  2012 9M  2011 2012
Commercial buildings 47% 24% 10% 26%
Industrial and warehouse facilities 29% 28% 43% 35%
Public buildings 20% 44% 45% 36%
Apartment buildings 4% 4% 2% 3%


As expected, the main revenue source for the Infrastructure segment was road construction. We are currently working on several large projects that involve not only seasonally restricted operations such as asphalt-laying but also various kinds of earthwork and construction of structures, which could also be carried out in the winter weather of the beginning of the year. Since most of the work relating to projects in progress will be performed in 2013, the contribution of the sub-segment should remain high.

In specialist engineering, we continued our work at Sillamäe port and Kärdla guest harbour. The contribution of the sub-segment has decreased compared with the previous year because most of the construction work at Sillamäe port was completed in 2012. We do not expect to win any major public or private specialist engineering projects in the remaining part of the year.

In 2012 Nordecon secured a number of environmental engineering contracts. Most of the construction work relating to them falls in 2013. In addition, in the reporting period we signed a contract of 6.4 million euros for the reconstruction of the wastewater treatment plant of the town of Paide. Thus, the contribution of environmental engineering will probably remain larger than in the previous year, with some of the rise resulting from shrinkage in the construction of utility networks (other engineering). The decrease in the latter is consistent with general market developments. The current year is the last one in the EU financial framework that is coming to an end and most of the work to be conducted with the support of allocated funds has already been awarded.

Revenue distribution within Infrastructure segment 9M  2013 9M  2012 9M  2011 2012
Road construction and maintenance 56% 49% 56% 51%
Specialist engineering (including hydraulic engineering) 8% 15% 1% 15%
Other engineering 24% 31% 33% 27%
Environmental engineering 12% 5% 10% 7%


Order book

At 30 September 2013, our order book stood at 85,765 thousand euros, a 41% decrease compared with a year ago.

The largest decrease in our order book (backlog of contracts signed but not yet performed) has occurred in road construction (approx. 77%) where in the past year we have been working on three large public procurement projects: (the Aruvalla-Kose section on the Tallinn-Tartu motorway, Tartu western bypass and Tartu eastern ring road). New national investments in large-scale road construction projects have been practically non-existent. In 2013, the state will probably select contractors for two large road construction projects but the total volume of the contracts will be less than 15 million euros. The order book for the construction of outdoor utility networks (other engineering sub-segment in the directors’ report) has shrunk too, because such work is typically procured with the support of the EU structural funds but in the last year of the EU budget period relevant allocations have been expectedly smaller.

On the other hand, the order books of the commercial buildings, industrial and warehouse facilities, and environmental engineering sub-segments have increased. In the case of the first two the rise is attributable to growth in private sector investments. In the case of the third, it has been achieved thanks to successful bidding and, partly, the fact that towards the end of the current EU budget period EU-supported investments in environmental engineering projects have increased.

The order book no longer includes the remaining balance of the Tivoli housing development project in Tallinn city centre (30 September 2012: 12,951 thousand euros). Nordecon published a stock exchange announcement on the termination of the contract on 13 June 2013.

As at the end of 9M  2013 9M  2012 9M  2011 2012
Order book (EUR’000) 85,765 146,070 155,421 127,259

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 69% and 31% of the order book respectively. This is a radical change: compared with recent years the figures for the two segments have reversed (30 September 2012: 30% and 70% respectively). Building construction contracts will continue to dominate the order book until the end of this year and probably also in the near future. In the next EU budget period (2014-2020) investments in infrastructure construction, which to date have mostly been made with the support of the EU structural funds, will not be as large as they were in the current period (2007-2013). In particular, this applies to next year because the national investment plan has not yet been adopted. Hence, we expect the revenues of the Infrastructure segment to decline in 2014 (for further information, see the Business risks section of the chapter Description of the main risks in the directors’ report). 

Between the reporting date (30 September 2013) and the date of release of this report, Group companies have secured additional construction contracts of approximately 3,768 thousand euros.



Staff and personnel expenses

In the first nine months of 2013, the Group (the parent and the subsidiaries) employed, on average, 784 people including 360 engineers and technical personnel (ETP). The number of staff did not increase significantly compared with a year ago.

