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Published: 2015-08-06 15:15:00 CEST
Half Year financial report

2015 II quarter and 6 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the first quarter and of 2015 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

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


Condensed consolidated interim statement of financial position

EUR ’000 30 June 2015 31 December 2014
Current assets    
Cash and cash equivalents 4,529 8,802
Trade and other receivables 32,848 23,235
Prepayments 2,204 1,201
Inventories 25,738 24,788
Total current assets 65,319 58,026
Non-current assets
Investments in equity-accounted investees 631 694
Other investments 26 26
Trade and other receivables 11,663 11,211
Investment property 3,549 3,549
Property, plant and equipment 10,223 9,319
Intangible assets 14,636 14,633
Total non-current assets 40,728 39,432
TOTAL ASSETS 106,047 97,458
Current liabilities    
Loans and borrowings 25,360 20,588
Trade payables 31,138 26,267
Other payables 5,572 7,542
Deferred income 882 1,786
Provisions 504 799
Total current liabilities 63,456 56,982
Non-current liabilities
Loans and borrowings 5,617 3,145
Trade payables 109 109
Other payables 96 96
Provisions 889 759
Total non-current liabilities 6,711 4,109
Share capital 20,692 20,692
Own (treasury) shares -1,582 -1,582
Share premium 547 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,102 771
Retained earnings 11,188 11,714
Total equity attributable to owners of the parent 34,501 34,696
Non-controlling interests 1,379 1,671
TOTAL EQUITY 35,880 36,367


Condensed consolidated interim statement of comprehensive income

EUR ’000 First half 2015 Second quarter
First half 2014 Second quarter     2014 Full year 2014
Revenue  69,211 42,098 67,444 43,900 161,289
Cost of sales -66,140 -39,436 -63,232 -40,858 -151,476
Gross profit 3,071 2,662 4,212 3,042 9,813
Marketing and distribution expenses -222 -104 -344 -95 -558
Administrative expenses -2,224 -1,115 -2,471 -1,347 -5,656
Other operating income 253 149 174 109 792
Other operating expenses -74 -36 -64 -35 -376
Operating profit 804 1,556 1,507 1,674 4,015
Finance income 325 160 326 162 738
Finance costs -662 9 -1,222 -262 -2,301
Net finance costs/income -337 169 -896 -100 -1,563
Share of profit of equity-accounted investees 33 129 22 83 85
Profit before income tax 500 1,854 633 1,657 2,537
Income tax -257 -257 -179 -179 -239
Profit for the period 243 1,597 454 1,478 2,298
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations 331 -193 810 89 1,069
Total other comprehensive income 331 -193 810 89 1,069
TOTAL COMPREHENSIVE INCOME 574 1,404 1,264 1,567 3,367
Profit attributable to:          
- Owners of the parent 397 1,681 221 1,294 1,956
- Non-controlling interests -154 -84 233 184 342
Profit for the period 243 1,597 454 1,478 2,298
Total comprehensive income attributable to:          
- Owners of the parent 728 1,488 1,031 1,383 3,025
- Non-controlling interests -154 -84 233 184 342
Total comprehensive income for the period 574 1,404 1,264 1,567 3,367
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.01 0.05 0.01 0.04 0.06
Diluted earnings per share (EUR) 0.01   0.05 0.01 0.04 0.06

Condensed consolidated interim statement of cash flows

EUR ’000 First half 2015 First half 2014
Cash flows from operating activities    
Cash receipts from customers1 73,141 73,297
Cash paid to suppliers2 -67,292 -66,917
VAT paid -1,898 -2,478
Cash paid to and for employees -10,977 10,195
Income tax paid -37 0
Net cash used in operating activities -7,063 -6,293
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -380 -360
Proceeds from sale of property, plant and equipment 238 111
Acquisition of a subsidiary 0 -180
Acquisition of investments in associates -1 0
Loans provided -27 -268
Repayment of loans provided 55 95
Dividends received 103 4
Interest received 5 1
Net cash used in investing activities -7 -597
Cash flows from financing activities    
Proceeds from loans received 6,909 9,695
Repayment of loans received -1,797 -4,255
Payment of finance lease liabilities -875 -706
Interest paid -348 -391
Dividends paid -1,091 -923
Net cash from financing activities 2,798 3,420
Net cash flow -4,272 -3,470
Cash and cash equivalents at beginning of period 8,802 12,575
Effect of movements in foreign exchange rates -1 -2
Decrease  in cash and cash equivalents -4,272 -3,470
Cash and cash equivalents at end of period 4,529 9,103

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

Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon group ended the first half of 2015 with a gross profit of 3,071 thousand euros (first half 2014: 4,212 thousand euros) and a gross margin of 4.4% (first half 2014: 6.2%). Compared with the same period last year, gross margin declined in the Buildings segment and improved slightly in the Infrastructure segment where the main sources of profit were road construction and road maintenance. The Group’s second-quarter gross margin was comparable to that of second quarter 2014 but not sufficient to offset the weaker result for the first quarter.

