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Published: 2018-02-08 07:00:00 CET
Quarterly report

2017 IV quarter and 12 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the fourth quarter and twelve months of 2017 (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 Tallinn and Nordecon’s web page (http://www.nordecon.com/for-investor/financial-reports/interim-reports).

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


Condensed consolidated interim statement of financial position

EUR ‘000 31 December 2017 31 December 2016
Current assets    
Cash and cash equivalents 8,915 9,786
Trade and other receivables 35,193 21,055
Prepayments 1,642 1,644
Inventories 23,230 22,992
Total current assets 68,980 55,477
Non-current assets
Investments in equity-accounted investees 1,888 1,640
Other investments 26 26
Trade and other receivables 8,950 10,816
Investment property 4,929 4,929
Property plant and equipment 12,566 11,111
Intangible assets 14,639 14,623
Total non-current assets 42,998 43,145
TOTAL ASSETS 111,978 98,622
Current liabilities    
Borrowings 16,197 6,297
Trade payables 34,824 29,811
Other payables 6,887 5,389
Deferred income 3,651 4,128
Provisions 533 753
Total current liabilities 62,092 46,378
Non-current liabilities
Borrowings 13,955 13,102
Trade payables 98 98
Other payables 71 117
Provisions 1,273 881
Total non-current liabilities 15,397 14,198
Share capital 18,263 19,720
Own (treasury) shares -1,349 -1,550
Share premium 589 564
Statutory capital reserve 2,554 2,554
Translation reserve 1,995 1,549
Retained earnings 11,086 13,091
Total equity attributable to owners of the parent 33,138 35,928
Non-controlling interests 1,351 2,118
TOTAL EQUITY 34,489 38,046


Condensed consolidated interim statement of comprehensive income

EUR ‘000   Q4 2017 Q4 2016 2017 2016
Revenue    56,478  49,759  231,387 183,329
Cost of sales   -54,551 -47,371 -222,692 -172,350
Gross profit   1,927 2,388 8,695 10,979
Marketing and distribution expenses   -175 -134 -623 -413
Administrative expenses   -1,561 -1,477 -6,936 -6,106
Other operating income   9 214 107 362
Other operating expenses   -11 -75 -141 -614
Operating profit   189 916 1,102 4,208
Finance income   99 127 2,901 463
Finance costs   -844 -303 -1,570 -1,088
Net finance costs/income   -745 -176 1,331 -625
Share of profit/loss of equity-accounted investees    -33  -108  485 609
Profit/loss before income tax   -589 632 2,918 4,192
Income tax expense   -402 -14 -1,193 -259
Profit/loss for the period   -991 618 1,725 3,933
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   187 -51 446 191
Total other comprehensive income/expense   187 -51 446 191
Profit/loss attributable to:          
- Owners of the parent   -1,590 607 1,388 3,044
- Non-controlling interests   599 11 337 889
Profit/loss for the period   -991 618 1,725 3,933
Total comprehensive income attributable to:          
- Owners of the parent   -1,403 556 1,834 3,235
- Non-controlling interests   599 11 337 889
Total comprehensive income/expense for the period   -804 567 2,171 4,124
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR)   -0.05 0.02 0.04 0.10
Diluted earnings per share (EUR)   -0.05 0.02 0.04 0.10

Condensed consolidated interim statement of cash flows

EUR ‘000 2017 2016
Cash flows from operating activities    
Cash receipts from customers1 264,891 214,871
Cash paid to suppliers2 -239,592 -179,312
VAT paid -6,971 -7,217
Cash paid to and for employees -22,593 -20,208
Income tax paid -605 -197
Net cash used in/from operating activities -4,870 7,937
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -343 -148
Paid on acquisition of intangible assets -5 -25
Proceeds from sale of property, plant and
49 160
Acquisition of a subsidiary 0 -15
Disposal of investments in subsidiaries and a joint venture 2,744 6
Loans provided -45 -81
Repayment of loans provided 1,739 55
Dividends received 153 153
Interest received 368 2
Sale of own shares 153 0
Net cash from investing activities 4,813 107
Cash flows from financing activities    
Proceeds from loans received 9,207 2,847
Repayment of loans received -1,123 -2,262
Finance lease principal paid -2,252 -2,478
Interest paid -752 -695
Dividends paid -4,497 -1,068
Reduction of share capital -1,384 -923
Net cash used in financing activities -801 -4,579
Net cash flow -858 3,465
Cash and cash equivalents at beginning of period 9,786 6,332
Effect of movements in foreign exchange rates -13 -11
Decrease/increase in cash and cash equivalents -858 3,465
Cash and cash equivalents at end of period 8,915 9,786

