Published: 2019-11-07 08:00:00 CET
Nordecon
Quarterly report

2019 III quarter and 9 months consolidated interim report (unaudited)

This announcement includes Nordecon AS’s consolidated financial statements for the third quarter and nine months of 2019 (unaudited) and overview of the key events influencing the period’s financial result.
Interim report is attached to the announcement and is also published on NASDAQ Tallinn and Nordecon’s web page (http://www.nordecon.com/for-investor/financial-reports/interim-reports).
Period’s investor presentation are attached to the announcement and are also published on Nordecon’s web page (http://www.nordecon.com/for-investor/investor-presentations).

Condensed consolidated interim statement of financial position

EUR ‘00030 September 201931 December 2018
ASSETS  
Current assets  
Cash and cash equivalents8,6307,678
Trade and other receivables42,12831,627
Prepayments3,6561,383
Inventories20,35520,444
Total current assets74,76961,132
 

Non-current assets
  
Investments in equity-accounted investees2,4062,266
Other investments2626
Trade and other receivables8,3948,225
Investment property5,5265,526
Property, plant and equipment16,11412,288
Intangible assets14,66514,674
Total non-current assets47,13143,005
TOTAL ASSETS121,900104,137
   
LIABILITIES  
Current liabilities  
Borrowings17,2439,374
Trade payables52,25834,954
Other payables8,1765,187
Deferred income2,5773,932
Provisions4441,013
Total current liabilities80,69854,460
 

Non-current liabilities
  
Borrowings8,56914,830
Trade payables9898
Other payables17771
Provisions812969
Total non-current liabilities9,65615,968
TOTAL LIABILITIES90,35470,428
   
EQUITY  
Share capital14,37916,321
Own (treasury) shares -660-693
Share premium635618
Statutory capital reserve2,5542,554
Translation reserve1,2151,992
Retained earnings11,53710,896
Total equity attributable to owners of the parent29,66031,688
Non-controlling interests1,8862,021
TOTAL EQUITY31,54633,709
TOTAL LIABILITIES AND EQUITY121,900104,137

Condensed consolidated interim statement of comprehensive income

EUR ‘000 9M 2019Q3 20199M 2018Q3 20182018
Revenue  

172,237
 

71,796
 

167,588
 

61,930
 

223,496
Cost of sales -164,516-67,369-160,900-58,441-213,463
Gross profit 7,7214,4276,6883,48910,033
       
Marketing and distribution expenses -635-137-470-139-626
Administrative expenses -4,668-1,620-4,977-1,591-6,725
Other operating income 128611,2251,0051,471
Other operating expenses -48-28-743-122
Operating profit 2,4982,7032,3922,7674,031
       
Finance income 1,215720241-144431
Finance costs -1,006-343-741-155-909
Net finance income/costs 209377-500-299-478
       
Share of profit of equity-accounted investees   

622
 

370
 

844
 

392
 

835
       
Profit before income tax 3,3293,4502,7362,8604,388
Income tax expense -4530-582-182-567
Profit for the period 2,8763,4502,1542,6783,821
       
Other comprehensive income 
Items that may be reclassified subsequently to profit or loss
      
Exchange differences on translating foreign operations -777-514102162-3
Total other comprehensive expense/income -777-514102162-3
TOTAL COMPREHENSIVE INCOME 2,0992,9362,2562,8403,818
       
Profit attributable to:      
- Owners of the parent 2,5323,3251,9722,5043,381
- Non-controlling interests 344125182174440
Profit for the period 2,8763,4502,1542,6783,821
       
Total comprehensive income attributable to:      
- Owners of the parent 1,7552,8112,0742,6663,378
- Non-controlling interests 344125182174440
Total comprehensive income for the period

 
 2,0992,9362,2562,8403,818
       
Earnings per share attributable to owners of the parent:      
Basic earnings per share (EUR) 0.080.100.060.080.11
Diluted earnings per share (EUR) 0.080.100.060.080.11

