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Published: 2011-05-11 15:35:00 CEST
Quarterly report

2011 I quarter and 3 months consolidated interim report (unaudited)

Nordecon AS publishes 2011 I quarter and 3 months consolidated interim report (unaudited)

Tallinn, Estonia, 2011-05-11 15:35 CEST --  


Group strategy and objectives

Nordecon Group’s main strategic objectives until 2013

- To complete the significant 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 current strategy

- 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 operate in 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 changes swiftly and flexibly and to enter the next economic growth cycle successfully”

In the board’s opinion, in forthcoming years the Group will have to focus on its core business operations in its main market, Estonia, where Nordecon is represented in practically 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 taking advantage of the benefits yielded by internal restructuring and streamlining, improving profitability by proactive cost management, and creating opportunities for successfully entering the growth phase of the construction market (also in the 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 has to support the Group’s recovery from the slump still prevailing in the construction market and to prepare ground for seizing the opportunities provided by a steadier growth that is anticipated to emerge in 2012.

In the foreseeable future, we will not seek to increase revenue without applying measures that ensure profitability because this might lead to taking unjustified risks in a situation where rapidly rising input prices may have a strong impact on companies’ performance in subsequent periods.



Changes in the Group’s Estonian operations

There were no major changes in the Group’s Estonian operations in the first quarter of 2011. The Group did not enter any new operating segments or exit any current segments or sub-segments.

Since the beginning of 2011, a significant proportion of the Group’s core business has been conducted by the parent, Nordecon AS, which at the end of 2010 merged with its subsidiaries Nordecon Ehitus AS and Nordecon Infra AS, which were involved in buildings and infrastructure construction respectively. At the same time, Nordecon AS will continue acting as a holding company for the Group’s main Estonian and foreign subsidiaries.

Changes in the Group’s foreign operations


There have been no changes in the Group’s Latvian operations compared with the fourth quarter of 2010. The Group has currently no active construction contracts in Latvia and no subsidiaries domiciled in Latvia.


There have been no changes in the Group’s Lithuanian operations compared with the fourth quarter of 2010. The Group has no currently active construction contracts in Lithuania and the activities of the Lithuanian subsidiary Nordecon Statyba UAB have been suspended.


The Group continues project-based business in Belarus, building a factory for a Finnish food industry company under a contract signed in a previous period. The Group does not have any other active contracts in Belarus. The project is performed through the Group’s Belarusian subsidiary Eurocon Stroi IOOO. According to the Group’s development strategy, Belarus is not among the Group’s target foreign markets and the above project was simply aimed at learning about local business practice. We have decided that after the delivery of the project in 2011 the Group will exit the Belarusian market. The decision was prompted by the fact that the Belarusian business and legal environment is not yet sufficiently transparent and supportive for continuing stable permanent operations in the Belarusian construction sector.


We have decided that the Group will continue operating in Ukraine in 2011 and that the target is to maintain optimal preparedness for re-launching construction activities as soon as the situation in the local construction market improves. Because of economic and political problems (and difficulties in the banking sector), the country has not been able to re-attract a sufficient number of foreign investors that are the Group’s target customers. The decision to remain in Ukraine was underpinned by well-planned activities during the slump and the prospects of market recovery in the next few years. 

Real estate development projects that require extensive investment (the Group has an interest in two conserved development projects) will remain suspended to minimise the risks until the situation in Ukraine eases up.


Nordecon Betoon OÜ and its Finnish subsidiary Estcon Oy will continue providing subcontracting services in the concrete works sector in Finland where the Group’s strengths include top quality technical expertise, mobility and a competitive price.




Nordecon Group ended the first quarter of 2011 with a gross loss of 73 thousand euros compared with a gross loss of 1,517 thousand euros for the first quarter of 2010. Although the Group did not yet earn a profit, the year-over-year improvement in the gross result is an indicator of positive developments our operating environment. The loss is partly attributable to adverse weather conditions that did not allow doing sufficient outdoor work (particularly in the Infrastructure segment). For the second consecutive year, the level of winter precipitation in Estonia was higher than average leading to zero profit or, in some cases, even a loss on road maintenance contracts. Moreover, the prolonged winter season lengthened the technological standstill during which the Group incurs fixed costs without earning revenue in an area that has a strong impact on its overall performance. 

