English Estonian
Published: 2016-11-10 07:00:00 CET
Quarterly report

2016 III quarter and 9 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the third quarter and nine months of 2016 (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/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/for-investor/investor-presentations).


Condensed consolidated interim statement of financial position

EUR ‘000 30 September 2016 31 December 2015
Current assets    
Cash and cash equivalents 7,288 6,332
Trade and other receivables 36,656 17,503
Prepayments 1,779 1,599
Inventories 23,941 23,603
Total current assets 69,664 49,037
Non-current assets
Investments in equity-accounted investees 1,749 1,179
Other investments 26 26
Trade and other receivables 10,866 10,516
Investment property 4,929 4,929
Property, plant and equipment 11,417 9,623
Intangible assets 14,623 14,609
Total non-current assets 43,610 40,882
TOTAL ASSETS 113,274 89,919
Current liabilities    
Borrowings 17,057 15,715
Trade payables 38,666 22,538
Other payables 7,612 5,475
Deferred income 2,568 3,233
Provisions 522 825
Total current liabilities 66,425 47,786
Non-current liabilities
Borrowings 7,936 5,098
Trade payables 104 104
Other payables 126 96
Provisions 1,053 768
Total non-current liabilities 9,219 6,066
Share capital 19,720 20,692
Own (treasury) shares -1,550 -1,582
Share premium 564 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,597 1,358
Retained earnings 12,484 10,970
Total equity attributable to owners of the parent 35,369 34,539
Non-controlling interests 2,261 1,528
TOTAL EQUITY 37,630 36,067


Condensed consolidated interim statement of comprehensive income

EUR ‘000   9M 2016 Q3 2016 9M 2015 Q3 2015 2015
Revenue    133,570  59,741  113,553  44,342 145,515
Cost of sales   -124,979 -55,303 -107,252 -41,112 -136,484
Gross profit   8,591 4,438 6,301 3,230 9,031
Marketing and distribution expenses   -279 -61 -274 -52 -412
Administrative expenses   -4,629 -1,847 -3,418 -1,203 -5,026
Other operating income   148 51 289 36 464
Other operating expenses   -539 -79 -83 0 -124
Operating profit   3,292 2,502 2,815 2,011 3,933
Finance income   336 101 491 166 655
Finance costs   -785 -319 -965 -303 -4,383
Net finance costs   -449 -218 -474 -137 -3,728
Share of profit of equity-accounted investees    717  233  233  200 226
Profit before income tax   3,560 2,517 2,574 2,074 431
Income tax expense   -245 0 -257 0 -257
Profit for the period   3,315 2,517 2,317 2,074 174
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   239 127 389 58 587
Total other comprehensive income   239 127 389 58 587
TOTAL COMPREHENSIVE INCOME   3,554 2,644 2,706 2,132 761
 Profit/loss attributable to:            
- Owners of the parent   2,437 2,011 2,482 2,085 179
- Non-controlling interests   878 506 -165 -11 -5
Profit for the period   3,315 2,517 2,317 2,074 174
Total comprehensive income/expense attributable to:            
- Owners of the parent   2,676 2,138 2,871 2,143 766
- Non-controlling interests   878 506 -165 -11 -5
Total comprehensive income for the period   3,554 2,644 2,706 2,132 761
Earnings per share attributable to owners of the parent:            
Basic earnings per share (EUR)   0.08 0.07 0.08 0.07 0.01
Diluted earnings per share (EUR)   0.08 0.07 0.08 0.07 0.01


