English Estonian
Published: 2014-11-06 15:30:02 CET
Quarterly report

2014 III quarter and nine months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the third quarter and nine months of 2014 (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 30 September 2014 31 December 2013
Current assets    
Cash and cash equivalents 7,704 12,575
Trade and other receivables 34,652 28,101
Prepayments 1,429 1,923
Inventories 26,346 23,785
Total current assets 70,131 66,384

Non-current assets
Investments in equity-accounted investees 771 566
Other investments 26 26
Trade and other receivables 11,253 10,645
Investment property 3,560 3,549
Property, plant and equipment 9,033 9,030
Intangible assets 14,590 14,494
Total non-current assets 39,233 38,310
TOTAL ASSETS 109,364 104,694
Current liabilities    
Loans and borrowings 26,396 23,875
Trade payables 30,252 26,372
Other payables 6,539 7,982
Deferred income 3,053 6,102
Provisions 508 913
Total current liabilities 66,748 65,244

Non-current liabilities
Loans and borrowings 3,976 3,303
Trade payables 155 156
Other payables 96 96
Provisions 969 969
Total non-current liabilities 5,196 4,524
Share capital 20,692 19,657
Treasury shares -1,582 0
Share premium 547 0
Statutory capital reserve 2,554 2,554
Other reserves 20 0
Translation reserve 423 -298
Retained earnings 12,365 10,681
Total equity attributable to owners of the parent 35,019 32,594
Non-controlling interests 2,401 2,332
TOTAL EQUITY 37,420 34,926

Condensed consolidated interim statement of comprehensive income


EUR’000 Q3 2014 Q3 2013 9M 2014 9M 2013 2013
Revenue 53,492 59,236 120,936 134,733 173,651
Cost of sales -48,913 -53,083 -112,145 -125,307 -162,342
Gross profit 4,579 6,153 8,791 9,426 11,309
Marketing and distribution expenses -76 -142 -420 -281 -452
Administrative expenses -1,535 -1,240 -4,006 -3,567 -4,922
Other operating income 129 154 270 360 464
Other operating expenses -225 -292 -256 -351 -1,096
Operating profit 2,872 4,633 4,379 5,587 5,303
Finance income 160 124 486 507 668
Finance costs -359 -329 -1,581 -887 -1,027
Net finance costs -199 -205 -1,095 -380 -359
Share of profit/loss of equity-accounted investees 186 120 208 197 -170
Profit before income tax 2,859 4,548 3,492 5,404 4,774
Income tax expense -63 -51 -242 -95 -135
Profit for the period 2,796 4,497 3,250 5,309 4,639
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations -89 82 721 49 106
Total other comprehensive income/expense -89 82 721 49 106
TOTAL COMPREHENSIVE INCOME 2,707 4,579 3,971 5,358 4,745
Profit attributable to:          
- Owners of the parent 2,386 4,409 2,607 5,137 4,642
- Non-controlling interests 410 88 643 172 -3
Profit for the period 2,796 4,497 3,250 5,309 4,639
Total comprehensive income attributable to:          
- Owners of the parent 2,297 4,491 3,328 5,186 4,748
- Non-controlling interests 410 88 643 172 -3
Total comprehensive income for the period 2,707 4,579 3,971 5,358 4,745
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.08 0.14 0.08 0.17 0.15
Diluted earnings per share (EUR) 0.08 0.14 0.08 0.17 0.15

Condensed consolidated interim statement of cash flows


EUR’000 9M 2014 9M 2013
Cash flows from operating activities    
Cash receipts from customers1 131,291 136,517
Cash paid to suppliers2 -118,250 -125,826
VAT paid -3,907 -2,419
Cash paid to and for employees -14,618 -13,403
Income tax paid -177 -2
Net cash used in operating activities -5,661 -5,133
Cash flows from investing activities    
Paid on acquisition of property, plant and equipment -284 -315
Paid on acquisition of intangible assets -14 0
Proceeds from sale of property, plant and equipment 185 191
Acquisition of a subsidiary -719 0
Acquisition of investments in associates 0 -350
Cash from liquidation of investments in associates 1 0
Loans provided -275 -377
Repayment of loans provided 106 202
Dividends received 4 4
Interest received 4 359
Net cash used in investing activities -992 -286
Cash flows from financing activities    
Proceeds from loans received 10,551 10,243
Repayment of loans received -5,887 -3,760
Payment of finance lease liabilities -1,110 -1,310
Interest paid -654 -736
Dividends paid -940 -107
Other payments made -175 0
Net cash from financing activities 1,785 4,330
Net cash flow -4,868 -1,089
Cash and cash equivalents at beginning of period 12,575 10,231
Effect of exchange rate fluctuations on cash and cash equivalents -3 -2
Decrease in cash and cash equivalents -4,868 -1,089
Cash and cash equivalents at end of period 7,704 9,140

