2023 II quarter and 6 months consolidated interim report (unaudited)

The dynamics of the construction market reflect the ongoing economic downturn and uncertainty about the future. Although the increase in the construction price index slowed in the second quarter of this year and the construction price index fell by 0.5% compared to the first quarter of 2023, no significant change in demand can be observed in the construction market. Loan interest rates have not stabilized due to the increase in Euribor so far, and this also affects the decisions of clients. Public orders have not yet recovered to their usual volume, many ongoing procurements are in a frozen state and there are no signs of a reversal in this trend yet. On the side of private customers, however, we see optimism and a will to find ways to realize their business plans in order to emerge from today's economic situation as a winner.
The group's sales revenue for the first half of 2023 amounted to €123,819 thousand, a decrease of approximately 17% compared to the same period last year. Sales revenue decreased in both segments, 19% in the Buildings segment and 4% in the Infrastructure segment. The decrease in sales revenue in both segments is expected and is due to the decline in construction volumes in the market, as well as the 2022 group's historically record sales revenue.
The gross profit of the Nordecon group in the first half of 2023 was €4,731 thousand. Compared to the same period last year, the group's gross profitability has improved, amounting to 3.8% in the first half of the year (H1 2022: 2.1%) and 4.5% in the second quarter (Q2 2022: 2.5%). Both segments were profitable in the first half of the year as well as in the second quarter, and profitability improved significantly compared to the same period in 2022.
The group has been successful in signing new contracts in the first half of this year. In total, new contracts worth €208,460 thousand were signed, including €123,530 thousand in the II quarter. As of 30 June 2023, the volume of the group’s order book was €256,328 thousand, which compared to the same period last year has increased by 16%.

Condensed consolidated interim statement of financial position

Condensed consolidated interim statement of comprehensive income

Condensed consolidated interim statement of cash flows

Financial review

Financial performance

Nordecon ended the first half of 2023 with a gross profit of €4,731 thousand (H1 2022: €3,181 thousand). Profitability improved year on year with the group’s gross margin rising to 3.8% for the half-year (H1 2022: 2.1%) and 4.5% for the second quarter (Q2 2022: 2.5%). Both operating segments earned a profit in both the second quarter and the first half year and improved their profitability significantly. The gross margin of the Buildings segment was 5.0% for the half-year and 4.9% for the second quarter (H1 2022: 3.8% and Q2 2022: 3.4%). The gross margins of the Infrastructure segment were lower: 0.1% for the half-year and 4.5% for the second quarter (H1 2022: (6.4)% and Q2 2022: (0.3)%).
The group’s administrative expenses for the period were €3,852 thousand. Compared with a year earlier, administrative expenses grew by around 24% (H1 2022: €3,118 thousand) due to growth in staff costs. The ratio of administrative expenses to revenue (12 months rolling) increased year on year, rising to 2.7% (H1 2022: 2.0%).
The group earned an operating profit of €673 thousand in the first half of 2023 (H1 2022: €1,457 thousand). EBITDA for the period was €2,405 thousand (H1 2022: €3,158 thousand). The operating profit and EBITDA for the comparative period were influenced by other income of €1,560 thousand, recognised after the approval of the restructuring plan of Swencn AB according to which the claims of the entity’s creditors were to be settled to the extent of 25%.
The group’s finance income and costs are affected by exchange rate fluctuations in the group’s foreign markets. During the period, the Ukrainian hryvnia weakened against the euro by around 2.6% and the Swedish krona weakened against the euro by around 5.8%. The translation of the loans provided to the group’s Ukrainian and Swedish subsidiaries in euros into the local currencies gave rise to a net exchange loss of €241 thousand (H1 2022: €2 thousand). The group's finance costs also grew due to the rise in interest rates.
The group ended the period with a net loss of €1,590 thousand (H1 2022: a net profit of €26 thousand). The net loss attributable to owners of the parent, Nordecon AS, was €2,493 thousand (H1 2022: a net loss of €928 thousand).

Cash flows

Operating activities in the first half of 2023 produced a net cash inflow of €4,329 thousand (H1 2022: an outflow of €1,955 thousand). Operating cash flow is strongly influenced by the fact that the contracts signed with most public and private sector customers do not require them to make advance payments while the group has to make prepayments to subcontractors and materials suppliers. 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 of the period resulted in a net cash outflow of €387 thousand (H1 2022: an inflow of €239 thousand). Investments in property, plant and equipment amounted to €185 thousand (H1 2022: €97 thousand) and proceeds from the sale of property, plant and equipment amounted to €291 thousand (H1 2022: €322 thousand). Loans provided amounted to €524 thousand (H1 2022: €9 thousand).
Financing activities for the half year generated a net cash outflow of €2,811 thousand (H1 2022: an outflow of €2,348 thousand). Loans received amounted to €1,242 thousand, consisting of the use overdrafts and development loans (H1 2022: €1,870 thousand). Repayments of loans received were €650 thousand (H1 2022: €1,605 thousand), consisting of regular repayments of long-term investment and development loans. Lease payments were €1,447 thousand (H1 2022: €1,790 thousand). Dividends paid in the first half of 2023 amounted to €1,355 thousand (H1 2022: €391 thousand).
The group’s cash and cash equivalents at 30 June 2023 amounted to €8,369 thousand (30 June 2022: €4,967 thousand).

