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Published: 2012-11-08 15:30:00 CET
Quarterly report

2012 III quarter and 9 months consolidated interim report (unaudited)

Nordecon AS announces its 2012 III quarter and 9 months consolidated interim report (unaudited)

Tallinn, Estonia, 2012-11-08 15:30 CET -- Announcement includes Nordecon AS’ consolidated financial statements for 2012 III quarter and 9 months, overview of the key events influencing the period’s financial result, outlook for the market and description of the main risks.

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

Period’s investor 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 2012 31 December 2011
Current assets    
Cash and cash equivalents 9,066 9,908
Trade and other receivables 49,717 34,645
Prepayments 2,930 2,610
Inventories 25,002 24,120
Non-current assets held for sale 0 242
Total current assets 86,715 71,525
Non-current assets
Investments in equity-accounted investees 338 199
Other investments 26 26
Trade and other receivables 2,427 2,504
Investment property 4,929 4,930
Property, plant and equipment 8,817 7,437
Intangible assets 14,882 14,960
Total non-current assets 31,419 30,056
TOTAL ASSETS 118,134 101,581
Current liabilities    
Loans and borrowings 30,144 19,130
Trade payables 37,256 27,403
Other payables 4,196 4,930
Deferred income 8,334 10,587
Provisions 229 485
Total current liabilities 80,159 62,535
Non-current liabilities
Loans and borrowings 6,411 9,513
Trade payables 198 199
Other payables 96 96
Provisions 963 841
Total non-current liabilities 7,668 10,649
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -461 -463
Retained earnings 6,193 4,563
Total equity attributable to equity holders of the parent 27,943 26,311
Non-controlling interest 2,364 2,086
TOTAL EQUITY 30,307 28,397


Condensed consolidated interim statement of comprehensive income

EUR '000 Q3 2012 Q3 2011 9M 2012 9M 2011  2011
Revenue 54,134 48,831 117,054 103,260 147,802
Cost of sales -50,296 -48,120 -111,028 -103,977 -147,608
Gross profit/loss 3,838 711 6,026 -717 194
Distribution expenses -63 -74 -253 -238 -317
Administrative expenses -1,437 -1,160 -3,941 -3,284 -4,641
Other operating income 254 367 620 746 806
Other operating expenses -289 13 -346 -151 -672
Operating profit/loss 2,303 -143 2,106 -3,644 -4,630
Finance income 118 144 459 494 938
Finance expenses -133 -271 -672 -884 -1,086
Net finance expense -15 -127 -213 -390 -148
Share of profit of equity-accounted investees 90 55 139 104 100
Profit/loss before income tax 2,378 -215 2,032 -3,930 -4,678
Income tax expense 0 -15 -44 -16 -30
Profit/loss for the period 2,378 -230 1,988 -3,946 -4,708
Other comprehensive income/expense:          
Exchange differences on translating foreign operations 55 -61 2 155 -329
Total other comprehensive income/expense for the period 55 -61 2 155 -329
Profit/loss attributable to:          
- Owners of the parent 2,121 -506 1,630 -4,157 -5,304
- Non-controlling interests 257 276 358 211 596
Profit/loss for the period 2,378 -230 1,988 -3,946 -4,708
Total comprehensive income/expense attributable to:          
- Owners of the parent 2,176 -550 1,632 -4,059 -5,924
- Non-controlling interests 257 259 358 268 887
Total comprehensive income/expense 2,433 -291 1,990 -3,791 -5,037
Earnings per share attributable to owners of the parent:          
Basic earnings per share (EUR) 0.07 -0.02 0.05 -0.14 -0.17
Diluted earnings per share (EUR) 0.07 -0.02 0.05 -0.14 -0.17