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 first nine months of 2014 with a gross profit of 8,791 thousand euros (9M 2013: 9,426 thousand euros) and a gross margin of 7.3% (9M 2013: 7.0%). Most of the period’s profit was earned in the third quarter when performance was not impacted by adverse weather conditions and the fixed costs of a technological standstill that typically characterise the beginning of the year. In contrast to the previous year, profit was not undermined by loss-making contracts and all segments succeeded in either maintaining or improving their profit margins.

The Group’s management has highlighted the expected fall in demand and the ensuing rise in competitive pressure in previous periods already (see also the chapters Order book, Description of the main risks and Outlooks of the Group’s geographical markets) and has enforced measures for maintaining and, possibly, improving profitability in a situation where volumes decrease. We are aware that rises in input prices pose a risk for long-term contracts and continue to prioritize a contract’s anticipated profitability over revenue growth or retention.

The Group’s administrative expenses for the first nine months of 2014 totalled 4,006 thousand euros, 12% up on a year ago (9M 2013: 3,567 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 3.4% (9M 2013: 2.8%). Administrative expenses have grown through a rise in payroll expenses and the provisions recognised in the third quarter based on the Group’s performance indicators. Our cost-control measures continue to yield strong results – administrative expenses remain below the target ceiling, i.e. 4% of revenue.

Operating profit for the first nine months amounted to 4,379 thousand euros (9M 2013: 5,587 thousand euros) while EBITDA was 5,743 thousand euros (9M 2013: 7,088 thousand euros).

Adverse movements in the euro/hryvna exchange rate gave rise to exchange losses that were significantly larger than those of previous periods. The Ukrainian hryvna weakened by around 33%, which meant that Group entities whose functional currency is the hryvna had to re-measure their euro-denominated liabilities. The Group’s exchange losses, which are reported within finance costs, totalled 817 thousand euros (9M 2013: an exchange loss of 43 thousand euros). The same exchange loss gave rise to a positive 721 thousand-euro change in the translation reserve reported in equity (9M 2013: a positive change of 49 thousand euros) and the net effect of the exchange loss on the Group’s net assets was 96 thousand euros (9M 2013: a positive net effect of 6 thousand euros).

As a result, the Group’s net profit amounted to 3,250 thousand euros (9M 2013: 5,309 thousand euros) of which the profit attributable to owners of the parent, Nordecon AS, was 2,607 thousand euros (9M 2013: 5,137 thousand euros).

Cash flows

Operating activities for the first nine months of 2014 resulted in a net cash outflow of 5,661 thousand euros (9M 2013: a net outflow of 5,133 thousand euros). In a situation where operating activities generate a profit, negative operating cash flow results primarily from a mismatch between the projects’ actual stage of completion (recognised revenue) and the amounts billed to customers. Cash inflow is also reduced by the amounts retained under the terms of construction contracts, which are released when construction activity ends. Retentions extend from 5% to 10% of the volume of a contract, being comparable to the profit margin. In addition, we continue to work on our own housing development projects but the cash flows of such projects are negative until sales commence. Projects completed in the previous year with higher than expected profit margins have also resulted in larger performance bonuses and accompanying tax charges. Operating cash flows continue to be influenced by a mismatch in settlement terms: the ones agreed with customers are long and in the case of public procurement mostly extend from 45 to 56 days while subcontractors generally have to be paid within 21 to 45 days.

Investing activities resulted in a net cash outflow of 992 thousand euros (9M 2013: a net outflow of 286 thousand euros). The largest one-off outflows resulted from a loan of 250 thousand euros to an entity of AS Nordic Contractors group (see note 14), a payment of 180 thousand euros made to purchase the remaining shares in the subsidiary AS Eston Ehitus from the non-controlling shareholders and acquisition of a further stake in Eurocon OÜ for 539 thousand euros (see note 15).

