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Published: 2014-02-13 15:30:01 CET
Quarterly report

2013 fourth quarter and twelve months consolidated interim report (unaudited)

Nordecon publishes 2013 fourth quarter and twelve months consolidated interim report (unaudited)

Tallinn, Estonia, 2014-02-13 15:30 CET -- This announcement includes Nordecon AS’s consolidated financial statements for the fourht quarter and twelve months of 2013 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

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


Condensed consolidated interim statement of financial position

EUR '000 31 December 2013 31 December 2012
Current assets    
Cash and cash equivalents 12,575 10,231
Trade and other receivables 28,900 42,896
Prepayments 1,710 1,840
Inventories 23,899 26,243
Total current assets 67,084 81,210
Non-current assets
Investments in equity-accounted investees 590 202
Other investments 26 26
Trade and other receivables 10,645 1,554
Investment property 3,549 4,930
Property, plant and equipment 9,030 8,851
Intangible assets 14,494 14,857
Total non-current assets 38,334 30,420
TOTAL ASSETS 105,418 111,630
Current liabilities    
Loans and borrowings 23,876 27,185
Trade payables 25,918 31,968
Other payables 8,287 5,014
Deferred income 6,415 11,404
Provisions 913 521
Total current liabilities 65,409 76,092
Non-current liabilities
Loans and borrowings 3,303 3,671
Trade payables 155 259
Other payables 96 96
Provisions 969 1,210
Total non-current liabilities 4,523 5,236
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -299 -404
Retained earnings 11,234 6,039
Total equity attributable to owners of the parent 33,146 27,846
Non-controlling interests 2,340 2,456
TOTAL EQUITY 35,486 30,302


Condensed consolidated interim statement of comprehensive income

EUR '000 Q4 2013 Q4 2012 12M 2013     12M 2012
Revenue 39,220 42,554 173,953 159,422
Cost of sales -36,716 -40,358 -162,023 -151,205
Gross profit 2,504 2,196 11,930 8,217
Marketing and distribution expenses -171 -136 -452 -389
Administrative expenses -1,439 -1,444 -5,006 -5,385
Other operating income 104 190 464 810
Other operating expenses -745 -220 -1,096 -566
Operating profit 253 586 5,840 2,687
Finance income 161 163 668 622
Finance costs -140 -576 -1,027 -1,248
Net finance income/costs 21 -413 -359 -626
Share of loss of equity-accounted investees -343 -218 -146 -79
Profit/loss before income tax -69 -45 5,335 1,982
Income tax expense -40 -12 -135 -56
Profit/loss for the period -109 -57 5,200 1,926
Other comprehensive income:        
Exchange differences on translating foreign operations 56 57 105 59
Total other comprehensive income for the period 56 57 105 59
Profit/loss attributable to:        
- Owners of the parent 58 -151 5,195 1,477
- Non-controlling interests -167 94 5 449
Profit/loss for the period -109 -57 5,200 1,926
Total comprehensive income/expense attributable to:        
- Owners of the parent 114 -94 5,300 1,536
- Non-controlling interests -167 94 5 449
Total comprehensive income/expense -53 0 5,305 1,985
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR) 0.00 0.00 0.17 0.05
Diluted earnings per share (EUR) 0.00 0.00 0.17 0.05


Condensed consolidated interim statement of cash flows

EUR '000 12M 2013 12M 2012
Cash flows from operating activities    
Cash receipts from customers1 204,768 193,524
Cash paid to suppliers2 -175,465 -161,447
VAT paid -5,131 -6,192
Cash paid to and for employees -18,647 -16,888
Income tax paid -99 -56
Net cash from operating activities 5,426 8,941
Cash flows from investing activities    
Purchase of property, plant and equipment -458 -1,792
Proceeds from sale of property, plant and equipment and intangible assets 317 379
Investments made in associates -616 0
Loans provided -922 -1,709
Repayment of loans provided 245 399
Dividends received 4 0
Interest received 616 18
Net cash used in investing activities -814 -2,705
Cash flows from financing activities    
Proceeds from loans received 3,440 3,190
Repayment of loans received -2,970 -5,950
Dividends paid -121 -80
Payment of finance lease liabilities -1,670 -1,967
Interest paid -945 -1,106
Net cash used in financing activities -2,266 -5,913
Net cash flow 2,346 323
Cash and cash equivalents at beginning of period 10,231 9,908
Effect of exchange rate fluctuations on cash and cash equivalents -2 0
Increase  in cash and cash equivalents 2,346 323
Cash and cash equivalents at end of period 12,575 10,231

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

2 Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon group’s gross profit for 2013 amounted to 11,930 thousand euros (2012: 8,217 thousand euros) and gross margin was 6.9% (2012: 5.2%). 