Condensed consolidated interim statement of cash flows

EUR ‘0009M 20199M 2018
Cash flows from operating activities  
Cash receipts from customers193,567201,839
Cash paid to suppliers-165,291-171,860
VAT paid-4,606-5,892
Cash paid to and for employees-17,332-16,764
Income tax paid-149-582
Net cash from operating activities6,1896,741
   
Cash flows from investing activities  
Paid on acquisition of property, plant and equipment-216-384
Proceeds from sale of property, plant and equipment21522
Loans provided-14-22
Repayment of loans provided910
Dividends received489249
Interest received68
Net cash from/used in investing activities489-117
   
Cash flows from financing activities  
Proceeds from loans received3,0361,916
Repayment of loans received-3,245-3,513
Finance lease payments made-1,532-1,365
Settlements of lease liability-8680
Interest paid-744-588
Dividends paid-2,360-2,627
Net cash used in financing activities-5,713-6,177
   
Net cash flow965447
   
Cash and cash equivalents at beginning of period7,6788,915
Effect of movements in foreign exchange rates-132
Increase in cash and cash equivalents965447
Cash and cash equivalents at end of period8,6309,364

Financial review

Financial performance


Nordecon ended the first nine months of 2019 with a gross profit of 7,721 thousand euros (9M 2018: 6,688 thousand euros). The Group’s gross margin was 4.5% for nine months (9M 2018: 4%) and 6.2% for the third quarter (Q3 2018: 5.6%). In contrast to the gross margin of the Buildings segment, which improved significantly, rising to 5.4% for nine months (9M 2018: 3.4%) and 5.1% for the third quarter (Q3 2018: 3.7%), the gross margin of the Infrastructure segment moved in the opposite direction, decreasing substantially. The Infrastructure segment’s nine-month gross margin was 4.0% (9M 2018: 6.7%) and third-quarter gross margin was 9.2% (Q3 2018: 10.1%). The Infrastructure segment is mainly involved in the performance of road construction and maintenance contracts. Road construction, which is capital intensive, requires a certain critical amount of work to cover its fixed costs, the largest share of which is made up of expenses related to asphalt production and laying equipment. The road maintenance result is mainly influenced by the weather. Exceptionally challenging weather conditions in the first two months of 2019 had an adverse impact on the profitability of national road maintenance contracts. The average cost of new road construction projects put out to tender in 2019 has decreased compared to 2018, which, in turn, has increased the number of bidders. Also, the gap between contractors’ asphalt concrete production capacity and market demand has widened: according to estimates, production capacity exceeds demand by at least 25%. All this has had a negative impact on bid prices and the Group has not been sufficiently successful in winning public road construction contracts.
The Group’s administrative expenses for the first nine months of 2019 totalled 4,668 thousand euros. Compared to the same period last year, administrative expenses decreased by around 6% (9M 2018: 4,977  thousand euros) and the ratio of administrative expenses to revenue (12 months rolling) dropped to 2.8% (9M 2018: 2.9%).
The Group ended the first nine months of 2019 with an operating profit of 2,498 thousand euros (9M 2018: 2,392  thousand euros). EBITDA amounted to 4,732 thousand euros (9M 2018: 3,879  thousand euros).
Finance income and costs of the period continued to be influenced by exchange rate fluctuations in the Group’s foreign markets. The Ukrainian hryvnia strengthened against the euro by around 20% and the Group recognised an exchange gain of 1,040 thousand euros (9M 2018: 29 thousand euros) on the translation of the loans provided to the Ukrainian subsidiaries in euros. The Swedish krona, on the other hand, weakened against the euro by around 4% and the Group recognised an exchange loss of 258 thousand euros (9M 2018: 124 thousand euros) on the translation of a loan provided to the Swedish subsidiary in euros.
The Group earned a net profit of2,876 thousand euros (9M 2018: 2,154 thousand euros) of which the net profit attributable to owners of the parent, Nordecon AS, was 2,532  thousand euros (9M 2018: 1,972 thousand euros).