Condensed consolidated interim statement of cash flows

EUR ‘000 9M 2016 9M 2015
Cash flows from operating activities    
Cash receipts from customers1 137,502 127,440
Cash paid to suppliers2 -119,130 -112,650
VAT paid -4,643 -2,990
Cash paid to and for employees -14,832 -15,373
Income tax paid -245 -109
Net cash used in operating activities -1,348 -3,682
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -145 -414
Paid on acquisition of intangible assets -25 0
Proceeds from sale of property, plant and equipment 97 238
Acquisition of a subsidiary 0 -8
Cash acquired on acquisition of a subsidiary 0 9
Acquisition of an investment in an associate 0 -1
Disposal of a subsidiary 6 0
Loans provided -40 -97
Repayment of loans provided 40 67
Dividends received 153 108
Interest received 0 7
Net cash from/used in investing activities 86 -91
Cash flows from financing activities    
Proceeds from loans received 7,166 7,124
Repayment of loans received -1,520 -2,615
Finance lease principal paid -1,831 -1,309
Interest paid -523 -580
Dividends paid -1,068 -1,091
Net cash from financing activities 2,224 1,529
Net cash flow 962 -2,244
Cash and cash equivalents at beginning of year 6,332 8,802
Effect of movements in foreign exchange rates -6 0
Increase/decrease in cash and cash equivalents 962 -2,244
Cash and cash equivalents at end of year 7,288 6,558

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 ended the first nine months of 2016 with a gross profit of 8,591 thousand euros (9M 2015: 6,301 thousand euros) and a gross margin of 6.4% (9M 2015: 5.5%). Despite growing competition, we succeeded in improving the gross margin year on year. Most of the profit was earned by the Buildings segment which raised its gross margin from 5.4% to 8.2%. The performance of the Infrastructure segment whose gross margin plummeted to 3.6% (9M 2015: 8.9%) remained less than satisfactory. The segment’s weak results are mainly attributable to a lack of self-performed projects (such as major earthworks) during the winter season and the third-quarter gross margin, which was weaker than a year ago. Taking into account the market situation where projects eligible to EU funding are still in the start-up phase and competition in the road construction segment is exceptionally stiff, we expect that in 2016 the profitability of the Infrastructure segment will remain lower than last year.

On securing long-term contracts, we remain alert to the risks resulting from growth in input prices and strive to prioritise, where possible, the contracts’ expected profitability over revenue growth.

Administrative expenses for the first nine months of 2016 totalled 4,629 thousand euros. Compared with the same period last year, administrative expenses grew (9M 2015: 3,418 thousand euros), primarily due to Nordecon’s expansion to the Swedish market and higher profitability, which increased the provisions made for performance bonuses. The ratio of administrative expenses to revenue (12 months rolling) was 3.8% (9M 2015: 3.3%), remaining below the target ceiling of 4% of revenue.

Operating profit for the period was influenced by the write-down of other receivables by 409 thousand euros (see note 12) due to the entry into force of the final judgement on the Group’s dispute with Teede REV-2 AS over the performance of the Koidula border crossing point contract in 2010 when our then venture partner ceased to fulfil its obligations and we had to complete the contract on our own. Although in essence the outcome of the litigation which ended in June was positive for Nordecon, some of the Group’s claims were rejected. Our nine-month operating profit was 3,292 thousand euros (9M 2015: 2,815 thousand euros) and EBITDA amounted to 4,723 thousand euros (9M 2015: 4,187 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were smaller than a year earlier. During the period, the Ukrainian currency weakened by around 10%, which meant that Group entities whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported in finance costs totalled 251 thousand euros (9M 2015: 375 thousand euros). The same movements in the exchange rate increased the translation reserve in equity by 239 thousand euros (9M 2015: 389  thousand euros) and the net effect of the exchange differences on the Group’s net assets was a loss of 12 thousand euros (9M 2015: a gain of 14 thousand euros).

The Group’s net profit amounted to 3,315 thousand euros (9M 2015: 2,317 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, amounted to 2,437 thousand euros (9M 2015: 2,482 thousand euros).

Cash flows

In the first nine months of 2016, operating activities resulted in a net cash outflow of 1,348 thousand euros (9M 2015:  an outflow of 3,682 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, operating cash flow proved negative due to VAT paid and payments made to and for employees. Operating cash flow continues to be affected by the fact that neither public nor private sector customers are required to make advance payments while the Group has to make prepayments to subcontractors, materials suppliers, etc. In addition, cash inflow is reduced by retentions which extend from 5 to 10% of the contract price and are released at the end of the construction period only.

