English Estonian
Published: 2013-05-09 13:35:00 CEST
Quarterly report

Financial report for the first quarter of 2013

Nordecon AS publishes financial report for the first quarter of 2013.

Tallinn, Estonia, 2013-05-09 13:35 CEST -- Announcement includes Nordecon AS’s consolidated financial statements for the first quarter 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 31 March 2013 31 December 2012
Current assets    
Cash and cash equivalents 6,474 10,231
Trade and other receivables 36,692 42,896
Prepayments 2,251 1,840
Inventories 25,497 26,243
Total current assets 70,914 81,210
Non-current assets
Investments in equity-accounted investees 193 202
Other investments 26 26
Trade and other receivables 384 1,554
Investment property 4,930 4,930
Property, plant and equipment 9,023 8,851
Intangible assets 14,832 14,857
Total non-current assets 29,388 30,420
TOTAL ASSETS 100,302 111,630
Current liabilities    
Loans and borrowings 26,225 27,185
Trade payables 27,504 31,968
Other payables 4,482 5,014
Deferred income 6,754 11,404
Provisions 446 521
Total current liabilities 65,411 76,092
Non-current liabilities
Loans and borrowings 3,659 3,671
Trade payables 259 259
Other payables 96 96
Provisions 1,281 1,210
Total non-current liabilities 5,295 5,236
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -457 -404
Retained earnings 5,366 6,039
Total equity attributable to owners of the parent 27,120 27,846
Non-controlling interests 2,476 2,456
TOTAL EQUITY 29,596 30,302


Condensed consolidated interim statement of comprehensive income

EUR '000 Q1 2013 Q1 2012 2012
Revenue 27,081 22,475 159,422
Cost of sales -26,488 -22,439 -151,205
Gross profit 593 36 8,217
Marketing and distribution expenses -62 -76 -389
Administrative expenses -1,236 -1,230 -5,385
Other operating income 200 113 810
Other operating expenses -37 -88 -566
Operating profit/loss -542 -1,245 2,687
Finance income 201 145 622
Finance costs -301 -284 -1,248
Net finance costs -100 -139 -626
Share of loss of equity-accounted investees -9 -24 -79
Profit/loss before income tax -651 -1,408 1,982
Income tax expense -1 0 -56
Profit/loss for the period -652 -1,408 1,926
Other comprehensive income/expense:      
Exchange differences on translating foreign operations -53 61 59
Total other comprehensive income/expense for the period -53 61 59
Profit/loss attributable to:      
- Owners of the parent -673 -1,364 1,477
- Non-controlling interests 21 -44 449
Profit/loss for the period -652 -1,408 1,926
Total comprehensive income/expense attributable to:      
- Owners of the parent -726 -1,303 1,536
- Non-controlling interests 21 -44 449
Total comprehensive income/expense -705 -1,347 1,985
Earnings per share attributable to owners of the parent:      
Basic earnings per share (EUR) -0.02 -0.04 0.05
Diluted earnings per share (EUR) -0.02 -0.04 0.05


Condensed consolidated interim statement of cash flows

EUR '000 Q1 2013 Q1 2012
Cash flows from operating activities    
Cash receipts from customers1 33,379 33,481
Cash paid to suppliers2 -32,499 -31,652
VAT paid -907 -1,558
Cash paid to and for employees -4,151 -4,073
Income tax paid -3 -12
Net cash used in operating activities -4,181 -3,814
Cash flows from investing activities    
Purchase of property, plant and equipment -127 -288
Proceeds from sale of property, plant and equipment and intangible assets 48 128
Loans provided -322 -294
Repayment of loans provided 196 9
Dividends received 4 0
Interest received 6 0
Net cash used in investing activities -195 -445
Cash flows from financing activities    
Proceeds from loans received 3,318 1,503
Repayment of loans received -1,969 -851
Payment of finance lease liabilities -476 -605
Interest paid -253 -310
Net cash from/used in financing activities 620 -263
Net cash flow -3,756 -4,522
Cash and cash equivalents at beginning of period 10,231 9,908
Effect of exchange rate fluctuations -1 -1
Decrease  in cash and cash equivalents -3,756 -4,522
Cash and cash equivalents at end of period 6,474 5,385

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 quarter of 2013 was 593 thousand euros (Q1 2012: 36 thousand euros). Generally first quarter results are impacted by a high proportion of fixed costs in the Infrastructure segment because seasonal factors impede outdoor work. However, this year the share of infrastructure projects where work could be done also during the winter months was larger than usual (e.g. earthwork for some major road construction projects and the construction of structures). Gross margin for the period was 2.2% (Q1 2012: 0.2%).

