English Estonian
Published: 2012-05-10 15:45:00 CEST
Quarterly report

2012 I quarter and 3 months consolidated interim report (unaudited)

Nordecon AS announces its 2012 I quarter and 3 months consolidated interim report (unaudited).

Tallinn, Estonia, 2012-05-10 15:45 CEST -- Announcement includes Nordecon AS’ consolidated financial statements for 2012 I quarter and 3 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 report and fact sheet are attached to the announcement and are also published on Nordecon’s web page (http://www.nordecon.com/root/en/for-investor/investor-presentations).


Condensed consolidated interim statement of financial position

EUR '000 31 March 2012 31 December 2011
Current assets    
Cash and cash equivalents 5,385 9,908
Trade and other receivables 28,274 34,645
Prepayments 2,661 2,610
Inventories 24,154 24,120
Non-current assets held for sale 0 242
Total current assets 60,474 71,525
Non-current assets
Investments in equity-accounted investees 191 199
Other investments 26 26
Trade and other receivables 2,338 2,504
Investment property 4,930 4,930
Property, plant and equipment 7,534 7,437
Intangible assets 14,934 14,960
Total non-current assets 29,953 30,056
TOTAL ASSETS 90,427 101,581
Current liabilities    
Loans and borrowings 23,466 19,130
Trade payables 19,161 27,403
Other payables 3,583 4,930
Deferred income 9,998 10,587
Provisions 388 485
Total current liabilities 56,596 62,535
Non-current liabilities
Loans and borrowings 5,610, 9,513
Trade payables 199 199
Other payables 96 96
Provisions 876 841
Total non-current liabilities 6,781 10,649
Share capital 19,657 19,657
Statutory capital reserve 2,554 2,554
Translation reserve -402 -463
Retained earnings 3,199 4,563
Total equity attributable to equity holders of the parent 25,008 26,311
Non-controlling interest 2,042 2,086
TOTAL EQUITY 27,050 28,397


Condensed consolidated interim statement of comprehensive income

EUR '000 3M 2012 3M 2011 2011
Revenue 22,475 17,723 147,802
Cost of sales -22,439 -17,796 -147,608
Gross profit/loss 36 -73 194
Distribution expenses -76 -96 -317
Administrative expenses -1,230 -1,067 -4,641
Other operating income 113 226 806
Other operating expenses -88 -106 -672
Operating loss -1,245 -1,116 -4,630
Finance income 145 183 938
Finance expenses -284 -305 -1,086
Net finance expense -139 -122 -148
Share of loss/profit of equity-accounted investees -24 0 100
Loss before income tax -1,408 -1,238 -4,678
Income tax income/expense 0 4 -30
Loss for the period -1,408 -1,234 -4,708
Other comprehensive income/expense:      
Exchange differences on translating foreign operations 61 115 -329
Total other comprehensive income/expense for the period 61 115 -329
Profit/loss attributable to:      
- Owners of the parent -1,364 -1,177 -5,304
- Non-controlling interests -44 -57 596
Loss for the period -1,408 -1,234 -4,708
Total comprehensive income/expense attributable to:      
- Owners of the parent -1,303 -1,090 -5,924
- Non-controlling interests -44 -29 887
Total comprehensive expense -1,347 -1,119 -5,037
Earnings per share attributable to owners of the parent:      
Basic earnings per share (EUR) -0.04 -0.04 -0.17
Diluted earnings per share (EUR) -0.04 -0.04 -0.17


Condensed consolidated interim statement of cash flows

EUR '000 3M 2012 3M 2011
Cash flows from operating activities    
Cash receipts from customers 33,481 21,774
Cash paid to suppliers -31,652 -20,525
VAT paid -1,558 -372
Cash paid to and for employees -4,073 -2,853
Income tax paid -12 -1
Net cash used in operating activities -3,814 -1,977
Cash flows from investing activities    
Acquisition of property, plant and equipment -288 -6
Proceeds from sale of property, plant and equipment and intangible assets 128 277
Loans granted -294 -39
Repayment of loans granted 9 13
Interest received 0 3
Net cash used in/from investing activities -445 248
Cash flows from financing activities    
Proceeds from loans received 1,503 163
Repayment of loans received -851 -1,164
Payment of finance lease liabilities -605 -493
Interest paid -310 -289
Net cash used in financing activities -263 -1,783
Net cash flow -4,522 -3,512
Cash and cash equivalents at beginning of period 9,908 5,818
Effect of exchange rate fluctuations -1 -3
Decrease  in cash and cash equivalents -4,522 -3,512
Cash and cash equivalents at end of period 5,385 2,303