Investing activities produced a net cash inflow of 86 thousand euros (9M 2015: an outflow of 91 thousand euros). The largest line items were payments made for property, plant and equipment of 170 thousand euros (9M 2015: 414 thousand euros) and dividends received of 153 thousand euros (9M 2015: 108 thousand euros).

Financing activities generated a net cash inflow of 2,224 thousand euros (9M 2015: an inflow of 1,529 thousand euros). Our financing cash flow is strongly influenced by loan and lease transactions.

Proceeds from loans received amounted to 7,166 thousand euros, consisting of use of overdraft facilities and development loans (9M 2015: 7,124 thousand euros). Loan repayments totalled 1,520  thousand euros, consisting of scheduled repayments of long-term investment and development loans (9M 2015: 2,615 thousand euros). Investments in road construction equipment and a new asphalt concrete plant increased finance lease payments which totalled 1,831  thousand euros (9M 2015: 1,309  thousand euros). Dividends paid amounted to 1,068 thousand euros (9M 2015: 1,091 thousand euros).

At 30 September 2016, the Group’s cash and cash equivalents totalled 7,288 thousand euros (30 September 2015: 6,558 thousand euros). Management’s commentary on liquidity risks is presented in the chapter Description of the main risks.

Key financial figures and ratios

Figure/ratio 9M 2016 9M 2015 9M 2014 2015
Revenue (EUR ’000) 133,570 113,553 120,936 145,515
Revenue change 17.6% -6.1% -10.2% -9.8%
Net profit (EUR ’000) 3,315 2,317 3,250 174
Net profit attributable to owners of the parent (EUR ’000) 2,437 2,482 2,607 179
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.08 0.08 0.08 0.01
Administrative expenses to revenue 3.5% 3.0% 3.3% 3.5%
Administrative expenses to revenue (rolling) 3.8% 3.3% 3.4% 3.5%
EBITDA (EUR ’000) 4,723 4,187 5,871 5,769
EBITDA margin 3.5% 3.7% 4.9% 4.0%
Gross margin 6.4% 5.5% 7.3% 6.2%
Operating margin 2.5% 2.5% 3.6% 2.7%
Operating margin excluding gain on asset sales 2.4% 2.3% 3.5% 2.4%
Net margin 2.5% 2.0% 2.7% 0.1%
Return on invested capital 6.8% 5.0% 6.5% 2.1%
Return on equity 9.0% 6.2% 9.0% 0.5%
Equity ratio 33.2% 35.9% 34.2% 40.1%
Return on assets 3.3% 2.3% 3.0% 0.2%
Gearing 28.3% 33.4% 33.4% 25.5%
Current ratio 1.05 1.07 1.05 1.03
As at 30 Sept 2016 30 Sept 2015 30 Sept 2014 31 Dec 2015
Order book (EUR ’000) 133,846 76,261 92,455 125,698

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 gain on asset sales = ((operating profit – gain on sales of non-current assets – gain on sales 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 nine months of 2016, Nordecon earned around 7% of its revenue outside Estonia compared with 4% in the same period last year. The contribution of foreign markets has increased through revenue generated in Sweden. The contribution of the Ukrainian market has remained relatively stable. Finnish revenues result from concrete works in the building construction segment.

  9M 2016 9M 2015 9M 2014 2015
Estonia 93% 96% 94% 96%
Sweden 4% 0% 0% 0%
Ukraine 2% 3% 2% 3%
Finland 1% 1% 4% 1%

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. Increasing the contribution of foreign markets is on Nordecon’s strategic agenda. Our vision of our foreign operations 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 in more challenging circumstances where one sub-segment may experience noticeable shrinkage.

Nordecon’s revenue for the first nine months of 2016 totalled 133,570 thousand euros, a roughly 18% increase on the 113,553 thousand euros generated in the same period last year. The overall downturn in the infrastructure construction market is also affecting our revenue structure. The revenue of the Buildings segment grew as anticipated, primarily thanks to contracts secured from the private sector, while the revenue of the Infrastructure segment decreased by around 16%, year on year, due to a lack of large-scale road construction projects. In the comparative period, we had two major road construction projects that generated a substantial amount of revenue (construction package 5 of the Tartu western bypass and the Keila-Valkse section of national road no. 8 Tallinn-Paldiski, km 24.9-29.5). However, thanks to a new asphalt concrete plant acquired at the beginning of the year, we were able to achieve strong growth in our asphalt concrete sales. Revenue from the sale of asphalt concrete amounted to 1,801 thousand euros (9M 2015: 621 thousand euros).