Nordecon’s management has noted the stagnation and the resulting strong competitive pressures in the construction market already in earlier periods (see also the chapters Order bookDescription of the main risks and Outlooks of the Group’s geographical markets) and has enforced measures for maintaining the Group’s profitability. In the infrastructure segment, the expected recovery has not materialized and launches of new projects have mostly been deferred. In the buildings segment, bidding activity is relatively high but the prices of most new contracts do not cover the risks involved and instigate caution. In entering into long-term contracts, we remain aware of the risks inherent in changes taking place in our operating environment and uphold the policy that contracts are not signed to simply grow the portfolio and new projects may not cause a significant rise in our operational risks.

The Group’s administrative expenses for the first half of 2015 totalled 2,224 thousand euros, a slight decrease compared with a year ago (first half 2014: 2,471 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 3.3% (first half 2014: 3.1%). The Group’s cost-control measures continue to yield strong results: we have been able to keep administrative expenses below the target ceiling, i.e., 4% of revenue.

The Group ended the first half of 2015 with an operating profit of 804 thousand euros (first half 2014: 1,507 thousand euros) and an EBITDA of 1,732 thousand euros (first half 2014: 2,455 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were smaller than a year ago. During the period, the Ukrainian currency weakened by around 18%, which meant that Group companies whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported within finance costs totalled 316 thousand euros (first half 2014: 854 thousand euros). In the second quarter, the hryvnia strengthened slightly, which lowered the Group’s exchange loss for the period by 200 thousand euros compared with the first quarter. The same movements in the exchange rate gave rise to a positive change of 331 thousand euros in the translation reserve in equity (first half 2014: 810 thousand euros) and the net effect of the exchange loss on the Group’s net assets was a gain of 15 thousand euros (first half 2014: a loss of 44 thousand euros).

Net profit for the period amounted to 243 thousand euros (first half 2014: 454 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, was 397 thousand euros (first half 2014: 221 thousand euros).

Cash flows

Operating activities of the period resulted in a net cash outflow of 7,063 thousand euros (first half 2014:  an outflow of 6,293 thousand euros). The negative operating cash flow of the first half-year stems from the cyclical nature of the construction business. Larger fixed costs and preparations for a more active construction period cause outflows to exceed inflows. Cash flows are strongly affected by the fact that neither public nor private sector contracts require customers to make advance payments while the Group has to make prepayments to sub-contractors, materials suppliers, etc. In the present market situation, making of an advance payment by the customer is an exception rather than a rule, which puts additional pressure on the cash flows of construction companies. In addition, cash inflow is reduced by retentions that extend from 5 to 10% of the contract price and are released only at the end of the construction period. Cash flow is also influenced by a mismatch in settlement terms: the ones agreed with customers are relatively long and in the case of public procurement mostly extend from 30 to 56 days while subcontractors generally have to be paid within 21 to 45 days. During the period, there was also a slight increase in payments to employees that resulted from performance bonuses paid for projects completed in the previous year with higher than expected profit margins.

Investing activities resulted in a net outflow of 7 thousand euros (first half 2014: a net outflow of 597 thousand euros). Cash flows from investing activities were influenced the most by acquisitions of property, plant and equipment of 380 thousand euros (first half 2014: 360 thousand euros) and sales of used items of property, plant and equipment for 238 thousand euros (first half 2014: 111 thousand euros). Loans provided decreased year over year. Dividends received amounted to 103 thousand euros (first half 2014: 4 thousand euros).

Financing activities resulted in a net cash inflow of 2,798 thousand euros (first half 2014: a net inflow of 3,420 thousand euros). Loan receipts exceeded repayments by 5,112 thousand euros (first half 2014: by 5,440 thousand euros). A major share of cash inflow from financing activities resulted from use of overdraft facilities for raising working capital for operating activities and use of bank loans for partial financing of own development projects. Dividends distributed in the first half of 2015 totalled 1,091 thousand euros (first half 2014: 923 thousand euros).

