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Published: 2015-05-07 15:15:00 CEST
Quarterly report

2015 first quarter consolidated interim report (unaudited)

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

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

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


Condensed consolidated interim statement of financial position

EUR '000 31 March 2015 31 December 2014
Current assets    
Cash and cash equivalents 2,198 8,802
Trade and other receivables 23,145 23,235
Prepayments 1,816 1,201
Inventories 24,821 24,788
Total current assets 51,980 58,026
Non-current assets
Investments in equity-accounted investees 502 694
Other investments 26 26
Trade and other receivables 11,276 11,211
Investment property 3,549 3,549
Property, plant and equipment 9,648 9,319
Intangible assets 14,637 14,633
Total non-current assets 39,638 39,432
TOTAL ASSETS 91,618 97,458
Current liabilities    
Loans and borrowings 19,548 20,588
Trade payables 21,256 26,267
Other payables 7,052 7,542
Deferred income 3,157 1,786
Provisions 674 799
Total current liabilities 51,687 56,982
Non-current liabilities
Loans and borrowings 3,382 3,145
Trade payables 109 109
Other payables 96 96
Provisions 807 759
Total non-current liabilities 4,394 4,109
Share capital 20,692 20,692
Own (treasury) shares -1,582 -1,582
Share premium 547 547
Statutory capital reserve 2,554 2,554
Translation reserve 1,295 771
Retained earnings 10,430 11,714
Total equity attributable to owners of the parent 33,936 34,696
Non-controlling interests 1,601 1,671
TOTAL EQUITY 35,537 36,367


Condensed consolidated interim statement of comprehensive income

EUR´000   Q1 2015 Q1 2014 2014
Revenue   27,113 23,544 161,289
Cost of sales   -26,704 -22,374 -151,476
Gross profit   409 1,170 9,813
Marketing and distribution expenses   -118 -249 -558
Administrative expenses   -1,109 -1,124 -5,656
Other operating income   104 65 792
Other operating expenses   -38 -29 -376
Operating profit/loss   -752 -167 4,015
Finance income   165 164 738
Finance costs   -671 -961 -2,301
Net finance costs   -506 -797 -1,563
Share of profit/loss of equity-accounted investees   -96 -61 85
Profit/loss before income tax   -1,354 -1,025 2,537
Income tax   0 -1 -239
Profit/loss for the period   -1,354 -1,026 2,298
Other comprehensive income
Items that may be reclassified subsequently to profit or loss
Exchange differences on translating foreign operations   524 721 1,069
Total other comprehensive income   524 721 1,069
Profit/loss attributable to:        
- Owners of the parent   -1,284 -1,074 1,956
- Non-controlling interests   -70 48 342
Profit/loss for the period   -1,354 -1,026 2,298
Total comprehensive income/expense attributable to:        
- Owners of the parent   -760 -353 3,025
- Non-controlling interests   -70 48 342
Total comprehensive income/expense for the period   -830 -305 3,367
Earnings per share attributable to owners of the parent:        
Basic earnings per share (EUR)   -0.04 -0.03 0.06
Diluted earnings per share (EUR)   -0.04 -0.03 0.06


Condensed consolidated interim statement of cash flows

EUR´000 Note Q1 2015 Q1 2014
Cash flows from operating activities      
Cash receipts from customers1   35,789 33,370
Cash paid to suppliers2   -34,416 -32,404
VAT paid   -1,239 -1,488
Cash paid to and for employees   -4,069 -4,659
Income tax paid   -37 0
Net cash used in operating activities   -3,972 -5,181
Cash flows from investing activities      
Paid on acquisition of property, plant and equipment   -275 -12
Proceeds from sale of property, plant and equipment 4 34 22
Acquisition of a subsidiary   0 -180
Acquisition of investments in associates   -1 0
Loans provided   -19 -13
Repayment of loans provided   40 95
Dividends received   103 4
Interest received   6 0
Net cash used in investing activities   -112 -84
Cash flows from financing activities      
Proceeds from loans received   331 8
Repayment of loans received   -2,350 -2,056
Payment of finance lease liabilities   -313 -356
Interest paid   -157 -202
Dividends paid   -30 0
Net cash used in financing activities   -2,519 -2,606
Net cash flow   -6,603 -7,871
Cash and cash equivalents at beginning of period   8,802 12,575
Effect of movements in foreign exchange rates   -1 -2
Decrease  in cash and cash equivalents   -6,603 -7,871
Cash and cash equivalents at end of period   2,198 4,702

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

Line item Cash paid to suppliers includes VAT paid.


