Balfour Beatty suffered a pre-tax loss of £199 million last year, according to the Group’s results for the full-year ended 31 December 2015, while underlying revenue from continuing operations, including joint ventures and associates, declined by 2% to £8,235 million from £8,440 million in 2014.
Balfour Beatty’s order book currently stands at £11 billion, a 4% decline in 2015 from £11.4 billion in 2014 – attributed to improved controls and disciplines on bidding, together with the decision to withdraw from certain types of work in noncore areas.
However Balfour Beatty said the quality of its order book has improved as the business increased bid margin thresholds and focused on jobs where the Group can deliver value.
Construction Services remained stable at £7.9 billion (2014: £7.9 billion) with an 11% increase in the US offsetting a 17% decline in the UK; the improved bidding framework resulted in lower order intake in areas of the UK business that suffered from the greatest contract problems in the prior year.
The Support Services order book declined by 11% to £3.1 billion (2014: £3.5 billion) caused largely as the business continued to execute on long-term contracts and by the decision to exit a poor performing local authority contract.
Strong pipeline of projects with preferred bidder status
At the year-end there was a strong pipeline of projects across both Support Services and Construction Services that were awarded preferred bidder status during 2015. These are not yet included in the order book, but are expected to reach final award in 2016.
Underlying loss from continuing operations was £106 million (2014: £58 million). Infrastructure Investments continued to deliver excellent results with profit from operations of £132 million (2014: £127 million), including the benefit of £95 million of gains from investment disposals (2014: £93 million).
Underlying losses in Construction Services of £229 million (2014: £209 million) were largely caused by historic issues in the UK, US and Middle East, whilst the Far East performed in line with expectations.
Support Services profits of £24 million (2014: £50 million) were lower than the prior year reflecting, in part, the regulatory cycle of some of its major customers. The Group said profitability in 2015 was impacted by lower volumes in the power sector and lower lifecycle cost benefits being realised in the utilities sector.
Board expects to reinstate the dividend as result of Build to Last transformation programme
The Group said the initial year of its Build to Last transformation programme launched in early 2015 has begun to deliver measurable improvements: costs are coming down and cash flow has improved substantially to the extent that the Board expects to reinstate the dividend at the interim results in August 2016.
Under the programme, rapid action was taken to remove layers and upgrade leadership and governance through a simplified Group structure. Actions were taken to simplify the business, including the reduction of 846 indirect employees, and standardisation of working practices which delivered £60 million of annualised savings in the year.
Commenting on the changes, Balfour Beatty described its back office structure as “a legacy of a decade of forced growth”, saying that the Group had been unnecessarily complicated with lack of integration, inefficiencies in processes, lack of accountability and control and significant additional cost.
Improvements in procurement processes will drive out costs
Improvements are also being introduced to procurement processes which it sees as a key focus to deliver value for customers and to drive out cost - the Group spends approximately £7 billion with suppliers.
Describing the procurement processes as “fragmented with localised arrangements and a disjointed supply base”, Balfour Beatty said an enhanced procurement capability for the business is now being put in place, with immediate savings being realised from indirect procurement in 2015. In 2016 the focus will move on to direct procurement costs, with the opportunity to reduce third-party spend across a range of categories.
In the UK, the organisation structure of the businesses has been simplified with the heads of Major Projects, Gas and Water, Power T&D and Rail all now reporting directly to the Group Chief Executive, as does the new role of managing director for the Regional and Engineering Services business.
Commenting on the bidding and operation of contracts, Balfour Beatty said an 8-gated business lifecycle is now mandated for all new business with systems and controls in place to ensure compliance. The process is aimed at reducing the risk of pursuing inappropriate opportunities, underbidding or accepting inappropriate levels of risk. It also reviews the cash profile of projects.
Prior to the introduction of the process, progress of bids could not be measured - today across the UK and US approximately 14% of bids are terminated before Gate 4, the final stage before bid submission.
Automated audit tests and business rules - which create a risk-weighted list of ‘review required' projects – are also being piloted in the UK. The system will be rolled out across the businesses in 2016, starting with UK Regional construction followed by US Construction. Balfour Beatty said this will enable management for the first time to invasively monitor and review any project in the system
UK Construction Services division revenues fell by 14%
In its UK construction services division, which is organised into three business units - Major Projects, Regional and Engineering Services - revenues fell by 14% to £2,024 million, predominantly attributed to a decline in the Regional construction business.
According to Balfour Beatty, the quality of the UK order book has improved as bid margin thresholds and the focus on larger jobs rose. At the year end there was a strong pipeline of projects that were awarded preferred bidder status during 2015 – these are not yet included in the order book, but are expected to reach final award in 2016.
However, 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, commenting:
“ The range of potential outcomes could result in a materially positive or negative swing to underlying profitability and cash flow. In the UK, the majority of these contracts are within Major Projects.”
Balfour Beatty said the business is continuing to manage the historic problem contracts through to completion - at the end of December 2015, 60% of these were already at practical or financial completion, up from 31% as at June 2015. By the end of 2016, the number of these projects at practical or financial completion is still expected to be greater than 90%.
A number of significant changes were also made during the year to improve the operational and financial performance of the business, including further streamlining of the regional business to focus on profitable markets, with a reduction in delivery units from 19 to 11.
Tideway Tunnel worth approximately £139 million to Balfour Beatty
The Major Projects business had a number of landmark successes in 2015, including a £416 million contract for the construction of the six-kilometre ‘West’ section of London’s new ‘super sewer’, the Thames Tideway Tunnel, as part of a joint venture with BAM and Morgan Sindall. Construction is expected to last until 2022 and is worth approximately £139 million to Balfour Beatty.
The Major Projects business is also continuing to pursue a number of major infrastructure opportunities across the core transportation and energy markets, with the largest being High Speed 2 (HS2).
Leo Quinn: confident we can reach industry-standard margins
Commenting on the results, Leo Quinn, Group Chief Executive, said:
“In its first year, Build to Last has achieved significant progress in transforming Balfour Beatty.”
“We have upgraded the leadership team and set out a clear direction. We are implementing consistent processes to integrate our businesses into a Group with greater transparency and control. Our main markets are providing a positive backdrop, so that with stronger governance we can both win and deliver business on the right terms. Looking to the future, we are investing to maintain Balfour Beatty’s expertise and assets.”
“By the end of 2016 we will achieve our Phase One targets: our costs are coming down, our cash flow has improved substantially and we expect to reinstate our dividend later this year. Over the following 24 months, I am confident we can reach industry-standard margins. But above all, Build to Last is putting in place the foundations to build a Balfour Beatty with market leading strengths and performance over the longer term.”