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Published: 2012-08-09 15:35:00 CEST
Half Year financial report

2012 II quarter and 6 months consolidated interim report (unaudited)

Nordecon AS announces its 2012 II quarter and 6 months consolidated interim report (unaudited).

Tallinn, Estonia, 2012-08-09 15:35 CEST -- Announcement includes Nordecon AS’ consolidated financial statements for 2012 II quarter and 6 months, overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

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


Condensed consolidated interim statement of financial position

EUR '000 30 June 2012 31 December 2011
Current assets    
Cash and cash equivalents 5,332 9,908
Trade and other receivables 47,177 34,645
Prepayments 2,883 2,610
Inventories 25,142 24,120
Non-current assets held for sale 0 242
Total current assets 80,534 71,525
Non-current assets
Investments in equity-accounted investees 248 199
Other investments 26 26
Trade and other receivables 2,370 2,504
Investment property 4,930 4,930
Property, plant and equipment 8,269 7,437
Intangible assets 14,907 14,960
Total non-current assets 30,750 30,056
TOTAL ASSETS 111,284 101,581
Current liabilities    
Loans and borrowings 30,754 19,130
Trade payables 33,302 27,403
Other payables 5,135 4,930
Deferred income 6,915 10,587
Provisions 300 485
Total current liabilities 76,406 62,535
Non-current liabilities
Loans and borrowings 5,790 9,513
Trade payables 199 199
Other payables 96 96
Provisions 918 841
Total non-current liabilities 7,003 10,649
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -516 -463
Retained earnings 4,072 4,563
Total equity attributable to equity holders of the parent 25,767 26,311
Non-controlling interest 2,108 2,086
TOTAL EQUITY 27,875 28,397

Condensed consolidated interim statement of comprehensive income

EUR '000 Q2 2012 Q2 2011 6M 2012 6M 2011 2011
Revenue 40,445 36,706 62,920 54,429 147,802
Cost of sales -38,293 -38,061 -60,732 -55,857 -147,608
Gross profit/loss 2,152 -1,355 2,188 -1,428 194
Distribution expenses -114 -68 -190 -164 -317
Administrative expenses -1,274 -1,057 -2,504 -2,124 -4,641
Other operating income 253 153 366 379 806
Other operating expenses 31 -58 -57 -164 -672
Operating profit/loss 1,048 -2,385 -197 -3,501 -4,630
Finance income 196 167 341 350 938
Finance expenses -255 -306 -539 -611 -1,086
Net finance expense -59 -139 -198 -261 -148
Share of profit of equity-accounted investees 73 47 49 47 100
Profit/loss before income tax 1,062 -2,477 -346 -3,715 -4,678
Income tax expense -44 -5 -44 -1 -30
Profit/loss for the period 1,018 -2,482 -390 -3,716 -4,708
Other comprehensive income/expense:          
Exchange differences on translating foreign operations -114 101 -53 216 -329
Total other comprehensive income/expense for the period -114 101 -53 216 -329
Profit/loss attributable to:          
- Owners of the parent 873 -2,475 -491 -3,652 -5,304
- Non-controlling interests 145 -7 101 -64 596
Profit/loss for the period 1,018 -2,482 -390 -3,716 -4,708
Total comprehensive income/expense attributable to:          
- Owners of the parent 759 -2,420 -544 -3,510 -5,924
- Non-controlling interests 145 39 101 10 887
Total comprehensive income/expense 904 -2,381 -443 -3,500 -5,037
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.03 -0.10 -0.02 -0.12 -0.17
Diluted earnings per share (EUR) 0.03 -0.10 -0.02 -0.12 -0.17


