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Published: 2012-02-08 15:45:00 CET
Quarterly report

Financial report for the fourth quarter and twelve months ended 31 December 2011 (unaudited)

Nordecon publishes unaudited financial report for the fourth quarter and twelve months ended 31 December 2011

Tallinn, Estonia, 2012-02-08 15:45 CET -- Announcement includes Nordecon AS’ consolidated financial statements for 2011 IV quarter and 12 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 report and fact sheet 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 2011 31 December 2010
Current assets    
Cash and cash equivalents 9,908 5,818
Trade and other receivables 34,645 31,266
Prepayments 2,616 1,060
Inventories 23,811 24,982
Non-current assets held for sale 332 321
Total current assets 71,312 63,447
Non-current assets
Investments in equity-accounted investees 182 99
Other investments 26 26
Trade and other receivables 2,504 2,215
Investment property 4,929 4,930
Property, plant and equipment 7,437 9,038
Intangible assets 15,385 15,486
Total non-current assets 30,463 31,794
TOTAL ASSETS 101,775 95,241
Current liabilities    
Loans and borrowings 17,149 19,231
Trade payables 27,360 17,429
Other payables 4,963 3,446
Deferred income 10,277 4,425
Provisions 492 1,160
Total current liabilities 60,241 45,691
Non-current liabilities
Loans and borrowings 11,494 15,377
Trade payables 199 215
Other payables 96 96
Provisions 833 423
Total non-current liabilities 12,622 16,111
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,558
Translation reserve -459 -233
Retained earnings 5,068 10,257
Total equity attributable to equity holders of the parent 26,820 32,240
Non-controlling interest 2,092 1,199
TOTAL EQUITY 28,912 33,439


Condensed consolidated interim statement of comprehensive income

EUR`000 Q4 2011 Q4 2010 12M 2011 12M 2010
Revenue 46,362 24,253 149,622 99,312
Cost of sales -45,450 -24,228 -149,427 -100,012
Gross profit/loss 912 25 195 -700
Distribution expenses -79 -117 -317 -401
Administrative expenses -1,357 -1,518 -4,641 -4,887
Other operating income 60 412 796 820
Other operating expenses -13 -3,077 -154 -3,807
Operating loss -477 -4,275 -4,121 -8,975
Finance income 177 234 671 3,059
Finance expenses -194 -1,950 -1,078 -6,338
Net finance expense -17 -1,716 -407 -3,279
Share of profit/loss of equity-accounted investees -22 -238 82 -517
Loss before income tax -516 -6,229 -4,446 -12,771
Income tax expense/income -2 -42 -18 33
Loss for the period -518 -6,271 -4,464 -12,738
Other comprehensive expense:        
Exchange differences on translating foreign operations -213 -4 -58 -28
Total other comprehensive expense for the period -213 -4 -58 -28
Profit/loss attributable to:        
- Owners of the parent -641 -5 938 -4 798 -11,811
- Non-controlling interests 123 -333 334 -927
Loss for the period -518 -6,271 -4,464 -12,738
Total comprehensive income/expense attributable to:        
- Owners of the parent -1356 -5 942 -5 415 -11,839
- Non-controlling interests 625 -333 893 -927
Total comprehensive expense -731 -6,275 -4,522 -12,766
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR) -0.02 -0.19 -0.16 -0.38
Diluted earnings per share (EUR) -0.02 -0.19 -0.16 -0.38


