Executive Commentary of Chairman of the Management Board on selected financial data for the year 2016

2016 was another very good year for the Budimex Group. Results for this year gave Budimex SA the top position among the largest construction companies in Poland. Despite a drop in construction and assembly production by 14.4%, the Group managed to increase sales by 8.5% and generated a record net profit of PLN 410 million.

In the last year, we completed construction of 87 kilometres of express roads and motorways, which made up more than 2/3 of the total length of routes commissioned for use by the General Directorate for National Roads and Motorways. In accordance with previous announcements, some sections were completed before the contractual deadline. During the year, favourable prices of raw materials and relatively low prices of subcontractors’ services prevailed, which was due to poor situation in the sector. Additionally, in the fourth quarter we recorded a significant decrease in the provision for expected losses from one of the infrastructure contracts being implemented. These factors, together with the improvement of the effectiveness of operations resulted in improving the profitability on every level of the financial result. Gross margin on sales, operating profit and net profit have increased by 52%, 73% and 74%, respectively, compared to the same period of the previous year.

In 2016, the value of contracts for infrastructure projects awarded significantly decreased, mainly due to suspending tender procedures by the General Directorate for National Roads and Motorways. For the whole 2016, the value of bids submitted by Budimex in the road segment was PLN 7.3 billion, and was by more than 70% lowercompared to the value of bids submitted in 2015. At the same time, in the second half of the year, tenders for railway projects, co-financed from the EU budget, gained the momentum. Until now, contractors submitted to PKP PLK bids for more than 20 projects, for the total amount above PLN 9 billion net. Despite adverse market conditions, in 2016, the Budimex Group was awarded contracts for PLN 5.7 billion (drop by 20% vs. 2015). During the same period, the total value of bids submitted by the company decreased by 39%. The satisfying level of contracts awarded could have been achieved, inter alia, as a result of intensifying works in the area of general construction. In this segment, we increased the value of contracts awarded, in annual terms, by 34%, by signing contracts for the record amount of PLN 2.8 billion.

In 2016, the value of contracts signed with the General Directorate for National Roads and Motorways decreased by 64%, and was PLN 1.6 billion. Only high effectiveness of the bidding process in other areas of the road market allowed the total value of contracts for infrastructure projects achieving the satisfactory level of PLN 2.4 billion. The value of contracts, in the case of which the Budimex Group submitted the bids for the lowest prices or the most favourable ones is currently about PLN 3.9 billion, of which 25% are contracts for railway projects, and 33% for projects ordered by the General Directorate for National Roads and Motorways.

At the end of 2016, the value of the order book stood at PLN 8.9 billion – an increase of PLN 0.5 billion (6%) compared to the end of 2015. The change of the structure of contracts awarded was reflected in the order book. A share of road projects decreased from 65% at the end of 2015 to 57% at the end of 2016. At the same time, the general construction sector represented 29% of the order book, which means an increase by 7 percentage points compared to the same period of the previous year. As at 31 December 2016, the net cash position was PLN 2.6 billion. This represents an increase of 13% compared to 31 December 2015. The increase in cash levels in 2016 is due to improved profitability of the construction segment and seasonal high flows in the fourth quarter.

The improved cash position of the Group also results from the increased balance of funds paid towards the purchase of flats by customers of Budimex Nieruchomości. In 2016, the number of flats purchased under the pre-sale procedure, in the development segment, amounted to 1,615 – a decrease of 16% (303 flats) compared to the previous year. The decrease in the number of flats sold under the pre-sale procedure is mainly due to the very attractive “New Czyżyny” project having come to an end (number of pre-sold flats decreased by 582). In 2016, in response to the increased customer demand, we started selling flats under the pre-sale procedure, within the framework of twelve new projects. We spent more than PLN 100 million to purchase land. As a result, for another year, we managed to develop the portfolio of projects ready to be initiated – at present, it includes more than 6,400 flats. In subsequent years, maintaining pre-sale at the level of 1,500 flats annually will require a continuous level of approximately 4,000 flats under construction. In 2016, a total of 1,188 notarial deeds were signed – an increase of 31% compared to 2015. At the same time, the growth dynamics of sales being reported was slightly lower and amounted to 19%. The lower sales growth is due to an increase share of projects located outside Warsaw, primarily in Kraków – an increase of the share from 25% to 44% in 2016. This trend will continue in subsequent months, as a result of planned subsequent flats to be commissioned within the framework of the “New Czyżyny” project.

Our focus in 2017 will be to build a profitable order book for subsequent years. We see the recovery in the market of tenders for infrastructure projects, pertaining both to road and railway infrastructure. In February, we submitted the lowest-price bids in two procedures for construction of the Western Bypass of Łódź, for the total amount of PLN 1.3 billion net. In both instances, we are waiting for subsequent decisions of the investor, since bids exceed the expected budget. At present, we are preparing to submit subsequent bids, inter alia, for sections of S19, S7 and S3 roads. We have signed a majority of contracts for deliveries of railway equipment. During the last few months we submitted (excluding parts belonging to consortium members) bids for railway projects for more than PLN 5 billion. Despite strong competition, we achieved the high bidding process effectiveness – almost 20%. Until now, we have submitted the lowest-price bids or the most favourable bids with the value of almost PLN 1 billion. We will analyse the behaviour of other companies and draw conclusions based on subsequent award decisions with respect to tenders for railway projects. Despite the construction market decline, in 2016 we have increased the number of employees by more than 500. At the end of 2016, the Budimex Group employed 5,708 people. Ambitious investment plans of key investors and a revival in the market of infrastructure tenders that can be observed since a few months encourage us to further increase the employment level in 2017. In the next quarters, we are expecting increased sales dynamics. A majority of road contracts making up the current order book, after completing design works, entered the construction part implementation phase. The increased scale of investment activities, in particular infrastructure ones, could increase the pressure on wage growth and further limit the availability of skilled workers. Additionally, in 2017 and in subsequent years, we will have to face the risk of growth of prices of materials and subcontractor costs. Budimex is a company which enjoys a great degree of confidence of the market and investors — both public and private ones. Since 2011, Budimex is continuously included in the RESPECT Index of companies which conduct their business activity in a responsible manner. In 2016, the Budimex paid corporate income tax (CIT) of PLN 116 million, which is by 45% more than in the previous year. This gives us the place among largest CIT payers in the country.

BUDIMEX Group

Financial highlights from the consolidated financial statements of the Budimex Group prepared in compliance with the International Financial Reporting Standards (IFRS) for 2016 and the comparable figures for 2015.

Reported segment results for 2016 (in PLN thousand):
 

Reported segment results for 2015 (in PLN thousand):