Condensed consolidated interim statement of cash flows

EUR '000 6M 2012 6M 2011
Cash flows from operating activities    
Cash receipts from customers* 65,346 58,164
Cash paid to suppliers** -62,528 -49,220
VAT paid -2,079 -1,246
Cash paid to and for employees -7,809 -5,851
Income tax paid -11 -1
Net cash used in/from operating activities -7,081 1,846
Cash flows from investing activities    
Acquisition of property, plant and equipment -836 -13
Proceeds from sale of property, plant and equipment and intangible assets 363 280
Loans granted -376 -87
Repayment of loans granted 19 1,631
Dividends received 0 4
Interest received 0 181
Net cash used in/from investing activities -830 1,996
Cash flows from financing activities    
Proceeds from loans received 6,334 892
Repayment of loans received -1,322 -2,408
Payment of finance lease liabilities -1,090 -931
Interest paid -587 -545
Other payments 0 -2
Net cash from/used in financing activities 3,335 -2,994
Net cash flow -4,576 848
Cash and cash equivalents at beginning of period 9,908 5,818
Effect of exchange rate fluctuations 0 -323
Decrease/increase  in cash and cash equivalents -4,576 848
Cash and cash equivalents at end of period 5,332 6,343

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

** Line item Cash paid to suppliers includes VAT paid to suppliers.


Financial review

Financial performance

Nordecon Group ended the first six months of 2012 with a gross profit of 2,188 thousand euros (HY1 2011: a gross loss of 1,428 thousand euros). Most of the profit was earned in the second quarter that was not undermined by adverse weather conditions and the fixed costs of a technological standstill, which impacted the first quarter. Moreover, compared with 2011 there were no losses from contracts secured in 2009-2010.

The main factors that helped restore operational profitability were Group-wide austerity measures enforced in 2010 due to market slump, internal restructuring, and streamlining of processes and operations. Although volume growth, which emerged in 2011, has clearly improved the situation in the Estonian construction market, we will have to continue working hard to maintain and enhance the results achieved and to counteract threats to profitability. Margins are still below target but we believe that we are moving in the right direction to improve operational profitability compared with 2011. Current estimates of the outcomes of contracts included in the Group’s order book support that view. It should also be kept in mind that the profits of construction contracts are recognised based on the stage of completion of contract activity, which means that the profits of long-term contracts are recorded gradually over the contract term.

The rise in profitability has also been underpinned by changes in the competitive environment. According to our assessment, in 2011 competition in certain segments of the construction market (e.g. road construction and construction of water and wastewater networks) weakened considerably. This may be attributed to some construction companies going bankrupt or leaving the market as well as the fact that in recent years all companies have had to reduce their personnel and support structures, which has undermined some players’ bidding capabilities. In addition, many companies were held back by tougher financial conditions imposed by customers and the financing institutions’ reluctance to provide guarantees. Most construction companies have become aware that long-term construction contracts entail the risk of growth in input prices. However, there is still no indication of a decrease in competitive pricing pressure in building construction, where lack of private sector customers has rendered the market too small for all general contractors. Altogether, this means that companies are weighing the risks involved in price-setting more carefully than during the period of rapid downturn but risks to profitability still persist.

Administrative expenses for the first half of 2012 totalled 2,504 thousand euros including non-recurring consulting fees incurred to adjust the Group’s strategy to the changing environment. The ratio of administrative expenses to revenue was 4.0% (HY1 2011: 3.9%). The Group’s cost-control measures are yielding strong results and we believe that on a whole-year basis we can maintain administrative expenses below the target ceiling, i.e. 5% of revenue. An indicator of effective cost management is the fact that despite growing volumes the 12-month rolling average ratio of administrative expenses to revenue was 3.2% (HY1 2011: 4.1%).

The Group’s operating loss for the first half-year was 197  thousand euros (HY1 2011: 3,501 thousand euros). EBITDA was positive at 925 thousand euros (HY1 2011: negative at 2,278 thousand euros).

The Group ended the first half of 2012 with net loss of 390 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 491 thousand euros. The first half of 2011 ended in a net loss of 3,716 thousand euros and the loss attributable to owners of the parent was 3,652 thousand euros.