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

Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon Group ended the year 2017 with a gross profit of 8,695 thousand euros (2016: 10,979 thousand euros) and a gross margin of 3.8% (2016: 6.0%). The weakening of the gross margin resulted mainly from the Buildings segment where gross margin dropped to 4.0% (2016: 7.5%). Above all, the year-on-year decrease in gross margin was attributable to growth in input prices, particularly materials and labour. Our performance is increasingly influenced by the insufficient availability of skilled labour and, consequently, the shortage of subcontractors in the building construction segment. In particular, this applies to housing construction, where the number of assets being built is high for the Estonian market. The situation enables subcontractors to raise their prices, which puts pressure on general contractors’ profit margins. The decline in the Group’s gross margin is also attributable to the loss of the Swedish subsidiary that incurred some interior work costs in the final stage of its first construction contract which could not be sufficiently accurately estimated in the new market. The performance of the Infrastructure segment improved compared to 2016, its gross margin rising to 4.1% (2016: 3.9%). At the beginning of the year, we finalised the merger of two subsidiaries engaged in the infrastructure business, Järva Teed AS and Hiiu Teed OÜ, and Nordecon AS’s road maintenance and machinery division. The restructuring, undertaken to streamline our infrastructure operations and increase the Group’s overall competitiveness, has justified itself and helped the Infrastructure segment improve its profitability and deliver revenue growth. Despite stiff competition and the continuing rise in input prices, we expect that in 2018 the Group’s profitability will improve compared to 2017.

Administrative expenses for 2017 totalled 6,936 thousand euros (2016: 6,106 thousand euros). Compared 2016, administrative expenses grew substantially, mainly through the termination benefits paid to two members of the board of Nordecon AS that stepped down and the council’s decision to increase the number of the company’s board members. Despite changes on the board, structural streamlining, and sustained investment in foreign markets which in the start-up phase is inevitably accompanied by planned growth in administrative expenses, our cost-control measures continued to produce good results and we were able to keep administrative expenses below the target ceiling of 4% of revenue. The ratio of administrative expenses to revenue was 3.0% (2016: 3.3%).

Operating profit for 2017 amounted to 1,102 thousand euros (2016: 4,208 thousand euros). EBITDA amounted to 3,123 thousand euros (2016: 6,017 thousand euros).

Finance income for the year amounted to 2,901 thousand euros (2016: 463 thousand euros). A significant share of finance income resulted from the sale of investments in the joint venture Unigate OÜ and the subsidiaries Paekalda 2 OÜ, Paekalda 3 OÜ, Paekalda 7 OÜ and Paekalda 9 OÜ, which generated gain of 2,527 thousand euros.

In 2017, the Ukrainian currency weakened against the euro by around 15%, which meant that Group entities whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported in finance costs totalled 451 thousand euros of which the portion resulting from the weakening of the hryvnia amounted to 416 thousand euros (2016: 195 thousand euros). The exchange losses increased the translation reserve in equity by 446 thousand euros (2016: 191 thousand euros) and the net effect of the exchange differences on the Group’s net assets was a gain of 5 thousand euros (2016: a loss of 4 thousand euros). Net profit was also influenced by the write-down of loans related to two Ukrainian real estate development projects by 448 thousand euros (2016: nil euros), recognised in the fourth quarter within finance costs. The investments were written down in connection with the weakening of the hryvnia.

The Group’s net profit amounted to 1,725 thousand euros (2016: 3,933 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, was 1,388 thousand euros (2016: 3,044 thousand euros).

Cash flows

In 2017, operating activities produced a net cash outflow of 4,870 thousand euros (2016: a net inflow of 7,937 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, operating cash flow proved negative due to VAT paid and payments made to and for employees. Operating cash flow continues to be influenced by the fact that the contracts signed with both public and private sector customers do not require them to make advance payments while we have to make prepayments to subcontractors, materials suppliers, etc. Cash inflow is also lowered by contractual retentions, which extend from 5 to 10% of the contract price and are released at the end of the construction period only.