Condensed consolidated interim statement of cash flows

EUR`000 12M 2011 12M 2010
Cash flows from operating activities    
Cash receipts from customers 185,147 120,719
Cash paid to suppliers -160,805 -105,501
VAT paid -2,384 -3,910
Cash paid to and for employees -13,476 -14,953
Income tax recovered/paid 41 -88
Net cash from/used in operating activities 8,523 -3,733
Cash flows from investing activities    
Acquisition of property, plant and equipment -58 -195
Proceeds from sale of property, plant and equipment and intangible assets 340 850
Proceeds from sale of investment property 0 709
Acquisition of subsidiaries, net of cash acquired 0 1
Disposal of subsidiaries, net of cash transferred 0 -615
Acquisition of associates 0 -2
Loans granted -213 -549
Repayment of loans granted 1,745 177
Dividends received 4 4
Interest received 204 258
Net cash from investing activities 2,022 638
Cash flows from financing activities    
Proceeds from loans received 1,925 6,642
Repayment of loans received -4,907 -8,617
Payment of finance lease liabilities -1,921 -2,379
Interest paid -1,089 -1,122
Other payments made -4 -15
Net cash used in financing activities -5,996 -5,491
Net cash flow 4,549 -8,586
Cash and cash equivalents at beginning of period 5,818 14,392
Effect of exchange rate fluctuations -459 12
Increase/decrease  in cash and cash equivalents 4,549 -8,586
Cash and cash equivalents at end of period 9,908 5,818


Preliminary financial results for 2011


Nordecon Group ended 2011 with a gross profit of 194 thousand euros (2010, audited: gross loss of 700 thousand euros). Formation of annual gross profit was strongly influenced by the losses incurred in the first and second quarters due respectively to seasonal factors and re-estimation of the outcomes of some loss-making contracts signed in 2009 and 2010. In the third and fourth quarters, the Group earned an operating profit.

The main factor that affected gross profit for the period was re-estimation of the outcomes of the Group’s loss-generating projects, a step taken in the second quarter due to changes in the operating environment. Additional losses were recognised because of a rise in the prices of construction inputs and, partly, due to some unforeseen project performance costs. A major share of the additional loss was attributable to a few contracts secured in 2009 and 2010 for which losses had also been recognised earlier. The Group’s estimates of losses expected to be incurred until delivery are based on its current best knowledge.

As regards loss-generating contracts, the strongest impact was exerted by the exhibition building of the Estonian Maritime Museum, built in the historical seaplane hangars near Tallinn Bay, which reached significant completion and was delivered to the customer in 2011. It is a unique renovation project where the exceptionally poor condition of the building and the true complexity of the work were discovered only in the course of the project. As allowed by the contract, we asked the customer for an extension of the delivery term and additional compensation for costs incurred due to circumstances that could not be foreseen at the time of the public procurement tender, or in connection with additional work requested by the customer. However, by the date of release of this report, only part of the problems, which have emerged, have found contractual solutions and many of our justified claims have still no cover.

Leaving aside a few loss-making projects secured during the downswing of the market, the average profit margins of our contracts improved compared with the previous year. Recognition of contract profits depends on the stage of completion of contract activity. Therefore, the better margins of contracts secured in the reporting period will have an impact in subsequent quarters, when work is performed. Above all, profitability has improved thanks to the following factors:

  • a clear focus on improving profitability, rather than increasing the size of the contracts portfolio, introduced as a target in 2010;
  • enforcement of stringent austerity measures imposed in previous periods; and
  • ongoing streamlining of internal processes and operations, including mergers of other Group entities with Nordecon AS at the beginning of the reporting period.

According to the Group’s assessment, in 2011 competition in some 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 deciding to exit the market as well as the fact that in recent years all companies have had reduce their personnel and support structures, which, in turn, has undermined some players’ bidding capabilities. Furthermore, many companies are held back by tougher financial conditions imposed by customers and the limited availability of guarantee facilities. However, there is still no indication that competitive pricing pressure would decrease in buildings construction, where the main problem is insufficient market volume, caused by a lack of private sector customers.

Most construction companies have become aware that long-term construction contracts entail the risk of growth in input prices. In general, this is exerting positive influence on the profitability of new construction contracts. Although the Group’s margins do not yet meet the target, management believes that the Group is moving in the right direction in restoring the profitability of its operating activities.

Administrative expenses for 2011 totalled 4,641 thousand euros. Compared with 2010, administrative expenses have decreased by 5%, reaching relative stability in relation to current operating volumes. The ratio of administrative expenses to revenue was 3.1% (2010, audited: 4.9%). We are pleased to report that our cost-saving measures yielded strong results and that the Group was able to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

The Group ended 2011 with an operating loss of 4,121 thousand euros (2010, audited: operating loss of 8,975 thousand euros). EBITDA for the period was negative at 1,773 thousand euros (2010, audited: negative at 5,375 thousand euros).