Condensed consolidated interim statement of cash flows

EUR '000 9M 2012 9M 2011
Cash flows from operating activities    
Cash receipts from customers1 131,577 116,904
Cash paid to suppliers2 -113,048 -101,479
VAT paid -4,500 -2,064
Cash paid to and for employees -12,212 -9,475
Income tax paid/recovered -55 67
Net cash from operating activities 1,762 3,953
Cash flows from investing activities    
Acquisition of property, plant and equipment -1,758 -31
Proceeds from sale of property, plant and equipment and intangible assets 363 306
Proceeds from sale of investment property 0 352
Loans granted -1,007 -151
Repayment of loans granted 94 2,056
Dividends received 0 4
Interest received 0 102
Net cash used in/from investing activities -2,308 2,638
Cash flows from financing activities    
Proceeds from loans received 4,329 1,795
Repayment of loans received -2,146 -4,746
Dividends paid -80 0
Payment of finance lease liabilities -1,542 -1,401
Interest paid -859 -886
Other payments 0 -4
Net cash used in financing activities -298 -5,242
Net cash flow -844 1,349
Cash and cash equivalents at beginning of period 9,908 5,818
Effect of exchange rate fluctuations 2 -345
Decrease/increase  in cash and cash equivalents -844 1,349
Cash and cash equivalents at end of period 9,066 6,822

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

2 Line item Cash paid to suppliers includes VAT paid to suppliers.


Financial review

Financial performance

Nordecon Group ended the first nine months of 2012 with a gross profit of 6,026 thousand euros (9M 2011: a gross loss of 717 thousand euros). Most of the profit was earned in the second and third quarters where performance was not weakened by adverse weather conditions and the fixed costs of the technological standstill, which impacted the first quarter. Moreover, compared with the previous year, profit was not undermined by loss-making contracts. In the comparative period, losses from contracts secured in 2009-2010 were significant and obscured the fact that the margins of contracts secured in 2011 would have allowed us to earn a gross profit already last year.

The main factors that helped restore operational profitability were Group-wide austerity measures enforced in 2010 due to market slump, restructuring, and streamlining of internal processes and operations. Although volume growth, which emerged in 2011, has clearly improved the situation in the Estonian construction market, we will have to continue working hard to maintain and enhance the results achieved and to counteract threats to profitability. It should be kept in mind that the profits of long-term construction contracts are recognised based on the stage of completion of contract activity, which means that profit is recorded gradually over the contract term.

The rise in profitability has also been underpinned by changes in the competitive environment. According to our assessment, in 2011 competition in certain segments of the construction market (e.g. road construction and construction of water and wastewater networks) weakened considerably. This may be attributed to some construction companies going bankrupt or leaving the market as well as the fact that in recent years all companies have had to reduce their personnel and support structures, which has undermined some players’ bidding capabilities. In addition, many companies were held back by tougher financial conditions imposed by customers and the financing institutions’ reluctance to provide guarantees. Most construction companies have become aware that long-term construction contracts entail the risk of growth in input prices. However, there is still no indication of a decrease in competitive pricing pressure in building construction, where lack of private sector customers has rendered the market too small for all general contractors. Altogether, this means that companies are weighing the risks involved in price-setting more carefully than during the period of rapid downturn but the risks to profitability still persist.

Administrative expenses for the reporting period totalled 3,941 thousand euros including non-recurring consulting fees incurred to adjust the Group’s strategy in the changing environment and partial provisions made for performance bonuses. The ultimate size of the performance bonuses will be determined at the end of the financial year. The ratio of administrative expenses to revenue was 3.4% (9M 2011: 3.2%). The 12 months’ rolling average ratio was 3.3% (9M 2011: 3.8%). The Group’s cost-control measures are yielding strong results and we believe that on a whole-year basis we can maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

The Group’s operating profit for the first nine months of 2012 was 2,106 thousand euros (9M 2011: an operating loss of 3,644 thousand euros). EBITDA was positive at 3,735  thousand euros (9M 2011: negative at 1,846 thousand euros).

The Group ended the first nine months of 2012 with a net profit of 1,988  thousand euros. The profit attributable to owners of the parent, Nordecon AS, was 1,630  thousand euros. The first nine months of 2011 ended in a net loss of 3,946 thousand euros and the loss attributable to owners of the parent was 4,157 thousand euros (i.e. subsidiaries with non-controlling interests operated with a profit).

Cash flows

Operating activities of the first nine months of 2012 resulted in a net cash inflow of 1,762 thousand euros (9M 2011: 3,953 thousand euros). Operating cash flows were influenced the most by cyclical fluctuations in project-related cash flows. The settlement terms granted to customers are still unreasonably long and in the case of public procurement generally extend from 45 to 100 days while subcontractors ordinarily have to be paid within 21 to 45 days. In 2012 the difference between the settlement terms agreed with customers and those agreed with subcontractors continued to increase. We counteract the cyclical fluctuations with factoring and overdraft facilities provided for raising additional working capital.

