Letter from the Chairman
2016 was quite a challenge for our Group. Within a complex setting, despite having a diversified portfolio of activities, for the first time in its history, the results of all the main companies in the Group were much worse than expected.
WORLD ECONOMIC SITUATION
International economic activity in 2016 seems to have picked up pace, and we may have reached a turning point: according to IMF figures, the economy grew by 3.1%, which is slightly lower than forecast but in line with 2015. The prospects for advanced economies in 2017-2018 have improved due to the boost in activity during the second half of 2016 and the expected fiscal stimulus in the United States. Growth perspectives have dropped somewhat in emerging and developing market economies where the financial conditions are, in general, less favourable.
SECTORS IN WHICH GRUPO VILLAR MIR IS PRESENT
Evolution in 2016 for the sectors in which Grupo Villar Mir operates can be summarised as follows:
- The results for Grupo OHL were highly negative, having been strongly influenced by the exceptional impact of the provisions allocated for the so-called Legacy projects and by unfavourable trends in exchange rates. However, the balance for the year was sound and consolidated, laying the groundwork for building the future.
Net financial debt was reduced by EUR 1,126 million in 2016, primarily through the sale of most of its interests in Abertis, enabling OHL to cancel its entire margin loan as a result.
The total short-term construction portfolio came to EUR 5,881 million, or EUR 6,552 million including the I-405 garnered in early 2017, which is equal to 25.5 months of revenues, while the long-term portfolio increased by 31% up to EUR 75,675 million, mainly by updating the forecasts for changes in rates and concession period extensions.
- In the Electrometallurgy Division, the trends in 2016 remained similar to those from 2015 regarding the prices of raw materials, which plummeted that year, on all the global markets. The lack of growth in the Chinese and other emerging countries’ economies, together with the uncertainty about economic growth internationally, has led prices of raw materials and the main commodities to remain at the lowest levels in recent decades. Silicon metal, silicon alloy and manganese alloy prices remain at record lows.
The downward trends that began back in 2015 also continued to be seen on the markets in which our Company is present, in terms of both prices and volume. Slower growth in emerging economies has prompted a drop in the prices of the main commodities (oil, aluminium, copper, iron ore, etc.) and in production of and demand for them. This situation is affecting the price of all commodities related to steel, stainless steel and aluminium, the prices of which have fallen significantly compared to those seen prior to 2015, when this price and demand volume recession began.
Within this negative context, our Company has made a highly significant effort to prevent the revenues figures for the Electrometallurgy Division from dropping as much as those of our competitors in the sector, which have experienced a decrease in turnover of nearly 50% in some cases as a result of the simultaneous decline in the number of tonnes sold and in the prices of their main products.
- Yields in the Energy Division were lower than expected due to the reduced prices reached in Spain in the electricity market, the low energy production rates and the limits on sales opportunities in the cross-border market within the EU, mainly on the border between France and Spain, due to the unification of European electricity markets.
- The Fertilizers and Basic Chemical Division also faced a very challenging situation, mainly because of the sharp drop in ammonia, urea and DAP prices, although a clear improvement was seen at the end of the year. The stabilisation experienced in Algerian operations since September also helped improve the results, despite the low ammonia prices, and this improvement should be even more significant in 2017.
- The Real Estate Division had a poor year in 2016 due to the decline in activity resulting from the limited stock available, the impact of reduced contributions from our interests in Inmobiliaria Colonial, now that they have decreased to just 3.2%, and the changes in tax legislation.
The Centro Canalejas Madrid project continued to progress quite satisfactorily in 2016. The structural construction work is complete, the underground levels have been excavated and commercialisation of the shopping centre has begun. The project is scheduled to be completed by the second quarter of 2019.
The Torre Caleido project was launched in 2016, which aims to rebuild the portfolio of real estate assets for rent and is expected to be finished in 2020.
GRUPO VILLAR MIR
Profits obtained by Grupo Villar Mir in 2016 were unsatisfactory due to the weak progress of its various activities and lines of business within a global context troubled by the abovementioned difficulties.
Consolidated revenue in 2016 (including 100% of Grupo OHL) amounted to EUR 6,495 million, 10% lower than the figure obtained the previous year.
EBITDA was much lower than the figure obtained in 2015, reaching EUR 198 million, which is equal to 3% of revenue.
In 2016, for the first time ever, losses were recorded, amounting to EUR 691 million. All the divisions have recognised losses, mainly due to the impact of the legacy projects, the provisions allocated in the Electrometallurgy Division and the drop in the prices of the main products produced by the Group.
The Group’s total consolidated assets at year-end 2016 amount to EUR 16,896 million, 18% less than at the close of the previous year, with OHL consolidated by means of the full consolidation method.
Net financial debt at year-end, including recourse and non-recourse debt, came to EUR 4,328 million, with a 28% decrease against the same figure for the previous year. Recourse net debt came to EUR 2,044 million, 8% lower than the EUR 2,214 million at year-end 2015, representing 12% of total assets.
At year end, the Consolidated Group’s equity came to EUR 4,845 million, 29% of its assets, with a guarantee ratio of 1.4 x. Of this total equity, the shareholders’ equity corresponding to Grupo Villar Mir represented EUR 1,594 million, and the rest is broken down among non-controlling interests, primarily OHL.
If we exclude OHL’s assets and liabilities, which have a comparably lower equity to total assets ratio due to the sectors in which it operates (construction and concessions), the rest of Grupo Villar Mir (i.e. consolidating OHL using the equity method) has a significantly higher rate of equity (38% of assets), and the guarantee ratio is also higher (1.6x), both of which are satisfactory figures.
Throughout 2017, in addition to setting the goal of reducing its net debt, the Group plans to continue with the internationalisation, innovation and diversification strategies that began a few years ago. According to the budget, the Group expects to achieve an increase in sales in 2017 and a higher EBITDA figure than that recorded in past years.
- The market is expected to recover in the Electrometallurgy Division, in terms of both prices and sales volumes.
- The Fertilizers Division expects to continue bolstering and optimising the different operating areas in 2017, especially Fertial, despite the fact that, from a profits perspective, the operational improvement may be slowed by an ongoing scenario of low prices.
- The Energy Division is likely to reach production levels similar to those for the average hydraulic year, while from a regulatory point of view authorisation is expected to be received to operate in more adjustment service markets, which would provide new income sources for the Division.
- The Real Estate Division will focus its property management activities on furthering the Centro Canalejas Madrid and Torre Caleido projects in 2017. As regards development activities, it will continue to add value to the Group’s portfolio of land, developing in locations in which there is a supply shortage (large cities and coastal areas with high purchasing power), while always reducing the rate of debt on development activities as much as possible.
- Finally, operation in Grupo OHL in 2017 will be defined by our customary commitment to the concession business and the development of construction activities focused on civil engineering and emblematic building work in areas where we already have a permanent presence, such as the Unites States, Canada, the four countries in the Pacific Alliance (Mexico, Chile, Peru and Colombia), Central Europe and Spain. Meanwhile, we shall also maintain a balanced, diversified portfolio and our level of financial discipline (ratio of recourse net debt divided by recourse EBITDA under 1.0), as well as our commitment to human capital and Corporate Social Responsibility as the cornerstones for value creation.
Like any other year, on behalf of the Board of Directors, I would like to take this opportunity to express my appreciation to our customers, suppliers and supporting financial institutions for trusting in the different Companies that make up the Group, as well as to thank all of our staff for their effort and dedication.
Juan-Miguel Villar Mir
Chairman of Grupo Villar Mir