Balfour Beatty, the international infrastructure group, has issued a £30 million profits warning and announced the departure of Chief Executive Andrew Naughton with inmmediate effect with the publication of its latest trading update for the period 1 January to 5 May 2014.

Balfour Beatty said:

“Whilst most parts of the Group are trading in line with management’s expectations, we now expect a £30 million shortfall in our UK construction business in 2014. As a result overall Group pre-tax profits for 2014 are expected to be significantly lower than previous expectations, in the range of £145 – £160 million."

Andrew McNaughton has stepped down as Chief Executive with immediate effect. Steve Marshall, will take over as Executive Chairman until a successor is appointed.

A strategic review has also led the Group to evaluate options for the possible sale of Parsons Brinckerhoff, acquired by Balfour Beatty in 2009 – the sale would be  “conditional on providing attractive shareholder value.”

The Interim Management Statement said that the Group is now expected to deliver significantly lower pre-tax profits in 2014 than management's expectations at the time of the full-year results announcement in March.

Overall Group pre-tax profits for 2014 are now expected to be in the range of £145 – £160 million, given current uncertainties in parts of the UK construction business.

The decline in profit expectations is predominantly within the UK construction business, where profits are now expected to be £30 million lower than previously anticipated.

Balfour Beatty said that actions taken in 2013 to improve the operational issues in the UK construction business are taking effect, but at a slower pace than expected. While there has been significant performance improvement in the regional construction business, but the mechanical and electrical engineering (M&E) and major buildings projects businesses have both experienced what are described as “significant operational issues.”

Poor operational delivery issues and low order intake

The Group flagged up in March that the M&E business had been impacted by adverse market conditions towards the end of 2013 - which have continued into 2014. Taken together with poor operational delivery issues on a number of contracts and low order intake, the business has experienced "an extremely challenging first quarter." Balfour Beatty commented:

“As a result, our performance expectations for this business in 2014 are significantly lower than previously anticipated. Furthermore, in major building projects we have experienced further cost increases and delays, mainly on specific projects we highlighted in March.”

Parsons Brinckerhoff could be up for sale

Balfour Beatty also announced that the Board has undertaken a strategic review, to explore ways to simplify the Group structure and create a more focused Group. The review has led to a decision to evaluate options for the possible sale of Parsons Brinckerhoff, although the Group said this would  only be pursued if it provides attractive shareholder value.

The statement says that since its acquisition by Balfour Beatty in 2009, Parsons Brinckerhoff has continued to be a highly successful business and has grown significantly under Balfour Beatty’s ownership.  However, Balfour Beatty said that  having professional services and construction capabilities combined within one organisation “has not delivered material competitive advantage for the Group. “ The Board is now examining how best to realise the substantial value of the Parsons Brinckerhoff business with an update to be provided in due course.

Steve Marshall, Balfour Beatty Executive Chairman, commented:

“Today’s trading update is once again disappointing. The Board is committed to rapidly addressing the root causes. As a result, action is being taken to improve operational delivery in the UK construction business. Our recent strategic review meanwhile has concluded that a sale of Parsons Brinckerhoff could deliver attractive shareholder value and make Balfour Beatty a simpler and more focussed Group going forward.”

Order book falls - partly due to impact of AMP5 cycle

The Group’s  order book reduced in the first quarter to £12.9 billion compared with £13.4 billion at the end of 2013. Increases to the Professional Services order book have been more than offset by reductions in the Construction Services and the Support Services order books.

The Construction Services order book has decreased in the first quarter, as increases in the Middle East and Hong Kong have been more than offset by reductions in the UK and US.

In the UK the order book decline has been particularly impacted by delays to contract awards in the regional and M&E businesses, although the regional order book is expected to improve going on  through the year.

The Support Services order book has declined as expected largely driven as the Asset Management Plan 5 (AMP5) water cycle enters its final year with awards for the next cycle anticipated later in 2014.  In May Balfour Beatty were  awarded approximately £115m of work from Anglian Water as part of its £1.3bn investment during AMP6 – the next water industry regulatory cycle, covering the period to 2020.