Compared with the same period in 2010, the Group achieved a significant increase in operating revenue while maintaining tight cost control. As a result, in the first quarter we practically reached break-even. Above all, operational profitability has improved on account of the following factors:

- The impact of the risks that realised on the performance of some long-term contracts secured mainly in 2009 has in all material respects been identified and associated losses have been recognised in previous periods. In 2010 the Group shifted the focus on improving the profitability, not the size, of its contracts portfolio.

- At the end of 2010 the Group won several contracts with the targeted gross profit whose full-scale performance could start during the winter months.

- And, last but not least, the stringent austerity and streamlining measures applied in the past two years have yielded clearly positive results.

For construction companies, the year 2011 brought the discovery that in some segments competition has started to subside. The main reason is not yet the bankruptcies of construction companies but the fact that in recent years many companies have had to cut their personnel and support structures to an extent which today is undermining their bidding capabilities. Furthermore, many companies are being held back by increasingly tougher financing requirements imposed by customers organizing tenders and the limited availability of guarantee facilities provided by financing institutions. A majority of construction companies have become aware of the fact that long-term construction contracts entail the risk of growth in input prices. All this is exerting positive influence on the margins of new construction contracts. Although the Group’s margins do not yet meet the target, management believes that the Group is moving in the right direction for restoring the profitability of its operating activities 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.

Administrative expenses for the first quarter of 2011 totalled 1,067 thousand euros. Compared with the same period in 2010, the Group has cut its administrative expenses by 9% and the figure has levelled off. The ratio of administrative expenses to revenue was 6.0% (Q1 2010: 10.4%). We are pleased to report that our cost-saving measures have yielded good results and that according to management’s estimates on a full-year basis the Group will be able to maintain the level of administrative expenses below the target, i.e. 5% of revenue.

The Group’s first-quarter operating loss was 1,116 thousand euros (Q1 2010: 2,912 thousand euros).

Consolidated net loss was 1,234 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 1,177 thousand euros. The first quarter of 2010 ended in a net loss of 1,642 thousand euros, including non-recurring net finance income of 1,177 thousand euros on the sale of the Latvian subsidiary. Excluding the effect of the latter, the Group’s net loss for the first quarter of 2010 would have been 2,819 thousand euros.

Cash flows

In the first quarter of 2011, the Group’s operating activities resulted in a net cash outflow of 1,977 thousand euros. In the comparative period, operating activities resulted in a net cash inflow of 2,359 thousand euros. Compared with the same period in 2010, 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’ settlement terms have lengthened to approx. 45 to 100 days. This means that under many projects, the first payments for work started in the first quarter are made in the second quarter, etc. The negative cash flow of unprofitable projects realises based on the performance of the work although their book loss has been recognised in previous periods.

Investing activities generated a net inflow of 248 thousand euros compared with a net outflow of 476 thousand euros for the first quarter of 2010. In the reporting period, inflows consisted mostly of receipts for sale of property, plant and equipment. In the comparative period, the net outflow was mainly attributable to the disposal of the Latvian subsidiary.

Financing activities resulted in a net cash outflow of 1,783 thousand euros. In the comparative period, the net outflow was 3,914 thousand euros. The structure of financing cash flows has remained more or less stable. The Group is raising slightly less debt capital than is required for meeting its loan commitments on a timely basis. On the other hand, repayments have decreased year-over-year thanks to agreements reached with the banks. The renegotiation of settlement terms did not cause any significant changes in interest rates.

At 31 March 2011, the Group’s cash and cash equivalents totalled 2,303 thousand euros (31 March 2010: 12,376 thousand euros). For information on potential liquidity risks, please refer to the chapter Description of the main risks.



