Nordecon As : Financial report for the third quarter and nine months ended 30 September 2011 (unaudited)

Nordecon
Quarterly report Financial report for the third quarter and nine months ended 30 September 2011 (unaudited) Nordecon publishes financial report for the third quarter and nine months ended 30 September 2011 (unaudited)

Tallinn, Estonia, 2011-11-10 15:35 CET (GLOBE NEWSWIRE) -- Announcement includes Nordecon AS' consolidated financial statements for 2011 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 report and fact sheet are 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 2011	31 December   2010
ASSETS
Current assets
Cash and cash equivalents	6,822	5,818
Trade and other receivables	42,242	31,266
Prepayments	1,638	1,060
Inventories	25,245	24,982
Non-current assets held for sale	331	321
Total current assets	76,278	63,447
Non-current assets
Investments in equity-accounted investees	203	99
Other investments	26	26
Trade and other receivables	2,583	2,215
Investment property	4,929	4,930
Property, plant and equipment	7,554	9,038
Intangible assets	15,407	15,486
Total non-current assets	30,702	31,794
TOTAL ASSETS	106,980	95,241
LIABILITIES
Current liabilities
Loans and borrowings	16,691	19,231
Trade payables	35,473	17,429
Other payables	3,565	3,446
Deferred income	8,220	4,425
Provisions	631	1,160
Total current liabilities	64,580	45,691
Non-current liabilities
Loans and borrowings	12,027	15,377
Trade payables	199	215
Other payables	96	96
Provisions	435	423
Total non-current liabilities	12,757	16,111
TOTAL LIABILITIES	77,337	61,802
EQUITY
Share capital	19,657	19,657
Statutory capital reserve	2,554	2,558
Translation reserve	-135	-233
Retained earnings	6,100	10,257
Total equity attributable to equity holders of the parent	28,176	32,240
Non-controlling interest	1,467	1,199
TOTAL EQUITY	29,643	33,439
TOTAL LIABILITIES AND EQUITY	106,980	95,241

Condensed consolidated interim statement of comprehensive income

EUR`000	Q3 2011	Q3 2010	9M 2011	9M 2010	2010
Revenue	48,831	37,856	103,260	75,257	99,312
Cost of sales	-48,120	-35,512	-103,977	-75,803	-100,012
Gross profit/loss	711	2,344	-717	-546	-700
Distribution expenses	-74	-84	-238	-284	-401
Administrative expenses	-1,160	-1,096	-3,284	-3,368	-4,887
Other operating income	367	135	746	497	820
Other operating expenses	13	-345	-151	-813	-3,807
Operating profit/loss	-143	954	-3,644	-4,514	-8,975
Finance income	144	114	494	2,817	3,059
Finance expenses	-2,71	-2,847	-884	-4,332	-6,338
Net finance expense	-127	-2,733	-390	-1,515	-3,279
Share of profit/loss of equity-accounted investees	55	-239	104	-279	-517
Loss before income tax	-215	-2,017	-3,930	-6,308	-12,771
Income tax expense/income	-15	-41	-16	75	33
Loss for the period	-230	-2,058	-3,946	-6,233	-12,738
Other comprehensive income/expense:
Exchange differences on translating foreign operations	-61	71	155	-24	-28
Total other comprehensive income/ expense for the period	-61	71	155	-24	-28
TOTAL COMPREHENSIVE EXPENSE FOR THE PERIOD	-291	-1,987	-3,884	-6,257	-12,766
Profit/loss attributable to:
- Owners of the parent	-506	-1,934	-4,157	-5,722	-11,811
- Non-controlling interests	276	-124	211	-511	-927
Loss for the period	-230	-2,058	-3,946	-6,233	-12,738
Total comprehensive income/expense attributable to:
- Owners of the parent	-550	-1,863	-4,152	-5,746	-11,839
- Non-controlling interests	259	-124	268	-511	-927
Total comprehensive expense	-291	-1,987	-3,884	-6,257	-12,766
Earnings per share attributable to owners of the parent:
Basic earnings per share (EUR)	-0.02	-0.06	-0.14	-0.19	-0.38
Diluted earnings per share (EUR)	-0.02	-0.06	-0.14	-0.19	-0.38