Financing activities resulted in a net cash inflow of 1,785 thousand euros (9M 2013: a net inflow of 4,330 thousand euros). Loan receipts exceeded loan repayments by 4,664 thousand euros compared with 6,483 thousand euros a year ago. The change is mainly attributable to changes in the Group’s overdraft balances.

Finance lease payments declined slightly year over year. Dividends distributed in the period totalled 940 thousand euros (9M 2013: 107 thousand euros).

At 30 September 2014, the Group’s cash and cash equivalents totalled 7,704 thousand euros (30 September 2013: 9,140 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 9M 2014 9M 2013 9M 2012 2013
Revenue (EUR’000) 120,936 134,733 117,054 173,651
Revenue change -10.2% 15.1% 13.4% 8.9%
Net profit (EUR’000) 3,250 5,309 1,988 4,639
Profit attributable to owners of the parent (EUR’000) 2,607 5,137 1,630 4,642
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.08 0.17 0.05 0.15
Administrative expenses to revenue 3.3% 2.6% 3.4% 2.8%
Administrative expenses to revenue (rolling) 3.4% 2.8% 3.3% 2.8%
EBITDA (EUR’000) 5,743 7,088 3,735 7,639
EBITDA margin 4.7% 5.3% 3.2% 4.4%
Gross margin 7.3% 7.0% 5.1% 6.5%
Operating margin 3.6% 4.1% 1.8% 3.1%
Operating margin excluding gains on sale of real estate 3.5% 4.0% 1.4% 2.9%
Net margin 2.7% 3.9% 1.7% 2.7%
Return on invested capital 6.5% 8.9% 4.6% 9.5%
Return on equity 9.0% 16.1% 6.8% 14.2%
Equity ratio 34.2% 27.0% 25.7% 33.4%
Return on assets 3.0% 4.4% 1.8% 4.3%
Gearing 33.4% 42.8% 41.1% 23.5%
Current ratio 1.05 1.12 1.08 1.02
  30 Sept 2014 30 Sept 2013 30 Sept 2012 31 Dec 2013
Order book (EUR’000) 92,455 85,765 146,070 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
Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses/past four quarters’ revenue)*100
EBITDA = operating profit + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA/revenue)*100
Gross margin = (gross profit/revenue)*100
Operating margin = (operating profit/revenue)*100
Operating margin excluding gains on sale of real estate = ((operating profit - gains on sale of non-current assets – gains on sale 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 the first nine months of 2014, around 6% of the Group’s revenue was generated outside Estonia compared with 2% in the first nine months of 2013.


  9M 2014 9M 2013 9M 2012 2013
Estonia 94% 98% 99% 95%
Finland 4% 2% 1% 5%
Ukraine 2% 0% 0% 0%

Finnish revenues comprise revenue from concrete works performed in the building construction segment. The contribution of the Finnish market has increased year over year through growth in Finnish revenues, which has been amplified by a year over year decrease in the Group’s total revenue. The contribution of the Ukrainian market has increased because we started work under a building construction contract. Still, foreign revenues for the year as a whole will probably not prove significantly larger than those of 2013.

Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive concentration on a single market. Our strategy foresees increasing foreign operations in the longer term; for further information, see the chapter Strategic agenda for 2014-2017. Our vision of the Group’s operations in foreign markets is described in the chapter Outlooks of the Group’s geographical markets.

Performance by business line

Segment revenues

The Group strives to maintain the revenues of its operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing construction operations in stressed circumstances where one segment may experience shrinkage.

Our revenue for the first nine months of 2014 amounted to 120,936 thousand euros, a 10% decrease from the 134,733 thousand euros generated in the nine months of 2013. A year ago, we were working on three large road construction projects of around 70 million euros whose contribution to the period’s revenue was considerable. Also, a year ago the volume of projects supported by the EU structural funds was larger. We drew attention to the fact that the volume of such projects would decline last year already. The revenues of the Buildings segment increased as expected through a rise in both the number and average cost of contracts secured from the private sector.

