Commentary by the President of the Management Board of Budimex SA – Dariusz Blocher on selected financial data from the consolidated financial statements of the Budimex Group for 2017

2017 was another very good year for the Budimex Group. We recorded a historic level of sales and a record net profit, which allowed us to take the first place among the largest construction companies in Poland again. Despite strong competition, we have signed new contracts worth PLN 7.3 billion and we are entering 2018, which is the year of the company’s 50th anniversary, with an order book of over PLN 10 billion.

In 2017, construction and assembly production increased by 12.9%, thus recording the highest dynamics since 2011. At the same time, the Group increased sales by 14.3% compared to the previous year and generated a net profit of PLN 464 million. The increase in sales in the Group’s construction segment was in line with the market growth rate and amounted to 12.6%, while the increase in the scale of handovers in the development part resulted in an increase in sales by 42.6%.

A significant increase in the scale of investments in the construction sector resulted in a further increase in the prices of raw materials and subcontractors’ services. The industry is also increasingly affected by the decline in the availability of labor. Despite the unfavourable conditions, the Budimex Group achieved satisfactory profitability at the operating level (9.2%).

After a difficult year 2016, in recent months the largest infrastructure investors have significantly increased the number of tenders awarded. The value of bids submitted by Budimex in 2017 increased by over 80% compared to the previous year. Bidding was driven by the road segment, primarily GDDKiA. The value of bids submitted for road construction in 2017 tripled compared to 2016, reaching the level of PLN 24.4 billion.

The favourable market for infrastructure tenders and the maintenance of high bidding efficiency on the general construction market allowed for the signing of a record PLN 7.3 billion of new orders. At the end of December 2017, the value of the order book reached  PLN 10.3 billion. Through a selective approach to road tenders and high activity in the railway and hydrotechnical segments, we achieved the goal of diversifying the contract portfolio. Currently, the leading segment of road infrastructure accounts for 45% of the order book, compared to 57% a year earlier. The contracts obtained from PKP PLK worth PLN 1.3 billion increased the share of the railway segment from 2% in December 2016 to 12% at the end of 2017. In addition, thanks to the signing of the contract for the completion of the construction of the Racibórz Dolny flood control reservoir, hydrotechnical works currently account for 7% of the order portfolio.

The Budimex Group ended 2017 with a net cash position of PLN 2.2 billion. Compared to 31 December 2016, it was lower by PLN 359 million. Supporting the further development of the waste management and road maintenance segments, in 2017 the Budimex Group increased its involvement in FBSerwis by over PLN 50 million. We also invested PLN 80 million in the expansion and modernization of the machine park and over PLN 150 million in the purchase of land in the development segment. One of the important factors adversely affecting the cash balance was the deteriorating financial situation of subcontractors, caused, among other things, by changes in VAT legislation. We try to support our subcontractors by offering early payments and enabling frequent and efficient invoicing of the work performed.

In 2017, pre-sales of the development segment amounted to 1,457 apartments and were 10% (158 apartments) lower than in the previous year. The weakening of the pace of pre-sales is mainly due to the very attractive offer of the “Nowe Czyżyny” project in Kraków (a decrease in pre-sales by 667 apartments).

We continue to expand the land bank, in 2017 we bought plots in Warsaw, Poznań, Tri-City and the first plot of land for over 1,000 apartments in Wrocław. As a result, we have increased the portfolio of projects ready for launch for another year in a row – currently it is almost 8,000 apartments. Maintaining annual pre-sales at the level of 1,500 units in the coming years will require a constant level of about 4,000 apartments under construction.

In 2017, Budimex Nieruchomości’s clients signed 1,914 notarial deeds. The increase compared to 2016 amounted to 61% and was mainly due to the commencement of notarial handovers as part of the “Nowe Czyżyny” project. Sales revenues amounted to PLN 499 million, which means an increase of 43% year-on-year. Net profit increased from PLN 41 million in 2016 to a record PLN 54 million in 2017. Despite significant expenditures on land and dividend payments, Budimex Nieruchomości maintained a strong positive cash position.

In the coming years, the largest public investors, i.e. GDDKiA and PKP PLK, are planning a significant increase in expenses. We are facing a period of increased work, for which we are prepared in terms of personnel and equipment.

In 2017, employment in the Budimex Group, including the FBSerwis Group, increased by over 1,200 people and exceeded 7,500 employees at the end of the year. In accordance with the adopted direction of staff development, we are increasing employment not only among white-collar workers, but we are also looking for blue-collar workers to strengthen the team of our own forces. In addition, bearing in mind the expected increase in the scale of infrastructure investments, over the last 2 years we have invested over PLN 150 million in the modernization of the machine park and the purchase of equipment necessary for the implementation of railway projects.

An increase in the scale of infrastructure investments and a systematic increase in the value of the general construction market may cause a further increase in the pressure on wage growth and an increase in the prices of subcontracting services. Therefore, it will be very important to pay special attention to the costs on the contracts being executed and to take a responsible approach to the calculation of new offers.

We are entering 2018 with a record order backlog. Such an ambitious level of orders to be carried out allows us to take a selective approach to bidding. We try to minimize the risk of newly signed contracts and reduce exposure to segments that are characterized by high volatility of labor prices and subcontracting services.

The following quarters and the entire year 2018 should bring positive sales dynamics. We  focus on the implementation of entrusted projects, with particular emphasis on the timeliness of implementation and high quality of work results.

BUDIMEX Group

Selected financial data from the consolidated financial statements of the Budimex Group prepared in accordance with International Financial Reporting Standards (IFRS) for 2017 and comparable data for 2016.

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

Results of the reporting segments for 2016 (in PLN thousand):