Cash flows

In the first half of 2012 operating activities resulted in a net cash outflow of 7,081 thousand euros (HY1 2011: a net inflow of 1,846 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, net cash flow was rendered negative by VAT and labour tax payments, which increased substantially compared with the prior year. In the first half of 2012, a significant amount of construction services was purchased from abroad without the possibility of recovering input VAT but on the resale of the services in Estonia VAT had to be paid. In the previous year, operating activities gave rise to prepaid VAT, which was used to offset labour tax liabilities. In the first half of this year we did not have similar offsetting opportunities. Operating cash flows continued to be influenced by cyclical fluctuations in project-related cash flows. The settlement terms granted to customers are long and in the case of public procurement generally extend from 45 to 100 days while suppliers generally have to be paid within 21 to 45 days. The Group counteracted cyclical fluctuations with factoring and overdraft facilities for working capital. The effect of difference in settlement terms should become positive in the second half-year when construction volumes (cash outlays) decrease and the Group starts receiving cash for work done during the earlier active construction months (May to June).

Cash flows from investing activities resulted in a net outflow of 830 thousand euros (HY1 2011: a net inflow of 1,996  thousand euros). The main reasons for the net outflow were loans granted to associates and payments made for property, plant and equipment (including prepayments for a new asphalt plant). In the comparative period, net cash flow from investing activities was positive on account of settlement of loans granted.

Financing activities resulted in a net cash inflow of 3,335  thousand euros (HY1 2011: a net outflow of 2,994 thousand euros). A major proportion of cash flows from financing activities resulted from use of overdraft facilities for raising sufficient working capital. The Group’s cash outflows from financing activities have stabilised thanks to agreements reached with the banks regarding repayment holidays and extension of loan agreements. The amendment of agreements did not cause any major change in the Group’s interest rates. 

At 30 June 2012, the Group’s cash and cash equivalents totalled 5,332 thousand euros (30 June 2011: 6,343 thousand euros).  Management’s comments on potential liquidity risk are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio 6M 2012 6M 2011 6M 2010 2011
Revenue (EUR’000) 62,920 54,429 37,401 147,802
Revenue growth/decrease, % 16% 46% -52% 49%
Net loss (EUR’000) -390 -3,716 -4,175 -4,708
Loss attributable to owners of the parent (EUR’000) -491 -3,652 -3,788 -5,304
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.02 -0.12 -0.12 -0.17
Administrative expenses to revenue, % 4.0% 3.9% 6.1% 3.1%
Administrative expenses to revenue (rolling) 3.2% 4.1% 5.4% 3.1%
EBITDA (EUR’000) 925 -2,278 -3,718 -1,819
EBITDA margin, % 1.5% -4.2% -9.9% -1.2%
Gross margin, % 3.5% -2.6% -7.7% 0.1%
Operating margin, % -0.3% -6.4% -14.6% -3.1%
Operating margin excluding gains on asset sales, % -0.7% -6.8% -14.6% -3.5%
Net margin, % -0.6% -6.8% -11.2% -3.2%
Return on invested capital, % 0.3% -5.0% -5.0% -5.9%
Return on equity, % -1.4% -11.7% -9.6% -15.2%
Equity ratio, % 25.0% 26.8% 38.2% 28.0%
Gearing, % 48.5% 40.8% 25.2% 32.8%
Current ratio 1.05 1.19 1.53 1.14
  30 June 2012 30 June 2011 30 June 2010 31 Dec 2011
Order book (EUR’000) 166,367 140,234 89,440 134,043


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


Performance by geographical market

In the first half of 2012, roughly 1% of the Group’s revenue was generated outside Estonia. In the first half of 2011, foreign operations accounted for 4% of the Group’s revenue.

  6M 2012 6M 2011 6M 2010 2011
Estonia 99% 96% 94% 97%
Ukraine 0% 0% 6% 0%
Belarus 0% 3% 0% 1%
Finland 1% 1% 0% 2%

The decline in foreign revenues results from discontinuance of operations in the Belarusian market (see also the chapter Changes in the Group’s business operations in the first half of 2012). Finnish revenues comprise revenue from rendering subcontracting services in the concrete works sector. We expect the contribution of foreign markets to remain at a similar level for the rest of the year.

