Leonardo da Vinci, the Italian Renaissance genius and probably the world’s most famous engineer ever, said “I have been impressed by the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do”.
Here at Sacyr we agree with this urgency of doing, the need to outdo ourselves. Even in difficult circumstances, such as those engulfing the Spanish economy during the last six years, we have been able to transform in order to continue to do things.
The crisis has forced us to reinvent ourselves, albeit without ever losing sight of our quintessence as a company, which is shaped by leading expertise, doing things well and cautious management.
The company characterised by high exposure to the Spanish market, particularly its real estate sector, and excessive leverage is a thing of the past. Today we are a smaller company and a more profitable one; we are focused on the businesses in which we have a competitive edge, opportunities abroad and the ability to innovate. The transformation has been hard work and I’d like to voice my tremendous gratitude to our more than 20,000 professionals for their huge effort. It has been worth it: we are approaching the end of the company’s restructuring process (in 2013 we slashed debt by €2 billion) and the outlook medium and long term is excellent. This optimistic outlook is underpinned by three factors: (i) growing profitability; (ii) international business momentum, lending earnings stability and visibility; and (iii) the restoration of financial health, a yardstick on which we are ahead of our peers.
2013 provides good examples of all three lines of initiative. All of our core businesses posted a profit thanks to cautious risk management and extreme vigilance over operating expenses. Our gross margin exceeded 12% as a result, the highest in the sector.
Last year we entered several new markets, including Peru, Colombia, India, Qatar, Mexico, the UK, Togo and Mozambique, markets in which we plan to expand our construction, concessions and industrial businesses. We also reinforced our presence in existing markets, such as Chile, Brazil, Panama and Angola, securing new contracts which entrench the company’s international footprint. Business outside Spain increased to account for 53% of the total last year, compared to 43% in 2012; this trend is expected to continue short term as we do not anticipate a significant recovery in the home market.
Last year we also forged ahead with the process embarked on in 2011 with a view to injecting transparency and clarity into the company’s financial snapshot: we wrote down our tax assets to better reflect the new paradigm and recognised impairment charges on our real estate assets to bring their value in line with the debt carried by this business so that its sale in the future will not generate an accounting loss. These last charges bring the write-downs to an end, barring unforeseen circumstances.
It was not all good news, however. The new renewable energy sector legislation undermined EBIT at Valoriza, the company’s services division; we opted to neutralise this one-off development by provisioning 100% of our exposure to this issue. Elsewhere, the revision of the budget for building the third set of locks at Panama Canal forced us to record a provision covering the potential loss. On this matter we also erred on the side of extreme caution so that any positive outcome in the arbitration proceedings undertaken to resolve the underlying issues will have a positive impact on future earnings.
Another noteworthy milestone last year was the group’s decision to classify Vallehermoso, the property development business holding company, as an asset held for sale. In light of the grave crisis afflicting the sector, the Board of Directors decided to separate this subsidiary from the rest of the group in order to structure it with an orderly liquidation in mind in the form of mortgage releases (deeds in lieu of foreclosure) and the subsequent sale of the remaining assets. Nevertheless, the group plans to retain its core team of professionals, the sector’s finest, in order to carry on business operations on a scale with the new property development paradigm in Spain: lower demand, lower leverage and lower prices.
In the early months of 2014 we also addressed two major issues which had generated uncertainty: (i) financing for the Panama Canal works, in which Sacyr is involved through its consortium, GUPC; and (ii) negotiation with the Argentine government of damages for our investee Repsol in connection with the expropriation of YPF in 2013.
The agreement reached with the Panama Canal Authority, allowing the works to recommence, satisfies all the parties involved and demonstrates, yet again, Sacyr’s ability to manage crises. I would like to stress the fact that the differences with the customer are restricted to contractual and budgetary issues; at no point in time has Sacyr’s technical capacity been called into question.
To the contrary. The customer has expressed its pride in the work performed to date and the standard of quality provided by the consortium headed up by our company on several occasions. One of the most complex civil engineering operations in the world, the project has given rise to multiple unforeseen complications, some of which significant, all of which have been overcome thanks to the hard work, dedication and unparalleled expertise of our professionals.
I am certain that we will ultimately be made whole for the costs associated with these unforeseen developments in the arbitration rulings that will eventually settle the differences between the parties.
We are likewise very satisfied with the agreement reached between the Argentine government and Repsol establishing fair compensation for the expropriation of YPF. I would like to congratulate the Repsol management team for securing the best possible payment along with all the necessary guarantees. I am convinced that Repsol will perform well in the future and generate an adequate return for the shareholders which have supported the company in difficult times.
With both lawsuits on the right path, in 2014 we will continue to develop and fine-tune one of the group’s hallmark attributes: our expertise. The excellent standards we provide are the result of our professionals’ skills and know-how as well as our ongoing strategic commitment to innovation.
Innovation is not empty rhetoric at Sacyr. We never settle at Sacyr. Part of our work consists of researching and imagining new ways of satisfying customer demands in order to save money and use resources more efficiently: development of road maintenance simulators, new techniques for harnessing the energy trapped in waste, alternative formulae for financing public-private initiatives, highly resistant and durable cement, etc. I personally encourage our teams to flex their innovative muscle on every project in order to differentiate Sacyr’s proposals from those of our competitors.
Thanks to this effort to continually do things better, we have won important contracts, having been named preferred bidder for the contract for a waste treatment and recovery plant in Australia, presented the best proposal for the Américo Vespucio Oriente urban motorway in Santiago de Chile, proving our ability to compete in international markets.
Against this backdrop, the strategic goal in the construction business in 2014 is to further expand and entrench our international footprint. To this end we plan to reinforce our presence in our core international markets, while exploring opportunities in new markets in which we have identified attractive prospects medium and long term. These projects will be increasingly tied to the concessions business, as the combination of these activities allows us to operate in a more stable and less risky environment. We will also continue to develop new public-private initiatives worldwide, leveraging our credibility in the financial markets and our reputation and credentials in project construction and management.
In the services segment, our aim is to secure new contracts that offer reasonable margins and collection guarantees. Our obsession is profitability, not scale. Many of these target contracts fall under the umbrella of Sacyr Industrial, our newest line of business and one for which we are very optimistic.
As Da Vinci suggested, we are doing. We continue to do things. Not the same things we were doing before, nor in the same way; but preserving our corporate culture nevertheless. The world, increasingly complex and uncertain, has changed. Sacyr too has changed. Now we have a solid financial structure and a well-defined strategy. I am certain of our ability to negotiate this decisive transformation phase with efficiency and caution.