The Group’s net loss was 4,464 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 4,798 thousand euros. The year 2010 ended in a net loss of 12,738 thousand euros, including non-recurring finance income and expenses on the sale of the Latvian subsidiary and the write-down of loans granted and receivables.


Cash flows

In 2011, the Group’s operating activities resulted in a net cash inflow of 8,523 thousand euros (2010, audited: outflow of 3,733 thousand euros). Operating cash flow continued to be strongly influenced by cyclical fluctuations in project-related cash flows (differences between the settlement terms agreed with customers and subcontractors) and performance of some loss-making projects. Positive cash flow was supported by factoring implemented to reduce the cyclical nature of cash flows and the proceeds (including advance payments) of new large contracts. The negative cash flow of unprofitable projects realises as the work is performed although the book loss has already been recognised in previous periods.

Investing activities generated a net inflow of 2,022 thousand euros (2010, audited: inflow of 638 thousand euros) that consisted mostly of repayments of loans granted, which totalled 1,745 thousand euros.

Financing activities resulted in a net cash outflow of 5,996 thousand euros (2010, audited: outflow of 5,491 thousand euros). The structure of financing cash flows has remained more or less stable in the past couple of years. The Group is settling its loan obligations faster than it is raising new debt. On the other hand, repayments have decreased somewhat in relation to the previous year thanks to agreements reached with the banks. Renegotiation of settlement terms has not caused significant changes in the Group’s interest rates.

At 31 December 2011, the Group’s cash and cash equivalents totalled 9,908 thousand euros (31 December 2010: 5,818 thousand euros). For information on liquidity risks, see the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio 12M 2011 12M 2010 12M 2009
Revenue (EUR’000) 149,622 99,312 154,595
Revenue growth/decrease, % 51% -36% -37%
Net loss (EUR’000) -4,464 -12,738 -5,717
Loss attributable to owners of the parent (EUR’000) -4,798 -11,810 -2,923
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.16 -0.38 -0.10
Average number of employees 731 774 1,128
Revenue per employee (EUR’000) 205 128 137
Personnel expenses to revenue, % 9.5% 14.6% 15.0%
Administrative expenses to revenue, % 3.1% 4.9% 5.2%
EBITDA1 (EUR’000) -1,773 -5,375 275
EBITDA margin, % -1.2% -5.4% 0.2%
Gross margin, % 0.1% -0.7% 5.6%
Operating margin, % -2.8% -9.0% -5.2%
Operating margin excluding gains on asset sales, % -3.1% -9.4% -5.4%
Net margin, % -3.0% -12.8% -3.7%
Return on invested capital, % -5.4% -15.8% -4.1%
Return on assets, % -4.2% -8.3% -6.0%
Return on equity, % -14.3% -32.6% -11.4%
Equity ratio, % 28.4% 35.1% 37.1%
Gearing, % 32.6% 42.3% 26.4%
Current ratio 1.18 1.39 1.47
As at 31 December 2011 2010 2009
Order book (EUR’000) 134,043 85,607 97,827

1 For the purpose of calculating EBITDA, non-cash items include not only depreciation and amortisation but also impairment losses on goodwill

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
Revenue per employee = revenue/average number of employees
Personnel expenses to revenue = (personnel expenses/revenue) *100
Administrative expenses to revenue = (administrative expenses/ 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 assets = (operating profit/the period’s average total assets)*100
Return on equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total equity and liabilities)*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 2011, roughly 4% of the Group’s revenue was generated outside Estonia. In 2010, foreign operations accounted for 6% of the Group’s revenue.

  12M 2011 12M 2010 12M 2009
Estonia 96% 94% 86%
Ukraine 0% 2% 3%
Latvia 0% 0% 11%
Belarus 2% 3% 0%
Finland 2% 1% 0%

Half of the Group’s foreign revenue resulted from project-based construction activity in Belarus where works have been significantly completed and delivered to the customer. In the first quarter of 2012 only rectification work will be performed there. Management has decided that the Group will not seek any new projects in Belarus (see also the chapter Changes in the Group’s business operations in the reporting period). The other half of foreign revenue was earned on concrete works performed in Finland.

