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Concessions, Construction and Services

Obrascón, Huarte, Lain
Torre Espacio
Ps de la Castellana 259-D
Planta 7 a 14
28046 Madrid. España
www.ohl.es
T: +34 91 348 4100
F: +34 91 348 4467 

Results Presentation 2016

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  • Strategic project promoter of public-private partnerships.
  • Twenty-eighth international contractor and eighth largest in Latin America (ENR 2015).
  • Benchmark company in the construction of railways and hospitals.
  • Reference partner of Abertis, worldwide leader in transport infrastructure concessions.

CONCESSIONS, CONSTRUCTION AND SERVICES DIVISION

OHL is a group of concessions and construction companies with over 100 years of experience, present in nearly 30 countries spanning five continents. Its activities are focused primarily on eight home markets: the United States and Canada, Mexico, Colombia, Peru, Chile, Central Europe and Spain.

At 31 December 2016, Grupo Villar Mir directly and indirectly controlled 51.96% of OHL’s share capital, and it was the controlling shareholder.

 

Grupo Villar Mir stake in OHL
 
Grupo OHL is the company holding the most important position in Grupo Villar Mir overall, as seen in the following graphs:



OHL information (Obrascon Huarte Lain, SA) that appears in this part, is obtained from the Annual Report of Grupo Villar Mir, S.L.U. reflects the figures with date December 31, 2016. See website OHL www.ohl.es for a more updated and detailed information.

 

Logo OHL

OHL is a group of concessions and construction companies with over 100 years of experience, present in nearly 30 countries spanning five continents. Its activities are focused primarily on eight home markets: the United States and Canada, Mexico, Colombia, Peru, Chile, Central Europe and Spain. It is currently:

  • Strategic developer of public-private partnership projects.
     
  • Twenty-eighth international contractor and fifth largest in Latin America (ENR 2016).
     
  • Benchmark company in the construction of railways and hospitals.
     
  • A member of the FTSE4 Good IBEX sustainability index.
     
  • Present in the CDP's Climate Change and Supplier Climate A List.

The international expansion carried out by Grupo OHL in the last decade has enabled it to end 2016 with substantial and balanced geographical diversification, a workforce of 24,410 employees (63% abroad) and with 79% of revenue and almost all of its EBITDA outside Spain.

COMPANY VALUES

The company's values constitute the foundation on which its Code of Ethics is based and establish the general guidelines for action to be observed by all of the individuals in Grupo OHL in the performance of their work:

  • Professional ethics, integrity, honesty, loyalty, efficiency and res ponsibility to our stakeholders in all of the company's actions, always in full compliance with applicable laws.
     
  • Spirit of achievement and continuous improvement in performance.
     
  • Transparency in the dissemination of information, which must be adequate, accurate, verifiable and complete.
     
  • Value creation with a permanent search for sustainable profitability and growth.
     
  • Constant promotion of committed quality, innovation, safety and environmental friendliness.

Grupo OHL undertakes to observe and apply the CSR regulations of the European Union and the guiding principles on business and human rights and to follow the guidelines and recommendations of the United Nations, The International Labour Organisation and the Organisation for Economic Cooperation and Development. Moreover, as a company belonging to the United Nations Global Compact since 2004, it strives to disseminate and promote its ten principles.

Grupo OHL has also accepted its role in the achievement of the Agenda 2030 and contributes to addressing the collective challenge of sustainable development -the Sustainable Development Goals (SDGs)- through the responsible performance of its business activity.

In this regard, the Group's main contribution focuses primarily on SDGs 9, 11 and 7, through business development and R&D&I. In addition, the CSR Strategic Plan is aligned with the Sustainable Development Goals and also contributes to numerous SDGs that are broadly connected to many of this goals. Within the CSR Strategic Plan, this is particularly relevant in the areas of Governance and CSR Management (26 connections to SDGs), Employees (20 goals), Environment (13 goals) and Fair Operating Practices (13 goals).

Five business divisions


Five buiness divisions

Strategic Plan Horizon 2020

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

  • Concentrating the core and drivers of future growth on eight priority markets for Grupo OHL: the United States, Canada, the four countries in the Pacific Alliance (Mexico, Chile, Peru and Colombia), Spain and Central Europe.

    These markets were selected because they displayed high political stability and low country risk and because of the significant prospects for growth for all the divisions.

    In addition, Grupo OHL continues to analyse and explore specific opportunities in other countries, preferably those that have demonstrated a high level of legal certainty, some of which could become home markets in the future.
     
  • Maintenance of a balanced portfolio that is highly diversified as regards project size, geography, type and client.
     
  • Reinforcement of the mechanisms of risk control and management.
     
  • Development of tools designed to improve business operation through digitalisation.
     
  • Ensuring the future feasibility of the Group's industrial business. The current situation of the EPC sector, with a decline in investments due to low oil and raw materials prices and increased competition and risk associated with the business, calls for the implementation of measures geared toward minimising losses and ensuring its sustainability by focusing on activities that deliver a high rate of return while minimising risk: Mining & Cement, Operation & Maintenance and renewable EPC projects. Within this context, the industrial business will be integrated into the organisational structure of the Construction Division in order to optimise overhead costs.
     
  • Focusing on human capital, R&D&I and Corporate Social Responsibility as value generators.
     
  • Financial strategy that seeks to deleverage and improve the financial ratios.

Good governance: a triple line of defence

RISKS AND INTERNAL CONTROL

With the goal of reinforcing the risk management and internal control mechanisms and of successfully addressing the challenges of the Strategic Plan, improvements in the Risk Management System continued throughout 2016, based on Grupo OHL's risk management policy. The following actions taken are particularly relevant:

Project-level Risk Management System

The project-level Risk Management System developed has a threefold objective and seeks to generate a culture within the organisation that accepts risk management as a strategic and differentiating element.

On a commercial or tendering level, the aim is to guarantee that the level of risk assumed in the contracting is compatible with the objectives and sustainability of the division and of Grupo OHL.

On the operational or project level, the goal is to maximise the rate of return on the projects through the early identification of risks and by taking effective mitigation measures so as to increase the likelihood of completing the projects within the set cost and on time.

From the perspective of the divisions, the objective is to generate comprehensive reporting that reflects the uncertainty derived from the existing risks and that assists management in making strategic decisions.

Third-party due diligence process

The third-party due diligence process makes it possible to assess the risk associated with contracting or cooperation with third parties (clients, partners or critical suppliers). During the year, third-party due diligence assessments were conducted of potential partners, clients, critical suppliers and subcontractors.

Updating Grupo OHL's Risk Map

In close collaboration with the individuals responsible for risk-related tasks in each division, the risk maps for each division were updated. These maps make it possible to draw up the Grupo OHL Risk Map and to undertake initiatives and projects designed to reduce the company's exposure to the main threats detected, in accordance with the terms of the regulations.

Grupos OHL's reputation management model

The Group's reputation management model has been designed and the first phase, consisting in defining its reputational vision and related goals, has been launched:

  • Prioritisation of the stakeholders to be included in the survey process.
     
  • Analysis of the internal perception of the Group's reputation.
     
  • Definition of the desired positioning axes.
     
  • Creation of the management unit (corporate reputation working group).
     
  • Determination of the scope of the diagnostic pilot.
     
  • Definition of the operational aspects of the stakeholder survey process.

COMPLIANCE

Code of ethics and anti-corruption policy

The Code of Ethics, which was approved by the Board of Directors in 2010 and revised in 2012 and 2015, constitutes an express and precise indication of the values, principles and standards of behaviour expected in daily work.

Its aim is:

  • To develop the models and standards of professional, ethical and responsible behaviour which are to guide all of the individuals belonging to Grupo OHL in the performance of their duties.
     
  • To prevent criminal behaviour and any other illicit conduct by the individuals bound to this code in the course of their work.
     
  • To establish the monitoring and control mechanisms needed to guarantee compliance.

The Group is a signatory of the United Nations Global Compact and is therefore bound to work throughout the world against corruption and bribery and to follow the recommendations issued in this regard by international organisations such as the OECD. Hence, Grupo OHL's anti-corruption policy, which was approved by the Board of Directors in 2015, reflects the company's stance of zero tolerance for any kind of corruption.

Ethical communication channel

The ethical channel is available to anyone belonging to Grupo OHL and to the company's stakeholders for making any queries or reporting in good faith any conduct in the professional sphere that could, by act or omission, involve irregularities, non-compliance with or violations of the rules and principles of action set forth in the code of ethics, any other standards or procedures contained in the Group's internal regulatory system, or the law.

CRIME PREVENTION MODEL

OHL has a Crime Prevention Organisation and Management Model (CPM) in place, which was updated in 2016 to adapt it to the Group's structural changes.

Year Performance

GROUP TRENDS

2016 was a year of poor results for OHL, strongly influenced by the full impact of the losses from the legacy projects and by negative trends in exchange rates. However, it has led to a reorganised, consolidated balance sheet, thus laying the groundwork for building the company's future.

In this regard, 2016 featured activities in two main areas:

  • Debt reduction and simplification of the financial structure. In other activities, the corporate debt of Concessions was reduced by 73%, trigger risk borrowings were completely eliminated and bonds amounting to EUR 84.8 million were redeemed before maturity.

    The rotation of non-strategic assets was instrumental in achieving this reduction. This rotation, which amounted to EUR 1,590 million in 2016 and EUR 627 million in the first two months of 2017, became particularly intense in the second half of the year with capital gains in all cases, obtaining net profits of EUR 330.2 million in 2016 and another EUR 100 million, approximately, in the first two months of 2017.
     
  • An in-depth analysis of the status of the legacy projects in order to neutralise their future impact on the income statement and to limit the impact on cash flows.

    This analysis has prompted a revision of the estimates for the ultimate targets of these projects, leading to a reduction in EBITDA and profit attributed to the parent company amounting to EUR 520.2 and 669.6 million, respectively. Once this has been achieved, the Group can concentrate on managing the rest of its construction business, which is now focused and balanced, and on producing positive cash flows.

The estimated impact of these projects on cash flows for the coming years is shown in the following graph:

Theasury impact of forthcoming projects

An overall outflow of cash amounting to EUR 165 million (EUR 64 million in 2017 and EUR 101 million in 2018) is expected in relation to these projects. However, starting in 2019, an inflow of EUR 284 million is forecast.