VAT and labour tax payments increased compared with the prior year. In the reporting period, we purchased a significant amount of building materials from abroad without the possibility of recovering input VAT but on the resale of our services in Estonia VAT had to be paid. The amount of VAT payments is also influenced by the fact that the Group is earning gross profit. In the previous year, due to the incurrence of a gross loss, operating activities gave rise to prepaid VAT, which was used, among other things, to offset labour tax liabilities. In 2012 we have not had similar offsetting opportunities.

Cash flows from investing activities resulted in a net outflow of 2,308  thousand euros (9M 2011: a net inflow of 2,638 thousand euros). The main reasons for the net outflow were loans granted to associates and payments made for property, plant and equipment (including the acquisition of a new and more productive asphalt plant through a sale and leaseback transaction). In the comparative period, net cash flow from investing activities was positive on account of settlement of loans granted.

Financing activities resulted in a net cash outflow of 298 thousand euros (9M 2011: a net outflow of 5,242 thousand euros). A positive difference between loan receipts and loan repayments indicates that we have had to borrow in order to secure the liquidity required for our operating activities. The volume of loans received was also increased by the acquisition of a new asphalt plant through a sale and leaseback transaction. Finance lease payments have increased due to more active investment. Dividends paid comprise profit distributions to a subsidiary’s non-controlling shareholders.

At 30 September 2012, the Group’s cash and cash equivalents totalled 9,066 thousand euros (30 September 2011: 6,822 thousand euros).  Management’s comments on potential liquidity risks are presented in the chapter Description of the main risks.

Key financial figures and ratios

Figure/ratio 9M 2012 9M 2011 9M 2010 2011
Revenue (EUR’000) 117,054 103,260 75,257 147,802
Revenue growth/decrease, % 13.4% 37.2% -40.2% 49%
Net profit/loss (EUR’000) 1,988 -4,039 -6,233 -4,708
Profit/loss attributable to owners of the parent (EUR’000) 1,630 -4,250 -5,722 -5,304
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) 0.05 -0.14 -0.19 -0.17
Administrative expenses to revenue, % 3.4% 3.2% 4.5% 3.1%
Administrative expenses to revenue (rolling) 3.3% 3.8% 5.0% 3.1%
EBITDA (EUR’000) 3,735 -1,846 -2,052 -1,819
EBITDA margin, % 3.2% -1.8% -2.7% -1.2%
Gross margin, % 5.1% -0.7% -0.7% 0.1%
Operating margin, % 1.8% -3.5% -6.0% -3.1%
Operating margin excluding gains on asset sales, % 1.4% -3.9% -6.3% -3.5%
Net margin, % 1.7% -3.9% -8.3% -3.2%
Return on invested capital, % 4.6% -5.1% -7.4% -5.9%
Return on equity, % 6.8% -12.8% -14.7% -15.2%
Equity ratio, % 25.7% 27.6% 36.7% 28.0%
Gearing, % 41.1% 37.6% 33.0% 32.8%
Current ratio 1.08 1.18 1.56 1.14
  30 Sept 2012 30 Sept 2011 30 Sept 2010 31 Dec 2011
Order book (EUR’000) 146,070 155,421 89,430 134,043


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
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 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 equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total liabilities and equity)*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 2012, roughly 1% of the Group’s revenue was generated outside Estonia. In the first nine months of 2011, foreign operations accounted for 4% of the Group’s revenue.

  9M 2012 9M 2011 9M 2010 2011
Estonia 99% 96% 96% 97%
Ukraine 0% 0% 3% 0%
Belarus 0% 2% 1% 1%
Finland 1% 2% 0% 2%

The decline in foreign revenues results from discontinuance of operations in the Belarusian market (see also the chapter Changes in the Group’s business operations in the reporting period). Finnish revenues comprise revenue from rendering subcontracting services in the concrete works sector. We expect the contribution of foreign markets to remain at a similar level until the end of the year.