At 30 June 2015, the Group’s cash and cash equivalents totalled 4,529 thousand euros (30 June 2014: 9,103 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio  First half 2015 First half 2014 First half 2013 Full year 2014
Revenue (EUR’000) 69,211 67,444 75,497 161,289
Revenue change 3% -11% 20% -7.1%
Net profit (EUR’000) 243 454 812 2,298
Net profit attributable to owners of the parent (EUR’000) 397 221 728 1,956
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.01 0.01 0.02 0.06
Administrative expenses to revenue 3.2% 3.7% 3.1% 3.5%
Administrative expenses to revenue (rolling) 3.3% 3.1% 3.0% 3.5%
EBITDA (EUR’000) 1,732 2,455 1,965 5,585
EBITDA margin 2.5% 3.6% 2.6% 3.5%
Gross margin 4.4% 6.2% 4.3% 6.1%
Operating margin 1.2% 2.2% 1.3% 2.5%
Operating margin excluding gains on sale of real estate 0.8% 2.1% 1.1% 2.3%
Net margin 0.4% 0.7% 1.1% 1.4%
Return on invested capital 1.3% 1.6% 2.2% 5.8%
Return on equity 0.7% 1.3% 2.7% 6.4%
Equity ratio 33.8% 33.8% 27.3% 37.3%
Return on assets 0.2% 0.4% 0.7% 2.3%
Gearing 39.6% 31.6% 45.4% 24.8%
Current ratio 1.03 1.07 1.08 1.02
As at 30 June 2015 30 June 2014 30 June 2013 31 Dec  2014
Order book (EUR’000) 70,837 87,236 103,230 83,544


Revenue change = (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 sale of real estate = ((operating profit -  gains on sale of non-current assets – gains on sale of real estate)/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
Return on assets = (net profit for the period/ the period’s average total assets)*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 half of 2015, the Group generated around 4% of its revenue outside Estonia compared with 7% in the same period in 2014. The contribution of foreign markets has decline due to a decrease in sales in Finland.

  First half 2015 First  half 2014 First half 2013 Full year 2014
Estonia 96% 93% 98% 94%
Finland 1% 6% 2% 2%
Ukraine 3% 1% 0% 4%

Finnish revenue comprised revenue from concrete works in the building construction segment. The contribution of the Finnish market has decreased because major projects have been completed. The relative importance of the Ukrainian market, where we mainly continue performing one building construction contract, has increased.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on a single market. However, conditions in our chosen foreign markets are also volatile and have a strong impact on our current results. Our strategy foresees increasing foreign operations in the longer term; for further information, see the chapter Strategic agenda for 2014-2017. Our vision of our operations in foreign markets is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

Segment revenues

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

Nordecon’s revenues for the first half of 2015 totalled 69,211 thousand euros, a 3% increase on the 67,444 thousand euros generated in the first half of 2014. Revenue grew in both the Buildings and the Infrastructure segment. In the Buildings segment, the strongest growth was achieved in housing construction. In the Infrastructure segment, revenue growth continues to be underpinned by slight growth in road construction volumes that have not yet regained the level measured a few years ago. Unfortunately, our engineering sub-segments have not recovered as anticipated, which is why we expect that in 2015 the volumes of projects performed with EU support will remain at the low levels of the previous financial year.

The segments’ revenues for the first half of 2015 were 49,154 thousand euros for Buildings and 18,543 thousand euros for Infrastructure. The corresponding figures for the first half of 2014 were 47,826 thousand euros and 17,936 thousand euros (see note 8). The Group’s order book has the same structure: at period-end 63% of contracts secured but not yet performed (in terms of value) were related to the Buildings segment (first half 2014: 67%).

Operating segments* First half 2015 First half 2014 First half 2013 Full year 2014
Buildings 68% 71% 41% 65%
Infrastructure 32% 29% 59% 35%

* In the directors’ report the Ukrainian buildings segment and the EU buildings segment, which are disclosed separately in the financial statements as required by IFRS 8 Operating Segments, are presented as a single segment.

In the directors’ report, projects have been allocated to operating segments based on their nature (i.e., building or infrastructure construction). In the segment reporting presented in the financial statements, allocation is based on the subsidiaries’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements, the results of a subsidiary that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In the directors’ report, the revenues of such a subsidiary are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialise in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both building and infrastructure construction. The figures for the parent company are allocated in both parts of the interim report based on the nature of the work.


