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

Nordecon 

10.05.2012 15:45
---------------------------------------------------------------------------

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

Tallinn, Estonia, 2012-05-10 15:45 CEST (GLOBE NEWSWIRE) -- Announcement
includes Nordecon AS' consolidated financial statements for 2012 I quarter and
3 months, overview of the key events influencing the period's financial result,
outlook for the market and description of the main risks. 

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

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



Condensed consolidated interim statement of financial position

EUR '000                                               31 March      31 December
                                                           2012             2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ASSETS                                                                          
Current assets                                                                  
Cash and cash equivalents                                 5,385            9,908
Trade and other receivables                              28,274           34,645
Prepayments                                               2,661            2,610
Inventories                                              24,154           24,120
Non-current assets held for sale                              0              242
Total current assets                                     60,474           71,525
Non-current assets                                                              
Investments in equity-accounted investees                   191              199
Other investments                                            26               26
Trade and other receivables                               2,338            2,504
Investment property                                       4,930            4,930
Property, plant and equipment                             7,534            7,437
Intangible assets                                        14,934           14,960
Total non-current assets                                 29,953           30,056
TOTAL ASSETS                                             90,427          101,581
                                                                                
LIABILITIES                                                                     
Current liabilities                                                             
Loans and borrowings                                     23,466           19,130
Trade payables                                           19,161           27,403
Other payables                                            3,583            4,930
Deferred income                                           9,998           10,587
Provisions                                                  388              485
Total current liabilities                                56,596           62,535
Non-current liabilities                                                         
Loans and borrowings                                     5,610,            9,513
Trade payables                                              199              199
Other payables                                               96               96
Provisions                                                  876              841
Total non-current liabilities                             6,781           10,649
TOTAL LIABILITIES                                        63,377           73,184
                                                                                
EQUITY                                                                          
Share capital                                            19,657           19,657
Statutory capital reserve                                 2,554            2,554
Translation reserve                                        -402             -463
Retained earnings                                         3,199            4,563
Total equity attributable to equity holders of           25,008           26,311
 the parent                                                                     
Non-controlling interest                                  2,042            2,086
TOTAL EQUITY                                             27,050           28,397
TOTAL LIABILITIES AND EQUITY                             90,427          101,581



Condensed consolidated interim statement of comprehensive income

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



Condensed consolidated interim statement of cash flows

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



Financial review

Financial performance

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

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

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

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

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

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

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

Cash flows

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

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

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

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

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



Key financial figures and ratios

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



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



Performance by geographical market

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

         3M 2012  3M 2011  3M 2010  2011
----------------------------------------
----------------------------------------
Estonia      98%      92%      96%   97%
Ukraine       0%       0%       4%    0%
Belarus       0%       5%       0%    1%
Finland       2%       3%       0%    2%

The decline in foreign revenues results from discontinuance of operations in
the Belarusian market (see also the chapter Changes in the Group's business
operations in the first quarter of 2012), which in the first quarter of the
previous year accounted for 5% of total revenue. Finnish revenues comprise
revenue from rendering subcontracting services in the concrete works sector. We
expect the contribution of foreign markets to remain stable for the rest of the
year. 

Geographical diversification of the revenue base has been a consciously
deployed strategy by which the Group mitigates the risks resulting from
excessive reliance on a single market. Although in the long term our strategy
foresees increasing foreign operations, in the short term the Group will focus
on the Estonian market and seizing opportunities in an environment that it
knows best and which entails comparatively fewer known market risks. The
Group's vision of the future of its foreign operations is described in the
chapter Outlooks of the Group's geographical markets. 



Performance by business line

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

The Group's revenue for the first quarter of 2012 was 22,475 thousand euros,
27% up on the 17,723 thousand euros generated in the first quarter of 2011. The
foundation for revenue growth was laid in 2011 when the Estonian construction
market began recovering and the Group secured significantly more new contracts
than in 2010. Revenue should continue growing on a year over year basis also in
the following quarters, although at a somewhat slower pace. 