Investing activities resulted in a net cash inflow of 4,813 thousand euros (2016: an inflow of 107 thousand euros). Cash flows from investing activities were strongly influenced by the sale of the investment in the joint venture Unigate OÜ for 2,744 thousand euros and loan principal and interest of 1,461 thousand euros and 329 thousand euros respectively collected through the transaction. Investments in property, plant and equipment and intangible assets totalled 348 thousand euros (2016: 173 thousand euros) and dividends received amounted to 153 thousand euros (2016: 153 thousand euros). Own shares sold during the reporting period generated income of 153 thousand euros (2016: nil euros).

Financing activities generated a net cash outflow of 801 thousand euros (2016: an outflow of 4,579 thousand euros). Our financing cash flow is strongly influenced by loan and finance lease transactions. Proceeds from loans received amounted to 9,207 thousand euros, consisting of development loans received and the use of overdraft facilities (2016: 2,847 thousand euros). Loan repayments totalled 1,123 thousand euros (2016: 2,262 thousand euros) consisting of scheduled repayments of long-term investment and development loans. Finance lease payments decreased slightly, amounting to 2,252 thousand euros (2016: 2,478 thousand euros). Dividends paid in 2017 totalled 4,497 thousand euros (2016: 1,068 thousand euros). Payments made to owners on the reduction of share capital totalled 1,384 thousand euros (2016: 923 thousand euros).

At 31 December 2017, the Group’s cash and cash equivalents totalled 8,915 thousand euros (31 December 2016: 9,786 thousand euros). Management’s commentary on liquidity risks is presented in the chapter Description of the main risks.

Key financial figures and ratios

Figure/ratio for the period 2017 2016 2015
Revenue (EUR ‘000) 231,387 183,329 145,515
Revenue change 26.2% 26.0% -9.8%
Net profit (EUR ‘000) 1,725 3,933 174
Net profit attributable to owners of the parent (EUR ‘000) 1,388 3,044 179
Weighted average number of shares 30,913,031 30,756,728 30,756,728
Earnings per share (EUR) 0.04 0.10 0.01
Administrative expenses to revenue 3.0% 3.3% 3.5%
EBITDA (EUR ‘000) 3,123 6,017 5,769
EBITDA margin 1.3% 3.3% 4.0%
Gross margin 3.8% 6.0% 6.2%
Operating margin 0.5% 2.3% 2.7%
Operating margin excluding gain on asset sales 0.5% 2.2% 2.4%
Net margin 0.7% 2.1% 0.1%
Return on invested capital 5.9% 8.5% 2.1%
Return on equity 4.8% 10.6% 0.5%
Equity ratio 30.8% 28.6% 40.1%
Return on assets 1.6% 4.2% 0.2%
Gearing 32.7% 16.7% 25.5%
Current ratio 1.11 1.20 1.03
As at 31 December 2017 2016 2015
Order book (EUR ‘000) 144,122 131,335 125,698

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


Performance by geographical market

In 2017, Nordecon earned around 6% of its revenue outside Estonia, compared with 7% in 2016. In terms of foreign markets, the strongest revenue contributor was Sweden where we provided general contractor’s services under three contracts. The share of Ukrainian revenues remained stable. In Ukraine, we are providing general contractor’s services under three building construction contracts and one infrastructure construction contract. Our Finnish revenues resulted from concrete works in the building construction segment.

  2017 2016 2015
Estonia 94% 93% 96%
Sweden 3% 4% 0%
Ukraine 2% 2% 3%
Finland 1% 1% 1%

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on one market. However, conditions in some of our selected foreign markets are also volatile and have a strong impact on our current results. Increasing the contribution of foreign markets is one of Nordecon’s strategic targets. Our vision of the Group’s foreign operations is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing construction operations in more challenging circumstances, for example when the operating volumes of a sub-segment decline sharply.

Nordecon’s revenues for 2017 totalled 231,387 thousand euros, a roughly 26% increase on the 183,329 thousand euros generated in 2016. Although revenues increased in both the Buildings and the Infrastructure segment, the main growth driver was the Buildings segment where growth was underpinned by a rise in the volume of contracts secured from the private sector. The scarcity in infrastructure construction projects, which is affecting the entire Estonian construction market (and the Group’s chosen strategy), has also left its mark on our revenue structure.

