English Estonian
Published: 2015-02-12 08:00:00 CET
Quarterly report

2014 fourth quarter and twelve months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the fourth quarter and twelve months of 2014 (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 December 2014 31 December 2013
Current assets    
Cash and cash equivalents 8,802 12,575
Trade and other receivables 23,243 28,101
Prepayments 1,201 1,923
Inventories 25,391 23,785
Total current assets 58,637 66,384
Non-current assets
Investments in equity-accounted investees 694 566
Other investments 26 26
Trade and other receivables 11,211 10,645
Investment property 3,549 3,549
Property, plant and equipment 9,319 9,030
Intangible assets 14,633 14,494
Total non-current assets 39,432 38,310
TOTAL ASSETS 98,069 104,694
Current liabilities    
Loans and borrowings 20,588 23,875
Trade payables 26,858 26,372
Other payables 7,552 7,982
Deferred income 1,796 6,102
Provisions 799 913
Total current liabilities 57,593 65,244
Non-current liabilities
Loans and borrowings 3,145 3,303
Trade payables 109 156
Other payables 96 96
Provisions 759 969
Total non-current liabilities 4,109 4,524
Share capital 20,692 19,657
Own (treasury) shares -1,582 0
Share premium 547 0
Statutory capital reserve 2,554 2,554
Translation reserve 771 -298
Retained earnings 11,714 10,681
Total equity attributable to owners of the parent 34,696 32,594
Non-controlling interests 1,671 2,332
TOTAL EQUITY 36,367 34,926

Condensed consolidated interim statement of comprehensive income

EUR’000 Q4 2014 Q4 2013 12M 2014 12M 2013
Revenue  40,353  39,220 161,289  173,651
Cost of sales -39,331 -36,716 -151,476 -162,342
Gross profit 1,022 2,504 9,813 11,309
Marketing and distribution expenses -138 -171 -558 -452
Administrative expenses -1,650 -1,439 -5,656 -4,922
Other operating income 489 104 792 464
Other operating expenses -87 -745 -376 -1,096
Operating profit/loss -364 253 4,015 5,303
Finance income 252 161 738 668
Finance costs -720 -140 -2,301 -1,027
Net finance costs/income -468 21 -1,563 -359
Share of profit/loss of equity-accounted investees  -123  -343 85  -170
Profit/loss before income tax -955 -69 2,537 4,774
Income tax 3 -40 -239 -135
Profit/loss for the period -952 -109 2,298 4,639
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations 348 56 1,069 106
Total other comprehensive income 348 56 1,069 106
Profit/loss attributable to:        
- Owners of the parent -651 58 1,956 4,642
- Non-controlling interests -301 -167 342 -3
Profit/loss for the period -952 -109 2,298 4,639
Total comprehensive income/expense attributable to:        
- Owners of the parent -303 114 3,025 4,748
- Non-controlling interests -301 -167 342 -3
Total comprehensive income/expense for the period -604 -53 3,367 4,745
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR) -0.02 0.00 0.06 0.15
Diluted earnings per share (EUR) -0.02 0.00 0.06 0.15

Condensed consolidated interim statement of cash flows

EUR’000 12M 2014 12M 2013
Cash flows from operating activities    
Cash receipts from customers1 192,701 204,768
Cash paid to suppliers2 -163,690 -175,465
VAT paid -5,429 -5,131
Cash paid to and for employees -19,384 -18,647
Income tax paid -184 -99
Net cash from operating activities 4,014 5,426
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -355 -458
Paid on acquisition of intangible assets -13 0
Proceeds from sale of property, plant and equipment 189 317
Acquisition of a subsidiary -737 0
Acquisition of investments in associates -44 -616
Cash from liquidation of investments in associates 1 0
Loans provided -292 -922
Repayment of loans provided 227 245
Dividends received 4 4
Interest received 7 616
Net cash used in investing activities -1,013 -814
Cash flows from financing activities    
Proceeds from loans received 7,815 3,440
Repayment of loans received -11,194 -2,970
Payment of finance lease liabilities -1,432 -1,670
Interest paid -852 -945
Dividends paid -940 -121
Other payments made -168 0
Net cash used in financing activities -6,771 -2,226
Net cash flow -3,770 2,346
Cash and cash equivalents at beginning of period 12,575 10,231
Effect of exchange rate fluctuations on cash and cash equivalents -3 -2
Decrease/increase  in cash and cash equivalents -3,770 2,346
Cash and cash equivalents at end of period 8,802 12,575