Financial review

Financial performance

Nordecon Group ended the first quarter of 2012 with a gross profit of 36 thousand euros, a strong improvement on the gross loss of 75 thousand euros incurred in the comparative period. It should also be noted that in the first quarter construction companies’ performance is influenced by seasonal factors, such as the weather conditions and the typical features of public procurement (in the first quarter fewer contracts are put out to tender than in the following quarters). Although the weather conditions were somewhat milder than in the previous year, they had a strong impact on the Group’s margins. Road maintenance costs are usually the highest in the first quarter and in a situation where revenue is fixed, the weather conditions and enforcement of somewhat stricter maintenance requirements have a direct effect on profitability. Moreover, a long winter season (which causes a so-called technological standstill) means incurrence of fixed costs in the Infrastructure segment where the revenue base shrinks during that period.    

We continue the work aimed at bringing the Group back into profit. The cost-cutting and streamlining measures enforced in 2010 yielded results already in 2011. We expect an even greater improvement this year, because the last remaining loss-generating contracts, which were signed in 2009-2010, will be completed. On the other hand, it should be kept in mind that the profits of construction contracts are recognised based on the stage of completion of contract activity, which means that the profits earned under long-term contracts are earned gradually over the entire contract term.

Although the Group’s margins do not yet meet the targets set by management, we believe that we are moving in the right direction to improve our operating margins compared with 2011. The current estimates of the final outcomes of contracts included in our order book (the portfolio of secured uncompleted contracts) support that view.

According to the Group’s 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 deciding to exit 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 the 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 first quarter of 2012 totalled 1,230 thousand euros including non-recurring consulting fees incurred to adjust the Group’s operating strategy to changes in the external environment. Compared with the same period last year, the ratio of administrative expenses to revenue decreased to 5.5% (Q1 2011: 6.0%). Our cost-control measures are yielding strong results and we believe that on a whole-year basis we can maintain the Group’s administrative costs below the target ceiling, i.e. 5% of revenue.

The Group’s operating loss for the first quarter was 1,245 thousand euros (Q1 2011: 1,116 thousand euros). One of the factors, which caused operating loss to increase slightly compared with a year ago, was that in the comparative period gains on the disposal of property, plant and equipment were more than two times larger (213 thousand euros in Q1 2011 against 100 thousand euros for Q1 2012).

The Group ended the first quarter of 2012 with net loss of 1,408 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 1,364 thousand euros. The first quarter of 2011 ended in a net loss of 1,234 thousand euros and the loss attributable to owners of the parent was 1,177 thousand euros.

Cash flows

Operating activities for the first quarter of 2012 resulted in a net cash outflow of 3,814 thousand euros (Q1 2011: a net outflow of 1,977 thousand euros). Although cash receipts from customers exceeded cash paid to suppliers, net cash flow was rendered negative by VAT and labour tax payments, which increased substantially compared with the prior year. In the first quarter of 2012, we purchased a significant amount of construction services from abroad from which we could not deduct input VAT but on the resale of the services in Estonia VAT had to be paid. In the previous year, our operations resulted in prepaid VAT, which was used to offset labour tax liabilities. In the first quarter of this year we did not have similar offsetting opportunities.

Operating cash flows continued to be influenced by cyclical fluctuations in project-related cash flows. The settlement terms granted to customers are long and in the case of public procurement generally extend from 45 to 100 days. The Group counteracts cyclical fluctuations with factoring. On the whole, the cash flows of the current year should be positively influenced by the fact that in the next few months we will complete the last remaining contracts signed in 2009-2010, which have generated significant losses.    

Cash flows from investing activities resulted in a net outflow of 445 thousand euros (Q1 2011: a net inflow of 248 thousand euros). The main reasons for the net outflow were loans granted to associates and payments and prepayments made for property, plant and equipment. In the comparative period, net cash flow from investing activities was positive because of payments received on the sale of property, plant and equipment.  In terms of amounts, cash inflows and outflows from investing activities remained expectedly modest.