During the period, Buildings and Infrastructure generated revenue of 96,648 thousand euros and 32,111 thousand euros respectively. The corresponding figures for the first nine months of 2015 were 70,944 thousand euros and 39,789 thousand euros (see note 8). Our order book has a similar structure: at period-end 78% of contracts secured but not yet performed was attributable to the Buildings segment (9M 2015: 73%).

Operating segments* 9M 2016 9M 2015 9M 2014 2015
Buildings 72% 61% 63% 64%
Infrastructure 28% 39% 37% 36%

* 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 a year ago, the revenue structure of the Buildings segment has changed considerably. In the period under review, the segment’s strongest revenue contributors, in practically equal proportions, were the apartment buildings and public buildings sub-segments. In the public buildings sub-segment, growth was underpinned by the state’s increasing investment in national defence. During the period, we completed the construction of the Piusa border guard station, a barracks at the Tapa military base, and a building complex at the Ämari air base and delivered to the customer phase I of Järveküla school. We continue the design and construction of the Lintsi warehouse complex and the reconstruction of Ugala Theatre in the city of Viljandi.

Most of our apartment building revenue resulted from general contracting. In Estonia, a major share of the apartment buildings we are working on is located in Tallinn. The period’s main revenue contributors were the three phases of the Pikksilma homes in Kadriorg and the Meerhof 2.0 building complex at Pirita tee 20a. The contributions of foreign markets continue to grow as well. In Ukraine, we are completing the Lepse street residential quarter in Kiev and continue building a housing district in the city of Brovary in the Kiev region. In Sweden, we are building two apartment buildings in Stockholm.

The contribution of our own development projects in Tartu and Tallinn (included in the apartment buildings sub-segment) continues to increase slowly but surely. In the first nine months of 2016, our own development projects generated revenue of 3,012 thousand euros (9M 2015: 2,708 thousand euros). We have completed 4 apartment buildings in the first three development phases of our Tammelinn project in Tartu. In March, we began building phase IV which comprises a five-floor apartment building with 25 apartments. By the reporting date, around 90% of the apartments were already covered with notarised preliminary sale agreements (www.tammelinn.ee). By period-end, we had also sold 16 of the 20 apartment ownerships in the first three phases of our Magasini 29 development project in Tallinn (www.magasini.ee), 5 of them this year. We continue to build the development’s fifth and last terraced house. In September, we began building two apartment buildings with a total of 30 apartments in Hane street in Tallinn. In carrying out our development activities, we monitor potential risks in the housing development market that stem from rapid growth in the supply of new housing as well as relative price increases with due care.

The volumes of the commercial buildings sub-segment, which used to dominate the Buildings segment for a long time, have declined considerably. We anticipated the shrinkage already at the end of last year. During the period, we completed and delivered on time the Veerenni business building in Tallinn and are completing the office and retail complex Arsenali Keskus in Tallinn.

Our industrial and warehouse facilities revenues have grown year on year. Private investment in industrial and warehouse buildings has increased. During the period, our largest projects were the construction of a warehouse for Riigiressursside Keskus in Tallinn, a production facility for Vecta Design in Pärnu, and KEVILI South Terminal (a cereals storage and handling complex). We continue to build an extension to the warehouse of Smarten and have started to build production and warehouse facilities for Harmet at Kumna, near Tallinn.             

