Commentary by the President of the Management Board of Budimex SA – Dariusz Blocher on the financial data from the consolidated financial statements of the Budimex Group for Q1 2018

The Budimex Group ended the first quarter of 2018 with good results – 27% higher year-on-year sales, satisfactory profitability and a net result of PLN 63 million.

Sales increased in both the construction (17%) and development (106%) segments. The significant increase in sales in the development segment is due to the delivery of as many as 688 apartments compared to 409 apartments in the first quarter of last year. Sales revenues in the construction segment increased by 17% compared to the same period of the previous year and were at the highest level recorded in history in the first quarter. At the same time, construction and assembly production increased by 28.2%. The current order book allows us to look optimistically at sales, therefore we expect to maintain positive dynamics in the coming quarters.

The increase in the revenues of the Budimex Group in the first quarter of 2018 was accompanied by a decrease in profitability. The Group achieved a gross profit before tax margin of 6.0%, compared to 4.4% in the construction segment. We see this result as very good, in particular
the viability of the entire construction sector. According to the Central Statistical Office, already in 2017 the industry recorded a decrease in gross profit margin to 3.8% compared to 5.0% in 2016. This is a consequence of the growing price pressure from subcontractors observed for several quarters and a significant increase in wages and material prices. Indexation indicators included
In the current contractual provisions, they do not reflect reality, as a consequence of which the entire cost risk is on the side of general contractors. That is why we are starting 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, 2018 is unlikely to bring stability. Despite this, in the coming quarters we will work on maintaining stable profitability, above market indicators.

At the end of March 2018, the Budimex Group’s order book reached PLN 10.4 billion and was close to the level of December 2017. During the first three months of 2018, we signed contracts
worth PLN 1.1 billion. Due to the increasingly difficult situation on the market, we are selective about new contracts and do not plan to further expand our order portfolio. A change in the approach to new offers is visible among most contractors. More and more often we observe situations on the market, in particular in the railway segment, where the lowest bids significantly exceed the contracting authority’s budget. The market is becoming more and more saturated, and the risk of further cost pressure is prompting the industry to be particularly cautious and prudent in its approach to calculating new cost estimates.

In the first quarter of 2018, we recorded a decrease in the level of cash, which is characteristic of this period. Despite this, at the end of the first quarter of 2018, the Budimex Group maintained its net cash position at a satisfactory level of PLN 1.55 billion.

In the first quarter of 2018, pre-sales of apartments in the development segment reached the level of 270 apartments compared to 392 apartments in the corresponding period of the previous year. Currently, nearly 3 thousand apartments are under construction, and 957 more apartments are waiting for customers.

During the year, Budimex Nieruchomości plans to expand its offer by another 3,000 apartments, which should result in accelerated pre-sales in the second half of the year. The currently owned land bank allows us to build another 7.6 thousand apartments.

The accumulation of signed notarial deeds in the first quarter of this year translated into a significant increase in sales revenues. We have delivered 688 m.in apartments to our customers. as part of the next stages of the Wiślany Mokotów, Nowe Czyżyny and Osiedle przy Rolnej investments. The operating profit of the real estate development segment amounted to PLN 27 million and was 128% higher than in the corresponding period of the previous year. At the same time, operating profitability improved and reached 12.7%.

In connection with the good results of 2017 and the safe level of cash, the Management Board recommended the payment of a record dividend of PLN 17.61 gross per share. The General Meeting of Shareholders will make a final decision on this matter on 17 May 2018. Budimex SA is a part of the WIGdiv index comprising companies that have regularly paid dividends over the last 5 years. Budimex SA has been paying dividends continuously since 2009.

Continuing the direction we chose last year to minimize the risk of lack of workforce, we are consistently increasing the number of blue-collar workers. In the first quarter of 2018, employment in the Budimex Group increased by over 300 people on the domestic market (of which over 200 are manual workers), and the total number of employees in the Group exceeded 6900 employees.

We are starting 2018 with a record order backlog, which should translate into maintaining positive sales dynamics in the coming quarters. During the year we will have to face
with the observed dynamic increase in the prices of materials and the costs of subcontractors’ services. Therefore, we minimize the risk of newly signed contracts and reduce exposure to segments that are characterized by high volatility of labor prices and subcontracted services. At the same time, we will focus on optimisation and special attention to costs on contracts under construction, so as to maintain stable profitability in the coming months.

We are a company that, despite difficult market conditions, keeps its contractual obligations
and performs the assigned tasks in accordance with the provisions, taking care of the highest quality. However, we believe that without solving the problem of real price indexation and introducing facilitations in hiring foreign workers, the implementation of the investment program based on EU funding may be threatened.

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 quarter of 2018 and comparable data for the first quarter of 2017.

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

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