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 the first half of 2017.

A historically high order book, a 12% year-on-year increase in sales, very good financial results at every level of activity, including a net profit of PLN 195 million, and a significant expansion of the land bank in the development segment are the main achievements of the Budimex Group in the first half of 2017.

In the first half of the year, the construction and assembly production increased by 8.0%. At the same time, sales in the construction segment of the Budimex Group were 10% higher than in the corresponding period of the previous year, reaching PLN 2,597 million. We expect that the positive sales dynamics in the Group’s construction segment will continue in the coming quarters. The sales growth in the period was driven by the general construction segment, with sales up 26% year-on-year. Record-breaking contracting in 2016 translated into a significant increase in the share of cubic capacity in the sales of the construction segment in the first half of 2017.

A significant increase in sales was recorded by Budimex Nieruchomości. In the first half of 2017, we delivered 892 apartments to customers, 106% more than in the same period of the previous year. As a result, sales of the property development segment reached PLN 230 million, increasing by 81% year-on-year.

In the first half of 2017, the Budimex Group generated very good results, improving them compared to the previous year at every level: gross margin, operating result and net result by 17%, 40% and 33%, respectively. Operating profitability in the Budimex Group reached 9.2% of sales in the first six months of 2017. Nevertheless, for several months we have been observing growing price pressure from subcontractors and a significant increase in wages and material prices. Due to the increasingly difficult situation on the construction market, it may be impossible to maintain a level of profitability comparable to the first half of the year in the coming quarters.

At the end of June 2017, the value of the Budimex Group’s order book once again reached a historically high level of PLN 9.6 billion and was higher than at the end of 2016 by PLN 684 million. The construction season is entering a period of peak production, which, with positive sales dynamics, may affect the value of outstanding orders in the coming quarters.

During the first six months of 2017, the Budimex Group signed contracts worth PLN 3.2 billion. The value of the contracts signed is comparable to the value from the corresponding period of 2016, with a significantly different structure. Due to the recovery in the infrastructure and railway tender market, the share of signed cubature contracts fell from 45% in the first half of 2016 to 32% in 2017.

The estimated value of contracts signed by PKP PLK under the National Railway Program in the first half of 2017 exceeded PLN 9 billion net. According to the announcements of the railway investor, by the end of 2017 it may exceed PLN 20 billion. In the first half of 2017, the Budimex Group signed contracts with PKP PLK with a total value of PLN 1,003 million (excluding consortium members), which constitutes 32% of the total value of the contracts obtained. Thus, we achieved our goal, which was to build a railway order portfolio worth PLN 1 billion. In addition, in July 2017, we submitted the most advantageous bids for the modernisation of the E-30 Trzebinia-Krzeszowice railway line worth PLN 299 million in the part attributable to the Budimex Group and for the construction of the Warszawa Główna station worth PLN 96 million.

For several months now, we have been observing a revival in the road infrastructure market. After a period of slowdown in the tender market announced by GDDKiA in 2016, in the first quarter of 2017 we observed very strong price competition. In the second quarter of 2017, the Budimex Group submitted the best bids in four tenders with GDDKiA with a total value of PLN 885 million.

We are consistently pursuing our strategy of expanding our operations into new segments of the construction market, strengthening our position on the energy and gas transmission market. In July 2017, we signed a contract with Tameh Polska Sp. z o.o. a contract for the construction of a gas-fired power unit worth PLN 126 million. We are starting the construction of a new heat and power plant in Vilnius, where the Contracting Authority has issued an Instruction to Start Works. On the gas transmission market, the consortium with the participation of Budimex SA submitted the lowest bid for the construction of the gas pipeline on the Brzeg-Kiełczów section, worth PLN 188 million, and the second highest bid for the construction of the gas pipeline on the Strachocina-Pogórska Wola section, worth PLN 413 million – both bids, however, exceed the budget of the Contracting Authority.

In the first half of 2017, we recorded a decrease in the level of cash, which is characteristic of this period. At the end of June, the net cash position amounted to PLN 1,288 million. In 2017, the cash balance decreased mainly as a result of seasonally lower cash flows from operating activities, higher capital expenditures (m.in. on railway equipment), the payment of a record-high dividend in the amount of PLN 383 million, as well as significant expenditure on land in the development segment. The deteriorating financial situation and liquidity of subcontractors, caused primarily by changes in VAT legislation, has also recently affected the level of capital involvement on the part of general contractors. We try to support our business partners by adapting payment terms to the changing market environment. Recently, we have also observed a significant increase in the level of bureaucracy on public contracts, which delays the invoicing process of completed works and has a negative impact on the level of cash.

In the first half of 2017, in line with the market trend, the Budimex Group recorded an increase in pre-sold apartments by 24%. During the first six months of 2017, pre-sales reached the level of 886 apartments compared to 712 in the same period of the previous year. In 2017, we started 4 new investments, expanding our offer by 710 apartments. Currently, over 4 thousand apartments are under construction, 902 of which are at the disposal of customers. To meet the ever-growing demand, we are actively looking for attractive locations for new investments. In the first half of 2017, the Budimex Group acquired plots of land in Warsaw, Poznań, Gdynia and Wrocław. This will allow us to expand the future sales offer by over 2,600 apartments. In the second half of 2017, we will continue our ambitious investment plans in this segment.

In line with its strategy of expansion on the maintenance services market, in June 2017 FBSerwis, 49% owned by Budimex SA, finalised the acquisition of Trans-Formers companies, specialising in waste collection and management. The total value of the transaction exceeded PLN 150 million.

Ambitious plans for infrastructure investments encourage us to further develop our staff. During the first six months of 2017, we employed 360 people in the Budimex Group on the domestic market and we plan to further increase employment. At the same time, we see a significant shortage of workers, especially blue-collar workers. With the expected increase in the scale of investments, the situation on the labour market and the availability of employees may deteriorate further.

BUDIMEX Group

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

Results of the reporting segments for the first half of 2017 (in PLN thousands):

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