Besides the effect described above, in terms of operations, the income statement for 2016 was burdened by the sharp devaluation of the exchange rates compared to the euro for the main currencies with which the Group operates (particularly the Mexican peso). Excluding these two impacts, the main figures of the income statement would be as shown in the table below:

Excluding the revised target estimates, at steady exchange rates, the Group's revenues, EBITDA and net profit would have experienced a -5.4%, -12.5% and -345.1% change, respectively.

The excellent performance of the Concessions Division can be highlighted, in which revenues and EBITDA from tolls in comparable terms (that is, at steady exchange rates and not including the effect of the change in the consolidation method for Metro Ligero Oeste) grew by 11.7% and 20.5%, respectively. Of particular note are the concessions in Mexico, which showed 14.7% growth in revenues and 14.8% in EBITDA in the local currency.

Likewise, the impact on net profits of the capital gains generated through the sale of 7% and 4.425% of Abertis Infraestructuras, S.A. and of 28.0% of Metro Ligero Oeste, S.A. (and the ensuing optimisation of the remaining 23.3%) was also significant, as these transactions amounted to EUR 276.2 and 41.0 million, respectively.

In the financial sphere, the following aspects can be spotlighted:

  • Transactions on the capital market. In 2016, OHL repurchased bonds on the capital market on two occasions:

    -On 23 February 2016, through a repurchase offer in cash of the bonds maturing in 2020 at a fixed price of 98%. The offer was accepted for a total of EUR 32.0 million (12% of the outstanding balance at that time).

    Starting in August, in light of the declining market price, through an open market repurchase for a nominal total of EUR 52.8 million: 43.3 million for bonds maturing in 2020, 5.5 million for those maturing in 2022 and 4.0 on the ones maturing in 2023. The average purchase prices was 85.89%.

    While these are relatively modest amounts, both of these liability management moves have had a highly positive impact on the listing prices of the bonds on the secondary market, which goes to show that prices on this market are not particularly representative at time of high volatility.

    Following these two transactions, Grupo OHL has an outstanding Eurobond balance of EUR 894.5 million with a comfortable maturity profile.

Maturity calendar of 2016 OHL bonds

  • Asset rotation.

    -Sale of 28.0% of Metro Ligero Oeste, S.A. As part of the asset rotation policy at Concessions, the sale of 28.0% of Metro Ligero Oeste was closed in September for a total of EUR 101.7 million. The company continues to own 23.3%. This transaction generated a total profit of EUR 41.0 million and includes the optimisation of the remaining interests.

    -Sale of 11.425% of Abertis. The sale took place in two blocks: one for 7.0% on 29 June 2016 and the other for 4.425% on 3 October. The total sum of the transaction, which amounted to EUR 1,329.0 million in net proceeds, made it possible: (i) to allocate additional funds to OHL Concessions in order to meet its equity commitments in newly awarded concessions, (ii) to completely eliminate its debt with trigger risks and (iii) to reduce its gross recourse debt.

    Furthermore, the transaction generated a total of EUR 276.2 million in capital gains, with an overall IRR of 26.7%.

    In addition, the remaining 2.5% of Abertis was sold on 23 January 2017 for a total of EUR 329.8 million in net proceeds, earmarked for (i) cancellation of the collar financing amounting to EUR 272.9 million and (ii) reduction of the gross recourse debt with the remaining amount.

    -Sale of 24.01% of OPI by OHL Mexico.

    -On 4 October 2016, OHL Mexico reached an agreement with IFM Global Infrastructure Fund for the sale of 24.01% of Organización de Proyectos de Infraestructuras, S.A. de C.V. (OPI), for a total of 8,644 million pesos. After the transaction is completed, OHL Mexico will continue owning 51% of OPI, while IFM's interests rise from 24.99% to 49%. The resources resulting from this transaction will be used to improve OHL Mexico's capital structure in order to continue investing in new concession projects. Since Grupo OHL still controls this concession, the transaction does not affect the income statement, with the results being recognised in equity.

    -Partial sale of assets in Mayakoba.

    The contract of sale dated 21 December 2016 includes a percentage of up to 80% of Fairmont and Rosewood (guaranteed minimum of 51%) and 51% of Banyan Tree, Andaz and El Camaleón golf course. This transaction, scheduled to take place in 2017, will provide EUR 158 to 218 million and generate capital gains of some EUR 71 million. Closure of the sale is subject to fulfilment of certain conditions that are typical for this type of transaction, including the relevant approval by the Federal Competition Commission.

    -Sale of a 17.5% stake in Centro Canalejas Madrid.

    On 9 February 2017, OHL signed a contract of sale on 17.5% of Centro Canalejas Madrid, for which it will receive EUR 79 million and capital gains of approximately EUR 29 million.

    Completion of the transaction is subject to fulfilment of a series of conditions precedent, scheduled to be met in the early months of 2017.

    -Reinforcement and simplification of the Group's financial structure.

    Both the capital increase made by the company in October 2015 and the asset rotation transactions carried out have contributed in a very positive way to create a comfortable and perfectly sustainable financial structure, regardless of the aforementioned intention of continuing to reduce the corporate debt at both OHL, S.A. and OHL Concesiones, S.A.

Financial structure of the Group
Total net debt of OHL Non-recourse net debt OHL

 

  • OHL Concesiones' corporate debt was reduced by 73% during the year, dropping to EUR 451.8 million at the end of 2016, compared to EUR 1,672.7 million at the end of 2015.

    NON-RECOURSE NET DEBT OF OHL CONCESIONES (million euros)
  • Complete elimination of trigger risk. With the sale of 4.425% of Abertis on 3 October 2016 and the early repayment of the entire margin loan for EUR 266.3 million, the process of eliminating all financing with trigger risk has been completed. This financing, which amounted to EUR 1,494.0 million at the start of 2015, was completely cancelled in 2016.

    TRIGGER RISK DEBT
     
  • Reduction of equity contribution commitments for new concessions awarded by (i) eliminating the La Molina-Angamos concession timetable and (ii) incorporating one or more partners with a 49% stake at the end of 2017, with negotiations for closing the deal at a very advanced stage. As shown in the graph, this incorporation would reduce the contributions needed by about half and would entail a cash inflow of some EUR 116 million for the proportion of equity already allocated to these projects. In addition, the delay in receiving environmental permits and other administrative procedures has led to a proportionate delay in the equity contribution timetable. Therefore, according to estimates by OHL Concesiones, the timetable would be as follows:

    ESTIMATED COMMITMENTS OF CONTRIBUTED EQUITY TO OHL CONCESIONES (146 million euros)
  • Financial flexibility thanks to an available recourse liquidity position of EUR 897.0 at year-end 2016, which is a combination of credit lines and issues of bonds with long and short term instruments in both cases. In this regard, the following events have occurred during the year:

    -Renewal of the Euro Commercial Paper Programme on 3 May 2016, which affords the Group short-term financing on the capital market, in which it can maintain up to EUR 500 million in circulation.

    -Approval of the first extension of the maturity date on 2 August 2016 for the EUR 250 million long-term syndicated loan, extending it to July 2019 for a total of EUR 209 million (84% of the initial principal). This loan offers OHL long-term financial flexibility at a very competitive price.

    -Recent conclusion of an agreement with the main reference financial institutions to add EUR 190 million in credit lines to this position.

On 27 February 2017, the company reached an agreement with the aforementioned institutions to draw up the formal documentation and sign a new multi-product syndicated financing agreement by 31 March 2017, which would represent the novation and complete substitution of the previous agreement, for an aggregate total of EUR 747.0 million earmarked for issuing guarantees (EUR 465.0) and reverse factoring (EUR 92.0 million), as well as including a revolving line of credit for EUR 190.0 million.

This new financing package, which ensures that Grupo OHL will be able to cover its working capital needs according to its business plan, combined with the debt reduction measures scheduled for 2017 will greatly bolster the company's liquidity profile.

i) EVOLUTION OF NET RECOURSE DEBT

At 31 December 2016, the Group's net recourse debt comes to EUR 748.4 million, which represents a 97.3% increase over the EUR 379.4 million recorded at 31 December 2015.

This increase is the result of the net effect of:

  • Equity investments totalling EUR 202.0 million in the areas of construction and developments.
     
  • The impact of EUR 315 million in losses recognised in legacy projects.
     
  • EUR 252 million paid, cancelled and invested (equity, margin loan, trigger, debt service, structure, etc.) by OHL Concesiones.
     
  • Net proceeds of EUR 573.0 million received on the sale of 11.425% of Abertis (EUR 472.0 million) and 28.0% of Metro Ligero Oeste (EUR 101.0 million).
     
  • Other activities and sundry items totalling EUR 173.0 million.

ii) SHARE BUYBACK PLAN

On 2 August, a share buyback plan was launched on up to 3% of the share capital or EUR 45 million. On 31 December 2016, a total of 8,202,962 shares were purchased, representing 2.75% of the share capital, for a sum of EUR 22.5 million. The programme ended on 2 February, entailing the purchase of a total of 8,849,190 shares, representing 2.96% of the share capital, for a sum of EUR 24.7 million.

iii) VALUE OF OHL MEXICO

Finally, mention must be made of the substantial value represented by OHL Mexico, with listed shares and liquid assets that have a market value of approximately EUR 922.3 million at year-end, or EUR 522.3 million net of its related debt, representing 1.2x the sum of net recourse debt at year-end in gross terms and 0.7x not including the debt backed by OHL Mexico shares (EUR 400 million of the exchangeable bond).

KEY FINANCIAL INDICATORS OF GRUPO OHL (EUR million)

KEY FINANCIAL INDICATORS OF GRUPO OHL (EUR million)

Grupo OHL Worldwide December 2016

Grupo OHL Worldwide December 2016

CONSOLIDATED BALANCE SHEET (31 december 2016)

CONSOLIDATED BALANCE SHEET (31 december 2016)

CONSOLIDATED INCOME STATEMENT (EUR million)

CONSOLIDATED INCOME STATEMENT (EUR million)

STOCK MARKET INFORMATION

At 31 December 2016, the share capital amounted to EUR 179,255,398.80 and is represented by 298,758,998 ordinary shares with a nominal value of EUR 0.60 each, all in the same class and series, listed at EUR 3.30 and with a PER on net attributable profit of -2.3 x in 2016.