Sub-segment revenues

Compared with the same period last year, the revenue structure of the Buildings segment has changed considerably. The contribution of the industrial and warehouse facilities sub-segment has contracted sharply while the contributions of other sub-segments have increased. The largest contributor is still the commercial buildings sub-segment.

The largest ongoing projects of the commercial buildings sub-segment are in Tallinn: the Eesti Loto, Lõõtsa and Veerenni business buildings as well as the Viimsi centre which is close to completion. In June, we completed and delivered on time the reconstruction of the Estonia Spa in Pärnu. We expect private sector investment activity to continue and the contribution of the sub-segment to remain at a similar or higher level throughout the year.

In the industrial and warehouse facilities sub-segment volumes have declined due to a decrease in both agricultural projects that used to dominate for a long time based on EU support and  warehouse and logistics facility projects. We do not expect the revenues of the sub-segment to increase substantially in the current year.

The volumes of the public buildings sub-segment have grown mainly through an increase in the state’s investments in national defence. The period’s largest projects were the construction of the Võru state secondary school and construction work on the premises of the Kuperjanov infantry battalion. In addition, we began building the Piusa border guard station and a building complex at the Ämari air base.

Our apartment building revenues resulted mostly from general contracting. The period’s main revenue contributors were the apartment building at Kentmanni põik 3 and phase II of the Tondi residential quarter in Tallinn that were started last year. In the second quarter, we began building phase I of Pikksilma Kodu in Kadriorg, Tallinn. The contribution of our own development projects in Tartu and Tallinn continues to increase. At the end of 2014, we completed two new apartment buildings with a total of 35 apartments in Tammelinn, Tartu. Sales have been successful: by the end of the period, 27 of the apartments had been sold or reserved. We continue to build phase II of the development where over half of the 20 apartments in the building that will be completed this September have already been sold under preliminary agreements or reserved (www.tammelinn.ee). In Tallinn, we continue to sell apartment ownerships in phases I and III and build phase III of our Magasini 29 development project (www.magasini.ee). By the end of the period, 7 of the 13 apartment ownerships in phases I and II had been sold.

Revenue distribution in Buildings segment First half 2015 First half 2014 First half 2013 Full year 2014
Commercial buildings 59% 49% 45% 42%
Industrial and warehouse facilities 10% 33% 34% 33%
Public buildings 13% 6% 19% 7%
Apartment buildings 18% 12% 2% 18%

In the first half of 2015, the main revenue source in the Infrastructure segment was road construction. We continued work on two major road construction projects in Tartu (construction package 5 of the Tartu western bypass) and Keila (Keila-Valkse section of national road no. 8 Tallinn – Paldiski, km 24.9-29.5) and started (in the second quarter) work on several smaller road repair projects whose total volume is substantial. In addition, Nordecon continues to deliver road maintenance services in the Järva and Hiiu counties and the Keila maintenance area. We expect that road construction will remain the main revenue source in the Infrastructure segment through 2015 and, similarly to last year, most of the projects will be small or medium-sized reconstruction and repair projects.

In specialist engineering, we did small-scale port construction work on the island of Hiiumaa. Investments in hydraulic engineering as well as our relevant revenue have declined in recent years and we do not expect to secure any large hydraulic engineering projects in the near future. The revenues of the sub-segment may increase through other complex engineering works but their addition is likely to be irregular.

Shrinkage in support provided from the EU structural funds continues to have a strong impact on environmental engineering whose volumes have decreased more rapidly than those of other sub-segments. The contribution of utility network construction (other engineering) has increased slightly but contracts that have been secured are small and continuing growth of the sub-segment is unlikely.

Revenue distribution in Infrastructure segment First half 2015 First half 2014 First half 2013 Full year 2014
Road construction and maintenance 82% 74% 54% 72%
Specialist engineering (including hydraulic engineering) 1% 4% 8% 2%
Other engineering 10% 7% 27% 19%
Environmental engineering 7% 15% 11% 7%


Order book

At 30 June 2015, the Group’s order book (backlog of contracts signed but not yet performed) stood at 70,837 thousand euros, a 19% decrease compared with a year ago. The order book decreased in both the Buildings segment and the Infrastructure segment.