Geographical diversification of the revenue base has been a consciously deployed strategy by which the Group mitigates the risks resulting from excessive reliance on a single market. Although in the long term our strategy foresees increasing foreign operations, in the short term the Group will focus on the Estonian market and seizing opportunities in an environment that it knows best and which entails fewer known market risks. The Group’s vision of the future of its foreign operations is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

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

The Group’s revenue for the first half of 2012 was 62,920 thousand euros, 16% up on the 54,429 thousand euros generated in the first half of 2011. The foundation for revenue growth was laid in 2011 when the Estonian construction market began recovering and the Group secured significantly more new contracts than in 2010. Revenue should continue growing on a year over year basis also in the following quarters, although at a somewhat slower pace.

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 an internal ceiling for revenue from the construction of apartment buildings, which has to remain below 20% of the Group’s total sales.

Segment revenue

In the first half of 2012, the revenues of our two main operating segments were practically equal. The contribution of the Infrastructure segment was slightly larger and should remain so also the second half of the year. The Buildings segment ended the first half of 2012 with revenue of 28,508 thousand euros and the Infrastructure segment with revenue of 32,766 thousand euros. The corresponding figures for the comparative period were 25,704 thousand euros and 27,402 thousand euros (see note 8).

For a long time, the bulk of the work in the construction market has been related to infrastructure assets (mostly projects financed with the support of the state and the EU structural funds) and the majority (69%) of contracts in the Group’s order book belong to the Infrastructure segment. Despite this, the segments’ revenues have been more or less equal because the present building construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is therefore comparatively smaller.

Revenue distribution between segments*

Operating segments 6M 2012 6M 2011 6M 2010 2011
Buildings 46% 46% 46% 48%
Infrastructure 54% 54% 54% 52%

* In connection with the entry into force of IFRS 8 Operating Segments, the Group has changed segment reporting in its financial statements. In Directors’ report the Ukrainian and Belarusian buildings segment and the EU buildings segment, which are disclosed separately in the financial statements, are presented as a single segment. In addition, the segment information presented in Directors’ report does not include the disclosures on “other segments” that are presented in the financial statements.

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

Revenue distribution within segments

In the Buildings segment, most of the revenue resulted from the construction of public buildings financed by the public sector. Compared with a year ago, the relative importance of public buildings decreased because the contributions of other sub-segments (primarily commercial buildings) increased. The segment’s largest project was the construction of the Ämari Air Base, which to date has been substantially completed.

In 2011 the economic environment improved, triggering certain recovery in the commercial buildings and industrial and warehouse facilities sub-segments, where private sector investments increased. Growth was particularly visible in the commercial buildings sub-segment, where the Group started the construction of four new buildings. A major share of the revenue of the industrial and warehouse facilities sub-segment resulted from buildings constructed for the agricultural sector. However, compared with a year ago, their proportion decreased and despite growth in private sector investments the sub-segment’s volumes declined. Apartment buildings were built for non-Group customers, the Group acting as a general contractor, not a developer.

Revenue distribution within the Buildings segment is influenced by the scarcity of projects on offer, which forces companies to compete in all market segments as the number of contracts awarded is small compared to bids made. The situation does not allow concentrating on a specific area and during the year revenue distribution within the segment may change significantly.                         