In 2016, a total of 850,290,271 shares (284.6% of the total shares admitted for trading) were traded on the stock market, with a daily average of 3,308,522 securities, while the market value fell by 37.5% over the year.

OHL had a total of 11,961,801 shares of treasury stock at the end of the year, equal to 4.004% of the company's current capital. This figure includes the purchase of 3,453,908 shares from the stock option plan for executives, which ended on 21 March 2016. This stock option plan for executives was settled without any income for any of the executives, due to the negative performance of the share.

Corporate Social Responsibility

The aim of the 2015-2020 CSR Strategic Plan is to provide guidelines for fulfilling CSR commitments and joining forces to make CSR an essential element that is interwoven and integrated into all the Group's activities.

Human capital

The success and evolution of Grupo OHL are based on its human capital. People are its greatest assets and, for this reason, it recognises and rewards the efforts of its employees by promoting and developing talent through ongoing training.

Grupo OHL's team at 31 December 2016 was made up of a total of 24,251 people. 94.9% of them work in OHL's home markets.

Diversity and equal opportunities

Grupo OHL states its absolute rejection of and zero tolerance for any conduct or action that could be identified as sexual, moral or gender-based harassment of any kind and undertakes to collaborate actively, effectively and firmly to prevent, detect, correct and penalise any such conduct.

Training

From the very start, Grupo OHL has considered training and the ensuing generation of knowledge capital as essential aspects of its business and, for this purpose, it needs its human capital to have the very best qualification, at the same time as it strengthens and develops its capacities.

Occupational health and safety

The physical and psychological health and safety of its employees and subcontractors are a priority concern for OHL. This is outlined in the Group's Occupational Risk Prevention, Environmental and Quality Policy, which was revised in early 2017, and in the various health and safety, environmental and quality policies of each of the divisions.

The goal is to achieve zero workplace accidents, and this is only possible on the basis of a strong culture of prevention driven by senior management, and by modifying behaviour by integrating safety into the production process.

The Group has opted for the implementation of occupational risk prevention (ORP) management systems in accordance with the guidelines of the OHSAS 18001 Standard. The development of the Integrated Management System (IMS) has entailed the integration of the quality, environmental and ORP management systems.

As a support to the IMS, the body of regulations is constantly being developed and updated. In 2016, various guides and procedures were added to this regulatory documentation, such as the maternity protection guide, the work-at-height guide, the health monitoring procedure and the noise exposure measurement and assessment guide.

Intellectual capital: culture of innovation

Grupo OHL is very much aware of the importance of research, development and innovation for long-term value creation and incorporates this dimension into all of its business activities. R&D&i is one of the cornerstones of its strategy and is reflected in the investment efforts made in this field, with nearly 300 innovation projects launched in the 2000-2016 period.

Strategy and management

Grupo OHL focuses its innovation strategy on both technology and on management, prompting it to rank among the leading companies in the concession and construction sectors for its excellent performance in R&D&i.

In 2016, the Corporate Innovation and Sustainability Department prepared and approved the Group's new Innovation Strategic Plan 2016-2020, aligned with the Group's Horizon 2020 strategy and applicable to the eight home markets in which it focuses its activities.

The Plan reinforces OHL's commitment to R&D&i for generating value for the business and its main objectives are as follows:

  • To offer support in meeting the targets of the Group's Strategic Plan.
     
  • To increase the recovery of innovation in all of its business activities.
     
  • To increase the generation of innovative ideas.
     
  • To foster and extend the culture of innovation to all of the Group's employees.
     
  • To internationalise R&D&i.
     
  • To become a benchmark in innovation within its sector worldwide.

To achieve these goals, actions will be taken in five dimensions: policy, processes, products, people and partners.

To further strengthen the Group's commitment to management excellence, the six companies subject to the UNE 166.002 Standard renewed their certification in 2016: Obrascón Huarte Lain, OHL Concesiones, OHL Industrial, Asfaltos y Construcciones Elsan, Sociedad Anónima Trabajos y Obras (SATO) and Agrupación Guinovart Obras y Servicios Hispania (G&O).

R&D INVESMENT 2000-2016 vs. TURNOVER (EUR million)

Leadership of OHL in the international R&D&i ranking

OHL is one of the one thousand European companies that invest the most in R&D, according to data published in the EU Industrial R&D Investment Scoreboard 2016. This report is published annually by the European Commission (EC) and classifies the top 2,500 companies in the world in terms of their investment in research and development, drawn from data on companies belonging to a range of sectors and headquartered in the European Union (EU), the United States, Japan and China, among others.

According to the EU Industrial R&D Investment Scoreboard 2016, Grupo OHL is placed twelfth in the ranking of European construction companies (R&D Ranking of the top 1000 EU companies by industrial sector) and seventeenth among Spanish companies across all sectors (R&D Ranking of the top 1000 EU companies). Furthermore, the Group, along with another 16 Spanish firms, is included on the list of the top 2,500 companies in the world in terms of their investment in R&D.

INNOVATIVE CAPACITY OF GRUPOS OHL'S DIVISIONS

Concessions

For the Concessions Division, intelligent management of mobility, improvement in the provision of its services and the company's capacity to innovate and anticipate market demand are critical factors.

The main initiatives addressed in 2016 by the division's operating areas and companies are:

  • Launch of an innovative line of projects designed to enhance mobility management in urban settings, leading to environmental benefits and greater safety for users.
     
  • Completion of the research in Spain for the bilateral Spain-Mexico SMARTSIT project. The main objective of the project, co-funded by CDTI (Spain) and Concyt (Mexico) under the IBEROEKA seal, was to develop a sensing solution based on the magnetic characteristics of vehicles in order to optimise automation of traffic management on motorways.
     
  • Tráfico y Transporte Sistemas (TTS), a technology subsidiary of the Concessions Division, is growing and has become consolidated as an innovative company that offers state-of-the-art technological solutions in Intelligent Transportation Systems (ITS) through new products and services in cutting-edge toll systems offering an integrated solution in addition to the latest collection mechanisms (Commercial and Operational BackOffice), and by providing an advanced Business Intelligence system to improve the management of concession business information.

Construction

The main goal of the innovation activities carried out by the Construction Division is to equip its projects with the most advanced technology in order to continue being one of the most efficient and innovative companies, to be a benchmark in technology for its clients and to generate a competitive edge. The following stand out as key aspects:

  • Twenty-two R&D&i projects in progress in 2016, with the collaboration of 40 universities and technological centres (16 in Spain and 24 abroad, belonging to 12 European countries) and more than 50 companies in 10 different countries, either as subcontractors or as partners in R&D consortiums.
     
  • The culture of innovation is becoming further consolidated at the company. Thus, in 2016, innovative ideas have been taken up from proposals by more than 40 employees of the division in 12 countries on four continents with active projects.
     
  • Three new patent applications filed in 2016, which are added to the current portfolio owned by the Spanish Construction subsidiaries. At 31 December, they are divided into 11 families of patents, extending to a total of 32 territories, in addition to the exclusive licence on the Cubipod patent by the Polytechnic University of Valencia, also extended internationally.
     
  • In 2016, the subsidiary SATO was authorised as the company for operation of technologies developed in-house, as a new line of business for the division. The first product to be marketed was the Cubipod (www.cubipod.com).

Industrial

R&D&i goes hand in hand with the Industrial Division business. Its commitment to cutting edge technology and the generation of innovations in products and processes has secured it a competitive position in the demanding business sector in which it operates. The following stand out as major milestones in 2016:

  • Receipt of European aid for execution of the In-Power project, aimed at the development of new materials and components for improving the efficiency of solar thermal technology. The project also seeks to reduce the cost of energy generation (Levelised Cost Of Energy) to below 10 €-cents/Kwh.
     
  • Development of an advanced fire protection system for electric actuator in petrochemical plant process valves. This is a ground-breaking design for achieving compliance with all of the technical requirements established by insurance companies (UL-1709 Hydrocarbon Pool Fire Standard), with a protection capacity under extreme fire and temperature conditions (1,150 oC/2,102 oF) of up to 45 minutes.

Culture of innovation

The implementation of a common model for all of the areas of the company and the promotion of the culture of innovation among its employees stand out as the basic principles of action of Grupo OHL in terms of R&D&i. To this end, several initiatives have been launched to help facilitate the generation of innovative ideas and their application in day-to-day tasks:

Creativity

  • Forum of Innovative Ideas and the OHL Award to the Most Innovative Idea (Corporate R&D&i Service). Call for submissions and decision on the fifth edition.
     
  • OHL Construcción LIDERA! Programme. Call for submissions and decision on the fourth edition.
     
  • OHL Concesiones INNOVA Programme. Call for submissions made and decision announced in January 2017.
     
  • Technological Oversight and Competitive Intelligence Service (Corporate R&D&i Service). Offers the possibility of generating technological or market reports at the request of the production lines.

Logo OHL Concesiones

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

Throughout 2016, a successful asset rotation policy was applied in the division, which included, among other transactions, the sale of the interests in Abertis, the sale of 24% of the interests in Conmex (Mexico) and of 28% of Metro Ligero Oeste, in Madrid. These rotations are integrated into the concessions business and part of the cash flows obtained will be reinvested in new projects, particularly in the area of Latin America and the United States.

Main figures

The division's figures have been strongly affected by currency trends, mainly the Mexican peso, which has experienced a 17.1% devaluation. Sales and EBITDA in comparable terms (that is, without exchange rate fluctuations and not including the effect of the change in the consolidation method for Metro Ligero Oeste) show 31.6% and 19.3% growth, respectively.

The trends in sales and EBITDA at OHL Concesiones compared to the previous financial year is shown in the following table:

Performance in sales and EBITDA. 2016/2015

Comparable sales and EBITDA from tolls (not including the effect of exchange rates and changes in scope) grew by 11.7% and 20.5%, respectively.

The main development that influenced the evolution of sales and EBITDA was the fact that revenues from tolls remained stable in euros but grew 11.7% at constant exchange rates compared to the same period in the previous year.

The trend in traffic flows and concession toll rates is shown in the table below:

OHL Concesiones manages a direct backlog of 18 main concessions that include: 14 toll road concessions (with a total of 1,070 kilometres), one airport and three ports.

The long-term backlog at 31 December 2016 comes to a total of EUR 75,449.4 million.