Financial review

Financial performance

Nordecon group ended the first quarter of 2015 with a gross profit of 409 thousand euros (Q1 2014: 1,170 thousand euros) and a gross margin of 1.5% (Q1 2014: 5%). Compared with the same period last year, gross margin declined in both of the main operating segments, Buildings and Infrastructure. The factor, which had the strongest impact on the Group’s overall performance, was the loss of the Infrastructure segment that resulted from a sharp decrease in major self-performed winter works (large-scale earthworks) and a large proportion of uncovered fixed costs.

Most of the first-quarter revenue resulted from projects started in 2014 whose margins were affected by the decrease in demand and ensuing rise in competitive pressure that characterised the previous financial year. In the following quarters, revenue will increasingly result from contracts secured in the current market and competitive environment. The Group’s management projected a decline or stagnation in the construction market and the accompanying rise in competitive pressure in previous periods already (see also the chapters Order bookDescription of the main risks and Outlooks of the Group’s geographical markets) and adopted measures for maintaining and, where possible, improving profitability. We are aware that potential rises in input prices pose a risk for long-term contracts and continue to prioritize a contract’s expected profitability over revenue growth or retention.

The Group’s administrative expenses for the first quarter of 2015 totalled 1,109 thousand euros, which is comparable to a year ago (Q1 2014: 1,124 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 3.4% (Q1 2014: 2.9%). Our cost-control measures continued to yield strong results: administrative expenses remained below the target ceiling, i.e., 4% of revenue.

The first quarter of 2015 resulted in an operating loss of 752 thousand euros (Q1 2014: an operating loss of 167 thousand euros) and a negative EBITDA of 285 thousand euros (Q1 2014: a positive EBITDA of 297 thousand euros).

Adverse movements in the euro/hryvnia exchange rate gave rise to exchange losses that were smaller than those of the comparative period. The Ukrainian hryvnia weakened by around 24%, which meant that Group companies whose functional currency is the hryvnia had to re-measure their euro-denominated liabilities. Exchange losses that are reported within finance costs totalled 516 thousand euros (Q1 2014: 776 thousand euros). In accounting, the same movements in the exchange rate gave rise to a positive 524 thousand-euro change in the translation reserve reported in equity (Q1 2014: 721 thousand euros) and the net effect of the exchange loss on the Group’s net assets was a gain of 8 thousand euros (Q1 2014: a loss of 55 thousand euros).

Accordingly, the Group ended the first quarter with a net loss of 1,354 thousand euros (Q1 2014: a net loss of 1,026 thousand euros), of which the net loss attributable to owners of the parent, Nordecon AS, was 1,284 thousand euros (Q1 2014: a net loss of 1,074 thousand euros).

Cash flows

Operating activities of the first quarter of 2015 resulted in a net cash outflow of 3,972 thousand euros (Q1 2014:  and outflow of 5,181 thousand euros). Negative operating cash flow is typical of the first quarter and stems from the cyclical nature of the construction business. Larger fixed costs and preparations made for more active construction operations in the second quarter cause outflows to exceed inflows. In addition, operating cash flows continued to be influenced by a mismatch in settlement terms: the ones agreed with customers are relatively long and in the case of public procurement mostly extend from 30 to 56 days while subcontractors generally have to be paid within 21 to 45 days.

Investing activities of the first quarter resulted in a net cash outflow of 112 thousand euros (Q1 2014: a net outflow of 84 thousand euros). Payments made for property, plant and equipment totalled 275 thousand euros (Q1 2014: 12 thousand euros). Dividends received amounted to 103 thousand euros (Q1 2014: 4 thousand euros).

