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Published: 2011-08-11 15:35:00 CEST
Half Year financial report

Financial report for the second quarter and six months ended 30 June 2011 (unaudited)

Nordecon publishes financial report for the second quarter and six months ended 30 June 2011 (unaudited)

Tallinn, Estonia, 2011-08-11 15:35 CEST --  

Directors’ report

Group strategy and objectives

Nordecon Group’s main strategic objectives until 2013

  • To complete the significant adjustments to the Group’s structure and governance that were launched in 2009 in order to secure profitable and rapid growth in the rise phase of the market
  • To operate in Latvia, Lithuania and Belarus on a project basis, assuming that this is profitable
  • To continue buildings construction operations in Ukraine in line with the current strategy
  • To maintain preparedness for re-launching more active operations in foreign markets (as a general contractor) as soon as the situation in the construction market has become sufficiently supportive
  •  To operate in the Finnish concrete works market (as a contractor) through a subsidiary in order to support development of the business line
  • To become the leading construction group in Estonia that earns half of its revenue from infrastructure and the other half from buildings construction by the end of 2013

The key theme of the strategy for 2010-2013 is “To respond to market changes swiftly and flexibly and to enter the next economic growth cycle successfully”

In the board’s opinion, in forthcoming years the Group will have to focus on its core business in its main market, Estonia, where Nordecon is represented in practically all construction segments and can rely on extensive local experience. In order to adapt to changes in the external environment, the Group will have to continue taking advantage of the benefits yielded by internal restructuring and streamlining, improving profitability by proactive cost management, and creating opportunities for successfully entering the growth phase of the construction market (also in the target foreign markets).

According to the board’s proposal, until 2013 (inclusive) the Group will focus on achieving the above. The strategy for the next three years has to support the Group’s recovery from the slump in the construction market and to prepare ground for seizing the opportunities provided by a steadier growth that is anticipated to emerge in 2012.

In the foreseeable future, we will not seek to increase revenue without applying measures that ensure profitability because this might lead to taking unjustified risks in a situation where rapidly rising input prices may have a strong impact on companies’ performance in subsequent periods.


Changes in the Group’s business operations in the first half of 2011

Changes in the Group’s Estonian operations

There were no major changes in the Group’s Estonian operations in the first half of 2011. The Group did not enter any new operating segments or exit any current segments or sub-segments.

Since the beginning of 2011, a significant proportion of the Group’s core business has been conducted by the parent, Nordecon AS, which at the end of 2010 merged with its subsidiaries Nordecon Ehitus AS and Nordecon Infra AS, which were involved in buildings and infrastructure construction respectively. At the same time, Nordecon AS continues to act as a holding company for the Group’s main Estonian and foreign subsidiaries (except for the Ukrainian ones).

Changes in the Group’s foreign operations


There have been no changes in the Group’s Latvian operations compared with the end of 2010. The Group has currently no active construction contracts in Latvia and no subsidiaries domiciled in Latvia.


There have been no changes in the Group’s Lithuanian operations compared with the end of 2010. The Group has no currently active construction contracts in Lithuania and the activities of the Lithuanian subsidiary Nordecon Statyba UAB have been suspended.


There have been no changes in the Group’s Belarusian operations compared with the end of 2010. The Group is completing its only active contract, the construction of a production facility for a Finnish food industry company. The project is performed through the Group’s Belarusian subsidiary Eurocon Stroi IOOO. According to the Group’s development strategy, Belarus is not a target foreign market and the project was undertaken to explore the market. We have decided that after the delivery of the project in 2011 the Group will exit the Belarusian market. The decision was prompted by the fact that the Belarusian business and legal environment is not yet sufficiently transparent and supportive for doing business in the construction sector.


We have decided that the Group will continue operating in Ukraine in 2011 and that the target is to maintain optimal preparedness for re-launching construction activities as soon as the situation in the local construction market improves. The decision to remain in Ukraine was underpinned by well-planned activities during the slump and the prospects for market recovery in the next few years.

