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Published: 2016-02-11 07:00:00 CET
Quarterly report

2015 fourth quarter and twelve months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the fourth quarter and 12 months of 2015 (unaudited), overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

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


Condensed consolidated interim statement of financial position

EUR’000 31 December 2015 31 December 2014
Current assets    
Cash and cash equivalents 6,332 8,802
Trade and other receivables 19,078 23,235
Prepayments 1,579 1,201
Inventories 24,983 24,788
Total current assets 51,972 58,026
Non-current assets
Investments in equity-accounted investees 1,178 694
Other investments 26 26
Trade and other receivables 8,940 11,211
Investment property 3,549 3,549
Property, plant and equipment 9,654 9,319
Intangible assets 14,609 14,633
Total non-current assets 37,956 39,432
TOTAL ASSETS 89,928 97,458
Current liabilities    
Loans and borrowings 15,715 20,588
Trade payables 20,715 26,267
Other payables 7,309 7,542
Deferred income 3,233 1,786
Provisions 825 799
Total current liabilities 47,797 56,982
Non-current liabilities
Loans and borrowings 5,098 3,145
Trade payables 104 109
Other payables 96 96
Provisions 768 759
Total non-current liabilities 6,066 4,109
Share capital 20,692 20,692
Own (treasury) shares -1,582 -1,582
Share premium 547 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,355 771
Retained earnings 10,960 11,714
Total equity attributable to owners of the parent 34,526 34,696
Non-controlling interests 1,539 1,671
TOTAL EQUITY 36,065 36,367


Condensed consolidated interim statement of comprehensive income

EUR’000   Q4 2015 Q4 2014 FY 2015 FY 2014
Revenue    31,962  40,353 145,515 161,289
Cost of sales   -29,232 -39,331 -136,484 -151,476
Gross profit   2,730 1,022 9,031 9,813
Marketing and distribution expenses   -138 -138 -412 -558
Administrative expenses   -1,608 -1,650 -5,026 -5,656
Other operating income   175 489 464 792
Other operating expenses   -41 -87 -124 -376
Operating profit/loss   1,118 -364 3,933 4,015
Finance income   164 252 655 738
Finance costs   -3,418 -720 -4,383 -2,301
Net finance costs   -3,254 -468 -3,728 -1,563
Share of profit/loss of equity-accounted investees    -8  -123 225 85
Profit/loss before income tax   -2,144 -955 430 2,537
Income tax   0 3 -257 -239
Profit/loss for the period   -2,144 -952 173 2,298
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   197 348 584 1,069
Total other comprehensive income   197 348 584 1,069
Profit/loss attributable to:          
- Owners of the parent   -2,315 -651 167 1,956
- Non-controlling interests   171 -301 6 342
Profit/loss for the period   -2,144 -952 173 2,298
Total comprehensive income/expense attributable to:          
- Owners of the parent   -2,118 -303 751 3,025
- Non-controlling interests   171 -301 6 342
Total comprehensive income/expense for the period   -1,947 -604 757 3,367
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR)   -0.08 -0.02 0.01 0.06
Diluted earnings per share (EUR)   -0.08    -0.02 0.01 0.06


Condensed consolidated interim statement of cash flows

EUR’000 FY 2015 FY 2014
Cash flows from operating activities    
Cash receipts from customers1 179,119 192,701
Cash paid to suppliers2 -151,033 -163,690
VAT paid -5,407 -5,429
Cash paid to and for employees -19,921 -19,384
Income tax paid -103 -184
Net cash from operating activities 2,655 4,014
Cash flows from investing activities    
Acquisition of property, plant and equipment -480 -355
Acquisition of intangible assets 0 -13
Proceeds from sale of property, plant and equipment 337 189
Acquisition of a subsidiary 0 -737
Acquisition of investments in associates -355 -44
Cash received from liquidation of investments in associates 0 1
Loans provided -291 -292
Repayment of loans provided 124 227
Dividends received 108 4
Interest received 366 7
Net cash used in investing activities -191 -1,013
Cash flows from financing activities    
Proceeds from loans received 2,099 7,815
Repayment of loans received -3,449 -11,194
Payment of finance lease liabilities -1,726 -1,432
Interest paid -767 -852
Dividends paid -1,091 -940
Other payments made 0 -168
Net cash used in financing activities -4,934 -6,771
Net cash flow -2,470 -3,770
Cash and cash equivalents at beginning of period 8,802 12,575
Effect of movements in foreign exchange rates 0 -3
Decrease  in cash and cash equivalents -2,470 -3,770
Cash and cash equivalents at end of period 6,332 8,802

