The Group's strategy and objectives
Need for adjusting the Group's strategy
The Group's development strategy for 2009-2013 was underpinned by the assumption
that in the forthcoming years the construction market would see shrinkage in
volumes, downward pressure on the end-price of the service, increasing
competition and subsequent market consolidation. The factors were interpreted
not only as threats but also as opportunities to be exploited for reinforcing
the Group's position and facilitating its international expansion. However, in
2009 the global financial crisis and the ensuing economic downturn had a more
severe impact on the Group's markets and financial performance than anticipated.
To date, the Group has suspended the operations of its Lithuanian subsidiary
Nordecon Statyba UAB and at the beginning of 2010 we divested our Latvian
subsidiary Nordecon Infra SIA owing to its poor operating results. In the past
year and a half, the Ukrainian buildings construction market has hit more or
less a standstill. As a result, we have had to make deep expense and job cuts
at our Ukrainian subsidiary Eurocon Ukraine TOV. At the reporting date,
approximately 95% of our business is conducted in Estonia.
In July 2010, the board of Nordecon International AS proposed that the council
revise the Group's development strategy because achieving one of the main
strategic goals (continuing internationalization) and the ultimate strategic
goal by 2013 had become unrealistic.
The board considered revision necessary in light of the following:
- In 2010 the construction markets of the Baltic countries and Ukraine will
remain in a slump.
- In the next few years, economic growth in the Baltic countries will be modest
and the construction market cannot be expected to recover before 2012.
- The construction market is dominated by public procurement tenders that
induce underbidding and do not allow construction companies to operate at their
average historical profit margins.
- The decline in input prices has been replaced by a rise and the forthcoming
years will reveal the extent of the risks taken/losses incurred with the intent
of lowering prices.
The Group's revised strategy for 2010-2012
The board is of the opinion that in the next couple of years, the Group should
focus on its core business in its main market Estonia where Nordecon is
represented in almost all sub-segments and can rely on extensive local
experience. In order to adapt to adverse changes in the external environment,
the Group will have to continue restructuring its operations, improving
profitability by effective cost management, and creating opportunities for
successfully entering the growth phase of the market (also in the foreign
markets).
According to the board's proposal, in 2010-2012 the Group should focus on
achieving the above. Thus, the new strategic outlook will be for a shorter term
than the previous one (for an overview of the strategy for 2009-2013, see the
annual report for 2009). The strategy for the next three years will have to
support the Group's recovery from the slump and prepare ground for seizing the
opportunities provided by the economic growth that is currently anticipated to
emerge in 2012.
The ultimate goal of the Group's strategy for 2009-2013 was to become the
fastest growing construction group on the Nordic and Baltic stock exchanges by
2013 in terms of revenue growth. In the next few years, revenue growth will not
be a priority because this would assume taking unjustified risks at margins that
are unnaturally low for the construction market.
The board submitted its proposals for revising the Group's strategy for
2010-2012 for review and approval by the council in July 2010. The council will
make its decisions in the first half of the third quarter.
The board's proposals for revising the strategy for 2010-2012
- To complete adjustments to the Group's structure and governance that were
launched in 2009 in order to secure profitable and rapid growth in the rise
phase of the market
- To operate in Latvia, Lithuania and Belarus on a project basis, assuming that
this is profitable
- To continue buildings construction operations in Ukraine in 2010 in line with
the former strategy and to decide the need for revising the strategy in light of
the economic situation in the country in the first quarter of 2011 at the latest
- To maintain preparedness for re-launching more active operations in foreign
markets (as a general contractor) as soon as the situation in the construction
market has become sufficiently supportive
- To penetrate the Finnish concrete works market (as a contractor) through a
subsidiary in order to support development of the division
- To become the leading construction group in Estonia that earns half of its
revenue from infrastructure and the other half from buildings construction by
the end of 2012
The leitmotif of the strategy for 2010-2012 is “To respond to market changes
swiftly and flexibly and to enter the next economic growth cycle successfully”
Changes in the Group's operations in the first half of 2010
Changes in the Group's Estonian operations
In the first half of 2010, the Group's Estonian operations did not change
significantly. By the end of 2009 all major planned restructuring activities
were completed and since the beginning of 2010 the Group has been conducting its
core business through two subgroups - Nordecon Ehitus and Nordecon Infra that
specialise in buildings and infrastructure construction respectively. Nordecon
International acts mostly as a holding company, providing the Group with
strategic management and intra-Group support services.
Changes in the Group's foreign operations
Latvia
The Group entered the Latvian market at the beginning of 2007 when the
acquisition of OÜ Kaurits provided it with a stake in a Latvian company - SIA
Abagars (later Nordecon Infra SIA). In order to avoid subsequent conflicts of
interest, the Group acquired the majority shareholding in the Latvian entity in
May 2008. The core business of the Latvian company was construction of water and
wastewater networks. Business volumes in Latvia grew swiftly and the company was
awarded and delivered several large public procurement projects. However, the
over-rapid growth rate resulted in an accumulation of operational risks which in
combination with drastic changes in the economic environment caused the company
to incur losses in the second half of 2009. The overall downturn in the Latvian
economy caused difficulties in collecting payments from customers including
counter-parties related to state and local governments.
As a result, in February 2010 the board of Nordecon International AS resolved to
divest the Group's entire 56% interest in Nordecon Infra SIA because it was
evident that in the next few years the entity would be operating with a loss.
The stake was sold to an individual (a non-controlling shareholder). After the
transaction, the Group does not have any ownership interests in companies
domiciled in Latvia. The financial aspects of the transaction are described in
greater detail in note 4 to the interim financial statements.
In the next years, the Group will continue operating in Latvia on a project
basis through its Estonian subsidiaries, involving partners where necessary.
However, the continuation of project-based operations assumes the availability
of profitable projects.
Belarus
The Group has signed a contract with a Finnish food industry company for the
construction of a factory in Belarus. The project is being performed through the
Group's wholly-held Belarusian subsidiary Eurocon Stroi IOOO whose establishment
was completed in January 2010. At the moment, this is the Group's only project
in Belarus. The Group used a similar strategy, i.e. contracts tendered by
well-known Nordic or Baltic companies, for penetrating the Ukrainian market more
than twelve years ago. The Group is not holding any negotiations regarding other
projects and according to the Group's development strategy penetrating the
Belarusian market more extensively in 2010 is not a priority. The current year
and the above project will serve as a basis for getting to know the market and
conducting further analyses.
Ukraine
There have not been any significant changes in the Group's Ukrainian operations
compared with the end of 2009.
Finland
The Group's subsidiary Nordecon Betoon OÜ has been seeking opportunities for
winning concrete works contracts in Finland since the end of 2009. For this, in
the first half of 2010 a Finnish subsidiary Estcon OY was acquired from the
parent. The Group undertook the transaction to support the development of its
concrete works operations.
The Group's structure and major structural changes
Major changes in the Group's structure in the first half of 2010
Nordecon International AS
In January, the establishment proceedings of Eurocon Stroi IOOO, a Belarusian
company founded by Nordecon International AS and Nordecon Ehitus AS, were
completed. The shareholders' interests are 70% and 30% respectively. The company
was established for performing project-based construction work. Since Belarus is
one of the Group's potential target markets, then in line with the corporate
strategy the majority shareholding in the entity belongs to the Group's parent
company.
In February, Nordecon International AS sold its 56% stake in the Latvian
subsidiary Nordecon Infra SIA along with interests in its subsidiaries. The
subsidiary was sold to an external party (a non-controlling shareholder). After
the transaction, the Group has no ownership interests in companies registered in
Latvia.