MARKET AND STRATEGY

Consolidation of the operator profile and future growth

The natural evolution of the concessions business in recent years, together with the award of new concessions projects and the upgrade of infrastructures in operation in Peru and Chile, the completion of construction and start of the operations of the Libramiento Elevado de Puebla Bypass (Mexico) and the opening to traffic of the entire length of the conversion into a dual carriageway of the Autopista del Norte (Peru), have bolstered the operator profile of Concesiones.

At the end of the year, 80% of the concessions of OHL investees were operational and providing service to the users of their road, port, railway and airport facilities, with an unwavering dedication to operational improvement that involves the introduction of new technology, innovation and ongoing improvement of the processes of end-customer service.

To guarantee the company's future growth, strong efforts have been made to study new business opportunities. Likewise, excellent operating results have been achieved, particularly in the concessions in Mexico, which presented growth figures for tolls in the local currency of 14.7% for revenues and 14.8% for EBITDA. Self-financing of the division was also secured through a number of financial transactions and rebalancing of the contracts, while development of inhouse technology for operation and control was bolstered.

An extensive backlog of projects under study in the principal markets of interest was maintained in 2016, with a total forecast investment of approximately EUR 10,800 million. Concesiones has bolstered the financial structure of the concessions group by means of:

  • A sharp reduction of corporate debt by 50.3%.
     
  • An extension of the scope (in terms of time, toll rates or number of kilometres) for several of the current contracts.
     
  • The reinforcing of the business of the Mexican electronic toll collection operator, TeleVía, and of its technology subsidiary, Tráfico y Transporte Sistemas (TTS), by expanding their range of services and intelligent solutions for management of toll collections, mobility and infrastructure operation.

The good performance of traffic flows of the concessions in operation in Spain is also worth noting: +4% on average for toll roads and an average increase of 14.5% in ports.

All these developments consolidate the commitment to good operational performance. They also made it possible to increase the average length of the agreements to 29 years while at the same time strengthening the business model adopted with a long-term outlook and with the use of investments featuring a low risk profile, scant volatility and high liquidity.

TERM OF CONCESSION CONTRACTS AND CURRENT STATE OF INVESTEE INFRASTRUCTURES

STRATEGY FOR STRENGTHENING PROJECT MANAGEMENT

Technology and service

The transportation infrastructure sector has continued to undergo the substantial process of transformation that began several years ago, which has a significant impact on concession companies in numerous aspects of their business activity.

The integration of physical and digital infrastructures, the incorporation of new technologies and information systems that make it possible to improve operating outcomes, risk control and mobility management, together with the prospects for development in the automotive industry and the need to encourage sustainable cities with resilient infrastructures, all comprise the critical components of this transformation process.

The capacity of a company to innovate and anticipate market demand is, now more than ever, a critical factor for its survival.

Thus, sensing systems, communication between vehicles and the infrastructure, collaborative frameworks among users, operators and public authorities or the capacity to integrate, save and process data on a large scale, as well as the prospect of improvements in mobility management with the introduction of driverless vehicles and flying vehicles, are all significant factors in the challenges of the immediate future in the medium term.

Within this context of constant change, Grupo OHL's Concessions Division, in addition to leading and continuing to drive important innovation projects on an international scale linked to the development of intelligent highways and cooperative systems, has continued to strengthen its technology platform and the services offered by its subsidiary TTS with initiatives that improve business intelligence and new information systems for the management of infrastructure and tolls.

The combined offer of its experience as a developer and operator, the development of in-house technology and the capacity to contribute capital and take on risk management afford the value proposal of the concession group a differential nature for the development of its own projects as well as those of third parties through its range of outsourcing services.

Great efforts have been made in 2016 by the concession companies in Spain, Chile, Colombia and Peru to improve the control and management of their communication channels.

Diverse management alternatives are being studied for the Mexican companies with a view to implementation starting in 2017.

Control and management of concessionaire communication channels

 

Sustainable development

The challenges posed by the transformation of the sector also evolve hand in hand with the need for sustainable business management, committed to the development and well-being of society. Likewise, the global challenges affecting the world today make it necessary to be prepared to face the demands that arise, minimise vulnerability and contribute to sustainable development.

Facing these challenges entails integrating the sustainability strategy into the entire production chain, into the business solutions that the concessions group creates from a perspective of long-term value generation. This management culture was fortified in 2016, endeavouring to take another step forward, catering to the needs of all the stakeholders in the company's success.

In this scenario of change, the regulatory bodies of the concession agreements and of the listed companies, as well as the investment funds and financial institutions, require the companies in the sector to become engaged as part of the future solutions, fostering performance that is in line with the best practices in corporate governance and a commitment to environmentally and socially responsible management.

With the aim of continuing to grow in harmony with criteria of responsibility and sustainability and to improve the increasing demand for information and transparency linked to principles of responsible investing, the Concessions Division initiated a process of adapting its Corporate Social Responsibility policy, aligning the goals of Grupo OHL's 2015-2020 CSR Strategic Plan and the seven basic areas of ISO Standard 26000 under these three guiding principles: environment, social commitment and governance.

As part of this process, new projects have been planned that include positive social and environmental aspects that are relevant to both the provision of services and to the Latin American geographical scope, the main destination of the division's investments.

In the social sphere, the “Women and Employment in Latin America” project was launched as an initiative that gives focus and scale to social investment. The project seeks to honour women and support their efforts as financial and moral pillars for the family, for their role in helping to reduce poverty on a regional level and for the part they play as inestimable redistributors of income to the benefit of the well-being of the family. In 2016, the implementation process for the project began in Mexico and it is scheduled to be gradually extended to the rest of the countries where business takes place starting in 2017.

In the environmental context, the commitment to the fight against climate change and protection of the world's natural capital was supported through initiatives designed to improve energy efficiency, preserve biodiversity and minimise greenhouse gas emissions. Likewise, the first steps were taken in 2016 for the integration of a comprehensive environmental programme that addresses one of the main problems affecting the markets in which the Group operates: the fight against environmental pollution in large cities.

Projects under study

In line with the strategy adopted by the company, efforts have continued for developing the backlog of projects under study in North America and the Pacific Alliance countries, as well as certain specific projects in Brazil.

Prequalification in the project for the development of the automated people mover inside the Los Angeles (United States) airport stands out among the results obtained. The investment planned by the LAX Connecting Alliance consortium, in the OHL Concesiones holds an interest, amounts to EUR 2,250 million and calls for the design, construction, financing, operation and maintenance of the automated passenger transportation system, with a capacity for moving 5,600 travellers per hour in each direction.

The procedures related to the private initiative developed by the company in Peru for the expansion and upgrade of the Ica-Quilca Stretch of the Panamericana Sur motorway have advanced at a steady pace. The project obtained the Declaration of Priority and Relevance and, in accordance with the Peruvian administrative process, is expected to receive the Declaration of Interest by the Public Administration during the first half of 2017.

Relevant activities in 2016

NEW CONCESSIONS ANd EXTENSION OF CONCESSION AGREEmENTS

In August 2016, the award of the Camino Nogales-Puchuncaví project was formalised through its publication in the Official Journal of the Republic of Chile. The concession company began operation of the current 27-kilometre two-way road in September and has undertaken the infrastructure modernisation project.

The new motorway will be 43 kilometres in length, with plans for conversion of the infrastructure into a dual carriageway, construction of an additional 16 kilometres for the Puchuncaví bypass and the Ventanas relief road, together with significant improvements in safety, in infrastructure for cyclists and public transport, in the lighting systems and in the impact on the landscape. The concession period for this new project is up to 38 years and the investment to be made comes to a total of USD 210 million.

In January 2016, the Metropolitan Council of Lima announced the award of the private initiative promoted by OHL Concesiones in Peru, known as Conexión La Molina-Angamos. This 12 kilometre long urban motorway will integrate the main service and business areas of the Peruvian capital, improving mobility in the metropolitan area of Lima, which has a population of 8.5 inhabitants. At the end of the year, the concession agreement was in the negotiation stage.

Significant developments in 2016 in Mexico and Peru included two relevant amendments to the concession agreements with the respective concession-granting authorities.

In Mexico, the concession company Grupo Autopistas Nacionales obtained recognition of the additional investments made in the Amozoc-Perote motorway and signed the amending agreement that extends the concession period by another 30 years and authorises the company to gradually increase toll rates over the next six years. In this context, rates were increased by 6% in July. Autopista Urbana Norte, in Mexico City, obtained a new toll rate schedule in recognition of the additional investments required in the project. Rates will be progressively increased throughout 2017.

Moreover, in Peru, Autopista del Norte signed the addendum for the construction of the Vía de Evitamiento de Chimbote bypass, which extends Road Network 4 by 40 kilometres and increases the concession period by an additional eight years. With an investment of 148 million dollars (approximately EUR 134.4 million), the new bypass will provide an efficient mobility solution to the districts of Nuevo Chimbote, Chimbote, Santa, Guadalupito and Campo Nuevo Alto.

INFRASTRUCTURES IN THE INVESTMENT STAGE AND START OF OPERATIONS

The Chilean concession companies Puente Industrial and Terminal Cerros de Valparaíso have received requests from the concession granting authorities for the modification of the project and expansion of the environmental impact studies, respectively, which seek to improve the projects and raise the standards of customer service. As a result of these new conditions, the estimated start date for execution of the work is now set for 2018.

Autopista Vespucio Oriente delivered Addendum 1 of the Environmental Impact Study and the authorities will issue their decision as regards the changes in the reference project requested by other government bodies. Environmental approval is expected to be received in the third quarter of 2017 and construction of the infrastructure is scheduled to begin in the last quarter of this year.

With respect to the new Nogales-Puchuncaví road concession in the region of Valparaiso, operation of the infrastructure began in September 2016 with good operating performance and a 5% increase in accrued traffic flows in the last four months of the year as compared with the figures for the same period of the previous year (2015).

In Colombia, Autopista Río Magdalena started construction work in September on the Puerto Berrío relief road (Functional Unit 4 of the project), having previously performed the work required in terms of rescuing plant and animal life, forest re-use and archaeological prospecting.

Construction work on the Atizapán-Atlacomulco motorway commenced in Mexico, with more than 95% of the right-of-way process completed. The executive project, 95% of which has also been delivered, was 50% approved and construction activities will end in 2018, according to the agreed deadline.