In previous interim reports we have described the work done to restore the Group’s profitability. The measures applied, including extensive internal restructuring and decisive cost cuts, have been effective but their effect on each subsequent year’s profit is inherently limited. In interpreting the results, it should be noted that the profits of long-term construction contracts are earned gradually, based on the stage of completion of contract activity.  

So far, the external environment has favoured the recovery of construction companies. In the first quarter, most builders performed contracts secured in previous periods. The combination of market growth and relatively stable input and subcontracting prices created a solid basis for a rise in the projects’ average profit margin. However, competition for public procurement contracts that will be put out to tender this year will be fierce, as companies expect a decrease in the volume of work procured by the public sector due to the depletion of resources allocated from the EU financial framework that is coming to an end in 2013. This will intensify competition and pricing pressure in all segments of the construction market. The Group is aware that long-term construction contracts involve the risk of growth in input prices and remains committed to prioritizing the profitability of contracts secured over increasing or maintaining its revenue figures. On the other hand, the investment activity of private sector customers, which is expected to rise slightly in 2013, should have a positive impact on the margins of construction companies.

The Group’s first-quarter administrative expenses totalled 1,236 thousand euros, remaining more or less stable compared with the 1,230 thousand euros incurred in the first quarter of 2012. The ratio of administrative expenses to revenue (12 months rolling) was 3.3% (Q1 2012: 3.1%). 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 loss for the first quarter of 2013 was 542 thousand euros (Q1 2012: an operating loss of 1,245 thousand euros) and EBITDA was negative at 35 thousand euros (Q1 2012: negative at 647 thousand euros).

The Group ended the first quarter with a net loss of 652 thousand euros (Q1 2012: a net loss of 1,408 thousand euros). The loss attributable to owners of the parent, Nordecon AS, was 673 thousand euros (Q1 2012: a loss of 1,364 thousand euros).

Cash flows

Operating activities of the first quarter of 2013 resulted in a net cash outflow of 4,181 thousand euros (Q1 2012: a net outflow of 3,814 thousand euros). Negative operating cash flow in the first quarter is quite common and attributable to the cyclical nature of construction activity. Higher fixed costs and preparations made for more active construction operations in the second quarter cause outflows to exceed inflows. Operating cash flow continued to be influenced by a difference between settlement terms. The settlement 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 counteract the mismatch between cash inflows and outflows with factoring and overdraft facilities obtained for meeting working capital requirements.

Cash flows from investing activities resulted in a net outflow of 195 thousand euros (Q1 2012: a net outflow of 445 thousand euros). We continued to invest in property, plant and equipment although not as extensively as a year ago. The volume of loans to associates was similar to the prior year but we received more loan repayments.

Financing activities resulted in a net cash inflow of 620 thousand euros (Q1 2012: a net outflow of 263 thousand euros). The net amount of loan receipts and repayments was positive at 1,349 thousand euros, being twice larger than a year ago, when the figure was 652 thousand euros. The Group borrowed more working capital because business volumes have increased compared with the previous year. Repayments, which were mostly related to meeting commitments under refinancing agreements, were larger as well.

At 31 March 2013, the Group’s cash and cash equivalents totalled 6,474 thousand euros (31 March 2012: 5,385 thousand euros).  Management’s comments on liquidity risks are presented in Description of the main risks.


Key financial figures and ratios

Figure/ratio Q1 2013 Q1 2012 Q1 2011 2012
Revenue (EUR’000) 27,081 22,475 17,723 159,422
Revenue growth, % 20% 27% 58% 7.9%
Net profit/loss (EUR’000) -652 -1,408 -1,234 1,926
Profit/loss attributable to owners of the parent (EUR’000) -673 -1,364 -1,177 1,477
Weighted average number of shares 30,756,727 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.02 -0.04 -0.04 0.05
Administrative expenses to revenue, % 4.6% 5.5% 6.0% 3.4%
Administrative expenses to revenue (rolling) 3.3% 3.1% 4.5% 3.4%
EBITDA (EUR’000) -35 -647 -484 4,833
EBITDA margin, % -0.1% -2.9% -2.7% 3.0%
Gross margin, % 2.2% 0.2% -0.4% 5.2%
Operating margin, % -2.0% -5.5% -6.3% 1.7%
Operating margin excluding gains on asset sales, % -2.3% -6.0% -7.5% 1.4%
Net margin, % -2.4% -6.3% -7.0% 1.2%
Return on invested capital, % -0.7% -2.1% -1.5% 5.2%
Return on equity, % -2.2% -5.1% -3.8% 6.6%
Equity ratio, % 29.5% 29.9% 35.5% 27.1%
Gearing, % 39.4% 42.2% 44.8% 33.7%
Current ratio 1.08 1.07 1.36 1.08
  31 March 2013 31 March 2012 31 March 2011 31 Dec 2012
Order book (EUR’000) 126,740 136,235 91,974 127,259