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

2 Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon group ended the year 2015 with a gross profit of 9,031 thousand euros (2014: 9,813 thousand euros) and a gross margin of 6.2% (2014: 6.1%). Despite increasing competition, we were able to maintain our gross margin at the level of 2014. Compared with the preceding year, the gross margin of the Infrastructure segment strengthened noticeably: from 6.8% to 8.6%. Most of the profit was earned in road construction and maintenance where margin improvement was underpinned by operational streamlining as well as a decline in certain input prices (materials such as bitumen). The profitability of the Buildings segment declined somewhat, largely due to strong competitive pressure that affected the margins of new contracts secured in 2015. However, we would like to highlight the fourth quarter where the Group’s gross margin rose to 9.3% compared with 3.6% a year earlier and both of our main operating segments delivered margin improvement.

The Group’s administrative expenses for 2015 totalled 5,026 thousand euros, a decrease of around 11% from a year earlier (2014: 5,656  thousand euros). The ratio of administrative expenses to revenue was 3.5% (2014: 3.5%). Our cost-control measures continue to yield strong results: we have been able to keep administrative expenses below the target ceiling, i.e., 4% of revenue.

The Group ended 2015 with an operating profit of 3,933 thousand euros (2014: 4,015 thousand euros) and EBITDA of 5,769 thousand euros (2014: 5,585 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were smaller than a year earlier. In 2015, the Ukrainian currency weakened by around 27%, which meant that Group companies whose functional currency is the hryvnia had to restate their euro-denominated liabilities. Exchange losses reported within finance costs totalled 574 thousand euros (2014: 1,299 thousand euros). The same movements in the exchange rate increased the translation reserve reported in equity by 584 thousand euros (2014: 1,069  thousand euros) and the net effect of exchange differences on the Group’s net assets was a gain of 10 thousand euros (2014: a loss of 230 thousand euros).

Net profit for 2015 was strongly influenced by the fourth-quarter write-down of loans provided for two real estate development projects in Ukraine. The write-down of 2,977 thousand euros, which was recognised in finance costs, is attributable to Ukraine’s continuing economic difficulties and the weakening of the hryvnia, which have lowered the prices of commercial real estate and relevant demand.

Nordecon group’s net profit for 2015 amounted to 173 thousand euros (2014: 2,298 thousand euros), of which net profit attributable to owners of the parent, Nordecon AS, was 167 thousand euros (2014: 1,956 thousand euros).

Cash flows

In 2015, operating activities generated a net cash inflow of 2,655 thousand euros (2014:  an inflow of 4,014 thousand euros). Cash flows continue to be strongly affected by the fact that neither public nor private sector customers are required to make advance payments while the Group has to make prepayments to sub-contractors, materials suppliers, etc. In the current market situation, a prepayment from a customer is an exception rather than a rule, which puts additional pressure on construction companies’ cash flows. Cash inflow is also reduced by retentions, which generally extend from 5 to 10% of the contract price and are released only at the end of the construction period. In addition, cash flow is influenced by a mismatch between settlement terms: the ones agreed with customers are relatively long and in the case of public procurement mostly extend from 30 to 56 days while subcontractors generally have to be paid within 21 to 45 days. We use factoring to counteract the cyclical nature of the construction business and overdraft facilities to raise additional working capital. The slight increase in payments to employees results from bonuses paid for projects completed in the prior year with higher than expected profit margins.