Real estate development projects that require extensive investment (the Group has an interest in two conserved development projects) will remain suspended to minimise the risks until the situation in Ukraine becomes clearer.


Group company Nordecon Betoon OÜ and its Finnish subsidiary Estcon Oy will continue providing subcontracting services in the concrete works sector in Finland where our strengths include top quality technical expertise, mobility and a competitive price.


Financial review


Nordecon Group ended the first half of 2011 with a gross loss of 1,428 thousand euros (HY1 2010: 2,889 thousand euros). The negative figure results from changes in the operating environment that required the Group to re-estimate the outcomes of its loss-generating projects. In particular, the additional loss estimate is attributable to construction inputs whose prices have been rising in recent quarters and, to a certain extent, some unforeseen project performance costs. The bulk of it stemmed from a few contracts secured in 2009-2010 for which losses had also been recognised earlier. The Group’s estimates of the losses expected to be incurred until the delivery of the contracts are based on the current best knowledge.

As regards loss-generating contracts, the strongest adverse impact was exerted by the exhibition building of the Estonian Maritime Museum that is being built inside the seaplane hangars next to the Tallinn Bay and is currently scheduled for completion at the end of 2011. It is a unique renovation project where the exceptionally poor condition of the building and the true complexity of the work have come to light only in the course of the project. The Group has accepted all losses incurred on account of its own miscalculations. However, where circumstances have arisen that could not be foreseen at the time of the procurement tender or where the customer has made changes to the initial project or has requested additional work, the Group has exercised its contractual right and demanded additional payment.

Setting aside the few loss-making contracts signed during the downturn, the profitability of the Group’s core business has started improving year over year. Above all, this has been achieved thanks to the following factors:

  • Since 2010, we have focused on improving the profitability, not the size of the Group’s contracts portfolio.
  • In 2010, a full set of stringent austerity measures was enforced across the Group. 
  • The Group’s internal processes and operations have been effectively streamlined. 

For construction companies, the year 2011 brought the news that in some segments of the construction market (e.g. road construction and water and wastewater network construction) competition has started to decrease. The main reason is not yet bankruptcy of construction companies but the fact that in recent years many companies have had to cut their personnel and support structures to an extent that is undermining their bidding capabilities compared with previous years. Furthermore, many companies are being held back by increasingly tougher financial requirements imposed by customers holding tenders and the limited availability of the guarantee facilities provided by financing institutions. A majority of construction companies have become aware that long-term construction contracts entail the risk of growth in input prices. In general, all this is exerting positive influence on the margins of new construction contracts. Although the Group’s margins do not yet meet the target, management believes that the Group is moving in the right direction in restoring the profitability of its core business.

Administrative expenses for the first half-year totalled 2,142 thousand euros. Compared with the same period in 2010, the Group has cut administrative expenses by 7% and the item has become relatively stable. The ratio of administrative expenses to revenue was 3.9% (HY1 2010: 6.1%). We are pleased to report that our cost-saving measures have yielded strong results and according to management’s estimates on a full-year basis the Group will be able to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

The Group’s operating loss for the first half-year was 3,501 thousand euros (HY1 2010: 5,469 thousand euros).

Consolidated net loss was 3,715 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 3,652 thousand euros. The first half of 2010 ended in a net loss of 4,175 thousand euros, including non-recurring net finance income of 1,177 thousand euros earned on the sale of the Latvian subsidiary. Excluding the latter, the Group’s net loss for the first half of 2010 would have been 5,352 thousand euros.

Cash flows

In the first half of 2011, the Group’s operating activities resulted in a net cash inflow of 1,846 thousand euros (HY1 2010: inflow of 690 thousand euros). Operating cash flow continued to be influenced the most by cyclical fluctuations in project-related cash flows (differences between the settlement terms agreed with customers and subcontractors) and the performance of loss-making projects. Positive cash flow was supported by factoring services implemented for reducing the cyclical nature of cash flows and the prepayments received under new large contracts. The negative cash flow of unprofitable projects realises based on the actual performance of the work although their book loss has already been recognised in previous periods.