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

  9M  2013 9M  2012 9M  2011 2012
ETP 360 372 362 367
Workers 424 417 390 397
Total average 784 789 752 764

The Group’s personnel expenses for the first nine months of 2013 including all taxes totalled 13,584 thousand euros, 15% up on the comparative period when the figure was 11,835 thousand euros. Personnel expenses have increased due to growth in both operating volumes and performance bonuses. Selective increases of basic salaries have had less impact.

The service fees of the members of the council of Nordecon AS for the first nine months of 2013 amounted to 120 thousand euros and associated social security charges totalled 40 thousand euros (9M 2012: 132 thousand euros and 44 thousand euros respectively). The figures (also for 2012) include the provisions made in the third quarter for performance bonuses that may be paid based on the Group’s result of operations.

The service fees of the members of the board of Nordecon AS amounted to 195 thousand euros and associated social security charges totalled 64 thousand euros (9M 2012: 291 thousand euros and 96 thousand euros respectively, including the remuneration of the member of the board that was removed on 30 April 2012). The figures (also for 2012) include the provisions made in the third quarter for performance bonuses that may be paid based on the Group’s result of operations.

Labour productivity and labour cost efficiency

In recent years, the number of the Group’s employees has been relatively stable and thus the rise in nominal labour productivity stems mostly from revenue growth. Nominal labour cost efficiency for the period was weakened by growth in performance bonuses paid in the context of improved profitability. In comparative periods, the proportion of performance bonuses in the Group’s personnel expenses was smaller. Basic salaries have not been substantially increased. Payment of performance bonuses is an ordinary activity that is linked to the achievement of certain profit targets. Compared with comparative historical figures, the period’s nominal labour cost efficiency was relatively high.

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

  9M  2013 9M  2012 9M  2011 2012
Nominal labour productivity (rolling), (EUR’000) 231.6 213.0 173.8 208.7
Change against the comparative period 8.7% 22.5% 39.6% 3.2%
Nominal labour cost efficiency (rolling), (EUR’000) 9.5 10.4 8.8 9.5
Change against the comparative period -8.3% 18.5% 34.2% -8.6%


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.

In 2013, competition for public sector contracts has intensified. The volume of public sector investments has decreased and the prospects of maintaining current operating volumes in 2014 are not good. Strong competitive pressure is driving bid prices down although input prices seem to be rising. Competition is particularly fierce in the building construction segment. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices tend to rise involves a high risk, because the contract may quickly start generating a loss. Thus, in price-setting we currently prioritize profitability over increasing or maintaining the revenue figures.

In the next periods, demand for construction services will be driven by public sector investments, which in recent years have mostly been made with the assistance of EU support. Present allocations from the EU structural funds are linked, both in terms of size and timing, to the current EU financial framework (2007-2013). The funds left for the last year of the budget period are smaller than earlier, which means that in 2013 fewer new projects have been started. In general, the amounts that will be allocated to Estonia during the next EU financial framework (2014-2020) are known but the volume and timeframe of investments involving construction work have not yet been approved. According to the latest information, the overall volume of construction-related investments is expected to decline and 2014 may become a so-called ‘gap’ year between the two budget periods, where most efforts will directed at preparatory administrative activities required for enabling the investments.

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

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

The Group’s operations are also influenced by the change of seasons. The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, earthwork, etc). To disperse the risk, we secure road maintenance contracts that generate year-round business. According to our business strategy, we counteract seasonal fluctuations in infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the two segments in balance (see also the chapter Performance by business line in the directors’ report). In addition, our companies consistently seek new technical solutions that would yield greater efficiency under changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 September 2013, the Group’s warranties provisions (including current and non-current ones) totalled 998 thousand euros. At 30 September 2012, the corresponding figure was 1,092 thousand euros.

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

Financial risks

Credit risk

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

In the first nine months of 2013, impairment losses on receivables totalled 261 thousand euros (9M 2012: 233 thousand euros).

The Group’s statement of financial position includes a trade receivable of approximately 2.4 million euros (includes a portion of late payment interest) due from the customer of the exhibition building of the Estonian Maritime Museum. Under the contract, determination of whether the Group’s claim against the debtor has merit is at the discretion of the Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s management is convinced that the claim has merit and has therefore not written the receivable down. By the date of release of this report, hearings have been held and the parties have to submit their final opinions to the court. The court is expected to rule upon the matter in January 2014.