Investing activities resulted in a net outflow of 191 thousand euros (2014: a net outflow of 1,013 thousand euros). Cash flows from investing activities were mainly influenced by acquisitions of property, plant and equipment of 480 thousand euros (2014: 355 thousand euros) and sales of used property, plant and equipment for 337 thousand euros (2014: 189 thousand euros). In 2015, the Group restored an associate’s negative share capital by making a capital contribution of 355 thousand euros. Through the same transaction, the associate settled its loan interest liabilities to the Group. Dividends received amounted to 108 thousand euros (2014: 4 thousand euros).

Financing activities resulted in a net cash outflow of 4,934 thousand euros (2014: a net outflow of 6,771 thousand euros). Financing cash flows are strongly influenced by loan and finance lease payments. The Group continued to repay long-term investment loans; loan repayments exceeded loan receipts by 1,350 thousand euros (2014: by 3,379 thousand euros). Investments made in new road construction and maintenance equipment increased finance lease payments, which amounted to 1,726 thousand euros (2014: 1,432 thousand euros). Dividends distributed in 2015 totalled 1,091 thousand euros (2014: 940 thousand euros).

At 31 December 2015, the Group’s cash and cash equivalents totalled 6,332 thousand euros (31 December 2014: 8,802 thousand euros). Management’s comments on liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio   2015 2014 2013
Revenue (EUR’000) 145,515 161,289 173,651
Revenue change -9.8% -7.1% 8.9%
Net profit (EUR’000) 173 2,298 4,639
Net profit attributable to owners of the parent (EUR’000) 167 1,956 4,642
Weighted average number of shares 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.01 0.06 0.15
Administrative expenses to revenue 3.5% 3.5% 2.8%
EBITDA (EUR’000) 5,769 5,585 7,639
EBITDA margin 4.0% 3.5% 4.4%
Gross margin 6.2% 6.1% 6.5%
Operating margin 2.7% 2.5% 3.1%
Operating margin excluding gain on asset sales 2.4% 2.3% 2.9%
Net margin 0.1% 1.4% 2.7%
Return on invested capital 2.1% 5.8% 9.5%
Return on equity 0.5% 6.4% 14.2%
Equity ratio 40.1% 37.3% 33.4%
Return on assets 0.2% 2.3% 4.3%
Gearing 25.5% 24.8% 23.5%
Current ratio 1.09 1.02 1.02
As at 31 December 2015 2014 2013
Order book (EUR’000) 125,698 83,544 64,286


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 2015, around 4% of the Group’s revenue was generated outside Estonia compared with 6% in 2014. The contribution of foreign markets has decline due to lower sales in Finland.

    2015 2014 2013
Estonia   96% 94% 95%
Ukraine   3% 2% 0%
Finland   1% 4% 5%

Finnish revenues resulted from concrete works in the building construction segment. The contribution of the Ukrainian market, where we mainly continued to perform one building construction contract, increased.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on a single market. However, economic conditions in our chosen foreign markets are also volatile and have a strong impact on our current results. Increasing the contribution of foreign markets is on Nordecon’s longer-term strategic agenda. The Group’s vision of its 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 also in stressed circumstances where one segment experiences noticeable shrinkage.

Nordecon’s revenues for 2015 totalled 145,515 thousand euros, 9.8% down from the 161,289 thousand euros generated in 2014. Revenue declined in both of the main operating segments. In the Buildings segment, the decrease resulted from lower volumes in the industrial and warehouse facilities sub-segment. In other sub-segments, revenues grew. The revenues of Infrastructure segment continued to be supported by the road construction sub-segment whose volumes grew somewhat compared with 2014. In other sub-segments, revenue declined sharply.

The segments’ revenues for 2015 were 94,341 thousand euros for Buildings and 47,628 thousand euros for Infrastructure. The corresponding figures for 2014 were 105,145 thousand euros and 51,585 thousand euros (see note 8).