Financing activities resulted in a net outflow of 263 thousand euros (Q1 2011: a net outflow of 1,783 thousand euros). The Group’s cash flows from financing activities have stabilised thanks to the agreements reached with banks regarding repayment holidays and extension of settlement terms. The changes did not result in any significant change in the loan interest rates. 

At 31 March 2012, the Group’s cash and cash equivalents totalled 5,385 thousand euros (31 March 2011: 2,303 thousand euros).  Management’s comments on liquidity risks are presented in the chapter Description of the main risks.


Key financial figures and ratios

Figure/ratio 3M 2012 3M 2011 3M 2010 2011
Revenue (EUR’000) 22,475 17,723 11,248 147,802
Revenue growth/decrease 27% 58% -70% 49%
Net loss (EUR’000) -1,408 -1,234 -1,606 -4,708
Loss attributable to owners of the parent (EUR’000) -1,364 -1,177 -1,316 -5,304
Weighted average number of shares 30,756,728 30,756,728 30,756,728 30,756,728
Earnings per share (EUR) -0.04 -0.04 -0.04 -0.17
Administrative expenses to revenue 5.5% 6.0% 10.4% 3.1%
Administrative expenses to revenue (rolling) 3.1% 4.5% 5.3% 3.1%
EBITDA (EUR’000) -647 -484 -1,968 -1,819
EBITDA margin -2.9% -2.7% -17.5% -1.2%
Gross margin 0.2% -0.4% -13.5% 0.1%
Operating margin -5.5% -6.3% -25.9% -3.1%
Operating margin excluding gains on asset sales -6.0% -7.5% -25.9% -3.5%
Net margin -6.3% -7.0% -14.3% -3.2%
Return on invested capital -2.1% -1.5% -1.7% -5.9%
Return on equity -5.1% -3.8% -3.6% -15.2%
Equity ratio 29.9% 35.5% 44.0% 28.0%
Gearing 42.2% 44.8% 22.8% 32.8%
Current ratio 1.07 1.36 1.74 1.14
  31 March 2012 31 March 2011 31 March 2010 31 Dec 2011
Order book (EUR’000) 136,235 91,974 88,603 134,043


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 quarter of 2012, roughly 2% of the Group’s revenue was generated outside Estonia. In the first quarter of 2011, foreign operations accounted for 8% of the Group’s revenue.

  3M 2012 3M 2011 3M 2010 2011
Estonia 98% 92% 96% 97%
Ukraine 0% 0% 4% 0%
Belarus 0% 5% 0% 1%
Finland 2% 3% 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 first quarter of 2012), which in the first quarter of the previous year accounted for 5% of total revenue. Finnish revenues comprise revenue from rendering subcontracting services in the concrete works sector. We expect the contribution of foreign markets to remain stable for the rest 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 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 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 quarter of 2012 was 22,475 thousand euros, 27% up on the 17,723 thousand euros generated in the first quarter of 2011. The foundation for revenue growth was laid in 2011 when the Estonian construction market began recovering and the Group secured significantly more new contracts than in 2010. Revenue should continue growing on a year over year basis also in the following quarters, although 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 the Group’s total sales.

Segment revenue

The first-quarter revenues of our two main operating segments were practically equal. Usually, the Buildings segment generates more first-quarter revenue because the winter season hinders full-scale performance of infrastructure projects. The Buildings and Infrastructure segments ended the first quarter of 2012 with revenue of 11,865 thousand euros and 9,973 thousand euros respectively. The corresponding figures for the comparative period were 8,724 thousand euros and 8,389 thousand euros (see note 8).

For a long time, the majority of 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 (78% at the reporting date) of contracts in the Group’s order book belong to the Infrastructure segment. Despite this, the segments’ revenues have been practically equal because our active 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. In the next quarters, the contribution of the Infrastructure segment should increase compared with that of the Buildings segment.