Consequently, the revenues of our two operating segments, Buildings and Infrastructure, for the first nine months of 2014 amounted to 76,690 thousand euros and 40,951 thousand euros respectively. The corresponding figures for the first nine months of 2013 were 52,294 thousand euros and 79,587 thousand euros (see note 8).


Operating segments* 9M 2014 9M 2013 9M 2012 2013
Buildings 63% 38% 42% 41%
Infrastructure 37% 62% 58% 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

In the revenue structure of the Buildings segment, the contribution of public buildings has decreased while the contributions of industrial and warehouse facilities and apartment buildings have increased. The contribution of commercial buildings has remained stable. The segment’s main revenue contributors were contracts on the construction of commercial buildings in Tallinn (the Stroomi shopping centre, an office building in Ülemiste City and Eesti Loto Maja (a commercial building)) and Narva (an extension to the ASTRI shopping centre). In Pärnu, we started the reconstruction of Estonia Spa. We expect the investment activity of private sector customers to remain robust and the contribution of the sub-segment to remain at a similar or even higher level throughout the year.

In the industrial and warehouse facilities sub-segment there has been a structural shift. In previous years, most of the revenue resulted from agricultural projects undertaken with the EU investment support. To date, the share of EU-supported projects has decreased visibly and the main contributors are warehouse facilities and logistics centres (e.g. the Smarten logistics centre). The work done for companies engaged in heavy industry has increased as well. Estonia’s economic growth is slowing but this has not yet had a negative impact on the long-cycle investment plans launched by companies in 2012 and 2013. Accordingly, we expect the revenues of the sub-segment to remain stable.

The competitive situation in the public buildings sub-segment is particularly challenging: it is hard to win a contract without taking excessive risks but our current policy is to avoid such risks. The largest projects of the period were the construction of the Translational Medicine Centre of the University of Tartu, the academic building of the NCO School of the Estonian National Defence College, phase V of St Paul’s Church in Tartu and the Võru State Secondary School. The first two were completed by the end of the reporting period. If competition remains fierce, the contribution of the sub-segment is likely to decline.

Our apartment building revenues resulted mostly from general contracting. Major revenue contributors were an apartment building at Pirita tee 26 and phase I in the construction of the Tondi residential quarter in Tallinn. We have been successful in selling the last apartments in our Tigutorn development project where only one apartment is still for sale. We continue to sell apartment ownerships in phase I and build phase II of our Magasini 29 development project in Tallinn (www.magasini.ee) and have re-launched real estate development in Tartu where two new buildings with a total of 35 apartments will be completed in Tammelinn by the end of 2014 (www.tammelinn.ee).


Revenue distribution within Buildings segment 9M 2014 9M 2013 9M 2012 2013
Commercial buildings 43% 47% 24% 45%
Industrial and warehouse facilities 37% 29% 28% 29%
Public buildings 6% 20% 44% 21%
Apartment buildings 14% 4% 4% 5%

In the first nine months of 2014, the main revenue source in the Infrastructure segment was road construction. The average cost of the sub-segment’s contracts has fallen and operating volumes are not going to rise to the level of 2013 because procurement of large-scale design and construction work has been replaced by smaller-scale reconstruction and repair work. Nevertheless, the contribution of the sub-segment will remain the strongest, partly thanks to road maintenance services delivered under long-term contracts in the Järva and Hiiu counties and the Keila maintenance area.

In specialist engineering, a major project was the construction of the Sõpruse bridge boat harbour in Tartu. There is currently no information about any major projects that might require hydraulic engineering work this year. The revenues of the sub-segment may increase through other complex engineering work but relevant revenue flows are likely to be irregular.

The decline in EU support due to the change of budget periods has had a strong impact on our environmental engineering and utility network construction (other engineering) revenues, which have decreased more rapidly than the revenues of other sub-segments. It is likely that the contributions of the two sub-segments will see further contraction because a relatively large portion of their revenue for the first nine months of 2014 resulted from long-term contracts secured in the previous period. Most new contracts are small.


Revenue distribution within Infrastructure segment 9M 2014 9M 2013 9M 2012 2013
Road construction and maintenance 74% 56% 49% 54%
Specialist engineering (including hydraulic engineering) 3% 8% 15% 8%
Other engineering 15% 24% 31% 26%
Environmental engineering 8% 12% 5% 12%

Order book

At 30 September 2014, our order book (backlog of contracts signed but not yet performed) stood at 92,455 thousand euros, an 8% increase compared with a year ago. Both the Buildings and the Infrastructure segment increased their order books.