Revenue distribution between different geographical segments is a consciously deployed strategy by which the Group avoids 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 that entails comparatively 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 buildings and infrastructure construction. The Group is involved, among other things, in the construction of commercial and industrial buildings and facilities, road construction and maintenance, environmental engineering, concrete works and development of residential real estate.

The Group’s revenue for 2011 was 149,622 thousand euros, 51% up on the 99,312 thousand euros generated in 2010. Last year, the downturn that had ravaged the Estonian construction market for almost three years bottomed out. The Group’s revenue growth is attributable to a decline in competition in certain market segments, successful bidding for projects in various infrastructure sub-segments, and slight growth in the buildings construction market.

The Group aims to maintain the revenues of its business segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides a more solid foundation under stressed circumstances when one segment experiences shrinkage. In view of estimated demand for apartments, in forthcoming years the proportion of revenue from construction of apartment buildings will remain modest, i.e. significantly below the strategic 20% ceiling.

Segment revenue

In 2011, the revenues of our two main business segments were practically equal. Buildings and Infrastructure ended the year with revenue of 71,946 thousand euros and 71,267 thousand euros respectively. The corresponding figures for 2010 were 50,271 thousand euros and 47,082 thousand euros.

For a long time, the majority of tenders in the construction market have been related to infrastructure (mainly projects financed with the support of the state and the EU structural funds) and the majority (80% at the reporting date) of contracts in the Group’s order book belong to the Infrastructure segment. Despite this, the segments’ revenues have been practically equal because our active buildings 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*

Business segments 12M 2011 12M 2010 12M 2009
Buildings 49% 48% 45%
Infrastructure 51% 52% 55%

* 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 business segments based on their nature (i.e. buildings or infrastructure construction). In the segment reporting presented in the financial statements, aggregation and allocation are based on Group entities’ main field of activity (as required by IFRS 8 Operating Segments). In the financial statements the results of an entity that is primarily engaged in infrastructure construction are presented in the Infrastructure segment. In Directors’ report, the revenues of such an entity are presented based on their nature. The differences between the two reports are not significant because in general Group entities specialize in specific areas except for the subsidiary Nordecon Betoon OÜ that is involved in both buildings and infrastructure construction.

Revenue distribution within segments

In the Buildings segment, most of the revenue resulted from construction of public buildings and industrial facilities. In the public buildings sub-segment, the largest contracts comprised construction of buildings for Koidula border station, an academic building for the Social Sciences Faculty of the University of Tartu, buildings for Ämari Air Base, and a new exhibition building for the Estonian Maritime Museum. In the industrial and warehouse facilities sub-segment, most of the revenue was earned on construction of agricultural buildings, and a food production facility built in Belarus. Compared with prior periods, the contribution of the commercial buildings sub-segment decreased considerably. Private sector investment remained depressed. Apartment buildings were built for non-Group customers, the Group acting as a general contractor, not a developer.                                                                                                          


Revenue distribution within the Buildings segment 12M 2011 12M 2010 12M 2009
Commercial buildings 12% 19% 66%
Industrial and warehouse facilities 42% 36% 10%
Public buildings 44% 35% 18%
Apartment buildings 2% 10% 6%


As anticipated, in the Infrastructure segment most of the revenue was generated by road construction and maintenance. The contribution of construction of water and wastewater networks (other engineering), where the Group won and started several new contracts in 2011, was expectedly large as well. Thanks to EU support, this is one of the best-funded areas in Estonia. The European Union also supports performance of various environmental engineering projects where the Group is quite well represented. The contribution of specialist engineering increased, as expected, through construction of facilities for Sillamäe port.

Revenue distribution within the Infrastructure segment 12M 2011 12M 2010 12M 2009
Road construction and maintenance 47% 64% 49%
Specialist engineering (including hydraulic engineering) 10% 1% 12%
Other engineering 35% 26% 31%
Environmental engineering 8% 9% 8%

Order book

At 31 December 2011, the Group’s order book stood at 134,043 thousand euros, being significantly larger than at 31 December 2010 when the figure was 85,607 thousand euros. In addition to an increase attributable to general growth of the Estonian construction market compared with the slump of 2010, the figure includes the remaining value of the design and build of the Aruvalla-Kose section of the E263 Tallinn-Tartu highway, a project with a major individual impact (total value on conclusion approx. 39.3 million euros).