Geographical diversification of the revenue base has been a consciously deployed strategy by which the Group mitigates the risks resulting from excessive reliance on a single market. Although in the long term our strategy foresees increasing foreign operations, in the short term the Group will focus on the Estonian market and seizing opportunities in an environment that it knows best and which entails 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 building and infrastructure construction. The Group is involved in the construction of commercial and industrial buildings and facilities, road construction and maintenance, environmental engineering, concrete works and real estate development.

The Group’s revenue for the first nine months of 2012 was 117,054 thousand euros, 13% up on the 103,260 thousand euros generated in the comparative period. The foundation for revenue growth was laid in 2011 when the Estonian construction market began recovering and the Group secured a number of major new contracts which are currently in progress. The first half of 2012 was also successful in terms of winning new contracts. Year over year revenue growth should continue in the last quarter but at a somewhat slower pace.

The Group aims to maintain the revenues of its operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing operations under stressed circumstances when one segment experiences shrinkage. The Group has set an internal ceiling for revenue from the construction of apartment buildings, which has to remain below 20% of its total sales.

Segment revenue

At the end of the first nine months of 2012, the contribution of the Infrastructure segment was somewhat larger than that of the Buildings segment and it should remain so until the year-end. The Buildings segment ended nine months with revenue of 49,637 thousand euros and the Infrastructure segment with revenue of 64,607 thousand euros. The corresponding figures for the comparative period were 48,756 thousand euros and 50,525 thousand euros respectively (see note 8).

For a long time, the bulk of the work in the construction market has been related to infrastructure assets (mostly projects financed with the support of the state and the EU structural funds) and the majority (70%) of contracts in the Group’s order book belong to the Infrastructure segment. Despite this, in recent periods the segments’ revenues have been more or less equal because the present building construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is therefore comparatively smaller.

Revenue distribution between segments2 9M 2012 9M 2011 9M 2010 2011
Buildings 42% 48% 47% 48%
Infrastructure 58% 52% 53% 52%

2 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 operating segments based on their nature (i.e. building or infrastructure construction). In the segment reporting presented in the financial statements, aggregation and allocation are 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 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 have been allocated in both parts of the interim report based on the nature of the work.

Revenue distribution within segments

The Buildings segment continued to earn most of its revenue from the construction of public buildings financed by the public sector. The largest project was the construction of the Ämari Air Base, which to date is substantially complete. We have also substantially completed the construction of the Estonian embassy in Kiev. The largest ongoing construction project is the design and build of the translational medicine centre of the University of Tartu.

Improvements in the economic environment have triggered a rise in private sector investments, particularly in the commercial buildings sub-segment. During the period, we began building five new commercial buildings – three in Tallinn, one in Tartu and one in Narva.  Compared with a year ago, private sector investments have grown visibly but their relative scarcity compared with public sector investments remains a problem.

There was certain growth in private sector investments in the industrial and warehouse facilities sub-segment but most of the revenue still resulted from contracts performed for the agricultural sector. Compared with the prior year, the contribution of the industrial and warehouse facilities sub-segment has declined because the support provided by the EU structural funds that co-finance the projects has decreased and the Belarusian contract has been completed. Apartment buildings were built for non-Group customers, the Group acting as a general contractor, not a developer.

We expect revenue distribution within the Buildings segment to remain more or less stable until the year-end.

Revenue distribution within the Buildings segment 9M 2012 9M 2011 9M 2010 2011
Commercial buildings 24% 10% 24% 12%
Industrial and warehouse facilities 28% 43% 31% 40%
Public buildings 44% 45% 33% 45%
Apartment buildings 4% 2% 12% 3%


As expected, at the reporting date the main revenue source in the Infrastructure segment was road construction and maintenance. The sub-segment’s contribution was boosted by contracts secured in the first half-year - the construction of the Tartu western bypass and eastern ring road. Although the relative importance of road construction and maintenance has decreased, its revenue has increased year over year.

In specialist engineering, growth was underpinned by the construction of Sillamäe port, which commenced in the second half of 2011, and Kärdla guest harbour, which began last summer.

Similarly to preceding periods, a major share of the revenue of the Infrastructure segment resulted from the construction of water and wastewater networks (other engineering) financed with the support of the EU structural funds across Estonia.