Condensed consolidated interim statement of cash flows

	EUR`000
	9M 2011	9M 2010
Cash flows from operating activities
Cash receipts from customers	116,904	79,613
Cash paid to suppliers	-101,479	-68,191
VAT paid	-2,064	-2,978
Cash paid to and for employees	-9,475	-10,908
Income tax recovered/paid	67	-76
Net cash from/used in operating activities	3,953	-2,540
Cash flows from investing activities
Acquisition of property, plant and equipment	-31	-87
Acquisition of intangible assets	0	0
Proceeds from sale of property, plant and equipment and intangible assets	306	616
Proceeds from sale of investment property	352	677
Acquisition of subsidiaries, net of cash acquired	0	1
Disposal of subsidiaries, net of cash transferred	0	-618
Acquisition of associates	0	-321
Loans granted	-151	-497
Repayment of loans granted	2,056	559
Dividends received	4	4
Interest received	102	295
Net cash from investing activities	2,638	630
Cash flows from financing activities
Proceeds from loans received	1,795	5,305
Repayment of loans received	-4,746	-7,423
Dividends paid	0	0
Payment of finance lease liabilities	-1,401	-1,950
Interest paid	-886	-935
Other payments made	-4	-16
Net cash used in financing activities	-5,242	-5,017
Net cash flow	1,349	-6,928
Cash and cash equivalents at beginning of period	5,818	14,392
Effect of exchange rate fluctuations	-345	9
Increase/decrease  in cash and cash equivalents	1,349	-6,928
Cash and cash equivalents at end of period	6,822	7,473

Financial review

Margins

Nordecon Group ended the first nine months of 2011 with a gross loss of 717 thousand euros (9M 2010: gross loss of 546 thousand euros). The gross losses incurred in the first and second quarters due to seasonal factors and re-estimation of the outcomes of some loss-making contracts signed in 2009 and 2010 respectively could not be counterbalanced by the Group's third quarter gross profit of 711 thousand euros. Results for the reporting period are somewhat weaker than those for the comparative period (particularly the third quarter). In the third quarter of 2010, Nordecon completed the construction of the Mäo bypass, a major contract whose revenue and profit figures had a significant impact on the Group's overall performance indicators.   

Gross result for the period was strongly influenced by re-estimation of the outcomes of the Group's loss-generating projects, a step taken in the second quarter due to changes in the operating environment. Additional losses were recognised because of a rise in the prices of construction inputs and identification of some unforeseen project performance costs. A major share of the additional loss is attributable to a few contracts secured in 2009 and 2010 for which losses have also been recognised earlier. The Group's estimates of the losses expected to be incurred until delivery are based on the current best knowledge.

As regards loss-generating contracts, the strongest adverse impact was exerted by the exhibition building of the Estonian Maritime Museum that is being built inside the seaplane hangars near Tallinn Bay and is currently scheduled for completion at the end of 2011. It is a unique renovation project where the exceptionally poor condition of the building and the true complexity of the work have been discovered only in the course of the project. In line with the contract, we have asked the customer for an extension of the delivery term and additional compensation for costs incurred due to circumstances that could not be foreseen at the time of the public procurement tender or additional work requested by the customer. By the date of release of this report, however, only part of the problems that have emerged have found contractually fixed solutions while many of the Group's justified claims have still no cover.

Setting aside a few loss-making projects secured during the downswing of the market, the average profit margins of the Group's contracts show a gradual but consistent improvement in relation to comparative periods. Recognition of contract profits depends on the stage of completion of contract activity. Therefore, the higher profitability of contracts secured in the reporting period will have an impact only in the following quarters when actual on-site activity reaches a greater volume. Above all, the improvement in profitability is underpinned by the following factors:

• Since 2010 the Group has prioritized profitability over growth of the contracts portfolio.
• In previous periods, a full set of stringent austerity measures was enforced across the Group.
• We continue to streamline our internal processes and operations.

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

Administrative expenses for the first nine months totalled 3,284 thousand euros. Compared with the same period in 2010, administrative expenses have decreased by 2.5%, reaching relative stability in relation to current operating volumes. The ratio of administrative expenses to revenue was 3.2% (9M 2010: 4.5%). We are pleased to report that our cost-saving measures have yielded strong results and according to management's estimates on a full-year basis the Group will be able to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

The Group's operating loss for the first nine months was 3,737 thousand euros (9M 2010: 4,514 thousand euros). EBITDA for the period was negative at 1,939 thousand euros (9M 2010: 2,052 thousand euros).

The Group's net loss was 4,039 thousand euros. The loss attributable to owners of the parent, Nordecon AS, was 4,250 thousand euros. The first nine months of 2010 ended in a net loss of 6,233 thousand euros, including non-recurring finance income and expenses on the sale of the Latvian subsidiary and the write-down of loans. Excluding those, the Group's net loss for the first nine months of 2010 would have been 4,838 thousand euros.

