Business strategy

Annual report 2005

HALF A CENTURY AFTER ITS FOUNDATION AS A CONSTRUCTION COMPANY, SIZEABLE CASH FLOW AND AN INVESTMENT POLICY AIMED AT GROWTH IN ITS FOUR STRATEGIC LINES OF BUSINESS HAVE ENABLED FERROVIAL TO BECOME ONE OF EUROPE'S LEADING SPECIALISTS IN THE DESIGN, CONSTRUCTION, FINANCING, MAINTENANCE AND MANAGEMENT OF TRANSPORT, MUNICIPAL AND SERVICES INFRASTRUCTURE.

Expansion has driven it to seek new markets, leading to the creation of a multinational group with a stable presence in over twelve countries in Europe, North America, Australia and Latin America.

Growth, which is a priority in Ferrovial's business strategy, is underpinned by a sizeable capital expenditure programme, mainly in transport infrastructure and services, with a clear objective of expanding internationally in OECD countries. In 2005, the Group invested 1.665 billion euro, of which 80% was allocated to infrastructure and services.

The policy of intense investments was made possible by the company's strong cash flow in recent years.

An analysis of the investments and payments made between 1997 and 2005, and the related sources of funding, shows that cash flow totalled over 6.461 billion euro; only on one occasion has the company had to resort to shareholders, and this was a 195 million euro capital increase on the occasion of the IPO in 1999.

Despite the intense pace of investment in 2005, Ferrovial had 272 million euro in debt with recourse, i.e. 9% gearing. Sizeable cash flow in the core business (construction) was complemented by strong cash flow from the more recurring activities, which accounted for 51% of the total operating cash flow in 2005. This circumstance enables Ferrovial to continue making sizeable investments while maintaining a solid balance sheet.

As a result, Ferrovial has changed profoundly, from being exposed primarily to cyclical activities (in 1998, construction and property development accounted for 94% of revenues and 90% of EBIT) to becoming a group with 44% of revenues and 58% of EBIT coming from infrastructure and services.

This gradual change in the business profile came in tandem with rapid growth: EBIT amounted to 871 million euro in 2005, which is 7 times the 1998 figure of 122 million euro; and revenues amounted to 8.989 billion euro, four times more than in 1998.

Ferrovial has also made significant strides in investments outside Spain. Of the total investment made in the last nine years, 55% was outside Spain. Only 11% of Ferrovial's revenues came from abroad in 1998, compared with the current 43% (mainly from the UK, Canada, the US, Australia, Central Europe, Poland, Ireland, Portugal and Chile). International activity accounted for 46% of total EBIT in 2005.

The latest transactions in the US (acquisition of toll roads in Chicago and Indiana, contract with the State of Texas and acquisition of Webber) and in Europe (acquisition of Swissport, the world's largest independent handling operator, and a larger stake in Tube Lines in the UK) will increase the weight of foreign revenues in the coming years. Ferrovial projects that nearly half of its revenues and over 60% of EBIT in 2006 will come from recurring activities, while foreign activities will account for half of revenues and EBIT.



Construction continues to be Ferrovial's mainstay for the future due primarily to the investment arising from the continuity of the various administrations' infrastructure investment plans, the development of a new 15-year infrastructure plan, a selective position in foreign growth markets, plus the sizeable cash flow which this area generates.

Ferrovial's medium-term strategy in this activity is to be actively involved in the development of infrastructure projects that require private initiative; this complementary formula is being introduced steadily worldwide.

Outside Spain, in the last few years the company has been positioning itself in markets with considerable growth potential, mainly Eastern Europe (acquisition in 2000 of Budimex, Poland's largest construction company) and the US (acquisition in the fourth quarter of 2005 of Webber, a construction group with a sizeable presence in Texas, the second-largest infrastructure market in the US). This activity outside Spain will also continue to be linked to the development of other businesses that generate induced construction work (e.g. infrastructure concessions).

With close to 40 years' experience in the field, Ferrovial is now one of the world's largest private-sector transport infrastructure development groups, with a committed investment of over 2 billion euro in 21 toll roads (in Spain, Portugal, Ireland, Italy, Chile, Canada and the US), 4 airports (in Australia, the UK and Chile, which handle a combined total of over 36 million passengers per year), and over 238,200 parking spaces (mainly in Spain). Managed investments total 15 billion euro.

The infrastructure business is one of Ferrovial's key growth engines and is backed by an expanding market that continues to demand companies with experience and investment capacity to respond to numerous privately-financed infrastructure development projects worldwide. Ferrovial's objectives in this market are to create value through growth, actively manage its growing project portfolio, and capitalise on the opportunities afforded by expanding markets, especially in OECD countries.

The toll road and parking business is run by listed subsidiary Cintra, which has a market capitalisation of over 5 billion euro and a clear growth strategy that has reinforced its position mainly in Europe and North America. In 2005, Cintra obtained further concessions in Spain, Ireland and Italy and the only two toll road privatisations in the US: Chicago Skyway and Indiana Toll Road (the latter early in 2006).

Moreover, in March 2005 Cintra became a strategic partner of the State of Texas for 50 years in designing one of the most ambitious infrastructure projects ever undertaken there: the Trans-Texas Corridor.


Real Estate is also a key business at Ferrovial, which tries to minimise the risks inherent to this market through very active risk management and an industrial approach to the business. The type of product that is considered to be least cyclical: first homes, a focus on real estate brokerage, through subsidiary Don Piso; the search for innovative marketing initiatives and a focus on expanding markets characterise Ferrovial's strategy in this business.

Services are a strategic activity for Ferrovial's future since they include stable businesses, with recurring revenues, in markets with significant growth prospects. The acquisition of Swissport (the world's largest independent handling operator) in 2005 boosted this area, which had focused in the last decade on growth in municipal services (street cleaning, municipal and industrial solid waste collection and treatment, and gardening), facility management, and end-to-end transport infrastructure maintenance.

The division's size and muscle (the second-largest in terms of revenues and EBIT) will increase with the consolidation of Swissport, which will improve the group's profile with a large international presence. The outlook for 2006 is that services revenues will exceed 3.7 billion euro (over 35% of group revenues) and services EBIT will surpass 260 million euro (over 25% of group EBIT).


Ferrovial is committed to creating long-term value, so that its business project is recognised as a world leader—an objective that is based on the fundamental principles of growth, profitability, innovation, transparency, ethics, employee motivation, reduced environmental impact, and social and economic development of the regions where it operates.

Those principles are highlighted by a number of initiatives each year that position the company as one of the leading infrastructure groups in terms of corporate responsibility and governance. In 2005, for the fourth year running, Ferrovial was the only Spanish construction group to be selected for the Dow Jones Sustainability Indexes, one of the world's leading sustainability benchmarks. Ferrovial also joined the FTSE4Good index for the first time.

 

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