Commentary of the President of the Management Board of Budimex SA, Dariusz Blocher, on selected financial data from the financial statements of the Budimex Group for H1, 2018

• In H1 sales in the construction sector of the Budimex Group was 17% higher in comparison with the corresponding period of the preceding year, reaching a record-high level of over PLN 3 billion.
• As of the end of June 2018 the order portfolio of the Budimex Group reached PLN 10.8 billion.
• During the first six months of 2018 the Budimex Group signed contracts with the value of PLN 3.4 billion.
• Given the unfavourable market conditions, we perceive the current profitability of the Budimex Group as satisfactory and significantly higher than the market benchmark.

The Budimex Group finalised the first six months of 2018 with a record-high level of sales revenues, profitability considerably above market indicators and a net profit of PLN 128 million.

In H1 of the current year construction and assembly production increased by 26.3%. In the same period sales in the construction segment of the Budimex Group was 17% higher in comparison with the corresponding period of the preceding year, reaching a record-high level of PLN 3.43 billion during the first six months of the year. In the period discussed sales was driven primarily by the segment of non-residential construction with sales higher by 42% year-on-year. We also recorded significant growth in the railway segment, where sales reached PLN 217 million in the first six months of the current year compared to PLN 76 million in the corresponding period of last year.

The Budimex Group reached the profitability of the gross profit before tax at the level of 4.9%, however, in the construction segment the figure was 3.6%. According to the Central Statistical Office (GUS) data, the profitability of the gross profit of the construction sector after the first quarter of the current year was merely 1.4%. Decreasing margins in construction are affecting the Budimex Group too. The growth of revenues recorded by the Budimex Group in H1, 2018 was accompanied by a drop of the profitability of the gross profit from the level of 9.0% last year.

This is a consequence of the growing price pressure on the part of subcontractors, which has been visible for a few quarters, and of a significant increase in payments and prices of materials. An increased scale of completed road and railway projects, combined with railway closures on the railway routes modernised, has a negative impact on the availability of transport services. We can feel that through increased logistic costs, in particular in the case of infrastructure contracts. Given the unfavourable market conditions, we perceive the current profitability of the Budimex Group as satisfactory and significantly higher than the market benchmark.

We are continuing to appeal to contracting authorities to introduce proper price indexation. The indicators included in current contractual provisions do not reflect reality, therefore, the entire cost risk is borne by general contractors and sub-contractors. Irrespective of that we are negotiating with investors in the scope of indexing remunerations with the aim of covering losses from extraordinary increases of prices of key assortments. Due to ambitious investment plans of key investors, there probably will not be any stabilisation in H2, 2018. Despite that we will be consistently working on maintaining stable profitability above market indicators.

As of the end of June 2018 the order portfolio of the Budimex Group amounted to PLN 10.784 billion and it was close to the level achieved at the end of the preceding quarter. During the first six months of 2018 we signed contracts with the value of PLN 3.359 billion. Having regard to the safe level of the order portfolio and the increasingly difficult market situation, we approach new contracts in a selective manner. We can see a negative trend where tender procedures get protracted, in particular in the case of road orders, where the average interval between submitting a bid and signing a contract is around 6 months. With such a dynamically changing market situation, this introduces an additional element of risk to bids submitted.

In H1, 2018 we recorded a seasonal drop in cash. As of the end of June the net cash item stood at PLN 734 million. In June 2017 the net cash balance was PLN 1.288 billion. In 2018 the cash balance decreased primarily as a result of seasonally lower cash flows from operating activities, higher capital expenditures than last year, including on railway equipment, and the payout of a record-high dividend of PLN 450 million. For several quarters we have been observing a significant increase in red tape in public procurement, which delays the process of approval and invoicing completed works. This is one of the reasons why the level of non-invoiced sales as of the end of June 2018 was 28% higher than in June last year, having a negative impact on the balance of cash. This year we have also purchased land in the property developer segment with the value of approx. PLN 140 million, of which PLN 60 million was already paid during the first six months of the year.

In H1, 2018 we delivered 1,107 flats to our clients as part of the next stages of Wiślany Mokotów, Nowe Czyżyny and Osiedle przy Rolnej projects. Thanks to that sales revenues of the property developer segment reached PLN 331 million, having increased by 43% year-on-year. The operating profit amounted to PLN 46 million and it was higher than in the corresponding period of last year by 42%.

Two quarters into 2018 the pre-sale of flats in the property developer segment achieved the level of 509 flats in comparison with 886 flats in the corresponding period of the preceding year. The pre-sale rate decreased as a result of a number of factors, including protracting administrative procedures related to the issuance of building permits for the construction of new housing estates. At present approx. 3 thousand flats are under construction and 1,089 units are waiting for clients. During the first six months of the current year we acquired land in Poznań and the Tri-City, allowing us to build more than 1,100 units, thanks to which our land bank increased to 8.3 thousand flats as of the end of June 2018.

A strong upward trend in contractorship prices has been observed on the residential market for a longer period of time, which has a negative impact on the anticipated profitability of new property developer projects. Despite that, having regard to favourable land prices in our land bank as well as the observed upward trend in average flat prices, we expect to maintain a stable profitability in the property developer segment over the next several quarters.

In H1, 2018 the number of employees at the Budimex Group rose by over 650, of whom 400 are blue-collar workers employed on the domestic market, while the total number of employees exceeded 7,200. We are continuing our strategy to expand our own resources, comprising mainly blue-collar workers. This direction allows us to boost our independence and minimise the risk of an increase of prices of sub-contractor services based on labour costs. In addition, this year only we have invested in excess of PLN 40 million in upgrading our machine park and purchasing equipment necessary to implement railway projects.

The order portfolio in excess of PLN 10 billion should make it possible to maintain positive sales dynamics in the construction segment in the subsequent quarters. In spite of difficult market conditions, we are striving to keep our contractual obligations, pursuing a transparent policy with respect to our counterparties at the same time. The problem of appropriate indexation of contractual prices remains unresolved. Representatives of the construction sector and public authorities are making efforts to verify the current indexation model. We take the stance that if this is not resolved shortly, this will contribute to a further decline of the sector’s portability. A scenario cannot be ruled out in which the entire sector will record a loss. Such a situation already occurred in 2012, when the number of bankruptcies soared and the entire construction sector incurred a gross loss of nearly PLN 200 million.

In spite of a difficult market situation, we are continuing our direction of development. We are expanding Mostostal Kraków, a company which, after launching a Steel Structure Production Plant in Żłobnica in 2017, considerably increased its manufacturing potential and which currently is one of the largest businesses operating on the domestic steel structure market. We are pleased with the results of our activities on the German market. In 2018 we stand a chance of achieving results similar to those recorded last year, when sales revenues reached PLN 199 million with operating profitability of 13%. We are consistently investing in expanding FBSerwis, a company providing services in the scope of waste management, road infrastructure maintenance and building technical maintenance. In 2018 revenues of FBSerwis together with its subsidiaries should exceed PLN 300 million. At present Budimex holds 49% of the company’s shares, however, we do not rule out taking control over the company in the future.

BUDIMEX Group

Selected financial data from the consolidated financial statements of the Budimex Group prepared in accordance with the International Financial Reporting Standards (IFRS) for H1, 2018 and comparative data for H1, 2017.

Results of the reporting segments for H1, 2018 (in PLN thousand):

Results of the reporting segments for H1, 2017 (in PLN thousand):