The construction process for the Libramiento Elevado de Puebla bypass was completed, operations began on 18 October 2016 and excellent performance has been seen, exceeding the average traffic flow for 2016 by 35% in December 2016. The road, with a total length of 15.30 kilometres and four lanes in each direction, has six intermediate branches, three for acces and three exits, and a mixed toll collection system that includes electronic toll lanes and manual toll collection.

The new bypass with help lower carbon dioxide emissions into the atmosphere by more than 424 kg/h, reduce traffic by 70% and considerably increase the average speed of traffic. Moreover, construction of the new toll road has created 1,800 direct and 5,700 indirect jobs.

Logo OHL Contruccion

OHL Construcción, in turn, has a better outlook when it comes to future business opportunities in its home markets, particularly in the United States, which is becoming consolidated as the main cornerstone for the division's future growth, and in Chile, Colombia, Mexico and Peru.

In updating its Strategic Plan, the relationship between profitability and risk was given priority over the goal of growth in completed work, rendering the division more selective in its contracts for new projects. The estimated targets in the income statements for the legacy projects in the Construction Division were recalculated during 2016 and the total forecast losses were revised. The agreements reached in relation to the largest legacy projects -Marmaray in Turkey and CHUM in Canada- are worth noting here, thus enabling their completion under conditions that are acceptable to OHL. Furthermore, with the aim of improving its cash position and debt profile, the Construction Division has established a series of measures, such as replacement of a good part of its management team, implementation of enhancement processes focusing on risk control and the launch of new human resources policies.

In 2017 OHL Construcción will consolidate the Group's industrial business in its structure, seeking marketing and operational synergies in the area of Mining & Cement.

Main figures. 2016/2015

The Construction Division accounted for 71.8% of the Group's total revenues, showing a 14.6% decrease compared to the production recorded in 2015.

EBITDA was negatively affected by:

  • The impact of recalculating the targets for the legacy projects (contracts formalised prior to June 2014), amounting to EUR 476.2 million.
     
  • The increased weight of small-/medium-size projects in the construction work mix in developed economies, with margins that are usually slightly lower.
     
  • The delay in starting construction work on the new concessions awarded in Mexico, Chile and Colombia.

It must be noted that, at 31 December 2016, the short-term backlog, amounting to EUR 5,880.9 million, represents 25.5 months of sales, affording great visibility to the future growth of this activity.

The backlog has a balanced profile in terms of both geography and project size, with 88.1% coming from the home markets (notably, 39.7% from Pacific Alliance countries and 28.8% from the United States and Canada) and just 23.0% of the projects exceed EUR 300.0 million in size, 70.2% of which correspond to contracts for the Group's own concessions.

On 3 February 2017, Grupo OHL was recently awarded a contract for the design and construction of the I-405 highway in California through its subsidiary OHL USA. With a budget of around EUR 1,118 million, this represents the most important project in the company's history in the United States. The pro-forma inclusion of this award in the backlog at year-end 2016 would prompt it to reach a total figure of EUR 6,552.0 million, representing 28.4 months of sales and achieving a book to build ratio of 1.1x. Due to its relevance, this project is included in the backlog, resulting in a pro-forma backlog detailed as follows, by geographic area:

Over 88% of the Construction portfolio is generated by home markets

MARKET AND STRATEGY

Main markets

OHL Construcción is an international benchmark in the execution of civil engineering infrastructure and unique building construction.

In accordance with the guidelines set out in the Group's Strategic Plan, the construction division focuses its business activity on eight reference markets Canada, the United States, Mexico, Colombia, Peru, Chile, Spain and Central Europe, which account for 89% of the division's backlog.

In addition, the division seeks to expand its business to new markets that offer legal certainty and sufficient guarantees for eventually becoming home markets. In this sense, it keeps its sights set on the Nordic countries (Norway, Sweden and Denmark).

It also maintains its interest in undertaking projects on a one-off basis, involving high technical quality linked to niches of specialisation in which it displays a strong competitive advantage and in markets such as Ireland, the United Kingdom, Eastern Europe and Saudi Arabia.

Strategy for strengthening project management

In 2016, OHL Construcción made significant progrees in the reinforcement of its capabilities and resources to bolster project performance and risk control within the division.

Strengthening of risk management in the division

The creation of the Construction Risks Department, which reports directly to the general manager of the division, is the most outstanding example of the organisation's commitment in this regard. It is tasked with promoting, coordinating and implementing new risk management initiatives, both internal initiatives and those stemming from Grupo OHL's policies, in addition to improving and strengthening those already in place.

A highlight of these initiatives is the application of the third-party due diligence procedure within the division, as well as the identification of red flags and the assessment of the country-risk impact on the projects.

Bolstering of the Contractual Affairs Management Department

The mission of the Contractual Affairs Management Department is to ensure compliance with the contractual obligations and rights established by OHL with third parties, starting from the business development phase, moving through the performance phase and up to project completion.

Contractual management has been enhanced in the project performance phase in particular, with the inclusion of specialised teams that work in coordination with and supported by resources from the central offices.

Integration of processes and knowledge management

An initiative was developed in 2016 to create a new integrated model for management, monitoring and control of the projects throughout their entire life cycle. This model constitutes a common monitoring and control framework, will minimise the learning curve for new employees with responsibilities in both the bidding phase in and the performance of projects, and will enable the division's management to have access in real time to the status of all the opportunities and projects.

These initiatives include the design of a Learned Lessons system that will enrich risk management, facilitate access to the best construction practices and help make new tenders more effective and competitive.

Digitalisation of management

OHL Construcción is introducing an internal digitalisation process in which the progressive application of the methodology known as BIM (Building Information Modelling) is included among the main initiatives undertaken in 2016.

The application of BIM over the past year in certain projects has made it possible to:

  • Detect conflicts and assess design alternatives with the client in relation to the Américo Vespucio urban motorway (Chile).
     
  • Study the project upgrades on the existing structures and plan details of demolitions in the reconstruction of the SKI station on the Follo Line project (Norway).
     
  • Support the construction work planning process and interact with the various stakeholders involved in the 72nd Street Subway Station project in Manhattan (United States) and coordinate the design, make detailed measurements and model assemblies of very unique elements such as seismic isolators, in the Gustavo Fricke Hospital (Chile).

Occupational health and safety

Workers' safety and health is a non-negotiable value at OHL Construcción that is fully integrated into the production process.

In this regard, greater emphasis has been placed on the organisation of preventive awareness-raising talks given by the production line managers on safe working practices.

As a result, a milestone was reached in the division in 2016 with the organisation of a total of 27,265 training sessions lasting 20-40 minutes on average for employees and workers at subcontractors, for a total of 470,290 hours.

The following projects undertaken in 2016 in this regard can also be highlighted:

  • Creation of a prevention equipment standard per activity and type of protective equipment with the aim of progressively ensuring that each and every construction site has the same safety standards and that safety is a mark of OHL's identity.
     
  • Implementation of a programme of more than 300 safety inspection points at construction sites per activity and the nature of the site, introducing quality concepts into the world of prevention. This programme endeavours to make the integration of safety in the production process traceable and to detect where failures occur due to a lack of integration.

Talent management

Construction is one of the industrial sectors that contributes the most to job creation. In 2016, with 12,183 employees, the Construction Division accounts for 50.24% of the Group's workforce. Furthermore, through subcontracting, 13,586 jobs were created.

OHL Construcción is committed to the promotion and recruitment of young talent through its Young Talent programme, which seeks to help young people join the working world and promote their career development.

Relevant activities 2016

NORTH AMERICA

The performance and positive outlook for the North American market, where OHL has successfully integrated construction operations in the new OHL North America (OHL NA) business unit, are of particular note.

In 2016, this area became consolidated as the main market for OHL Construcción, accounting for 48% of turnover and 44% of new contracts.

OHL NA has bolstered its presence in the key markets of the United States (California, Texas, Florida, New York and Illinois), where populations and investments in infrastructure are the greatest and important programmes are in place at the federal, state and local levels.

OHL NA is also present in New Jersey, Connecticut, Virginia, Massachusetts and Washington DC.

Thanks to the important flow of future projects identified in its areas of action and its good positioning, the market share is expected to continue to grow.

In California, the leading state in terms of backlog in the United States, where OHL NA is currently developing 13 projects, highlights in 2016 include the award of the project for restoration of Owens Lake, amounting to EUR 195.7 million, and the contract for the design and construction of the upgrade project on 26 kilometres of the I-405 highway, for EUR 1,118 million, which was formalised in January 2017, with OHL holding a 60% interest.

In addition, OHL NA has submitted a bid for the Automated People Mover project at the Los Angeles airport, a concession initiative in which it is prequalified, along with OHL Concesiones.

In New York, OHL has completed the purchase of 100% of the capital of its subsidiary Judlau Contracting Inc., through which it continues to expand in this area, with awards totalling more than EUR 260 million in 2016.

As a significant milestone in the year, Judlau completed the fit-out of the 72nd Street Subway Station and the renovation of the 63rd Street Station. Both belong to the new Second Avenue subway line in New York, which will provide service to two hundred thousand passengers a day.

The strategy of forming alliances with top American companies has made it possible to secure prequalification in the Green Line Extension project in Massachusetts, with an estimated budget of more than USD 1,000.0 million, which is expected to be tendered in 2017.

The volume of awards in other states has also exceeded expectations. Outstanding examples include the award of the contract for the expansion of almost 18 kilometres of Interstate Highway 35 East, for EUR 116 million, in Texas, the I-90 (Mannheim-Oakton) project in Chicago, for EUR 53 million and more than 140 million in contracts in Florida.

In Canada, OHL is progressing with the execution of its two major infrastructure projects: the extension of the Toronto subway and the Montreal University Hospital (CHUM).

LATIN AMERICA

OHL remains firm in its commitment to the Latin American market and, thanks to the knowledge and experience gained in this area, is determined to further develop its field of action, placing special emphasis on the home markets.

In Chile, where OHL has its largest project backlog, surpassed only by that of the United States, the following awards can be highlighted:

  • Curicó Hospital, with a budget of EUR 229.9 million.
     
  • Nogales-Puchuncaví, consisting of the conversion of the current concession (27 kilometres) into a dual carriageway, for a total of EUR 115.1 million.
     
  • Raising the Talabre dam, for a total of EUR 145.2 million, in which OHL has a 49% interest.

An important aspect in the development of projects such as the Américo Vespucio Oriente motorway, Biobío industrial bridge and the Port of Valparaíso is the collaboration with the Concessions Division.