  12M 2011 12M 2010 12M 2009
Order book, in thousands of euros 134,043 85,607 97,827

At 80% the Infrastructure segment continues to account for a major proportion of the Group’s total order book (31 December 2010: 74%).

In a situation where the decrease in input prices has been replaced by a rise in all areas of the construction sector, the Group’s management continues to focus on improving the profitability of the contract portfolio.

Between the reporting date (31 December 2011) and the date of release of this report, Group companies have been awarded additional construction contracts of approximately 2,464 thousand euros.



Staff and personnel expenses

In 2011, the Group (including the parent and the subsidiaries) employed, on average, 731 people including 351 engineers and technical personnel (ETP). In the past year, downsizing has notably decelerated. The main changes in headcount resulted from seasonal fluctuations in the second and third quarters. Compared with 2010, the number of employees decreased primarily at the parent company. Reorganization, undertaken after the parent’s merger with two subsidiary entities (see the chapter Changes in the Group’s business operations in the reporting period), allowed streamlining both the support and operating functions.

Average number of the Group’s employees (including the parent and its subsidiaries):

  12M 2011 12M 2010 12M 2009
ETP 351 362 467
Workers 380 412 661
Total average 731 774 1,128

The Group’s personnel expenses for 2011 including all associated taxes totalled 14,225 thousand euros, a figure similar to the 14,494 thousand euros incurred in 2010.

In 2011, the remuneration of the members of the council of Nordecon AS including associated social security charges amounted to 92 thousand euros. The corresponding figure for 2010 was also 92 thousand euros. The remuneration and bonus benefits of the members of the board of Nordecon AS including social security charges totalled 316 thousand euros compared with 199 thousand euros for 2010. The remuneration provided to the board has increased because in the comparative period the board had two members while the current number is four. The composition of the board changed in connection with the merger of two subsidiaries and the Group’s parent at the end of 2010.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market in 2012

  • The Group does not expect the construction market to grow significantly in 2012. Infrastructure procurement will dominate. However, buildings construction, where recovery has been the slowest, should offer somewhat better opportunities for growth, assuming that private sector customers (including foreign investors) that abandoned the market in previous periods will return. In the development of new residential real estate, the success of a project will depend on the developer’s ability to either offer a low cost or exploit a new niche. Consumer behaviour will remain highly volatile while banks will impose more stringent borrowing conditions.
  • Total demand in the construction market will remain disproportionately reliant on public procurement and projects performed with the support of the EU. The success of such projects is directly related to the administrative and public procurement capabilities of the central and local governments. Patchy procurement quality may cause hold-ups and disruptions both during the procurement proceedings and the construction process.
  • Players will continue consolidating, particularly as regards general contractors in the segment of buildings construction, where competition is still overly aggressive. Tenders arranged in 2011 indicate that pricing pressure in the segment remains strong. In addition to competition, the number and operating volumes of market participants will be influenced by the players’ ability to participate in the bidding process and meet the tender or procurement conditions. In the performance phase, the decisive factors will be financial management (including relations with banks) and the ability to ensure sufficient liquidity, particularly when loss-generating contracts need to be performed.
  • Companies may continue challenging the results of poorly prepared public procurement tenders but mostly on account of fundamental technical issues. Some public procurement tenders will be cancelled because customers have prepared their budgets based on the construction prices of 2009-2010, which in the current situation are regrettably no longer realistic and the bids made by construction companies exceed them by tens of percents. The time and finance costs of the proceedings will be high for all involved.
  • The contracts signed with public sector customers will continue to impose rigorous conditions on construction companies, including greater obligations for the builder, tough sanctions, different financial guarantees, extremely long settlement terms, etc. In a situation where the public procurement process 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. On the other hand, there are areas where price fluctuations are unpredictable and thus may be notably greater and hard or impossible to influence (petroleum and metal products, some other materials). 
  • The situation in the labour market has stabilised to a certain extent and labour outflow to the Scandinavian countries will not increase significantly. Companies have adapted to the situation but when volumes recover the availability of qualified labour will again be an issue. On the whole, in 2012 the base wages paid by construction companies that have to maintain tight cost control are not expected to increase.
  • In 2012 the construction market will be seriously and unfortunately somewhat unpredictably impacted by massive funds raised from the sale of carbon dioxide emission quotas, which will be allocated within an exceptionally short period for improving the energy efficiency of buildings. This has already triggered demand hikes in some specialized construction segments (joint filling, facade and roof works, heating systems, etc) and unreasonable rises in respective prices, which will cause temporary problems for the entire sector.
  • The volume of investments made in the construction sector will depend on the rate of economic growth and forecasts made on the basis of that figure. At present, the sentiment of both investors and banks remains relatively cautious but this may change quickly in either direction in the light of Estonia’s and the EU’s actual economic indicators.

Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will continue adjusting to the post-recession environment also in 2011. The Group does not exclude the possibility that in the next few years it will undertake some projects in Latvia through its Estonian entities, involving partners where necessary. Continuation 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, the Group has suspended the operations of its 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. It does not change the Group’s 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 were practically no private customers in that segment. We do not expect the situation to improve significantly in 2012. Maintaining minimal readiness at the current cost base, the Group has decided to continue its business in Ukraine. We review the sustainability of our Ukrainian operations on a regular basis and are prepared to restructure them significantly, if necessary.

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 2008-2009 and changes in the political landscape have had a sluggish effect on the construction sector. Demand is mainly undermined by private customers’ inability to raise financing for commencing construction. Stabilisation of the political situation has not occurred at the expected pace and private sector customers have not started investing in projects where the Group has a competitive advantage.

Still, the construction market of a country with a population of around 46 million has strong business potential. Our key success factor is relatively little competition among project management companies offering flexible construction management in combination with European practices and competencies. We are confident that the present slump in the Ukrainian construction market and economy as a whole will transform local understanding and expectations of general contracting and project management in the construction business and, in the long term, the new thinking will improve the Group’s position.


In the Finnish market the Group focuses solely on offering subcontracting services in the field of concrete works. This is an area where Estonian companies continue to have a certain edge over local entities because their 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, the Group will maintain a rational approach and will avoid taking excessive risks in Finland. The Group is currently not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).


Description of the main risks

Business risks

Management believes that in the near future the main business risk will be stiff competition that induces companies to bid unreasonably low prices in a situation where input prices have started rising and may cause an exponential slide in profitability. In the construction market, the situation is aggravated by the fact that the need for winning contracts that would cover fixed costs and overheads at a level ensuring normal operating capacities is increasing. The Group’s management expects to mitigate the risks by tight cost control and effective austerity measures as well as attention to detail and thorough analysis of new projects.

To mitigate the risks arising from the seasonal nature of the construction business (primarily weather conditions during the winter months), the Group has acquired road maintenance contracts that generate year-round business. In addition, Group companies are constantly seeking new technical solutions that would allow working more efficiently under changeable weather conditions.

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project, 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 issued for the benefit of a Group company. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranties provisions. At 31 December 2011, the provisions (including current and non-current ones) totalled 1,213 thousand euros. At 31 December 2010, the corresponding figure was 1,329 thousand euros.

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

The Estonian Road Administration published a notice of the public procurement tender for the design and build of the E263 Aruvalla-Kose road section on 25 September 2008. Nordecon AS (at that date the Group’s subsidiary Nordecon Infra AS) and Ramboll Eesti AS participated in the tender with a joint bid of 506.2 million kroons (32.4 million euros).

The tender gave rise to numerous disputes and challenges between 2008 and 2010. Owing to the challenges, the Road Administration endeavoured to cancel the procurement tender but the public procurement dispute review committee declared the Road Administration’s resolution for cancellation invalid. The tender 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, adopted a resolution that declared the public procurement tender invalid on the basis that during the procurement 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 apply 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 tender for 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 economics. Nordecon AS and Erkki Suurorg have given their testimony to the security police board and have affirmed that the charges against them are baseless. By the date of release of this report, no criminal charges have been filed against any of the suspects.

