Executive Commentary of the Chairman of the Management Board of Budimex SA
The sales of the Group for the first half of 2016 was PLN 2.4 billion, and was higher than the sales accomplished in the same period of the previous year by more than PLN 160 million. The construction segment was the reason for the increase (noted increase of sales by 9.4% YOY), since in succeeded in intensifying the works on selected road building contracts in accordance with the request of the Investor (General Directorate for National Roads and Motorways), and in commissioning of two sections of the A1 motorway and A4 Rzeszów-Jarosław motorway section before the planned deadline. In discussed period the construction and assembly production fell by 12.5%.
In the first half of 2016, Budimex Group also achieved very good results, improving them on every level: gross margin on sales, operating result and net profit by: 40%, 38% and 37%, respectively, compared to the same period of the previous year. This improvement resulted not only from the aforementioned acceleration of works at the selected contracts, but also from the continuously low prices of raw materials and the costs of subcontracted works.
Despite the fact that the General Directorate for National Roads and Motorways has stopped the announcement of new road construction tenders in 2016, the value of the Budimex Group backlog is increasing quarterly and at the end of June of the current year amounted to PLN 9.3 billion. This is its highest value in the history of the Budimex Group.
The increasing backlog of Budimex Group orders results from high level of contracting in the general construction sector. This mitigated the effect of the stagnation on the infrastructure tenders market which could already be felt in the second quarter of this year. In the period of April to June of this year in this segment of the general construction contracts with a value of PLN 1,053 million were signed. The total value of contracts signed by Budimex Group in the first half of the year exceeded PLN 3 billion and was higher by 6.4% than the value signed in the same period of the previous year. The structure of signed contracts has changed. In the first half of 2015 the general construction segment contracts amounted to 32% of the signed contracts, whereas in the same period of this year their share increased to 45%.
The value of contracts in which Budimex’s bid was chosen as the most favourable one at the end of June amounted to PLN 988 million, of which infrastructure contracts amount to only 17%. In addition to the facilities construction market we also increased our activities in the power engineering industry, where the offer for the construction of Wilno waste incineration facility filed by a consortium which includes Budimex was selected as the most advantageous. The Budimex’s share in the filed bid amounted to approx. PLN 375 million.
As of 30 June 2016, the net cash position of the Budimex Group was PLN 1,784 million. This represents a 20% increase as compared to the end of June of 2015. One of the main reasons for the increase of the cash level during this period is the increase of the amount of funds paid for the purchase of apartments by the Budimex Nieruchomości customers (increase by 67%, which amounts to PLN 220 million).
The expiring offer of flats at the “Nowe Czyżyny” project is the main reason for the decrease of pre-sales at Budimex Nieruchomości. In the first half of 2016 the company sold 467 less flats of the aforementioned project (that is, 60% less) than in the corresponding period last year. The total decrease of the pre-sale of flats in is lower and amounts to 367 flats, that is, 34% compared to the same period last year (712 apartments pre-sold currently compared to 1079 pre-sold apartments in the first half of the previous year).
In H1 2016 we have commenced the pre-sale of flats under five new projects. Until the end of the year we are planning the start of a few new investments. Starting at least ten development projects per year is necessary to maintain the annual pre-sale of flats at the level of 1500. Currently our offer for customers includes 1285 apartments, which amounts to 30% of the flats currently under construction. Despite the higher number of the signed notarised deeds (increase by 8.0%) the established sales in the estate development segment dropped by 8.8%, compared to the corresponding period of the preceding year. This resulted from the decrease of the average price of a flat, resulting from the increase of sales of projects located outside of Warsaw, that is, in Poznań and Kraków. The operational profitability of the estate development projects remains at a level of 15%. In the second half of this year Budimex Group will still concentrate on implementing the operational and strategic goals assumed at the beginning of the year. We have commenced investing in railway machine facilities. We are continuously improving our position on the general construction and power engineering construction market. We try to adapt to the changing macroeconomic environment on an ongoing basis. We are expanding our regional structures and are starting a wide-reaching campaign of filing bids for small road construction contracts. At the same time after the amendment to the public orders law was passed we are awaiting for the resumption of publishing of
infrastructure tenders from the new EU perspective. We are prepared to participate in tenders according to the new criteria for bid assessment. Meeting the deadlines and ensuring appropriate qualities are key elements of the Group strategy. We possess 20 laboratories all over Poland, including a central laboratory, which was updated and equipped in state of the art devices for the testing of construction products and for surface diagnostics. We employ over 150 people on quality control at every step of the investment.
The Budimex Group also emphasizes corporate social responsibility, creating new jobs, caring for its employees and for the environment. This year, we have employed 500 more full-time employees. For this reason since 2011, Budimex has been continuously included in the RESPECT Index — a stock exchange index of companies which conduct their business activity in a responsible manner. Financial highlights from the consolidated financial statements of the Budimex Group prepared in compliance with the International Financial Reporting Standards (IFRS) for the first half of 2016 and the comparable figures for the first half of 2015 are provided in the attached table.