Strategy and business model

Twin tunnels under the Vistula River. - Grupo OHL
Twin tunnels under the Vistula River. Poland.

MISSION

The mission of the OHL Group is the creation of value in conditions of economic, social and environmental sustainability, catering to the specific interests of investors, clients and the employees comprising the Group and other interested parties.

One of the planks of the strategy of the OHL Group is its wager on R&D&I, on account of its contribution to driving and enhancing productivity and competitiveness through the development of innovative products, services, processes and technologies.

In terms of Corporate Social Responsibility (CSR), the Group has maintained an active and firm commitment since 2003, materialized at the present time in the CSR Strategic Plan 2015-2020. This plan adds ethical, social and environmental commitments and good governance to the objectives of profitability, and incorporates CSR into the Group’s business activity.

The OHL Group has become a global concession and construction group thanks to the people who are part of the company and to their talent, responsibility and effort. All of this is in addition to maintaining a strong commitment to the communities where the Group operates, contributing to their economic and social progress, and improving the quality of life of the local population.

SECTOR ENVIRONMENT. CHALLENGES AND OPPORTUNITIES

2016 has been a year marked largely by high political uncertainty in a number of markets. Outstanding examples of this situation include the referendum and the stepping-down of Prime Minister Matteo Renzi in Italy, the victory of the “Brexit” following the British referendum, the election of Donald Trump as president of the United States and the difficulties experienced in Spain derived from the process for forming a government.

Moreover, the cyclical situation of low prices for crude oil, metals and other mining products has limited the capacity for investment in public works in a number of countries.

Despite all of this, the OHL Group has succeeded in strengthening its position of leadership in the markets in which it operates, reaffirming itself as a global reference that stands out for its experience in the performance of complex construction projects in sectors with high added value and for its excellence in the development and operation of concessions.

  • UNITED STATES
  • CANADA
  • LATIN AMERICA
  • EUROPE
  • ASIA PACIFIC
I-405 in California. USA.

Despite the uncertainty experienced during the electoral period in the United States, the U.S. infrastructure sector has continued its recovery, which is expected to endure over the next few years. In this regard, President Donald Trump has stated his commitment to increasing domestic investment in infrastructures during his term of office, placing particular emphasis on the modernization and upgrading of highways and bridges, the improvement of the passenger and goods railway networks, as well as the rehabilitation of airports and the introduction of new air traffic control systems.

The activity of Construction in the U.S. accounts for one-third of the total business of the division and ranks as one of the most important markets for the Group and main growth vector looking to the future. This activity is concentrated in the leading States in the U.S. in terms of their contribution to GDP and their history of investment in transportation infrastructures, such as California, Texas, New York, Florida and Illinois. During the 2016 financial year, Construction continued its expansion in the U.S., strengthening its presence in those States where it was already operating and starting its business activity in other significant areas in the country (e.g.: Washington D.C.), consolidating a more diversified backlog of projects, both in terms of geographical location as well as of size. Finally, an important highlight is the award, in February 2017, of the most significant contract obtained to date by the company in the U.S., the I-405 highway upgrade project in California. Worth 1,118 million euros, the contract involves the upgrading of the highway section from State Route 73 to Interstate 605, one of the most congested stretches of road in Orange County, California.

In addition, plans are in place for leveraging the significant presence of the Group in the U.S. for developing fresh business opportunities in the areas of Concessions and Services.

With respect to the country’s neighbor to the North, Canada, the new Prime Minister Trudeau is also determined to modernize the country’s transportation infrastructure network. The Canadian government has been increasing public expenditure on infrastructure since the 2008 crisis, although there is still a need to move ahead with this modernization trend, particularly in the highway sector, to reduce the costs associated with the country’s logistics processes.

OHL will continue exploring the opportunities existing in Canada and will give priority to small-scale projects with moderate risk.

Bicentennial Viaduct in Mexico.

In the Latin American markets, generally more dependent on the exports of oil and mining products, delays and budget cuts have been observed, which have adversely affected the development of transportation infrastructure projects in the past year. However, the strong commitments of their governments, together with the need for continuing to develop and renovate the local infrastructures, have not ceased to generate opportunities that are particularly attractive in the highway, port, airport and pipeline transportation sectors.