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 2014 with a gross profit of 9,813 thousand euros (2013: 11,309 thousand euros) and a gross margin of 6.1% (2013: 6.5%). Profitability grew in the Buildings segment and dropped slightly in the Infrastructure segment.

The Group’s management was conscious of the expected fall in demand and the ensuing rise in competitive pressure in previous periods already (see also the chapters Order bookDescription of the main risks and Outlooks of the Group’s geographical markets) and enforced measures for maintaining profitability in a situation where volumes decrease. We are aware that potential rises in input prices pose a risk for long-term contracts and continue to prioritize a contract’s expected profitability over revenue growth or retention.

The Group’s administrative expenses for 2014 totalled 5,656 thousand euros, 14.9% up on the year before (2013: 4,922 thousand euros). The ratio of administrative expenses to revenue was 3.5% (2013: 2.8%). The main factors that contributed to growth in administrative expenses were a rise in payroll expenses and recognition of a performance pay provision based on the Group’s financial indicators. Our cost-control measures continued to yield strong results – administrative expenses remained below the target ceiling, i.e., 4% of revenue.

Operating profit for 2014 amounted to 4,015 thousand euros (2013: 5,303 thousand euros) and EBITDA (including the effect of goodwill) was 5,585 thousand euros (2013: 7,639 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were significantly larger than those of previous periods. The Ukrainian hryvnia weakened by around 44%, which meant that Group entities whose functional currency is the hryvnia had to re-measure their euro-denominated liabilities. The Group’s exchange losses, which are reported within finance costs, totalled 1,299 thousand euros (2013: 144 thousand euros). In financial accounting, the same exchange loss gave rise to a positive 1,069 thousand-euro change in the translation reserve reported in equity (2013: a change of 106 thousand euros) and the net effect of the exchange loss on the Group’s net assets was 230 thousand euros (2013: 38 thousand euros).

Thus, the Group’s net profit amounted to 2,298 thousand euros (2013: 4,639 thousand euros) of which the profit attributable to owners of the parent, Nordecon AS, was 1,956 thousand euros (2013: 4,642 thousand euros).

Cash flows

Operating activities of 2014 resulted in a net cash inflow of 4,014 thousand euros (2013: a net inflow of 5,426 thousand euros). During the year, the Group signed several contracts with private sector customers which do not require the customer to make advance payments. Absence of advance payments has become quite common also in the case of public sector contracts. Amounts retained from invoices issued during the construction period that are released only when construction activity ends also reduce cash inflow. Retentions account for 5-10% of the value of a contract. Besides, cash inflow is undermined by the construction of own housing development projects. Projects completed by the Group with higher than expected profit margins resulted in larger performance bonuses and accompanying tax charges. Operating cash flows continue to be influenced by a mismatch in settlement terms: the ones agreed with customers are long and in the case of public procurement mostly extend from 45 to 56 days while subcontractors generally have to be paid within 21 to 45 days. We counter the cyclicality by using factoring services and overdraft facilities provided for financing our working capital needs.

Investing activities resulted in a net cash outflow of 1,013 thousand euros (2013: a net outflow of 814 thousand euros). The largest non-recurring outflows resulted from a loan of 250 thousand euros to an entity of AS Nordic Contractors group (see note 14), a payment of 180 thousand euros for purchasing the remaining shares in the subsidiary AS Eston Ehitus from the non-controlling shareholders and payments of 557 thousand euros for increasing the Group’s ownership interest in Eurocon OÜ (see note 15).