Work continued throughout 2016 on important projects such as the Gustavo Fricke Hospital, several interventions on lines 3 and 6 of the Santiago Metro and on Route 60 CH.

The wide range of types of projects being undertaken by OHL Construcción in the Chilean market is noteworthy, spanning the building construction sector, transportation infrastructure and urban thoroughfares, as well as port and mining projects.

In Peru, faithful to its strategy of sector diversification in the home markets, OHL has succeeded in extending its market to the field of building construction with the award of the National Museum of Archaeology in Lurín, Lima, for a total of EUR 90.5 million, in which OHL holds a 50% interest.

Moreover, the company maintains its strong interest in mining, continuing its work for several of the most important clients in the country in 2016, with the award of contracts worth more than EUR 90 million.

Within the framework of its collaboration with OHL Concesiones, new initiatives continue to be assessed, such as the award of the construction of Evitamiento de Chimbote bypass in 2016, as part of the work for the Road Network 4 concession, totalling EUR 117 million.

In Colombia, OHL is participating in the flagship programme, Fourth Generation Concessions (4G) with the Río Magdalena motorway 2 awarded to OHL Concesiones. Another highlight is the entry of the Group into the country's booming airport sector through the award of the project for runway expansion work and work on the taxiways at the Cali airport, for a total of EUR 14 million.

The completion of the Medellín River Parks project construction work in December, one of the most emblematic projects in the city, is also relevant. The project consisted mainly of underground construction of 470 metres of the regional motorway that runs along the river, increasing the number of lanes from four to seven, and construction of a park on the surface above the underground construction.

This country is the Group's most recent home market and for this reason OHL Colombia continues to explore the possibilities of establishing relations with new clients.

Finally, in Mexico, OHL continues its expansion in the market and currently maintains a strong backlog of projects in progress.

Its participation in the development of the most important railway infrastructures in the country stands out and includes the execution of the Zinacantepec stretch of the Mexico-Toluca Inter-city Train Integrated Passenger Carriage Project and the construction of viaduct 2 between Plaza Bandera and Central Camionera, as well as six elevated stations in the expansion of the light rail system in the metropolitan area of Guadalajara.

Other important sectors of activity include urban thoroughfares and highways, among which the Libramiento de Puebla bypass, consisting of a 6.8-kilometre viaduct, and 77 kilometres of the Atizapán-Atlacomulco motorway are excellent examples.

EUROPE

In Spain, the number of public calls for tenders increased slightly in 2016 compared to the previous year, with the regional governments and local administrations being responsible for the most significant increases.

OHL maintains its firm position in the domestic market, where it ranks as the second largest construction company in terms of contracts awarded, worth more than EUR 3 million.

The most important milestones reached include the award of the Central Wharf in the Port of Bilbao, for a total of EUR 79 million, in which OHL has an 80% interest, and the construction of the GMP real estate group's offices in Madrid and of offices and a hotel in Distrito 22@ Barcelona, known as the innovation district.

Work continues on emblematic projects such as Centro Canalejas Madrid and Centro Botín in Santander. In the field of transportation infrastructure, construction is ongoing on the Espiño (Orense) and Zumárraga (Vizcaya) tunnels, the Huelva railway station and the port of Granadilla (Canary Islands).

During the past year, construction of the five-star hotel belonging to the Hard Rock chain in Tenerife was successfully completed.

Grupo OHL has maintained its strategy in Central Europe through its subsidiary OHL ŽS, the main aim of which is to consolidate its home market in the Czech Republic and Slovakia, as well as performing oneoff projects in other countries within is area of influence.

In 2016, in addition to the company's traditional segments of railways, roads and building construction, other segments in which OHL ŽS has had a successful track record in recent years have also been bolstered, such as water treatment and purification projects, industrial and energy projects.

In terms of new awards, various projects related to railway infrastructure, such as the optimisation of the Beroun-Králuº v Dvuº r railway line and the reconstruction of the passenger station in Pilsen, can be highlighted.

Moreover, construction work on the Pavlov archaeological park and the modernisation of the Tabor-Sudomerice u Tabora railway were completed in 2016.

The execution of the main thoroughfare in northern Slovakia, the Hubová-Ivachnová stretch of motorway D1, is progressing, consisting of a 15-kilometre stretch and entailing construction of the 2-kilometre-long Cebrat tunnel and 21 other structures, including bridges and viaducts.

In the Nordic countries, OHL was awarded its first project in Norway in 2015. This project, known as EPC Ski and sponsored by the National Rail Infrastructure Administration (Bane NOR, formerly Jernbaneverket), belongs to the Follo Line high speed railway plan, the largest transportation infrastructure project built in the country to date.

As is the case in Norway, Grupo OHL continues its marketing activity in Denmark and Sweden, where there is a strong commitment to upgrading transportation infrastructure.

In Ireland, the Group is awaiting the final award of the National Forensic Mental Health Service Hospital, while in the United Kingdom, progress is being made in the cooperation with OHL Desarrollos in the Old War Office project in London.

Finally, in Turkey, work continues on the CR3 Marmaray project, one of the largest transport infrastructure projects in Istanbul, which will connect Halkali, in Europe, with Gebze in Asia.

MIDDLE EAST AND AFRICA

OHL continues moving forward on schedule with two of its most relevant projects worldwide.

In the Mecca-Medina high speed railway project in Saudi Arabia, OHL has substantially finished laying the tracks and completed 90% of the electrification work, thus enabling trial runs on the stretch built by the Group to start.

In turn, a significant portion of the Jamal Abdul Nasser urban viaduct in Kuwait was opened to traffic, in accordance with the timeline, set for final delivery in 2018.

Logo OHL Industrial

Industrial Division activities earned a total of EUR 243.6 million in revenue, representing a 30.8% decrease compared to the figure registered for the same period in the previous year. This decrease comes primarily as a result of:

  • The completion of projects in progress.
     
  • The temporary drop in the pace of execution of certain projects, mainly in Mexico.
     
  • The negative effect of exchange rates (primarily the Mexican peso), which accounts for 3.0% of this change.

Being consolidated under IFRS according to the equity method, the figures above do not include the division's 50% stake in the joint venture for the construction of the Empalme I combined cycle plant in Mexico for the CFE (Federal Electricity Commission), awarded in April 2015. If this stake were consolidated by proportionate consolidation, the revenue and backlog figures for this period would increase by EUR +118.5 and +52.9 million, which would prompt a -9.9% change in revenue and +24.8% in backlog compared to the previous year.

  • The figures for EBITDA are negative, being affected by the foregoing as well as by:
     
  • The recalculation of targets for project completion indicated above, with a negative figure of approximately EUR 44.0 million.
     
  • Overhead costs that are necessary in order to take on new projects but are not being absorbed by the division yet.

At 31 December 2016, OHL Industrial's orders portfolio came to EUR 437.3 million, equal to 21.5 months of sales, including the recent award for the construction of a cement manufacturing plant in Colombia, for EUR 218.4 million.

Market and strategy

Grupo OHL's industrial business, created in 2008, specialises in developing the engineering and construction of turnkey industrial plants, while also possessing significant know-how in manufacturing equipment for handling solids and fire protection systems.

In 2017 OHL Industrial will focus its business activity on the areas of mining and cement, renewable energy plants, fire protection systems, O&M and other services for industry, mainly in the Group's home markets.

Accordingly, two important photovoltaic plants, each with a capacity of 67 MWdc, have been awarded in Jordan in 2017. These projects include the basic and detailed engineering work, supply of equipment, materials and spare parts, as well as full construction and performance testing of the plants.

An important engineering contract has also been secured in 2017 for the engineering, manufacturing, supply and start-up supervision of mining equipment in Vietnam.

STRATEGY FOR STRENGTHENING PROJECT MANAGEMENT

From the outset, the division has been aware of the importance of designing and implementing an innovative strategy in terms of both management and of technology.

Integration of intelligent systems for project design and management

In order to handle major international contracts that ensure partners and customers reliable services, intelligent systems for project design and management have been integrated throughout the division, using the most innovative tools available in the fields of quality control, occupational health and safety, and deadline, cost and risk management.

Coinciding with the implementation of a new Enterprise Resource Planning system (SAP) in the division, all the production IT systems have been integrated into a single platform, the electronic design systems have been connected to the Smart Plan Materials integrated supply system and all the information is saved through a corporate document management procedure. Furthermore, OHL Industrial has a comprehensive production system that combines the marketing phase, intelligent 3D models and other components under the BIM (Building Information Modelling) paradigm.

Strengthening of risk management

In 2016, OHL Industrial defined a single risk management model for all its business lines and geographic areas in order to ensure uniformity and comparability in risk analyses, spanning the entire project life cycle in an integrated manner.

To implement the Risk Management System, the division has developed the relevant processes and procedures, integrating them into the other processes. The entire Risk Management System is supported by a technology platform that ensures the integrity and traceability of the data, and allows for data analysis through sophisticated simulations. This results in the generation of risk reports that show the red flags and probability curves of the potential impact on the cost and likely date of completion, enabling the division to establish contingencies in its tenders, estimate the probable margin for projects and, above all, to identify the main mitigation measures to be taken in order to effectively manage risk.

After consolidating the new risk management methodology, the next steps for OHL Industrial will focus on improving the quality of the data, thereby rendering the results more reliable.

Occupational health and safety

In terms of occupational health and safety, the division has intensified its efforts within the framework of the coordination of business activities, HSE (Health, Safety & Environment) operational control in its projects and in the standardisation of occupational risk prevention requirements across the countries in which it operates.

Another important activity that began back in 2015 is the creation of training matrixes based on positions and tasks performed, as well as the updating and implementation of the mandatory initial HSE welcome course.

Relevant activities in 2016

2016 was a year of restraint in the investment in industrial projects related to oil, raw materials and, in particular, minerals, due to the fact that prices in the various international markets have not sufficiently recovered.

However, commodities prices began to show certain signs of recovery in the second half of 2016. Having overcome the crisis in mineral price trends, investment expectations have been reactivated and all indications are that the second half of 2017 will be significantly more active in the launch of new projects.

Some of the oil export countries have been compelled to reduce their economic dependence on oil, seeking to improve their competitiveness through diversification. In this regard, the development of power generation projects based on clean technologies is being encouraged. In 2016, numerous public, public-private and private investment projects were launched at power generation facilities, particularly in relation to renewable energies, which are becoming an increasingly relevant portion of the overall investments made due to the significant drop in prices seen for these technologies forecast to continue their growth.

