Balfour Beatty: UK business 'may take three years to heal'

Balfour Beatty is to close four of its regional offices, including Bristol and Exeter, in the wake of its latest £75m profit warning, the firm has confirmed, and has warned it could take three years before margins in the UK construction business recover.

Today the troubled contractor issued a fresh £75m profit warning, its fifth in less then two years (see timeline below), with its share price tumbling 20% on the news this morning.

It said the profit shortfall was spread across its UK construction business – the same source as the previous warnings – with £30m focused on the M&E business; £20m on large London area building projects; £15m on the regional construction business; and £10m on the major infrastructure projects business, which was flagged as a source of problems for the first time.

Balfour Beatty said it had appointed accountants KMPG to undertake an independent review of the UK construction business, at contract level, to provide “assurance” to its investors.

The firm also announced that executive chairman Steve Marshall, who took on the executive role after the exit of former group chief executive Andrew McNaughton following a £30m profit warning in May, would be stepping down from the firm after a new chief executive and non- executive chairman are appointed – meaning the firm will have effectively lost two chief executives in a year.

Marshall played the leading role in the merger talks with Carillion over the summer that collapsed in acrimony after the two construction giants failed to agree over Balfour’s planned sale of consultant arm Parsons Brinckerhoff.

The firm said it was close to appointing a new chief executive, with an announcement expected in the coming weeks.

Balfour Beatty management told analysts today that the £15m shortfall in the regional construction business was focused on the South-west and Wales regions, with the firm set to close four unprofitable regional offices.

A Balfour Beatty spokesman told Building that the Exeter and Bristol offices would close, with the business units merged into one office and relocated to an as yet undecided location.

Two further offices, in Redhill, Surrey, and in Croydon, are also set to close, the spokesman said, leaving the regional business with 17, rather than 20 business units.

He said staff in the four offices were currently under consultation, but would not say how many were at risk of redundancy.

Marshall said the latest write-down was “obviously eye-catching, but it obscures the work that is actually going on to heal the business”.

But when quizzed about the 12-18 month time line to get the business on track that was outlined in May, he said there was still “a lot of healing work to do” and there would “doubtless be work to do beyond that [the 12-18 months] as well”.

He said that “in practice” the full recovery of the business to a position where its margins were in line with its competitors could take “two years or three years”.

As Building revealed this morning, Balfour Beatty has restructured the regional business, with managing director Mark Cutler exiting after just eight months in the role, while the role of regional finance director, currently held by Beverly Dew, will also be dropped when Dew leaves to join Kier at the beginning of next year.

Balfour Beatty’s UK construction chief executive Nick Pollard said the move was aimed at “removing a complete layer [of management] in the regional structure, so that we get a much better visibility, control and immediacy of action towards both bidding and execution of work on site”.

He told analysts that the problems with the “handful” of major infrastructure projects, the source of a £10m profit shortfall - the first time the business had been flagged as a source of problems - reflected “recent changes in scope and complexity on the project” and “technical changes, by and large, which are emerging on some jobs that we’re currently engaged in”.

He said that on these jobs there were “additional works and additional costs”, adding: “There’s an opportunity on some of those to turn that position round, but that will require a lot of hard work and it will require the agreement of additional revenue with our customers.”

“That’s something we will be working on over the coming weeks and months and until such time as that revenue is clearly likely to be secured, the position we’ve struck is the right one.”

Speaking more generally about the firm’s problem projects, Pollard said: “In terms of the projects that are now on our list of problem projects, the issues are broadly similar.

“They relate to operational issues in the field, a shortage of key resources or that under tender, a proposition that was originally conceived was ill-balanced or ill-judged in some way and therefore at the end of those projects has given us problems.”

Pollard added: “When you hit a bump in the road, when you hit a problem on one of those contracts and an end date slides or you have to do some additional work because you find something was done wrong in a previous phase of the project, then that incurs extra costs and unfortunately it is dumped on you.”

“We need to get to the back end of those legacy contracts and into the smooth water of more normal trading.”

Quizzed by analysts on whether the appointment of KPMG to review the firm’s contracts indicated a “breakdown in trust within the organization” and a failure in the “core skill set that contracting companies should have in order to be able to profitably execute and deliver contracts”, executive chairman Steve Marshall said: “We have to speak plainly. The company has had a series of surprises. And it has been surprised itself. So it isn’t about trust between any part of the company.

“The problem is we have all been surprised by what has happened in this business and therefore, certainly, I and the board judge that the right thing to do to give the company the assurance it needs and, frankly, the investors the assurance they need is to have an independent review”.

Marshall said KPMG would report to the board before the end of the year.

Kevin Cammack, analyst at Cenkos, said the profit warning was “apocalyptic”. “I’d like to think it’s deck-clearing for the new chief executive where we are told the appointment is at ‘an advanced stage’ but I fear it is not.”

He said the appointment of KPMG, emphasized the “sheer lack of confidence and controls in anyone and anything” in the UK construction business.

“KMPG’s appointment is basically to re-assure external investors and of course because they no longer have confidence in anyone internally,” he said, adding: “Horse, stable door and bolted spring to mind.”

“I’m speechless really and unsure where Balfour Beatty goes from here. Carillion are unlikely to come back with the Parsons sale agreed and due for shareholder approval in October … whilst the only ‘certainty’ of value now is the PFI portfolio.

“A full break-up of the group may be the best may forward … but clearly a lot depends on the new chief executive and market confidence in him.”

Stephen Rawlinson, analyst Whitman Howard, said the latest profit warning was a “bombshell” and brought the total profit shortfall announced this year to around £150m.

He said: “That is just in the UK and we are asked to believe that all is okay in the rest of the world.

“The new chief executive is promised very soon and we do not know what he will make of contracts outside the UK.

“The company grasps at straws by mentioning its priorities, the likely departure of chairman Steve Marshall once the dust has settled and that there is hard work going on to get the UK right.

“What might Carillion be thinking now, close shave or another opportunity to have a pop?”