Investing activities generated a net inflow of 1,996 thousand euros (HY1 2010: inflow of 461 thousand euros). Inflows consisted mostly of principal and interest receipts for loans granted in previous periods, which totalled 1,812 thousand euros.

Financing activities resulted in a net cash outflow of 2,994 thousand euros (HY1 2010: outflow of 5,085 thousand euros). The structure of financing cash flows has remained more or less stable. The Group is settling its loan obligations faster than it is raising new debt. On the other hand, repayments have decreased in relation to the comparative period thanks to agreements reached with the banks. The renegotiation of settlement terms has not resulted in any significant changes in the Group’s  interest rates.

At 30 June 2011, the Group’s cash and cash equivalents totalled 6,343 thousand euros (30 June 2010: 10,476 thousand euros). For information on liquidity risks, please refer to the chapter Description of the main risks.


Key financial figures and ratios


Figure / ratio 6M 2011 6M 2010 6M 2009 2010
Revenue (EUR’000) 54,429 37,401 78,298 99,312
Revenue growth/decrease, % 46% -52% 58% -36%
Net profit/loss (EUR’000) -3,716 -4,175 329 -12,738
Profit/loss attributable to owners of the parent (EUR’000) -3,652 -3,788 1,353 -11,811
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.12 -0.12 0.04 -0.38
Average number of employees 731 797 1,187 774
Revenue per employee (EUR’000) 74 47 66 128
Personnel expenses to revenue, % 12.2% 18.6% 15.4% 14.6%
Administrative expenses to revenue, % 3.9% 6.1% 5.3% 4.9%
EBITDA1 (EUR’000) -2,278 -3,718 2,628 -5,512
EBITDA margin, % -4.2% -9.9% 3.4% -5.6%
Gross margin, % -2.6% -7.7% 6.9% -0.7%
Operating margin, % -6.4% -14.6% 0.4% -9.0%
Operating margin excluding gains on asset sales, % -6.8% -14.6% 0.3% -9.4%
Net margin, % -6.8% -11.2% 0.4% -12.8%
Return on invested capital, % -5.0% -5.0% 1.9% -15.8%
Return on assets, % -3.4% -4.7% 0.2% -8.3%
Return on equity, % -11.7% -9.6% 0.6% -32.6%
Equity ratio, % 26.8% 38.2% 35.8% 35.1%
Gearing, % 40.8% 25.2% 31.7% 42.3%
Current ratio 1.19 1.53 1.36 1.39
  6M 2011 6M 2010 6M 2009 2010
Order book (EUR’000) 140,234 89,440 100,214 85,607

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

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


Performance by geographical market

In the first half of 2011, roughly 96% of the Group’s revenue was earned in Estonia. In the comparative period, foreign operations accounted for 6% of the Group’s revenue.

  6M 2011 6M 2010 6M 2009 2010
Estonia 96% 94% 84% 94%
Ukraine 0% 6% 2% 2%
Lithuania 0% 0% 1% 0%
Latvia 0% 0% 13% 0%
Belarus 3% 0% 0% 3%
Finland 1% 0% 0% 1%

The greatest proportion of foreign revenue was earned from project-based construction business in Belarus, which is expected to be completed in the second half of the year. Management has decided that the Group will not seek any new projects in Belarus (see also the chapter Changes in the Group’s business operations in the first half of 2011). Finnish revenues result from the performance of concrete works.

Revenue distribution between different geographical segments is a consciously deployed strategy by which the Group avoids excessive reliance on a single market. Although in the long term the Group’s strategy foresees increasing foreign operations, in the short term the Group will focus on the Estonian market and seizing opportunities in an environment that it knows best and that entails comparatively fewer known market risks. The Group’s vision of the future of its foreign operations is described in the chapter Outlooks of the Group’s geographical markets.