In 2017, our Buildings segment and Infrastructure segment generated revenue of 174,447 thousand euros and 56,335 thousand euros respectively. The corresponding figures for 2016 were 134,554 thousand euros and 45,817 thousand euros (see note 8). The Group’s order book has a similar structure: at the year-end, 75% of contracts secured but not yet performed was attributable to the Buildings segment (31 December 2016: 76%).

Operating segments* 2017 2016 2015
Buildings 74% 73% 64%
Infrastructure 26% 27% 36%

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


Sub-segment revenues

In the period under review, the largest revenue source in the Buildings segment continued to be the apartment buildings sub-segment, where we earned most of the revenue as a general contractor. In Estonia, a substantial share of our apartment building projects is located in Tallinn. In 2017, the largest of them were the Meerhof 2.0 apartment building complex at Pirita tee 20a and apartment buildings at Sõjakooli 12 (phase 1) and Virbi 10. The contribution of foreign markets sustained growth. In Ukraine, we continued to build a residential quarter in the city of Brovary in the Kiev region. In Sweden, we completed the construction of two apartment buildings and continued the design and construction of a third, an 8-floor apartment building in Stockholm.

We continued work on our own housing development projects (reported in the apartment buildings sub-segment) in Tartu and Tallinn. In Tartu, we completed the construction and sale of apartment buildings in phases 5 and 6 and began building phase 7 (the last but one) of the Tammelinn project (www.tammelinn.ee). In Tallinn, we completed the construction of the fifth and last terraced house in our Magasini 29 development project (www.magasini.ee) and two apartment buildings with a total of 30 apartments in Hane street. We continue to sell apartments in both of our Tallinn projects. The period’s housing development revenues totalled 6,533 thousand euros (2016: 5,216 thousand euros). In carrying out development activities, we monitor closely potential risks in the housing development market that stem from rapid growth in the supply of new housing and growth in input prices.

The revenues of the industrial and warehouse facilities sub-segment grew year on year. The largest projects were the construction of Harmet’s production and warehouse facilities at Kumna, near Tallinn, a co-generation plant at Kehra, and the Metsä Wood plywood factory and an extension to the Metaprint production plant in Pärnu. A strong contributor to the sub-segment’s revenue growth was a rise in work secured from the agricultural sector. The largest assets built for the agricultural sector included the Kogula, Saimre, and Kirbla cattle sheds.

The revenues of the commercial buildings sub-segment grew considerably compared with 2016. We completed the renovation of the machinery hall of the historical Luther furniture factory into a modern office building and the construction of the office and commercial complex Viimsi Äritare. We continued to build an office building at Lõõtsa 12, the Öpiku B building and a multi-storey car park at Lõõtsa 11 in Ülemiste City and the Martens house in Pärnu.

The revenue contribution of the public buildings sub-segment decreased compared with 2016. The revenues of this sub-segment have been strongly influenced by growth in the state’s investment in national defence. In 2017, we delivered to the customers the building of Ugala Theatre in Viljandi, the Lintsi warehouse complex, and a depot, infrastructure for armoured vehicles, a canteen and a barracks at the Tapa military base.

Based on the order book of the Buildings segment, we expect that in 2018 the share of the commercial buildings and public buildings sub-segments in the Group’s total revenue will increase compared to 2017.

Revenue breakdown in the Buildings segment 2017 2016 2015
Apartment buildings 30% 34% 22%
Industrial and warehouse facilities 26% 20% 12%
Commercial buildings 25% 16% 50%
Public buildings 19% 30% 16%

The revenue of the Infrastructure segment grew by around 22% year on year, driven by road construction and maintenance which has dominated the segment for a long time and increased its revenue by around 20%. In contrast to two previous years, when most of the segment’s revenues resulted from small or medium-sized reconstruction or rehabilitation projects, in 2017 we had four large contracts: the construction of a 2+1 road (a road with passing lanes) on the Ääsmäe-Kohatu section of the Tallinn-Pärnu-Ikla road secured at the end of 2016 and the reconstruction of the Haabersti intersection in Tallinn, the construction of a 2+1 road on the Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road, and the reconstruction of a section of the Tallinn ring road (km 0.6-2.8) secured in 2017. We continued to render road maintenance services in Järva and Hiiu counties and the Keila and Kose maintenance areas in Harju county. A substantial share of the period’s revenues also resulted from forest road improvement services provided to the State Forest Management Centre.