Figure / ratio Q1 2011 Q1 2010 Q1 2009 2010
Revenue (EUR’000) 17,723 11,248 37,750 99,312
Revenue growth/decrease 58% -70% -24% -36%
Net loss (EUR’000) -1,234 -1,606 -34 -12,738
Loss attributable to owners of the parent (EUR’000) -1,177 -1,316 450 -11,811
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.04 -0.04 0.01 -0.38
Average number of employees 699 745 1,223 774
Revenue per employee (EUR’000) 25 15 31 128
Personnel expenses to revenue 17.4% 29.6% 16.7% 14.6%
Administrative expenses to revenue 6.0% 10.4% 6.3% 4.9%
EBITDA1 (EUR’000) -484 -1,968 947 -5,512
EBITDA margin -2.7% -17.5% 2.5% -5.6%
Gross margin -0.4% -13.5% 6.2% -0.7%
Operating margin -6.3% -25.9% -0.6% -9.0%
Operating margin excluding gains on asset sales -7.5% -25.9% -0.7% -9.4%
Net margin -7.0% -14.3% -0.1% -12.8%
Return on invested capital -1.5% -1.7% 0.5% -15.8%
Return on assets -1.2% -2.6% -0.1% -8.3%
Return on equity -3.8% -3.6% -0.1% -32.6%
Equity ratio 35.5% 44.0% 36.7% 35.1%
Gearing 44.8% 22.8% 31.8% 42.3%
Current ratio 1.36 1.74 1.28 1.39
  31 March 2011 31 March 2010 31 March 2009 31 Dec 2010
Order book (EUR’000) 91,974 88,603 109,556 1,339,459

1 On calculating EBITDA, non-cash expenses include depreciation and amortisation as well as impairment losses on goodwill of 411 thousand euros recognised in 2010.

Earnings per share (EPS) = net profit attributable to equity holders of the parent / weighted average number of shares outstanding
Revenue per employee = revenue / average number of employees
Personnel expenses to revenue = personnel expenses / revenue
Administrative expenses to revenue = administrative expenses / revenue
EBITDA = earnings before interest, taxes, depreciation and amortisation
EBITDA margin = EBITDA / revenue
Gross margin = gross profit / revenue
Operating margin = operating profit / revenue
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
Net margin = net profit for the period / revenue
Return on invested capital = (profit before tax + interest expense) / the period’s average (interest-bearing liabilities + equity)
Return on assets = operating profit / the period’s average total assets
Return on equity = net profit for the period / the period’s average total equity
Equity ratio = total equity / total equity and liabilities
Gearing = (interest-bearing liabilities – cash and cash equivalents) / (interest bearing liabilities + equity)
Current ratio = total current assets / total current liabilities



In the first quarter of 2011, roughly 6% of the Group’s revenue was generated outside Estonia. In the first quarter of 2010, foreign operations accounted for 4% of the Group’s revenue.

  Q1 2011 Q1 2010 Q1 2009 2010
Estonia 92% 96% 83% 94%
Ukraine 0% 4% 3% 2%
Lithuania 0% 0% 2% 0%
Latvia 0% 0% 12% 0%
Belarus 5% 0% 0% 3%
Finland 3% 0% 0% 1%

The greatest proportion of foreign revenue was earned from project-based construction business in Belarus, which is expected to be completed in the second half-year. Management has decided that the Group will not seek any new projects in Belarus (see also the chapter Changes in the Group’s business operations in the first quarter of 2011). Finnish revenues result from subcontracting in the field 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 the Group’s strategy foresees increasing foreign operations, in the short term the Group will focus on the Estonian market and seizing opportunities in an environment that it knows best and that entails comparatively fewer market risks. The Group’s vision of the future of its foreign operations is described in the chapter Outlooks of the Group’s geographical markets.



The core business of Nordecon Group is general contracting and project management in the field of 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 the first quarter of 2011 was 17,723 thousand euros, a 58% increase on the 11,248 thousand euros generated a year ago. Last year, the downturn that ravaged the Estonian construction market in 2008-2010 bottomed out. Revenue growth is attributable to the following factors: moderate growth in the buildings construction market, decline of competition in certain market segments and successful bidding for infrastructure contracts that could be performed during the winter season.

The Group aims to maintain the revenues of 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 forthcoming years the proportion of revenue from the construction of apartment buildings will remain significantly below the strategic 20% ceiling.

Segment revenue

The first-quarter revenues of our two main business segments were practically equal. Usually, the Buildings segment generates more first-quarter revenue because the winter season hinders full-scale performance of infrastructure projects such as road construction. However, the first quarter of 2011 was different because the Infrastructure segment had some projects whose performance was not significantly influenced by the weather. The Buildings and Infrastructure segments ended the first quarter of 2011 with revenue of 8,744 thousand euros and 8,389 thousand euros respectively. The corresponding figures for the comparative period were 8,326 thousand euros and 2,802 thousand euros.