Financing activities resulted in a net cash outflow of 2,519 thousand euros (Q1 2014: a net outflow of 2,606 thousand euros). Loan repayments exceeded loan receipts by 2,019 thousand euros (Q1 2014: by 2,048 thousand euros). Repayments comprise changes in overdraft balances as well as regular payments made under long-term loan agreements of 943 thousand euros (Q1 2014: 364 thousand euros).

At 31 March 2015, the Group’s cash and cash equivalents totalled 2,198 thousand euros (31 March 2014: 4,702 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  Q1 2015 Q1 2014 Q1 2013 2014
Revenue (EUR’000) 27,113 23,544 27,081 161,289
Revenue change 15.2% -13.1% 20.5% -7.1%
Net loss/profit (EUR’000) -1,354 -1,026 -652 2,298
Loss/profit attributable to owners of the parent (EUR’000) -1,284 -1,074 -673 1,956
Weighted average number of shares 30,756,726 30,756,726 30,756,727 30,756,728
Earnings per share (EUR) -0.04 -0.03 -0.02 0.06
Administrative expenses to revenue 4.1% 4.8% 4.6% 3.5%
Administrative expenses to revenue (rolling) 3.4% 2.9% 3.3% 3.5%
EBITDA (EUR’000) -285 297 -35 5,585
EBITDA margin -1.1% 1.3% -0.1% 3.5%
Gross margin 1.5% 5.0% 2.2% 6.1%
Operating margin -2.8% -0.7% -2.0% 2.5%
Operating margin excluding gains on sale of real estate -3.1% -0.8% -2.3% 2.3%
Net margin -5.0% -4.4% -2.4% 1.4%
Return on invested capital -2.0% -1.4% -0.7% 5.8%
Return on equity -3.8% -3.0% -2.2% 6.4%
Equity ratio 38.8% 38.5% 29.5% 37.3%
Return on assets -1.4% -1.1% -0.6% 2.3%
Gearing 35.5% 31.7% 39.4% 24.8%
Current ratio 1.01 1.01 1.08 1.02
As at 31 March 2015 31 March 2014 31 March 2013 31 Dec 2014
Order book (EUR’000) 72,689 83,864 126,740 83,544


Revenue change = (revenue for the reporting period/revenue for the previous period) – 1*100
Earnings per share (EPS) = net profit attributable to owners of the parent / weighted average number of shares outstanding
Administrative expenses to revenue = (administrative expenses/ revenue)*100
Administrative expenses to revenue (rolling) = (past four quarters’ administrative expenses/past four quarters’ revenue)*100
EBITDA = operating profit + depreciation and amortisation + impairment losses on goodwill
EBITDA margin = (EBITDA/revenue)*100
Gross margin = (gross profit/revenue)*100
Operating margin = (operating profit/revenue)*100
Operating margin excluding gains on sale of real estate = ((operating profit -  gains on sale of non-current assets – gains on sale of real estate)/revenue) *100
Net margin = (net profit for the period/revenue)*100
Return on invested capital = ((profit before tax + interest expense)/ the period’s average (interest-bearing liabilities + equity))*100
Return on equity = (net profit for the period/ the period’s average total equity)*100
Equity ratio = (total equity/ total liabilities and equity)*100
Return on assets = (net profit for the period/ the period’s average total assets)*100
Gearing = ((interest-bearing liabilities – cash and cash equivalents)/ (interest-bearing liabilities + equity))*100
Current ratio = total current assets/ total current liabilities


Performance by geographical market

In the first quarter of 2015, around 5% of the Group’s revenue was generated outside Estonia compared with 8% in the first quarter of 2014.

  Q1 2015 Q1 2014 Q1 2013 2014
Estonia 95% 92% 97% 94%
Finland 2% 7% 3% 2%
Ukraine 3% 1% 0% 4%

Finnish revenue comprises revenue from concrete works in the building construction segment. The contribution of the Finnish market has decreased because major projects in Finland have been completed. The contribution of the Ukrainian market where we continue work under one building construction contract has increased.