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

Segment revenue

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

For a long time, the majority of tenders in the construction market have been
related to infrastructure (mainly projects financed with the support of the
state and the EU structural funds) and the majority (78% at the reporting date)
of contracts in the Group's order book belong to the Infrastructure segment.
Despite this, the segments' revenues have been practically equal because our
active building construction contracts have a shorter term than those of
infrastructure construction. Infrastructure contracts have a longer term (e.g.
road maintenance contracts) and their contribution to realised revenue is
therefore comparatively smaller. In the next quarters, the contribution of the
Infrastructure segment should increase compared with that of the Buildings
segment. 



Revenue distribution between segments *

Operating segments  3M 2012  3M 2011  3M 2010  2011
---------------------------------------------------
---------------------------------------------------
Buildings               54%      51%      72%   48%
Infrastructure          46%      49%      28%   52%

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

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

Revenue distribution within segments

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

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

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



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

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



Order book

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

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

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

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



People

Staff and personnel expenses

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

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

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

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

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

Labour productivity and labour cost efficiency

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

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

                                                3M 2012  3M 2011  3M 2010   2011
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Nominal labour productivity (rolling),            206.4    138.7    126.9  202.3
 (EUR'000)                                                                      
Change against the comparative period             48.8%     9.3%   -33.4%  57.7%
                                                                                
Nominal labour cost efficiency (rolling),          10.7      7.4      6.3   10.4
 (EUR'000)                                                                      
Change against the comparative period             43.6%    17.6%   -15.7%  51.6%



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



Outlooks of the Group's geographical markets

Estonia

Processes and developments characterising the Estonian construction market in
2012 

  -- According to our estimates, the construction market will not grow
     significantly in 2012. Infrastructure contracts will dominate but
     opportunities for certain market growth will be better in the building
     segment where recovery has been slower, assuming that private sector
     customers (including foreign investors) that abandoned the market in
     previous years will return. In new housing development, the success of a
     project will depend on the developer's ability to either offer a low cost
     or exploit a new niche. Consumer behaviour will remain highly volatile
     while banks will impose more stringent financing conditions.
  -- Total demand in the construction market will remain disproportionately
     reliant on public procurement contracts and projects executed with the
     support of the EU structural funds. The success of such projects is
     directly related to the administrative and procurement capabilities of the
     central and local government. Patchy procurement quality may cause hold-ups
     and disruptions both during the procurement proceedings and the
     construction process.

  -- Players will continue consolidating, particularly as regards general
     contractors in the segment of building construction, where competition is
     still overly aggressive. Bids made for contracts put out to tender in 2011
     reflect that pricing pressure in the segment remains strong. In addition to
     competition, the number and business volumes of market participants will
     depend on their ability to participate in the bidding process and meet
     tendering requirements. In the execution phase, the decisive factors will
     be financial management (including relations with banks) and the ability to
     ensure sufficient liquidity, particularly when loss-generating contracts
     need to be performed.

  -- Companies may continue to challenge the results of poorly prepared public
     procurements but mostly on account of fundamental, not technical issues.
     Some procurements will be cancelled because customers have prepared their
     budgets based on the construction prices of 2009-2010 but in the current
     situation these are no longer realistic and construction companies' bids
     exceed them by tens of percents. The time and finance costs of the
     proceedings will be high for all involved.
  -- The contracts signed with public sector customers will impose rigorous
     conditions on construction companies, including greater obligations for the
     builder, strict sanctions, different financial guarantees, long settlement
     terms, etc. In a situation where the public procurement process is based on
     underbidding, this increases the risks of all market players.
  -- Growth in input prices will decelerate compared with the previous year,
     remaining within the range of a few percent (on a quarterly basis)
     throughout 2012. On the other hand, there are areas where price
     fluctuations are unpredictable and may be notably greater and hard or even
     impossible to influence (petroleum and metal products and some other
     materials).
  -- The situation in the labour market has somewhat stabilised and labour
     outflow to the Scandinavian countries will not increase significantly.
     Companies have adapted to the situation but when volumes recover the
     availability of qualified labour will again be an issue. On the whole, in
     2012 the base wage paid by construction companies that have to maintain
     tight cost control is not expected to increase.
  -- In 2012 the construction market will be seriously and somewhat
     unpredictably impacted by massive funds raised from the sale of carbon
     dioxide emission quotas, which will be allocated within an extremely short
     period for improving the energy efficiency of buildings. This has already
     triggered demand hikes in some specialised segments of the construction
     market (joint filling, facade and roof works, installation of heating
     systems, etc) and unreasonable rises in respective prices, which will cause
     temporary problems for the entire sector.
  -- The volume of investments made in the construction sector by private
     investors will depend on the economic growth rate and forecasts made on the
     basis of the latter. According to economic statistics on 2011, in recent
     years all parties - companies, investors and banks have made decisions that
     have reduced private sector investments. In 2012 the volume of investments
     will not increase significantly, because in line with the current outlook
     economic growth has started to slow after a recovery that followed the
     slump of 2010 and consumer confidence remains low. The sovereign debt
     crisis is Europe has not been resolved either. On the other hand,
     investment may grow more vigorously in certain building and infrastructure
     sub-segments.