Financing activities resulted in a net cash outflow of 6,771 thousand euros (2013: a net outflow of 2,226 thousand euros). Loan repayments exceeded loan receipts by 3,379 thousand euros whereas in 2013 loan receipts exceeded repayments by 470 thousand euros. The changes are mainly attributable to changes in the Group’s overdraft balances and repayments made under long-term investment loans. Finance lease and interest payments declined slightly. Dividends distributed in 2014 totalled 940 thousand euros (2013: 121 thousand euros).

At 31 December 2014, the Group’s cash and cash equivalents totalled 8,802 thousand euros (31 December 2013: 12,575 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 2014 2013 2012
Revenue (EUR’000) 161,289 173,651 159,422
Revenue change -7.1% 8.9% 7.9%
Net profit (EUR’000) 2,298 4,639 1,926
Profit attributable to owners of the parent (EUR’000) 1,956 4,642 1,477
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.06 0.15 0.05
Administrative expenses to revenue 3.5% 2.8% 3.4%
EBITDA (EUR’000)* 5,585 7,639 4,833
EBITDA margin 3.5% 4.4% 3.0%
Gross margin 6.1% 6.5% 5.2%
Operating margin 2.5% 3.1% 1.7%
Operating margin excluding gains on sale of real estate 2.3% 2.9% 1.4%
Net margin 1.4% 2.7% 1.2%
Return on invested capital 5.8% 9.5% 5.2%
Return on equity 6.4% 14.2% 6.6%
Equity ratio 37.1% 33.4% 27.1%
Return on assets 4.0% 4.3% 33.7%
Gearing 24.8% 23.5% 41.1%
Current ratio 1.02 1.02 1.08
As at 31 December 2014 2013 2012
Order book (EUR’000) 83,544 64,286 127,259

* EBITDA for 2014 includes expenses of 192 thousand euros (2013: 348 thousand euros) from write-down of goodwill and income of 414 thousand euros from the acquisition of negative goodwill.  

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
EBITDA = operating profit + depreciation and amortisation +/- changes in 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 2014, around 6% of the Group’s revenue was generated outside Estonia compared with 5% in 2013.

  2014 2013 2012
Estonia 94% 95% 98%
Finland 4% 5% 2%
Ukraine 2% 0% 0%

Finnish revenues comprise revenue from concrete works performed in the building construction segment. The contribution of the Finnish market has decreased slightly and the contribution of the Ukrainian market where we started work under a new 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 concentration on a single market. Our strategy foresees increasing foreign operations in the longer term; for further information, see the chapter Strategic agenda for 2014-2017. Our vision of the Group’s 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 may experience noticeable shrinkage.

In 2014, Nordecon’s revenues totalled 161,289 thousand euros, 7% down from the 173,651 thousand euros generated in 2013. The decline is mainly attributable to the Infrastructure segment that saw shrinkage across all sub-segments, mostly because the projects supported by the EU structural funds came to an end and contract volumes dropped sharply. The revenue of the Buildings segment grew as expected through a rise in both the number and average cost of contracts secured from the private sector. We drew attention to the change already at the end of the previous financial year.

Accordingly, in 2014 the revenues of our two operating segments, Buildings and Infrastructure, amounted to 105,145 thousand euros and 51,585 thousand euros respectively. The corresponding figures for 2013 were 71,694 thousand euros and 98,550 thousand euros (see note 8).

Operating segments* 2014 2013 2012
Buildings 65% 41% 42%
Infrastructure 35% 59% 58%

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

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


Sub-segment revenues

In the revenue structure of the Buildings segment, the contribution of public buildings decreased and that of commercial buildings declined slightly whereas the contributions of industrial and warehouse facilities and apartment buildings increased. The segment’s largest revenue contributors were contracts for the construction of commercial buildings in Tallinn (the Stroomi shopping centre, an office building in Ülemiste City and the Eesti Loto building) and Narva (an extension to the ASTRI shopping centre). In Pärnu, the Group is reconstructing Estonia Spa. We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain at a similar or even higher level also in the next financial year.