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


Performance by business line

Segment revenues

We strive to maintain the revenues of our operating segments (Buildings and Infrastructure) in balance as this helps disperse risks and provides better opportunities for continuing construction operations also in stressed circumstances where one segment experiences noticeable shrinkage.

Nordecon’s revenues for the first quarter of 2015 totalled 27,113 thousand euros, a 15% increase on the 23,544 thousand euros generated in the first quarter of 2014. As anticipated, most of the revenue growth resulted from the Buildings segment that has been less affected by the contraction in public sector spending. Revenue growth in the Infrastructure segment was underpinned by slight growth in road construction volumes; however, the rise in road construction is not comparable to the level achieved a few years ago. In 2015, the volumes of projects performed with EU support are expected to remain at the level of 2014. 

Hence, the two segments’ revenue figures for the first quarter of 2015 were 21,815 thousand euros for Buildings and 4,914 thousand euros for Infrastructure. The corresponding figures for the first quarter of 2014 were 18,826 thousand euros and 4,314 thousand euros (see note 8). The same revenue structure is reflected in our order book as at the end of the first quarter of 2015 where 62% of contracts (in terms of value) belonged to the Buildings segment (Q1 2014: 72%).

Operating segments* Q1 2015 Q1 2014 Q1 2013 2014
Buildings 78% 80% 46% 65%
Infrastructure 22% 20% 54% 35%

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

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

Sub-segment revenues

Compared with the same period last year, the revenue structure of the Buildings segment has changed somewhat. The largest contributor is still the commercial buildings sub-segment whose largest ongoing projects are in Tallinn (e.g., Viimsi Centre and the Eesti Loto and Lõõtsa commercial buildings) and Pärnu (reconstruction of Estonia Spa). We expect private sector investment activity to remain robust and the contribution of the sub-segment to remain at a similar or higher level throughout the year.

The volumes of the industrial and warehouse facilities sub-segment have declined. In previous periods, most of the sub-segment’s revenue resulted from agricultural projects carried out with EU-investment support. Currently, EU-supported projects have been replaced by warehouse and logistics centres (e.g., the Smarten logistics centre) that do not counterbalance the decrease in agricultural projects.  There has also been a rise in work done for the heavy industry (e.g., different construction works on the Petroter 3 oil plant). We do not expect the revenues of the sub-segment to increase substantially.

Competition in the public buildings sub-segment is particularly challenging: it is hard to win a procurement without taking risks but our current policy is to avoid unreasonable risks. The period’s largest projects were the construction of the Võru State Secondary School and work done on the premises of the Kuperjanov Infantry Battalion. If competition remains fierce, it is not likely that the contribution of the sub-segment will increase significantly.

Our apartment building revenues resulted mostly from general contracting. The main revenue contributors were the apartment building at Kentmanni põik 3 and phase II of the Tondi residential quarter in Tallinn that were secured last year. The contribution of our own development projects in Tartu and Tallinn continues to increase. At the end of 2014, we completed two new apartment buildings with a total of 35 apartments in the Tammelinn district in Tartu. Sales of the apartments have been successful: by period-end 22 apartments had been sold. We have started construction of phase II of the development where one third of the 20 apartments that will be built have already been sold or reserved (www.tammelinn.ee). In Tallinn, we continue to sell apartment ownerships in phase I and build phase II of our Magasini 29 development project (www.magasini.ee). By the end of the reporting period, 6 of the 8 apartment ownerships in phase I had been sold. 

Revenue distribution within Buildings segment Q1 2015 Q1 2014 Q1 2013 2014
Commercial buildings 58% 45% 47% 42%
Industrial and warehouse facilities 11% 26% 28% 33%
Public buildings 12% 18% 18% 7%
Apartment buildings 19% 11% 7% 18%

In the first quarter of 2015, the main revenue source in the Infrastructure segment was road construction. We continue to provide services under road maintenance contracts in the Järva and Hiiu counties and the Keila maintenance area. Favourable weather conditions also allowed to do work on two major road construction projects in Tartu (construction package 5 of the Tartu western bypass) and Keila (Keila-Valkse section of national road no. 8 Tallinn – Paldiski, km 24.9-29.5). We expect that road construction will remain the main revenue source in the Infrastructure segment and, similarly to last year, most of the road construction revenue will result from small or medium-sized reconstruction and repair projects.