In April, Nordecon International AS sold 100% of its shares in the Finnish
subsidiary Estcon OY to Group company Nordecon Betoon OÜ that is going to use
the subsidiary for performing concrete works in Finland. Finland is not one of
the Group's target markets. Therefore, the transfer of the investment was not in
contradiction with the Group's general investment holding strategy.
Nordecon Infra AS
In April, Nordecon Infra AS participated in the establishment of Pigipada OÜ,
paying for a 24% stake with a monetary contribution of 9.6 thousand kroons (0.6
thousand euros). Pigipada OÜ will engage in the production of bitumen emulsion.
After the reporting date, Nordecon Infra AS has increased its interest in the
company to 49% (see Significant structural changes after the reporting date).
The operations of Pigipada OÜ have not yet been launched.
Eston Ehitus AS
In March, Eston Ehitus AS established a subsidiary Kaasa Vara OÜ. The share
capital of the subsidiary is 40 thousand kroons (3 thousand euros). At the
moment, the company is not active. The company was established for executing the
corporate rehabilitation plans of major debtors of Eston Ehitus AS.
In May, Eston Ehitus AS participated in the establishment of Magasini 29 OÜ,
acquiring a 34% stake for a monetary contribution of 13.6 thousand kroons (0.9
thousand euros). The entity was established so that it could be transferred some
of the assets and liabilities of Crislivinca OÜ (in which the stake of Eston
Ehitus AS was also 34%) that were related to an undeveloped property in Magasini
street, Tallinn. After the reporting date, Eston Ehitus AS has raised its stake
in the entity to 100% (see Significant structural changes after the reporting
date).
Eurocon Ukraine TOV
In March, Eurocon Ukraine TOV sold its 99% stake in the subsidiary Bukovina
Development TOV. The entity did not conduct any active business operations.
After the transaction, the Group has no ownership interest in Bukovina
Development TOV.
Significant structural changes after the reporting date
Nordecon Infra AS
Nordecon Infra AS has raised its 24% stake in Pigipada OÜ to 49%, paying for the
additional interest 10 thousand kroons (0.64 thousand euros).
Eston Ehitus AS
In August, Eston Ehitus AS and AS EKE Invest completed a transaction by which
they exchanged interests in Crislivinca OÜ and Magasini 29 OÜ. Before the
transaction, the respective stakes of Eston Ehitus AS and AS EKE Invest were 34%
and 66% in both companies. After the transaction, Eston Ehitus AS holds 100% of
the shares in Magasini 29 OÜ and has no stake in Crislivinca OÜ while AS EKE
Invest holds all the shares in Crislivinca OÜ and has no stake in Magasini 29
OÜ. See also note 16 to the interim financial statements.
Financial review
Margins
Nordecon International Group ended the first half of 2010 with a gross loss of
45.2 million kroons (2.9 million euros). In the comparative period (first half
of 2009), the Group earned a gross profit of 84.4 million kroons (5.4 million
euros). The loss of the first half-year is mainly attributable to the combined
effect of the seasonal nature of the construction business, unfavourable weather
conditions and estimates of potential losses on projects secured before the
input prices started rising.
The following table provides an overview of seasonal fluctuations in gross
profit development:
--------------------------------------------------------------------------------
| Percentage of annual | Q1 | Q2 | Q3 | Q4 | Total |
| gross profit | | | | | |
--------------------------------------------------------------------------------
| 2006 | 10% | 20% | 33% | 37% | 100% |
--------------------------------------------------------------------------------
| 2007 | 13% | 30% | 26% | 31% | 100% |
--------------------------------------------------------------------------------
| 2008 | 28% | 38% | 20% | 13% | 100% |
--------------------------------------------------------------------------------
| 2009 | 27% | 35% | 59% | -21% | 100% |
--------------------------------------------------------------------------------
The past winter was considerably harsher for construction companies than the
previous ones. Abundance of snow and temperature fluctuations did not allow
continuing work on the majority of active projects or making preparations for
new ones. On the other hand, regardless of the number of projects in progress
and suspension of work, companies were incurring their fixed costs. Moreover,
the long and snowy winter had a strong impact on road care and maintenance
activities that are performed mostly in that period. Performance of fixed-price
maintenance contracts in the first quarter of 2010 proved highly unprofitable
because snow clearing and de-icing operations were much more time and labour
consuming than usual.
Excluding the effect of seasonal factors, the decline in gross profit has
continued owing to the slump prevailing in the external environment. Steep
shrinkage in the volume of contracts on offer has heightened competition,
triggering a rapid (and, to some extent, ongoing) decline in construction prices
that has not always been in correlation with the decrease in input prices. In
such a situation, long-term construction contracts carry the risk of loss. The
Group's second quarter gross loss is mainly attributable to the recognition of
potential losses that may result from increases in the prices of raw materials
(such as bitumen, metal and others) as well as the exhaustion of opportunities
for benefiting from stiff competition among the suppliers of subcontracting
services and goods. In line with generally accepted accounting principles,
potential contract losses have to be recognised immediately and in full, which
concentrates their impact on a specific quarter although project work will
continue. In view of the above, management believes that in the second half-year
the Group's margins will start improving although this need not ensure that the
year will end in a profit.
The Group's administrative expenses for the first half-year totalled 35.6
million kroons (2.3 million euros). Compared with the first half of 2009, the
Group has cut its administrative expenses by 46%. As at the reporting date, the
ratio of administrative expenses to revenue was 6.1% (HY1 2009: 5.3%).
Management believes that the implementation of specific cost-cutting measures
will reduce the Group's annual administrative expenses by at least a third
compared with 2009. This should ensure that the annual ratio of administrative
expenses to revenue will be at the 5% level targeted by management.
Because of the above factors, the Group ended the first half of 2010 with an
operating loss of 85.6 million kroons (5.5 million euros) (HY1 2009: operating
profit of 5.2 million kroons/0.3 million euros).
The Group's net loss for the period amounted to 65.3 million kroons (4.2 million
euros). Consolidated operating loss was reduced by one-off finance income from
the sale of the loss-generating Latvian operations (for further information, see
note 4 to the interim financial statements). The loss attributable to owners of
the parent Nordecon International AS amounted to 59.3 million kroons (3.8
million euros).
Cash flows
The Group's operating activities for the first half of 2010 generated a net
inflow of 10.8 million kroons (0.7 million euros), a significant improvement on
the net outflow of 57.1 million kroons (3.7 million euros) posted for the first
half of 2009. The positive operating cash flow is mainly attributable to the
work done with contract partners and suppliers in extending the Group's
settlement terms in line with market conditions, a decrease in employee bonuses
(the gross loss did not allow making bonus payments) and the deferral of the
settlement terms of some projects started in 2009 to 2010 (e.g. those of
institutions funded from the state budget). On the other hand, the customers'
contractual settlement terms have also become longer (particularly in the case
of public sector entities) and owing to the ongoing economic downturn there
occur significant settlement delays that give rise to overdue accounts. The
Group's ability to maintain a positive operating cash flow depends on how well
we can adapt to our operating environment and whether we are able to sustain the
work done to reduce our operating expenses.
The Group's investing activities generated a net inflow of 7.2 million kroons
(0.5 million euros) compared with a net outflow of 41.1 million kroons (2.6
million euros) for the first half of 2009. A significant proportion of cash
outflows from investing activities (9.9 million kroons/0.6 million euros) are
attributable to outflows related to the disposal of the subsidiary Nordecon
Infra SIA and the discontinuance of its consolidation (see note 4 to the interim
financial statements). A significant proportion of cash inflows resulted from
the disposal of property, plant and equipment and investment properties that
generated 16.0 million kroons (1.0 million euros).