The order book of the Infrastructure segment grew by 5% thanks to work secured by the road construction sub-segment. In other sub-segments of the Infrastructure segment order books shrank. The largest decreases occurred in contracts signed for the construction of utility networks (other engineering sub-segment) and environmental engineering as in the last year of the EU 2007-2013 budget period allocations of relevant investment support were expectedly smaller. The backlog of hydraulic engineering work decreased as well.

The order book of the Buildings segment grew by around 9%. The order book of the commercial buildings sub-segment grew substantially, mostly thanks to a rise in private sector investments.


  9M 2014 9M 2013 9M 2012 2013
Order book (EUR’000) 92,455 85,765 146,070 64,286

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 70% and 30% of our order book respectively (30 September 2013: 69% and 31% respectively). The distribution is typical of the past year but radically different from the preceding periods when the figures for the two segments were more or less equal. It is likely that building construction contracts will continue to dominate the order book in the next few years. In the current EU budget period (2014-2020) investments in infrastructure construction, which to date have mostly been made with the support of the EU structural funds, will not be as large as in 2007-2013. In particular, this applies to 2014, which is becoming a switchover year between two budget periods, where most efforts are directed at preparatory administrative activities required for enabling the investments. Hence, we expect the revenues of the Infrastructure segment to decline in 2014 (for further information, see the Business risks section of the chapter Description of the main risks).

We believe that in a situation where the market is expected to shrink, our priority, at least in the current year, cannot be increasing the Group’s revenue or maintaining it at the level of 2013. Instead, the main focus must be on improving profitability. Compared with the end of 2013, our order book has grown by 44%.

Between the reporting date (30 September 2014) and the date of release of this report, Group companies have secured additional construction contracts in the region of 7,939 thousand euros.


Staff and personnel expenses

In the first nine months of 2014, the Group (the parent and the subsidiaries) employed, on average, 751 people including 364 engineers and technical personnel (ETP). Workforce has decreased compared with a year ago due to shrinkage in operating volumes.

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


  9M 2014 9M 2013 9M 2012 2013
ETP 364 360 372 357
Workers 387 424 417 400
Total average 751 784 789 757

The Group’s personnel expenses for the first nine months of 2014 including all taxes totalled 14,357 thousand euros, 6% up on the comparative period when the figure was 13,584 thousand euros. The rise is mostly attributable to an increase in basic salaries as well as payment of project-based performance pay. Personnel expenses (also for the comparative period) include the provisions made in the third quarter for performance bonuses that may be paid based on the Group’s performance indicators.

The service fees of the members of the council of Nordecon AS for the first nine months of 2014 amounted to 166 thousand euros and associated social security charges totalled 55 thousand euros (9M 2013: 120 thousand euros and 40 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 411 thousand euros and associated social security charges totalled 136 thousand euros (9M 2013: 195 thousand euros and 64 thousand euros respectively).

The fees (also for the previous year) include the provisions made in the third quarter for performance bonuses that may be paid based on the Group’s performance indicators.

Labour productivity and labour cost efficiency

The period’s nominal labour productivity declined because revenue decreased and bonus payments made in the context of increased profitability grew. In comparative periods, the proportion of performance bonuses in the Group’s personnel expenses was significantly smaller. In addition, basic salaries have increased.

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:


  9M 2014 9M 2013 9M 2012 2013
Nominal labour productivity (rolling), (EUR’000) 218.8 231.6 213.0 229.4
Change against the comparative period -5.5% 8.7% 22.5% 9.9%
Nominal labour cost efficiency (rolling), (EUR’000) 7.5 9.5 10.4 8.4
Change against the comparative period -21.9% -8.3% 18.5% -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.

Compared with a year ago, competition for public sector contracts has intensified visibly. The volume of public sector investments decreased in 2013 and the prospects of maintaining volumes in 2014 are not good. There is strong competitive pressure on builders’ bid prices although input prices mostly continue to climb. Competition is particularly fierce in the building construction segment. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered noticeably and competition is fierce involves high risk, because the contract may quickly start generating a loss. Thus, in price-setting we currently prioritize profitability over increasing or retaining the revenue figure.