During 2016, Chile considerably reduced its level of investment in infrastructures, adversely affecting the development of public works. In turn, the mining sector experienced a significant decline in terms of investment, due primarily to the lower copper prices and the increase in the costs associated with operations, generating a degree of contraction in this market, in addition to the devaluation of the local currency against the dollar.

In this home market, in addition to public calls for tenders, where OHL has won significant projects such as the Curicó Hospital worth 229.9 million euros, the company’s strategy is also based on developing public-private initiatives, such as the Autopista Costanera Central project, and the formalization of strategic alliances with local firms, thereby facilitating its positioning in new sectors such as mining.

As a significant example, in Calama, in the region of Antofagasta, OHL has been awarded the project for the expansion of the Talabre Dam worth 145.2 million euros, granted by Codelco Chile.

In Colombia, raw materials, particularly oil and other mining products, have given rise to a slight downturn in investment and in the development of new public works projects.

Nevertheless, the government continues to demonstrate its strong commitment to the development of the country’s infrastructures by maintaining its investment efforts through the start-up of the Intermodal Transportation Master Plan (PMTI) which seeks to reactivate the infrastructure sector during the next 20 years, together with the fourth-generation 4G Program of Road Concessions, in which the OHL Group participates with the Rio Magdalena 2 Toll Road.

OHL’s growth objectives in Colombia consist of the composition of a mixed backlog, with public projects, works for concessions and private clients. OHL seeks to grow in Colombia with a view to positioning itself as one of the top construction companies in the country.

The Mexican economy grew at a rate of 2.2% in 2016 and is expected to do so at 1.8% in 2017. The economy is being affected by the introduction of structural reforms, as well as by the fiscal pressure caused by the decline in the prices of oil and mining products. Despite the adverse economic environment, there is a growing need for developing and renovating the country’s infrastructures supported by the Transportation and Communications Infrastructure Investment Program 2013-2018 (PIITC).

After having overcome its reputational crisis, the OHL Group continues to consider Mexico as one of its most relevant markets, in which it will continue working to improve the country’s transportation infrastructures.

In Peru, despite the relative stagnation of public investment during 2016 due, among other factors, to the change in the political cycle in the country, the OHL Group succeeded in underpinning its substantial competitive position in the mining sector which has translated into the obtaining of two contracts worth a total of close to 110 million euros for two of the top mining companies in Peru (Antamina and Las Bambas).

In the transportation sector, OHL continues to develop a significant backlog of concessions in the country and to maintain a focus on civil works. In addition, OHL has decided to enter the building construction sector and is set to build the National Museum of Archeology of Peru, a project with a budget of 90.5 million euros.

Modernization of the Tabor-Sudomerice railway

In Eastern Europe, the OHL Group has embarked on a concentration in key markets, centering its operations in the Czech Republic. The opportunities in the railway sector stand out and to a lesser degree in roads, water treatment and electricity generation. All in all, 2016 has been a year with a decline in contracting due, among other reasons, to the end of the five-year investment cycle originating from EU funds in the Czech Republic.

In addition, the Group wishes to strengthen its competitive position in Europe, particularly in the so-called Nordic countries and, most especially, in Sweden, Norway and Denmark through the establishment of alliances with the principal local players, where OHL is improving its marketing position with several significant projects currently in the bidding stage. With respect to its firm commitment to reinforcing the development of the business in the area and with the aim of favoring the early identification of opportunities, a business development office will be opened in Sweden, additional to the office already established in Norway, for meeting the operational needs in the region.

The OHL Group is also beginning to explore opportunities in Ireland in the building construction sector, particularly in hospitals.

In the United Kingdom, the uncertainty generated by its withdrawal from the EU (the so-called “Brexit”) has not had a significant impact on the performance of the Group in that country, where OHL continues to perform the project for the restoration of the historic British War Ministry, the Old War Office of London. Consequently, it is hoped that the performance of this landmark project in the capital will serve in the future as a support for the analysis of other one-off opportunities in the British market.