Cash flows

In the first nine months of 2011, the Group's operating activities resulted in a net cash inflow of 3,953 thousand euros (9M 2010: outflow of 2,540 thousand euros). Operating cash flow continued to be strongly influenced by cyclical fluctuations in project-related cash flows (differences between the settlement terms agreed with customers and subcontractors) and the performance of the aforementioned loss-making projects. Positive cash flow was supported by factoring implemented for reducing the cyclical nature of cash flows and proceeds from new large contracts. The negative cash flow of unprofitable projects realises as the work is performed although the estimated loss has already been recognised in previous periods.

Investing activities generated a net inflow of 2,638 thousand euros (9M 2010: inflow of 630 thousand euros) that consisted mostly of repayments of loans granted in prior periods of 2,056 thousand euros.

Financing activities resulted in a net cash outflow of 5,242 thousand euros (9M 2010: outflow of 5,017 thousand euros). The structure of financing cash flows has remained more or less stable. The Group is settling its loan obligations faster than it is raising new debt. On the other hand, repayments have decreased in relation to the comparative period thanks to agreements reached with the banks. Renegotiation of settlement terms has not resulted in any significant changes in the Group's interest rates.

At 30 September 2011, the Group's cash and cash equivalents totalled 6,822 thousand euros (30 September 2010: 5,818 thousand euros). For information on liquidity risks, see the chapter Description of the main risks.

Key financial figures and ratios

Figure / ratio	9M 2011	9M 2010	9M 2009	2010
Revenue (EUR'000)	103,260	75,257	125,755	99,312
Revenue growth/decrease, %	37.2%	-40.2%	-32.7%	-36%
Net profit/loss (EUR'000)	-4,039	-6,233	2,987	-12,738
Profit/loss attributable to owners of the parent (EUR'000)	-4,250	-5,722	4,182	-11,811
Weighted average number of shares	30,756,728	30,756,728	30,756,728	30,756,728
Earnings per share (EUR)	-0.14	-0.19	0.14	-0.38
Average number of employees	752	808	1,110	774
Revenue per employee (EUR'000)	137	93	113	128
Personnel expenses to revenue, %	10.2%	14.0%	14.2%	14.6%
Administrative expenses to revenue, %	3.2%	4.5%	4.9%	4.9%
EBITDA1 (EUR'000)	-1,939	-2,052	6,230	-5,512
EBITDA margin, %	-1.9%	-2.7%	5.0%	-5.6%
Gross margin, %	-0.7%	-0.7%	8.4%	-0.7%
Operating margin, %	-3.6%	-6.0%	2.3%	-9.0%
Operating margin excluding gains on asset sales, %	-4.0%	-6.3%	2.1%	-9.4%
Net margin, %	-3.9%	-8.3%	2.4%	-12.8%
Return on invested capital, %	-5.1%	-7.4%	5.3%	-15.8%
Return on assets, %	-3.7%	-3.9%	1.9%	-8.3%
Return on equity, %	-12.8%	-14.7%	5.5%	-32.6%
Equity ratio, %	27.6%	36.7%	36.9%	35.1%
Gearing, %	37.6%	33.0%	25.7%	42.3%
Current ratio	1.18	1.56	1.43	1.39
	30 Sept 2011	30 Sept 2010	30 Sept 2009	31 Dec 2010
Order book (EUR'000)	155,421	89,430	100,214	85,607

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

Revenue growth/decrease = (revenue for the reporting period/ revenue for the previous period) - 1*100 Earnings per share (EPS) = net profit attributable to equity holders of the parent / weighted average number of shares outstanding Revenue per employee = revenue/average number of employees Personnel expenses to revenue = (personnel expenses/revenue) *100 Administrative expenses to revenue = (administrative expenses/ revenue)*100 EBITDA = operating profit + depreciation and amortisation EBITDA margin = (EBITDA/revenue)*100 Gross margin = (gross profit/revenue)*100 Operating margin = (operating profit/revenue)*100

Operating margin excluding gains on asset sales = ((operating profit -  gains on sale of property, plant and equipment - gains on sale of investment properties and real estate held for sale)/revenue) *100 Net margin = (net profit for the period/revenue)*100 Return on invested capital = ((profit before tax + interest expense)/ the period's average (interest-bearing liabilities + equity))*100 Return on assets = (operating profit/the period's average total assets)*100 Return on equity = (net profit for the period/ the period's average total equity)*100 Equity ratio = (total equity/ total equity and liabilities)*100 Gearing = ((interest-bearing liabilities - cash and cash equivalents)/ (interest bearing liabilities + equity))*100 Current ratio = total current assets/ total current liabilities

Performance by geographical market

In the first nine months of 2011, roughly 4% of the Group's revenue was generated outside Estonia. In the comparative period, foreign operations also accounted for 4% of the Group's revenue.