  First half 2015 First half 2014 First half 2013 Full year 2014
Order book (EUR’000) 70,837 87,236 103,230 83,544

In the Infrastructure segment, there was a slight increase in the order book of the road construction sub-segment that is engaged in two large road construction projects started in 2014 in Tartu and Keila (see the chapter Sub-segment revenues) and has secured several smaller road repair projects. The order books of the other sub-segments decreased significantly compared with a year ago.

In the Buildings segment, the order books of the apartment buildings and public buildings sub-segments grew while the order book of the industrial and warehouse facilities sub-segment, which is strongly affected by the fall in EU-supported agricultural projects, decreased.

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 63% and 37% of the Group’s order book respectively (30 June 2014: 67% and 33% respectively). The domination of the Buildings segment is typical of the past two years but radically different from earlier periods when the order books of the two segments were more or less equal. It is likely that the present order book structure will persist for the next few years. In the current EU budget period (2014-2020) investments in infrastructure construction, which are mostly made with the support of the EU structural funds, will not be as large as in 2007-2013. The new EU budget period will have an impact on the construction sector at the end of 2015 at the earliest. Hence, we expect that the revenues of the Infrastructure segment will decline in 2015 (for further information, see also the Business risks section of the chapter Description of the main risks).

The volume of contracts secured in the second quarter of 2015 proved smaller than expected, which is also reflected in our order book. In a situation of stiff competition, we have avoided taking unjustified risks that could have an adverse impact on the Group. We prefer to keep costs under control and focus on projects with a positive outlook. According to our assessment, in the present situation it is difficult to maintain revenue and profit margins at the level of 2014 without taking unreasonable risks. Therefore, a decline in the second half-year is more than likely.

Between the reporting date (30 June 2015) and the date of release of this report, Group companies secured additional construction contracts in the region of 10,032 thousand euros.



Staff and personnel expenses

In the first half of 2015, the Group (the parent and the subsidiaries) employed, on average, 693 people including 351 engineers and technical personnel (ETP).

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

  First half 2015 First half 2014 First half 2013 Full year 2014
ETP 351 353 362 357
Workers 342 388 412 375
Total average 693 741 774 732

Compared with a year ago, headcount decreased by 6.5%, mostly through a decline in the number of workers that is attributable to shrinkage in the volume of work performed with own resources. Personnel expenses for the first half-year decreased accordingly. The Group’s personnel expenses for the first half-year including all taxes totalled 8,329 thousand euros (first half 2014: 8,904 thousand euros).

In the first half of 2015, the service fees of the members of the council of Nordecon AS amounted to 71 thousand euros and associated social security charges totalled 23 thousand euros (first half 2014: 71 thousand euros and 23 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 171 thousand euros and associated social security charges totalled 56 thousand euros (first half 2014: 138 thousand euros and 46 thousand euros respectively).


Labour productivity and labour cost efficiency

The rise in the Group’s labour productivity and labour cost efficiency, relative to the same period last year, is attributable to both revenue growth and a decrease in headcount and personnel expenses.

We measure the efficiency of our operating activities using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses incurred:

  First half 2015 First half 2014 First half 2013 Full year 2014
Nominal labour productivity (rolling), (EUR’000) 225.8 224.1 224.6 220.4
Change against the comparative period 0.7% -0.2% 7.7% -4.0%
Nominal labour cost efficiency (rolling), (EUR) 8.4 7.9 9.4 8.0
Change against the comparative period 5.8% -16.0% -11.3% 4.8%


Nominal labour productivity (rolling) = (past four quarters’ revenue) / (past four quarters’ average number of employees)
Nominal labour cost efficiency (rolling) = (past four quarters’ revenue) / (past four quarters’ personnel expenses)


Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins, are competition in the construction market and changes in the demand for construction services.

Competition is fierce in all segments of the construction market. In 2015 public sector investment is not likely to grow substantially compared with 2014, as was expected in the comparative period. There is strong competitive pressure on builders’ bid prices in a situation where input prices have not decreased noticeably. Competition is particularly aggressive in general building and utility network construction. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered significantly and competition is fierce is risky because negative developments in the economy may quickly render the contract onerous. Thus, in price-setting we currently prioritize a reasonable balance of contract performance risks and tight cost control over plain revenue growth.

Demand for construction services continues to be strongly influenced by the volume of public sector investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros, exceeding the figure of the previous financial framework, but the amounts earmarked for construction work are substantially smaller. The reporting period reflects unequivocally that these allocations are not going to impact the construction sector in 2015. Instead, their effect will emerge later.