The contracts of the environmental engineering and other engineering (utility network construction) sub-segments are small and significant growth of their revenues is unlikely. In recent years, we have not done any work in the specialist engineering sub-segment, where we used to perform mainly hydraulic engineering projects, as the procurement of such work tends to be irregular.

Revenue breakdown in the Infrastructure segment 2017 2016 2015
Road construction and maintenance 86% 86% 81%
Other engineering 8% 9% 14%
Environmental engineering 6% 5% 4%
Specialist engineering (including hydraulic engineering) 0% 0% 1%

Order book

At 31 December 2017, the Group’s order book (backlog of contracts signed but not yet performed) stood at 144,122 thousand euros, around 10% up on 2016. Both the Buildings and the Infrastructure segment increased their order books by around 10%. In the fourth quarter, we secured new contracts of 49,683 thousand euros.

As at 31 December 2017 2016 2015
Order book (EUR ‘000)  144,122 131,335  125,698

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 75% and 25% of the Group’s order book respectively (31 December 2016: 76% and 24% respectively).

In the Buildings segment, the strongest order book growth was delivered by commercial buildings which increased its order book by around 53% year on year. Growth was mainly driven by the construction of a multi-storey car park at Sepise 8 in Ülemiste City and the design and construction of a 14-floor commercial and residential building at Mustamäe tee 3 in the WoHo quarter in Tallinn. The sub-segment’s order book has also grown through two major contracts secured in the second half of 2017 in Ukraine: one for the construction of a 7-floor office building in the Unit City innovation park in Kiev and the other for the construction of a 6-floor office building in the LvivTech.City innovation park in Lviv. The order books of the public buildings and the industrial and warehouse facilities sub-segments have also grown somewhat. A significant share of the order book of the public buildings sub-segment is made up of contracts for the construction of buildings for the Estonian Academy of Security Sciences and Abja Health Centre that were secured in the third quarter and contracts for the construction of infrastructure for armoured vehicles and two barracks at the Tapa military base that were secured in the fourth quarter. A major share of the order book of the industrial and warehouse facilities sub-segment is made up of contracts for the construction of the Metsä Wood plywood factory in Pärnu and phase 4 of the Ekseko pig farm. The order book of the apartment buildings sub-segment has decreased by around 32%. A large share of the order book of the apartment buildings sub-segment is made up of contracts signed in 2017 for the construction of an eight-floor apartment building (Väsby Terrass) in Sweden and the design and construction of three apartment buildings at Kakumäe in Tallinn. In addition, we continue to build five apartment buildings in the city of Brovary in Kiev region in Ukraine.

The order book of the Infrastructure segment is supported by growth in contracts signed by the road construction and maintenance sub-segment whose order book accounts for 86% of the segment’s total order book. The largest projects in the road construction order book are the contracts signed in 2017 for the reconstruction of the Haabersti intersection in Tallinn, the reconstruction of a section of the Tallinn ring road (km 0.6-2.8) and the construction of a 2+1 road on the Valmaotsa–Kärevere section of the Tallinn–Tartu–Võru–Luhamaa road. We continue to provide road maintenance services in three road maintenance areas: Järva, Hiiu, and Kose. The order book of the environmental engineering sub-segment has grown through a contract signed for the construction of a water treatment plant in Kiev, Ukraine. Although according to our projections in 2018 public investments will not increase substantially, our order book as at the reporting date allows us to expect that in 2018 the revenue of the Infrastructure segment will grow slightly compared to 2017 (for further information, see the Business risks section of the chapter Description of the main risks).

Based on the order book and known developments in our selected markets, we expect that the Group’s revenue for 2018 will remain at the same level as in 2017. In an environment of stiff competition, we avoid taking unjustified risks whose realisation in the contract performance phase may have an adverse impact on our results. Despite this, where suitable opportunities arise, we strive to increase the portfolio to counteract market-triggered margin compression. Our policy is to keep fixed costs under control and monitor market developments.

Between the reporting date (31 December 2017) and the date of release of this report, Group companies have secured additional construction contracts in the region of 4 136 thousand euros.