Revenue distribution within the Buildings segment 6M 2012 6M 2011 6M 2010 2011
Commercial buildings 19% 6% 26% 12%
Industrial and warehouse facilities 28% 38% 21% 40%
Public buildings 49% 54% 38% 45%
Apartment buildings 4% 2% 15% 3%

As expected, by the end of the first half-year the main revenue contributor in the Infrastructure segment was road construction and maintenance. In the second half-year, its relative importance should increase even further in connection with the construction of the Tartu western bypass and eastern ring road, which were secured in the reporting period. Similarly to preceding periods, a major share of the revenue of the Infrastructure segment resulted from the construction of water and wastewater networks financed with the support of the EU structural funds (other engineering). The contribution of other engineering should remain stable in the second half-year. In specialist engineering, growth was underpinned by the construction of facilities for Sillamäe port, which commenced in the second half of 2011. The contribution of environmental engineering has decreased because there is currently no contract comparable to the construction of the bio-filter for the wastewater treatment plant of Tallinn, which was in progress in the first half of 2011.

Revenue distribution within the Infrastructure segment 6M 2012 6M 2011 6M 2010 2011
Road construction and maintenance 40% 46% 65% 47%
Specialist engineering (including hydraulic engineering) 16% 1% 1% 10%
Other engineering 38% 37% 26% 35%
Environmental engineering 6% 16% 8% 8%


Order book

At 30 June 2012, our order book stood at 166,367 thousand euros, being 19% larger than a year ago. Order book has increased thanks to general growth in the construction market and successful bidding, which has led to the award of several major contracts (such as the Aruvalla-Kose road section, Sillamäe port facilities, Luige intersection, Tartu western bypass and eastern ring road, etc) since the second quarter of 2011.

  30 June 2012 30 June 2011 30 June 2010 2011
Order book (EUR’000) 166,367 140,234 89,440 134,043

At 69% the Infrastructure segment continues to account for a major share of the total order book (30 June 2011: 72%).

Between the reporting date (30 June 2012) and the date of release of this report, Group companies have been awarded construction contracts of approximately 15,569 thousand euros.



Staff and personnel expenses

In the first half of 2012, the Group (the parent and the subsidiaries) employed, on average, 771 people including 371 engineers and technical personnel (ETP). In connection with growth in the Group’s operating volumes in 2012, both the number ETP and the number of workers have increased year over year. Due to the seasonal nature of construction activity, at the reporting date the number of staff was expectedly larger than at the end of the previous financial year.

Average number of the Group’s employees (comprising all Group entities)

  6M 2012 6M 2011 6M 2010 2011
ETP 371 352 362 351
Workers 400 379 435 380
Total average 771 731 797 731

The Group’s personnel expenses for the first half of 2012 including all taxes totalled 7,143 thousand euros, 8% up on the first half of 2011 when personnel expenses were 6,602 thousand euros. The growth in personnel expenses is mainly attributable to growth in the number of staff.

The remuneration of the members of the council of Nordecon AS for the first half of 2012, including associated social security charges, amounted to 94 thousand euros. The corresponding figure for the first half of 2011 was 50 thousand euros. The amount has increased in connection with the decision of Nordecon AS’s annual general meeting to increase the remuneration of the council as from 2012. The remuneration of the members of the board of Nordecon AS, including social security charges, totalled 196 thousand euros. The figure for the comparative period was 143 thousand euros. The figure increased due to the termination benefits paid to the member of the board who was recalled in May 2012.

Labour productivity and labour cost efficiency

In connection with rapid revenue growth, both the Group’s labour productivity and labour cost efficiency have improved year over year. Labour productivity and labour cost efficiency have improved also compared with the end of 2011.

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

  6M 2012 6M 2011 6M 2010 2011
Nominal labour productivity (rolling), (EUR’000) 208.6 155.9 124.8 202.3
Change against the comparative period, % 33.8% 25.0% -25.8% 57.7%
Nominal labour cost efficiency (rolling), (EUR’000) 10.6 8.2 6.3 10.4
Change against the comparative period, % 29.1% 30.9% -11.7% 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)