Financing activities for the first half of 2010 resulted in a net cash outflow
of 79.6 million kroons (5.1 million euros) compared with an outflow of 39.9
million kroons (2.6 million euros) in the first half of 2009. The structure of
financing cash flows has changed because the Group has reduced borrowing and is
settling its existing loan liabilities on a timely basis.
Key financial figures and ratios
--------------------------------------------------------------------------------
| Figure / ratio | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
--------------------------------------------------------------------------------
| Weighted average number of |30,756,728 |30,756,728 | 30,756,728 | 30,756,728 |
| shares (1) | | | | |
--------------------------------------------------------------------------------
| Earnings per share (in | -1.93 | 0.69 | 3.39 | -1.49 |
| kroons) | | | | |
--------------------------------------------------------------------------------
| Earnings per share (in | -0.12 | 0.04 | 0.22 | -0.09 |
| euros) | | | | |
--------------------------------------------------------------------------------
| Revenue growth | -52.2% | -34.5% | 23.1% | -37.5% |
--------------------------------------------------------------------------------
| Average number of | 797 | 1,187 | 1,209 | 1,128 |
| employees | | | | |
--------------------------------------------------------------------------------
| Revenue per employee (in | 734 | 1,032 | 1,547 | 2,144 |
| thousands of kroons) | | | | |
--------------------------------------------------------------------------------
| Revenue per employee (in | 47 | 66 | 99 | 137 |
| thousands of euros) | | | | |
--------------------------------------------------------------------------------
| Personnel expenses to | 18.6% | 15.4% | 12.4% | 15.0% |
| revenue | | | | |
--------------------------------------------------------------------------------
| Administrative expenses to | 6.1% | 5.3% | 5.0% | 5.2% |
| revenue | | | | |
--------------------------------------------------------------------------------
| EBITDA (in thousands of | -58,170 | 41,125 | 179,579 | 4,308 |
| kroons) (2) | | | | |
--------------------------------------------------------------------------------
| EBITDA (in thousands of | -3,718 | 2,628 | 11,477 | 275 |
| euros) (2) | | | | |
--------------------------------------------------------------------------------
| EBITDA margin | -9.9% | 3.4% | 9.6% | 0.2% |
--------------------------------------------------------------------------------
| Gross margin | -7.7% | 6.9% | 12.8% | 5.6% |
--------------------------------------------------------------------------------
| Operating margin | -14.6% | 0.4% | 7.8% | -5.2% |
--------------------------------------------------------------------------------
| Operating margin excluding | -14.6% | 0.3% | 7.6% | -5.4% |
| gains on asset sales | | | | |
--------------------------------------------------------------------------------
| Net margin | -11.2% | 0.4% | 5.9% | -3.7% |
--------------------------------------------------------------------------------
| Return on invested capital | -5.0% | 1.9% | 11.7% | -4.1% |
--------------------------------------------------------------------------------
| Return on assets | -4.7% | 0.2% | 6.3% | -6.0% |
--------------------------------------------------------------------------------
| Return on equity | -9.6% | 0.6% | 13.7% | -11.4% |
--------------------------------------------------------------------------------
| Equity ratio | 38.2% | 35.8% | 33.0% | 37.1% |
--------------------------------------------------------------------------------
| Gearing | 25.2% | 31.7% | 27.4% | 26.4% |
--------------------------------------------------------------------------------
| Current ratio | 1.53 | 1.36 | 1.45 | 1.47 |
--------------------------------------------------------------------------------
| | 30 June | 30 June | 30 June | 31 Dec |
| | 2010 | 2009 | 2008 | 2009 |
--------------------------------------------------------------------------------
| Order book (in thousands | 1,399,433 | 1,568,004 | 3,196,937 | 1,530,661 |
| of kroons) | | | | |
--------------------------------------------------------------------------------
| Order book (in thousands | 89,440 | 100,214 | 204,322 | 97,827 |
| of euros) | | | | |
--------------------------------------------------------------------------------
(1) For comparability, the weighted average number of shares is the number of
shares after the bonus issues.
(2) On calculating EBITDA, non-cash expenses included depreciation and
amortisation as well as impairment losses on goodwill.
--------------------------------------------------------------------------------
| Earnings per share (EPS) = net | Operating margin excluding gains on |
| profit attributable to equity | asset sales = (operating profit - |
| holders of the parent / weighted | gains on sale of property, plant and |
| average number of shares outstanding | equipment - gains on sale of real |
| Revenue per employee = revenue / | estate) / revenue |
| average number of employees | Net margin = net profit for the |
| Personnel expenses to revenue = | period / revenue |
| personnel expenses / revenue | Return on invested capital = (profit |
| Administrative expenses to revenue = | before tax + interest expense) / the |
| administrative expenses / revenue | period's average (interest-bearing |
| EBITDA = earnings before interest, | liabilities + equity) |
| taxes, depreciation and | Return on assets = operating profit / |
| amortisation | the period's average total assets |
| EBITDA margin = EBITDA / revenue | Return on equity = net profit for the |
| Gross margin = gross profit / | period /the period's average total |
| revenue | equity |
| Operating margin = operating profit | Equity ratio = total equity / total |
| / revenue | equity and liabilities |
| | Gearing = (interest-bearing |
| | liabilities - cash and cash |
| | equivalents) / (interest bearing |
| | liabilities + equity) |
| | Current ratio = total current assets |
| | / total current liabilities |
--------------------------------------------------------------------------------
Performance by geographical market
In the first half of 2010, revenue earned outside Estonia accounted for around
6% of the Group's total revenue. A year ago, the contribution of foreign markets
was around 16%. The decrease results from the Group's decision to sell its
Latvian operations in 2010 (see also the chapter Changes in the Group's
operations in the first half of 2010). In addition, in contrast to the first
half of 2009 the Group did not earn any revenue in Lithuania. The proportion of
the Group's Ukrainian revenues has increased somewhat but mainly on account of a
decrease in its Estonian revenues. The Group's vision of its operations in the
Latvian, Lithuanian and Ukrainian markets is presented in the chapter Outlooks
of the Group's geographical markets.
--------------------------------------------------------------------------------
| | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
--------------------------------------------------------------------------------
| Estonia | 94% | 84% | 80% | 86% |
--------------------------------------------------------------------------------
| Ukraine | 6% | 2% | 15% | 3% |
--------------------------------------------------------------------------------
| Lithuania | 0% | 1% | 2% | 0% |
--------------------------------------------------------------------------------
| Latvia | 0% | 13% | 3% | 11% |
--------------------------------------------------------------------------------
In the reporting period, we started performing a project-based construction
contract in Belarus but the period's revenue was not significant. The work will
continue in the second half-year. Concrete works in Finland did not yet account
for a percentage of consolidated revenue either.
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 perspective the Group's strategy foresees
increasing foreign operations, in the short-term perspective the Group will
focus on the Estonian market and seizing opportunities in an environment that it
knows best and that entails comparatively fewer identified market risks.
Performance by business line
The core business of Nordecon International Group is general contracting and
project management in buildings and infrastructure construction. The Group is
involved, among other things, in the construction of commercial and industrial
buildings and facilities, road construction and maintenance, environmental
engineering, concrete works and real estate development.
Consolidated revenue for the first half of 2010 amounted to 585.2 million kroons
(37.4 million euros), a 52% decrease from the 1,225.1 million kroons (78.3
million euros) generated in the first half of 2009. Above all, the downturn is
attributable to a significant decline in the demand for construction services in
all of the Group's markets and, in the first quarter, an exceptionally snowy and
cold winter that had the strongest impact on the Infrastructure segment where
most of the work is done outdoors. In addition, the absolute revenue figure has
been influenced by stiff competition that has lowered the construction prices.
