Executive Commentary of Dariusz Blocher, Chairman of the Management Board of Budimex S.A., on financial data from the consolidated financial statements of the Budimex Group for three quarters of 2017

The increase in sales was recorded both in the construction segment (7%) and real estate development segment (84%). The increase in sales in the real estate development segment, which were higher by PLN 175 million than during 9 months of 2016, resulted from a 123% increase in the number of flats sold under notarial deeds.

During three quarters of 2017, the Budimex Group achieved very good results, improving them on every level: gross margin, operating result and net profit by: 17%, 38% and 34%, respectively, compared to the same period of the previous year. High profitability resulted mainly from settling ending infrastructure contracts signed 2-3 years ago. However, due to rising price pressure from subcontractors and significant increases in wages and material prices in the construction industry, it may not be possible to maintain a comparable level of profitability in subsequent quarters.

As at the end of September 2017, the value of the Budimex Group’s order book reached a satisfactory level of PLN 9.3 billion. According to the strategy adopted, railway contracts accounted for as much as PLN 1.1 billion in the order book. In addition, in October 2017 we signed another contract with PKP PLK for the modernisation of railway line E-30 on the Trzebinia – Krzeszowice section, which gives us the fourth place in terms of value of contracts acquired on the railway market. In order to implement railway projects, the Budimex Group has already contracted 100% of the planned rail equipment deliveries. Additional purchases will be possible in the future, but on a much smaller scale. 

Within the first three quarters of 2017, the Budimex Group signed contracts worth PLN 4.5 billion. The value of the contracts signed was 8% higher than in the corresponding period of 2016. In addition, the value of contracts in which Budimex’s bid was chosen as the most favourable amounts currently to approx. PLN 2 billion. We expect further revival on the infrastructure tenders market and numerous tender decisions from the General Directorate for National Roads and Motorways. Due to the increasingly difficult situation on the market - increase in employment costs, staff shortages, rising prices of materials and subcontractors' services — we will selectively approach new contracts. At present, we are preparing to submit bids, inter alia, for the construction of sections of S19, S61 roads and completion of A1 road.

The Budimex Group closed the third quarter of 2017 with a net cash position of PLN 1,471 million. After the decrease in the cash balance in the first half of the year, in the third quarter we recorded a growth that is typical of this period. We expect that this growth will continue also in subsequent months. Compared to the balance as at 30 September 2016, the cash position was lower by PLN 656 million, due to higher capital expenditure (including for railway equipment), as well as an increase in expenditure on purchase of land in the real estate development segment. In order to protect ourselves against the price increase anticipated in the near future, we have also significantly increased our spending on materials. To support further growth of waste management and road maintenance segments, in 2017 the Budimex Group also increased its involvement in the subsidiary FBSewis — by more than PLN 50 million.

The deteriorating financial position of subcontracting companies, caused, among other reasons, by changes in VAT legislation, has recently also affected the level of capital engaged by general contractors. We strive to support our subcontractors by offering early payments and allowing for frequent and efficient invoicing of works performed.  

During three quarters of 2017, pre-sale of flats in the real estate development segment reached the level of 1,220 flats, compared to 1,121 flats in the corresponding period of the previous year.

At present, more than 3 thousand flats are being erected, of which only 726 are still available to clients. We are consistently expanding the land bank. Since the beginning of this year, we have purchased land for the construction of 2,600 flats. In order to meet the growing demand, we will launch new projects in the near future.

Due to high sales made under notarial deeds, the real estate development segment closed the third quarter of 2017 with impressive results – the operating profit and net profit were higher than in the corresponding period of 2016 by, respectively, 96% and 81%.

By the end of the year, the Budimex Group will make a decision concerning the sale or implementation of a development plan in Elektromontaż Poznań. Currently, two entities are potentially interested in acquiring the company. During three quarters, Elektromontaż Poznań earned sales of PLN 117 million and operating profit of 6.5%.

In the period of three quarters of 2017, the Budimex Group's headcount increased by nearly 550 persons on the domestic market and the total number of the Group's employees exceeded 6450. The construction industry in Poland is still facing an increasing wage pressure and a further decline in the availability of qualified staff. In order to minimize the risk of a shortage of labour, we plan to increase the number of employees by about 1000 people in 2018, focusing mainly on blue-collar workers.

We will have to address the issue of the observed increase in the prices of raw materials and subcontractor costs in the nearest future. In 2017, there were increases in prices on the material market, as compared to the corresponding period of 2016. Among other materials, there was an increase in prices of asphalt (by 32%), granite aggregates (by 20%), reinforcing bars (by 19%) and ready-mixed concrete (by 14%). For this reason, we will pay particular attention to the control of costs of ongoing contracts and to the responsible approach to calculating new bids.

BUDIMEX Group

Financial highlights from the consolidated financial statements of the Budimex Group prepared in compliance with the International Financial Reporting Standards (IFRS) for three quarters of 2017 and comparable data for three quarters of 2016.

Results of reporting segments for three quarters of 2017 (in PLN thousand):

Results of reporting segments for three quarters of 2016 (in PLN thousand):