In relation to fire protection systems, there has been a decline in upgrade activities in the nuclear sector in Spain in 2016, upon completion of the adaptation to the new requirements introduced following the Fukushima incident.

MAIN PROJECTS CURRENTLY IN OPERATION

In Mexico, where OHL Industrial is developing several projects, the project management services for the EPC of the Los Ramones 2 north and south gas pipeline are now finished with excellent results, which has led the client to extend the contract, prolonging services until the middle of next year. Construction of the 60 MW cogeneration plant in Coatzacoalcos is also finished.

In turn, the sulphur solidifying plants in the state of Veracruz and the 30 MW cogeneration plant at the Francisco Madero I refinery in Tamaulipas are also completed from a mechanical perspective.

Finally, in the state of Sonora, work on the 770 MW Empalme I combined cycle plant continues apace. The project is well into the construction phase, with all the main equipment already in place. It should be pointed out that three million hours of work have been successfully completed without accidents.

In Guatemala, execution of the Xacbal Delta hydropower plant continues, where all of the civil engineering work is now completed (intake, dam, tunnel and engine room) and the electro-mechanical assemblies are at a very advanced stage. This plant is scheduled to begin operation in the first quarter of 2017.

Similarly, the projects in the Middle East, relating to the oil product terminal in Jordan and the CRM (Condensation Recovery Maximization) plants in Oman, both of which are now in the construction phase after completing the engineering and procurement phases, are progressing at a steady pace. Between these two projects, more than three million hours of accident-free construction work have been achieved.

Most significant awards

The main award secured by OHL Industrial in 2016 was the Tower for Ecocementos project. This turnkey project consists in a cement plant capable of producing 3,150 t/d of clinker located in the town of Sonsón, in the department of Antioquía, Colombia. It is estimated to be capable of producing approximately 1.0 million tons of clinker and 1.4 million tons of cement per year. This contract is a milestone for the Industrial division, as its first in this country, one of the Group's main home markets, where it has been present since 2012 and where OHL Industrial has garnered its first important reference in the cement sector, thus underpinning its position in Latin America.

In Oman, a collaboration agreement has been signed with the local firm Bahwan Engineering Company for the performance of the EPC project, Closure of the Saih Rawl F9E 60 MW Open Cycle Plant, which consists in the development of the engineering, procurement of equipment and materials, monitoring of the component manufacturing process, execution of civil engineering work, electro-mechanical assembly, start-up of the plant and functional testing until provisional acceptance is signed off by the end client Petroleum Development Oman to transform the existing open cycle plant into a combined cycle facility. The plant will include a heat recovery boiler, a 60 MWe steam turbine, an associated BOP (Balance of Plant) and ancillary services, as well as a small power transfer line connected to an existing substation.

In Spain, the division was awarded the Valiente wind farm project, the first one of its kind in the country, following the energy reform.

The 20 MW facility will have ten 2.0 MW turbines and the project scope includes the engineering, procurement and construction of civil engineering work and the power transfer infrastructure, which contains a substation located within the wind farm and expansion of the existing substation.

Another highlight is the award of the project for equipment supply and installation of a crushing plant with agglomeration, to which a continuous heap leaching PAD system shall be added, for the client, Shahuindo, in Peru. This project will be supplied with Sthim, Laron and Atmos brand equipment and will take place in a district historically known as the mining region, 80 kilometres south of Cajamarca, the region's capital, and 15 kilometres west of the city of Cajabamba.

The fire protection system line of business has secured international contracts for the ASTPP terminal in Jordan, the Empalme I CC in Mexico and the Mid Town Building AY B in Gibraltar. In Spain, the maintenance systems of the passive fire protection installations at the Ascó and Vandellós nuclear plants can be highlighted.

Operation and Maintenance Contracts

Operation and Maintenance (O&M) service contracts have evolved quite well, all of them achieving high returns and production values.

Accordingly, the Industrial Division has also managed to successfully pass the annual guaranteed production test with a score of 105% at the Arenales solar thermal plant in Spain. This is a success for OHL Industrial, as this milestone marks the completion of the Arenales project, the largest undertaken by the division to date.

In turn, 2016 marked the second year of operation of the copper treatment plant in Chile for CODELCO (Corporación Nacional del Cobre), achieving maximum production values during the year. Due to its good performance, OHL Industrial was named as preferred contractor in the Ministro Hales Division by CODELCO, which granted it the HSE award for zero accidents for the second year in a row.

The 65 MW photovoltaic plant in La Jacinta, Uruguay, also successfully completed its first year of operation and maintenance without incident. The availability rates reached since that time exceed 99.5%.

Logo OHL Servicios

OHL Servicios continues to display great potential and has successfully managed to take its first steps in the international expansion of its business in Chile with facilities management services, focusing its efforts on increasing its contracts with private clients.

Additionally, the division will endeavour to enter other home markets on the American continent, mainly Mexico and the United States, where it has recently opened offices.

In Spain, the goal of OHL Servicios is to continue consolidating its commercial portfolio, meeting the highest quality and profitability standards.

Revenue in this division amounts to EUR 194.4 million and, in comparable terms (not including revenue from the subsidiary Sacova in the figures for 2015, which was sold in November 2015), shows 11.3% growth.

Business activities by the Services Division obtained an EBITDA margin of 1.3% compared to 2.5% the previous year (in comparable terms), due to the effect of stronger competition in the domestic market, which is quite mature, and affected by reduced market opportunities.

Market and strategy

In Spain, the main market in which OHL Servicios operates, the slight recovery trend that began the year before continued in 2016.

OHL Servicios has progressed in the internationalisation process established in Grupo OHL's Strategic Plan, implementing projects in Mexico and Chile and continuing its prospecting work in the United States' market, where it already has a structure in place.

The urban services transferred from the Construction division have become consolidated through new contracts in 2016, notably the Public Service Management contract under a concession arrangement for containerisation, pick-up and transport of waste in the city of Madrid Lot 2, in which the Services division is a member of a joint venture with other companies in the sector.

The sector remained on an even keel in 2016, in which a return of the public sector to the outsourcing of services was observed, together with a stable trend in the revision of contracts in force.

Turnover for the facilities cleaning sector business line increased by 1.3% in 2016. Moderate growth is expected in 2017. The division is set to continue the process of concentrating its range of services and of increasing its backlog, along with the pursuit of internationalisation in light of the increasing maturity of the domestic market.

With respect to the technical maintenance sector for buildings and facilities, a gradual improvement has been detected in the activity overall, as was already evidenced in 2016, and therefore the estimated growth for this business line is expected to be achieved.

The presence of multi-service groups specialised in the provision of ancillary services to companies and installation and assembly firms is significant. The leading companies in this field are continuing their diversification within Spain and abroad, to meet the growing demand for global offers that combine these services under a single provider and harness the opportunities that arise in terms of energy efficiency.

In care services the concentration process undertaken by the companies in the sector continues, driven by the entry of foreign investors that consider Spain an ideal market in which to offer retirement plans to European pensioners. At the domestic level, municipal and regional public retirement homes have given priority to price considerations in their calls for tenders and have reduced the number of subsidised places due to budget cuts stemming from the need to meet deficit targets.

STRATEGY FOR STRENGTHENING PROJECT MANAGEMENT

In 2016, OHL Servicios has undertaken several initiatives designed to improve the profitability of its contracts and to reduce management risks. Among these, the following deserve particular mention:

Commercial process

OHL Servicios has re-engineered its processes in the marketing area to adapt to the new demands of this competitive market. In this regard, a CRM (Customer Relationship Management) system was introduced for the planning of the sales process, preparation of tenders, tracking marketing activities and analysis of results. Since mid-2016 this system has enabled the division to be more selective in its contracting and to obtain higher technical scores in contracts.

Human Resources Management System

In the second half of 2016, the Services division implemented the Meta 4 Cloud tool for managing its human resources-the division's most important asset.

This new tool makes it possible to reduce the indirect costs of personnel management, improve efficiency and provide detailed information on the management parameters, all of which leads to an improvement in labour costs.

Implementation of the CPS

For its activities in Spain, an adapted version of the Computerised Construction Procurement System has been implemented, making it possible to enhance the control and automation of processes.

Digitalisation of information

In 2016 the FileNet system was implemented throughout the division. This is a document management system and work tool for sharing information on tenders and best practices, as well as guaranteeing confidentiality and access to the company's knowhow. In 2017, the division plans to expand the use of this tool for contract management and to implement a legal database to improve management of labour conflicts.

Strengthening of risk management

OHL Servicios has started to implement the third-party due diligence process in an effort to reduce financial, technical and reputational risks that could stem from its commercial activities. To this end, training activities were conducted, focusing on implementation of the applicable regulations and use of assessment and scope tools.

Relevant activities in 2016

INTERNATIONALISATION OF THE DIVISION

Progress was seen in 2016 in OHL Servicios' process of internationalisation of its activities in its target countries: Mexico, Chile and the United States, following the guidelines in the OHL Strategic Plan.

Its strategy of international development is focused on the home markets where the Group's main divisions -Construction and Concessions- have the strongest presence, in order to take advantage of their market position, knowledge of the legal environment, brand awareness and support structure with a view to reducing the risks involved in implementing a business activity that, by nature, is led by local companies.

In Mexico, the Services division has abandoned its strategy of purchasing companies due to the uncertainty of the country's economic situation and the high expectations of the sellers, among other factors, and has opted for a strategy of organic development of the business in order to reduce the possible risks involved in an investment of this kind. This change in strategy harnessed its first successes in late 2016 with the award of several facilities management contracts for private clients.

In Chile, the division has started its business with the award of several contracts for public and private clients in all of the activities included in its range of services. In 2017, it expects the successful trend in awards to continue, together with the addition of several activities related to Concesionaria Centro de Justicia de Santiago mid-year.

In the United States, a basic structure has been set up in the state of Florida and the process of detection, analysis and negotiations for the purchase of one or more companies in sectors related to the division's activities has begun. This process will be completed in 2017 and initiatives will be undertaken with the Construction and Concessions divisions to bolster the marketing capacity, generating synergies that can be transferred to clients in the areas of maintenance, energy efficiency and services for the care of dependent persons.