The industrial and warehouse facilities sub-segment saw a structural shift. In previous years, most of the revenue resulted from agricultural projects undertaken with the EU investment support. In 2014, the share of EU-supported projects decreased visibly and the main contributors were warehouse facilities and logistics centres (e.g., the Smarten logistics centre). The work done for companies engaged in heavy industry increased as well. We do not expect the revenues of the sub-segment to increase in 2015.

The competitive situation in the public buildings sub-segment is extremely challenging: it is hard to win a contract without taking risks but our current policy is to avoid various risks. The largest projects of the year were the construction of the Translational Medicine Centre of the University of Tartu, the academic building of the NCO School of the Estonian National Defence College, phase V of St Paul’s Church in Tartu and the Võru State Secondary School. Construction of the state secondary school will continue in 2015. If competition remains fierce, the revenue of the sub-segment is likely to decline.

Our apartment building revenues resulted mostly from general contracting. Major revenue contributors were the apartment buildings at Pirita tee 26 and in Kentmanni street and phase I of the Tondi residential quarter in Tallinn. The contribution of our own development projects also continues to increase. At the year-end, we completed two new apartment buildings with a total of 35 apartments in the Tammelinn district of Tartu. Sales of the apartments have been highly successful: by the year-end, 17 apartments were sold (www.tammelinn.ee). We have started preparations for the construction of phase II of the development. Most of the apartments in the Tigutorn apartment building (our other development project in Tartu) have been sold - at the year-end, only one apartment was still for sale. In Tallinn, we continue to sell apartment ownerships in phase I and build phase II of our Magasini 29 development project (www.magasini.ee).

Revenue distribution within Buildings segment 2014 2013 2012
Commercial buildings 42% 45% 26%
Industrial and warehouse facilities 33% 29% 35%
Public buildings 7% 21% 36%
Apartment buildings 18% 5% 3%

In 2014, the main revenue source in the Infrastructure segment was road construction. The average size of the sub-segment’s contracts has decreased considerably and volumes are not going to regain the level of 2013 because procurement of large-scale design and construction work has been replaced by smaller reconstruction and repair projects. Still, the contribution of the sub-segment will remain the strongest, partly thanks to the performance of long-term road maintenance contracts in the Järva and Hiiu counties and the Keila maintenance area.

In specialist engineering, a major project was the construction of the Sõpruse bridge boat harbour in Tartu. There is currently no information about any major investments in projects requiring hydraulic engineering work. The revenues of the sub-segment may increase through other complex engineering work but relevant revenues are likely to be irregular.

The decline in EU support due to the change of budget periods had a strong impact on our environmental engineering and utility network construction (other engineering) revenues, which decreased more rapidly than the revenues of other sub-segments. It is unlikely that the contributions of these sub-segments will remain stable in 2015. Instead, it is likely that their volumes will continue to contract because in 2014 a relatively large portion of their revenue resulted from long-term contracts secured in the previous period. Most new contracts are small.

Revenue distribution within Infrastructure segment 2014 2013 2012
Road construction and maintenance 72% 54% 51%
Specialist engineering (including hydraulic engineering) 2% 8% 15%
Other engineering 19% 26% 27%
Environmental engineering 7% 12% 7%

Order book

At 31 December 2014, our order book (backlog of contracts signed but not yet performed) stood at 83,544 thousand euros, a 30% increase compared with a year ago. Both the Buildings and the Infrastructure segment increased their order books. 

The order book of the Infrastructure segment grew by 51% through work secured by the road construction sub-segment. There is a substantial amount of work signed but not yet performed under two large road construction projects - one in Tartu (design and construction work under construction package 5 of the Tartu western bypass) and the other one in Keila (reconstruction of  the Keila-Valkse section of national road no. 8 Tallinn – Paldiski, km 24.9-29.5). In other sub-segments of the Infrastructure segment order books shrank considerably. The largest decrease occurred in environmental engineering but the decline in hydraulic engineering was steep as well.

