Commentary by Artur Popko, President of Budimex, on the financial data for the first quarter of 2022

The first quarter of 2022 was a difficult period for the Budimex Group, the construction market and the whole world. The outbreak of war in Ukraine has significantly affected most branches of our economy. Construction is one of the sectors that have been most affected by the consequences of the conflict across our eastern border. The most important factors affecting our sector are the drastic increase in the prices of materials, in particular steel and oil, as well as the outflow of workers from Ukraine.

Despite extremely difficult market conditions, the Budimex Group generated an operating profit of PLN 57 million (compared to PLN 63 million in the first quarter of 2021), while recording a decrease in profitability from 5.0% to 3.6%. The lower profitability is primarily the result of the deterioration of the result in the construction part. Most of the work carried out in the first quarter of 2022 was related to contracts where some of the material was already on construction sites and the prices of key assortments and services for the following months were contracted. Nevertheless, we observe that the drastic increase in the prices of materials, including steel and oil, has affected the profitability of most contracts, especially those that are currently in the initial stages of implementation.

The gross profit of the Budimex Group amounted to PLN 63 million with a margin of 3.9% compared to 4.4% in the first quarter of the previous year. The profitability at the level of gross profit was supported by a significant improvement in the result on financing activities, which is the result of an increase in the average interest rate on cash invested by the Budimex Group.

We recorded a significant increase in the Group’s sales revenues, mainly due to the larger scale of sales in the construction part. In the services part, revenues were similar to the level of the first quarter of 2021.

Construction and assembly production in the first quarter of 2022 (in current prices) increased year-on-year by 35.1% from PLN 17.3 billion to PLN 23.4 billion. In the building segment, production sold increased by 45.3%, while in the infrastructure area the increase was as much as 23%.

In the first quarter of 2022, the sales of the construction segment of the Budimex Group amounted to PLN 1,436 million (+21.7% y/y), while recording a decrease in both operating profitability (from 4.1% to 3.0%) and gross profitability (from 3.4% to 3.2%).

The scale of sales revenues generated in the first quarter of 2022 in the construction segment was much higher than in the corresponding period of the previous year. A high order book and favorable weather conditions allowed us to increase revenues by over 20%.

The operating profitability of the construction segment amounted to 3.0% and was lower compared to the corresponding period of the previous year, when it amounted to 4.1%. We are experiencing a drastic increase in the prices of materials, which is best seen in the prices of various types of steel. In some areas, we are observing supply chain disruptions, which further hinders the performance of contracts. The budgets of all our projects are updated on an ongoing basis, and thanks to

good profitability of contracts in the last stages of execution the average profitability of the portfolio remains stable. The impact of changes in the prices of key assortments is visible primarily on projects where we have relatively little material advancement.

The gross margin of the construction segment in the period in question was 3.2% and was lower than in the first quarter of 2021, when it amounted to 3.4%. This year, profitability at the level of gross profit was supported by a positive result on financing activities due to interest on deposits.

Unexpected increases in material prices have also translated into our approach to new offers. All projects in which calculations were based on prices from before the outbreak of the war in Ukraine have been recalculated so that we can make responsible decisions about signing or resigning from a given tender. In most cases, the updated cost estimates significantly exceeded the value of the submitted bids, which forced us to resign from participating in such tenders.

In the first quarter of 2022, we acquired contracts worth over PLN 1.4 billion. The Budimex Group’s order book at the end of March 2022 amounted to PLN 13.2 billion and secures the work front for the entire current year and most of 2023. The challenge will be to maintain the order book over the next few quarters in terms of securing revenues in the following years (after 2023).

The Budimex Group ended the first quarter of 2022 with a net cash position of PLN 3 billion. In June 2022. We plan to pay the remaining dividend for 2021 in the amount of PLN  23.47 per share. Thus, the total dividend for 2021 per share (including the interim dividend paid in 2021) will amount to PLN 38.37.