Employees and personnel expenses

In 2017, the Group (the parent and the subsidiaries) employed, on average, 735 people including 426 engineers and technical personnel (ETP). The number of employees, particularly the ETP staff, has increased year on year by around 7% in connection with growth in the Group’s business operations.

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

  2017 2016 2015
ETP 426 381 356
Workers 309 303 334
Total average 735 684 690

Our personnel expenses for 2017, including all taxes, totalled 22,872 thousand euros (2016: 20,401 thousand euros), a roughly 12% increase year on year. The growth in personnel expenses is mainly attributable to a larger headcount but pay rises have also played a role.

The service fees of the members of the council of Nordecon AS for 2017 amounted to 167 thousand euros and associated social security charges totalled 55 thousand euros (2016: 138 thousand euros and 45 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 1,001 thousand euros and associated social security charges totalled 330 thousand euros (2016: 350 thousand euros and 116 thousand euros respectively). The figures include termination benefits of 550 thousand euros paid to two board members in the third quarter and associated social security charges of 182 thousand euros (2016: nil euros). In addition, the board’s compensation has grown because the number of board members has increased.

Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses incurred:

  2017 2016 2015
Nominal labour productivity, (EUR ‘000) 314.9 267.8 210.9
Change against the comparative period 17.6% 27.0% -4.3%
Nominal labour cost efficiency, (EUR) 10.1 9.0 8.0
Change against the comparative period 12.6% 12.8% -0.6%
Nominal labour productivity = revenue / average number of employees
Nominal labour cost efficiency = revenue / personnel expenses

The Group’s nominal labour productivity and labour cost efficiency increased year on year, mainly through revenue growth (see the section Employees and 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.

Competition continues to be stiff in all segments of the construction market and in 2018 public investment is not expected to grow substantially compared with 2017. Thus, builders’ bid prices are under strong competitive pressure in a situation where the prices of construction inputs have been trending upwards moderately but consistently for several quarters. Bidders for contracts include not only rival general contractors but also former subcontractors. This is mainly attributable to the state and local governments’ policy to keep the qualification requirements of public procurement tenders low, which sometimes results in the sacrifice of quality and adherence to deadlines to the lowest possible price. We acknowledge the risks inherent in the performance of contracts signed in an environment of stiff competition and rising input prices. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered noticeably and competition is tough is risky because negative developments in the economy may quickly render the contract onerous. In setting our prices in such an environment, we focus on ensuring a reasonable balance of contract performance risks and tight cost control.

Demand for construction services continues to be strongly influenced by the volume of public investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros. Although the amount exceeds the figure for the previous financial framework, the amounts earmarked for construction work are substantially smaller than in the previous budget period. Projects supported by the EU during the 2014-2020 financial framework had a visible impact on the construction sector in 2017 and in the following years the process is expected to accelerate.

In the light of the above factors, we expect that in 2018 our business volumes will remain at the same level as in 2017. Our action plan foresees flexible resource allocation aimed at finding more profitable contracts and performing them effectively. According to its business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.

Our business is also influenced by seasonal changes in weather conditions, which have the strongest impact on infrastructure construction where a lot of work is done outdoors (road and port construction, earthwork, etc.). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our strategy is to counteract the seasonality of infrastructure operations with building construction that is less exposed to seasonal fluctuations. Our long-term goal is to be flexible and keep our two operating segments in relative balance (see also the chapter Performance by business line). Where possible, our entities implement different technical solutions that allow working efficiently also in changeable conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific insurance contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount due until the contract has been completed. To remedy construction deficiencies which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 31 December 2017, the Group’s warranty provisions (including current and non-current ones) totalled 1,262 thousand euros (31 December 2016: 1,212 thousand euros).

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

Financial risks

Credit risk

During the period, we recognised credit losses of 37 thousand euros. A year earlier, credit losses totalled 547 thousand euros, comprising impairment losses on trade receivables of 138 thousand euros and impairment losses on other receivables of 409 thousand euros. The overall credit risk exposure of receivables is low because the solvency of prospective customers is evaluated, the share of public sector customers is large, and customers’ settlement behaviour is consistently monitored. The main indicator of the realisation of credit risk is settlement default that exceeds 180 days along with no activity on the part of the debtor that would confirm the intent to settle.

Liquidity risk

The Group remains exposed to higher than usual liquidity risk. At the reporting date, the Group’s current assets exceeded its current liabilities 1.11-fold (31 December 2016: 1.20-fold). The key factor which influences the current ratio is the classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities (particularly overdrafts) for a period exceeding twelve months.