Operating segments*   2015 2014 2013
Buildings   64% 65% 41%
Infrastructure   36% 35% 59%

* In the directors’ report, the Ukrainian buildings segment and the EU buildings segment, which are disclosed separately in the financial statements as required by IFRS 8 Operating Segments, are presented as a single segment.

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


Sub-segment revenues

Compared with 2014, the revenue structure of the Buildings segment has changed considerably. The contribution of the industrial and warehouse facilities sub-segment has contracted sharply while the contributions of other sub-segments have increased. The largest revenue source continues to be the commercial buildings sub-segment.

The largest project in progress in the commercial buildings sub-segment is the Arsenal Centre in Tallinn. The construction of the Veerenni business building in Tallinn has reached the final phase. In 2015, we completed the reconstruction of the Estonia Spa in Pärnu and the construction of an office building in Lõõtsa street in Tallinn and the Viimsi Centre in Viimsi. In recent years, the commercial buildings sub-segment has generated around half of the revenue of the Buildings segment. It is not likely that investment in commercial properties will continue at the same rate. Thus, we expect the revenues of the commercial buildings sub-segment to decline in 2016.

Most of the revenue of the apartment buildings sub-segment resulted from general contracting. A substantial share of the work was done in Tallinn and the main revenue contributors were phases II and III of the Tondi residential quarter and phases I and II of the Pikksilma homes in Kadriorg. We are proud to report that the residential quarter we are completing in Lepse street in Kiev, the capital of Ukraine, was selected as one of the city’s three best housing development projects of the year. Work on all those projects will continue in 2016. We expect the contribution of the apartment buildings sub-segment to continue growing also in the current year. The contribution of our own development projects in Tartu and Tallinn continues to increase as well. In the first two development phases of the Tammelinn project in Tartu we have completed 3 apartment buildings.  Sales have been very successful: by the year-end, 52 of the 55 apartments had been sold. In phase III, which is still under construction, 9 of the 20 apartments have been sold (www.tammelinn.ee). By the year-end, we had also sold 9 of the 20 apartment ownerships in the first three phases of our Magasini 29 development project in Tallinn (www.magasini.ee). While carrying out our own development projects, we monitor with due care potential risks in the housing development market which may result from rapid growth in the supply of new housing and a comparative price increase.

The volumes of the public buildings sub-segment have grown mainly through the state’s increasing investment in national defence. In 2015, we completed and delivered on time the buildings of the Võru state secondary school and the Lasva kindergarten and the work done on the premises of the Kuperjanov infantry battalion. We will continue building the Piusa border guard station, a building complex at the Ämari air base, and a barracks at the Tapa military base and have started with the design and construction of a warehouse complex at Lintsi.

In the industrial and warehouse facilities sub-segment, volumes have declined due to a decrease in both agricultural projects, which used to dominate the sub-segment for a long time thanks to the EU support, and  warehouse and logistics projects. The industrial and warehouse facilities sub-segment is not expected to grow significantly in 2016.

Revenue distribution in Buildings segment   2015 2014 2013
Commercial buildings   50% 42% 45%
Apartment buildings   22% 18% 5%
Public buildings   16% 7% 21%
Industrial and warehouse facilities   12% 33% 29%

Similarly to the two previous years, in 2015 the main revenue source in the Infrastructure segment was road construction. We completed the work started in 2014 on two major road construction projects: one in Tartu (construction package 5 of the Tartu western bypass) and the other in Keila (Keila-Valkse section of national road no. 8 Tallinn-Paldiski, km 24.9-29.5). In addition, we performed numerous smaller road repair projects whose total volume was substantial. The more important ones included surface dressing in Võru and Põlva counties and the reconstruction of the Tartu-Märja road. Compared with 2014, the volume of road construction for the private sector increased (e.g., ETK logistics centre).  In addition, Nordecon continues to deliver road maintenance services in the Järva and Hiiu counties and the Keila and Kose maintenance areas in Harju county. We expect that road construction will remain the main revenue source in the Infrastructure segment also in 2016 and that similarly to 2015 most of the work will be done under small or medium-sized reconstruction and repair contracts.