CERTAIN RELEVANT CONTRACTS

Some of the most important awards in the OHL Servicios backlog, with more than 500 contracts in 2016, are as follows:

Cleaning. General cleaning and service provisions related to the Ministry of Defence facilities located in Extremadura, Andalusia and Murcia. The contract is worth EUR 21.4 million and covers a period of 24 months.

Health management services. Management and administration of "Residència i del Centre de Dia Assistida Municipal Fortpienc", pertaining to the Ajuntament de Barcelona, under the FORTPIENC joint venture (80%, INGESAN and 20% Asociación Edad Dorada-Mensajeros de la Paz). The contract is valid for 24 months and is worth some EUR 9 million.

Maintenance. Mixed contract for efficiency management of the primary energy systems used in the following buildings: Princesa University Hospital, Hermanos García Noblejas Specialised Centre and Chamartín Mental Health Centre (Marqués de Ahumada). The contract, which started in March 2016, spans a period of 15 years and is worth EUR 34.1 million.

Urban Services. Public Service Management contract under a concession arrangement for containerisation, pick-up and transport of waste in the city of Madrid Lot 2 (joint venture between Valoriza-Acciona Servicios-OHL Servicios-ASCAN). The contract is valid for four years and is worth more than EUR 38.2 million.

Logo OHL Desarrollos

OHL Desarrollos continued its activity in unique projects in the high added value tourism and hospitality sector, such as the case of Centro Canalejas Madrid (Spain), Old War Office (United Kingdom) and Mayakoba (Mexico).

The Centro Canalejas Madrid project includes the renovation of an emblematic block of historical buildings in the centre of the Spanish capital, where calle Alcalá, Plaza de Canalejas and Carrera de San Jerónimo all converge, just metres away from the Congress of Deputies and Puerta del Sol. Within this complex, the first hotel and residential project in Spain by the Four Seasons brand will be located, in addition to a luxury shopping centre, La Galería de Canalejas, a car park with 400 spaces and 22 residential units with Four Seasons services.

OHL has sold 17.5% of the complex to the firm Mohari Limited, owned by Mark Scheinberg, for EUR 78.75 million, under an agreement in conjunction with Grupo Villar Mir. The transaction generated EUR 29 million in capital gains.

Regarding the Mayakoba Resort Development, the most mature project in the division, a controlling interest was successfully sold to the Mexican group RLH, thus meeting the targets set in terms of asset rotation.

The Old War Office project in London has made greater than expected progress, the construction permit has been received and construction is expected to begin in 2017.

The division has become consolidated worldwide as a differentiated developer focusing on the design and execution of mixed-use real estate projects operated by world-class luxury hotel chains.

With revenue of EUR 130.7 million, the Developments Division has registered a 5.0% increase over the same period for the previous year, as a reflection of the good performance of sales of the Mayakoba hotels and the benchmark currency, the US dollar. The success of the Mayakoba hotels, with occupancy rates of 61% in 2016, in line with those seen in 2015, must be highlighted here.

Regarding EBITDA, which amounts to EUR 28.4 million, quite significant growth was seen compared to the same period of the previous year. The increase in the EBITDA of the Mayakoba hotels resulting from occupancy and improved margins, as well as the increase in real estate sales at Mayakoba and in the Ciudad Mayakoba project, have contributed to this growth.

The Developments Division was created in 2001 as a separate line of business within OHL with the aim of identifying strategic diversification opportunities for the Group in the top quality tourist resort and hotel sector.

Market and strategy

OHL Desarrollos is currently present in the following markets:

  • In Riviera Maya, Mexico, where it has been developing the Mayakoba project since the division was established, and also with the Ciudad Mayakoba project.
     
  • In Madrid, where OHL Desarrollos is developing the Centro Canalejas Madrid project, the economic growth trend in the hotel market has become consolidated. In 2016, a number of hotel transactions were signed in Madrid. Investors see this project as a driving force for the city's hotel sector.
     
  • London, also a highly relevant market for the division with its Old War Office project, has been influenced by the "Brexit" process. However, the Developments division's perception is that this is, and will continue to be, one of the most important markets in the world in terms of high quality hospitality.

The resort and hotel sector currently constitutes one of the markets with the greatest degree of expansion worldwide. With the consolidation of economic recovery, especially in the US market, both the number of tourists and their average spending will increase.

INVESTMENT REQUIREMENTS

OHL Desarrollos focuses its business activities on the segment of mixed-use hotel and tourism projects that meet the following requirements:

  • They represent an opportunity for value creation according to criteria of financial returns and attractive generation of cash flows, usually in conjunction with powerful financial investors.
     
  • They are designed according to criteria of maximum sustainability, from a perspective of urban settings and heritage preservation, in the case of assets in urban environments, or environmental criteria, in the case of resort assets.
     
  • They enable the division to implement its experience, prestige and knowledge by acting as the developer.
     
  • They involve the repositioning and/or development of an asset in a market with great potential in the high quality segment.
     
  • They are positioned in the high quality segment, thus excluding development models based on high volume and low quality.

CHALLENGES AND OPPORTUNITIES

The processes of partial rotation of assets carried out in 2016 have consolidated the division in the market as a developer of high quality, complex, projects in both the urban and resort segments. Through the initiatives undertaken to date, the division has demonstrated its technical capacity in the execution of these projects and also its capacity to handle developments according to criteria of profitability and financial feasibility, while also endowing them with a wealth of urban planning and environmental features.

The extraordinary experience and know-how acquired in the Mayakoba, Centro Canalejas Madrid and Old War Office projects have positioned the division as a global developer of top rate projects. For this reason, it intends to capitalise on this prestige and experience garnered over the years by offering its services to other potential investors.

Its future will focus on expanding and developing business in the tourist hospitality sector by analysing diverse opportunities on the international market, following a strategy based on project performance with the ensuing creation of market value.

When the asset reaches the optimal maturity and value from a financial and market perspective, rotation will take place through partial or full divestment.

Relevant activities in 2016

ENTRY OF AN INVESTOR IN THE MAYAKOBA RESORT DEVELOPMENT PROJECTS

The Mayakoba Development is a high quality, sustainable resort located 10 km from Playa del Carmen with an approximate area of 240 hectares. It has four hotels in operation, run by some of the most prestigious international hotel chains, all of them in the five-star Grand Luxury category: Fairmont (401 rooms), Banyan Tree (132 rooms), Rosewood (128 rooms), and Andaz (213 rooms). Mayakoba also has a golf course, El Camaleón, designed by Greg Norman, which, until 2017, was the only course to host an official tournament on the prestigious PGA tour outside of the USA and Canada and celebrated its tenth anniversary in 2016.

OHL Desarrollos had recently noted significant interest in certain assets in the project. For this reason, it conducted a market survey and established preliminary contact with a range of investors in the luxury hotel field, all of which boast excellent reputations and strong financial capacity. After signing a preliminary agreement with the Mexican investment group RLH Properties S.A. de C.V. (RLH), on 1 December 2016, a binding agreement was reached with this investment group.

The transaction consists in RLH's purchase of a stake of up to 80% of the share capital of the companies that own the Rosewood Mayakoba and Fairmont Mayakoba hotels, with a guaranteed minimum of 51%, in addition to 51% of the share capital of the companies that own the Banyan Tree Mayakoba and Andaz Mayakoba hotels and the El Camaleón golf course. This disparity in the divestment of the stakes is due to the differing maturity levels reached by the hotels, with a greater divestment of the assets that have reached a higher maturity rate.

The initial price of the operation is set at a maximum of around 3,811 million Mexican pesos for a 51% stake in the Mayakoba hotel assets included in the transaction. The sale of this 51% stake will deliver a minimum cash inflow for the Group of an estimated EUR 158 million and capital gains of approximately EUR 71 million. In addition, the sale of an 80% stake in the companies owning the Rosewood Mayakoba and Fairmont Mayakoba hotels would mean an estimated cash inflow of a further EUR 60 million.

Conclusion of the transaction is subject to prior fulfilment of several conditions linked to this type of transaction, including approval by the Federal Competition Commission. Closure on the operation is expected to take place in the first quarter of 2017.

COMPLETION OF THE ANDAZ MAYAKOBA HOTEL. OPENING 13 DECEMBER 2016

This fourth and last hotel in the Mayakoba project features the lifestyle offer, with 213 rooms, and is a high quality asset that adds to and complements the other three existing hotels, which offer different categories within the high-quality segment.

CELEBRATION OF THE TENTH ANNIVERSARY OF THE OHL CLASSIC AT MAYAKOBA

In 2016, Mayakoba had the privilege of hosting yet another edition of the OHL Classic at Mayakoba. This year's tournament was especially significant as it marked the tenth anniversary of this successful event on the PGA Tour.

PROGRESS OF THE CIUDAD MAYAKOBA PROJECTS

In 2016, the different projects included in Ciudad Mayakoba experienced a consolidation process on the real estate market in Playa del Carmen:

  • Senderos de Mayakoba. This project, the first in Ciudad Mayakoba, continued to progress at a steady pace in terms of sales and development, with 80% of the total inventory sold in just two years.
     
  • Lagunas de Ciudad Mayakoba. In this project, by the end of 2016, approximately 70% of the total inventory scheduled for the initial phase had been sold, just one year after being launched on the market.
     
  • Jardines de Ciudad Mayakoba. This project focuses on the development of economical, affordable housing and its marketing activity has also been highly successful in terms of sales and development.

RECOGNITIONS AND AWARDS

In 2016, Ciudad Mayakoba was invited to participate in the Habitat III Conference organised by the UN, a highly relevant event that takes place every 20 years and represents a meeting place and opportunity for analysis to determine urban development policies for the next 20 years.

Ciudad Mayakoba was invited as a model of planned communities in tourism areas and as a reference of joint participation between business, government and UN-Habitat in the generation and management of public spaces that integrate the community.

NEW PROJECTS

Late last year, the necessary agreements were reached in order to launch the new La Ceiba de Ciudad Mayakoba project in 2017, a group of homes featuring an innovative design. In addition, another agreement was reached with a prestigious Mexican healthcare group to provide Ciudad Mayakoba with quality healthcare infrastructure, through the opening of the Puerta de Hierro Hospital.

Finally, under an arrangement with the organisations Learning One to One and Enseña por México, school activities are set to begin starting in the summer of 2018.