The Group aims to maintain the revenues generated by 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 subsequent
years the proportion of housing construction revenue will remain within the
strategic 20% limit.
Segment revenue
By the end of the first half-year, the Group's infrastructure construction
revenues exceeded those of buildings construction. Considering that for some
time most of the construction market tenders have been related to infrastructure
(primarily projects financed by the state and with the support of the EU
structural funds) and that the Infrastructure segment accounts for roughly two
thirds of the Group's order book, this was an expected development. According to
management's estimates, in the second half-year the relative importance of the
Infrastructure segment will increase even further.
In the first half of 2010, the Buildings and Infrastructure segments generated
revenue of 273.0 million kroons (17.4 million euros) and 305.0 million kroons
(19.5 million euros) respectively. The corresponding figures for the first half
of 2009 were 600.8 million kroons (38.4 million euros) and 616.4 million kroons
(39.4 million euros).
Revenue distribution between segments *
--------------------------------------------------------------------------------
| Business segments | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
--------------------------------------------------------------------------------
| Buildings | 46% | 49% | 72% | 45% |
--------------------------------------------------------------------------------
| Infrastructure | 54% | 51% | 28% | 55% |
--------------------------------------------------------------------------------
* 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 EU Buildings segments 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.
Revenue distribution within segments
Distribution of projects within the Buildings segment has changed significantly
compared with a year ago as well as with historical annual averages. There are
two main reasons for this. The scarcity of projects forces companies to compete
in all market segments and the number of contracts awarded is small compared
with bids made. Such a situation does not allow concentrating on a specific
business area. Another important factor is the general economic environment.
During the past year, private companies' investments in commercial and
industrial buildings and facilities have been almost nonexistent while local
governments' investments in schools, nurseries and public buildings have
increased, partly thanks to the support received from the EU structural funds.
The proportion of industrial buildings in the Group's portfolio is large mainly
because of the ongoing construction of the Ahtme peak load boiler plant. The
Group builds apartment buildings for external customers as a general contractor,
not a developer. Revenue distribution within the segment should remain similar
throughout the rest of the year.
--------------------------------------------------------------------------------
| Revenue distribution in the | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
| Buildings segment | | | | |
--------------------------------------------------------------------------------
| Commercial buildings | 26% | 71% | 59% | 66% |
--------------------------------------------------------------------------------
| Industrial and warehouse | 21% | 11% | 20% | 10% |
| facilities | | | | |
--------------------------------------------------------------------------------
| Public buildings | 38% | 16% | 13% | 18% |
--------------------------------------------------------------------------------
| Apartment buildings | 15% | 1% | 8% | 6% |
--------------------------------------------------------------------------------
As anticipated, at the end of the first half-year roughly two thirds of the
revenue generated by the Infrastructure segment is attributable to road
construction and maintenance. The construction of other engineering facilities
(mostly water and wastewater networks) is an area where the Group has won many
tenders. Therefore, the contribution of other engineering projects will remain
relatively large throughout the year. The contribution of environmental
engineering projects (e.g. the closure of landfills) has remained stable
compared with 2009. Hydraulic engineering that depends heavily on the ports'
investment policies has plummeted to an all-time low and its recovery in the
second half-year is not likely.
--------------------------------------------------------------------------------
| Revenue distribution in the | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
| Infrastructure segment | | | | |
--------------------------------------------------------------------------------
| Road construction and | 65% | 32% | 51% | 49% |
| maintenance | | | | |
--------------------------------------------------------------------------------
| Specialist engineering | 1% | 17% | 26% | 12% |
| (including hydraulic | | | | |
| engineering) | | | | |
--------------------------------------------------------------------------------
| Other engineering | 26% | 38% | 19% | 31% |
--------------------------------------------------------------------------------
| Environmental engineering | 8% | 14% | 4% | 8% |
--------------------------------------------------------------------------------
Order book
At 30 June 2010, the Group's order book stood at 1,399.4 million kroons (89.4
million euros), approximately 11% down from the 1,568.0 million kroons (100.2
million euros) posted a year ago. Over the past quarters, the decline in the
Group's order book has decelerated and levelled off at around 1,350 to 1,500
million kroons (86 to 95 million euros).
--------------------------------------------------------------------------------
| | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
--------------------------------------------------------------------------------
| Order book, in thousands of | 1,399,433 | 1,568,004 | 3,196,937 | 1,530,661 |
| kroons | | | | |
--------------------------------------------------------------------------------
| Order book, in thousands of | 89,440 | 100,214 | 204,322 | 97,827 |
| euros | | | | |
--------------------------------------------------------------------------------
At 66% the Infrastructure segment continues to account for a significant
proportion of the Group's total order book (HY1 2009: 68%).
The value of the order portfolio has decreased due to the downturn in the
construction market. In absolute terms, the order book figures have also been
influenced by the year-over-year decrease in construction prices. In many
segments of the construction market the decrease in input prices has ceased or
turned to a rise. Therefore, in the near future the Group's management will
focus mainly on improving the profitability of the contract portfolio rather
than increasing its size or growth rate.
Between the reporting date (30 June 2010) and the date of release of this
report, Group companies have been awarded additional construction contracts of
approximately 95 million kroons (6 million euros).
People
Staff and personnel expenses
In the first half of 2010, the Group (including the parent and the subsidiaries)
employed, on average, 797 people including around 360 engineers and technical
personnel (ETP). A significant one-off decrease in the number of staff is
attributable to the divestment of the Latvian subsidiary Nordecon Infra SIA in
the first quarter of 2010. At the end of 2009, the Nordecon Infra SIA subgroup
employed over 160 people. In addition to disposals of companies, the number of
staff has decreased on account of downsizing (lay-offs and termination of
contracts). In a situation where construction volumes are expected to continue
shrinking throughout the year, the headcount may decrease even further. However,
due to the seasonal nature of the business, in the second and third quarters the
number of staff should increase through fixed-term contracts.
Average number of the Group's employees (including the parent and its
subsidiaries):
--------------------------------------------------------------------------------
| | 6M 2010 | 6M 2009 | 6M 2008 | 2009 |
--------------------------------------------------------------------------------
| ETP | 362 | 480 | 493 | 467 |
--------------------------------------------------------------------------------
| Workers | 435 | 707 | 716 | 661 |
--------------------------------------------------------------------------------
| Total average | 797 | 1,187 | 1,209 | 1,128 |
--------------------------------------------------------------------------------
The Group's personnel expenses for the first half of 2010 including associated
taxes totalled 108.7 million kroons (6.9 million euros), a 42% decrease compared
with the 188.4 million kroons (12.0 million euros) incurred in the first half of
2009.
Personnel expenses have declined on account of downsizing and the cutting of
basic salaries. In 2009, employee salaries were lowered at all Group entities;
the average pay-cut for engineers and technical personnel was 15%. The
performance pay of project staff that is linked to the projects' profit margins
has also dropped.
In the first half of 2010, the remuneration of the members of the council of
Nordecon International AS including social security charges amounted to 783
thousand kroons (50 thousand euros). The corresponding figure for the first half
of 2009 was also 718 thousand kroons (46 thousand euros). The remuneration and
benefits of the members of the board of Nordecon International AS including
social security charges totalled 1,128 thousand kroons (72 thousand euros)
compared with 1,674 thousand kroons (107 thousand euros) for the first half of
2009. The remuneration of the board has decreased because in the comparative
period the board had three members whereas the current number is two.