Latvia and Lithuania

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

For the time being, we have suspended the operations of our Lithuanian
subsidiary, Nordecon Statyba UAB. We are monitoring market developments and do
not rule out the possibility that in the next few years the Group will resume
its Lithuanian operations on a project basis. Temporary suspension of
operations does not cause any major costs for the Group and it does not change
our strategic objectives in Lithuania, i.e. the objective of operating in the
Lithuanian construction market through local subsidiaries. 

Ukraine

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

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

The country with a population of around 46 million is facing some tough
choices. Unfortunately the ongoing uncertainty is also increasing the risks of
companies operating in the local construction market. 

Finland

In the Finnish market the Group offers subcontracting services in the field of
concrete works. This is an area where Estonian companies still have an edge
over local entities because our total personnel expenses are lower. The Finnish
concrete works (sub)contracting market allows us to compete for selected
projects (the main criteria are the location and the customer's low risk
level). We expect demand for concrete works to remain stable in 2012.
Nevertheless, we will maintain a rational approach and will avoid taking
excessive risks in Finland. We are not planning to penetrate other segments of
the Finnish construction market (general contracting, project management, etc). 



Description of the main risks

Business risks

The principal factors, which affect the Group's business volumes and profit
margins, are competition in the construction market and changes in the demand
for construction services. In addition, in the region, where the Group
operates, construction operations are influenced by seasonality caused by the
change of seasons. 

The Group acknowledges the risks inherent in the execution of contracts
concluded in an environment of stiff competition. Securing a long-term
construction contract at an unreasonably low price in a situation where input
prices are rising involves as high risk because the contract may quickly start
generating a loss. 

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

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

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

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

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

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

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

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

Operational risks

To manage their daily construction risks, Group companies purchase contractors'
all risks insurance. Depending on the nature of the project and the requests of
the customer, both general frame agreements and special, project-specific
contracts are used. In addition, as a rule, subcontractors are required to
secure the performance of their obligations with a bank guarantee provided to a
Group company. To remedy builder-caused deficiencies, which may be detected
during the warranty period, Group companies create warranties provisions based
on their historical experience. At 31 March 2012, the Group's warranties
provisions (including current and non-current ones) totalled 1,153 thousand
euros. At 31 March 2011, the corresponding figure was 1,192 thousand euros. 

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

Financial risks

Credit risk

Despite continued uncertainty, the Group did not have to recognise any
significant credit losses. The credit risk exposure of the Group's receivables
continues to be low because the proportion of public sector customers that
receive their financing from the state and local government as well as the EU
structural funds is high. The main indicator of the realisation of credit risk
is settlement default that exceeds 180 days coupled with no activity on the
part of the debtor that would confirm the intent to settle. 

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

Liquidity risk

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

The Group continues to work with the banks in implementing its financing
program for 2011-2014, which was developed in 2011 with the assistance of one
of the world's leading consulting firms (Roland Berger Strategy Consultants).
In line with the program, the banks will support the Group's liquidity position
by refinancing long-term loans and by granting repayment holidays for loan
principal (for 2011-2012 with the option to extend the repayment holiday for
2013). Where necessary, the banks will support the Group with additional
short-term loans. At the end of the reporting period, the Group had received
loans of this kind of 3.1 million euros. 