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 quarter of 2013, around 3% of the Group’s revenue was generated outside Estonia compared with 2% in the first quarter of 2012.

  Q1 2013 Q1 2012 Q1 2011 2012
Estonia 97% 98% 92% 98%
Finland 3% 2% 3% 2%
Belarus 0% 0% 5% 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. 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.


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 quarter of 2013 was 27,081 thousand euros, a 20% improvement on the 22,475 thousand euros generated in the first quarter of 2012.

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 quarter of 2013, the revenues of the two main segments were more or less equal, amounting to 12,703 thousand euros for Buildings and 13,157 thousand euros for Infrastructure. The corresponding prior-year figures were 11,713 thousand euros and 10,043 thousand euros (see note 8). The Infrastructure segment increased its revenue by 30% and, in contrast to the past few years, outperformed the Buildings segment largely thanks to the fact that the number of Infrastructure projects where work could also be done in the winter season was somewhat larger than usual. Compared with the first quarter of 2012, the proportion of building construction contracts in the Group’s portfolio has increased (mostly through contracts secured from the private sector), contributing to growth in building construction revenues. 

Operating segments* Q1 2013 Q1 2012 Q1 2011 2012
Buildings 46% 54% 51% 42%
Infrastructure 54% 46% 49% 58%

* In 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 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 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

Additional private sector contracts secured in 2012 facilitated revenue growth in the commercial buildings sub-segment. We are currently building several commercial buildings in Tallinn and Tartu and, at the end of the quarter, secured a contract of over 15 million euros for building an extension to the ASTRI shopping centre in Narva. We expect the investment activity of private sector customers to continue through 2013 and the proportion of the sub-segment to remain considerable. 

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 exceptionally challenging: it is difficult to win procurement tenders without taking excessive risks but our current policy is to avoid unjustified 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 in the sub-segment are the construction of the Translational Medicine Centre of the University of Tartu and Phase V of St Paul’s Church in Tartu.

Despite slight growth in private sector investment in industrial and warehouse facilities, most of the sub-segment’s revenue still resulted from contracts performed for the agricultural sector. However, compared with the first quarter of 2012, their volume has declined because the support allocated from the EU structural funds that co-finance the projects has decreased.

The Group built apartment buildings as a general contractor, not a developer. Within the apartment buildings sub-segment, revenue from sale of the Tigutorn apartments increased compared with a year ago.

Revenue distribution within Buildings segment Q1 2013 Q1 2012 Q1 2011 2012
Commercial buildings 47% 19% 11% 26%
Industrial and warehouse facilities 28% 32% 28% 35%
Public buildings 18% 42% 58% 36%
Apartment buildings 7% 7% 3% 3%


In the first quarter of 2013, the main revenue source for the Infrastructure segment was road construction. We have several large projects involving not only seasonally restricted operations such as asphalt-laying but also various kinds of earthwork and construction of structures, which could also be done in the weather of the first quarter. Most of the work relating to those projects, which are still in progress, will be performed in 2013.

In specialist engineering, our main projects were construction of facilities for Sillamäe port and construction of Kärdla guest harbour. The bulk of work at Sillamäe port has been completed and the remaining operations require better weather conditions.  This one of the reasons why the sub-segment’s contribution has decreased compared with the previous year.  

In 2012 we secured a number of environmental engineering contracts. Most of the work relating to those contracts will be performed in 2013. In addition, in the reporting period, we signed a contract of 6.4 million euros on 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 water and wastewater 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 tendered.

Revenue distribution within Infrastructure segment Q1 2013 Q1 2012 Q1 2011 2012
Road construction and maintenance 44% 36% 21% 51%
Specialist engineering (including hydraulic engineering) 10% 19% 1% 15%
Other engineering 32% 41% 50% 27%
Environmental engineering 14% 4% 28% 7%


Order book

At 31 March 2013, our order book stood at 125,740 thousand euros, being 8% smaller than a year ago.