Performance by business line

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

Consolidated revenue for the first half of 2011 was 54,429 thousand euros, a 46% increase on the 37,401 thousand euros generated a year ago. Last year, the downturn that ravaged the Estonian construction market in 2008-2010 bottomed out. Revenue growth is attributable to the following factors: moderate growth in the buildings segment, decline of competition in certain market segments and successful bidding for infrastructure contracts that could also be performed during the winter season.

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

Segment revenue

In the first half of 2011, the revenues of our two main business segments were practically equal. The Buildings and Infrastructure segments ended the first half-year with revenue of 25,704 thousand euros and 27,402 thousand euros respectively. The corresponding figures for the comparative period were 18,254 thousand euros and 18,618 thousand euros.

For a long time most tenders in the construction market have been related to infrastructure (mainly projects financed with the support of the state and the EU structural funds) and the majority (72%) of contracts in the Group’s order book belong to the Infrastructure segment. Regardless of this, the revenues of the segments have been practically equal because the Group’s active buildings construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is therefore comparatively smaller. We expect that in the next quarters the contributions of the Buildings and Infrastructure segments will have similar proportions.

Revenue distribution between segments*

Business segments 6M 2011 6M 2010 6M 2009 2010
Buildings 46% 46% 49% 48%
Infrastructure 54% 54% 51% 52%

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

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

Revenue distribution within segments

In the Buildings segment, most of the revenue for the first half-year resulted from the construction of public buildings. At the end of 2010, the Group won two public sector contracts that were large under the circumstances – one for the construction of the buildings of the Koidula border station and the other for the construction of the academic building of the Social Sciences Faculty of the University of Tartu. In addition, the Group continued a major project involving the reconstruction of the seaplane hangars in Tallinn into the premises of the Estonian Maritime Museum. In the industrial and warehouse facilities sub-segment most of the revenue resulted from the construction of various agricultural facilities and a food production facility that is being built in Belarus. Compared with previous periods, the contribution of the commercial buildings sub-segment has decreased considerably, primarily because of a lack of private sector customers. In the construction of apartment buildings the Group was a general contractor, not a developer.                                          

Revenue distribution within the Buildings segment 6M 2011 6M 2010 6M 2009  2010
Commercial buildings 6% 26% 71% 37%
Industrial and warehouse facilities 38% 21% 11% 18%
Public buildings 54% 38% 16% 35%
Apartment buildings 2% 15% 1% 10%

As usual, in the Infrastructure segment most of the revenue was generated by road construction and maintenance. The contribution of the construction of water and wastewater networks where the Group has won several tenders also in 2011 was expectedly large as well. Thanks to support from the EU structural funds, this is one of the best-funded areas in Estonia. The European Union also supports the performance of various environmental engineering projects where the Group is well represented. Revenues from hydraulic engineering that depends mostly on Estonian ports’ investment policies have been negligible in the past two years.

Revenue distribution within the Infrastructure segment 6M 2011 6M 2010 6M 2009 2010
Road construction and maintenance 46% 65% 32% 62%
Specialist engineering (including hydraulic engineering) 1% 1% 17% 1%
Other engineering 38% 26% 38% 28%
Environmental engineering 16% 8% 14% 8%


Order book

At 30 June 2011, the Group’s order book stood at 140,234 thousand euros, being significantly larger than at 30 June 2010 when the figure was 89,440 thousand euros. In addition to a general rise in the Group’s construction volumes compared with the slump of 2010, the growth includes a substantial one-off transaction: the cost of the design and build of the Aruvalla-Kose section of E263, the Tallinn-Tartu road (approx. 39.3 million euros).

  6M 2011 6M 2010 6M 2009 2010
Order book, in thousands of euros 140,234 89,440 100,214 85,607

At 72% the Infrastructure segment continues to account for a major proportion of the Group’s total order book (30 June 2010: 66%).

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

Between the reporting date (30 June 2011) and the date of release of this report, Group companies have been awarded additional construction contracts of approximately 14,977 thousand euros.



