Revealing a further £130m pre-tax loss in Balfour Beatty’s interim results, new chief executive Leo Quinn this week gave a candid picture of the transformation underway – and the depth of the historic problems.
But he told an audience of City analysts and investors: “I wouldn’t be distracted by the profit number, I’d be distracted by the fact that we’re stable and that we’re improving the underlying business.”
He also argued that Balfour Beatty “still had one of the strongest balance sheets in the sector” with assets of £1.25bn, and a policy of gradual disposals to fund further investment opportunities.
But the interim results showed that Balfour Beatty was still dealing with 89 “problem” construction contracts in the UK, with just 28 having reached financial or practical completion by June 2015. Most of the rest will complete next year, with 10% running until 2017.
Losses and provisions against these contracts amounted to £100m, while there was £32m of provision for problem contracts in the US and £20m for Middle East contracts.
Quinn talked investors through the US problems, which stemmed from “multi-family housing” contracts bid in 2012-13. After taking on new clients, a new project management team and a new supply chain to deliver the contracts, Balfour Beatty US found that several of the new subcontractors were overstretched on capacity and then went bust.
New finance director Phil Harrison said that most of his first eight weeks in the company had been spent in “understanding where we stand on our historic project base”.
“We are running into a favourable market, and on a rising tide, all ships rise, and Balfour Beatty is still the largest ship in the UK market.”
Leo Quinn
But he added that his attention was also turning to major infrastructure contracts in Hong Kong, run by its Gammon joint venture, which he said were “trading to break even”. “I’ll be visiting the operation in the coming months… it needs continuous review,” he noted.
Looking at the order book – which stands at £11.3bn, compared to £11.4bn six months previously – Quinn said that “higher bid margin thresholds resulted in lower order intake” in London and the south east.
But he expected new orders to increase in second half of the year, as projects at preferred bidder stage – including smart motorways contracts, the Thames Tideway Tunnel and its £460m electrical package at Hinkley Point C with NG Bailey – enter the order book.
Looking further ahead at future public sector infrastructure spend, in water, nuclear and HS2, he said: “We are running into a favourable market, and on a rising tide, all ships rise, and Balfour Beatty is still the largest ship in the UK market.”
But it’s also understood that 400 staff have been made redundant, mainly as result of removing duplication in support functions as Balfour Beatty moves from a “federated” structure to a single group. However, the results statement also talks of “underperforming” project managers exiting the business.
The group’s cash position was “better than expected”, with £260m net cash compared to £219m six months ago, attributed to the success of the “Cash is our compass” training initiative.
Other staff training initiatives include business development teams switching to “a culture based on selling value rather than price” and improving their negotiation skills.
And there’s a project management leadership forum that measures performance against “Compass”, an assessment tool aligned to Association of Project Management competencies.