Revenue breakdown in Buildings segment 9M 2016 9M 2015 9M 2014 2015
Apartment buildings 32% 20% 14% 22%
Public buildings 31% 13% 6% 16%
Commercial buildings 15% 56% 43% 50%
Industrial and warehouse facilities 22% 11% 37% 12%

Similarly to previous years, in the first nine months of 2016 the main revenue source in the Infrastructure segment was road construction where we had mostly medium-sized and small projects. Our largest projects were the reconstruction of Majaka street in Tallinn and Meoma-Alatskivi and Rannamõisa-Kloogaranna road sections. We continue to render road maintenance services in the Järva and Hiiu counties and the Keila and Kose maintenance areas of the Harju county. Kose is a new area, where work started in February 2016. We also provided the State Forest Management Centre with forest road improvement services. We expect that road construction will remain the main revenue source in the Infrastructure segment through 2016 but the amount of its revenues will decrease compared with the previous year.

A decrease in EU support continues to affect our other engineering and environmental engineering sub-segments whose revenues have decreased by around one third year on year. In specialist engineering, there is no sign of major hydraulic engineering investments in the current year and addition of other complex engineering projects is also likely to be irregular.

Revenue breakdown in Infrastructure segment 9M 2016 9M 2015 9M 2014 2015
Road construction and maintenance                    86% 82% 74% 81%
Other engineering 9% 13% 15% 14%
Environmental engineering 5% 4% 8% 4%
Specialist engineering (including hydraulic engineering) 0% 1% 3% 1%


Order book

At 30 September 2016, the Group’s order book (backlog of contracts signed but not yet performed) stood at 133,846 thousand euros, a 76% increase year over year. Order books grew in both the Buildings and the Infrastructure segment. In the third quarter, Group companies secured new contracts of 53,714 thousand euros.

  30 Sept 2016 30 Sept 2015 30 Sept 2014 31 Dec 2015
Order book (EUR ’000)  133,846  76,261 92,455 125,698

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 78% and 22% of the Group’s order book respectively (30 September 2015: 73% and 27% respectively).

Compared with a year ago, the order book of the Buildings segment has grown by around 88%. Major growth has been posted by nearly all sub-segments. The order book is the largest in the apartment buildings sub-segment where growth is attributable to large contracts signed at the end of 2015, including those for the construction of the Meerhof 2.0 building complex at Pirita tee 20a in Tallinn, five apartment buildings in the city of Brovary in the Kiev region in Ukraine and a five-floor apartment building in Stockholm, Sweden. In 2016, we have also secured contracts for the construction of phase III in the Pikksilma homes development in Kadriorg, apartment buildings at Kopli 4a and 6, phase II of the development at Pirita tee 20a, and apartment buildings at Virbi 10 in Tallinn and an apartment building in the Nacka district in Stockholm. Growth in the order book of the public buildings sub-segment is mostly attributable to the construction of a depot at the Tapa military base and the reconstruction of Ugala Theatre in Viljandi as well as the contract secured in the third quarter of 2016 for building the armoured vehicle infrastructure, a canteen and a barracks at the Tapa military base. The growth in the order book of the industrial and warehouse facilities sub-segment is supported by the construction of an extension to the warehouse of Smarten and production and warehouse facilities for Harmet. After some decline, the order book of the commercial buildings sub-segment has also started to grow. In the second quarter, we signed large-scale contracts for the design and construction of the office premises complex Viimsi Äritare and the non-renovated part of the historical Luther furniture factory and the accompanying outdoor facilities at Vana-Lõuna 39 in Tallinn. In the third quarter, we secured a contract for the construction of a commercial building in the Rotermann quarter in Tallinn.

Compared with a year earlier, the order book of the Infrastructure segment has grown by 43%. The rise is largely underpinned by growth in the road construction sub-segment, which is supported by the contracts secured for the provision of road maintenance services in the Järva, Hiiu, and Kose road maintenance areas in the period 2016-2021. The order book of the road construction sub-segment is also influenced by the reconstruction of Logi street and the construction of new checkpoints and waiting areas in the north-western part of the Old City Harbour in Tallinn. The order book of the environmental engineering sub-segment, where we continue to perform a contract for the design and construction of an extension to the Kohtla-Järve wastewater treatment plant, has also grown somewhat. The order books of other Infrastructure sub-segments have decreased. According to our estimates, in 2016 the volume of public investments will not increase substantially, compared with 2015, and the new EU financial framework (2014-2020) will not have a visible impact on the construction sector. Thus, it is more likely than not that in 2016 the revenue of the Infrastructure segment will decrease compared with the year before (for further information, see the Business risks section of the chapter Description of the main risks).