Because the political and economic situation in Ukraine is still complicated, we believe that the Group’s Ukrainian investment properties cannot be realised in the short term. Accordingly, at the reporting date the Group’s loans to its Ukrainian associates of 8,492 thousand euros were classified as non-current assets.

For better cash flow management, we use overdraft facilities and factoring by which we counter the mismatch between the settlement terms agreed with customers and subcontractors. Under IFRS EU, borrowings have to be classified into current and non-current based on contract terms in force at the reporting date. As at 31 December 2017, the Group’s short-term borrowings totalled 16,197 thousand euros, including factoring liabilities of 5,648 thousand euros. Based on our prior experience with banks, we expect that out of the above amount contracts of 13,288 thousand euros will be extended when their maturity dates arrive.

At the reporting date, the Group’s cash and cash equivalents totalled 8,915 thousand euros (31 December 2016: 9,786 thousand euros).

Interest rate risk

Our interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. During the period, interest-bearing borrowings grew by 10,612 thousand euros year on year. Factoring liabilities and use of overdraft facilities increased whereas loan and finance lease liabilities decreased slightly (see also the section Liquidity risk). At 31 December 2017, interest-bearing borrowings totalled 29,990 thousand euros (31 December 2016: 19,399 thousand euros). Interest expense for 2017 amounted to 655 thousand euros (2016: 681 thousand euros).

The main source of interest rate risk is a possible rise in the variable component of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In the light of the Group’s relatively heavy loan burden, this would cause a significant rise in interest expense, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. We have entered into a derivative contract to manage the risks resulting from changes in the interest rates of the finance lease contract for the acquisition of a new asphalt concrete plant.

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in the currency of the host country, i.e., in euros (EUR), Ukrainian hryvnias (UAH), and Swedish kronas (SEK).

The exchange rate of the hryvnia has been unstable because the political and economic environment in Ukraine continues to be complicated due to the conflict between Ukraine and Russia which broke out at the beginning of 2014. Moreover, at the beginning of 2015 the National Bank of Ukraine decided to discontinue determining the national currency’s indicative exchange rate. In 2017, the hryvnia weakened against the euro by around 15%. For our Ukrainian subsidiary, this meant additional foreign exchange losses from the translation of euro-denominated loans into the local currency. Relevant exchange losses totalled 416 thousand euros (2016: 195 thousand euros). Exchange gains and losses on financial instruments are recognised in Finance income and Finance costs respectively. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

Our Ukrainian and non-Ukrainian entities’ reciprocal receivables and liabilities which are related to the construction business and denominated in hryvnias do not give rise to exchange losses. Nor do the loans provided to the Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s accounts.

In 2017, the Swedish krona weakened against the euro by around 3%. Due to adverse movements in the krona/euro exchange rate, the translation of operating receivables and payables resulted in an exchange loss of 15 thousand euros (2016: 18 thousand euros). The exchange loss has been recognised in Other operating expenses. The translation of a loan provided to the Swedish subsidiary in euros into the local currency gave rise to an exchange loss of 35 thousand euros (2016: nil euros). This exchange loss has been recognised in Finance costs.