The order book of the Buildings segment grew by around 23%. The commercial buildings sub-segment increased its order book substantially, mostly thanks to a rise in private sector investment. A substantial portion of work signed but not yet performed by the commercial buildings sub-segment is made up of the construction of a business building in Viimsi (Viimsi Keskus), a business building at Veerenni 24, an office building in Ülemiste City and the Eesti Loto building as well as the reconstruction of Estonia Spa.

  2014 2013 2012
Order book (EUR’000) 83,544 64,286 127,259

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 73% and 27% of the Group’s order book respectively (2013: 77% and 23% respectively). The distribution is typical of the past year but radically different from earlier years when the figures for the two segments were more or less equal. It is likely that the order book will continue to reflect the change for the next few years. In the current EU budget period (2014-2020) investments in infrastructure construction, which to date have mostly been made with the support of the EU structural funds, will not be as large as in 2007-2013. The new EU budget period is likely to have an impact on the construction sector at the end of 2015 at the earliest. Hence, we expect the revenues of the Infrastructure segment to decline in 2015 (for further information, see the Business risks section of the chapter Description of the main risks).

We believe that in a situation where the market is likely to shrink and competition continues to be fierce, the main challenge is to maintain the Group’s revenue and profitability.

Between the reporting date (31 December 2014) and the date of release of this report, Group companies have secured additional construction contracts in the region of 5,678 thousand euros.



Staff and personnel expenses

In 2014, the Group (the parent and the subsidiaries) employed, on average, 732 people including 357 engineers and technical personnel (ETP). Workforce decreased compared with 2013 due to shrinkage in operating volumes. 

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

  2014 2013 2012
ETP 357 357 367
Workers 375 400 397
Total average 732 757 764

The Group’s personnel expenses for 2014 including all taxes totalled 20,099 thousand euros, 3% down from 2013 when the figure was 20,664 thousand euros. The slight decrease is attributable to a decline in the number of staff.

In 2014, the service fees of the members of the council of Nordecon AS amounted to 141 thousand euros and associated social security charges totalled 47 thousand euros (2013: 141 thousand euros and 47 thousand euros respectively). The provision for their performance bonuses, made based on the Group’s performance indicators, amounted to 113 thousand euros and associated social security charges totalled 37 thousand euros (2013: 14 thousand euros and 4 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 262 thousand euros and associated social security charges totalled 87 thousand euros (2013: 195 thousand euros and 65 thousand euros respectively). The provision for their performance bonuses, made based on the Group’s performance indicators, amounted to 387 thousand euros and associated social security charges totalled 128 thousand euros (2013: 51 thousand euros and 17 thousand euros respectively).

Labour productivity and labour cost efficiency

The period’s nominal labour productivity dropped because the Group’s revenue decrease exceeded the decline in the number of staff. The main factors that lowered nominal labour cost efficiency were payment of performance bonuses and a rise in basic salaries.

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:

  2014 2013 2012
Nominal labour productivity (rolling), (EUR’000) 220.4 229.4 208.7
Change against the comparative period -4.0% 9.9% 3.2%
Nominal labour cost efficiency (rolling), (EUR) 8.0 8.4 9.5
Change against the comparative period -4.8% -11.6% -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.

Compared with a year ago, competition has grown visibly in almost all segments of the construction market. In 2014, public sector investment plummeted and it is not likely to recover noticeably in 2015. There is strong competitive pressure on builders’ bid prices in a situation where input prices have been relatively stable. Competition is particularly fierce 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 over plain revenue growth.

Demand for construction services will remain heavily dependent on 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. In the construction market, the effects of the EU funding are not likely to kick in before the end of 2015.

In light of the above, we do not expect any significant business growth in 2015. It is probable that the volumes of the Infrastructure segment will shrink moderately 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 proportion 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 only one narrow (particularly 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, we endeavour 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 even 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 31 December 2014, the Group’s warranty provisions (including current and non-current ones) totalled 1,162 thousand euros. The figure for the comparative period was 1,546 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

In 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 2014, impairment losses on receivables amounted to 14 thousand euros (2013: 305 thousand euros).