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market in 2012

  • We do not expect the construction market to grow significantly in 2012. Infrastructure contracts will dominate but opportunities for certain market growth will be better in the buildings segment where recovery has been slower, assuming that private sector customers (including foreign ones) that abandoned the market in prior years will return. In housing development, the success of a project will depend on the developer’s ability to either offer a low cost or exploit a new niche. The banks’ financing terms will remain stringent.
  • Total demand in the construction market will remain disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the second half of 2012 the volume of new procurement contracts will start decreasing because the current EU budget period (2013/2014) is coming to an end and co-financing terms require that a project should be completed during the budget period. Anticipation of shrinkage in public sector investments from 2013 will intensify competition and will put pressure on construction companies’ profit expectations. Uncertainty about the future is increased by lack of information about the investment volumes of the next EU budget period.
  • Players will continue consolidating, particularly general contractors in building construction, where competition is still overaggressive. The tenders of 2012 reflect that pricing pressure in the segment is strong. Besides competition, the number and business volumes of market participants will depend on their ability to participate in the bidding process and to meet tendering requirements. In the execution phase, the decisive factors are financial management (including relations with banks) and the ability to ensure sufficient liquidity.
  • Companies will continue to challenge the results of poorly prepared public procurements but mostly on account of substantive, not technical issues. Some procurements will be cancelled because the customers have prepared their project budgets based on the construction prices of 2009-2010. The latter are no longer realistic and construction companies’ bids exceed them by tens of percents.
  • The contracts signed with public sector customers will impose rigorous conditions on construction companies, including extensive obligations, strict sanctions, different financial guarantees, long settlement terms, etc. In a situation where public procurement is based on underbidding, this increases the risks of all market players.
  • Growth in input prices will decelerate compared with the previous year, remaining within the range of a few percent (on a quarterly basis) throughout 2012. However, there are areas where price fluctuations are unpredictable and may be notably greater and hard or even impossible to influence (petroleum and metal products and some other materials). The rise in input prices, which began in 2011, has reached a point where it is hindering private customers’ investment decisions.
  • The situation in the labour market will remain relatively stable. Companies have adapted to the situation but when volumes increase the availability of qualified labour will again be an issue. In 2012 the base wage paid by construction companies, which have to maintain tight cost control, is not likely to rise but the pressure for a wage increase remains high. There will be no more surges in labour migration to the Nordic countries. As the size of the Nordic construction market stabilises, the same will probably happen to labour migration.
  • In 2012 the construction market will continue to be seriously and somewhat unpredictably impacted by massive funds raised from the sale of carbon dioxide emission quotas, which are allocated within an extremely short period for improving the energy efficiency of buildings. It has already triggered demand hikes in certain segments of the construction market (joint filling, facade and roof works, installation of heating systems, etc), causing unreasonable rises in respective prices and hence temporary problems for the entire sector. In 2013, when the resources are depleted, volumes will plummet and competition will heighten, particularly among small and medium-sized players in the segments involved.
  • The volume of private investments in the construction sector will depend on the economic growth rate, the export markets and related forecasts. According to economic statistics on 2011, in recent years all parties (companies, investors and banks) have made decisions that have reduced private sector investments. In the first half of 2012, slightly more investment decisions were made but recovery is slow and cautious because consumer confidence remains low and the European debt crisis has not been resolved. Still, we expect to see a few large investments in certain sub-segments of building and infrastructure construction (extensions to shopping centres and industrial facilities, and hydraulic engineering projects respectively).

Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will continue adjusting to the post-recession environment also in 2012. We do not exclude the possibility that in the next few years we will 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 the Group’s strategic objectives in Latvia, i.e. the objective of operating in the Latvian construction market through local subsidiaries.

For the time being, we have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba UAB. We are monitoring market developments and do not rule out the possibility that in the next few years the Group will resume its Lithuanian operations on a project basis. Temporary suspension of operations does not cause any major costs for the Group and does not change our strategic objectives in Lithuania, 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. We do not believe that in 2012 there will be a significant increase in the activity of customers that interest us in the Ukrainian market. Maintaining minimal readiness at the current cost base, we have decided to continue our business in Ukraine until the end of 2012. We review the sustainability of our Ukrainian operations on a regular basis and will make a more definite decision regarding the future in the autumn.