The profit from long-term construction contracts is recorded gradually over the contract term, based on the stage of completion of contract activity. During the life of a contract, our estimates of the profitability of the contract may change. If this happens, the proportionate share of contract profit already recognised in the financial statements is adjusted to reflect the new estimate. During the year (particularly in the third quarter), a substantial share of our construction projects reached the stage of completion and their actual outcomes could be specified. Many of the projects were highly complex, involving construction risks whose potential costs were considered in making the profitability estimates for the financial statements. Thanks to successful performance, the costs were not incurred. In particular, revision of outcomes increased profit on projects for the construction of utility networks and environmental engineering. Although the projects were won by making the lowest bids in public tenders, the experience our people have gained in those segments over the years allowed us to benefit from strong improvements in productivity.

The rise in profitability was also supported by the external environment. Market growth in the previous year, relative stability in materials and subcontracting prices, and a slight decline in competitive pressure in certain segments created conditions that favoured a rise in the projects’ average profit margin.

The Group’s administrative expenses for 2013 totalled 5,006 thousand euros, reflecting a certain decrease compared with the previous year (2012: 5,385 thousand euros). The ratio of administrative expenses to revenue was 2.9% (2012: 3.4%). Our cost-control measures continue to yield strong results – we have been able to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

At the year-end, we wrote down real estate held for development (reported within inventories) by 330 thousand euros (2012: no expenses from write-down of real estate). In addition, non-recurring expenses from the write-down of goodwill amounted to 348 thousand euros (2012: no expenses from write-down of goodwill). As a result, we ended the year with an operating profit of 5,840 thousand euros (2012: 2,687 thousand euros) and an EBITDA of 8,162 thousand euros (2012: 4,833 thousand euros).

The Group’s net profit amounted to 5,200 thousand euros (2012: 1,926 thousand euros). The profit attributable to owners of the parent, Nordecon AS, was 5,195 thousand euros (2012: 1,477 thousand euros).

Cash flows

Operating activities for the year resulted in a net cash inflow of 5,426 thousand euros (2012: a net cash inflow of 8,941 thousand euros). In 2013, we completed a number of major projects that commenced in previous periods and for which we received substantial advances. Adjustment of subsequent billings for advances received and project-related retentions (release of the retentions has partially been postponed to 2014) led to a year over year decrease in net operating cash inflow. Amounts paid to employees increased as well (also proportionately), mostly on account of performance bonuses paid in the context of improved profitability.

Operating cash flows continued to be influenced by differences in settlement terms: the ones agreed with customers are long and in the case of public procurement generally extend from 45 to 56 days while subcontractors usually have to be paid within 21 to 45 days. Moreover, although amounts retained under subcontracts are smaller, they have to be released more quickly than those released by customers. We use factoring to counteract the impacts of cyclicality and overdraft facilities to raise working capital.

Investing activities resulted in a net cash outflow of 814 thousand euros (2012: a net outflow of 2,705 thousand euros). We continued to invest in property, plant and equipment although not as extensively as the year before. The volume of loans provided decreased and, in contrast to 2012, most of them were short-term loans to be repaid in 2014. During the year, we made contributions of 616 thousand euros to restore associates’ negative equity and, as part of the same transactions, associates settled their loan interest commitments.

Financing activities resulted in a net cash outflow of 2,266 thousand euros (2012: a net outflow 5,913 thousand euros). Loan receipts exceeded loan repayments by 470 thousand euros, whereas in 2012 loan repayments exceeded loan receipts by 2,760 thousand euros. Borrowing grew in connection with growth in business operations. Compared with 2012, we made fewer early loan settlements with funds raised from asset sales. Finance lease payments declined considerably because several leases concluded in 2008 expired in 2013.