Revenue distribution between segments *

Operating segments 3M 2012 3M 2011 3M 2010 2011
Buildings 54% 51% 72% 48%
Infrastructure 46% 49% 28% 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 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

In the Buildings segment, most of the revenue resulted from the construction of public buildings financed by the public sector. However, compared with a year ago, the proportion of public buildings has decreased. Partly this results from growth in the contributions of other sub-segments and partly from the completion of some major contracts (including the contract for the Maritime Museum) in 2011, which reduced revenue compared with a year ago. The period’s largest project for the sub-segment was the Ämari Air Base. In 2011 the economic environment improved, triggering some recovery in the commercial buildings and industrial and warehouse facilities sub-segments, where private investors began making small-scale investments (2-4 million euros). As a result, revenue grew in both sub-segments. A significant proportion of the revenue of the industrial and warehouse facilities sub-segment results from the work done for the agricultural sector. Apartment buildings were built for non-Group customers, the Group acting as a general contractor, not a developer.

Revenue distribution within the Buildings segment is influenced by the scarcity of projects on offer, which forces companies to compete in all market segments as the number of contracts awarded is small compared to bids made. The situation does not allow concentrating on a specific area and during the year revenue distribution within the segment may change significantly.

Revenue distribution within the Buildings segment 3M 2012 3M 2011 3M 2010 2011
Commercial buildings 19% 11% 22% 12%
Industrial and warehouse facilities 32% 28% 28% 40%
Public buildings 42% 58% 34% 45%
Apartment buildings 7% 3% 16% 3%


In the Infrastructure segment, the main contributor was other engineering, where most of the revenue was earned on the construction of water and wastewater networks in different places across Estonia. The decrease in the sub-segment’s contribution is attributable to revenue growth in other sub-segments. In particular, significant revenue growth was achieved in road construction and maintenance and in specialist engineering. In road construction, the largest contracts with a positive impact were the construction of the Aruvalla-Kose road section, awarded in 2011, and the Luige intersection on the Tallinn ring road. In specialist engineering, growth was underpinned by the construction of facilities for Sillamäe port, which commenced in the second half of 2011. The contribution of environmental engineering has decreased because there is currently no contract comparable to the construction of a bio-filter for the wastewater treatment plant of Tallinn, which was in progress in the first quarter of 2011. In light of existing and recently secured major road construction contracts (including the construction of the Tartu western bypass and the Tartu city eastern ring road), the contribution of road construction and maintenance should increase in the following quarters.  

Revenue distribution within the Infrastructure segment 3M 2012 3M 2011 3M 2010 2011
Road construction and maintenance 36% 21% 52% 47%
Specialist engineering (including hydraulic engineering) 19% 1% 3% 10%
Other engineering 41% 50% 30% 35%
Environmental engineering 4% 28% 15% 8%


Order book

At 31 March 2012, our order book stood at 136,235 thousand euros, being 48% larger than at 31 March 2011, when the figure was 91,974 thousand euros. Order book has increased thanks to general growth in the construction market and successful bidding, which has led to the award of several major contracts (such as the Aruvalla-Kose road section, Sillamäe port facilities, Luige intersection, Ämari Air Base, etc) since the second quarter of 2011.

  3M 2012 3M 2011 3M 2010 2011
Order book (EUR’000) 136,235 91,974 88,603 134,043

At 78% the Infrastructure segment continues to account for a major proportion of the total order book (31 March 2011: 71%).

Between the reporting date (31 March 2012) and the date of release of this report, Group companies have been awarded construction contracts of approximately 26,623 thousand euros. The figure includes a contract of 13,955 thousand euros signed on 26 April 2012 for the design and build of section 1 of the Tartu city eastern ring road.



Staff and personnel expenses

During the first quarter of 2012, the Group (the parent and the subsidiaries) employed, on average, 734 people including 362 engineers and technical personnel (ETP). In connection with growth in the Group’s operating volumes in 2011, both the number ETP and the number of workers have increased year over year. Because of the seasonal nature of construction activity, the number of staff may increase somewhat during the year.

Average number of the Group’s employees (comprising all Group entities)

  3M 2012 3M 2011 3M 2010 2011
ETP 362 337 354 351
Workers 372 362 391 380
Total average 734 699 745 731

The Group’s personnel expenses for the first quarter of 2012 including all associated taxes totalled 3,147 thousand euros, 2% up on the first quarter of 2011 when personnel expenses were 3,076 thousand euros.