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 45 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 1.02-fold (31 December 2013: 1.02-fold). The key factors which influence the current ratio are the classification of the Group’s loans to its Ukrainian associates as non-current items and the banks’ general policy not to refinance interest-bearing liabilities for a period exceeding 12 months.

The political situation in Ukraine remains unstable 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 10,767 thousand euros were classified as non-current assets.

Interest-bearing liabilities account for a significant proportion of our current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when the 12 months have passed.

At the reporting date, the Group’s cash and cash equivalents totalled 8,802 thousand euros (31 December 2013: 12,575 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 December 2014, the Group’s interest-bearing loans and borrowings totalled 23,733 thousand euros, a decrease of 3,445 thousand euros year over year. An important factor that contributed to the decrease was settlement of short-term bank loans and a decline in the use of factoring services. Interest expense for 2014 amounted to 1,001 thousand euros, 54 thousand euros down from a year ago.

The main source of the Group’s interest rate risk is the possibility of a rapid upsurge in the base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In 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 the 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).

At the beginning of 2014, the political and economic environment in Ukraine deteriorated due to the differences between Ukraine and Russia, which caused the exchange rate of the hryvnia to tumble. During the year, the hryvnia weakened against the euro by around 44%. For the Group’s Ukrainian subsidiaries, this meant additional exchange losses on the translation of their euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 1,299 thousand euros (2013: an exchange loss of 144 thousand euros). Exchange gains and losses on financial instruments are reported in 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 (items connected with the construction business that are denominated in hryvnias) do not give rise to any material 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 financial statements.

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 markedly and the extent to which they can be realised is still unclear. Although during the 2014-2020 EU budget period allocations to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), support payments that influence the construction market will not increase. Instead, compared with the previous budget period, there will be a rise in allocations not designed for tangible assets.

Investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and the National Road Administration) which will reach signature of a construction contract in 2015 will either not increase significantly or will decrease. As a result, the Estonian construction market (particularly segments related to infrastructure construction) will remain in a relative slump. The situation will be somewhat alleviated by the positive level of private sector investments in building construction.

·   The protracted and painful process of construction market consolidation will continue, 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 too large, but more slowly than expected. Based on the past three years’ experience it is likely that stiff competition and insufficient demand will induce some general contractors to go slowly out of business or shrink in size rather than merge or exit the market. In our opinion, one of the factors that is slowing down the change is the customers’ (particularly the public sector customers’) desire to apply increasingly laxer tendering requirements in order to increase competition and thus lower the price even though this increases the risks related to security, quality, adherence to deadlines and the 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 the 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 downshift in input prices and companies that are banking on this in the bidding phase may run into difficulty. Construction prices and thus also profit margins are under strong competitive pressure.

·   In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the 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 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 encumber the builder with extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and the accommodating tendering requirements. Low qualification requirements and the precondition of making a low bid have made it easier to win a contract but have heightened the risks taken by the customers in respect of contract performance and delivery.

·   The prices of construction inputs will remain relatively stable. In the short term, weakening demand may lower local subcontracting prices. However, taking into account the subcontractors’ financial and human resources, the decline cannot be large or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).

·   Shortage of skilled labour (including project and site managers) will persist. This will weaken the quality of the construction service/process rather than the companies’ performance capabilities. Shrinkage in 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 also decline, 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 shrinkage 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 objective of operating in our neighbouring construction markets through local subsidiaries.

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


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 a few contracts with local investors on the premise that the terms may not involve any unjustified 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 significantly larger than a year ago. Despite the ongoing armed conflict in eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated compared with a year or two ago. Difficult times have reduced the number of inefficient local (construction) companies and when the economic situation normalises we will have much better prospects for increasing our operations. We monitor the situation in the Ukrainian construction market closely and consistently and are ready to restructure our operations if 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 conserved real estate projects or signing a construction contract with a prospective new owner.


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


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2013 was 174 million euros and net profit 4.6 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.


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

Investor presentation_12m_2014.pdf