Shrinkage in support granted from the EU structural funds continues to have a strong impact on environmental engineering whose volumes have decreased more rapidly than those of other sub-segments. The contracts secured by other engineering sub-segment (utility network construction) are small and growth of the sub-segment is unlikely.

In specialist engineering, we did small-scale port construction work on the island of Hiiumaa. Investments in hydraulic engineering as well as the Group’s relevant revenue have declined in recent years and we do not expect to secure any large hydraulic engineering projects in the near term. The revenues of the sub-segment may increase through other complex engineering projects but their addition is likely to be irregular.

Revenue distribution in Infrastructure segment   2015 2014 2013
Road construction and maintenance   81% 72% 54%
Other engineering   14% 19% 26%
Environmental engineering   4% 7% 12%
Specialist engineering (including hydraulic engineering)   1% 2% 8%


Order book

At 31 December 2015, the Group’s order book (backlog of contracts signed but not yet performed) stood at 125,698 thousand euros, a roughly 50% increase on the previous year-end. Order books grew in both the Buildings and the Infrastructure segment. In the fourth quarter of 2015, we secured new contracts of 56 million euros, which is recent years’ largest quarterly order book growth.

As at 31 December   2015 2014 2013
Order book (EUR’000)  
125,698 83,544 64,286

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 72% and 28% of the Group’s order book respectively (31 December 2014: 73% and 27% respectively). It is likely that the Buildings segment will continue to dominate the order book in the next few years.

Compared with a year earlier, the order book of the Buildings segment grew by around 48%. Major growth was posted in all sub-segments except commercial buildings whose order book contracted by over 60%. The order book of the apartment buildings sub-segment grew mostly through contracts signed at the end of 2015 for the construction of the Meerhof 2.0 building complex at Pirita tee 20a and an apartment building at Virbi 8/10 in Tallinn, Estonia, and five apartment buildings in the city of Brovary in the Kiev region in Ukraine (the contracts were secured under a frame agreement signed in autumn 2015). It should also be noted that in October 2015 we signed a contract for the construction of a five-storey apartment building in Stockholm, Sweden, where most of the construction work will be done in 2016. Growth in the order book of the public buildings sub-segment is attributable to the design and construction of the Järveküla school and the Lintsi warehouse complex that started at the end of 2015. A substantial share of work under those contracts will be performed in 2016. Slight growth in the order book of the industrial and warehouse facilities sub-segment results from the construction of  a warehouse for Riigiressursside Keskus and the South Terminal (a cereals storage and handling complex) for farmers’ cooperative KEVILI.

Compared with a year earlier, the order book of the Infrastructure segment grew by around 57%. The rise was mainly underpinned by growth in the road construction sub-segment, which was supported by the contracts secured for the performance of road maintenance services in the Järva, Hiiu, and Kose road maintenance areas in the period 2016-2021. The order books of the environmental engineering sub-segment, which signed a contract for the design and construction of an extension to the Kohtla-Järve wastewater treatment plant, and other engineering sub-segment also grew somewhat. However, due to the small size of their contracts, this did not have a strong impact on the segment’s overall portfolio growth. According to our estimates, in 2016 the volume of public sector investments will not increase substantially compared with 2015 and the new EU budget period (2014-2020) will not have any significant impact on the construction sector before the second half of the year. Hence, we do not expect the revenues of the Infrastructure segment to increase in 2016 (for further information, see the Business risks section of the chapter Description of the main risks).

In the light of order book growth and the developments reported in our chosen markets, we forecast probable volume growth for 2016. In an environment of stiff competition, we pursue the policy of avoiding unjustified risks that could realize on the execution of contracts and have an adverse impact on our performance.  Instead, we prefer to keep costs under control and focus on projects with positive prospects.