Staff and personnel expenses

At the end of the first six months of 2011, the Group (including the parent and the subsidiaries) employed, on average, 731 people including around 352 engineers and technical personnel (ETP). In the past year, the decrease in personnel has decelerated. In 2011 headcount is expected to remain stable or to grow slightly. Besides additional seasonal labour hired for the second and third quarters, the figure may be influenced by year-over-year growth in the Group’s operating volumes.

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


  6M 2011 6M 2010 6M 2009 2010
ETP 352 362 480 362
Workers 379 435 707 412
Total average 731 797 1,187 774

The Group’s personnel expenses for the first half of 2011 including all associated taxes totalled 6,620 thousand euros, a 5% decrease compared with the 6,945 thousand euros incurred in the first half of 2010. Personnel expenses have declined on account of a decrease in the total number of staff.

In the first half of 2011, the remuneration of the members of the council of Nordecon AS including associated social security charges amounted to 50 thousand euros. The corresponding figure for the first half of 2010 was also 50 thousand euros. The remuneration of the members of the board of Nordecon AS including social security charges totalled 156 thousand euros compared with 72 thousand euros for the first half of 2010. The remuneration provided to the board has increased because in the comparative period the board had two members while the current number is four. The composition of board changed in connection with the merger of two subsidiaries and the Group’s parent that took place at the end of 2010.


Outlooks of the Group’s geographical markets


According to the assessment of the Group’s management, in 2011 the Estonian construction market will be influenced by the following factors:

  • Total demand in the construction market will remain disproportionately dependent on public procurement tenders and projects performed with the support of the EU structural funds. Project performance success is closely related to the administrative capabilities and procurement organisation skills of the central and local government which have improved compared with previous periods but are still of unreliable quality, causing hold-ups and difficulties both during the procurement proceedings and the performance of construction work.
  • The contraction of the construction market ended with 2010. In the current year, the market will start picking up and construction volumes will grow somewhat. In addition to the infrastructure sector, new projects will be launched in the buildings construction sector. The latter should offer the main opportunities for growth, primarily through the return of private sector customers (including foreign investors) that abandoned the market in previous years. However, in 2011 demand is not yet expected to recover to a level where all currently operating construction companies could secure sufficient profitable business.
  • Market consolidation will continue owing to the contraction in volumes in 2008-2010. In the past two years, many medium-sized and small real estate development and buildings construction companies that were unable to respond to market changes sufficiently quickly or had taken excessive real estate risks were forced to exit the market. In 2011, the number of construction companies will continue decreasing primarily because rising input prices are rendering the performance of contracts in the portfolios of companies that have survived a fall in market and construction prices too unprofitable for those that have not noticed the trend or have chosen to ignore it due to cash flow problems. It is quite probable that in 2011 or 2012 even some fairly well-known companies (including those engaged in infrastructure construction) will have to discontinue or restructure their operations. Above all, construction companies’ ability to continue their operation will depend on how well they can manage their finances and whether they can maintain sufficient liquidity.
  • Both active projects and those secured in 2011 will be significantly influenced by various terms and conditions (including different warranties, long settlement terms, etc) dictated by customers that are becoming increasingly unfavourable for construction companies.
  • Construction contracts’ profit margins will remain under pressure from continuously fierce competition and rising input prices. In addition, companies may continue challenging the results of poorly prepared public procurement tenders. However, an even larger number of (public procurement) tenders will be cancelled because customers have prepared their budgets using the construction prices of 2009-2010 which in the current situation are no longer realistic and the bids made by construction companies exceed them by tens of percents. The time and finance costs are regrettably high for all involved.
  • The situation in the labour market has stabilised to a certain extent and construction workers’ outflow to the Scandinavian countries will not increase significantly. Companies have adapted to the situation but when volumes recover the availability of qualified labour will again be an issue. In general, in 2011 the base wage paid by construction companies that have to maintain tight cost control is not yet expected to increase.
  • In 2011 and 2012 the construction market will be seriously and unfortunately somewhat unpredictably impacted by a massive and rapid allocation of funds raised from the sale of the carbon dioxide emission quotas for improving the energy efficiency of buildings. Around 150 million euros will be distributed for that purpose within roughly one and a half years. This will trigger rapid demand hikes in some specialized construction segments (joint filling, facade and roof works, heating systems, etc) as well as related segments, which will cause an unreasonable rise in respective prices and may cause temporary problems for the entire sector.
  • Overall economic recovery should increase the banks’ interest in granting private-sector customers new investment loans and, in the case of a suitable risk profile, also funding for real estate development. The investments made with the involvement of banks would not trigger major market growth but would give a much-needed signal of the stabilisation of the investment climate, creating a basis for more visible growth in 2012. Realisation of the assumption depends on whether the euro-zone countries will be able to prevent the debt crisis from spreading further into the banking sector.