In specialist engineering, we did small-scale port construction work on the island of Hiiumaa. At present, there is currently no information about any major investments involving hydraulic engineering work. The revenues of the sub-segment may increase through other complex engineering work but relevant volumes are likely to be irregular.

The decline in EU support continues to have a strong impact on environmental engineering work whose volumes have decreased more rapidly than those of other sub-segments. The contribution of utility network construction (other engineering) has increased slightly but contracts that have been secured are small and continuing growth of the sub-segment is unlikely.

Revenue distribution within Infrastructure segment Q1 2015 Q1 2014 Q1 2013 2014
Road construction and maintenance 79% 46% 44% 72%
Specialist engineering (including hydraulic engineering) 1% 10% 10% 2%
Other engineering 15% 12% 32% 19%
Environmental engineering 5% 32% 14% 7%


Order book

At 31 March 2015, the Group’s order book (backlog of contracts signed but not yet performed) stood at 72,689 thousand euros, a 13% decrease compared with a year ago. The order book of the Infrastructure segment has increased but the rise has not compensated for the decline in work secured by the Buildings segment. 

  Q1 2015 Q1 2014 Q1 2013 2014
Order book (EUR’000) 72,689 83,864 113,983 83,544

In the Infrastructure segment, the road construction sub-segment that is engaged in two large road construction projects in Tartu and Keila (see the chapter Sub-segment revenues) increased its order book. The order books of other sub-segments remained stable compared with a year ago.

In the Buildings segment, the order books of the apartment buildings and public buildings sub-segments grew while the order book of the industrial and warehouse facilities sub-segment that is more strongly affected by the fall in EU-supported agricultural projects decreased.

At the reporting date, contracts secured by Buildings and Infrastructure accounted for 62% and 38% of the Group’s order book respectively (31 March 2014: 72% and 28% respectively). The distribution is typical of the past two years but radically different from earlier periods when the order books of the two segments were more or less equal. It is likely that the change in the order book structure will persist for the next few years. In the current EU budget period (2014-2020) investments in infrastructure construction, made mostly with the support of the EU structural funds, will not be as large as in 2007-2013. The new EU budget period will have an impact on the construction sector at the end of 2015 at the earliest. Hence, we expect that the revenues of the Infrastructure segment will decline in 2015 (for further information, see the Business risks section of the chapter Description of the main risks).

We believe that in a situation of exceptionally stiff competition, the main challenge is to maintain the Group’s revenue and profitability.

Between the reporting date (31 March 2015) and the date of release of this report, Group companies have secured additional construction contracts in the region of 9,891 thousand euros.



Staff and personnel expenses

In the first quarter of 2015, the Group (the parent and the subsidiaries) employed, on average, 711 people including 362 engineers and technical personnel (ETP). Headcount remained practically the same as a year ago.

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

  Q1 2015 Q1 2014 Q1 2013 2014
ETP 362 341 361 357
Workers 349 359 379 375
Total average 711 700 739 732


The Group’s personnel expenses for the first quarter of 2015 including all taxes totalled 3,781 thousand euros, which is comparable to the first quarter of 2014 when the figure was 3,741 thousand euros.

In the first quarter of 2015, the service fees of the members of the council of Nordecon AS amounted to 35 thousand euros and associated social security charges totalled 12 thousand euros (Q1 2014: 35 thousand euros and 12 thousand euros respectively).

The service fees of the members of the board of Nordecon AS amounted to 74 thousand euros and associated social security charges totalled 24 thousand euros (Q1 2014: 69 thousand euros and 23 thousand euros respectively).

