OREANDA-NEWS. Announcement includes Nordecon AS's consolidated financial statements for the third quarter and nine months of 2013 (unaudited), overview of the key events influencing the period's financial result, outlook for the market and description of the main risks.

Nordecon group's gross profit for the first nine months of 2013 amounted to 9,426 thousand euros (9M 2012: 6,026 thousand euros) and gross margin was 7.0% (9M 2012: 5.1%).

In previous interim reports we have described the work done to increase the Group's profitability. The measures applied, including extensive internal restructuring and cost cutting, have been effective. However, they have their limits and the rate of internally generated growth in profitability cannot be maintained indefinitely.

The profit from long-term construction contracts is recorded gradually over the contract term, based on the stage of completion of contract activity. During the life of a contract, our estimates of the profitability of the contract may change. If this happens, the proportionate share of contract profit already recognised in the financial statements is adjusted to reflect the new estimate. In the reporting period (particularly in the third quarter), a substantial share of our construction projects reached the stage of completion and their actual outcomes could be specified. Many of the projects were highly complex, involving construction risks whose potential costs were considered in making the profitability estimates. Thanks to effective performance, the costs were not incurred. In particular, revision of outcomes increased profit on projects for the construction of utility networks and environmental engineering. Although the projects were won by making the lowest bids in public tenders, the experience our people have gained in those segments over the years allowed us to benefit from strong improvements in productivity.

Margin improvements have also been supported by the external environment. Market growth in the previous year, relative stability in materials and subcontracting prices, and a slight decline in competitive pressure in certain segments have created conditions that favour a rise in the projects' average profit margin.

The Group's administrative expenses for the first nine months of 2013 totalled 3,567 thousand euros, reflecting a certain decrease compared with a year ago (9M 2012: 3,941 thousand euros). The ratio of administrative expenses to revenue (12 months rolling) was 2.8% (9M 2012: 3.3%). Our cost-control measures continue to yield strong results, allowing us to maintain administrative expenses below the target ceiling, i.e. 5% of revenue.

Operating profit for the first nine months of 2013 was 5,587 thousand euros (9M 2012: 2,106 thousand euros) and EBITDA was positive at 7,088 thousand euros (9M 2012: 3,735 thousand euros).

The Group ended the reporting period with a net profit of 5,309 thousand euros (9M 2012: 1,988 thousand euros). The profit attributable to owners of the parent, Nordecon AS, was 5,137 thousand euros (9M 2012: 1,630 thousand euros).

In the last quarter of the year we are going to complete many projects (including road construction ones) whose total volume is significant. The probability of realisation of their performance risks is higher than that of the projects, which reached the stage of completion in the third quarter. Moreover, by the date of release of the preliminary annual results, the court will probably have ruled in the matter concerning the action brought against the Estonian Maritime Museum (for further information, see the Credit risk section of the chapter Description of the main risks in the directors' report).

Cash flows

Operating activities of the first nine months of 2013 resulted in a net cash outflow of 5,133 thousand euros (9M 2012: a net cash inflow of 1,762 thousand euros). When the Group operates with a profit, negative operating cash flow results primarily from a mismatch between the projects' actual stage of completion (recognised revenue) and the amounts billed to customers. Cash inflow is also reduced by the amounts retained under the terms of construction contracts, which are released when construction activity ends. Retentions extend from 5% to 10% of the volume of a contract, being comparable to its profit margin. In addition, we have launched a housing development project. In the comparative period, we did not have such projects and before we start selling the apartments, the project's cash flow will be negative.

Besides the above, our operating cash flows continued to be influenced by differences in settlement terms: the payment terms agreed with customers are long and in the case of public procurement generally extend from 45 to 56 days while subcontracts ordinarily have to be paid within 21 to 45 days. We use factoring to counteract the impacts of cyclicality and overdraft facilities to raise working capital.

Cash flows from investing activities resulted in a net outflow of 286 thousand euros (9M 2012: a net outflow of 2,308 thousand euros). We continued to invest in property, plant and equipment although not as extensively as a year ago. The volume of loans provided to associates decreased considerably and we received more loan repayments. In addition, we made a contribution of 350 thousand euros to restore an associate's negative equity.

Financing activities resulted in a net cash inflow of 4,330 thousand euros (9M 2012: a net outflow 298 thousand euros). Loan receipts exceeded loan repayments by 6,483 thousand euros compared with 2,183 thousand euros in the first nine months of 2012. We borrowed more working capital to meet the needs of growing business volumes and to cover negative operating cash flow. On the other hand, loan repayments, which were made to meet commitments under refinancing agreements, were larger too.

At 30 September 2013, the Group's cash and cash equivalents totalled 9,140 thousand euros (30 September 2012: 9,066 thousand euros). Management's comments on liquidity risks are presented in the chapter Description of the main risks in the directors' report.