For some time most tenders in the construction market have been related to infrastructure (mainly projects financed with the support of the state and the EU structural funds) and the majority (71%) of contracts in the Group’s order book belong to the Infrastructure segment. Regardless of this, the revenues of the segments have been 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 therefore comparatively smaller. We expect that in the next quarters the contributions of the Buildings and Infrastructure segments will have similar proportions.

Revenue distribution between segments *

Business segments Q1 2011 Q1 2010 Q1 2009 2010
Buildings 51% 72% 58% 48%
Infrastructure 49% 28% 42% 52%

* 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.

In Directors’ report, projects have been aggregated and allocated to business segments based on their nature (i.e. buildings or infrastructure construction). In the segment reporting presented in the financial statements, aggregation and allocation is based on the Group entities’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements the results of an entity that is primarily engaged in infrastructure construction are presented within the Infrastructure segment. In Directors’ report, the revenues of such an entity are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialize in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both buildings and infrastructure construction.

Revenue distribution within segments

In the Buildings segment, most of the first quarter revenue resulted from the construction of public buildings. At the end of 2010, the Group won two public sector contracts whose size in the current market situation is substantial – one for the construction of the buildings of the Koidula border station and the other for the construction of the academic building of the Social Sciences Faculty of the University of Tartu. In addition, the Group continued a large-scale project involving the reconstruction of the historic seaplane hangars in Tallinn into the premises of the Estonian Maritime Museum. In the industrial and warehouse facilities sub-segment most of the revenue resulted from the construction of the Ahtme peak load boiler plant, which is under completion, and the food industry facilities being built in Belarus.

Distribution of revenues within the Buildings segment is influenced by the scarcity of projects on offer, which is forcing companies to compete in all market segments as the number of contracts awarded is small compared to bids made. The situation does not allow concentrating on a specific area. Another important factor is the general economic environment. During the downturn, private companies’ investments in commercial and industrial buildings were modest while the central and local governments’ investments in schools, nursery schools and public buildings increased, partly thanks to the support received from the EU structural funds. In the reporting period the Group built apartment buildings for external customers as a general contractor, not a developer.                              

Revenue distribution within the Buildings segment Q1 2011 Q1 2010 Q1 2009 2010
Commercial buildings 11% 22% 75% 37%
Industrial and warehouse facilities 28% 28% 8% 18%
Public buildings 58% 34% 12% 35%
Apartment buildings 3% 16% 4% 10%

The Infrastructure segment achieved a three-fold increase in revenue compared with the first quarter of 2010 and the trends are reflected in the segment’s internal revenue distribution. A significant proportion of revenue resulted from work that could be done during the winter season. This includes projects for the construction of water and wastewater networks because the Group has won several tenders in that field. We expect that the proportion of such projects will remain relatively large also in the rest of the year. In environmental engineering, the biggest project was the construction of a bio-filter for the water utility services provider AS Tallinna Vesi in Paljassaare. The proportion of road construction and maintenance revenues has decreased because the revenues of other sub-segments have grown. Most likely, the proportion of the Group’s road construction and maintenance revenues will start increasing from the next quarter. Hydraulic engineering that depends heavily on Estonian ports’ investment policies was almost non-existent in the reporting period.

Revenue distribution within the Infrastructure segment Q1 2011 Q1 2010 Q1 2009 2010
Road construction and maintenance 21% 52% 20% 62%
Specialist engineering (including hydraulic engineering) 1% 3% 22% 1%
Other engineering 50% 30% 17% 28%
Environmental engineering 28% 15% 41% 8%



At 31 March 2011, the Group’s order book stood at 91,974 thousand euros, 4% up on the 88,603 thousand euros posted a year ago. In the past quarters, the decline in the Group’s order book has notably decelerated and the forward order book has levelled off at around 85 to 95 million euros.

  Q1 2011 Q1 2010 Q1 2009
Order book, in thousands of euros 91,974 88,603 109,556

At 71% the Infrastructure segment continues to account for a major proportion of the Group’s total order book (31 March 2010: 77%).