En España, a pesar de la difícil situación política vivida durante el año 2016, la economía sigue creciendo por encima de la media del resto de los países de la Eurozona. Además, la formación del nuevo gobierno junto con la mejora en las previsiones económicas, afianza las perspectivas de recuperación del sector para los próximos años, aunque lejos de alcanzar ni el volumen de licitación ni los niveles de crecimiento previos a la crisis. El nuevo Gobierno dará continuidad al Plan de Infraestructuras, Transporte y Vivienda (PITVI) aprobado durante la pasada legislatura, que marcará la senda futura de inversión en infraestructuras y transporte hasta 2024.

In Spain, despite the difficult political situation experienced during 2016, the economy continues to grow above the average for the rest of the countries in the Eurozone.

Moreover, the formation of the new government, together with the improvement in the economic forecasts, has reinforced the outlook for the recovery of the sector in the next few years, although far from reaching either the volume of tendering or the levels of growth existing prior to the crisis. The new government will continue with the Infrastructure,Transportation and Housing Plan (PITVI) approved during the past legislature, which will mark the future road map of investment in infrastructures and transportation up to the horizon of 2024.

In the Asia-Pacific region a concentration of operations is being carried out mainly in Vietnam and The Philippines. In The Philippines, the OHL Group has chosen to work with the leading investors in concessions in the country with a view to developing major highway and urban railway projects. In Vietnam, the Group will continue to submit tenders for projects with limited risk in the civil works sector.

STRATEGIC PLAN HORIZON 2020

Electronic toll collection on the Mexiquense Beltway operated by TeleVía

The principles on which the Strategic Plan 2015-2020 was defined remain unchanged: ensure cash generation and guarantee the sustainability of each of the divisions, with the following guidelines of action:

  • Concentration of the center of gravity and engine of future growth in the eight priority markets for the OHL Group (home markets): USA, Canada, the four Pacific Alliance countries (Mexico, Chile, Peru and Colombia), Central Europe and Spain
    • These markets have been selected on having shown high political stability and low country risk and because they present a significant outlook for growth for all of the divisions
    • In addition, the OHL Group continues to analyze and explore specific opportunities in other countries, preferably in those that have demonstrated a high level of legal certainty, some of which could eventually become home markets in the future
  • Maintaining of a balanced backlog well diversified in terms of project size, geographical location, type and client
  • Reinforcement of the risk management and control mechanisms
  • Development of tools designed to improve the operating effectiveness of the business through digitalization
  • Ensure the future feasibility of the industrial business of the Group. The current situation of the EPC sector, with a decline in investments due to the low oil and raw materials prices and the stepped-up competition and increased risk associated with the business, calls for the implementation of measures geared to minimizing losses and to ensuring its sustainability through focusing on activities that deliver a high rate of returns while minimizing risk: renewable Mining & Cement, Operation & Maintenance and EPC projects. In this context, the industrial business will be integrated into the organizational structure of the Construction division with the objective of optimizing overhead costs
  • Focus on the human capital, R&D&I and Corporate Social Responsibility as generators of value
  • Financial strategy oriented towards deleveraging and the improvement of the financial ratios
  • OHL Concessions
  • OHL Construction
  • OHL Services
  • OHL Developments

The Concessions division has a current backlog of projects made up by young concessions on different levels of maturity and with traffic growth sustained over time.

In the course of 2016, a successful asset rotation policy has been applied in the division that included, among other moves, the sale of the stakes in Abertis, the sale of 24% of the interest in Conmex México and the sale of a 28% stake in the West Light Rail line in the Community of Madrid. These rotations are set in the framework of the concessions business and part of the cash obtained will be reinvested in new projects, particularly in the area of Latin America and, in the future, in the United States.

In terms of the award of concessions, 2016 has been a successful year for the division thanks to the award, among others, of the 43-km-long Chilean concession, Camino Nogales-Puchuncavi. Another two awards were added to this: the first in Peru, a private initiative called Conexión La Molina-Angamos, with 12 km in length and an investment of 445 million euros and, the second, an addendum for the performance of the Evitamiento de Chimbote bypass in the framework of the Northern Toll Road project. Likewise, the division succeeded in obtaining prequalification for an important project in the U.S.: the LAX Automated People Mover. This project, promoted by Los Angeles World Airports (LAWA), is for the modernization of the land access to the airport facilities of that Californian metropolis. With a total investment of 2,250 million euros, the project includes the design, construction, financing, operation and maintenance of the automated passenger transportation system, with a capacity for moving 5,600 travelers per hour in each direction.