Key financial figures and ratios

Performance by geographical market

The revenue contribution of foreign markets has remained more or less stable compared with the same period last year. In the first half of 2023, revenue earned outside Estonia, i.e. in Finland and Ukraine, accounted for 2% of the group’s total revenue. Despite the war, Nordecon’s construction volumes in Ukraine have increased year on year. We have secured a number of small-scale projects and in June we completed and delivered on time a modular kindergarten with a bomb shelter in the city of Ovruch. Finnish revenues, which include mainly subcontracting revenue from the provision of concrete works, have decreased. Nordecon did not generate any revenue and had no ongoing construction contracts in the Swedish market. Nor did the group generate any revenue in Latvia and Lithuania, where we operate on a project basis.

Performance by business line

Segment revenues

Our targets include maintaining the revenues of our two main operating segments (Buildings and Infrastructure) in balance, if this is permitted by market conditions, because this helps diversify risks and provides better opportunities to continue construction operations in more challenging market conditions where the volumes of one subsegment may decline sharply while the volumes of another may begin growing more rapidly.
The group’s revenue for the first half of 2023 was €123,819 thousand, roughly 17% less than in the same period last year, when the figure was €149,256 thousand. The Buildings segment generated revenue of €103,970 thousand and the Infrastructure segment revenue of €19,822 thousand. The corresponding figures for the same period in 2022 were €128,430 thousand and €20,703 thousand. Revenue declined by 19% in the Buildings segment and 4% in the Infrastructure segment. The decrease in both segments was expected and is attributable to market contraction. Although the group was successful in winning new contracts in the first half of 2023, these did not yet affect revenue for the period. The steep fall in the revenue of the Infrastructure segment to its practically lowest-ever level is directly related to cutbacks in the investments of the largest customer, the Transport Administration. This is counterbalanced to some extent by the group's success in securing renewable energy projects: the construction of wind farms accounts for an increasing share of the revenue of the Infrastructure segment.

Subsegment revenues

In the Buildings segment, the half-year revenues of all subsegments decreased compared with the same period in 2022. The largest revenue contributors are still the public buildings and the apartment buildings subsegments whose revenues decreased less. The revenues of the commercial buildings and the industrial and warehouse facilities subsegments, however, contracted significantly, falling by 46% and 23% year on year, respectively.
The period’s largest projects in the public buildings subsegment were the construction of the main building of the Estonian Internal Security Service in Tallinn, the design and construction of storage facilities and utility networks for the Centre for Defence Investment in Harju county, the construction of the building and outdoor premises of the Karlsson kindergarten in Viljandi and the construction of the Viljandi Rescue Station.
The apartment buildings subsegment earns most of its revenue from the construction of apartment buildings for third parties. During the period, the largest projects of this kind were the design and construction of the Luccaranna and the Kastanikodu housing estates near Tallinn. Revenue generated by the group’s own development operations decreased, amounting to €5,510 thousand (H1 2022: €6,335 thousand). Nordecon continues the development of the Mõisavahe Kodu (https://moisavahe.ee) housing estate and the construction of the Emajõe Residents (https://emajoeresidents.ee) housing estate, which is situated near the city centre on the bank of the river Emajõgi (both in Tartu). The group is also making preparations for the construction of an apartment building in the Kivimäe Süda development in the Nõmme district in Tallinn (https://www.kivimaesuda.ee/en) and moving on with the design of the Seileri Kvartal housing estate in Pärnu (https://seileri.ee/en). In carrying out our own development activities, we carefully monitor potential risks in the housing development market.
The largest projects in the commercial buildings subsegment were the construction of the commercial and residential complex Vektor and the Ahtri 4 office building in Tallinn, the design and construction of the Männiku commercial building in the Kandiküla district in Tartu, and the construction of a biopharmaceuticals manufacturing facility for Icosagen AS in Kambja municipality.
The largest projects under construction in the industrial and warehouse facilities subsegment are a production facility for E-Piim in Paide and a production and office building for Harju Elekter AS in Hüüru, near Tallinn.