The contribution of environmental engineering decreased because there is no contract comparable to the bio-filter for the wastewater treatment plant of Tallinn, which was under construction in 2011. We have won several environmental engineering contracts in 2012 but the bulk of their construction activity will fall in 2013.

We expect revenue distribution in the Infrastructure segment to remain more or less stable until the year-end.

Revenue distribution within the Infrastructure segment 9M 2012 9M 2011 9M 2010 2011
Road construction and maintenance 49% 56% 69% 47%
Specialist engineering (including hydraulic engineering) 15% 1% 1% 10%
Other engineering 31% 33% 22% 35%
Environmental engineering 5% 10% 8% 8%


Order book

At 30 September 2012, our order book stood at 146,070 thousand euros, being 6% smaller than a year ago.

On the one hand, order book has decreased due to gradual performance of major contracts secured in 2011 (e.g. the design and build of the Aruvalla-Kose road section, construction of berths at Sillamäe port). Addition of large contracts is irregular. Initially they increase the order book significantly (positive impact on order book), but as they are performed, the balance of major projects declines (negative impact on order book). 

On the other hand, the decline is attributable to changes taking place in the construction market. Due to market shrinkage, competition in the public buildings sub-segment is fierce and, as a result, the proportion of such contracts in the Group’s portfolio has decreased.

However, we have been able to increase our order book in the commercial and apartment buildings sub-segments (Buildings segment) and in the specialised engineering (construction of water and wastewater networks) and environmental engineering sub-segments (Infrastructure segment).

  30 Sept 2012 30 Sept 2011 30 Sept 2010 31 Dec 2011
Order book (EUR’000) 146,070 155,421 89,430 134,043

At 70% the Infrastructure segment continues to account for a major share of the total order book (30 September 2011: 74%).

Between the reporting date (30 September 2012) and the date of release of this report, Group companies have been awarded construction contracts of approximately 7,376 thousand euros.



Staff and personnel expenses

At the reporting date, the Group (the parent and the subsidiaries) employed, on average, 789 people including 372 engineers and technical personnel (ETP). In connection with growth in the Group’s operating volumes, both the number ETP and workers have increased year over year. Due to the seasonal nature of construction activity, at the reporting date the number of staff was expectedly larger than at the beginning of the financial year. For the same reason, headcount should decrease slightly towards the year-end.

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

  9M 2012 9M 2011 9M 2010 2011
ETP 372 362 380 351
Workers 417 390 428 380
Total average 789 752 808 731

The Group’s personnel expenses for the first nine months of 2012 including all taxes totalled 11,835 thousand euros, 12% up on the comparative period  when personnel expenses were 10,543 thousand euros. The growth in personnel expenses is mainly attributable to growth in the number of staff. In the third quarter, personnel expenses were further increased by the recognition of partial provisions for potential performance bonuses.

The remuneration expenses of the members of the council of Nordecon AS for the first nine months of 2012, including associated social security charges, amounted to 176 thousand euros (9M 2011: 69 thousand euros). The amount has increased in connection with the decision of Nordecon AS’s annual general meeting to increase the remuneration of the council as from 2012. The remuneration expenses of the members of the board of Nordecon AS, including social security charges, totalled 387 thousand euros (9M 2011: 204 thousand euros). The figure has increased due to the termination benefits paid to the member of the board who was recalled in May 2012. The remuneration expenses of both the council and the board include the partial provisions made for their potential performance bonuses. The ultimate size of the performance bonuses will be determined at the end of the financial year.

Labour productivity and labour cost efficiency

In connection with rapid revenue growth, both the Group’s labour productivity and labour cost efficiency have improved year over year. Labour productivity and labour cost efficiency have improved also compared with the end of 2011.