Labour productivity and labour cost efficiency

We measure the efficiency of our operating activities using the following productivity and efficiency indicators, which are based on the number of employees and personnel expenses incurred:

  Q1 2015 Q1 2014 Q1 2013 2014
Nominal labour productivity (rolling), (EUR’000) 224.5 227.7 214.3 220.4
Change against the comparative period -1.4% 6.3% 3.9% -4.0%
Nominal labour cost efficiency (rolling), (EUR) 8.2 8.4 9.3 8.0
Change against the comparative period -2.1% -9.7% -13.2% 4.8%


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


Description of the main risks

Business risks

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

Competition is fierce in all segments of the construction market. In 2015, public sector investment is not expected to increase substantially compared with 2014. There is strong competitive pressure on builders’ bid prices in a situation where input prices have remained relatively stable. Competition is particularly aggressive in general building and utility network construction. We acknowledge the risks inherent in the execution of contracts concluded in an environment of stiff competition. Securing a long-term construction contract at an unreasonably low price in a situation where input prices cannot be lowered significantly and competition is fierce is risky because negative developments in the economy may quickly render the contract onerous. Thus, in price-setting we currently prioritize a reasonable balance of contract performance risks over plain revenue growth.

Demand for construction services continues to be strongly influenced by the volume of public sector investment, which in turn depends on the co-financing received from the EU structural funds. Total support allocated to Estonia during the current EU budget period (2014-2020) amounts to 5.9 billion euros, exceeding the figure of the previous financial framework, but the amounts earmarked for construction work are substantially smaller. In the construction market, the effects of the EU funding are not likely to have an impact before the end of 2015.

In the light of the above factors, we do not expect any significant business growth in 2015. It is probable that the volumes of the Infrastructure segment will shrink but the decline should be counterbalanced by increasing investment activity in the Buildings segment. Our action plan foresees redirecting our resources (including some of the labour of the Infrastructure segment) to increasing the share of contracts secured from the private sector. According to our business model, Nordecon operates in all segments of the construction market. Therefore, we are somewhat better positioned than companies that operate in one narrow (and, in the current market situation, particularly some infrastructure) segment.

The Group’s business is also influenced by the fact that construction operations are seasonal. The impacts of seasonal fluctuations are the strongest in the Infrastructure segment where a lot of work is done outdoors (road and port construction, earthworks, etc.). To disperse the risk, we secure road maintenance contracts that generate year-round business. Our business strategy is to counteract seasonal fluctuations in infrastructure operations with building construction that is less exposed to seasonality. Thus, our long-term goal is to keep the two segments in balance (see also the chapter Performance by business line). In addition, where possible, our companies implement appropriate technical solutions that allow working efficiently also in changeable weather conditions.

Operational risks

To manage their daily construction risks, Group companies purchase contractors’ all risks insurance. Depending on the nature of the project and the requests of the customer, both general frame agreements and special, project-specific contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee provided to a Group company or the Group retains part of the amount payable until the completion of the contract. To remedy builder-caused deficiencies, which may be detected during the warranty period, Group companies create warranty provisions based on their historical experience. At 31 March 2015, the Group’s warranty provisions (including current and non-current ones) totalled 1,066 thousand euros. The figure for the comparative period was 1,416 thousand euros.

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

Financial risks

Credit risk

In the period, the Group did not incur any major credit losses. The credit risk exposure of the Group’s receivables continued to be low because the share of public sector customers is significant and the customers’ settlement behaviour is monitored on an ongoing basis. The main indicator of the realization of credit risk is settlement default that exceeds 180 days coupled with no activity on the part of the debtor that would confirm the intent to settle.

In the first quarter of 2015 as well as in the comparative period, the Group did not incur any impairment losses on receivables.

Liquidity risk

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

At the reporting date, the Group’s current assets exceeded its current liabilities 1.01-fold (31 March 2014: 1.01-fold). The key factors which influence the current ratio are classification of the Group’s loans to its Ukrainian associates as non-current assets and the banks’ general policy not to refinance interest-bearing liabilities for a period exceeding twelve months.

The political situation in Ukraine remains tense and we believe that realization of our Ukrainian investment properties may take longer than originally expected. Accordingly, at the reporting date the Group’s loan receivables from its Ukrainian associates of 10,894 thousand euros were classified as non-current assets.

