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 2018

• Sales in the construction segment of the Budimex Group in the first half of the year were 17% higher than in the corresponding period of the previous year, reaching a record level of over PLN 3 billion.
• At the end of June 2018, the Budimex Group’s order book reached PLN 10.8 billion.
• During the first half of 2018, the Budimex Group signed contracts worth PLN 3.4 billion.
• Given the unfavourable market conditions, we perceive the current profitability of the Budimex Group as good and significantly higher than the market benchmark.

The Budimex Group closed the first half of 2018 with a record level of sales revenues, profitability well above market indicators and a net profit of PLN 128 million.

In the first half of the year, construction and assembly production increased by 26.3%. At the same time, sales in the construction segment of the Budimex Group were higher by 17% compared to the same period of the previous year, reaching a record level of PLN 3 billion 43 million in the first half of the year. The sales growth in the period in question was mainly driven by the part of non-residential construction with sales higher by 42% year-on-year. We also recorded a significant increase in the railway construction segment, where sales in the first half of this year amounted to PLN 217 million compared to PLN 76 million in the same period last year.

The Budimex Group achieved a gross profit before tax margin of 4.9%, with
in the construction segment it was 3.6%. According to the Central Statistical Office, the gross profit margin of the construction industry after the first quarter of this year amounted to only 1.4%. Falling margins in the construction industry are also noticeable for the Budimex Group. The increase in the Budimex Group’s revenues in the first half of 2018 was accompanied by a decrease in gross profit margin from 9.0% last year.

This is a consequence of the growing price pressure from subcontractors observed for several quarters and a significant increase in wages and material prices. The increase in the scale of road and rail investments combined with track closures on modernised routes has a negative impact on the availability of transport services. We are experiencing this through significant increases in logistics costs, especially on infrastructure contracts. Given the unfavourable market conditions, we perceive the current profitability of the Budimex Group as good and significantly higher than the market benchmark.

We are constantly calling for the introduction of appropriate price indexation by contracting authorities. The ratios contained in the current contract provisions do not reflect reality, as a consequence of which the entire cost risk is on the side of general contractors and subcontractors. Regardless of this, we are conducting negotiations with investors regarding the indexation of remuneration, the purpose of which is to cover losses resulting from above-average increases in the prices of key assortments. Due to the ambitious investment plans of key investors, the second half of 2018 is unlikely to bring stability. Despite this, we will consistently work to maintain stable profitability, above market indicators.

At the end of June 2018, the Budimex Group’s order book reached PLN 10 billion 784 million and was close to the level at the end of the previous quarter. During the first half of 2018, we signed contracts worth PLN 3 billion 359 million. Bearing in mind the safe level of the order book and the increasingly difficult market situation, we are selective about new contracts. We are observing an unfavourable trend of extending tender procedures, especially in the case of road contracts, where the average time from submitting an offer to signing a contract is about 6 months. With such a dynamically changing market situation, this introduces an additional element of risk to the bids submitted.

In the first half of 2018, we recorded a seasonal decline in the level of cash. At the end of June, the net cash position amounted to PLN 734 million. In June 2017, the net cash balance amounted to PLN 1 billion 288 million. In 2018, the cash balance decreased mainly as a result of seasonally lower cash flows from operating activities, higher capital expenditures (m.in. on railway equipment) and the payment of a record-high dividend in the amount of PLN 450 million. For several quarters, we have been observing a significant increase in bureaucracy on public contracts, which delays the process of accepting and invoicing the work performed. It is one of the
for reasons why the level of uninvoiced sales at the end of June 2018 was 28% higher than in June last year, adversely affecting the cash balance. This year, we also bought land in the development segment worth about PLN 140 million, of which PLN 60 million has already been paid in the first half of the year.

In the first half of the year, we delivered 1,107 apartments m.in. as part of the next stages of the Wiślany Mokotów, Nowe Czyżyny and Osiedle przy Rolnej investments. As a result, sales revenues of the real estate development segment reached PLN 331 million, increasing by 43% year-on-year. Operating profit amounted to PLN 46 million and was 42% higher than in the corresponding period of the previous year.

After 2 quarters of 2018, pre-sales in the development segment reached 509 apartments compared to 886 apartments in the corresponding period of the previous year. The decrease in the pace of pre-sales is the result of m.in. protracted administrative procedures related to the
with the issuance of permits for the construction of new housing estates. Currently, about 3 thousand apartments are under construction, and 1,089 more units are waiting for customers. In the first half of this year, we purchased land in Poznań and the Tri-City allowing for the construction of over 1,100 apartments, thanks to which the land bank increased to 8.3 thousand apartments at the end of June 2018.