In measuring operating efficiency, the Group uses the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses paid:

  9M 2012 9M 2011 9M 2010 2011
Nominal labour productivity (rolling), (EUR’000) 213.0 173.8 124.5 202.3
Change against the comparative period, % 22.5% 39.6% -20.7% 57.7%
Nominal labour cost efficiency (rolling), (EUR’000) 10.4 8.8 6.6 10.4
Change against the comparative period, % 18.5% 34.2% -6.8% 51.6%


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)


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market in 2012-2013

  • Infrastructure contracts, which have dominated the construction market in 2012, will continue to prevail also in 2013. Opportunities for certain market growth are better in the buildings segment, where recovery has been slower, assuming that private sector customers (including foreign ones) that abandoned the market in prior years will return. The buildings segment will be influenced by two large public sector contracts, which are expected to be launched in 2013 - the Estonian National Museum and the Maarjamõisa Medical Campus of Tartu University Hospital. In housing development, the success of a project will depend on the developer’s ability to either offer a low cost or exploit a new niche. The banks’ financing terms will remain stringent.
  • The construction market will remain disproportionately reliant on public procurement and projects executed with the support of the EU structural funds. In the second half of 2012 the volume of new procurement contracts will start decreasing because the current EU budget period  is coming to an end (2013) and co-financing terms require that a project should be completed during the budget period. Anticipation of shrinkage in public sector investments from 2013 onward will intensify competition and will put pressure on construction companies’ profit expectations. Uncertainty about the future is increased by lack of information about the investment volumes of the next EU budget period (2014-2020).
  • Players will continue consolidating, 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. The tenders of 2012 reflect that pricing pressure in the segment remains strong. Based on the past three years’ experience it is reasonable to assume that stiff competition and insufficient demand will bring about slow shrinkage rather than rapid adjustment of the number of companies intermediating construction services. Besides competition, the number and business volumes of market participants will depend on their ability to make successful bids and to meet tendering requirements. In the execution phase, the decisive factors are financial management (including relations with banks) and the ability to secure sufficient liquidity.
  • Companies will continue to challenge the results of poorly prepared public procurements but mostly on account of substantive, not technical issues. Somewhat fewer public procurements will be cancelled because customers have prepared the budgets using unrealistic construction prices that are tens of percents lower than the bids made by construction companies.
  • The contracts signed with public sector customers will impose rigorous conditions on construction companies, including extensive obligations, strict sanctions, different financial guarantees, extremely long settlement terms, etc. In a situation where public procurement is based on underbidding, this increases the risks of all market participants.
  • Growth in input prices will decelerate compared with the previous year, remaining within the range of a few percent (on a quarterly basis) throughout 2012. However, there are areas where price fluctuations are unpredictable and may be notably greater and hard or even impossible to influence (petroleum and metal products and some other materials). The rise in input prices, which began in 2011, has reached a point where it is holding back private customers’ investment decisions.
  • The situation in the labour market will remain relatively stable. Companies have adapted to the situation but when volumes increase the availability of qualified labour will again be an issue. In 2012 the base wage paid by construction companies, which have to maintain tight cost control, is not likely to rise but the pressure for a wage increase remains high. There will be no more surges in labour migration to the Nordic countries. As the size of the Nordic construction market stabilises, the same will probably happen to labour migration.
  • In 2012 the construction market will continue to be seriously and somewhat unpredictably impacted by massive funds raised from the sale of carbon dioxide emission quotas, which are allocated within an extremely short period for improving the energy efficiency of buildings. It has already triggered demand hikes in certain segments of the construction market (joint filling, facade and roof works, installation of heating systems, etc), causing unreasonable rises in respective prices and hence temporary problems for the entire sector. In 2013, when the resources are depleted, volumes will plummet and competition will heighten, particularly among smaller and medium-sized players in the segments involved.
  • The volume of private investments in the construction sector will depend on the economic growth rate, the export markets and related forecasts. According to economic statistics on 2011, in recent years companies, investors and banks have made decisions that have held back private sector investments. The recovery, which began in 2012, will continue in 2013 but the decision-making processes will be slow and cautious and private sector customers will not yet become a viable alternative to public sector customers. Moreover, the European debt crisis, which has both direct and indirect influence on investment decisions, has not been definitively resolved. Still, we expect to see a few large investments in certain sub-segments of both building and infrastructure construction (extensions to shopping centres and industrial facilities, and hydraulic engineering projects respectively).


Latvia and Lithuania

According to the Group’s assessment, the Latvian construction market will continue adjusting to the post-recession environment also in 2012. We do not exclude the possibility that in the next few years we will undertake some projects in Latvia through our Estonian entities, involving partners where necessary. Execution of project-based business assumes that the projects can be performed profitably. The decision does not change our strategic objectives in Latvia, i.e. the objective of operating in the Latvian construction market through local subsidiaries.