	9M 2011	9M 2010	9M 2009	2010
Estonia	96%	96%	85%	94%
Ukraine	0%	3%	2%	2%
Lithuania	0%	0%	1%	0%
Latvia	0%	0%	12%	0%
Belarus	2%	1%	0%	3%
Finland	2%	0%	0%	1%

Half of the Group's foreign revenue resulted from project-based construction activity in Belarus that will be completed at the end of this year. Management has decided that the Group will not seek any new projects in Belarus (see also the chapter Changes in the Group's business operations in the reporting period). The other half of foreign revenue was earned on concrete works performed in Finland.

Revenue distribution between different geographical segments is a consciously deployed strategy by which the Group avoids excessive reliance on a single market. Although in the long term 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 that entails comparatively fewer known market risks. The Group's vision of the future of its foreign operations is described in the chapter Outlooks of the Group's geographical markets.

Performance by business line

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

The Group's revenue for the first nine months of 2011 was 103,260 thousand euros, 37% up on the 75,257 thousand euros generated a year ago and also an improvement on the full-year figure for 2010. Last year, the downturn that had ravaged the Estonian construction market for almost three years bottomed out. Revenue growth is attributable to a decline in competition in certain market segments, successful bidding for projects in various infrastructure sub-segments, and moderate growth in the buildings construction segment.

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

Segment revenue

In the first nine months of 2011, the revenues of our two main business segments were practically equal. The Buildings and Infrastructure segments ended nine months with revenue of 48,757 thousand euros and 50,525 thousand euros respectively. The corresponding figures for the comparative period were 34,859 thousand euros and 39,149 thousand euros.

For a long time most tenders in the construction market have been related to infrastructure (mainly projects financed with the support of the state and the EU structural funds) and the majority (74%) of contracts in the Group's order book belong to the Infrastructure segment. Regardless of this, the revenues of the segments have been practically equal because the Group's active buildings construction contracts have a shorter term than those of infrastructure construction. Infrastructure contracts have a longer term (e.g. road maintenance contracts) and their contribution to realised revenue is therefore comparatively smaller. We expect that on a full-year basis the contributions of the Buildings and Infrastructure segments will have similar proportions.

Revenue distribution between segments *

Business segments	9M 2011	9M 2010	9M 2009	2010
Buildings	48%	47%	44%	48%
Infrastructure	52%	53%	56%	52%

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

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

Revenue distribution within segments

In the Buildings segment, most of the nine-month revenue resulted from construction of public buildings and industrial facilities. In the public buildings sub-segment, the largest contracts included construction of buildings for the Koidula border station, an academic building for the Social Sciences Faculty of the University of Tartu, buildings for the Ämari Air Base and an exhibition building (the seaplane hangars) for the Estonian Maritime Museum. In the industrial and warehouse facilities sub-segment, most of the revenue resulted from the construction of various agricultural facilities and a food production facility that is being built in Belarus. Compared with prior periods, the contribution of the commercial buildings sub-segment has decreased considerably, primarily because of a relative scarcity of private sector customers. However, the number of private sector customers has started to increase - this is indicated by a four-percentage point growth in the contribution of the sub-segment compared with the first half-year. In the construction of apartment buildings, the Group was a general contractor, not a developer.                           

Revenue distribution within the Buildings segment	9M 2011	9M 2010	9M 2009	2010
Commercial buildings	10%	24%	64%	37%
Industrial and warehouse facilities	43%	31%	9%	18%
Public buildings	45%	33%	23%	35%
Apartment buildings	2%	12%	4%	10%

As usual, in the Infrastructure segment most of the revenue was generated by road construction and maintenance. The contribution of the construction of water and wastewater networks where the Group has won several new tenders also in 2011 (other engineering) was expectedly large as well. Thanks to support from the EU structural funds, this is one of the best-funded areas in Estonia. The European Union also supports performance of various environmental engineering projects where the Group is well represented. In forthcoming quarters, the contribution of specialist engineering should increase in connection with the realization of a major project - the construction of new berths for Sillamäe port.