In the light of the above factors, we do not expect year over year business growth in 2015. It is probable that the volumes of the Infrastructure segment will shrink but the decline should be counterbalanced by increasing activity in the Buildings segment. Our action plan foresees redirecting our resources (including some of the labour of the Infrastructure segment) to increasing the share of contracts secured from the private sector. According to our business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.

The Group’s business is also influenced by the fact that construction operations are seasonal. The impacts of seasonal fluctuations 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. Our business strategy is to counteract seasonal fluctuations in infrastructure operations with building construction that is less exposed to seasonality. Thus, our long-term goal is to keep the two segments in balance (see also the chapter Performance by business line). In addition, where possible, our companies implement appropriate technical solutions that allow working efficiently also in changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific 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 June 2015, the Group’s warranty provisions (including current and non-current ones) totalled 1,036 thousand euros. The figure for the comparative period was 1,199 thousand euros.

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

Financial risks

Credit risk

During the period, the Group did not incur any major credit losses. The credit risk exposure of the Group’s receivables continued to be low because the share of public sector customers is significant and the customers’ settlement behaviour is monitored on an ongoing basis. The main indicator of the realization of credit risk is settlement default that exceeds 180 days coupled with no activity on the part of the debtor that would confirm the intent to settle.

In the first half of 2015 as well as in the comparative period, the Group did not incur any impairment losses on receivables.

Liquidity risk

The Group remains exposed to higher than usual liquidity risk resulting from a mismatch between the long settlement terms demanded by customers (mostly 30 to 56 days) and increasingly shorter settlement terms negotiated by subcontractors (mostly 21 to 45 days). The Group counteracts the differences in settlement terms by using factoring where possible.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.03-fold (30 June 2014: 1.07-fold). The key factors which influence the current ratio are classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities for a period exceeding twelve months.

The political situation in Ukraine remains tense and we believe that realization of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date the Group’s loan receivables from its Ukrainian associates of 11,022 thousand euros were classified as non-current assets.

At period-end, interest-bearing liabilities accounted for a significant share of our current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on contract terms in force at the reporting date. To date, banks have generally 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.

At the reporting date, the Group’s cash and cash equivalents totalled 4,529 thousand euros (30 June 2014: 9,103 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. The amount of the Group’s interest-bearing liabilities has remained similar to the comparative period but the liability structure has changed. Current and non-current bank loans have decreased by 3,023 thousand euros while factoring liabilities and, to a lesser extent, finance lease liabilities have increased. The Group uses factoring to counteract the difference in settlement terms agreed with customers and subcontractors (see also the chapter Liquidity risk).  At 30 June 2015, the Group’s interest-bearing loans and borrowings totalled 30,977 thousand euros (30 June 2014: 29,602 thousand euros). Interest expense for the first half of 2015 was 342 thousand euros (first half 2014: 363 thousand euros).

The main source of the Group’s interest rate risk is a possible rise in the base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In the light of the Group’s relatively heavy loan burden this would cause a significant increase in interest expense, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. The Group does not use derivatives to hedge its interest rate risk.

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e., in euros (EUR) and Ukrainian hryvnias (UAH).

The hryvnia has been weakening because the political and economic environment in Ukraine continues to be strained due to the differences between Ukraine and Russia which emerged at the beginning of 2014 and at the beginning of 2015 the National Bank of Ukraine decided to discontinue determination of the national currency’s indicative exchange rate. In the first half of 2015, the hryvnia weakened against the euro by around 18%. For the Group’s Ukrainian subsidiaries, this meant additional foreign exchange losses on the translation of their euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 316 thousand euros (first half 2014: 854 thousand euros). Exchange gains and losses on financial instruments are reported within Finance income and Finance costs in the statement of comprehensive income. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

The reciprocal receivables and liabilities of the Group’s Ukrainian and non-Ukrainian entities which are connected with the construction business and denominated in hryvnias do not give rise to exchange losses. Nor do the loans provided to the Group’s Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s statement of comprehensive income.