The main risks in the Ukrainian market stem from the low administrative efficiency of the central and local government and the judicial system. Ukraine’s recovery from the economic crisis of 2008-2010 has been slow and achievement of political stability complicated. Demand continues to be undermined by private customers’ pessimism about the political future of the country and lack of financing for commencing construction operations. To date private sector customers have not started investing in projects where the Group would have a competitive advantage.

The country with a population of around 46 million is facing some tough choices. Unfortunately, the ongoing uncertainty is increasing the risks of companies operating in the local construction market.


In the Finnish market the Group offers subcontracting services in the field of concrete works. This is an area where Estonian companies still have an edge over local entities because our total personnel expenses are lower. The Finnish concrete works (sub)contracting market allows us to compete for selected projects (the main criteria are the location and the customer’s low risk level). We expect demand for concrete works to remain stable in 2012. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks in Finland. We are not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).


Description of the main risks

Business risks

The main factors, which affect the Group’s business volumes and profit margins, are competition in the construction market and changes in the demand for construction services. In addition, in the region where the Group operates construction operations are influenced by seasonality caused by the change of seasons.

The Group acknowledges the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices are rising involves as high risk because the contract may quickly start generating a loss.

In the next years, the Estonian construction market will be heavily dependent on public sector investments. A significant proportion of the latter is made up of support from the EU structural funds. The availability of that support is relatively certain until the end of the current budget period (2007-2013). According to disbursement terms, a supported project has to be completed by the end of the budget period. This means that in 2013 the number of projects launched will decrease significantly. We do not know the details of the budget for 2014-2020, although it is clear that the investments included in it will have a significant and direct impact on the business volumes of construction companies. According to currently available information, the volume of planned investments will decrease.

The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, surface works, etc). In order to disperse the risk, the Group has secured road maintenance contracts that generate year-round business. According to its business strategy, the Group counteracts seasonal fluctuations in its infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the operating volumes of the two segments in balance (see also the chapter Performance by business line). In addition, Group companies consistently seek new technical solutions that would yield greater efficiency under changeable weather conditions.

Institution of criminal proceedings against Nordecon AS and a member of its board

On 25 September 2008, the Estonian Road Administration published a notice of the public procurement of services for the design and build of the E263 Aruvalla-Kose road section. Nordecon AS (at that date the Group’s subsidiary Nordecon Infra AS) and Ramboll Eesti AS submitted a joint bid of 32.4 million euros.

The procurement gave rise to numerous challenges in the period 2008-2010. Owing to the challenges, the Road Administration decided to cancel the procurement but the Public Procurement Dispute Review Committee declared the Road Administration’s cancellation resolution invalid. The procurement process reached the stage where the joint bid of Nordecon AS and Ramboll Eesti AS was selected as the successful one and only the contract needed to be signed. However, on 26 October 2010 the financial control department of the Ministry of Finance, exercising state supervision, declared the procurement process invalid on the basis that during the proceedings the Road Administration had repeatedly and seriously violated the Public Procurement Act.

Nordecon AS and Ramboll Eesti AS challenged the resolution of the financial control department of the Ministry of Finance in the administrative court and applied for preliminary legal protection that would have allowed moving on with the public procurement proceedings. The court did not grant preliminary legal protection although it found that the challenge had potential.

The Security Police Board instituted criminal proceedings for investigation of circumstances surrounding the public procurement of the design and build of the Aruvalla-Kose road section. Member of the management board of Nordecon AS Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were charged with suspicion of attempting to conclude an agreement for distorting competition. Suspicion charges were also brought against the director general of the Road Administration and the chancellor of the Ministry of Economic Affairs and Communications. By the date of release of this report, no criminal charges have been filed against any of the suspects.