Revenue distribution within the Infrastructure segment	9M 2011	9M 2010	9M 2009	2010
Road construction and maintenance	56%	69%	43%	62%
Specialist engineering (including hydraulic engineering)	1%	1%	16%	1%
Other engineering	33%	22%	31%	28%
Environmental engineering	10%	8%	10%	8%

Order book

At 30 September 2011, the Group's order book stood at 155,421 thousand euros, being significantly larger than at 30 September 2010 when the figure was 89,430 thousand euros. In addition to an increase attributable to general growth in the Estonian construction market compared with the slump of 2010, the figure includes the remaining value of the design and build of the Aruvalla-Kose section of the E263 Tallinn-Tartu highway, a project with a major individual impact (total contractual value approx. 39.3 million euros).

	9M 2011	9M 2010	9M 2009	2010
Order book, in thousands of euros	155,421	89,430	100,214	85,607

At 74% the Infrastructure segment continues to account for a major proportion of the Group's total order book (30 September 2010: 72%).

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

Between the reporting date (30 September 2011) and the date of release of this report, Group companies have been awarded additional construction contracts of approximately 8,033 thousand euros.

People

Staff and personnel expenses

At the end of September 2011, the Group (including the parent and the subsidiaries) employed, on average, 752 people including 362 engineers and technical personnel (ETP). In the past year, the decrease in personnel has decelerated. In 2011 headcount is expected to remain stable or to grow slightly. Besides additional seasonal labour hired for the second and third quarters, the figure is influenced by year-over-year growth in the Group's operating volumes.

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

	9M 2011	9M 2010	9M 2009	2010
ETP	362	380	456	362
Workers	390	428	654	412
Total average	752	808	1,110	774

The Group's personnel expenses for the first nine months of 2011 including all associated taxes totalled 10,543 thousand euros, a figure similar to the 10,550 thousand euros incurred in the first nine months of 2010.

In the first nine months of 2011, the remuneration of the members of the council of Nordecon AS including associated social security charges amounted to 69 thousand euros. The corresponding figure for the first nine months of 2010 was also 69 thousand euros. The remuneration of the members of the board of Nordecon AS including social security charges totalled 204 thousand euros compared with 95 thousand euros for the comparative period. The remuneration provided to the board has increased because in the comparative period the board had two members while the current number is four. The composition of the board changed in connection with the merger of two subsidiaries and the Group's parent that took place at the end of 2010.

Outlooks of the Group's geographical markets

Estonia

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

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

Nordecon Group's main operational objectives for 2011

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

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

Latvia and Lithuania

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

For the time being, the Group has suspended the operations of its Lithuanian-based 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. It does not change the Group's strategic objectives in Lithuania, i.e. the objective of conducting future operations in the Lithuanian construction market through local subsidiaries.

Ukraine

The Group will continue in Ukraine primarily as a general contractor and project manager in the construction of commercial buildings and production facilities. In 2009 and 2010, there were practically no private foreign customers in those sub-segments. Regrettably, the Ukrainian construction market has not recovered notably in 2011 although there are some signs of improvement. Maintaining minimal readiness at the current cost base, the Group has decided to carry on its business in Ukraine.

The main risks in the Ukrainian market are connected with the low administrative efficiency of the central and local government and the judicial system. The recovery of the Ukrainian economy from the crisis of 2008-2009 has been slow, which has affected inflation and the availability of quality construction inputs. Demand has mainly been undermined by private customers' inability to raise financing for commencing construction. Stabilisation of the political situation has not occurred at the expected pace and private sector customers have not started investing in projects where the Group has a competitive advantage.

Still, the construction market of a country with a population of around 46 million has strong business potential. Our key success factor is relatively little competition among project management companies offering flexible construction management in combination with European practices and competencies. We are confident that the present downturn in the Ukrainian construction market and economy as a whole will transform local understanding and expectations of general contracting and project management in the construction business and, in the long term, the new thinking will improve the Group's position.

Belarus

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

Finland

In the Finnish market the Group focuses solely on providing subcontracting services in the field of concrete works. This is an area where Estonian companies continue to have a certain edge over local entities because their total personnel expenses are lower. The Finnish concrete works (subcontracting) 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 2011. Nevertheless, the Group will maintain a rational approach and will avoid taking excessive risks in Finland. The Group is currently not planning to penetrate other segments of the Finnish construction market (general contracting, project management, etc).