Cash flows


Operating activities of the first nine months of 2019 produced a net cash inflow of 6,189 thousand euros (9M 2018: 6,741 thousand euros). The key factor that affects operating cash flow is the mismatch between customers’ and suppliers’ settlement terms. Cash flow is also strongly influenced by the fact that the contracts signed with both public- and private-sector customers do not require the customer to make advance payments while the Group has to make prepayments to subcontractors, materials suppliers, etc. Cash inflow is also reduced by contractual retentions, which extend from 5 to 10% of the contract price and are released at the end of the construction period only.
Investing activities resulted in a net cash inflow of 489 thousand euros (9M 2018: an outflow 117 thousand euros). The largest items were amounts paid for the acquisition of property, plant and equipment of 216 thousand euros (9M 2018: 384 thousand euros) and proceeds from sales of property, plant and equipment of 215 thousand euros (9M 2018: 22 thousand euros). Dividends received amounted to 489 thousand euros (9M 2018: 249 thousand euros).
Financing activities generated a net cash outflow of 5,713 thousand euros (9M 2018: 6,177 thousand euros). The largest items were loan, finance lease and dividend payments. Proceeds from loans received totalled 3,036  thousand euros, comprising development loans and overdrafts used (9M 2018: 1,916 thousand euros). Loan repayments totalled 3,245  thousand euros (9M 2018: 3,513 thousand euros), consisting of scheduled repayments of long-term investment and development loans. Finance lease payments totalled 1,532 thousand euros (9M 2018: 1,365  thousand euros). Dividends paid amounted to 2,360 thousand euros (9M 2018: 2,627 thousand euros).
At 30 September 2019, the Group’s cash and cash equivalents totalled 8,630 thousand euros (30 September 2018: 9,364 thousand euros). 

Key financial figures and ratios

Figure/ratio for the period 9M 20199M 20189M 20172018
Revenue (EUR ‘000)172,237167,588174,909223,496
Revenue change2.8%-4.2%30.9%-3.4%
Net profit (EUR ‘000)2,8762,1542,7163,821
Net profit attributable to owners of the parent (EUR ‘000)2,5321,9722,9783,381
Weighted average number of shares30,986,58530,986,58530,913,03131,528,585
Earnings per share (EUR)0.080.060.100.11
Administrative expenses to revenue2.7%3.0%3.1%3.0%
Administrative expenses to revenue (rolling)2.8%2.9%3.0%3.0%
EBITDA (EUR ‘000)4,7323,8792,4196,021
EBITDA margin2.7%2.3%1.4%2.7%
Gross margin4.5%4.0%3.9%4.5%
Operating margin1.5%1.4%0.5%1.8%
Operating margin excluding gain on asset sales1.4%0.8%0.5%1.3%
Net margin1.7%1.3%1.6%1.7%
Return on invested capital5.8%5.4%6.5%8.4%
Return on equity8.8%6.4%7.2%11.2%
Equity ratio25.9%28.6%29.3%32.4%
Return on assets2.5%1.9%2.4%3.5%
Gearing30%29.1%31.6%28.5%
Current ratio 0.930.961.041.12
As at30 Sept 201930 Sept 201830 Sept 201731 Dec 2018
Order book (EUR ‘000)196,493131,953142,553100,352

Performance by geographical market

In the first nine months of 2019, the contribution of the Group’s foreign markets increased compared to the same period last year, rising to around 9% of total revenue. 