In the next periods, demand for construction services will be driven by public sector investments. In previous years, a major share of investments was made with the assistance of allocations from the EU structural funds that were determined, both in terms of size and timing, by the EU financial framework 2007-2013. In general, the amounts allocated to Estonia under the current EU financial framework (2014-2020) are known (5.9 billion euros) but the volume and schedule of investments involving construction work have not yet been finalised. According to information released to date, the overall volume of construction-related investments is going to decline compared with the previous budget period and 2014 will become a so-called ‘gap’ year between the two budget periods, where most efforts are directed at preparatory administrative activities required for enabling the investments.

In light of the above, it is likely that in 2014 our business volumes will shrink, particularly in the Infrastructure segment where the proportion of public sector investments has been the largest. Our action plan foresees redirecting our resources (including some of the labour of the Infrastructure segment) to increasing the proportion of contracts secured from the private sector. According to our business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in only one narrow (particularly some infrastructure) segment.

Our primary goal is to maintain profitability even when construction volumes shrink. Thanks to decisions adopted in previous periods, we will not have to undertake any extensive restructuring when construction volumes change.

The Group’s business is also influenced by the fact that construction operations are seasonal. The impacts of seasonal fluctuations are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, earthwork, etc). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our business strategy is to counteract seasonal fluctuations in infrastructure operations with building construction that is less exposed to seasonality. Thus, we endeavour to keep the two segments in balance (see also the chapter Performance by business line). In addition, where possible, our companies implement appropriate technical solutions that allow working efficiently even 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 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 30 September 2014, the Group’s warranty provisions (including current and non-current ones) totalled 1,096 thousand euros. The comparative figure for a year ago was 998 thousand euros.

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

Financial risks

Credit risk

In the period, the Group did not incur any major credit losses. The credit risk exposure of the Group’s receivables continued to be low because the share of public sector customers is significant and the customers’ settlement behaviour is monitored on an ongoing 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 the first nine months of 2014, impairment losses incurred on receivables amounted to 10 thousand euros (9M 2013: 261 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 45 to 56 days) and increasingly shorter settlement terms negotiated by subcontractors (mostly 21 to 45 days). The Group counteracts the differences in settlement terms by using factoring where possible.

At the reporting date, the Group’s current assets exceeded its current liabilities 1.05-fold (30 September 2013: 1.12-fold). Factors influencing the ratio include reclassification of loans provided to the Group’s Ukrainian associates to non-current assets and the fact that generally banks do not refinance interest-bearing liabilities for a period exceeding 12 months.

The political situation in Ukraine remains tense and we believe that realization of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date loan receivables from our Ukrainian associates of 10,632 thousand euros were classified as non-current assets.

Interest-bearing liabilities account for a significant proportion of our current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on the contractual conditions effective at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when the 12 months have passed.

At the reporting date, the Group’s cash and cash equivalents totalled 7,704 thousand euros (30 September 2013: 9,140 thousand euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. At 30 September 2014, the Group’s interest-bearing loans and borrowings totalled 30,372 thousand euros, a decrease of 12,156 thousand euros year over year. An important factor that contributed to the decrease was a decline in factoring. Interest expense for the period amounted to 762 thousand euros, 21 thousand euros down from a year ago.

The main source of the Group’s interest rate risk is the possibility of a rapid upsurge in the base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In light of the Group’s relatively heavy loan burden this would cause a significant increase 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 the loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. The Group does not use derivative financial instruments 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) and Ukrainian hryvnas (UAH).

At the beginning of 2014, the political and economic environment in Ukraine became strained due to the conflict between Ukraine and Russia, which caused the exchange rate of the hryvna to tumble. Although in the third quarter the fall began to slow, by the reporting date the hryvna had weakened against the euro by around 33%. For the Group’s Ukrainian subsidiaries, this meant additional exchange losses on the translation of their euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 817 thousand euros (9M 2013: an exchange loss of 43 thousand euros).

Exchange gains and losses on financial instruments are reported within Finance income and Finance costs in the statement of comprehensive income. Translation of receivables and liabilities related to 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 (items connected with the construction business that are denominated in hryvnas) do not give rise to any material 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 financial statements.