Nordecon Group’s main operational objectives for 2011

In 2011, Nordecon Group will focus on raising profitability compared with 2010 by:

  • Vigorously improving the efficiency of various aspects of its core operations
  • Maintaining strict control over fixed costs
  • Keeping up and improving the team spirit and dedication of the Nordecon people


Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will continue adjusting to the post-recession environment also in 2011. The Group does not exclude the possibility that in the next few years it will undertake some projects in Latvia through its Estonian entities, involving partners where necessary. Continuation of project-based business assumes the availability of profitable projects. The decision does not change the Group’s strategic objectives in the Latvian construction market, i.e. the objective of conducting future operations in the Latvian market through local subsidiaries.

The Lithuanian construction market does not show any signs of recovery in areas where Group entity Nordecon Statyba UAB is competitive. Therefore, the operations of the Lithuanian-based Nordecon Statyba UAB have been suspended and the Group is monitoring the market situation. The temporary suspension of operations does not cause any major costs for the Group. It is possible that the Lithuanian operations will remain suspended through 2011. The decision does not change the Group’s strategic objectives in the Lithuanian construction market, i.e. the objective of conducting future operations in the Lithuanian market through local subsidiaries.


The Group will continue operating in Ukraine as a general contractor and project manager in the construction of commercial buildings and production facilities. In 2009 and 2010, there were practically no private foreign customers in those sub-segments. Regrettably, the Ukrainian construction market has not recovered notably in 2011 although there are some signs of improvement. The Group has decided to continue its operation in Ukraine. Costs are kept minimal and the Group is maintaining readiness for re-launching more active operations

The main risks in the Ukrainian market are connected with the low administrative efficiency of the central and local government and the judicial system. The recovery of the Ukrainian economy from the crisis of 2008-2009 has been slow, which has affected inflation and the availability of quality construction inputs. Demand is mainly undermined by private customers’ lack of financing. The political situation has not stabilised as quickly as anticipated and private sector customers have not started investing in projects where the Group has a competitive advantage

However, the construction market of a country with a population of around 46 million has strong business potential. The Group’s key success factor is relatively little competition among project management companies (the Group offers flexible construction management in combination with European practices and competencies) compared with the real needs of a normally functioning construction market. The Group’s management is confident that the ongoing downturn in the Ukrainian construction market and economy as a whole will transform local understanding and expectations of general contracting and project management in the construction business and, in the long-term perspective, the new thinking will improve the Group’s position.


Although there is a certain temporal development lag, the Belarusian business environment has features similar to the Ukrainian one: bureaucracy, complex taxation principles and constraints on cross-border services. The potential of the Belarusian construction market is also comparable to the Ukrainian one. There is demand for new buildings, the state has started to permit more direct foreign investment and there are no contemporarily managed construction companies in the market. Despite this, in 2011 the Group will operate in Belarus on a project basis, completing its only active project. After this, for the time being no new projects will be started.


In Finland, the Group provides subcontracting services in the field of concrete works. This is an area where Estonian companies still have a certain edge over local entities through lower personnel expenses. The Finnish concrete works market allows the Group (both as a contractor and subcontractor) to compete for selected projects (the main criteria are the location and the customer’s risk profile). We expect demand for concrete works to remain stable in 2011. Nevertheless, the Group will maintain a rational approach and will avoid taking excessive risks in Finland. The Group is currently not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).