At 31 March 2012, the Group's current assets exceeded its current liabilities
1.07-fold (31 March 2011: 1.36-fold). Bank loans make up a significant
proportion of current liabilities. In accordance with IFRS EU, loan commitments
have to be classified into current and non-current liabilities based on the
(contractual) conditions effective at the reporting date. Although management
believes that it is likely that the Group's overdraft liabilities and other
short-term bank loans will be refinanced for another 12 months, relevant
decisions will be made in the next quarters of 2012. Therefore, at the
reporting date the loan commitments constituted short-term liabilities.
According to the Group's estimates, current liabilities include loans of 10,510
thousand euros that will probably be refinanced in 2012. If the current ratio
were adjusted accordingly, it would be 1.31. 

At the reporting date, the Group's cash and cash equivalents totalled 5,385
thousand euros (31 March 2011: 2,303 thousand euros). 

Interest rate risk

The Group's interest-bearing liabilities to banks have both fixed and floating
interest rates. Finance lease liabilities have mainly floating interest rates.
The base rate for floating interest rates is mostly Euribor. At 31 March 2012,
the Group's interest-bearing loans and borrowings totalled 29,076 thousand
euros, a decrease of 1,285 thousand euros year-over-year. Interest expense for
the first quarter of 2012 amounted to 993 thousand euros. Compared with the
first quarter of 2011, interest expense has decreased by 3 thousand euros. 

The Group's interest rate risk is currently influenced by two factors: a rise
in the base rate for floating interest rates (Euribor) and a low interest
coverage ratio caused by weak operating cash flow. The first risk factor is
mitigated by fixing, where possible, the interest rates of liabilities during
the period of low market interest rates. Realisation of the second risk factor
depends on the success of operating activities. 

In recent years, banks and leasing companies have been increasingly interested
in charging a floating interest rate. This increases the Group's exposure to
additional finance costs that may result from a rise in the base interest rate.
Meanwhile, the Group's loan liabilities have decreased and the trend is likely
to continue in subsequent years. This curbs the potential negative impact of a
rise in the base interest rate on the Group's interest-related cash flows. The
Group has not acquired any derivatives for hedging the risks arising from
instruments with a floating interest rate. 

Currency risk

As a rule, the prices of construction contracts and subcontracts are fixed in
the currency of the host country, i.e. in euros (EUR) and in Ukrainian hryvnas
(UAH). From the beginning of 2012 the Group is not exposed to currency risks
related to the Belarusian ruble (BYR) because the Group has practically
discontinued its operations in Belarus. 

The exchange rate of the Ukrainian hryvna against the euro has been stable
since 2010. In the first quarter of 2012, fluctuations in the euro-hryvna
exchange rate remained below 5%. The Group's foreign exchange gains and losses
for the first quarter of 2012 resulted in a net exchange gain of 91 thousand
euros (Q1 2011: 140 thousand euros). 

In connection with suspension of operations in Lithuania, currency risks
related to that country are not relevant. Since Estonia's adoption of the euro
at the beginning of 2011, the Group's Finnish operations do not involve a
currency risk. Currency risk is also reduced by the fact that the prices of
materials and services that the Group's Estonian entities purchase from abroad
are mostly denominated in euros. 

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



Nordecon is a group of construction companies whose core business is
construction project management and general contracting in the buildings and
infrastructures segment. Geographically the Group operates in Estonia, Ukraine
and Finland. The parent of the Group is Nordecon AS, a company registered and
located in Tallinn, Estonia. In addition to the parent company, there are more
than 10 subsidiaries in the Group. The consolidated revenue of the Group in
2011 was 147.8 million euros. Currently Nordecon Group employs more than 700
people. Since 18 May 2006 the company's shares have been quoted in the main
list of the NASDAQ OMX Tallinn Stock Exchange. 


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



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Company:      Nordecon
              
               
              Estonia
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E-mail:       
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ISIN:         EE3100039496
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