Outlooks of the Group's geographical markets
Estonia
According to the assessment of the Group's management, in 2010 the Estonian
construction market will be characterised by the following features:
- Total demand in the construction market will remain heavily dependent on
public procurement tenders and projects performed with the support of the
European Union funds. Project initiation success depends on the administrative
capabilities of the central and local government which have improved compared
with previous periods. However, the demand resulting from public sector projects
will not be able to compensate for the steep contraction of the buildings
construction market that remains abandoned by most private sector companies and
individuals. Accordingly, the Group's management forecasts that by the end of
2010 the total volume of the construction market will have decreased by over 50%
compared with 2008.
- The number of residential and general buildings construction companies is
decreasing. Companies engaged in the sector are seeking opportunities for
penetrating also other market segments such as infrastructure. This has
heightened competition which, in turn, has increased the number of companies
going bankrupt or needing corporate rehabilitation. The trend will continue
through 2010. The Group does not forecast a significant number of mergers or
takeovers because in the current market situation this would not have sufficient
business rationale.
- In 2010 the decrease in construction prices is expected to cease after which
the prices are expected to start rising compared with 2008-2009. In such a
situation, performance of construction contracts concluded at unreasonably low
margins or below cost may have extremely adverse consequences and may cause
serious financial difficulties for companies that have not noticed the trend or
have been forced to ignore it due to cash flow problems.
- Banks have divided companies operating in the construction market into
different risk categories. Banks' risk exposures still include the real estate
and investment loans granted to companies that were engaged in real estate
development. In 2010, the survival of a number of companies will depend on the
banks' risk management principles. On the other hand, the banks have announced
that they are again ready to start financing the construction sector although to
a limited extent.
- In 2009 building materials manufacturers that had significantly increased
their output during the growth phase of the market experienced continuing
shrinkage in demand and, consequently, greater strain in meeting the
obligations taken for increasing their capacities. To date, the decline in
building materials prices
has halted and in 2010 prices are expected to start rising.
Because of the increasing importance of infrastructure projects, the key
competitive advantages will include industry-specific (engineering and
technical) expertise, experience and references as well as the availability of
relevant resources.
- Shrinkage in construction volumes has caused continuously rising unemployment
among construction workers. The ensuing growth in the supply of labour will help
construction companies control their personnel expenses.
- Construction projects' financing principles have changed. There are now
additional requirements to the funding to be provided by the builder during the
construction period. Moreover, contractual settlement terms have lengthened and
there are settlement defaults. All this will increase the companies' liquidity
risks.
Latvia and Lithuania
In February 2010, the Group sold its loss-generating Latvian subsidiary Nordecon
Infra SIA whose core business was construction of water and wastewater networks.
According to the Group's assessment, the Latvian construction market will be
undergoing extensive adjustment to the recessionary environment through
2010-2011. Therefore, in the next few years the Group will continue operating in
Latvia on a project basis, through its Estonian subsidiaries, 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
long-term strategic objectives in the Latvian market, i.e. the objective of
operating there in the future through local subsidiaries.
Recent economic developments in Lithuania have been similar to the ones in the
other Baltic countries. Slowdown in investment, both in the public and private
sectors, and similar factors have had a direct impact on the construction
market. The commercial and residential construction markets (the Group as a
general contractor not a developer) have contracted visibly and the launch of
any new private sector projects in the near future is unlikely.
In response to this, the operations of the Group's Lithuanian subsidiary
Nordecon Statyba UAB have been suspended and the Group is monitoring the market
situation. The temporary suspension of operations does not cause any major costs
for the Group. The Group's management does not exclude the possibility that the
Lithuanian operations will remain suspended also after 2010. The decision does
not change the Group's long-term strategic objectives in the Lithuanian
construction market, i.e. the objective of operating there in the future through
local subsidiaries.
Ukraine
In Ukraine, the Group will continue mainly as a general contractor and project
manager in the construction of commercial buildings and production facilities.
In 2009, the number of projects started in the buildings construction market
decreased substantially. The situation in the sector is not expected to improve
until after the second half of 2010. This implies, above all, the need for tight
cost control.
Activities on development projects that require major investment have been
suspended to minimise the risks until the situation in the Ukrainian and global
financial markets eases up (the Group has currently interests in two development
projects that have been conserved)
The main risks in the Ukrainian market are connected with the low administrative
efficiency of the central and local government and the judicial system,
inflation, and the availability of quality construction inputs. Demand is mainly
undermined by the customers' lack of financing. To date, the weakening of the
local currency that began in 2008 has stopped and the Group's exposure to
market-based currency risk has decreased considerably. It is also clear that the
political climate has stabilised after the presidential elections, which may
pave the way for an improvement in the general economic climate. This, in turn,
would revive investment by local and foreign companies who account for a
significant proportion of the Group's customers in the Ukrainian market.
Notwithstanding the above, the Group believes that the construction market of a
country with a population of 46 million will offer excellent business
opportunities also in the future. The Group's key success factor is relatively
little competition among project management companies (the Group offers flexible
construction management in combination with European practices and competencies)
compared with the real needs of a normally functioning construction market. The
Group's management is confident that the current crisis in the Ukrainian
construction market and economy as a whole will transform the local
understanding and expectations of general contracting and project management in
the construction business, which will improve the Group's position significantly
in the long-term perspective.
Description of the main risks
Business risks
Management believes that in the next few years the main business risk will be
stiff competition that induces construction companies to bid unreasonably low
prices in a situation where input prices have started rising and may cause steep
losses. 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 cost cutting as well as detailed
and precise analyses 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 specially tailored project-specific contracts are used. In
addition, as a rule, subcontractors are required to secure the performance of
their obligations with a bank guarantee issued for the benefit of a Group
company. To remedy builder-caused deficiencies which may be detected during the
warranty period, all Group companies create warranties provisions. At 30 June
2010, the provisions (including current and non-current ones) totalled 13.4
million kroons (0.9 million euros). At 30 June 2009, the corresponding figure
was 15.1 million kroons (1.0 million euros).
Credit risk
For credit risk management, a potential customer's settlement behaviour and
creditworthiness are analysed already in the tendering stage. Subsequent to the
signature of a contract, the customer's settlement behaviour is monitored on an
ongoing basis from the making of an advance payment to adherence to the
contractual settlement schedule, which usually depends on the documentation of
the delivery of work performed. We believe that the system in place allows us to
respond to customers' settlement difficulties with sufficient speed. At the end
of the reporting period, our customers' settlement behaviour was good in the
current economic situation; however, there were also some large problem
customers. The proportion of overdue receivables has increased, which heightens
the risk of future credit losses. In accordance with the Group's accounting
policies, all receivables that are more than 180 days overdue or in respect of
which no additional settlement agreements have been reached are recognised as an
expense.
In the first half of 2010, net gain on doubtful receivables (recoveries of items
written down in previous periods exceeded the amount of items written down in
the reporting period) amounted to 0.1 million kroons (0 million euros). In the
first half of 2009, net loss on doubtful receivables amounted to 9.2 million
kroons (0.6 million 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 1.53-fold (30 June 2009: 1.36-fold) and available cash funds
totalled 163.9 million kroons (10.5 million euros) (30 June 2009: 158.1 million
kroons / 10.1 million euros), providing a sufficient liquidity buffer for
operating in conditions that are more complicated than in the previous year.