The remuneration of the members of the council of Nordecon AS, including associated social security charges, amounted to 21 thousand euros. The corresponding figure for the first quarter of 2011 was also 21 thousand euros. The remuneration of the members of the board of Nordecon AS, including social security charges, totalled 72 thousand euros. The figure for the comparative period was also 72 thousand euros. 

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

  3M 2012 3M 2011 3M 2010 2011
Nominal labour productivity (rolling), (EUR’000) 206.4 138.7 126.9 202.3
Change against the comparative period 48.8% 9.3% -33.4% 57.7%
Nominal labour cost efficiency (rolling), (EUR’000) 10.7 7.4 6.3 10.4
Change against the comparative period 43.6% 17.6% -15.7% 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

  • According to our estimates, the construction market will not grow significantly in 2012. Infrastructure contracts will dominate but opportunities for certain market growth will be better in the building segment where recovery has been slower, assuming that private sector customers (including foreign investors) that abandoned the market in previous years will return. In new 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. Consumer behaviour will remain highly volatile while banks will impose more stringent financing conditions.
  • Total demand in the construction market will remain disproportionately reliant on public procurement contracts and projects executed with the support of the EU structural funds. The success of such projects is directly related to the administrative and procurement capabilities of the central and local government. Patchy procurement quality may cause hold-ups and disruptions both during the procurement proceedings and the construction process.
  • Players will continue consolidating, particularly as regards general contractors in the segment of building construction, where competition is still overly aggressive. Bids made for contracts put out to tender in 2011 reflect that pricing pressure in the segment remains strong. In addition to competition, the number and business volumes of market participants will depend on their ability to participate in the bidding process and meet tendering requirements. In the execution phase, the decisive factors will be financial management (including relations with banks) and the ability to ensure sufficient liquidity, particularly when loss-generating contracts need to be performed.
  • Companies may continue to challenge the results of poorly prepared public procurements but mostly on account of fundamental, not technical issues. Some procurements will be cancelled because customers have prepared their budgets based on the construction prices of 2009-2010 but in the current situation these are no longer realistic and construction companies’ bids exceed them by tens of percents. The time and finance costs of the proceedings will be high for all involved.
  • The contracts signed with public sector customers will impose rigorous conditions on construction companies, including greater obligations for the builder, strict sanctions, different financial guarantees, long settlement terms, etc. In a situation where the public procurement process is based on underbidding, this increases the risks of all market players.
  • 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. On the other hand, 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 situation in the labour market has somewhat stabilised and labour 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. On the whole, in 2012 the base wage paid by construction companies that have to maintain tight cost control is not expected to increase.
  • In 2012 the construction market will be seriously and somewhat unpredictably impacted by massive funds raised from the sale of carbon dioxide emission quotas, which will be allocated within an extremely short period for improving the energy efficiency of buildings. This has already triggered demand hikes in some specialised segments of the construction market (joint filling, facade and roof works, installation of heating systems, etc) and unreasonable rises in respective prices, which will cause temporary problems for the entire sector.
  • The volume of investments made in the construction sector by private investors will depend on the economic growth rate and forecasts made on the basis of the latter. According to economic statistics on 2011, in recent years all parties - companies, investors and banks have made decisions that have reduced private sector investments. In 2012 the volume of investments will not increase significantly, because in line with the current outlook economic growth has started to slow after a recovery that followed the slump of 2010 and consumer confidence remains low. The sovereign debt crisis is Europe has not been resolved either. On the other hand, investment may grow more vigorously in certain building and infrastructure sub-segments.

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 the Group’s 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 the Group will resume its Lithuanian operations on a project basis. Temporary suspension of operations does not cause any major costs for the Group and it 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 in 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, the Group has decided to continue its business in Ukraine until the end of 2012. We review the sustainability of our Ukrainian operations on a regular basis and will make a more definite decision regarding future steps in the autumn.

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 sector 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 is facing some tough choices. Unfortunately the ongoing uncertainty is also 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). We expect demand for concrete works to remain stable in 2012. Nevertheless, we will maintain a rational approach and will avoid taking excessive risks in Finland. 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 principal 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.

During the next years, the Estonian construction market will be heavily dependent on public sector investments, which consist largely of the support allocated from the EU structural funds. The availability of this support is relatively certain until 2013 (inclusive) when the current budget period ends. At present, we do not have detailed information on the structure of the budget for 2014-2020, but it is clear that the investments included in it will have a direct and significant impact on the business volumes of companies operating in the construction market.