As a result of market shrinkage, in 2010 the value of the uncompleted portfolio hit the bottom. In a situation where the decrease in input prices has been replaced by 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 March 2011) and the date of release of this report, Group companies have been awarded additional construction contracts of approximately 57,221 thousand euros. The figure includes a contract on the design and build of the Aruvalla-Kose section of the Tallinn-Tartu road of 39,262 thousand euros signed on 15 April 2011 and a contract on the construction of the facilities of the Ämari air base of 10,854 thousand euros signed on 2 May 2011. In light of the above, we expect that in subsequent periods the portfolio will grow on account of the emerging recovery of the construction market.



Staff and personnel expenses

At the end of the first quarter of 2011, the Group (including the parent and the subsidiaries) employed, on average, 699 people including around 337 engineers and technical personnel (ETP). In recent quarters, the decrease in personnel has decelerated and reached a turning point. The Group’s management believes that in 2011 headcount will remain stable or will grow slightly. The figure will be influenced by additional seasonal labour hired for the second and third quarters as well as anticipated business growth.

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


  Q1 2010 Q1 2010 Q1 2009
ETP 337 354 499
Workers 362 391 624
Total average 699 745 1,223

The Group’s personnel expenses for the first quarter of 2011, including all associated taxes, totalled 3,076 thousand euros, an 8% decrease compared with the 3,332 thousand euros incurred in the first quarter of 2010.

Personnel expenses have declined on account of downsizing compared with a year ago and a decrease in performance pay that is linked to the projects’ profit margins.

In the first quarter of 2011, the remuneration of the members of the council of Nordecon AS including associated social security charges amounted to 21 thousand euros. The corresponding figure for the first quarter of 2010 was 25 thousand euros. The remuneration of the members of the board of Nordecon AS including social security charges totalled 72 thousand euros compared with 36 thousand euros in the first quarter of 2010. The remuneration provided to the board has increased because in the comparative period the board had two members while the current number is four. The composition of board changed in connection with the merger of two subsidiaries and the Group’s parent that took place at the end of 2010.




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 disproportionately dependent on public procurement tenders and projects performed with the support of the EU structural funds. Project performance success is closely related to the administrative capabilities and procurement organisation skills of the central and local government which have improved compared with previous periods but are still of unreliable quality, causing hold-ups and difficulties both during the procurement proceedings and the performance of construction work.

- The contraction of the construction market ended with 2010. In 2011 the market will start recovering and construction volumes will grow somewhat. In addition to the infrastructure sector, where volumes are expected to remain steady, new projects will gradually be launched in the buildings construction sector. The latter should offer the main opportunities for growth, primarily because of the return of private sector customers (including foreign investors) that abandoned the market in previous years. However, in 2011 demand is not yet expected to recover 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, 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 were forced to exit the market. 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 chosen to ignore it due to cash flow problems. It is quite probable that in 2011 or 2012 even some fairly well-known companies (including those engaged in infrastructure construction) will have to discontinue or restructure their operations. Above all, construction companies’ ability to continue their operation will depend on how well they can manage their finances and whether they can maintain sufficient liquidity.

- Both active projects and those secured in 2011 will be significantly influenced by various terms and conditions (including different warranties, extended settlement terms, etc) dictated by customers that are becoming increasingly unfavourable for construction companies.

- Construction contracts’ profit margins will remain under pressure from continuously fierce competition and rising input prices. In addition, companies may continue challenging the results of poorly prepared public procurement tenders. The time and finance costs of the proceedings are high for all involved. It seems, though, that the most problematic time was in 2010 and the situation has started to improve. It will be increasingly important to meticulously comply with every detail of the tender requirements

 -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 but when volumes recover the availability of qualified labour will again be an issue. In 2011 the base wages paid by construction companies that have to maintain tight cost control are not expected to increase.

- In 2011 and 2012 the construction market will be seriously and unfortunately somewhat unpredictably impacted by a massive and rapid allocation of funds raised from the sale of the carbon dioxide emission quotas for improving the energy efficiency of buildings. Around 150 million euros will be distributed for that purpose within roughly one and a half years. This will trigger rapid demand hikes in some specialized construction segments (e.g. joint filling, facade and roof works, and heating systems) as well as related segments, which will cause an unreasonable rise in respective prices and may cause temporary problems for the entire sector.

