Commentary by the President of the Management Board of Budimex SA, Dariusz Blocher, on the financial data of the Budimex Group for the third quarter of 2018

• After three quarters of 2018, the sales of the Budimex Group in the construction segment were 18% higher than in the corresponding period of the previous year.
• The Budimex Group achieved a gross profit margin of 5.6%, with 3.8% in the construction part, which we perceive as a very good result, much higher than the market benchmark.
• At the end of September 2018, the Budimex Group’s order book reached a record level
  PLN 11.0 billion.
• The value of contracts acquired during the 9 months of 2018 amounted to PLN 5.6 billion.

After three quarters of 2018, the Budimex Group recorded an increase in sales revenues by 18% compared to the same period of the previous year and achieved a gross profit margin of 5.6%. In the third quarter of 2018, the profitability of the Budimex Group was higher and amounted to 6.7%, which was related to the recognition of the result on the sale of subsidiaries Elektromontaż-Poznań S.A. and Biuro Inwestycji “Grunwald” S.A. The impact of the transaction on the consolidated financial statements was in line with the preliminary estimate indicated in current announcement No. 64/2018 and amounted to PLN 44 million at the level of gross profit.

The construction market has maintained a high growth rate for several quarters. During 9 months of 2018, construction and assembly production increased by 22.9% compared to the same period of the previous year. At the same time, the data of the Central Statistical Office indicate a deterioration in the profitability of the sector – the gross profit of the construction industry after the first half of this year amounted to 2.3% compared to 2.8% in the first half of last year. Taking into account the scale of investments and the deteriorating situation of entities operating in the sector, a scenario in which the next quarters may bring a continuation of the downward trend seems realistic.

After three quarters of 2018, the sales of the construction segment of the Budimex Group reached PLN 5.1 billion and were higher by 18% compared to the same period of the previous year. Despite very challenging market conditions, the gross profit margin for the construction segment stabilized at 3.8%, significantly above the market benchmark.

The industry faces the challenge of implementing a powerful investment program in the face of problems
liquidity and profitability. There are clear signals from the market about significant payment backlogs, terminated contracts and financial difficulties of companies, including bankruptcies. Thanks to the selective approach to bidding and care for maintaining a profitable order book, the current situation of the Budimex Group is stable. Nevertheless, market difficulties are reflected in the level of profitability achieved and the lower net cash position.

At the end of September 2018, the Budimex Group’s order book reached PLN 11.0 billion and was slightly higher than at the end of the previous quarter. During the first three quarters of 2018, we signed contracts worth PLN 5.6 billion. Bearing in mind the safe level of the order book and the very difficult market situation, we are selective about new contracts. There are more and more situations on the market where protracted tender procedures force bidders to withdraw their bids. As a result, despite a cautious approach to submitting bids, over the last few months we have acquired contracts initially occupying further positions in the ranking. Additional contracts made it possible to exceed the internal contracting plans and maintain the order book at a good level, while maintaining a responsible approach to margin calculation.

After three quarters of 2018, we recorded a seasonal decline in the level of cash. At the end of September, the net cash position amounted to PLN 620 million. In September 2017, the net cash balance amounted to PLN 1,471 million. In 2018, the cash balance decreased m.in. as a result of seasonally lower cash flows from operating activities, including a significant decrease in contractual advances. The financial difficulties of the industry also led us to decide to further increase the scale of financing subcontractors through early payments and frequent invoicing of the works carried out. We are constantly observing delays on the part of investors in the process of acceptance and invoicing of the works performed. The increase in the level of bureaucracy translates into a higher level of uninvoiced sales, which at the end of September 2018 was 20% higher than in September last year, negatively affecting the cash balance. In addition, given the record level of the order book and the increase in the prices of subcontracting services, during the first three quarters of 2018 we incurred capital expenditures in the amount of approximately PLN 100 million compared to approximately PLN 50 million in the corresponding period of the previous year.

In the period from January to September 2018, Budimex Nieruchomości’s clients signed 1,335 notarial deeds m.in. as part of the next stages of the Wiślany Mokotów, Nowe Czyżyny and Osiedle przy Rolnej investments. Sales revenues of the real estate development segment increased by 6% compared to the previous year and amounted to PLN 412 million. Operating profit for the three quarters amounted to PLN 57 million with a margin of 14.0%.

After three quarters of 2018, pre-sales in the development segment reached 810 apartments compared to 1,220 apartments in the same period of the previous year. The decrease in the pace of pre-sales is mainly due to shifts in the launch of new projects. This is a consequence of the subsequent finalization of the purchase of new land and protracted administrative procedures related to the issuance of building permits. Currently, about 3 thousand apartments are under construction, and 1,192 more units are waiting for customers. Over the last 9 months, we have spent PLN 145 million on land in Kraków, Poznań and the Tri-City, allowing us to build over 2,800 units. As a result, the land bank at the end of September 2018 increased to 9.6 thousand apartments.

Demand on the housing market remains at a high level. On the other hand, there is an upward trend in the prices of construction and land, which translates into an increase in housing prices. It is possible that in the coming quarters this may have a negative impact on the pace of pre-sales of new development projects.

At the end of September 2018, employment in the Budimex Group exceeded 7,000  people and was similar to the level at the end of June. The policy of expanding own forces, which has been continued for several quarters, turned out to be a good choice. The team of manual workers allows us to have a higher degree of independence in the work carried out and to manage the risk of an increase in the prices of services based on the cost of labour. Additional intensive investments in the machine park strengthen our position in the decision to select and hire subcontractors.

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. The industry is increasingly affected by the increase in the cost of materials and labour. We are observing a constant deterioration of the financial condition of our contractors, which more and more often results in bankruptcy. That is why we consistently try to support our subcontractors by offering early payments and enabling frequent and efficient invoicing of the work performed.

Due to the lack of valorisation solutions and the galloping increase in construction prices, the profitability of subsequent quarters in the industry and in the construction segment of the Budimex Group may remain under pressure. We perceive the current level of the Group’s order book as safe.
We assess its condition as relatively good and do not expect a collapse in profitability. Despite the deteriorating situation in the industry, we will fight to maintain profitability above market indicators.

BUDIMEX SA is a Polish company with a fifty-year tradition, which has a significant share in the economic development of Polish. During the 50 years of its existence, the company has completed thousands of modern infrastructural, cubature and industrial investments. The culture of innovation, improvement and following the principles of sustainable development have allowed Budimex to become the leader of the Polish construction market. The Budimex Group currently executes 300 construction contracts throughout Poland and employs 7 thousand people. The company’s partners are ok. 15000 subcontractors and contractors. Budimex is the largest tax payer in Poland among all construction companies. Budimex is gradually increasing its involvement in the facility management sector (servicing real estate and infrastructure facilities) and waste management. Since 1995, Budimex has been listed on the Warsaw Stock Exchange, and since 2011 it has been included in the RESPECT index – the most responsible listed companies. Budimex’s strategic investor is a Spanish company with a global reach – Ferrovial. The group includes: Budimex Nieruchomości and Mostostal Kraków. Budimex is one of the signatories of the Agreement for Safety in the Construction Industry – an initiative established in 2010, bringing together 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 three quarters of 2018 and comparable data for the three quarters of 2017.

Results of the reportable segments for 9 months of 2018 (in PLN thousand):

Results of the reporting segments for 9 months of 2017 (in PLN thousand):