 9M 20199M 20189M 20172018
Estonia91%94%95%93%
Finland4%1%1%1%
Sweden3%2%3%2%
Ukraine2%3%1%4%

It is worth noting that the share of revenue earned in Finland has increased. Based on nine-month results and our Finnish order book, where the largest project is a subcontract for supplying concrete constructions for the Raitinkartano commercial and residential building, in 2019 our Finnish revenues will be the largest ever. The Group’s Swedish revenue has also grown year on year, underpinned by two new general construction contracts secured in 2019. The contribution of the Ukrainian market where we are currently providing general contractor’s services under two building construction contracts has decreased compared to the same period last year. 
Geographical diversification of the revenue base is a consciously deployed strategy by which we mitigate the risks resulting from excessive reliance on one market. However, conditions in some of our chosen foreign markets are also volatile and affect our current results. Increasing the contribution of foreign markets is one of Nordecon’s strategic targets. 

Performance by business line

Segment revenues


In the first nine months of 2019, Nordecon generated revenue of 172,237 thousand euros, roughly 3% more than in the same period last year when revenue amounted to 167,588 thousand euros. Revenue grew in both the Buildings and the Infrastructure segment, by 2% and 6% respectively. In the light of the Group’s order book, revenue growth met expectations.
The limited volume of infrastructure projects, which is affecting the entire Estonian construction market, is also reflected in our revenue structure. In the first nine months of 2019, our Buildings and Infrastructure segments generated revenue of 122,825 thousand euros and 49,138 thousand euros respectively. In the same period last year, the corresponding figures were 120,766 thousand euros and 46,454 thousand euros (see note 8). 

Operating segments9M 20199M 20189M 20172018
Buildings70%71%75%72%
Infrastructure30%29%25%28%

Sub-segment revenues

The largest revenue source in the Buildings segment continues to be the commercial buildings sub-segment. The period’s largest projects were the reconstruction and extension of the building of Terminal D in the Old City Harbour, the construction of phase I of the Porto Franco commercial and office development next to the Admiralty Basin and a multi-storey car park at Sepapaja 1, and the design and construction of an eight-floor accommodation building at Liimi 1B and a concrete frame for an eight-floor car park and commercial building at Tammsaare tee 92 in Tallinn.
Based on the Group’s order book, we expect that in 2019 the revenue of the public buildings sub-segment will increase compared to 2018. The sub-segment’s revenue for the period was influenced the most by the construction of the Peetri sports and leisure centre in Rae parish and a state upper secondary school at Kohtla-Järve. The state’s investments in national defence also continue to play an important role. During the period, we continued to build an assembly area at the defence forces’ base at Tapa and a barracks for 300 people at the defence forces’ base at Jõhvi. The buildings of the Estonian Academy of Security Sciences in Tallinn and Kohtla-Järve state upper secondary school were delivered to the customer on schedule.
A significant share of the Group’s Estonian apartment building projects is located in Tallinn and its immediate vicinity. During the period, the largest of them were located at Lesta 10, Sammu 6 and Valge 16. Sweden, where we are providing services under three housing development contracts, also continues to influence the sub-segment’s revenue. Apartment buildings in phases III and IV of the Sõjakooli project and at Lesta 10 were delivered to the customer on schedule.
We continue to carry out our own housing development projects in Tallinn and Tartu (reported in the apartment buildings sub-segment). During the period, we completed a four-floor apartment building with 21 apartments at Nõmme tee 97 in Tallinn and three apartment buildings with 10 apartments each at Aruküla tee in Tartu. Work continues on a five-floor apartment building with 24 apartments at Võidujooksu 8c in Tallinn (www.voidujooksu.ee). During the period, our own housing developments generated revenue of 6,388 thousand euros (9M 2018: 5,566 thousand euros). In conducting real estate development activities, we monitor closely potential risks in the housing development market.
The largest projects in the industrial and warehouse facilities sub-segment are the construction of a warehouse and office building at Kaldase tee in Maardu, the reconstruction (phase V) of the fattening unit of a pig farm of Rakvere Farmid AS (EKSEKO) and the construction of micro-warehouses in Betooni street in Tallinn. Compared to previous periods, the share of contracts signed with the agricultural sector has decreased significantly, which is one of the reasons for the sub-segment’s revenue decline.