However, in the light of order book growth and developments in our chosen markets, we forecast overall volume growth for 2016. In an environment of stiff competition, we pursue the policy of avoiding unjustified risks whose realisation in the contract performance phase would have an adverse impact on our results.  Instead, we prefer to keep costs under control and focus on projects with positive prospects.

Between the reporting date (30 September 2016) and the date of release of this report, Group companies have secured additional construction contracts in the region of 16 041 thousand euros.



Staff and personnel expenses

In the first nine months of 2016, Nordecon Group (the parent and the subsidiaries) employed, on average, 679 people including 374 engineers and technical personnel (ETP). Compared with the same period in 2015, the number of workers decreased by around 3% due to shrinkage in the portfolio of self-performed projects while the number of engineers and technical personnel grew slightly.

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

  9M 2016 9M 2015 9M 2014 2015
ETP 374 357 353 356
Workers 305 342 378 334
Total average 679 699 731 690

Our personnel expenses for the first nine months of 2016 including all taxes totalled 14,898 thousand euros (9M 2015: 13,056 thousand euros), a roughly 14% increase year over year. The growth in personnel expenses is attributable to the Group’s expansion to the Swedish market, selective pay-rises and performance bonuses.

The service fees of the members of the council of Nordecon AS for the first nine months of 2016 amounted to 145 thousand euros and associated social security charges totalled 48 thousand euros (9M 2015: 120 thousand euros and 39 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 480 thousand euros and associated social security charges totalled 158 thousand euros (9M 2015: 329 thousand euros and 109 thousand euros respectively).

The fees (also for the comparative period) include the provisions made in the third quarter on the basis of the Group’s financial indicators for payment of potential performance bonuses.

Labour productivity and labour cost efficiency

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:

  9M 2016 9M 2015 9M 2014 2015
Nominal labour productivity (rolling), (EUR ’000) 245.1 217.5 218.8 210.9
Change against the comparative period 12.7% -0.6% -5.5% -4.3%
Nominal labour cost efficiency (rolling), (EUR) 8.2 8.2 7.5 8.0
Change against the comparative period 0.6% 9.8% -21.9% -0.6%
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)

Nominal labour productivity increased year on year, mainly through revenue growth.


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 continues to be stiff in all segments of the construction market and in 2016 public investment is not likely to grow substantially. Thus, builders’ bid prices are under strong competitive pressure while the prices of construction inputs in the aggregate have not decreased noticeably. Even though unhealthily aggressive competition in building construction has started to recede thanks to growth in the volume of projects put out to tender, the slump in infrastructure construction is fuelling fierce competition for the limited number of contracts available. Bidders increasingly include not only well-known general contractors but also former subcontractors, a trend attributable to the state and local governments’ policy to lower the qualification requirements of public procurement tenders. We acknowledge the risks inherent in the performance 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 tough is risky because negative developments in the economy may quickly render the contract onerous. Thus, in price-setting we currently prioritise a reasonable balance of contract performance risks and tight cost control over revenue growth.

Demand for construction services continues to be strongly influenced by the volume of public 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. Moreover, the allocations will have an impact on the construction sector in the second half of 2016 only.

Despite the above factors, we see opportunities for achieving overall year-on-year business growth in 2016: the rise in the Estonian building construction segment is increasingly supported by positive developments in our chosen foreign markets. Our action plan foresees using our resources (including some of the labour released from the Infrastructure segment) to increase the share of contracts secured from the private sector. According to its business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.

Our business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction 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 strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance (see also the chapter Performance by business line). Where possible, our entities 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 insurance 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 due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 30 September 2016, the Group’s warranty provisions (including current and non-current ones) totalled 1,117 thousand euros (30 September 2015: 1,880 thousand euros).