The Construction division faces a better scenario in terms of business opportunities in its home markets, particularly in the U.S., which has become consolidated as the main growth vector of the division looking to the future, and in the Pacific Alliance countries (Chile, Colombia, Mexico and Peru).

However, in the updating of the Strategic Plan it was decided to give priority to the risk-return ratio over the growth in completed works objective, in addition to being more selective in the contracting of new projects.

With respect to the OHL Construcción legacy projects, in the course of 2016 a revision of the targets of these projects was made on the income statement, restating the total losses expected. An important development in this context consists of the agreements reached in the largest legacy projects, such as Marmaray in Turkey and CHUM in Canada, which will enable their completion under reasonable terms for OHL.

On another side, the Construction division has put into place a number of measures designed to improve its cash position and forward-looking debt profile, such as the renewal of a significant part of the division’s management team, the implementation of risk- control-oriented improvement processes and the introduction of new HR policies.

The Construction division will consolidate the industrial business of the Group within its structure in 2017, seeking commercial and operational synergies in the area of Mining & Cement.

Services continues to show great potential and has succeeded in taking its first steps in the direction of the international expansion of its business in Chile, in the facilities management sector, focusing its efforts on increasing contracts with private clients. In addition, the division will look for opportunities for entry into other home markets on the American continent, mainly Mexico and the United States, countries where it has recently opened an office.

In Spain the objective of OHL Servicios continues to be that of consolidating its sales backlog, meeting the highest possible standards of quality and profitability.

The Developments division has continued its activity in landmark projects in the high- added-value tourism-hotel area, such as in Canalejas, the Old War Office and Mayakoba.

Centro Canalejas is a project in which a landmark city block of heritage buildings is being rehabilitated. The complex is located on the most central corridor of Madrid, with historical façades facing Alcalá Street, Canalejas Plaza and the Carrera de San Jerónimo, just a stone’s throw away from the Congress of Deputies and Puerta del Sol square. The Four Seasons Hotel, the chain’s first in Spain, with 200 rooms, will be established in this complex together a top-level residential area, also operated by the hotel chain; an exclusive luxury class shopping arcade and a 400-space parking lot.

OHL has sold a 17.5% stake in the complex to the firm, Mohari Limited, owned by Mark Scheinberg, for 78.75 million euros, in a joint agreement together with Grupo Villar-Mir. The transaction has generated 29 million euros in capital gains.

With respect to Mayakoba, the division’s most mature project, the sale of a majority stake to the Mexican company RLH was successfully concluded, meeting the objectives established in asset rotation terms.

The Old War Office project in London is advancing at a faster pace than expected, having already obtained its building permit and looking to start construction work during 2017

OHL Desarrollos has become consolidated on a global level as a differentiated developer with a focus on the design and performance of mixed-use real estate projects operated by the leading ultra-luxury hotel chains on the international level.

FUTURE OUTLOOK

CHALLENGES, OPPORTUNITIES AND FORESEEABLE DEVELOPMENTS
STRATEGIC PLAN
  • OHL AND THE Sustainable Development Goals
  • CORPORATE POLICIES
  • In September 2015 the United Nations General Assembly unanimously approved the Sustainable Development Goals
  • 17 goals and 169 targets that shape the Agenda 2030, an action plan to the benefit of people, the planet, prosperity, peace and alliances
  • Implementation officially commenced on January 1, 2016

Businesses play an indispensable role in the success of the Agenda 2030, and the Group accepts this role and contributes to addressing the collective challenge of sustainable development in the performance of its business activity.

Lines of the CSR Strategic Plan that contribute most to the SDGs and their targets


Lines of the CSR Strategic Plan

The Sustainability Committee decided in July 2016 to address the issue of a Human Rights Policy for the Group. In December 2016, the senior management decided to revise the Corporate Policies of the Group, grouping together and condensing their texts in ten corporate policies to facilitate their understanding, application and presentation.

Corporate policies