Interest rate risk
The Group's interest-bearing liabilities to banks have mainly fixed interest
rates. Finance lease liabilities have floating interest rates and are linked to
EURIBOR. At 30 June 2010, the Group's interest-bearing loans and borrowings
totalled 440.7 million kroons (28.2 million euros), a 179.0 million kroon (11.4
million euro) decrease year-over-year. Interest expense for the first half of
2010 amounted to 7.7 million kroons (0.5 million euros). Compared with the first
half of 2009, interest expense has contracted by 8.0 million kroons (0.5 million
euros) in connection with a decline in the EURIBOR base rate and a decrease in
loans and borrowings.
The Group's interest rate risk results mainly from two factors: an increase in
the base rate for floating interest rates (EURIBOR) and insufficient operating
cash flow that may render the Group unable to settle its interest expense. 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 cash flow risk depends on the success of operating activities. The Group
does not use derivatives to hedge the interest rate risk.
Currency risk
As a rule, construction contracts and subcontractors' service contracts are made
in the currency of the host country: in Estonia in Estonian kroons (EEK) and in
Ukraine in Ukrainian hryvnas (UAH). In connection with shrinkage in 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
operations because the Ukrainian national currency floats against the euro and,
consequently, against the Estonian kroon. To date, the weakening of the
Ukrainian hryvna against the euro that began in the last quarter of 2008 has
ceased. The Group's exchange gains and losses for the first half of 2010
resulted in a net exchange loss of 0.9 million kroons (0.1 million euros). In
the first half of 2009, exchange differences resulted in a gain of 0.3 million
kroons (0 million euros).
Condensed consolidated interim statement of financial position
--------------------------------------------------------------------------------
| EEK`000 | 30 June 2010 | 31 December |
| | | 2009 |
--------------------------------------------------------------------------------
| ASSETS | | |
--------------------------------------------------------------------------------
| Current assets | | |
--------------------------------------------------------------------------------
| Cash and cash equivalents | 163,911 | 225,191 |
--------------------------------------------------------------------------------
| Trade and other receivables | 593,601 | 644,704 |
--------------------------------------------------------------------------------
| Prepayments | 36,198 | 30,595 |
--------------------------------------------------------------------------------
| Inventories | 395,293 | 389,328 |
--------------------------------------------------------------------------------
| Non-current assets held for sale | 5,542 | 4,617 |
--------------------------------------------------------------------------------
| Total current assets | 1,194,545 | 1,294,435 |
--------------------------------------------------------------------------------
| Non-current assets | | |
--------------------------------------------------------------------------------
| Investments in equity accounted investees | 1,584 | 2,191 |
--------------------------------------------------------------------------------
| Other investments | 414 | 414 |
--------------------------------------------------------------------------------
| Trade and other receivables | 34,696 | 33,329 |
--------------------------------------------------------------------------------
| Investment property | 77,135 | 87,975 |
--------------------------------------------------------------------------------
| Property, plant and equipment | 164,275 | 204,115 |
--------------------------------------------------------------------------------
| Intangible assets | 244,036 | 268,233 |
--------------------------------------------------------------------------------
| Total non-current assets | 522,140 | 596,257 |
--------------------------------------------------------------------------------
| TOTAL ASSETS | 1,716,685 | 1,890,692 |
--------------------------------------------------------------------------------
| LIABILITIES | | |
--------------------------------------------------------------------------------
| Current liabilities | | |
--------------------------------------------------------------------------------
| Loans and borrowings | 170,855 | 262,959 |
--------------------------------------------------------------------------------
| Trade payables | 406,945 | 377,925 |
--------------------------------------------------------------------------------
| Other payables | 79,358 | 94,580 |
--------------------------------------------------------------------------------
| Deferred income | 116,210 | 136,438 |
--------------------------------------------------------------------------------
| Provisions | 6,368 | 10,364 |
--------------------------------------------------------------------------------
| Total current liabilities | 779,736 | 882,266 |
--------------------------------------------------------------------------------
| Non-current liabilities | | |
--------------------------------------------------------------------------------
| Loans and borrowings | 269,856 | 294,328 |
--------------------------------------------------------------------------------
| Trade payables | 3,023 | 4,846 |
--------------------------------------------------------------------------------
| Other payables | 1,500 | 1,500 |
--------------------------------------------------------------------------------
| Provisions | 7,041 | 7,041 |
--------------------------------------------------------------------------------
| Total non-current liabilities | 281,420 | 307,715 |
--------------------------------------------------------------------------------
| TOTAL LIABILITIES | 1,061,156 | 1,189,981 |
--------------------------------------------------------------------------------
| EQUITY | | |
--------------------------------------------------------------------------------
| Share capital | 307,567 | 307,567 |
--------------------------------------------------------------------------------
| Statutory capital reserve | 40,024 | 40,012 |
--------------------------------------------------------------------------------
| Translation reserve | -4,686 | -3,201 |
--------------------------------------------------------------------------------
| Retained earnings | 286,006 | 345,280 |
--------------------------------------------------------------------------------
| Total equity attributable to equity | 628,911 | 689,658 |
| holders of the parent | | |
--------------------------------------------------------------------------------
| Non-controlling interest | 26,617 | 11,053 |
--------------------------------------------------------------------------------
| TOTAL EQUITY | 655,528 | 700,711 |
--------------------------------------------------------------------------------
| TOTAL LIABILITIES AND EQUITY | 1,716,685 | 1,890,692 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| EUR`000 | 30 June 2010 | 31 December |
| | | 2009 |
--------------------------------------------------------------------------------
| ASSETS | | |
--------------------------------------------------------------------------------
| Current assets | | |
--------------------------------------------------------------------------------
| Cash and cash equivalents | 10,476 | 14,392 |
--------------------------------------------------------------------------------
| Trade and other receivables | 37,938 | 41,204 |
--------------------------------------------------------------------------------
| Prepayments | 2,313 | 1,955 |
--------------------------------------------------------------------------------
| Inventories | 25,264 | 24,883 |
--------------------------------------------------------------------------------
| Non-current assets held for sale | 354 | 295 |
--------------------------------------------------------------------------------
| Total current assets | 76,345 | 82,729 |
--------------------------------------------------------------------------------
| Non-current assets | | |
--------------------------------------------------------------------------------
| Investments in equity accounted investees | 101 | 140 |
--------------------------------------------------------------------------------
| Other investments | 26 | 26 |
--------------------------------------------------------------------------------
| Trade and other receivables | 2,218 | 2,130 |
--------------------------------------------------------------------------------
| Investment property | 4,930 | 5,623 |
--------------------------------------------------------------------------------
| Property, plant and equipment | 10,499 | 13,045 |
--------------------------------------------------------------------------------
| Intangible assets | 15,597 | 17,143 |
--------------------------------------------------------------------------------
| Total non-current assets | 33,371 | 38,108 |
--------------------------------------------------------------------------------
| TOTAL ASSETS | 109,716 | 120,837 |
--------------------------------------------------------------------------------
| LIABILITIES | | |
--------------------------------------------------------------------------------
| Current liabilities | | |
--------------------------------------------------------------------------------