On 20 June 2012, the public prosecutor’s office issued an order for partial termination of criminal proceedings instituted by the security police in November 2011 for investigation of circumstances surrounding the public procurement of the design and build of the Aruvalla-Kose road section. Erkki Suurorg and Nordecon AS were charged with suspicion of attempting to conclude an agreement for distorting competition and later also of promising a gratuity. With the order, the public prosecutor’s office terminated criminal proceedings related to the suspicion of promising a gratuity because it established that the act had not taken place.

Criminal proceedings concerning the alleged episode of a competition act offence are still pending. Erkki Suurorg and Nordecon AS gave their testimony during the preliminary investigation and have affirmed that the suspicions are baseless.

If criminal charges are brought and a conviction takes effect, then under section 400 of the Penal Code the maximum pecuniary punishment for Nordecon AS may extend to 10% of turnover and for a time the company may not be allowed to tender for public procurement contracts.

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 the performance of their obligations with a bank guarantee provided to a Group company. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranties provisions based on their historical experience. At 30 June 2012, the Group’s warranties provisions (including current and non-current ones) totalled 1,103 thousand euros. At 30 June 2011, the corresponding figure was 1,045 thousand euros.

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


Financial risks

Credit risk

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

In the first half of 2012, recoveries of receivables written down in prior periods exceeded credit losses by 4 thousand euros (HY1 2011: the Group recognised a credit loss of 2 thousand euros). 

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.

The Group continues to work with the banks in implementing its financing program for 2011-2014, which was developed in 2011 with the assistance of one of the world’s leading consulting firms (Roland Berger Strategy Consultants). In line with the program, the banks will support the Group’s liquidity position by refinancing long-term loans and by granting repayment holidays for loan principal (for 2011-2012 with the option to extend the repayment holiday for 2013). Where necessary, the banks will support the Group with additional short-term loans. At the end of the reporting period, the Group had received loans of this kind of 6.2 million euros. 

At 30 June 2012, the Group’s current assets exceeded its current liabilities 1.05-fold (30 June 2011: 1.19-fold). Bank loans make up a significant proportion of current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. Although management believes that it is likely that the Group’s overdraft liabilities and other short-term bank loans will be refinanced for another 12 months, relevant decisions will be made in the next quarters of 2012. Therefore, at the reporting date the loan commitments constituted short-term liabilities. According to the Group’s estimates, current liabilities include loans of 10,499 thousand euros that will probably be refinanced. If the current ratio were adjusted accordingly, it would be 1.37.

At the reporting date, the Group’s cash and cash equivalents totalled 5,332 thousand euros (30 June 2011: 6,343 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 floating interest rates is mostly Euribor. At 30 June 2012, the Group’s interest-bearing loans and borrowings totalled 36,544 thousand euros, an increase of 5,202 thousand euros year-over-year. Interest expense for the first half of 2012 amounted to 504 thousand euros. Compared with the first half of 2011, interest expense has increased by 5 thousand euros. The Group’s interest rate risk is currently influenced by two factors: a rise in the base rate for floating interest rates (Euribor) and a low interest coverage ratio caused by weak operating cash flow. The first risk factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. Realisation of the second risk factor depends on the success of operating activities.

In recent years, banks and leasing companies have been increasingly interested in charging a floating interest rate. This increases the Group’s exposure to additional finance costs that may result from a rise in the base interest rate. The Group has not acquired any derivatives for hedging 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). From the beginning of 2012 the Group is not exposed to currency risks related to the Belarusian ruble (BYR) because the Group has practically discontinued its operations in Belarus. The exchange rate of the Ukrainian hryvna against the euro has been stable since 2010. In the first half of 2012, fluctuations in the euro-hryvna exchange rate remained below 5%. The Group’s net foreign exchange gain for the first half of 2012 was 83 thousand euros (HY1 2011: a loss of 109 thousand euros).

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s Finnish operations do not involve a currency risk. Nor does the Group have any currency risk in Lithuania where operations have been suspended. Currency risk is also reduced by the fact that the prices of construction materials and services that the Group’s Estonian entities purchase from abroad are mostly denominated in euros.

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


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2011 was 147.8 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