Balfour Beatty has reported a total loss of £59 million (2013: £35 million) with a further £118 million write-down in UK construction losses with the publication this morning of its results for the full year ended 31st December 2014.
Total revenue rose 2% to £8.8 billion while its order book fell 7% (at CER) to £11.4 billion (2013: £11.8 billion)
The Board has decided not to recommend a final dividend, to ensure balance sheet strength is maintained, but said it expects to reinstate the dividend “at an appropriate level” by March 2016.
The group’s ‘Build to Last’ business transformation programme has gained early momentum, according to the results. Phase 1 is 24 months of self-help: to deliver £200 million cash flow improvement and £100 million cost savings versus 2014. Significant progress has also been made in the first 12 weeks of 2015 with Board changes, senior leadership appointments, programme work streams established and consolidation of UK support functions already underway.
In its Construction Services division, the Board said an underlying loss for the year of £209 million (2013: profit £18 million) reflected “a very poor performance” from the UK construction business. Underlying revenue in the division remained flat at £6.6 billion. Total loss for the year was £391 million (2013: £103 million).
UK construction revenues fell by 6% to £2.35 billion, while growth in Major Projects was “more than offset” by reductions elsewhere. The business remains focused on implementing the recommendations of the KPMG review, to return to profitability and peer group margins. Balfour Beatty said that senior leadership within the UK Regional and Engineering Services businesses will be strengthened by the introduction of a new chief operating officer.
In January 2015, having received the results of the KPMG review on the operational issues in the UK construction business, the Board announced £70 million of contract write-downs and that it would also assess the overall level of contract risk provisions in that business. The Board has now concluded that further risk provisions of £118 million are appropriate.
In contrast, revenue in Support Services for the year was up 1% at £1,273 million, with a 35% increase in transportation revenues being largely offset by expected revenue decline in the power sector. Underlying profit2,3 from operations was down 9% at £50 million (2013: £55 million), with an underlying operating margin of 3.9% (2013: 4.3%). Balfour Betty said that good performances in the water sector, including the settlement of multi-year commercial issues, and the transportation sector, were offset by lower volumes in power.
Strengthening water sector order book
The Support Services order book ended the year at £3.5 billion, down 14% from a year ago (2013: £4.1 billion). The increase in order book in the water sector has been more than offset by the expected contraction in the power and transportation order books, as the division continues to execute on long-term contracts. However, further awards were made in the water sector after the year end, which will benefit the 2015 order book.
The water business order book benefited from new contracts tendered under the AMP 6 regulatory cycle, which controls capital expenditure across the network from April 2015 through to 2020. In May it was awarded approximately £115 million of work by Anglian Water as part of its investment programme. In addition the business has also won a new contract award from United Utilities valued at £125 million. Following a 23-month early contractor involvement in a three-way joint venture contract with Thames Water, the joint venture was awarded an initial £800 million contract in February 2015, which was not recorded in the year end order book.
Underlying performance has been declining since 2010
The report by Leo Quinn, Group Chief Executive said that Balfour Beatty’s underlying performance had been declining since 2010, with the sharpest and most noticeable decline occurring over the last 12 months. This had been caused not only by the significant operational issues impacting Construction Services UK over the last two years, but also because the cost base of the Group is too high. Current Group-wide overheads are approximately 1% of revenue above industry benchmarks.
The report states:
"....the root cause lies in the Group’s rapid fourfold revenue expansion since 2000, largely by acquisitions which were insufficiently integrated. This resulted in an overly complex, devolved organisation with poor controls and weak disciplines in cost control and project bidding."
Chief executive says Group faces major short-term challenges
Leo Quinn commented:
“Balfour Beatty is a global name built on the exceptional engineering skills of its people. This strength is evidenced by the continuing flow of landmark contracts across the Group. The business model also balances Construction Services and Support Services with a successful Investments business which will continue to create significant value.
“Over the next two years we should work through the severe legacy of “problem” construction projects. However, in tackling the cultural change required to ensure these issues are behind us, we face major short-term challenges. The key is that we are determined to address this through self-help. Our transformation programme, Build to Last, is gaining rapid traction and we are driving initial improvements of £200 million cash in, £100 million cost out over 24 months. In addition, our Investments portfolio will provide the financial flexibility of both reliable income and the sale of maturing assets into a strong market.”
“I remain convinced that all our operations can achieve industry-standard performance as markets improve. The real prize is a sustainable return to profitable growth, built on the Group’s unique capabilities, underpinned by leaner, stronger processes and flawless execution. Longer term we believe that as a leader in its core markets Balfour Beatty should be able to deliver superior returns to the benefit of its customers, employees and shareholders.”