| Loans and borrowings | 10,920 | 16,806 |
--------------------------------------------------------------------------------
| Trade payables | 26,008 | 24,154 |
--------------------------------------------------------------------------------
| Other payables | 5,072 | 6,045 |
--------------------------------------------------------------------------------
| Deferred income | 7,427 | 8,720 |
--------------------------------------------------------------------------------
| Provisions | 407 | 662 |
--------------------------------------------------------------------------------
| Total current liabilities | 49,834 | 56,387 |
--------------------------------------------------------------------------------
| Non-current liabilities | | |
--------------------------------------------------------------------------------
| Loans and borrowings | 17,246 | 18,811 |
--------------------------------------------------------------------------------
| Trade payables | 194 | 310 |
--------------------------------------------------------------------------------
| Other payables | 96 | 96 |
--------------------------------------------------------------------------------
| Provisions | 450 | 450 |
--------------------------------------------------------------------------------
| Total non-current liabilities | 17,986 | 19,667 |
--------------------------------------------------------------------------------
| TOTAL LIABILITIES | 67,820 | 76,054 |
--------------------------------------------------------------------------------
| EQUITY | | |
--------------------------------------------------------------------------------
| Share capital | 19,657 | 19,657 |
--------------------------------------------------------------------------------
| Statutory capital reserve | 2,558 | 2,557 |
--------------------------------------------------------------------------------
| Translation reserve | -299 | -205 |
--------------------------------------------------------------------------------
| Retained earnings | 18,279 | 22,067 |
--------------------------------------------------------------------------------
| Total equity attributable to equity | 40,195 | 44,077 |
| holders of the parent | | |
--------------------------------------------------------------------------------
| Non-controlling interest | 1,701 | 706 |
--------------------------------------------------------------------------------
| TOTAL EQUITY | 41,896 | 44,784 |
--------------------------------------------------------------------------------
| TOTAL LIABILITIES AND EQUITY | 109,716 | 120,837 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| EEK`000 | Q2 2010 | Q2 2009 | 6M | 6M 2009 | 2009 |
| | | | 2010 | | |
--------------------------------------------------------------------------------
| Revenue | 409,202 | 634,430 | 585,200 | 1,225,094| 2,418,880|
| | | | | | |
--------------------------------------------------------------------------------
| Cost of sales |-430,677 |-586,932 |-630,404 |-1,140,741|-2,282,575|
| | | | | | |
--------------------------------------------------------------------------------
| Gross profit / loss | -21,475 | 47,498 | -45,206 | 84,353 | 136,305 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Distribution expenses | -1,129 | -2,140 | -3,126 | -4,363 | -9,416 |
--------------------------------------------------------------------------------
| Administrative expenses | -17,289 | -27,946 | -35,557 | -65,350 | -125,206 |
--------------------------------------------------------------------------------
| Other operating income | 4,982 | 18,209 | 5,658 | 19,898 | 25,592 |
--------------------------------------------------------------------------------
| Other operating expenses | -5,088 | -26,950 | -7,333 | -29,373 | -154,014 |
--------------------------------------------------------------------------------
| Operating profit / loss | -39,999 | 8,671 | -85,564 | 5,165 | -126,739 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Finance income | 3,047 | 12,128 | 42,281 | 30,903 | 86,513 |
--------------------------------------------------------------------------------
| Finance expenses | -4,437 | -9,131 | -23,227 | -22,913 | -33,934 |
--------------------------------------------------------------------------------
| Net finance income / | -1,390 | 2,997 | 19,054 | 7,990 | 52,579 |
| expense | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Share of profit / loss | -621 | 538 | -631 | -2,106 | -7,666 |
| of equity accounted | | | | | |
| investees | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Profit / loss before | -42,010 | 12,206 | -67,141 | 11,049 | -81,826 |
| income tax | | | | | |
--------------------------------------------------------------------------------
| Income tax expense / | 1,814 | -6,513 | 1,814 | -5,895 | -7,618 |
| income | | | | | |
--------------------------------------------------------------------------------
| Profit / loss for the | -40,196 | 5,693 | -65,327 | 5,154 | -89,444 |
| period | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Other comprehensive | | | | | |
| income / expense: | | | | | |
--------------------------------------------------------------------------------
| Exchange differences on | -919 | -231 | -1,485 | -1,711 | 905 |
| translating foreign | | | | | |
| operations | | | | | |
--------------------------------------------------------------------------------
| Total other | -919 | -231 | -1,485 | -1,711 | 905 |
| comprehensive income / | | | | | |
| expense for the period | | | | | |
--------------------------------------------------------------------------------
| TOTAL COMPREHENSIVE | -41,115 | 5,462 | -66,812 | 3,443 | -88,539 |
| INCOME / EXPENSE FOR THE | | | | | |
| PERIOD | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Profit / loss | | | | | |
| attributable to: | | | | | |
--------------------------------------------------------------------------------
| - Owners of the parent | -38,679 | 14,130 | -59,274 | 21,176 | -45,740 |
--------------------------------------------------------------------------------
| - Non-controlling | -1,517 | -8,437 | -6,053 | -16,022 | -43,704 |
| interests | | | | | |
--------------------------------------------------------------------------------
| Profit / loss for the | -40,196 | 5,693 | -65,327 | 5,154 | -89,444 |
| period | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Total comprehensive | | | | | |
| income / expense | | | | | |
| attributable to: | | | | | |
--------------------------------------------------------------------------------
| - Owners of the parent | -39,598 | 14,031 | -60,759 | 22,469 | -44,835 |
--------------------------------------------------------------------------------
| - Non-controlling | -1,517 | -8,569 | -6,053 | -19,026 | -43,704 |
| interests | | | | | |
--------------------------------------------------------------------------------
| Total comprehensive | -41,115 | 5,462 | -66,812 | 3,443 | -88,539 |
| income / expense | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Earnings per share | | | | | |
| attributable to owners | | | | | |
| of the parent: | | | | | |
--------------------------------------------------------------------------------
| Basic earnings per share | -1.26 | 0.46 | -1.93 | 0.69 | -1.49 |
| (EEK) | | | | | |
--------------------------------------------------------------------------------
| Diluted earnings per | -1.26 | 0.46 | -1.93 | 0.69 | -1.49 |
| share (EEK) | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| EUR`000 | Q2 2010 | Q2 2009 | 6M 2010 | 6M 2009 | 2009 |
--------------------------------------------------------------------------------
| Revenue | 26,153 | 40,547 | 37,401 | 78,298 | 154,595 |
--------------------------------------------------------------------------------
| Cost of sales | -27,525 | -37,512 | -40,290 | -72,907 | -145,883 |
--------------------------------------------------------------------------------
| Gross profit / loss | -1,372 | 3,036 | -2,889 | 5,391 | 8,711 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Distribution expenses | -72 | -137 | -200 | -279 | -602 |
--------------------------------------------------------------------------------
| Administrative expenses | -1,105 | -1,786 | -2,273 | -4,177 | -8,002 |
--------------------------------------------------------------------------------
| Other operating income | 319 | 1,164 | 362 | 1,272 | 1,636 |
--------------------------------------------------------------------------------
| Other operating expenses | -325 | -1,722 | -469 | -1,877 | -9,843 |
--------------------------------------------------------------------------------
| Operating profit / loss | -2,555 | 554 | -5,469 | 330 | -8,100 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Finance income | 195 | 775, | 2,702 | 1,975 | 5,529 |
--------------------------------------------------------------------------------
| Finance expenses | -284 | -584 | -1,484 | -1,464 | -2,169 |
--------------------------------------------------------------------------------
| Net finance income / | -89 | 192 | 1,218 | 511 | 3,360 |
| expense | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Share of profit / loss | -40 | 34 | -40 | -135 | -490 |
| of equity accounted | | | | | |
| investees | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Profit / loss before | -2,684 | 780 | -4,291 | 706 | -5,230 |
| income tax | | | | | |
--------------------------------------------------------------------------------