The Group has not acquired derivatives to hedge its currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2015, public sector investments will not grow significantly and the extent to which they can be realised is still unclear. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the share of support that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to intangible areas.
  • Investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and National Road Administration) that reach signature of a construction contract in 2015 will not increase significantly and may be postponed to 2016. As a result, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. To some extent, the situation will be improved by the positive level of private sector investments in building construction.
  • The long and painful construction market consolidation will continue, although slowly. In particular, this applies to general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is too large. Based on recent years’ experience it is likely that stiff competition and insufficient demand will cause some general contractors to go slowly out of business or shrink in size rather than merge or exit the market. According to our assessment, in recent years the process has been slowed down by the customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements to increase competition and lower the price even though this increases the risks related to collateral, quality, adherence to deadlines and builder’s liability.
  • Competition will increase in all segments of the construction market. The average number of bidders for a contract has increased and there is a wide gap between the lowest bids made by winners and the average bids. The situation is somewhat similar to 2009 when expectations of shrinkage in demand prompted a fall in construction prices, which triggered a slide in the prices of many construction inputs. However, currently we do not see any noticeable downshift in input prices and companies that are banking on this in the bidding phase may run into difficulty. Stiff competition is putting pressure on contract prices and, thus, also profit margins.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the business plan and, thus, set affordable sales prices. 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 to the standard of living and the banks’ lending terms remain strict.  Similarly to previous periods, successful projects include those that create or fill a niche.
  • There is an increasing contrast between the stringent terms of public sector contracts, which impose on the builder extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and modest tendering requirements. Low qualification requirements and the precondition of making a low bid have made it easier for builders to win a contract but have heightened the risks taken by customers in respect of contract performance and delivery.
  • The prices of construction inputs will remain relatively stable. For a short term, shrinkage in demand may lower local subcontracting prices. However, taking into account subcontractors’ financial and human resources, the decline cannot be large or long-lasting. In some areas, price fluctuations will be unpredictable and may thus be greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • Shortage of skilled labour (including project and site managers) will persist but this will weaken the quality of the construction process/service rather than the companies’ performance capabilities. Shrinkage in the Estonian construction volumes may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and even though Nordic construction volumes (particularly in Finland) will decline as well, the number of job seekers that will return will not increase considerably. This sustains pressure for a wage increase.

Latvia and Lithuania

The Latvian construction market, which was hit by a severe downturn a few years ago, has not regained sufficient stability and, similarly to the Estonian market, in 2015 it will probably be adversely affected by a slowdown in public sector demand. Accordingly, it is unlikely that we will enter the Latvian construction market permanently in 2015.

In the near term we may undertake some projects in Latvia through our Estonian entities, involving partners where necessary. Undertaking a project assumes that it can be performed profitably. The decision does not change our strategy for the future, i.e., the goal to operate in our neighbouring construction markets through local subsidiaries.

The operations of the Group’s Lithuanian subsidiary, Nordecon Statyba UAB, have been suspended. We monitor the market situation and may resume operations in the next few years because developments in the Lithuanian construction market have been quite positive in the Baltic context. Temporary suspension of operations does not cause any major costs for the Group and does not change our strategy for the future, i.e., the goal to operate in the Lithuanian construction market through local subsidiaries.


In Ukraine, we prefer to provide general contracting and project management services to foreign private sector customers in the segment of building construction. However, due to the market situation, we have also signed contracts with local investors where the terms have not involved any unreasonable or uncontrollable risks. The unstable political and economic situation hinders adoption of business decisions but construction activity in Kiev has not halted. In 2015, the Group will continue its business in the Kiev region and our current Ukrainian order book is larger than a year ago. Despite the armed conflict in eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have much better prospects for increasing our operations and profitability. We monitor the situation in the Ukrainian construction market closely and consistently and are ready to restructure our operations as and when necessary. Should the crisis spread to Kiev (currently highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects that have been put on hold or signing a construction contract with a prospective new owner.


In Finland, we offer mainly subcontracting services in the concrete works segment but based on experience gained, have also started to perform some more complex works. The local concrete works market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Our policy is to maintain a rational approach and avoid taking excessive risks. At present, we are not planning to penetrate any other segments of the Finnish construction market (general contracting, project management, etc.).


In 2015, Nordecon started preparations for potential expansion into the Swedish market. The Group is planning to offer construction of residential and non-residential buildings, particularly in central Sweden. To begin construction activity, in July 2015 we acquired 100% of ownership interest in SWENCN AB, a company registered in the Kingdom of Sweden.


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2014 was 161 million euros and net profit 2.3 million euros. Currently Nordecon Group employs close to 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.


         Andri Hõbemägi
         Nordecon AS
         Head of Investor Relations
         Tel: +372 6272 022
         Email: andri.hobemagi@nordecon.com

Investor presentation_6m_2015..pdf