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 participate in public procurement tenders.

Credit risk

For credit risk management, a potential customer’s settlement behaviour and creditworthiness are analysed already in the tendering stage. When the contract has been signed, the customer’s settlement behaviour is monitored on an ongoing basis from the making of an advance payment to adherence to the contractual settlement schedule, which usually depends on the documentation of the delivery of work performed. We believe that the system in place allows us to respond to customers’ settlement difficulties sufficiently promptly. At the end of 2011, our customers’ settlement behaviour was relatively good, considering the economic situation, although there were also a few problem customers. The proportion of overdue receivables is stable; the figure consists mostly of items that are not significantly past due and stem from the routines to be completed between public sector companies and their financing authorities. In accordance with the Group’s accounting policies, all receivables that are more than 180 days overdue or in respect of which no additional settlement agreement has been reached are recognised as an expense.

In 2011 income from recovery of receivables written down in previous periods exceeded expenses from write-down of receivables and the Group could recognise income of 7 thousand euros. In the comparative period, expenses from write-down of receivables and loans granted totalled 6,131 thousand euros.

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the largest banks in the markets where the Group operates. To ensure timely settlement of liabilities, approximately two weeks’ working capital is kept in current accounts or overnight deposits. Where necessary, overdraft facilities are used. At the reporting date, the Group’s current assets exceeded its current liabilities 1.18-fold (31 December 2010: 1.39-fold) and available cash funds totalled 9,908 thousand euros (31 December 2010: 5,818 thousand euros).

The Group remains exposed to higher than average liquidity risk resulting from a gap between the customers’ long settlement terms (mostly 45 to 56 days) and the subcontractors’ increasing interest to negotiate shorter settlement terms (mostly 21 to 45 days). In the reporting period, the liquidity position was further weakened by the completion of some loss-making projects. Moreover, business growth is increasing the Group’s need for working capital, the impacts of which will emerge in subsequent quarters. The Group counteracts the differences in settlement terms by using factoring where possible. In order to raise additional working capital, the Group carried out negotiations with banks based on the Nordecon Group Business Plan and Financing Program 2011-2014, prepared at the request of Nordecon AS by one of the world’s leading consulting firms Roland Berger Strategy Consultants GmbH.

By the date of release of this report, the parties have agreed that settlement of the Group’s long-term liabilities will be partly suspended through 2012 (with an option to extend the suspension through 2013). In addition, the Group has been granted additional short-term credit lines of up to 5,300 thousand euros of which 1,660 thousand euros was in use at the reporting date. 

Interest rate risk

The Group’s interest-bearing liabilities to banks have mainly fixed interest rates. Finance lease liabilities have floating interest rates and are linked to EURIBOR. At 31 December 2011, the Group’s interest-bearing loans and borrowings totalled 28,643 thousand euros, a decrease of 5,966 thousand euros year-over-year. Interest expense for 2011 amounted to 1,028 thousand euros. Compared with 2010, interest expense has decreased by 27 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 low operating cash flows. The first factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. The realisation of the interest payment cash flow risk depends on the success of operating activities. The Group has not acquired derivatives to hedge its interest rate risk.

Currency risk

As a rule, construction contracts and subcontractors’ service contracts are made in the currency of the host country: in euros (EUR), in Ukrainian hryvnas (UAH) and in Belarusian rubles (BYR). In connection with discontinuance of operations in Latvia and Lithuania, the currency risks of those countries are no longer relevant. Services purchased from other countries are mostly priced in euros, which does not constitute a currency risk for the Group’s Estonian entities.

The Group’s foreign exchange gains and losses result mainly from its Ukrainian and Belarusian operations because the Ukrainian and Belarusian national currency float against the euro. The Group has not acquired derivatives to hedge its currency risks.

The Group’s foreign exchange gains and losses for 2011 resulted in a net exchange gain of 171 thousand euros. In the comparative period, exchange differences resulted in a net exchange loss of 400 thousand euros.


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 2010 was 99.3 million euros. Currently Nordecon Group employs nearly 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