At 31 December 2013, the Group’s cash and cash equivalents totalled 12,575 thousand euros (31 December 2012: 10,231 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks in the directors’ report.


Key financial figures and ratios

Figure/ratio 2013 2012 2011
Revenue (EUR’000) 173,953 159,422 147,802
Revenue growth 9.1% 7.9% 48.8%
Net profit/loss (EUR’000) 5,200 1,926 -4,708
Profit/loss attributable to owners of the parent (EUR’000) 5,195 1,477 -5,304
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.17 0.05 -0.17
Administrative expenses to revenue 2.9% 3.4% 3.1%
EBITDA (EUR’000) 8,162 4,833 -1,819
EBITDA margin 5.5% 3.0% -1.2%
Gross margin 6.9% 5.2% 0.1%
Operating margin 3.4% 1.7% -3.1%
Operating margin excluding gains on sales of real estate 3.2% 1.4% -3.5%
Net margin 3.0% 1.2% -3.2%
Return on invested capital 10.6% 5.2% -5.9%
Return on equity 15.8% 6.6% -15.2%
Equity ratio 33.7% 27.1% 28.0%
Gearing 23.3% 33.7% 32.8%
Current ratio 1.03 1.08 1.14
As at 31 December 2013 2012 2011
Order book (EUR’000) 64,631 127,259 134,043

* EBITDA for 2011 and 2013 includes impairment loss on goodwill of 435 thousand euros and 348 thousand euros respectively.

Revenue growth = (revenue for the reporting period/revenue for the previous period) – 1*100
Earnings per share (EPS) = net profit attributable to owners of the parent / weighted average number of shares outstanding
Administrative expenses to revenue = (administrative expenses/ revenue)*100
Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses/past four quarters’ revenue)*100
EBITDA = operating profit + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA/revenue)*100
Gross margin = (gross profit/revenue)*100
Operating margin = (operating profit/revenue)*100
Operating margin excluding gains on sales of real estate = ((operating profit -  gains on sale of property, plant and equipment - gains on sale of investment properties and real estate held for sale)/revenue) *100
Net margin = (net profit for the period/revenue)*100
Return on invested capital = ((profit before tax + interest expense)/ the period’s average (interest-bearing liabilities + equity))*100
Return on equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total liabilities and equity)*100
Gearing = ((interest-bearing liabilities – cash and cash equivalents)/ (interest-bearing liabilities + equity))*100
Current ratio = total current assets/ total current liabilities


Performance by geographical market

In 2013, around 5% of the Group’s revenue was generated outside Estonia compared with 2% in 2012.

  2013 2012 2011
Estonia 95% 98% 97%
Finland 5% 2% 2%
Belarus 0% 0% 1%

Finnish revenues comprise revenue from concrete works. In 2013 our Finnish subsidiary won a substantial contract that increased its business volumes.

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. Although in the long term our strategy foresees increasing foreign operations, in the short term we will focus on the Estonian market that we know best and which entails fewer known market risks. The Group’s vision of our future operations in foreign markets is described in the chapter Outlooks of the Group’s geographical markets in the directors’ report.


Performance by business line

The core business of Nordecon group is general contracting and project management in the field of building and infrastructure construction. The Group is involved in the construction of commercial and industrial buildings and facilities, road construction and maintenance, environmental engineering, concrete works and real estate development.

The Group’s revenue for 2013 amounted to 173,953 thousand euros, a 9% improvement on the 159,422 thousand euros generated in 2012.

The Group aims to maintain the revenues of its operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing operations under stressed circumstances when one segment experiences shrinkage. The Group has set a strategic ceiling for revenue from the construction of apartment buildings, which has to remain below 20% of total sales.

Segment revenues

In 2013, our two main operating segments, Buildings and Infrastructure, generated revenue of 71,977 thousand euros and 98,550 thousand euros respectively. The corresponding figures for 2012 were 66,924 thousand euros and 89,211 thousand euros (see note 8). The larger contribution and absolute figures of the Infrastructure segment (also compared to 2012) are mostly attributable to the performance of major road construction projects.