Between the reporting date (31 December 2015) and the date of release of this report, Group companies have secured additional construction contracts in the region of 12 125 thousand euros.



Staff and personnel expenses

In 2015, the Group (the parent and the subsidiaries) employed, on average, 690 people including 356 engineers and technical personnel (ETP). 

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

    2015 2014 2013
ETP   356 357 357
Workers   334 375 400
Total average   690 732 757

Compared with a year earlier, headcount decreased by around 6% through a decline in the number of workers, which resulted from shrinkage in the work performed with own resources. Personnel expenses dropped by around 9%, year over year, through a smaller headcount and a decrease in performance bonuses paid. The Group’s personnel expenses for 2015 including all taxes totalled 18,248 thousand euros (2014: 20,099 thousand euros).

The service fees of members of the council of Nordecon AS for 2015 amounted to 139 thousand euros and associated social security charges totalled 46 thousand euros (2014: 141 thousand euros and 47 thousand euros respectively). The provision for the council’s performance bonuses, made based on the Group’s performance indicators, amounted to 37 thousand euros and the provision for associated social security charges totalled 12 thousand euros (2014: 113 thousand euros and 37 thousand euros respectively).

The service fees of members of the board of Nordecon AS for 2015 amounted to 322 thousand euros and associated social security charges totalled 106 thousand euros (2014: 262 thousand euros and 87 thousand euros respectively). The provision for the board’s performance bonuses, made based on the Group’s performance indicators, amounted to 188 thousand euros and the provision for associated social security charges totalled 62 thousand euros (2014: 387 thousand euros and 128 thousand euros respectively).


Labour productivity and labour cost efficiency

Nominal labour productivity dropped compared with 2014 because revenue decrease outstripped the decline in workforce.

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:

    2015 2014 2013
Nominal labour productivity (rolling), (EUR’000)   210.9 220.4 229.4
Change against the comparative period   -4.3% -4.0% 9.9%
Nominal labour cost efficiency (rolling), (EUR)   8.0 8.0 8.4
Change against the comparative period   -0.6% -4.8% -11.6%


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


Description of the main risks

Business risks

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

Competition continues to be fierce in all segments of the construction market. In 2016, public sector investment is not likely to grow substantially compared with 2015. There is strong competitive pressure on builders’ bid prices in a situation where input prices have not decreased noticeably. Competition is particularly aggressive in general building construction. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered significantly and competition is tough is risky because negative developments in the economy may quickly render the contract onerous. Thus, in price-setting we currently prioritise a reasonable balance of contract performance risks and tight cost control over revenue growth.

Demand for construction services continues to be strongly influenced by the volume of public sector investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros, exceeding the figure of the previous financial framework, but the amounts earmarked for construction work are substantially smaller. Moreover, these allocations are not expected to have an impact on the construction sector before the second half of 2016.

In the light of the above factors, we see opportunities for business growth compared with 2015 mostly in our chosen foreign markets. We expect that in Estonia infrastructure construction volumes will remain at the level of 2015 while investment in building construction may grow slightly. Our action plan foresees directing our resources (including some of the labour of the Infrastructure segment) to increasing the share of contracts secured from the private sector. According to its business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and in the current market situation particularly some infrastructure) segment.

The Group’s business is also influenced the seasonal nature of construction operations. Seasonality is the strongest in infrastructure construction, which is more exposed to changes in weather conditions (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. Thus, 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). In addition, where possible, our entities implement appropriate technical solutions that allow working efficiently also in changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific insurance contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 31 December 2015, the Group’s warranty provisions (including current and non-current ones) totalled 1,184 thousand euros (31 December 2014: 1,162 thousand euros).