In addition to managing the risks directly related to construction operations, in recent years we have also 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, we recognised credit losses of 506 thousand euros of which 97 thousand euros resulted from the write-down of trade receivables and 409 thousand euros from the write-down of other receivables (see also the chapter Financial performance). In the comparative period, we did not incur any credit losses. The overall credit risk exposure of receivables is low because the solvency of all prospective customers is evaluated, the share of public sector customers is large and customers’ settlement behaviour is consistently monitored. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days along with no activity on the part of the debtor that would confirm the intent to settle.

Liquidity risk

The Group remains exposed to higher than usual liquidity risk. At the reporting date, the Group’s current assets exceeded its current liabilities 1.05-fold (30 September 2015: 1.07-fold). The key factors which influence the current ratio are the 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 (particularly overdraft facilities) for a period exceeding twelve months.

Due to the strained political and economic situation in Ukraine, we believe that the Group’s investment properties in that country cannot be realised in the short term. Accordingly, as at the reporting date the Group’s loans to its Ukrainian associates of 8,555 thousand euros are classified as non-current assets.

Interest-bearing liabilities make up a significant share of our current liabilities. Under IFRS EU, loan commitments have to be classified into current and non-current based on contract terms in force at the reporting date. At 30 September 2016, short-term loan liabilities totalled 17,057 thousand euros (30 September 2015: 23,566 thousand euros), including overdraft liabilities of 12,241 thousand euros (30 September 2015: 13,576 thousand euros) which will probably be refinanced after 12 months.

At the reporting date, the Group’s cash and cash equivalents totalled 7,288 thousand euros (30 September 2015: 6,558 thousand euros).

Interest rate risk

Our 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. Compared with the same period last year, interest-bearing liabilities declined by 3,881 thousand euros. Loan and factoring liabilities decreased (by 5,299 thousand euros) while finance lease liabilities increased (by 1,418 thousand euros). The growth in finance lease liabilities is mainly attributable to the acquisition of a new asphalt concrete plant. We use factoring to counteract the mismatch in the settlement terms agreed with customers and subcontractors.  At 30 September 2016, interest-bearing liabilities totalled 24,993 thousand euros (30 September 2015: 28,874 thousand euros). Interest expense for the first nine months of 2016 amounted to 501 thousand euros (9M 2015: 585 thousand euros).

The main source of interest rate risk is a possible rise in the variable component 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 rise 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. We have entered into a derivative contract to hedge the risks resulting from changes in the interest rates of the finance lease contract underlying the acquisition of the new asphalt concrete plant.

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), Ukrainian hryvnias (UAH), and Swedish kronas (SEK).

The hryvnia has been weakening because the political and economic environment in Ukraine continues to be strained due to the conflict between Ukraine and Russia which broke out 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 nine months of 2016, the hryvnia weakened against the euro by around 10%. For our Ukrainian subsidiaries, this meant additional foreign exchange losses on the translation of their euro-denominated loans into the local currency. Relevant exchange losses totalled 251 thousand euros (9M 2015: 375 thousand euros).

Exchange gains and losses on financial instruments are recognised in Finance income and Finance costs respectively. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

The reciprocal receivables and liabilities of our 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  Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s accounts.

Due to movements in the Swedish krona/euro exchange rate, translation of operating receivables and payables resulted in an exchange gain of 5 thousand euros for the period (9M 2015: nil thousand euros). The exchange gain has been recognised in Other operating income.