Operating segments* 2013 2012 2011
Buildings 41% 42% 48%
Infrastructure 59% 58% 52%

* 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 have been allocated in both parts of the interim report based on the nature of the work.


Sub-segment revenues

Last year’s rise in private sector investments laid the foundation for rapid revenue growth in the commercial buildings sub-segment. We continued work under previously secured contracts for the construction of commercial buildings in Tallinn and Tartu and secured a contract of over 15 million euros for building an extension to the ASTRI shopping centre in Narva and a contract of over 9 million euros for building the Stroomi shopping centre in Tallinn. We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain substantial also in the next financial year.

The revenues of the public buildings sub-segment decreased because we did not have any major projects comparable to those performed in 2012. The competitive situation in this market segment is particularly challenging: it is hard to win a contract without taking excessive risks but our current policy is to avoid such risks. Our largest projects of 2013 were the construction of the Translational Medicine Centre of the University of Tartu, Phase V in the project of St Paul’s Church in Tartu and the construction of an academic building for the NCO School of the Estonian National Defence College. In 2014 public investments in this market sub-segment are not expected to increase significantly and, thus, competition will remain fierce.

In the industrial and warehouse facilities sub-segment we continued to earn most of the revenue from the construction of buildings procured by the agricultural sector but the volume of such work was smaller than in previous years because allocations from the EU structural funds that co-finance the projects decreased at the end of the budget period. As regards new work for the agricultural sector, in 2013 we won a contract of over 9 million euros for building a dairy farm complex at Väätsa. Shrinkage in the volume of work done for the agricultural sector was counterbalanced by non-agricultural private investments in new industrial and production buildings.

Our apartment building revenues resulted mostly from general contracting. Compared with the previous year, the contribution of the sub-segment grew because in May we won a contract of around 10 million euros for the construction of an apartment building at Pirita tee 26 in Tallinn (our recent years’ largest apartment building contract). The year was also successful in the sale of the last apartments and office premises in the Tigutorn development project. Only 4 Tigutorn apartments are still for sale. Phase I in our Magasini 29 development project (www.magasini.ee), which was launched in 2013, will be completed in 2014.

Revenue distribution within Buildings segment 2013 2012 2011
Commercial buildings 45% 26% 12%
Industrial and warehouse facilities 29% 35% 40%
Public buildings 21% 36% 45%
Apartment buildings 5% 3% 3%


As expected, the main revenue source for the Infrastructure segment was road construction. During the year, we were concurrently building the Aruvalla-Kose section of the Tallinn-Tartu motorway, construction package 4 of the Tartu western bypass and construction package 1 of the Tartu eastern ring road. All those projects were delivered, in the stage of substantial completion, in the last quarter of 2013.  

In specialist engineering, the main projects were Sillamäe port and Kärdla guest harbour. The bulk of the work on Sillamäe port was done in 2012, which is why the contribution of the sub-segment decreased compared with the previous year. The work at Sillamäe will continue in 2014 but on a much smaller scale. The construction of Kärdla guest harbour was completed in the last quarter of 2013. Compared to prior years, the number of potential investment projects involving ports and other more complex facilities has increased but taking such projects to the construction stage is time-consuming.

The market for the construction of utility networks (other engineering) is going to shrink. The year 2013 was the last one in the previous EU financial framework through which investments of the sub-segment received most of their financing. A large share of public procurement tenders for relevant projects were already announced in previous years. Investments of the next EU budget period are still under preparation and should reach the tendering stage (in more considerable volumes) in 2015 and 2016.

The contribution of environmental engineering grew thanks to growth in investments made in the sector in previous years as well as successful bidding – during the year we secured a contract of 6.4 million euros for the reconstruction of the wastewater treatment plant of the town of Paide. However, we expect a decrease in environmental engineering work due to the same reasons that impact financing of the construction of utility networks from the EU budget.

Revenue distribution within Infrastructure segment 2013 2012 2011
Road construction and maintenance 54% 51% 47%
Specialist engineering (including hydraulic engineering) 8% 15% 10%
Other engineering 26% 27% 35%
Environmental engineering 12% 7% 8%


Order book

At 31 December 2013, our order book stood at 64,631 thousand euros, a 49% decrease compared with the end of 2012.

