Balfour Beatty has returned to profit following after two years of losses and seen its order book rise 15% to £12.7 billion, according to its financial results for the full year ended 31 December 2016 published today.

The Group is expecting a peak volume year in 2017, as it represents the middle of the current AMP6 cycle.

Balfour Beatty said the order book had increased despite the more disciplined and selective approach to bidding. The quality of the order book had also improved as the business increased bid margin thresholds and focused on jobs where the Group can deliver value.

The improved order book was predominantly due to Construction Services at £9.6 billion (2015: £7.9 billion), with increases in all material geographical regions: UK construction up 11%; US construction up 10%; and Far East construction up 14%.

Peak volume year expected  in 2017 - the middle of the current AMP6 cycle

The Support Services order book was stable at £3.1 billion (2015: £3.1 billion). The Support Services segment comprises utilities and transportation businesses - utilities operates across power transmission and distribution and the gas and water sectors.

Balfour Beatty said the slight reduction in gas and water underlying revenue was caused by the dip in the UK water regulatory cycle between the completion of Asset Management Period 2010-2015 (AMP5) and new contracts continuing to mature under AMP6 (2015-2020).

“The reduction in the order book was as expected, given the progress of the AMP6 delivery cycle. Many water contracts are extended over multiple AMP periods and the Group has already started to engage on the AMP7 planning cycle.”

 In 2016, gas and water secured an extension, through to 2020, to the gas transmission and distribution contract worth £130 million for Bord Gais, in Ireland, and also won a £38 million water treatment scheme for South West Water. The Group said delivery of key and complex schemes remains on track with gas and water expecting a peak volume year in 2017, as it represents the middle of the current AMP6 cycle.

Underlying revenue for the division reduced by 12% to £1,103 million (2015: £1,259 million), due to the phasing of contract and regulatory cycles. However, underlying profit from operations increased to £34 million (2015: £24 million), as the 3.1% (2015: 1.9%) underlying profit from operations margin in 2016 returned Support Services to the bottom end of the Build to Last Phase Two industry-standard margin target of 3%-5%.

Uncertainty around contractual issues in construction portfolio

However, the Group cautioned that across the construction portfolio there remain a small number of long-term and complex projects where the Group has incorporated significant judgements over contractual entitlements, saying:

“ The range of potential outcomes could result in a materially positive or negative swing to profitability and cash flow. In the UK, the majority of these contracts are within the Major Projects business unit.”

“Outside the UK, the Group still has a number of significant contracts in Hong Kong where the range of potential outcomes could result in a materially positive or negative swing to profitability.”

According to Balfour Beatty, by 2014 the company had become overly complex following more than a decade of acquisition-led forced growth. The Group Chief Executive’s review says:

“There was an overall lack of leadership and strategic direction. Operationally, project bidding and delivery lacked standard processes and internal systems and controls were weak with little focus on cash management. A federated culture had resulted in layers of unnecessary cost and a tendency for elements of the business to compete with one another. Inevitably, performance had deteriorated not only financially but in terms of customer and employee satisfaction.”

Turnaround due to Build to Last transformation programme

The Group has attributed the turnaround to the Build to Last transformation programme launched at the start of 2015.

The programme addresses Balfour Beatty’s performance with all stakeholders – customers and suppliers, employees and subcontractors, investors and communities.

The Group said the first phase – a 24-month self-help plan – has just delivered its goals, tackling the root causes of previous poor performance in order to provide a strong platform for future profitable growth. Looking ahead, strategically, Balfour said this provides the framework for the Group to enter its second two-year phase of Build to Last with greater confidence.

In UK construction, the Group met its year-end target, with 90% of the legacy projects having reached practical completion and over 70% having reached financial completion. Importantly, the UK construction business reported an underlying profit from operations in the second half of the year.

Construction Services underlying revenue was up 7% at £6,852 million (2015: £6,388 million) as growth in the US offset an expected decline in the UK.  Support Services underlying revenue declined 12% at £1,103 million (2015: £1,259 million) due to the phasing of contract and regulatory cycles.

The Group said Infrastructure Investments continued to deliver excellent results with underlying profit from operations of £89 million (2015: £132 million), including the benefit of £65 million of profits from investment disposals (2015: £95 million).

Support Services rebounded to more normal levels, compared to the prior year, with underlying profit from operations of £34 million (2015: £24 million). Underlying loss from operations in Construction Services reduced to £23 million (2015: £229 million loss), where losses in the UK of £64 million (2015: £187 million loss) were only partially offset by profits in the US of £33 million (2015: £22 million loss).

Leo Quinn, Group Chief Executive, commented:

“The transformation of Balfour Beatty is well underway. We have returned the Group to profit and significantly exceeded our Build to Last Phase One targets. We have upgraded leadership, processes and controls while continuing to invest in the Group’s unique strengths. As a result, we have improved not just the quality of our order book but our customer satisfaction scores.”

“Having simplified the Group, we are focused on our core markets in the UK and US, where governments are committed to large scale expenditure on infrastructure.”