Description of the main risks

Business risks

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

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

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project, both general frame agreements and special project-specific contracts are used. In addition, as a rule, subcontractors are required to secure the performance of their obligations with a bank guarantee issued for the benefit of a Group company. To remedy builder-caused deficiencies which may be detected during the warranty period, Group companies create warranties provisions. At 30 June 2011, the provisions (including current and non-current ones) totalled 1,045 thousand euros. At 30 June 2010, the corresponding figure was 857 thousand euros.

Credit risk

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

In the first half of 2011, expenses from write-down of receivables totalled 2 thousand euros. In the first half of 2010, recoveries of previously expensed receivables exceeded expenses from the write-down of receivables and the Group could recognise a reduction of expenses of 4 thousand euros.

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the largest banks in the markets where the Group operates. To ensure timely settlement of liabilities, approximately two weeks’ working capital is kept in current accounts or overnight deposits. Where necessary, overdraft facilities are used. At the reporting date, the Group’s current assets exceeded its current liabilities 1.19-fold (30 June 2010: 1.53-fold) and available cash funds totalled 6,343 thousand euros (30 June 2010: 10,476 thousand euros).

The balance of free cash funds has increased compared with the end of the first quarter by 4,040 thousand euros. Despite an improvement in its liquidity position, the Group remains exposed to higher than average liquidity risk resulting from a gap between the customers’ long settlement terms (mostly 45 to 56 days) and the subcontractors’ increasing interest to negotiate shorter settlement terms (mostly 21-45 days). In addition, business growth is increasing the Group’s need for working capital, a trend that will become more apparent in subsequent quarters. The Group counteracts the differences in settlement terms by using factoring where possible. In order to raise additional working capital, the Group has started negotiations with banks based on the Nordecon Group Business Plan and Financing Program 2011-2014, prepared at the request of Nordecon AS by one of the world’s leading consulting firms Roland Berger Strategy Consultants GmbH.

Interest rate risk

The Group’s interest-bearing liabilities to banks have mainly fixed interest rates. Finance lease liabilities have floating interest rates and are linked to EURIBOR. At 30 June 2011, the Group’s interest-bearing loans and borrowings totalled 31,344 thousand euros, an increase of 3,177 thousand euros year-over-year. Interest expense for the first half-year amounted to 499 thousand euros. Compared with the same period in 2010, interest expense has increased by 4 thousand euros. The Group’s interest rate risk is currently influenced by two factors: a rise in the base rate for floating interest rates (EURIBOR) and a low interest coverage ratio caused by low operating cash flows. The first factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. The realisation of the interest payment cash flow risk depends on the success of operating activities. The Group has not acquired derivatives to hedge its interest rate risk.

Currency risk

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

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

The Group’s exchange gains and losses for the first half of 2011 resulted in a net exchange loss of 109 thousand euros. In the comparative period, exchange differences resulted in a net exchange loss of 59 thousand euros.


Condensed consolidated interim statement of financial position

EUR`000 30 June 2011 31 December 2010
Current assets    
Cash and cash equivalents 6,343 5,818
Trade and other receivables 43,660 31,266
Prepayments 1,943 1,060
Inventories 26,795 24,982
Non-current assets held for sale 313 321
Total current assets 79,054 63,447
Non-current assets
Investments in equity-accounted investees 147 99
Other investments 26 26
Trade and other receivables 2,454 2,215
Investment property 4,930 4,930
Property, plant and equipment 7,840 9,038
Intangible assets 15,432 15,486
Total non-current assets 30,829 31,794
TOTAL ASSETS 109,883 95,241
Current liabilities    
Loans and borrowings 18,697 19,231
Trade payables 34,450 17,429
Other payables 3,721 3,446
Deferred income 8,951 4,425
Provisions 763 1,160
Total current liabilities 66,582 45,691
Non-current liabilities
Loans and borrowings 12,648 15,377
Trade payables 199 215
Other payables 96 96
Provisions 423 423
Total non-current liabilities 13,366 16,111
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,558
Translation reserve -90 -233
Retained earnings 6,605 10,257
Total equity attributable to equity holders of the parent 28,726 32,240
Non-controlling interest 1,209 1,199
TOTAL EQUITY 29,935 33,439