The largest decrease in our order book (backlog of contracts signed but not yet performed) has occurred in road construction (approx. 82%) where in 2013 we were involved in three major public procurement projects (construction of the Aruvalla-Kose section on the Tallinn-Tartu motorway, the Tartu western bypass, and the Tartu eastern ring road). All of them were completed by the year-end. The new national road management plan reflects a change in the structure of road construction investments. In particular, the proportion of large-scale projects is going to diminish. This means that companies engaged in road construction have to face a new reality – the average cost of road construction contracts is going to decrease, which will inevitably affect the competitive environment.

The order book for the construction of utility networks (other engineering sub-segment in the directors’ report) has also shrunk significantly, because such work is typically procured with the support of the EU structural funds but in the last year of the EU budget period relevant allocations were expectedly smaller.

On the other hand, the order books of the commercial buildings and industrial and warehouse facilities sub-segments have almost doubled, mostly thanks to growth in private sector investments.

As at 31 December 2013 2012 2011
Order book (EUR’000) 64,631 127,259 134,043

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 77% and 23% of the order book respectively. This is a radical change: compared with recent years the figures for the two segments have reversed (31 December 2012: 35% and 65% respectively). Building construction contracts will probably continue to dominate the order book 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 they were in 2007-2013. In particular, this applies to 2014 because the national investment plan has not yet been adopted. Hence, we expect the revenues of the Infrastructure segment to decline in 2014 (for further information, see the Business risks section of the chapter Description of the main risks in the directors’ report).

We believe that in a situation where the market is expected to shrink, our priority cannot be increasing or maintaining the Group’s revenue. Instead, the main focus should be on improving profitability. We do not consider the present decline in the Group’s order book to be critical. Based on our historical experience, it is quite typical that a significant portion of budgeted operating volumes is secured through new contracts signed during the year.    

Between the reporting date (31 December 2013) and the date of release of this report, Group companies have secured additional construction contracts of approximately 7,073 thousand euros.



Staff and personnel expenses

In 2013, the Group (the parent and the subsidiaries) employed, on average, 757 people including 357 engineers and technical personnel (ETP). The number of staff did not change significantly compared with 2012.

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

  2013 2012 2011
ETP 357 367 351
Workers 400 397 380
Total average 757 764 731

The Group’s personnel expenses for 2013 including all taxes totalled 20,792 thousand euros, 24% up on the comparative period when the figure was 16,803 thousand euros. Personnel expenses increased due to growth in operating volumes and performance bonuses provided for and paid in an environment of improved profitability. Selective increases of basic salaries had less impact.

In 2013, 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 (2012: 141  thousand euros and 47 thousand euros respectively). Expenses on the provision for council members’ performance bonuses, made based on the Group’s performance indicators, amounted to 22 thousand euros and the provision for associated social security charges amounted 7 thousand euros (2012: 52 thousand euros and 17 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 195 thousand euros and associated social security charges totalled 64 thousand euros (2012: 248 thousand euros and 82 thousand euros respectively, including the remuneration of the member of the board that was removed on 30 April 2012). Expenses on the provision for board members’ performance bonuses, made based on the Group’s performance indicators, amounted to 81 thousand euros and the provision for associated social security charges amounted 27 thousand euros (2012: 201 thousand euros and 66 thousand euros respectively, including the proportionate share of the member of the board that was removed on 30 April 2012).

Labour productivity and labour cost efficiency

In recent years, the number of the Group’s employees has been relatively stable and thus the rise in nominal labour productivity stems mostly from revenue growth. Nominal labour cost efficiency for the year was weakened mainly by growth in performance bonuses paid in the context of improved profitability. In comparative periods, the proportion of performance bonuses in the Group’s personnel expenses was smaller. Basic salaries have not been substantially increased. Payment of performance bonuses on the achievement of certain profit targets is an ordinary activity and, compared with comparative historical figures, the period’s nominal labour cost efficiency was relatively high.