The decrease in order book compared with the first quarter of 2012 is attributable to the gradual performance of major contracts (e.g. the design and build of the Aruvalla-Kose road section and construction of berths at Sillamäe port). Addition of large contracts is irregular. Initially new contracts increase the order book considerably (positive impact on order book), but as they are performed, their balance declines (negative impact on order book).

Compared with the end of 2012, the order book has remained stable – the Group has won new contracts in the same volume as older contracts have been performed. This is a good indicator for the first quarter. The largest increase was in the commercial buildings sub-segment where we won the contract on building an extension to the ASTRI shopping centre in Narva.

The order book used to include the outstanding balance of the Tivoli housing development project in Tallinn city centre of 12,757 thousand euros. On 4 February 2013, Tivoli Arendus OÜ sent us a notice of termination of the contract, which in our opinion is baseless. Accordingly, as at the date of release of this report Nordecon AS considers the notice of termination unfounded and the contract still effective. However, in light of the circumstances, we believe that it is unlikely that construction work can continue under the same contract.

As at the end of Q1 2013 Q1 2012 Q1 2011 2012
Order book (EUR’000) 125,740 136,235 91,974 127,259

Because of the general situation in the construction market, infrastructure contracts account for a larger proportion of the order book than building construction contracts. However, compared with a year ago, the lead of the Infrastructure segment has decreased significantly. At the reporting date, infrastructure contracts accounted for 56% of the order book compared with 78% at 31 March 2012. 

Between the reporting date (31 March 2013) and the date of release of this report, Group companies have secured additional construction contracts of approximately 18,517 thousand euros.



Staff and personnel expenses

In the first quarter of 2013, the Group (the parent and the subsidiaries) employed, on average, 739 people including 349 engineers and technical personnel (ETP). The number of staff did not increase substantially compared with a year ago.

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

  Q1 2013 Q1 2012 Q1 2011 2012
ETP 361 362 337 367
Workers 379 372 362 397
Total average 739 734 699 764

The Group’s personnel expenses for the first quarter of 2013 including all taxes totalled 4,056 thousand euros, 29% up on the comparative period when personnel expenses were 3,147 thousand euros. The growth in personnel expenses is mainly attributable to performance pay provided on the completion of projects. Selective increases of basic salaries had less impact.

In the first quarter of 2013, the service fees of the members of the council of Nordecon AS amounted to 37 thousand euros and associated social security charges totalled 12 thousand euros (Q1 2012: 17 thousand euros and 6 thousand euros respectively). The figure has increased in connection with the decision of Nordecon AS’s annual general meeting to increase the council’s fees as from the beginning of 2012. The fees for the months preceding the general meeting were paid out and recognised retrospectively in the second quarter of 2012.

The service fees of the members of the board of Nordecon AS amounted to 51 thousand euros and associated social security charges totalled 17 thousand euros (Q1 2012: 56 thousand euros and 18 thousand euros respectively including the remuneration of the member of the board that was removed on 30 April 2012).

Labour productivity and labour cost efficiency

In measuring operating efficiency, the Group uses the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses paid.

  Q1 2013 Q1 2012 Q1 2011 2012
Nominal labour productivity (rolling), (EUR’000) 214.3 206.4 138.7 208.7
Change against the comparative period, % 3.9% 48.8% 9.3% 3.2%
Nominal labour cost efficiency (rolling), (EUR’000) 9.3 10.7 7.4 9.5
Change against the comparative period, % -13.2% 43.6% 17.6% -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 addition, in the region where the Group operates construction operations are influenced by seasonality caused by the change of seasons.

The Group acknowledges 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 as high risk because the contract may quickly start generating a loss.

In the next periods, the Estonian construction market will depend mainly on public sector investments. A significant proportion of those investments will be funded with the assistance of the EU structural funds. The availability of EU support is relatively certain until the end of the current budget period (2007-2013). However, the allocations remaining for the last year of the budget period are smaller than in the previous years, which means, that the number of new projects started in 2013 will decrease significantly. The expenditures of the EU financial framework for 2014-2020 that will be designated for investments involving construction work are still unclear. Although the amounts allocated to Estonia under the cohesion policy programmes will increase, the national priorities may have changed. Nevertheless, the planned investments will have a significant and direct impact on the business volumes of construction companies.