Revenue breakdown in the Buildings segment9M 2019 9M 20189M 20172018
Commercial buildings35%36%24%35%
Apartment buildings30%22%31%25%
Public buildings28%27%22%25%
Industrial and warehouse facilities7%15%23%15%

We do not expect revenue breakdown in the Infrastructure segment to change significantly in 2019. The segment will continue to be dominated by road construction and maintenance despite the fact that the contribution of other engineering work has grown. During the period, a major share of the revenue of the road construction and maintenance sub-segment resulted from contracts secured in 2018: the construction of passing lanes on the Pikknurme-Puurmani section of the Tallinn–Tartu–Võru–Luhamaa road (a 2+1 road section) and roads and bridges for the defence forces’ central training area in Kuusalu parish. The strongest revenue contributors among contracts secured in 2019 were two large projects: one for the construction of the Missokülä-Hindsa section (8 km) and the Misso small town section (2 km) of main road no. 7 (Riga-Pskov) and the other for the construction of the Kernu bypass, and the Kernu filling station and Haiba junctions. A significant share of the sub-segment’s revenue results from forest road improvement services provided to the State Forest Management Centre. The Group also continues to provide road maintenance services in Järva and Hiiu counties and the Kose maintenance area in Harju county. 
During the period, the Group continued earthworks on the Kiili-Paldiski section of the onshore part of Balticconnector (a gas pipeline between Estonia and Finland) that generated a major share of other engineering revenue. The sub-segment’s revenue is also influenced by the construction of foundations for 73 wind turbines in the Nysäter wind farm being built in northern Sweden, near Sundsvall.

Revenue breakdown in the Infrastructure segment9M 20199M 20189M 20172018
Road construction and maintenance81%91%84%89%
Other engineering16%6%12%7%
Environmental engineering3%3%4%4%

Order book

At 30 September 2019, the Group’s order book (backlog of contracts signed but not yet performed) stood at 196,493 thousand euros, an increase of 49% year on year. In the third quarter of 2019, we signed new contracts of 69,894 thousand euros (Q3 2018: 61,761 thousand euros).

As at30 Sept 201930 Sept 201830 Sept 201731 Dec 2018
Order book (EUR ‘000) 196,493 131,953 142,553100,352

At the reporting date, contracts secured by the Buildings segment and the Infrastructure segment accounted for 80% and 20% of the Group’s total order book respectively (30 September 2018: 73% and 27% respectively). Compared to 30 September 2018, the order book of the Buildings segment has increased by around 65% and that of the Infrastructure segment by around 6%.
In the Buildings segment, the largest order books are those of the commercial and the public buildings sub-segments, which account for 29% and 27% of the of the segment’s order book respectively. Besides the above, the order book of the industrial and warehouse facilities sub-segment has also grown considerably compared to the same period last year. The order book of the apartment buildings sub-segment has decreased slightly year on year. In the commercial buildings sub-segment, the largest projects in progress are mostly in Tallinn: the construction of a new seven-floor commercial building in Rotermann City and phase I of the Porto Franco development as well as the design and construction of a concrete load-bearing structure for an office building and multi-storey car park at Veskiposti 2. A large part of the order book of the public buildings sub-segment is made up of contracts signed at the beginning of 2019 for the construction of the Estonian Academy of Security Sciences and the University of Tartu Training Centre in Narva, a sports and health centre at Kohtla-Järve and a storage area at the defence forces’ base at Tapa, and the reconstruction and extension of a research and academic building of Tallinn University of Technology at Mäepealse 3. The order book of the apartment buildings sub-segment includes contracts for the construction of apartment buildings in Tallinn and its immediate vicinity. At the beginning of 2019 we were also awarded contracts for the construction of two apartment buildings in Sweden: one near Uppsala city centre and the other in the Bromma district in Stockholm.
For a long time, the order book of the Infrastructure segment was dominated by contracts secured by the road construction and maintenance sub-segment. However, in the reporting period the structure of the segment’s order book changed significantly. At the reporting date, other engineering contracts accounted for roughly a half of the order book of the Infrastructure segment. A major share of the order book of the other engineering sub-segment is made up of a contract secured in the third quarter for the construction of foundations for 73 wind turbines in the Nysäter wind farm in northern Sweden, near Sundsvall. The other half of the Infrastructure order book is made up of contracts awarded to the road construction and maintenance sub-segment whose largest projects include a contract secured in the second quarter of 2019 for building the Kernu bypass and the Kernu filling station and Haiba junctions on the Tallinn-Pärnu-Ikla road and roads in the target area of the defence forces’ central training area. The Group continues to provide road maintenance services in three road maintenance areas: Järva, Hiiu and Kose. 
Based on the size of the Group’s order book and known developments in our chosen markets, we expect that in 2019 the Group’s revenue will grow slightly compared to 2018. In an environment of exceptionally stiff competition, we avoid taking unjustified risks whose realisation in the contract performance phase would have an adverse impact on the Group’s results. Despite this, where suitable opportunities arise, we strive to increase the portfolio to counteract the pressure on margins that is caused by the market situation. Our preferred policy is to keep fixed costs under control and monitor market developments closely.
Between the reporting date (30 September 2019) and the date of release of this report, Group companies have secured additional construction contracts in the region of 58,238 thousand euros.