For a long time, the residential market has been experiencing a strong upward trend in construction prices, which has a negative impact on the expected profitability of new development projects. Despite this, taking into account the favourable land prices in our land bank and the observed upward trend in average housing prices, we expect stable profitability in the development segment to be maintained over the next few quarters.

In the first half of 2018, employment in the Budimex Group increased by over 650 people (of which over 400 are blue-collar workers employed on the domestic market), and the total number of employees exceeded 7,200. We continue the strategy of expanding the own forces team, consisting mainly of
from manual workers. This direction allows us to increase our independence and minimize the risk of an increase in the prices of subcontracting services based on the cost of labor. In addition, this year alone, we have invested over PLN 40 million in the modernization of the machine park and the purchase of equipment necessary for the implementation of railway projects.

The order backlog exceeding PLN 10 billion should allow us to maintain positive sales dynamics in the construction segment in the coming quarters. Despite difficult market conditions, we try to keep our contractual obligations while maintaining a transparent policy towards our contractors. The problem of appropriate indexation of contract prices remains unresolved. Representatives of the construction industry and the public side are involved in the work on making the current valorisation model more realistic. We believe that the lack of a quick solution will translate into a further decline in the sector’s profitability. A scenario in which the entire industry will record a loss is possible. Such a situation already took place in 2012, when the number of bankruptcies increased drastically and the entire construction sector suffered a gross loss of almost PLN 200 million.

Despite the difficult market situation, we continue our chosen direction of development. We are developing Mostostal Kraków, which after the launch of the Steel Structures Production Plant in Żłobnica in 2017, significantly increased its production potential and is currently one of the largest companies operating on the domestic steel structures market. We are satisfied with the results of our operations on the German market. In 2018, we have a chance to achieve results similar to last year, when sales revenues reached PLN 199 million with an operating margin of 13%. We consistently invest in the development of FBSerwis, which provides services in the field of waste management, maintenance of road infrastructure and technical maintenance of buildings. In 2018, the revenues of FBSerwis, including its subsidiaries, should exceed PLN 300 million. Currently, Budimex holds 49% of the company’s shares, however, we do not rule out taking control of the company in the future.

Dariusz Blocher – President of the Management Board of Budimex S.A.

Since September 2009, he has been the President of the Management Board and CEO of Budimex SA. A graduate of the Faculty of Mechanics and Mechanical Engineering at the Częstochowa University of Technology. Since May 1994. until February 2002, he was associated with Pepsi Co. Poland, performing successively the following functions: Head of the Sales Branch in Silesia, Director of Sales in the Sales and Distribution Department, and since September 1998. Director of Chief Veterinary Officer personnel in production plants and at the Pepsi Cola headquarters in Poland. In 2007, he graduated from IESE Business School in Barcelona, completing the AMP (Advance Management Program). Since February 2002. he was a member of the Management Board, Director of human resources management of Budimex SA. From November 2007, he was the President of the Management Board, Chief Executive Officer of Budimex Dromex SA and Member of the Management Board of Budimex SA.

BUDIMEX SA is a company with a fifty-year tradition, which has a significant share in the economic development of Polish. With our work, we improve the quality of life of millions of Poles. During the 50 years of the company’s existence, we have completed thousands of modern infrastructural, cubature and industrial investments. A culture of innovation, improvement and following the principles of sustainable development have allowed us to become the leader of the Polish construction market. We are present not only on the Polish market, but also abroad. We are gradually increasing our involvement in the facility management sector and waste management. Since 1995, our company has been listed on the Warsaw Stock Exchange, and since 2011 it has been included in the RESPECT index – the most responsible listed companies. Its strategic investor is a Spanish company with a global reach – Ferrovial. The group includes: Budimex Nieruchomości, Mostostal Kraków and Elektromontaż Poznań SA. We are one of the signatories of the Agreement for Safety in Construction – an initiative established in 2010, associating the largest general contractors in Poland in order to increase the level of occupational safety in the construction industry.

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 2018 and comparable data for the first half of 2017.

Results of the reporting segments for the first half of 2018 (in PLN thousands):

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

More information is available on
www.media.budimex.pl

Press photos:
http://media.budimex.pl/2539/pl/presskit/7826

Contact:

BUDIMEX SA

Michał Wrzosek – Spokesman

Tel. (22) 62 36 164, 512 478 522, e-mail: michal.wrzosek@budimex.pl