We do not use derivatives to hedge our currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2016, public 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 portion 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 the National Road Administration) that reach signature of a construction contract in 2016 will not increase substantially. Even though the Ministry of Defence has been a positive exception for builders by carrying out procurements which have made a significant contribution to market revival, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. The situation is mitigated by the positive level of private investments in building construction.
  • The long and painful process of construction market consolidation will continue, albeit slowly. In particular, this applies to general contracting in building construction where the number of medium-sized general contractors (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 decelerated due to customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements in order to increase competition and lower the price even though this increases their own risks related to security, quality, adherence to deadlines, and the builder’s liability.
  • Competition is tough in all segments of the construction market, intensifying in line with market developments. The rise in the average number of bidders for a contract reflects this. However, the gap between the lowest bids made by winners and the average ones is narrowing, which shows that the quality of procurement documents is gradually improving and bidders’ prices are evening up. It is clear that in the current market situation the prices of construction inputs are not going to decrease noticeably and in order to succeed companies need to be efficient. Regrettably, the number of materials producers, suppliers, and subcontractors that are trying to survive or succeed in a difficult environment by dishonest means, e.g., by supplying goods with concealed defects or considerably lower quality than the one recorded in the product certificate, has been increasing quite rapidly. If the trend continues, both construction service providers and end-customers will have to apply strict and substantive quality control measures to make sure that the outcome meets their expectations. Unfair competition is putting visible pressure on prices and the quality of the construction service. Unfortunately, the problem is underpinned by the customers’ (including state institutions’ and state-owned companies’) increasing tendency to lower the bidders’ qualification requirements and prioritise quality more on paper than in practice.
  • 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 sales prices that are affordable for prospective buyers. The prices of new apartments are relatively high compared to the standard of living and the banks’ lending terms are strict. This has held back rapid growth of the housing market but since the second half of 2015 the supply of new housing has grown significantly, slowing down the sale of apartments with relatively high sales prices. Similarly to previous periods, successful projects include those that create or fill a niche. In Tallinn and Tartu, the picture is encouraging but in the rest of the country activity is still relatively sluggish.
  • There is a growing contrast between the stringent terms of public contracts, which require the builder to agree to extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and the modest participation requirements. Lenient qualification requirements and the precondition of making a low bid have made it easier for an increasing number of builders to win a contract but have heightened the contract performance risks taken by customers in terms of funding, deadlines and quality.
  • The prices of construction inputs will remain relatively stable but growth in housing development has made it unlikely that the prices charged by local subcontractors, particularly in building construction, will decline. Certainly there are areas where major changes in the environment may trigger more abrupt price movements.
  • The rise in housing construction has lengthened the supply periods of various essential materials and services, making it impossible to carry out all processes in the former optimistic timeframes. As a result, activities require more extensive planning or may need to be postponed.
  • Persisting shortage of skilled labour (including project and site managers) may start restricting companies’ performance capacities, having an impact on different aspects of the construction process including quality. Labour migration to the Nordic countries will remain steady and the number of job seekers who return to the Estonian construction market is not likely to increase considerably. All of the above will sustain pressure for a wage increase, particularly in the case of the younger and less experienced workforce whose mobility and willingness to change jobs is naturally higher.


In Ukraine, we provide general contracting and project management services to private sector customers in the segment of building construction. Political and economic instability continues to restrict the adoption of business decisions but construction activity in Kiev and the surrounding area has not halted. In 2016, we will continue our operations 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 considerably better prospects for increasing our operations and profitability. We assess the situation in the Ukrainian construction market regularly and critically and are ready to restructure our operations as and when necessary. Should the crisis spread to Kiev (which at the date of release of this report is 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 have provided mainly subcontracting services in the concrete segment but based on experience gained have started preparations for expanding into the general contracting market. The local concrete work market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Still, our policy is to maintain a rational approach and avoid taking excessive risks.


In July 2015, Nordecon Group acquired a 100% stake in SWENCN AB, a company registered in the Kingdom of Sweden, and expanded to the Swedish market where we intend to offer mainly construction of residential and non-residential buildings, particularly in central Sweden. In October 2015, we signed the first contract on the construction of a five-floor apartment building in Stockholm. The cost of the work amounts to around 8.4 million euros. In 2016, we secured a contract for the construction of another, smaller apartment building in Stockholm. We will sustain efforts aimed at increasing our operations in Sweden and are currently moderately optimistic about the developments.

Latvia and Lithuania

It is not likely that we will enter the Latvian or the Lithuanian construction market in the next few years.

However, we do not rule out the possibility of carrying out certain projects in Latvia through our Estonian entities, with the involvement of partners where necessary. Undertaking a project assumes that it can be performed profitably.

We have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba UAB, for the time being and are monitoring developments in the Lithuanian construction market. Temporary suspension of operations does not cause any major costs for us and does not change our interest to do business in the Lithuanian construction market on a project basis through a subsidiary operating in the local market.


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, Finland and Sweden. 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 2015 was 145.5 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_9m_2016.pdf