At the reporting date, interest-bearing liabilities accounted for a significant share of our current liabilities. In accordance with IFRS EU, loan commitments have to be classified into current and non-current liabilities based on contract terms in force at the reporting date. To date, banks have refinanced the Group’s liabilities for periods not exceeding 12 months, which is why a substantial portion of loans are classified as current liabilities although it is probable that some borrowings (particularly overdraft facilities) will be refinanced again when the 12 months have passed. At 31 March 2015, the Group’s current loan liabilities totalled 14,472 thousand euros. During the first quarter and after the reporting period banks have committed to refinancing current loan liabilities of 7,155 thousand euros, settlement of 6,555 thousand euros of which will be deferred to 2016.

At the reporting date, the Group’s cash and cash equivalents totalled 2,198 thousand euros (31 March 2014: 4,702 thousand euros).

Interest rate risk

The Group’s interest-bearing liabilities to banks have both fixed and floating interest rates. Finance lease liabilities have mainly floating interest rates. The base rate for most floating-rate contracts is EURIBOR. The amount of the Group’s interest-bearing liabilities has remained similar to a year ago but the liability structure has changed.  Current and non-current bank loans have decreased by 3,346 thousand euros while factoring liabilities and, to a lesser extent, finance lease liabilities have increased. The Group uses factoring to counteract the difference in settlement terms agreed with customers and subcontractors (see also the chapter Liquidity risk).  At 31 March 2015, the Group’s interest-bearing loans and borrowings totalled 22,930 thousand euros (31 March 2014: 22,953 thousand euros). Interest expense for the first quarter of 2015 amounted to 152 thousand euros, a decrease of 31 thousand euros compared with the first quarter of 2014.

The main source of the Group’s interest rate risk is a possible rise in the base rate of floating interest rates (EURIBOR, EONIA or the creditor’s own base rate). In the light of the Group’s relatively heavy loan burden this would cause a significant increase in interest expense, which would have an adverse impact on profit. We mitigate the risk by pursuing a policy of entering, where possible, into fixed-rate contracts when the market interest rates are low. As regards loan products offered by banks, observance of the policy has proved difficult and most new contracts have a floating interest rate. The Group does not use derivatives to hedge its interest rate risk.

Currency risk

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

The hryvnia has been weakening because the political and economic environment in Ukraine continues to be strained due to the conflict between Ukraine and Russia which broke out at the beginning of 2014 and at the beginning of 2015 the National Bank of Ukraine decided to discontinue determination of the national currency’s indicative exchange rate. During the period, the hryvnia weakened against the euro by around 24%. For the Group’s Ukrainian subsidiaries, this meant additional foreign exchange losses on the translation of their euro-denominated loan commitments into the local currency. Relevant exchange losses totalled 516 thousand euros (Q1 2014: 776 thousand euros).

Exchange gains and losses on financial instruments are reported within Finance income and Finance costs in the statement of comprehensive income. Translation of receivables and liabilities from operating activities did not give rise to any exchange gains or losses.