People

Employees and personnel expenses


In the first nine months of 2019, the Group (the parent and the subsidiaries) employed, on average, 689 people including 413 engineers and technical personnel (ETP). Headcount decreased by around 1% compared to the same period last year.

Average number of employees at Group entities (including the parent and the subsidiaries)

 9M 20199M 20189M 20172018
ETP413425425419
Workers276272314268
Total average689697739687

The Group’s personnel expenses for the first nine months of 2019, including all taxes, totalled 17,772 thousand euros. In the same period last year, personnel expenses amounted to 16,820 thousand euros. Despite a decline in the number of staff, personnel expenses grew by around 5.7% year on year. Due to a persisting shortage of qualified and experienced labour, employers are under strong pressure to increase wages and salaries.
The service fees of the members of the council of Nordecon AS for the first nine months of 2019 amounted to 140 thousand euros and associated social security charges totalled 46 thousand euros (9M 2018: 140 thousand euros and 46 thousand euros respectively).
The service fees of the members of the board of Nordecon AS amounted to 356 thousand euros and associated social security charges totalled 117 thousand euros (9M 2018: 536 thousand euros and 177 thousand euros respectively). The figures for the first nine months of 2018 include termination benefits of 180 thousand euros paid to a member of the board and associated social security charges of 60 thousand euros

Labour productivity and labour cost efficiency

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

 9M 20199M 20189M 20172018
Nominal labour productivity (rolling), (EUR ‘000)335.0318.6308.1325.4
Change against the comparative period, % 5.1%3.4%25.7%3.3%
     
Nominal labour cost efficiency (rolling), (EUR)9.59.610.39.7
Change against the comparative period, %-0.6%-6.7%24.8%-3.8%

The Group’s nominal labour productivity increased year on year, mostly in connection with revenue growth. At the same time, nominal labour cost efficiency decreased because the rise in personnel expenses outpaced revenue growth.


Nordecon (www.nordecon.com) 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, Finland and Sweden. The parent of the Group is Nordecon AS, a company registered and located in Tallinn, Estonia. The consolidated revenue of the Group in 2018 was 223 million euros. Currently Nordecon Group employs close to 690 people. Since 18 May 2006 the company's shares have been quoted in the main list of the NASDAQ Tallinn Stock Exchange.

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

Attachments


NCN investor presentation 3Q 2019.pdf
Nordecon_Interim_report_Q3_2019.pdf