We measure the efficiency of our core business using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses paid:

  2013 2012 2011
Nominal labour productivity (rolling), (EUR’000) 230 208.7 202.3
Change against the comparative period 10.1% 3.2% 57.7%
Nominal labour cost efficiency (rolling), (EUR’000) 8.4 9.5 10.4
Change against the comparative period -11.6% -8.6% 51.6%


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



Description of the main risks

Business risks

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

In 2013, competition for public sector contracts intensified. The volume of public sector investments decreased and the prospects of maintaining operating volumes in 2014 are not good. Strong competitive pressure is driving bid prices down although input prices seem to be rising slowly. Competition is particularly fierce in the building construction segment. 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 tend to rise involves a high risk, because the contract may quickly start generating a loss. Thus, in price-setting we currently prioritize profitability over increasing or maintaining the revenue figures.

In the next periods, demand for construction services will be driven by public sector investments. In recent years a major share of investments was made with the assistance of EU support whose allocation was linked, both in terms of size and timing, to the EU financial framework 2007-2013. In general, the amounts that will be allocated to Estonia during the next EU financial framework (2014-2020) are known but the volume and schedule of investments involving construction work have not yet been finalised. According to information released to date, the overall volume of construction-related investments will decline compared with the previous budget period and 2014 may become a so-called ‘gap’ year between two budget periods, where most efforts are directed at preparatory administrative activities required for enabling the investments.

In light of the above, it is likely that in 2014 our business volumes will shrink, particularly in the Infrastructure segment where the proportion of public sector investments has been the largest. 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 those companies that operate in only one specific (particularly infrastructure) segment.

Our primary goal is to maintain profitability even when construction volumes shrink. In many functions (e.g. support services), our costs have increased considerably more slowly than the volumes of our operating activities. Essentially, our costs are at the levels where they were taken by various cost cuts after the last major downturn in the construction market, which was in 2009-2010. This means that if construction volumes change, we will not have to undertake any extensive restructuring.  

The Group’s operations are also influenced by the change of seasons. The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, earthwork, etc). To disperse the risk, we secure road maintenance contracts that generate year-round business. According to our business strategy, we counteract seasonal fluctuations in infrastructure operations with building construction operations that are less exposed to seasonality. Thus, we endeavour to keep the two segments in balance (see also the chapter Performance by business line in the directors’ report). In addition, our companies consistently seek new technical solutions that would yield greater efficiency under changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 31 December 2013, the Group’s warranties provisions (including current and non-current ones) totalled 1,546  thousand euros. At the end of 2012, the corresponding figure was 1,407 thousand euros.

In addition to managing 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 reporting period, the Group did not recognise any significant credit losses. The credit risk exposure of the Group’s receivables continued to be low because the proportion of public sector customers that receive their financing from the state and local governments as well as the EU structural funds continued to be high. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days coupled with no activity on the part of the debtor that would confirm the intent to settle.

In 2013, impairment losses on receivables totalled 305 thousand euros (2012: 239 thousand euros).

The Group’s statement of financial position includes a trade receivable of approximately 2.4 million euros (includes a portion of late payment interest) due from the customer of the exhibition building of the Estonian Maritime Museum. Under the contract, determination of whether the Group’s claim against the debtor has merit is at the discretion of the Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s management is convinced that the claim has merit and has therefore not written the receivable down. By the date of release of this report, hearings have been held and the parties have submitted their final opinions to the court. According to the regulations of the Arbitration Court, the latest date for a ruling is 28 February 2014.

Liquidity risk

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

At the reporting date, the Group’s current assets exceeded its current liabilities 1.03-fold (31 December 2012: 1.08-fold). The figure has dropped compared with the previous year due to the reclassification of loans provided to the Group’s Ukrainian subsidiaries.

The political situation in Ukraine has aggravated and we believe that we will need more time for realising our Ukrainian investment properties. Accordingly, at the year-end we reclassified loan receivables from our Ukrainian associates to non-current assets. On the other hand, we had our largest Ukrainian development project appraised as at the year-end and determined that there was no need to write the loan receivables down.