- The post-depression macroeconomic and construction market indicators will continue to improve. As a result, the banks will be increasingly interested 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 will not 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 various aspects of its core operations

- Maintaining strict control over fixed costs

- Keeping up and improving the team spirit and dedication of the Nordecon people

Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will continue adjusting to the post-recession environment also in 2011. The Group does not exclude the possibility that in the next few years it will undertake some projects in Latvia 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.

The Lithuanian construction market does not show any signs of recovery in areas where Group entity Nordecon Statyba UAB is competitive. Therefore, the operations of the Lithuanian-based Nordecon Statyba UAB have been suspended and the Group is monitoring the market situation. The temporary suspension of operations does not cause any major costs for the Group. It is possible 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.


The Group will continue operating in Ukraine as a general contractor and project manager in the construction of commercial buildings and production facilities. In 2009 and 2010, there were practically no private foreign customers in those sub-segments. Although the Ukrainian construction market is not expected to recover notably in 2011 there are some signs of improvement. The Group has decided to continue its operation in Ukraine. Costs are kept minimal and the Group is maintaining readiness for re-launching more active operations.

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 private customers’ lack of financing. The political situation has not stabilised as quickly as anticipated and private sector customers have not started investing in projects where the Group has a competitive advantage.

However, the construction market of a country with a population of around 46 million has strong business potential. 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. We are confident that the crisis experienced by 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 and, in the long-term perspective, the new thinking will improve the Group’s position.


The Belarusian business environment has features similar to the Ukrainian one although there is a certain temporal shift: bureaucracy, complex taxation principles and constraints on providing cross-border services. The potential of the Belarusian construction market is also 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 will operate in Belarus on a project basis, completing the only active project. After this, for the time being no new projects will be started.


In Finland, the Group provides subcontracting services in the field of concrete works. This is an area where Estonian companies still have an edge over local entities through lower personnel expenses. The Finnish concrete works market allows the Group to compete for selected projects (the main criteria are the location and the customer’s risk profile). In 2011 demand for concrete works should remain stable. Nevertheless, the Group will maintain a rational approach and will avoid taking excessive risks in Finland. The Group is currently not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).



Business risks

Management believes that in the near future the main business risk will be stiff competition that induces companies to bid unreasonably low prices in a situation where input prices have started rising and may cause steep losses. In the construction market, 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 austerity measures as well as attention to detail and thorough analysis 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, Group companies create warranties provisions. At 31 March 2011, the provisions (including current and non-current ones) totalled 1,109 thousand euros. At 31 March 2010, the corresponding figure was 916 thousand 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 although there were also some large problem customers. The proportion of overdue receivables has increased. On the one hand, this heightens the risk of future credit losses but on the other hand, many debtors with overdue accounts are state or local government institutions with whom major problems are less likely. 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 the first quarter of 2011, expenses from write-down of receivables totalled 2 thousand euros. In the first quarter of 2010, recoveries of previously expensed receivables exceeded expenses from the write-down of receivables and the Group could recognise a reduction of expenses of 9 thousand euros.

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 1.36-fold (31 March 2010: 1.74-fold) and available cash funds totalled 2,303 thousand euros (31 March 2010: 12,376 thousand euros).

The balance of free cash funds has decreased compared with the end of 2010. This is attributable to the commencement of full-scale construction operations after the technological standstill of the winter season, particularly in the Infrastructure segment. The customers’ settlement terms have lengthened and extend to 45 to 100 days as a rule. According to management’s estimates the decrease in cash funds is of a cyclical nature and will reverse in the following quarters because settlement dates generally fall in the second to fourth quarters. The cash balance should see gradual growth also on account of new projects whose margins are higher than the current ones that were secured in an environment of aggressive competition.

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 March 2011, the Group’s interest-bearing loans and borrowings totalled 30,361 thousand euros, an increase of 1,217 thousand euros year-over-year. Interest expense for the first quarter of 2011 amounted to 273 thousand euros. Compared with the same period in 2010, interest expense has contracted by 21 thousand euros. The Group’s interest rate risk is currently influenced by two factors: a rise in the base rate for floating interest rates (EURIBOR) and comparative weakness of operating cash flows. 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 has not acquired derivatives to hedge its interest rate risks.

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

The Group’s exchange gains and losses for the first quarter of 2011 resulted in a net exchange loss of 139 thousand euros. In the comparative period, exchange differences resulted in a net exchange gain of 174 thousand euros. 