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

Financial risks

Credit risk

In 2015, the Group did not incur any significant credit losses. The credit risk exposure of the Group’s receivables is low because the solvency of all prospective customers is assessed, the share of public sector customers is large and the customers’ settlement behaviour is monitored on a continuous basis. The main indicator of the realization of credit risk is settlement default that exceeds 180 days coupled with no activity on the part of the debtor that would confirm the intent to settle.

In 2015, impairment losses on receivables totalled 17 thousand euros (2014: 14 thousand euros).

Liquidity risk

The Group remains exposed to higher than usual liquidity risk resulting from a mismatch between the long settlement terms demanded by customers (mostly 30 to 56 days) and increasingly shorter settlement terms negotiated by subcontractors (mostly 21 to 45 days). The Group counteracts the differences in settlement terms by using factoring where possible.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.09-fold (31 December 2014: 1.02-fold). The key factors which influence the current ratio are the classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities for a period exceeding twelve months.

The political situation in Ukraine remains tense and we believe that the realization of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date the Group’s loan receivables from its Ukrainian associates of 8,302 thousand euros were classified as non-current assets.

Interest-bearing liabilities account for a significant share of our current liabilities. Under IFRS EU, loan commitments have to be classified into current and non-current items based on contract terms in force at the reporting date. So far, banks have generally refinanced liabilities for periods not exceeding 12 months, which is why a substantial portion of loans is classified as current although it is probable that some borrowings, particularly overdraft facilities which account for around a half of current loan liabilities, will be refinanced when the 12 months have passed.

At the reporting date, the Group’s cash and cash equivalents totalled 6,332 thousand euros (31 December 2014: 8,802 thousand euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. In 2015, the Group’s interest-bearing liabilities decreased by 2,920 thousand euros compared with the year before. Current and non-current bank loans decreased by 2,614 thousand euros and factoring liabilities by 710 thousand euros. Finance lease liabilities grew slightly. The Group uses factoring to counteract the difference in the settlement terms agreed with customers and subcontractors (see also the chapter Liquidity risk).  At 31 December 2015, the Group’s interest-bearing loans and borrowings totalled 20,813 thousand euros (31 December 2014: 23,733 thousand euros). Interest expense for 2015 amounted to 770 thousand euros, a decrease of 231 thousand euros compared with 2014.

The main source of the Group’s interest rate risk is a possible rise in the base rate 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. In 2015, the Group did not use derivatives to hedge its interest rate risk.

Currency risk

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

The hryvnia has been weakening because the political and economic environment in Ukraine continues to be strained due to the conflict between Ukraine and Russia which broke out at the beginning of 2014 and at the beginning of 2015 the National Bank of Ukraine decided to discontinue determination of the national currency’s indicative exchange rate.

In 2015, the hryvnia weakened against the euro by around 27%. For the Group’s Ukrainian subsidiaries, this meant additional foreign exchange losses on the translation of their euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 574 thousand euros (2014: 1,299 thousand euros). Exchange gains and losses on financial instruments have been recognised in Finance income and Finance costs in the statement of comprehensive income. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

The reciprocal receivables and liabilities of the Group’s Ukrainian and non-Ukrainian entities which are connected with the construction business and denominated in hryvnias do not give rise to exchange losses. Nor do the loans provided to the Group’s Ukrainian associates in euros give rise to exchange losses that ought to be recognised in the Group’s statement of comprehensive income.

The Group has not acquired derivatives to hedge its currency risk.


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

·   In 2016, public sector investments will not grow significantly and the extent to which they can be realised is still unclear. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the share of support that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to intangible areas.

Investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and National Road Administration) that reach signature of a construction contract in 2016 will not increase significantly. As a result, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. To some extent, the situation will be improved by the positive level of private sector investments in building construction.

·   The long and painful process of construction market consolidation will continue, albeit slowly. In particular, this applies to general contracting in building construction where the number of medium-sized construction service intermediaries (annual turnover of around 15-40 million euros) is too large. Based on recent years’ experience it is likely that stiff competition and insufficient demand will cause some general contractors to go slowly out of business or shrink in size rather than merge or exit the market. According to our assessment, in recent years the process has been slowed down by the customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements to increase competition and lower the price even though this increases the risks related to security, quality, adherence to deadlines and the builder’s liability.