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

Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

· In 2014 public sector investment will decrease in connection with the change of the EU budget periods because implementation of measures requires time. Although during the 2014-2020 financial framework allocations to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), support payments from the structural funds that influence the construction market will not increase significantly. Instead, compared with the previous budget period, there will be an increase in allocations to projects not related to tangible assets.

Investments made by the largest public sector customers (state-owned real estate company Riigi Kinnisvara AS and the National Road Administration), which will reach the stage of conclusion of a construction contract in 2014 will either not increase significantly or may even decrease. As a result, the Estonian construction market (particularly segments related to infrastructure construction) will shrink. The situation will be somewhat alleviated by private customers’ increasing investment in building construction.

· The construction market will see further consolidation, particularly in the field of general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is still too large, but the process will be slower than expected. Based on the past three years’ experience it is likely that stiff competition and insufficient demand will induce some general contractors to go slowly out of business or shrink in size rather than merge with another or exit the market. However, it is also increasingly common that two to four smaller players that are seeking ways to remain in business will form a consortium to bid for major procurement contracts, meet tendering terms and secure the required funding.

· Competition will increase in all segments of the construction market. We see a rise in the average number of bidders for a contract and there is already a notable gap between the lowest bids made by the winners and the average bids. The situation is somewhat similar to 2009 when anticipation of a fall in demand caused a rapid decline in construction prices, which triggered a slide in the prices of many construction inputs. However, there are currently no massive decreases in input prices and companies that are banking on this in the bidding phase may run into difficulty. Construction prices and thus also profit margins are under strong competitive pressure.

· In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the business plan and thus to set an affordable sales price. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict. Similarly to previous periods, successful projects include those that create or fill a niche.

· The contracts signed with public sector customers continue to impose tough conditions on construction companies: extensive obligations, strict sanctions, various financial guarantees, long settlement terms, etc. Contractors cannot implement more optimal solutions identified in the construction phase that would reduce the construction or operating costs of the asset without sanctions because procurement terms do not allow this. In a situation where public procurement is based on underbidding, the above factors increase the risks of all market participants. Still, compared to two or three years ago, the situation has improved and in some respects procurement terms have become more reasonable for construction companies.

· The prices of construction inputs will remain relatively stable. In the short term, weakening demand may lower local subcontracting prices. However, taking into account the subcontractors’ financial and human resources, the decline cannot be substantial or long-lasting. In some areas, price fluctuations are be unpredictable and, thus, notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).

· Shortage of skilled labour (including project and site managers) will persist. This will undermine not so much the companies’ performance capabilities as the quality of carrying out the construction process, i.e. delivering the service. Shrinkage in construction volumes in Estonia may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and although those markets (particularly the Finnish one) may also shrink, the number of job seekers that will return will not increase considerably. Accordingly, the basic wage of construction-sector employees will not decrease. Instead, the rise in the cost of living is creating pressure for a wage increase.

Latvia and Lithuania

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

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

The operations of our Lithuanian subsidiary, Nordecon Statyba UAB, are suspended. We are monitoring market developments and may resume our Lithuanian operations on a project basis. Temporary suspension of operations does not cause any major costs for the Group and does not change our strategy for the future, i.e. the objective of operating in the Lithuanian construction market through local subsidiaries.


The Group prefers to operate in Ukraine as a general contractor and project manager that serves foreign private sector customers in the segment of building construction. Even though the political situation in Ukraine shows signs of improvement, it continues to restrict adoption of business decisions by construction market participants. Regardless of this, we will continue our business in Ukraine in 2014 and our current Ukrainian order book is significantly larger than in the comparative period. We continue to monitor the situation in the Ukrainian construction market closely and will restructure our operations as appropriate. We also continue to seek opportunities for exiting our two conserved real estate projects or signing a construction contract with a potential new owner.


In the Finnish market, we have been offering mainly subcontracting services in the field of concrete works but based on experience gained, we have also started to deliver some more complex services. The local concrete works market provides opportunities for competing for projects where the customer wishes to purchase all concrete works from one reliable partner. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks. We are not planning to penetrate any other segments of the Finnish construction market (general contracting, project management, etc).

Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2013 was 174 million euros and net profit 4.6 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.


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

Investor presentation_9m_2014.pdf