We have not acquired derivatives to hedge our currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2018, public investment should grow slightly. However, it is still unclear for companies in which segments of the construction market and to what extent the state will be able to realise its investment plans. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the portion that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to intangible areas.
  • In the context of the market in general, investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and the National Road Administration) which will reach signature of a construction contract in 2018 will not increase substantially. The Ministry of Defence has been a positive exception for builders as its needs and activity in carrying out new procurement tenders and placing orders through a single agency, the Centre for Defence Investment, have made a significant contribution to market revival. Hence, the Estonian construction market as a whole (particularly infrastructure construction segments) will remain relatively stable.
  • The long and painful process of construction market consolidation will continue, albeit slowly. In particular, this applies to general contracting in building construction where the number of medium-sized general contractors (annual turnover of around 15-40 million euros) is too large. Based on the experience of the last major crisis it is likely that in an environment of stiff competition and rising input prices some general contractors may run into difficulties which will be passed on to several other market participants.
  • Competition remains stiff across the construction market, intensifying in different segments in line with market developments. The rise in the average number of bidders for a contract reflects this. It is clear that in the new environment of rising input prices that has emerged in the past year, efficiency is the key to success. Regrettably, the number of materials producers, suppliers, and subcontractors that are trying to survive or succeed in a difficult environment by dishonest means, e.g., by supplying goods with concealed defects or considerably lower quality than the one recorded in the product certificate, has increased quite rapidly. If the trend continues, both construction service providers and end-customers will have to apply strict and thorough quality control measures to make sure that the outcome meets their expectations. Unfair competition is putting visible pressure on prices and the quality of the construction service. Unfortunately, the problem is also underpinned by the customers’ (including state institutions’ and state-owned companies’) increasing tendency to lower the bidders’ qualification requirements and prioritise quality more on paper than in practice.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in its business plan and set sales prices that are affordable for prospective buyers. Despite the market situation, the housing market sustained growth also in 2017, accounting for a somewhat disproportionately large share of the total construction market and thus amplifying associated risks.
  • There is a growing contrast between the stringent terms of public contracts, which require the builder to agree to extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and the modest participation requirements. Lenient qualification requirements and the precondition of making a low bid have made it relatively easy for an increasing number of builders to win a contract but have heightened the risks taken by customers in terms of funding, deadlines and quality during the contract performance phase and the subsequent warranty period.
  • The past year has brought a rise in the prices of construction inputs, particularly in building construction. At first, general contractors tried to absorb the cost increase by making margin concessions but their capacity for doing this has been practically exhausted. The construction market includes an increasing number of areas where changes in the environment (including materials producers’ rapid and successful entry into foreign markets) may trigger a sharp price increase. The rise in housing construction has lengthened the supply terms of various essential materials and services considerably, making it impossible to carry out all processes in the former optimistic timeframes. As a result, activities require more extensive planning or may need to be postponed.
  • The persisting shortage of skilled labour (including project and site managers) is restricting companies’ performance capacities, affecting different aspects of the construction process, including quality. Labour migration to the Nordic countries will remain steady and the number of job seekers who return to the Estonian construction market is not likely to increase considerably. All of the above sustains pressure for a wage increase, particularly in the category of the younger and less experienced workforce whose mobility and willingness to change jobs is naturally higher.


In Ukraine, we mainly offer general contracting and project management services to private sector customers in the segment of building construction. Political and economic instability continues to restrict the adoption of business decisions but construction activity in Kiev and the surrounding area has not halted. In 2018, we will continue our Ukrainian operations primarily in the Kiev region but the preparations made in western Ukraine are also bearing fruit: in October 2017, we signed a large-scale contract in Lviv. Based on our order book, we expect that in 2018 it may be possible that our Ukrainian business volumes will increase compared to 2017. Despite the military conflict in eastern Ukraine, for Nordecon the market situation has not deteriorated compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have considerably better prospects for increasing our operations and profitability. The Ukrainian government’s recent crackdown on cash-in-hand work is definitely a step in the right direction, which in the long term should improve our position in the Ukrainian construction market. We assess the situation in the Ukrainian market regularly and critically and are ready to restructure our operations as and when necessary. Should the crisis in eastern Ukraine spread (which at the date of release of this report is highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects, which have been put on hold, or signing a construction contract with a prospective new owner.


In Finland, we have provided mainly subcontracting services in the concrete work segment but, based on experience gained, have started preparations for expanding into the general contracting market. The local concrete work market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Our policy is to maintain a rational approach and avoid taking excessive risks.


We entered the Swedish market in July 2015, when we acquired a 100% stake in SWENCN AB, a company registered in the Kingdom of Sweden. In the Swedish market, we intend to offer mainly the construction of residential and non-residential buildings, particularly in central Sweden. On gaining experience in the new market, we have prioritised quality and the observance of deadlines and have therefore accepted lower profitability. As regards our longer-term goals and the plan to build a viable and strong organisation that would compete successfully in the Swedish market, we are positive about the developments so far and see potential for sustaining business growth and operating profitably in a large market when we have been able to stabilise order book growth at the desired level.


Nordecon (www.nordecon.com) is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine, Finland and Sweden. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. The consolidated unaudited revenue of the Group in 2017 was 231 million euros. Currently Nordecon Group employs close to 740 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

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

Nordecon_investor presentation Q4_2017.pdf