Description of the main risks

Business risks

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

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

To manage their daily construction risks, Group companies purchase contractors' all risks insurance. Depending on the nature of the project, both general frame agreements and special project-specific contracts are used. In addition, as a rule, subcontractors are required to secure performance of their obligations with a bank guarantee issued for the benefit of a Group company. To remedy builder-caused deficiencies which may be detected during the warranty period, Group companies create warranties provisions. At 30 September 2011, the provisions (including current and non-current ones) totalled 925 thousand euros. At 30 September 2010, the corresponding figure was 1,332 thousand euros.

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

The Estonian Road Administration published a notice of the public procurement tender for the design and build of the E263 Aruvalla-Kose road section on 25 September 2008. Nordecon AS (at that date the Group's subsidiary Nordecon Infra AS) and Ramboll Eesti AS participated in the tender with a joint bid of 506.2 million kroons (32.4 million euros).

The tender gave rise to numerous disputes and challenges between 2008 and 2010. Owing to the challenges, the Road Administration endeavoured to cancel the procurement tender but the public procurement dispute review committee declared the Road Administration's resolution for cancellation invalid. The tender 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, adopted a resolution that declared the public procurement tender invalid on the basis that during the procurement 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 tender 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 participate in public procurement tenders.

Credit risk

For credit risk management, a potential customer's settlement behaviour and creditworthiness are analysed already in the tendering stage. When the contract has been signed, the customer's settlement behaviour is monitored on an ongoing basis from the making of an advance payment to adherence to the contractual settlement schedule, which usually depends on the documentation of the delivery of work performed. We believe that the system in place allows us to respond to customers' settlement difficulties sufficiently promptly. At the end of the first nine months of 2011, our customers' settlement behaviour was relatively good considering the economic situation although there were also a few problem customers. The proportion of overdue receivables is stable; the figure consists mostly of items that are not significantly past due and stem from the routines to be completed between public sector companies and their financing authorities. In accordance with the Group's accounting policies, all receivables that are more than 180 days overdue or in respect of which no additional settlement agreement has been reached are recognised as an expense.

In the first nine months of 2011, expenses from write-down of receivables totalled 28 thousand euros (9M 2010: 2 thousand euros).

Liquidity risk

Free funds are placed in overnight or fixed-interest term deposits with the largest banks in the markets where the Group operates. To ensure timely settlement of liabilities, approximately two weeks' working capital is kept in current accounts or overnight deposits. Where necessary, overdraft facilities are used. At the reporting date, the Group's current assets exceeded its current liabilities 1.18-fold (30 September 2010: 1.56-fold) and available cash funds totalled 6,822 thousand euros (30 September 2010: 7,473 thousand euros).

The Group remains exposed to higher than average liquidity risk resulting from a gap between the customers' long settlement terms (mostly 45 to 56 days) and the subcontractors' increasing interest to negotiate shorter settlement terms (mostly 21-45 days). In the reporting period, the liquidity position was further weakened by the completion of loss-making projects. Moreover, business growth is increasing the Group's need for working capital, the impacts of which will emerge in subsequent quarters. The Group counteracts the differences in settlement terms by using factoring where possible. In order to raise additional working capital, the Group has started negotiations with banks based on the Nordecon Group Business Plan and Financing Program 2011-2014, prepared at the request of Nordecon AS by one of the world's leading consulting firms Roland Berger Strategy Consultants GmbH. At the date of release of this report, negotiations are reaching a close and we believe that relevant agreements will be signed in 2011.

Interest rate risk

The Group's interest-bearing liabilities to banks have mainly fixed interest rates. Finance lease liabilities have floating interest rates and are linked to EURIBOR. At 30 September 2011, the Group's interest-bearing loans and borrowings totalled 28,718 thousand euros, an increase of 2,017 thousand euros year-over-year. Interest expense for the first nine months of 2011 amounted to 774 thousand euros. Compared with the same period in 2010, interest expense has increased by 36 thousand euros. The Group's interest rate risk is currently influenced by two factors: a rise in the base rate for floating interest rates (EURIBOR) and a low interest coverage ratio caused by low operating cash flows. The first factor is mitigated by fixing, where possible, the interest rates of liabilities during the period of low market interest rates. The realisation of the interest payment cash flow risk depends on the success of operating activities. The Group has not acquired derivatives to hedge its interest rate risk.

Currency risk

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

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

The Group's foreign exchange gains and losses for the first nine months of 2011 resulted in a net exchange gain of 35 thousand euros. In the comparative period, exchange differences resulted in a net exchange loss of 400 thousand euros.

Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue of the Group in 2010 was 99.3 million euros. Currently Nordecon Group employs 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
         www.nordecon.com

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