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 risks, 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. Consequently, 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.

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

On 25 September 2008, the Estonian Road Administration published a notice of the public procurement of services for the design and build of the E263 Aruvalla-Kose road section. Nordecon AS (at that date the Group’s subsidiary Nordecon Infra AS) and Ramboll Eesti AS submitted a joint bid of 32.4 million euros.

The procurement gave rise to numerous challenges in the period 2008-2010. Owing to the challenges, the Road Administration decided to cancel the procurement but the public procurement dispute review committee declared the Road Administration’s resolution for cancellation invalid. The procurement process reached the stage where the joint bid of Nordecon AS and Ramboll Eesti AS was selected as the successful one and only the contract needed to be signed. However, on 26 October 2010 the financial control department of the ministry of finance, exercising state supervision, declared the procurement process invalid on the basis that during the proceedings the Road Administration had repeatedly and seriously violated the Public Procurement Act.

Nordecon AS and Ramboll Eesti AS challenged the resolution of the financial control department of the ministry of finance in the administrative court and applied for preliminary legal protection that would have allowed moving on with the public procurement proceedings. The court did not apply preliminary legal protection although it found that the challenge had potential.

The security police board instituted criminal proceedings for investigation of circumstances surrounding the public procurement of services for the design and build of the Aruvalla-Kose road section. Member of the management board of Nordecon AS Erkki Suurorg and Nordecon AS (at the time Nordecon Infra AS) were charged with suspicion of attempting to conclude an agreement for distorting competition. Suspicion charges were also brought against the director general of the Road Administration and the chancellor of the ministry of economics. Nordecon AS and Erkki Suurorg have given their testimony to the security police board and have affirmed that the charges against them are baseless. By the date of release of this report, no criminal charges have been filed against any of the suspects.

If criminal charges are brought and a conviction takes effect, then under section 400 of the Penal Code the maximum pecuniary punishment for Nordecon AS may extend to 10% of turnover and for a time the company may not be allowed to tender for public procurement contracts.

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 31 March 2012, the Group’s warranties provisions (including current and non-current ones) totalled 1,153 thousand euros. At 31 March 2011, the corresponding figure was 1,192 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

Despite continued uncertainty, the Group did not have to recognise any significant credit losses. The credit risk exposure of the Group’s receivables continues 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 is 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.

In the first quarter of 2012, the Group recognised credit losses of 4 thousand euros (Q1 2011: 2 thousand euros).  

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 of 3.1 million euros.  

At 31 March 2012, the Group’s current assets exceeded its current liabilities 1.07-fold (31 March 2011: 1.36-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 the next quarters of 2012. Therefore, at the reporting date the loan commitments constituted short-term liabilities. According to the Group’s estimates, current liabilities include loans of 10,510 thousand euros that will probably be refinanced in 2012. If the current ratio were adjusted accordingly, it would be 1.31.

At the reporting date, the Group’s cash and cash equivalents totalled 5,385 thousand euros (31 March 2011: 2,303 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 31 March 2012, the Group’s interest-bearing loans and borrowings totalled 29,076 thousand euros, a decrease of 1,285 thousand euros year-over-year. Interest expense for the first quarter of 2012 amounted to 993 thousand euros. Compared with the first quarter of 2011, interest expense has decreased by 3 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 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. Meanwhile, the Group’s loan liabilities have decreased and the trend is likely to continue in subsequent years. This curbs the potential negative impact of a rise in the base interest rate on the Group’s interest-related cash flows. 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 quarter of 2012, fluctuations in the euro-hryvna exchange rate remained below 5%. The Group’s foreign exchange gains and losses for the first quarter of 2012 resulted in a net exchange gain of 91 thousand euros (Q1 2011: 140 thousand euros).

In connection with suspension of operations in Lithuania, currency risks related to that country are not relevant. Since Estonia’s adoption of the euro at the beginning of 2011, the Group’s Finnish operations do not involve a currency risk. Currency risk is also reduced by the fact that the prices of 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 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 2011 was 147.8 million euros. Currently Nordecon Group employs more than 700 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.

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