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). In order to disperse the risk, the Group has secured road maintenance contracts that generate year-round business. According to its business strategy, the Group counteracts seasonal fluctuations in its infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the operating volumes of the two segments in balance (see also the chapter Performance by business line). In addition, Group 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 31 March 2013, the Group’s warranties provisions (including current and non-current ones) totalled 1,377 thousand euros. At 31 March 2012, the corresponding figure was 1,153 thousand euros.

In addition to managing the risks, which are directly related to construction operations, in recent years the Group has sought to mitigate also the risks inherent in preliminary activities. In particular, we have focused on the bidding process, i.e. the Group’s 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 quarter of 2013, reversals of prior period credit losses gave rise to a gain of 9 thousand euros (Q1 2012: credit losses on the write-down of receivables totalled 4 thousand euros).

The Group has recognised 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 claim 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. The case is expected to be ruled upon in the second half of 2013.

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 1.08-fold (31 March 2012: 1.07-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 12 months have passed. During and partly after the end of the reporting period, loans of 13,415 thousand euros which at 31 December 2012 were recognised as current liabilities (at 31 March 2013 corresponding loan balances totalled 16,729 thousand euros) were refinanced (or the Group obtained binding confirmations of their refinancing during 2013) and their settlement dates were (or will be) deferred to 2014.

At the reporting date, the Group’s cash and cash equivalents totalled 6,474 thousand euros (31 March 2012: 5,385 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 31 March 2013, the Group’s interest-bearing loans and borrowings totalled 29,884 thousand euros, an increase of 808 thousand euros year over year. Interest expense for the first quarter of 2013 amounted to 245 thousand euros. Compared with the first quarter of 2012, interest expense decreased by 2 thousand euros. 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 for hedging the risks arising from instruments with a floating interest rate.

Currency risk

In the first quarter of 2013, the exchange rate of the Ukrainian hryvna against the euro was stable. The Group’s net foreign exchange gain for the period was 89 thousand euros (Q1 2012: a net foreign exchange loss of 91 thousand euros).

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s Finnish operations do not involve a currency risk. Nor does the Group have any currency risk in Lithuania where operations have been suspended. Currency risk is reduced by the fact that the prices of construction materials and services that the Group’s Estonian entities purchase from abroad are mostly denominated in 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 will be larger in the infrastructure segment but the segment’s lead over building construction will diminish at an increasing pace. Private sector investments, which will grow compared with 2012, will mostly be channelled to the buildings segment. Moreover, the public sector will contribute to building construction through two major contracts - the construction of a new main building of the Estonian National Museum and the Maarjamõisa medical campus of Tartu University Hospital. The turnover of the infrastructure segment, on the other hand, will be undermined by the depletion of funds allocated from the EU budget for the period 2007-2013.
  • The construction market will remain disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the last year of the EU budget period, the volume of new procurements will decrease because most funds have already been allocated.  Co-financing terms generally require that a project should be completed during the budget period. Thus, most of the remaining procurements will be announced in the first half of 2013. This means that in the second half of the year public procurement of construction work may plummet. The EU financial framework 2014-2020 has still not been finalised. This increases uncertainty about how the construction market will develop in 2014 and forces companies to make their decisions based on shorter-term prospects.
  • 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. 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 will also become 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 stringent tendering conditions and secure the required funding.
  • Competition will intensify 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 the prices of construction inputs and companies that are banking on this in the bidding phase may run into difficulty. Profit margins are already under strong competitive pressure.
  • In new housing development, the success of a project will depend 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 will include those that create or fill a niche.
  • The contracts signed with public sector customers will 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 procured 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.
  • 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 continue to be unpredictable and, thus, notably greater and hard or even impossible to influence (petroleum and metal products, certain materials and equipment).
  • The situation in the labour market will be comparatively stable. There is still a shortage of qualified labour (including project and site managers) but construction companies, which have to maintain tight cost control, are not ready for a general rise in the base wage.  However, as the cost of living is increasing, pressure for a wage increase remains strong. Labour migration to the Nordic countries will also remain steady and despite potential market shrinkage (particularly in Finland), the number of job seekers is not expected to 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.

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba UAB. We are monitoring market developments and may resume our Lithuanian operations in the coming years 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 may pick up in 2013 although the economic and political risks do not allow us to expect any rapid changes. We will monitor the situation in the Ukrainian construction market closely and will be ready to carry out additional restructuring at the companies involved. We will continue seeking opportunities for exiting the 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 company. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks. We are not planning to penetrate 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_3m_2013.pdf