In the Infrastructure segment, the largest revenue contributor is still road construction and maintenance although its revenue has decreased year on year by roughly 25%. During the period, a major share of the subsegment’s revenue resulted from the construction of the Tagadi ecoduct on the Rail Baltica route, the construction of the Neanurme–Pikknurme 2+1 road section of the Tallinn–Tartu–Võru–Luhamaa road in Jõgeva county and the reconstruction of the Hageri–Kohila road section in Harju county. The group also continues to deliver road maintenance services in Järva county.
The revenue contribution of the other engineering subsegment, which is currently generating most of its revenue from the construction of three wind farms (Saarde, Tootsi-Sopi and Aidu) in Estonia, increased year on year. The revenue of the environmental engineering subsegment came from design and construction works for the elimination of residual pollution from the Erra river and the Kiviõli ditch.

Order book

The group’s order book (backlog of contracts signed but not yet performed) stood at €256,328 thousand at 30 June 2023, reflecting 16% growth compared to the same period last year. The group signed new contracts of €208,460 thousand during the half year (H1 2022: €89,661 thousand), of which contracts of €123,530 thousand were signed in the second quarter (Q2 2022: €26,494 thousand). The surge in materials prices and the uptrend in interest rates due to the rise in EURIBOR have made development projects significantly more expensive and caused the postponement of new projects. The volume of investments made by the Transport Administration has decreased sharply and this has had a direct impact on the size of the order book of the Infrastructure segment. The volume of procurements for the Rail Baltica project has increased and will partly counterbalance the decline in the investments of the Transport Administration. While public investments in the buildings construction segment have also decreased, investments in national defence infrastructure are going to increase according to currently available information and this is a subsegment where Nordecon has traditionally been very successful.

The proportions of the two main operating segments in the group’s order book have remained largely the same with the Buildings segment accounting for 80% and the Infrastructure segment for 20% of the total order book (30 June 2022: 85% and 15%, respectively). The order book of the Buildings segment increased by 9% while the order book of the Infrastructure segment grew by 54% compared with 30 June 2022. Growth in the order book of the Infrastructure segment was driven by the other engineering subsegment, which has secured mostly wind farm construction contracts.
Larger contracts secured in the second quarter include:

• the reconstruction of the Hageri–Kohila section on kilometres 8.7-16.0 of national road no. 11220 Kernu–Kohila with an approximate cost of €3,460 thousand;
• the construction of wind turbine foundations for the Aidu wind farm in Ida-Viru county, Lüganuse municipality, with an approximate cost of €5,000 thousand;
• the construction of four terraced houses with 36 apartments in the Laaneserva housing estate in Viimsi municipality with an approximate cost of €6,800 thousand;
• the construction of a new school building with a sports facility for Saku Upper Secondary School with an approximate cost of €24,100 thousand;
• the design and construction of storage facilities for the Centre for Defence Investment in Harju county with an approximate cost of €8,400 thousand;
• the construction of an office building for the Centre for Defence Investment in Tallinn, with an approximate cost of €13,000 thousand;
• the design and construction of a commercial and residential building to be built on the corner of Volta and Kopli streets in Tallinn – the second stage of a new business quarter – with an approximate cost of €51,000 thousand;
• the construction of office and production facilities at Vana-Narva mnt 10 in Maardu, with an approximate cost of €7,400 thousand.

Based on the size of the group’s order book, including the share of work to be performed in 2023 and 2024, and the overall situation in the construction market, management forecasts that in 2023 the group’s revenue will decrease compared with 2022. Increasing competition and cost inflation, particularly the growth in labour costs, will continue to drive up input prices, which will keep profit margins under pressure. In an environment of stiff competition, we will avoid taking unjustified risks whose realisation in the contract performance phase would have an adverse impact on the group’s results. Our focus remains on cost control as well as pre-construction and design activities, where we can deploy our professional competitive advantages.

People

Employees and staff costs

The group’s average number of employees in the first half of 2023 was 572, including 384 engineers and technical professionals (ETP). Headcount decreased by around 15% year on year, mainly due to the restructuring of the group’s infrastructure construction business.

Average number of employees at group entities (incl. the parent and the subsidiaries):

The group’s staff costs for the first half of 2023, including all taxes, were €12,799 thousand compared with €12,936 thousand in the same period last year. Pressures for wage growth persist and the decline in staff costs was due to the decrease in workforce.
The service fees of the members of the council of Nordecon AS for the first half of 2023 were €79 thousand and associated social security charges were €26 thousand (H1 2022: €75 thousand and €25 thousand, respectively).
The service fees of the members of the board of Nordecon AS were €253 thousand and associated social security charges were €83 thousand (H1 2022: €202 thousand and €67 thousand, respectively).

Labour productivity and labour cost efficiency

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

The group’s nominal labour productivity increased year on year, mainly due to the decrease in the number of staff. The fall in revenue has lowered nominal labour cost efficiency.

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

Attachments

• Nordecon_Interim_report_Q2_2023
• NCN investor presentation Q2_2023