Condensed consolidated interim statement of comprehensive income

EUR`000 Q2 2011 Q2 2010 6M 2011 6M 2010  2010
Revenue 36,706 26,153 54,429 37,401 99,312
Cost of sales -38,061 -27,525 -55,857 -40,290 -100,012
Gross loss -1,355 -1,372 -1,428 -2,889 -700
Distribution expenses -68 -72 -164 -200 -401
Administrative expenses -1,057 -1,105 -2,124 -2,273 -4,887
Other operating income 153 319 379 362 820
Other operating expenses -58 -325 -164 -469 -3,807
Operating loss -2,385 -2,555 -3,501 -5,469 -8,975
Finance income 167 195 350 2,702 3,059
Finance expenses -306 -284 -611 -1,484 -6,338
Net finance income / expense -139 -89 -261 1,218 -3,279
Share of profit / loss of equity-accounted investees 47 -40 47 -40 -517
Loss before income tax -2,477 -2,684 -3,715 -4,291 -12,771
Income tax expense / income -5 116 -1 116 33
Loss for the period -2,482 -2,568 -3,716 -4,175 -12,738
Other comprehensive income / expense:          
Exchange differences on translating foreign operations 101 -59 216 -95 -28
Total other comprehensive income / expense for the period 101 -59 216 -95 -28
TOTAL COMPREHENSIVE EXPENSE FOR THE PERIOD -2,381 -2,627 -3,500 -4,270 -12,766
Loss attributable to:          
- Owners of the parent -2,475 -2,471 -3,652 -3,788 -11,811
- Non-controlling interests -7 -97 -64 -387 -927
Loss for the period -2,482 -2,568 -3,716 -4,175 -12,738
Total comprehensive expense attributable to:          
- Owners of the parent -2,420 -2,530 -3,510 -3,883 -11,839
- Non-controlling interests 39 -97 10 -387 -927
Total comprehensive expense -2,381 -2,627 -3,500 -4,270 -12,766
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) -0.10 -0.08 -0.12 -0.12 -0.38
Diluted earnings per share (EUR) -0.10 -0.08 -0.12 -0.12 -0.38


Condensed consolidated interim statement of cash flows

EUR`000 6M 2011 6M 2010
Cash flows from operating activities    
Cash receipts from customers 58,164 46,025
Cash paid to suppliers -49,220 -35,757
VAT paid -1,246 -2,010
Cash paid to and for employees -5,851 -7,532
Income tax paid -1 -36
Net cash from operating activities 1,846 690
Cash flows from investing activities    
Acquisition of property, plant and equipment -13 -78
Proceeds from sale of property, plant and equipment and intangible assets 280 344
Proceeds from sale of investment property 0 677
Disposal of subsidiaries, net of cash transferred 0 -617
Acquisition of associates 0 -2
Loans granted -87 -178
Repayment of loans granted 1,631 177
Dividends received 4 4
Interest received 181 134
Net cash from investing activities 1,996 461
Cash flows from financing activities    
Proceeds from loans received 892 2,344
Repayment of loans received -2,408 -5,675
Payment of finance lease liabilities -931 -1,351
Interest paid -545 -407
Other payments made -2 4
Net cash used in financing activities -2,994 -5,085
Net cash flow 848 -3,934
Cash and cash equivalents at beginning of period 5,818 14,392
Effect of exchange rate fluctuations -323 18
Increase / decrease in cash and cash equivalents 848 -3,934
Cash and cash equivalents at end of period 6,343 10,476


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2010 was 99.3 million euros. Currently Nordecon Group employs nearly 700 people. Since 18 May 2006, the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

         Raimo Talviste
         Nordecon AS
         Head of Finance and Investor Relations
         Tel: +372 615 4445
         Email: raimo.talviste@nordecon.com