Condensed consolidated interim statement of financial position

EUR´000 31 March 2011 31 December 2010
Current assets    
Cash and cash equivalents 2,303 5,818
Trade and other receivables 29,348 31,266
Prepayments 1,322 1,060
Inventories 26,516 24,982
Non-current assets held for sale 321 321
Total current assets 59,810 63,447
Non-current assets
Investments in equity-accounted investees 99 99
Other investments 26 26
Trade and other receivables 2,421 2,215
Investment property 4,930 4,930
Property, plant and equipment 8,359 9,038
Intangible assets 15,459 15,486
Total non-current assets 31,294 31,794
TOTAL ASSETS 91,104 95,241
Current liabilities    
Loans and borrowings 16,366 19,231
Trade payables 18,245 17,429
Other payables 3,935 3,446
Deferred income 4,658 4,425
Provisions 871 1,160
Total current liabilities 44,075 45,691
Non-current liabilities
Loans and borrowings 13,994 15,377
Trade payables 295 215
Other payables 0 96
Provisions 423 423
Total non-current liabilities 14,712 16,111
Share capital 19,657 19,657
Statutory capital reserve 2,555 2,558
Translation reserve -146 -233
Retained earnings 9,081 10,257
Total equity attributable to equity holders of the parent 31,147 32,240
Non-controlling interest 1,170 1,199
TOTAL EQUITY 32,317 33,439


Condensed consolidated interim statement of comprehensive income

EUR´000 Q1 2011 Q1 2010  2010
Revenue 17,723 11,248 99,312
Cost of sales -17,796 -12,765 -100,012
Gross loss -73 -1,517 -700
Distribution expenses -96 -128 -401
Administrative expenses -1,067 -1,168 -4,887
Other operating income 226 43 820
Other operating expenses -106 -144 -3,807
Operating loss -1,116 -2,912 -8,975
Finance income 183 2,508 3,059
Finance expenses -305 -1,201 -6,338
Net finance income / expense -122 1,307 -3,279
Share of loss of equity-accounted investees 0 -1 -517
Loss before income tax -1,238 -1,606 -12,771
Income tax expense / income 4 0 33
Loss for the period -1,234 -1,606 -12,738
Other comprehensive income / expense:      
Exchange differences on translating foreign operations 115 -36 -28
Total other comprehensive income / expense for the period 115 -36 -28
Loss attributable to:      
- Owners of the parent -1,177 -1,316 -11,811
- Non-controlling interests -57 -290 -927
Loss for the period -1,234 -1,606 -12,738
Total comprehensive expense attributable to:      
- Owners of the parent -1,090 -1,352 -11,839
- Non-controlling interests -29 -290 -927
Total comprehensive expense -1,119 -1,642 -12,766
Earnings per share attributable to owners of the parent:      
Basic earnings per share (EUR) -0.04 -0.04 -0.38
Diluted earnings per share (EUR) -0.04 -0.04 -0.38


Condensed consolidated interim statement of cash flows

EUR´000 Q1 2011 Q1 2010
Cash flows from operating activities    
Cash receipts from customers 21,774 22,017
Cash paid to suppliers -20,525 -14,374
VAT paid -372 -1,336
Cash paid to and for employees -2,853 -3,937
Income tax paid -1 -11
Net cash used in / from operating activities -1,977 2,359
Cash flows from investing activities    
Acquisition of property, plant and equipment -6 -52
Proceeds from sale of property, plant and equipment and intangible assets 277 27
Disposal of subsidiaries, net of cash transferred 0 -633
Loans granted -39 -75
Repayment of loans granted 13 170
Dividends received 0 2
Interest received 3 85
Net cash from / used in investing activities 248 -476
Cash flows from financing activities    
Proceeds from loans received 163 1,222
Repayment of loans received -1,164 -4,202
Payment of finance lease liabilities -493 -711
Interest paid -289 -217
Other payments made 0 -6
Net cash used in financing activities -1,783 -3,914
Net cash flow -3,512 -2,031
Cash and cash equivalents at beginning of period 5,818 14,392
Effect of exchange rate fluctuations -3 15
Decrease in cash and cash equivalents -3,512 -2,031
Cash and cash equivalents at end of period 2,303 12,376


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 2010 was 99.3 million euros. 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