For the time being, we have suspended the operations of our Lithuanian subsidiary, Nordecon Statyba UAB. We are monitoring market developments and do not rule out the possibility that in the next few years we will 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 strategic objectives in Lithuania, i.e. the objective of operating in the Lithuanian construction market through local subsidiaries.


The Group operates in Ukraine as a general contractor and project manager in the segment of commercial buildings and production facilities, offering its services primarily to foreign private sector customers. In the past three years, there have been practically no private sector customers in that segment. We do not believe that at the end of 2012 there will be a significant increase in the activity of customers that interest us in the Ukrainian market. Maintaining minimal readiness at the current cost base, we have decided to continue our business in Ukraine until the end of 2012.

Most probably we will continue operating in Ukraine with a similar action plan also in 2013. At the end of 2012, management of our Ukrainian operations will be assigned to a new CEO who has been working for an entity related to the Group’s Ukrainian operations for over six years. The main task set by the Group for the first half of 2013 is to conduct a critical analysis of the prospects of the Group’s Ukrainian operations and to develop an appropriate action plan.

The main risks in the Ukrainian market stem from the low administrative efficiency of the central and local government and the judicial system. Ukraine’s recovery from the economic crisis of 2008-2010 has been slow and achievement of political stability complicated. Demand continues to be undermined by private customers’ pessimism about the political future of the country and lack of financing for commencing construction operations. To date private sector customers have not started investing in projects where the Group would have a competitive advantage.

The country with a population of around 46 million continues to experience tough times. Unfortunately, the ongoing uncertainty is increasing the risks of companies operating in the local construction market.


In the Finnish market the Group offers subcontracting services in the field of concrete works. This is an area where Estonian companies still have an edge over local entities because our total personnel expenses are lower. The Finnish concrete works (sub)contracting market allows us to compete for selected projects (the main criteria are the location and the customer’s low risk level). The prospects of continuing operations in Finland in 2013 according to the same action plan are good. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks. We are not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).


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. In addition, in the region where the Group operates construction operations are influenced by seasonality caused by the change of seasons.

The Group acknowledges 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 are rising involves as high risk because the contract may quickly start generating a loss.

In the next years, the Estonian construction market will be heavily dependent on public sector investments. A significant proportion of the latter is made up of support from the EU structural funds. The availability of that support is relatively certain until the end of the current budget period (2007-2013). According to disbursement terms, a supported project has to be completed by the end of the budget period. This means that in 2013 the number of projects launched will decrease significantly. We do not know the details of the budget for 2014-2020, although it is clear that the investments included in it will have a significant and direct impact on the business volumes of construction companies. According to currently available information, the volume of planned investments will decrease.

The impacts of seasonality are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, surface works, etc). In order to disperse the risk, the Group has secured road maintenance contracts that generate year-round business. According to its business strategy, the Group counteracts seasonal fluctuations in its infrastructure operations with building construction operations that are less exposed to seasonality. Thus, the Group endeavours to keep the operating volumes of the two segments in balance (see also the chapter Performance by business line). In addition, Group companies consistently seek new technical solutions that would yield greater efficiency under changeable weather conditions.  

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

On 26 September 2012, the Public Prosecutor’s Office issued a ruling by which it terminated the criminal proceedings instituted against Nordecon AS and a member of its management board, Erkki Suurorg, in November 2010.

The criminal matter concerned the first procurement of services for the design and build of the Aruvalla-Kose road section arranged by the Estonian Road Administration. In connection with the procurement, Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were charged with suspicion of attempting to conclude an agreement for distorting competition and to engage in concerted practices, as well as of attempting to offer a bribe which in the course of the proceedings was reclassified to an attempt to grant gratuities.

The criminal proceedings concerning the attempt to grant gratuities were terminated by the Public Prosecutor’s Office already earlier, with a ruling issued on 20 June 2012. In the final ruling, the Public Prosecutor’s Office found, based on evidence gathered, that the suspicions brought against Erkki Suurorg and Nordecon AS had no basis and terminated the criminal proceedings against them in their entirety.