Competition will increase in all segments of the construction market. The average number of bidders for a contract has increased and there is a wide gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when expectations of shrinkage in demand prompted a fall in construction prices, which triggered a slide in the prices of many construction inputs. However, currently we do not see any noticeable downshift in input prices and companies that are banking on this in the bidding phase may run into difficulty. Aggressive competition is putting visible pressure on contract prices and, thus, also profit margins.

·   In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the business plan and, thus, set sales prices that are affordable for prospective buyers. The prices of new apartments are relatively high compared to the standard of living and the banks’ lending terms are strict. This has held back rapid growth of the housing market but in the second half of 2015 the supply of new apartments grew significantly, slowing down the sale of apartments with relatively high sales prices. Similarly to previous periods, successful projects include those that create or fill a niche.

·   There is an increasing contrast between the stringent terms of public sector contracts, which require the builder to agree to extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc., and modest tendering requirements. Low qualification requirements and the precondition of making a low bid have made it easier for builders to win a contract but have heightened the risks taken by customers in respect of contract performance and delivery.

·   The prices of construction inputs will remain relatively stable but growth in housing development has made it unlikely that the prices charged by local building construction subcontractors would decline any further. Certainly there are areas where major changes in the environment may trigger more abrupt price changes.

·   Shortage of skilled labour (including project and site managers) will persist but this will weaken the quality of the construction process/service rather than the companies’ performance capabilities. Labour migration to the Nordic countries will remain steady and even though construction volumes (particularly in Finland) will decline, the number of job seekers that will return to the Estonian construction market will not increase considerably. In combination with the above, this will sustain pressure for a wage increase.

Latvia and Lithuania

It is not likely that the Group will enter the Latvian construction market in 2016. However, we do not rule out the possibility of carrying out certain projects in Latvia through our Estonian entities, with the involvement of partners where necessary. Undertaking a project assumes that it can be performed profitably.

The decision does not change our strategy for the future, i.e., the goal to operate in our neighbouring construction market through local subsidiaries.

The operations of the Group’s Lithuanian subsidiary, Nordecon Statyba UAB, have been suspended. We continue to monitor developments in the Lithuanian construction market that have been quite positive in the Baltic context. Temporary suspension of operations does not cause any major costs for the Group and does not change our strategy for the future, i.e., the goal to operate in the Lithuanian construction market through local subsidiaries.


In Ukraine, we provide general contracting and project management services to private sector customers in the segment of building construction. The unstable political and economic situation hinders adoption of business decisions but construction activity in Kiev and its vicinity has not halted. In 2016, the Group will continue its business in the Kiev region and our current Ukrainian order book is larger than a year ago. Despite the armed conflict in eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have considerably better prospects for increasing our operations and profitability. We monitor the situation in the Ukrainian construction market closely and consistently and are ready to restructure our operations as and when necessary. Should the crisis spread to Kiev (highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects that have been put on hold or signing a construction contract with a prospective new owner.


In Finland, we have provided mainly subcontracting services in the concrete segment but based on experience gained, we are ready to start performing some more complex works. The local concrete works 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.


In July 2015, Nordecon acquired 100% ownership interest in SWENCN AB, a company registered in the Kingdom of Sweden, and entered the Swedish market. We intend to offer mainly construction of residential and non-residential buildings, particularly in central Sweden. In October 2015, the first contract for the construction of a five-storey apartment building in Stockholm was concluded. The cost of the work amounts to around 8.4 million euros. We will continue the work aimed at increasing our business volumes in Sweden.



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 2014 was 161 million euros and net profit 2.3 million euros. Currently Nordecon Group employs close to 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.


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

Investor presentation_12m_2015.pdf
Nordecon_Interim_ report_Q4_2015.pdf