Liquidity risk

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

At the reporting date, the Group’s current assets exceeded its current liabilities 1.12-fold (30 September 2012: 1.08-fold). Interest-bearing liabilities account for a significant proportion of current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when the 12 months have passed. In the first nine months of 2013, the Group refinanced loans of 13,415 thousand euros which at 31 December 2012 were recognised as current liabilities (at 30 September 2013 relevant loan balances totalled 15,322 thousand euros) and deferred their maturities to 2014.

At the reporting date, the Group’s cash and cash equivalents totalled 9,140 thousand euros (30 September 2012: 9,066 thousand euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is Euribor. At 30 September 2013, the Group’s interest-bearing loans and borrowings totalled 42,528 thousand euros, an increase of 5,937 thousand euros year over year. Growth in factoring liabilities accounted for 5,096 thousand euros of the overall rise in loans and borrowings. Interest expense for the first nine months of 2013 amounted to 783 thousand euros, 16 thousand euros down from a year ago. The Group’s interest rate risk results mainly from a rise in the base rate for floating interest rates (Euribor/EONIA). The risk is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates.

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

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e. in euros (EUR) and in Ukrainian hryvnas (UAH). In the first nine months of 2013, the exchange rate of the Ukrainian hryvna against the euro was stable. The Group’s net foreign exchange loss for the period was 43 thousand euros (9M 2012: a net foreign exchange loss of 8 thousand euros).

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


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2013 construction volumes in the infrastructure segment are still larger but the segment’s lead over building construction is diminishing. The public sector is contributing to building construction through two major projects – the construction of a new main building for the Estonian National Museum and the Maarjamõisa medical campus of Tartu University Hospital. The turnover of the infrastructure segment is undermined by the depletion of funds allocated from the EU budget for the period 2007-2013. The private sector is investing mainly in building construction. The rise in private sector investments should continue in 2014.
  • The construction market continues to be disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the last year of the current EU budget period, the volume of new procurements has decreased. The volumes and timing of projects to be executed using the support of the next EU financial framework (2014-2020) are still unclear. The volumes of new investments made by two large public sector customers, Riigi Kinnisvara AS (a state-owned real estate company) and the National Road Administration, are going to decline. It is more likely than not that this year growth of the Estonian construction market is going to decelerate and next year the market may see certain shrinkage.
  • The industry will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is still too large, but the process will be slower than expected. Based on the past three years’ experience it is likely that stiff competition and insufficient demand will induce some general contractors to go slowly out of business or shrink in size rather than merge with another or exit the market. However, it is also becoming increasingly common that two to four smaller players that are seeking ways to remain in business will form a consortium to bid for major procurement contracts, meet tendering terms and secure the required funding.
  • Competition is increasing in all segments of the construction market. The average number of bidders for a contract has increased and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand caused a rapid decline in construction prices, which triggered a slide in the prices of many construction inputs. However, currently there are no massive decreases in input prices and companies that are banking on this in the bidding phase may run into difficulty. Construction prices and thus also profit margins are already under strong competitive pressure.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in its business plan and thus to set an affordable sales price. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Similarly to the previous year, successful projects include those that create or fill a niche.
  • The contracts signed with public sector customers continue to impose tough conditions on construction companies: extensive obligations, strict sanctions, various financial guarantees, extremely long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants. Still, compared to two or three years ago, the situation has improved and in some respects procurement terms have become more reasonable for construction companies.
  • The prices of construction inputs will remain relatively stable. Local subcontracting prices may decrease due to weakening demand but, taking into account the subcontractors’ financial and human resources, the decline cannot be substantial or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • There is a shortage of high-quality labour (including project and site managers). Shrinkage in construction volumes in Estonia may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and although those markets (particularly Finland) may also shrink, the number of job seekers that will return will not increase considerably. Accordingly, the basic wage of construction-sector employees will not decrease. Instead, the rise in the cost of living is creating pressure for a wage increase.

Latvia and Lithuania

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

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

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


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. Regardless of this, we will continue our business in Ukraine in 2013. There are some signs that investment activity in Ukraine will recover in 2013 to a certain extent although the economic and political risks do not allow us to expect any rapid changes. We continue to monitor the situation in the Ukrainian construction market closely and will restructure our operations as appropriate. We also continue to seek opportunities for exiting our two conserved real estate projects or signing a construction contract with a potential new owner.


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


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2012 was 159.4 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

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

Investor presentation_9m_2013.pdf