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 31 December 2013, overdrafts (balances in use) that need to be refinanced in 2014 totalled 6,910 thousand euros. At the date of release of this report, the amount is expected to increase rather than decrease. If interest-bearing liabilities were refinanced to the above extent, the adjusted current ratio would be 1.15. Similarly to previous years, we are working with our main financing partners to find ways for restructuring our liabilities. The plan for 2014 should be completed by April. 

At the reporting date, the Group’s cash and cash equivalents totalled 12,575 thousand euros (31 December 2012: 10,231 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 2013, the Group’s interest-bearing loans and borrowings totalled 27,178 thousand euros, a decrease of 3,677 thousand euros year over year. Interest expense for 2013 amounted to 1,055  thousand euros, 42 thousand euros down from a year ago. The Group’s interest rate risk results mainly from a rise in the base rate for floating interest rates (Euribor/EONIA). The risk is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates.

The Group has not acquired any derivatives to hedge the risks arising from instruments with a floating interest rate.

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 in Ukrainian hryvnas (UAH). In 2013, the exchange rate of the Ukrainian hryvna against the euro was stable. The Group’s net foreign exchange loss for the period was 104 thousand euros (2012: a net foreign exchange loss of 95 thousand euros).

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


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2014 public investment is expected to decrease in connection with the commencement of a new EU budget period. The investments made by the largest public sector customers, Riigi Kinnisvara AS (a state-owned real estate company) and the National Road Administration, that reach the stage of conclusion of a construction contract in 2014, will either not increase significantly or may even decrease. The situation may be somewhat alleviated by private customers’ increasing investment in building construction.  
  • The industry will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is still too large, but the process will be slower 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 with another or exit the market. However, it is also increasingly common that two to four smaller players that are seeking ways to remain in business will form a consortium to bid for major procurement contracts, meet tendering terms and secure the required funding.
  • Competition is increasing in all segments of the construction market. The average number of bidders for a contract has increased and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand caused a rapid decline in construction prices, which triggered a slide in the prices of many construction inputs. However, there are currently no massive decreases 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 its business plan and thus to set an affordable sales price. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Similarly to the previous year, successful projects include those that create or fill a niche.
  • The contracts signed with public sector customers continue to impose tough conditions on construction companies: extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants. Still, compared to two or three years ago, the situation has improved and in some respects procurement terms have become more reasonable for construction companies.
  • The prices of construction inputs will remain relatively stable. Local subcontracting prices may decrease due to weakening demand but, taking into account the subcontractors’ financial and human resources, the decline cannot be substantial or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • There is a shortage of high-quality labour (including project and site managers). Shrinkage in construction volumes in Estonia may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and although those markets (particularly Finland) may also shrink, the number of job seekers that will return will not increase considerably. Accordingly, the basic wage of construction-sector employees will not decrease. Instead, the rise in the cost of living is creating pressure for a wage increase.

Latvia and Lithuania

In our opinion, the Latvian construction market, which was hit by a severe downturn a few years ago, has not regained sufficient stability and similarly to the Estonian market in 2014 it will probably see shrinkage in public sector demand. Accordingly, it is unlikely that we will enter to the Latvian construction market permanently in 2014.

In the next few years we may undertake some projects in Latvia through our Estonian entities, involving partners where necessary. Execution of project-based business assumes that the projects can be performed profitably. The decision does not change our strategy for the future, i.e. the objective of operating in our neighbouring construction markets through local subsidiaries.

The operations of our Lithuanian subsidiary, Nordecon Statyba UAB, have been 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.


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. The political situation in Ukraine gives cause for concern and undoubtedly affects adoption of business decisions by construction market participants. Regardless of this, we will continue our business in Ukraine in 2014. Compared with the previous year, we have a larger Ukrainian order book than a year ago. We continue to monitor the situation in the Ukrainian construction market closely and will restructure our operations as appropriate. We also continue to seek opportunities for exiting our two conserved real estate projects or signing a construction contract with a potential new owner.


In the Finnish market, we offer mainly subcontracting services in the field of concrete works but based on experience gained, we also deliver some more complex services. The local concrete works market provides opportunities for competing for projects where the customer wishes to purchase 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 unaudited consolidated revenue of the Group in 2013 was 174 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: raimo.talviste@nordecon.com

Investor presentation_12m_2013.pdf