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

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


Outlooks of the Group’s geographical markets


Processes and developments characterising the Estonian construction market

  • In 2015, public sector investments will not grow significantly and the extent to which they can be realised is still unclear. Although in the 2014-2020 EU budget period the support allocated to Estonia will increase to 5.9 billion euros (2007-2013: 4.6 billion euros), the share of support that will influence the construction market will not increase. Instead, compared with the previous period, there will be a rise in allocations to other areas.
  • Investments made by the largest public sector customers (e.g., state-owned real estate company Riigi Kinnisvara AS and National Road Administration) that reach signature of a construction contract in 2015 will not increase significantly and may be postponed to 2016. As a result, the Estonian construction market (particularly infrastructure construction segments) will remain in relative stagnation. To some extent, the situation will be improved by the positive level of private sector investments in building 
  • The long and painful market consolidation will continue, although slowly. In particular, this applies to general contracting in building construction where the number of medium-sized operators (annual turnover of around 15-40 million euros) is too large. Based on recent years’ experience it is likely that stiff competition and insufficient demand will cause some general contractors to go slowly out of business or shrink in size rather than merge or exit the market. According to our assessment, in recent years the process has been slowed down by the customers’ (particularly public sector customers’) increasing desire to apply less stringent tendering requirements to increase competition and lower the price even though this increases the risks related to collateral, quality, adherence to deadlines and builder’s liability.
  • Competition will increase in all segments of the construction market. The average number of bidders for a contract has increased and there is a wide gap between the lowest bids made by winners and the average bids. The situation is somewhat similar to 2009 when expectations of shrinkage in demand prompted a fall in construction prices, which triggered a slide in the prices of many construction inputs. However, currently we do not see any downshift in input prices and companies that are banking on this in the bidding phase may run into difficulty. Stiff competition is putting pressure on contract prices and, thus, also profit margins.
  • In new housing development, the success of a project depends on the developer’s ability to control the input prices included in the business plan and, thus, set affordable sales prices. Although the overall situation is improving steadily, the offering of new residential real estate cannot be increased dramatically because the prices of new apartments are relatively high compared with the standard of living and the banks’ lending terms remain strict.  Similarly to previous periods, successful projects include those that create or fill a niche.
  • There is an increasing contrast between the stringent terms of public sector contracts, which impose on builders extensive obligations, strict sanctions, different financial guarantees, long settlement terms, etc. and modest tendering requirements. Low qualification requirements and the precondition of making a low bid have made it easier to win a contract but have heightened the risks taken by customers in respect of contract performance and delivery.
  • The prices of construction inputs will remain relatively stable. For a short term, shrinkage in demand may lower local subcontracting prices. However, taking into account subcontractors’ financial and human resources, the decline cannot be large or long-lasting. In some areas, price fluctuations will be unpredictable and, thus, may be notably greater and hard or even impossible to influence (oil and metal products, certain materials and equipment).
  • Shortage of skilled labour (including project and site managers) will persist but this will weaken the quality of the construction process/service rather than the companies’ performance capabilities. Shrinkage in the Estonian construction volumes may increase labour supply but not substantially. Labour migration to the Nordic countries will remain steady and even though Nordic construction volumes (particularly in Finland) will decline as well, the number of job seekers that will return will not increase considerably. This sustains pressure for a wage increase.

Latvia and Lithuania

The Latvian construction market, which was hit by a severe downturn a few years ago, has not regained sufficient stability and, similarly to the Estonian market, in 2015 it will probably be adversely affected by a slowdown in public sector demand. Accordingly, it is unlikely that we will enter the Latvian construction market permanently in 2015.

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

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


In Ukraine, we prefer to provide general contracting and project management services to foreign private sector customers in the segment of building construction. However, due to the market situation, we have also signed contracts with local investors where the terms have not involved any unreasonable or uncontrollable risks. The unstable political and economic situation hinders adoption of business decisions but construction activity in Kiev has not halted. In 2015, the Group will continue its business in the Kiev region and our current Ukrainian order book is larger than a year ago. Despite the armed conflict in eastern Ukraine, for Nordecon the market situation in Kiev has not deteriorated compared with a year or two ago. Hard times have reduced the number of inefficient local (construction) companies and when the economy normalises we will have much better prospects for increasing our operations and profitability. We monitor the situation in the Ukrainian construction market closely and consistently and are ready to restructure our operations as and when necessary. Should the crisis spread to Kiev (currently highly unlikely), we can suspend our operations immediately. We continue to seek opportunities for exiting our two real estate projects that have been put on hold or signing a construction contract with a prospective new owner.


In Finland, we offer mainly subcontracting services in the concrete works segment but based on experience gained, have also started to perform some more complex works. The local concrete works market allows competing for projects where the customer wishes to source all concrete works from one reliable partner. Our policy is to maintain a rational approach and avoid taking excessive risks. At present, we are not planning to penetrate any other segments of the Finnish construction market (general contracting, project management, etc.).


In 2015, we started preparations for potential expansion into the Swedish market. We are planning to offer construction of residential and non-residential buildings, particularly in central Sweden.


Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2014 was 161 million euros and net profit 2.3 million euros. Currently Nordecon Group employs more than 710 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.


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

Investor presentation_3m_2015.pdf