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 the performance of their obligations with a bank guarantee provided to a Group company. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranties provisions based on their historical experience. At 30 September 2012, the Group’s warranties provisions (including current and non-current ones) totalled 1,092 thousand euros. At 30 September 2011, the corresponding figure was 925 thousand euros.

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

Financial risks

Credit risk

In the reporting period, the Group did not have to recognise any significant credit losses. The credit risk exposure of the Group’s receivables continued to be low because the proportion of public sector customers that receive their financing from the state and local government as well as the EU structural funds was high. The main indicator of the realisation 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.

At the end of the first nine months of 2012, credit losses on the write-down of receivables totalled 233 thousand euros (9M 2011: 28 thousand euros). 

The Group has recognised a trade receivable of approximately 2.4 million euros (includes a portion of late payment interest) related to the construction of the Exhibition Building of the Estonian Maritime Museum. Under the contract, determination of whether the claim has merit is at the discretion of the Arbitration Court of the Estonian Chamber of Commerce and Industry. The Group’s management is convinced that the claim has merit and has therefore not written the receivable down. Most probably the case will be ruled upon in 2013.

Liquidity risk

The Group remains exposed to higher than average 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.

The Group continues to work with the banks in implementing its financing program for 2011-2014, which was developed in 2011 with the assistance of one of the world’s leading consulting firms, Roland Berger Strategy Consultants. In line with the program, the banks will support the Group’s liquidity position by refinancing long-term loans and by granting repayment holidays for loan principal (for 2011-2012 with the option to extend the repayment holiday for 2013). Where necessary, the banks will support the Group with additional short-term loans. At the end of the reporting period, the Group had received loans of this kind (including unused facilities) of 6.2 million euros. 

At 30 September 2012, the Group’s current assets exceeded its current liabilities 1.08-fold (30 September 2011: 1.18-fold). Bank loans make up a significant proportion of 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. Although management believes that it is likely that the Group’s overdraft liabilities and other short-term bank loans will be refinanced for another 12 months, relevant decisions will be made in 2013 when the loans fall due. Therefore, at the reporting date the loan commitments constituted short-term liabilities. According to the Group’s estimates, current liabilities include loans of 10,499 thousand euros that will probably be refinanced. If the items were reported as long-term liabilities, the current ratio would be 1.24.

At the reporting date, the Group’s cash and cash equivalents totalled 9,066 thousand euros (30 September 2011: 6,822 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 floating interest rates is mostly Euribor. At 30 September 2012, the Group’s interest-bearing loans and borrowings totalled 36,555 thousand euros, an increase of 7,837 thousand euros year over year, of which 6,535 thousand euros resulted from an increase in short-term factoring liabilities. Interest expense for the first nine months of 2012 amounted to 799 thousand euros. Compared with the first nine months of 2011, interest expense has increased by 55 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/EONIA) and a low interest coverage ratio caused by weak operating cash flow. The first risk factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. Realisation of the second risk factor depends on the success of operating activities.

In recent years, banks and leasing companies have been increasingly interested in charging a floating interest rate. This increases the Group’s exposure to additional finance costs that may result from a rise in the base interest rate. The Group has not acquired any derivatives for hedging the risks arising from instruments with a floating interest rate.

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 in Ukrainian hryvnas (UAH). From the beginning of 2012 the Group is not exposed to currency risks related to the Belarusian ruble (BYR) because the Group has practically discontinued its operations in Belarus. The exchange rate of the Ukrainian hryvna against the euro has been stable since 2010. In the first nine months of 2012, fluctuations in the euro-hryvna exchange rate remained below 10%. The Group’s net foreign exchange loss for the first nine months of 2012 was 8 thousand euros (9M 2011: a net foreign exchange gain of 35 thousand euros).

Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s Finnish operations do not involve a currency risk. Nor does the Group have any currency risk in Lithuania where operations have been suspended. Currency risk is also reduced by the fact that the prices of construction materials and services that the Group’s Estonian entities purchase from abroad are mostly denominated in euros.

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


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructure segments. 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, the Group includes more than 10 subsidiaries. The Group’s consolidated revenue for 2011 was 147.8 million euros. Currently, Nordecon Group employs more than 700 people. Since 18 May 2006 the parent 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

Investor presentation_9m_2012.pdf