In the first quarter of 2022. The FBSerwis Group maintained a high level of sales revenues while maintaining good profitability. Gross profit amounted to PLN 16 million compared to PLN 22 million in the first quarter of 2021.

The revenues of the FBSerwis Group, which is a key asset in the service segment (the results of the service part also include the activities of several smaller companies, including Budimex Parking Wrocław) amounted to PLN 165 million and were similar to the corresponding period of the previous year. The achieved sales volume was slightly higher than our internal plans, which was mainly due to increased throughput in the infrastructure maintenance part. The increase in the prices of key assortments had little impact on the main area of the FBSerwis Group’s operations, i.e. the environmental services segment. In the part of infrastructure maintenance, we have mainly experienced an increase in fuel prices.

As we expected, we are currently fully using the potential and production capacity of the FBSerwis Group, which limits the possibility of organic business growth. We focus on investments in the expansion of existing waste processing installations and landfills, which will allow us to increase the scale of operations using our resources. In addition, several acquisition projects are underway, one of which – the acquisition of a waste management company with annual revenues of PLN 30 million – may be finalized in the first half of this year. We are looking for companies that will help us carry out our current tasks, fit into the Group’s business model and at the same time contribute to increasing sales revenues so that in 2026 we can reach PLN 1 billion while maintaining the level of profitability.

We are entering the construction season with a high order book of PLN 13.2 billion.

As a representative of the industry, we call for the verification and update of the indexation clauses, which only partially compensate for the increase in material prices. We positively assess the increase in indexation limits for some contracting authorities to 10%, but with the current scale of increases in material prices and double-digit inflation, this is still not a sufficient level, especially in contracts under construction.

The lack of indexation may lead to the need for contractors to suspend work on contracts or even bankruptcies of companies in a weaker financial condition.

Our goal and challenge in the coming year is to maintain our leading position in key segments of the construction market. At the same time, the difficult situation on the local construction tender market gives us additional arguments for strengthening our presence on neighbouring markets. We are already carrying out our first order on the German market, and recently we have been selected to carry out another tender for the construction of a small sports hall. The next stage of foreign expansion will be to win a contract on the Czech and Slovak markets, where our goal is primarily infrastructure projects. In recent months, we have submitted several significant offers in these markets, some of which are in second place in terms of price.

After purchasing the Drachowo wind farm project (SPV Magnolia) with a capacity of 7MW, we immediately started construction works. We will start producing green energy as early as next year. We are looking at further investment opportunities in RES, in line with the development directions adopted by the Budimex Group, and the high cash position gives us a wide range of investment opportunities.

We are testing automatic monitoring in the field of occupational health and safety on our construction sites with the winner of the Budimex Startup Challenge programme. We are starting cooperation with the OSA Team, a team of young scientists, who are the winners of the main prize of the European Space Agency in the CanSat competition.

We have allocated PLN 0.5 million for specialist hospital medicines for the children’s neonatal hospital and St. Peter’s Hospital. Panteleimon in Lviv. Together with the Polish Association of Construction Industry Employers, we are co-financing the purchase of an ambulance for Ukraine. In addition, our employees across the Ferrovial Group are also donating their own funds to humanitarian aid for Ukraine. The money doubled by the Ferrovial Group and Budimex will be donated to a jointly selected foundation helping Ukraine. We estimate that the total value of our aid to Ukraine, including our employees, will exceed PLN 4 million.

We are preparing the first two out of five Parent Zones this year in the Independent Public Health Care Facility of the County Hospital in Pisz and the Provincial Children’s Hospital im. J. Brudzinski in Bydgoszcz. We are carrying out finishing works on a house for a family of eight in the Dom z Serca 2 project in Pomerania.

In the Infrastructure and Construction Diamonds competition, we won the title of the general construction contractor of 2021. The construction of a new power unit in  Turów for PGE, carried out by Budimex, won first place in the Build Safely competition of the National Labour Inspectorate.