| Income tax expense / | 116 | -416, | 116 | -377 | -487 |
| income | | | | | |
--------------------------------------------------------------------------------
| Profit / loss for the | -2,568 | 364 | -4,175 | 329 | -5,717 |
| period | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Other comprehensive | | | | | |
| income / expense: | | | | | |
--------------------------------------------------------------------------------
| Exchange differences on | -59 | -15 | -95 | -109 | 58 |
| translating foreign | | | | | |
| operations | | | | | |
--------------------------------------------------------------------------------
| Total other | -59 | -15 | -95 | -109 | 58 |
| comprehensive income / | | | | | |
| expense for the period | | | | | |
--------------------------------------------------------------------------------
| TOTAL COMPREHENSIVE | -2,627 | 349 | -4,270 | 220 | -5,659 |
| INCOME / EXPENSE FOR THE | | | | | |
| PERIOD | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Profit / loss | | | | | |
| attributable to: | | | | | |
--------------------------------------------------------------------------------
| - Owners of the parent | -2,471 | 903 | -3,788 | 1,353 | -2,923 |
--------------------------------------------------------------------------------
| - Non-controlling | -97 | -539 | -387 | -1,024 | -2,793 |
| interests | | | | | |
--------------------------------------------------------------------------------
| Profit / loss for the | -2,568 | 364 | -4,175 | 329 | -5,717 |
| period | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Total comprehensive | | | | | |
| income / expense | | | | | |
| attributable to: | | | | | |
--------------------------------------------------------------------------------
| - Owners of the parent | -2,530 | 897 | -3,883 | 1,436 | -2,865 |
--------------------------------------------------------------------------------
| - Non-controlling | -97 | -548 | -387 | -1,216 | -2,793 |
| interests | | | | | |
--------------------------------------------------------------------------------
| Total comprehensive | -2,627 | 349 | -4,270 | 220 | -5,659 |
| income / expense | | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Earnings per share | | | | | |
| attributable to owners | | | | | |
| of the parent: | | | | | |
--------------------------------------------------------------------------------
| Basic earnings per share | -0.08 | 0.03 | -0.12 | 0.04 | -0.10 |
| (EUR) | | | | | |
--------------------------------------------------------------------------------
| Diluted earnings per | -0.08 | 0.03 | -0.12 | 0.04 | -0.10 |
| share (EUR) | | | | | |
--------------------------------------------------------------------------------
Condensed consolidated interim statement of cash flows
--------------------------------------------------------------------------------
| | EEK`000 | EUR`000 |
--------------------------------------------------------------------------------
| | 6M 2010 | 6M 2009 | 6M 2010 | 6M 2009 |
--------------------------------------------------------------------------------
| Cash flows from operating | | | | |
| activities | | | | |
--------------------------------------------------------------------------------
| Cash receipts from | 720,137 | 1,448,843 | 46,025 | 92,598 |
| customers | | | | |
--------------------------------------------------------------------------------
| Cash paid to suppliers | -559,476 |-1,234,214 | -35,757 | -78,880 |
| | | | | |
--------------------------------------------------------------------------------
| VAT paid | -31,452 | -37,767 | -2,010 | -2,414 |
--------------------------------------------------------------------------------
| Cash paid to and for | -117,850 | -225,462 | -7,532 | -14,410 |
| employees | | | | |
--------------------------------------------------------------------------------
| Income tax paid | -558 | -8,538 | -36 | -546 |
--------------------------------------------------------------------------------
| Net cash from / used in | 10,801 | -57,138 | 690 | -3,652 |
| operating activities | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash flows from investing | | | | |
| activities | | | | |
--------------------------------------------------------------------------------
| Acquisition of property, | -1,217 | -839 | -78 | -54 |
| plant and equipment | | | | |
--------------------------------------------------------------------------------
| Acquisition of intangible | 0 | -7,530 | 0 | -481 |
| assets | | | | |
--------------------------------------------------------------------------------
| Proceeds from sale of | 5,371 | 4,762 | 343 | 304 |
| property, plant and | | | | |
| equipment and intangible | | | | |
| assets | | | | |
--------------------------------------------------------------------------------
| Proceeds from sale of | 10,600 | -200 | 677 | -13 |
| investment property | | | | |
--------------------------------------------------------------------------------
| Acquisition of | 0 | -11,720 | 0 | -749 |
| subsidiaries, net of cash | | | | |
| acquired | | | | |
--------------------------------------------------------------------------------
| Disposal of subsidiaries, | -9,648 | 0 | -617 | 0 |
| net of cash transferred | | | | |
--------------------------------------------------------------------------------
| Acquisition of associates | -24 | -6,000 | -2 | -383 |
--------------------------------------------------------------------------------
| Proceeds from disposal of | 0 | 7,465 | 0 | 477 |
| associates | | | | |
--------------------------------------------------------------------------------
| Acquisition of interests in | 0 | -20,000 | 0 | -1,278 |
| joint ventures | | | | |
--------------------------------------------------------------------------------
| Loans granted | -2,788 | -54,803 | -178 | -3,502 |
--------------------------------------------------------------------------------
| Repayment of loans granted | 2,763 | 38,094 | 177 | 2,435 |
--------------------------------------------------------------------------------
| Dividends received | 61 | 0 | 4 | 0 |
--------------------------------------------------------------------------------
| Interest received | 2,102 | 9,707 | 134 | 620 |
--------------------------------------------------------------------------------
| Net cash from / used in | 7,220 | -41,064 | 461 | -2,624 |
| investing activities | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash flows from financing | | | | |
| activities | | | | |
--------------------------------------------------------------------------------
| Proceeds from loans | 36,669 | 141,095 | 2,344 | 9,018 |
| received | | | | |
--------------------------------------------------------------------------------
| Repayment of loans received | -88,798 | -108,970 | -5,675 | -6,965 |
--------------------------------------------------------------------------------
| Dividends paid | 0 | -31,933 | 0 | -2,041 |
--------------------------------------------------------------------------------
| Payment of finance lease | -21,145 | -25,305 | -1,351 | -1,618 |
| liabilities | | | | |
--------------------------------------------------------------------------------
| Interest paid | -6,361 | -14,444 | -407 | -923 |
--------------------------------------------------------------------------------
| Other payments made | 56 | -381 | 4 | -24 |
--------------------------------------------------------------------------------
| Net cash used in financing | -79,579 | -39,938 | -5,085 | -2,553 |
| activities | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Net cash flow | -61,558 | -138,140 | -3,934 | -8,829 |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Cash and cash equivalents | 225,191 | 296,184 | 14,392 | 18,930 |
| at beginning of period | | | | |
--------------------------------------------------------------------------------
| Effect of exchange rate | 278 | 45 | 18 | 3 |
| fluctuations | | | | |
--------------------------------------------------------------------------------
| Decrease in cash and cash | -61,558 | -138,140 | -3,934 | -8,829 |
| equivalents | | | | |
--------------------------------------------------------------------------------
| Cash and cash equivalents | 163,911 | 158,089 | 10,476 | 10,104 |
| at end of period | | | | |
--------------------------------------------------------------------------------
Nordecon International is a group of construction companies whose core business
is general contracting and construction management in the construction of
buildings and infrastructures in Estonia, Lithuania and Ukraine. In addition,
in Estonia our companies act as independent contractors in road construction
and maintenance, environmental engineering, the assembly of reinforced concrete
elements, and the performance of cast-on-site concrete works. The parent of the
Group is Nordecon International AS, a company registered and located in
Tallinn, Estonia. In addition to the parent company, there are more than 15
subsidiaries in the Group. The consolidated revenue of the Group in 2009 was
2.4 billion kroons (155 million euros). Currently Nordecon International Group
employs nearly 750 people. Since 18 May 2006, the company's shares have been
quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange.
1 euro = 15.6466 kroons
Raimo Talviste
Nordecon International AS
Head of Finance and Investor Relations
Tel: +372 615 4445
Email: raimo.talviste@nordecon.com
www.nordecon.com
