Balfour Beatty PLC (BBY) - Q3 Interim Management Statement
RNS Number : 6040Q
Balfour Beatty PLC
08 November 2012
8 November, 2012
BALFOUR BEATTY 2012 Q3 IMS
Balfour Beatty, the international infrastructure group, announces its 2012 Q3
Interim Management Statement, covering the period 30 June to 7 November 2012.
Our Professional Services, Support Services and Infrastructure Investments
businesses are demonstrating resilience and strength in a challenging economic
environment, performing well and in line with our expectations.
In Construction Services, difficult trading conditions have persisted in the
period in our two major markets. US construction markets remain depressed, and
the performance of our UK construction business is weaker than anticipated.
Structural problems in European Rail markets added to the challenges. We have
made good progress in implementing both phases of our cost efficiency
programme and that has been helpful in offsetting some of the weakness.
As a result and based on the outturn for the third quarter, profitability in
2012 will be slightly lower than expected at the time of the half-year results
although this will be somewhat offset by a slightly lower effective tax rate.
Furthermore, the conditions that have led to a recent decline in the order
book point to 2013 being a difficult year for Construction Services.
After a small decrease in the first half in the Construction Services order
book, we saw a more significant decline in the third quarter. As a result,
even though order intake in our other businesses was stable, the Group order
book closed at £14.4 billion at the end of September, down from £15.0 billion
at the end of June.
Professional Services has continued to perform well, benefitting from its
geographical diversity and the less cyclical nature of its civil
infrastructure work. The order book remained stable overall, with small
reductions in the UK and US offset by increases in the rest of the world.
Revenue in the third quarter was in line with expectations, with a decline in
the UK being offset by modest growth in the US. We made continued good
progress in the rest of the world, particularly in Qatar which is a new and
growing market for our Professional Services division. Last week our business
in the North East of the US was disrupted by the impact of Hurricane Sandy,
although we do not think it is likely to have a material impact on our
The division has maintained its focus on increasing utilisation rates and
combined with the successful completion of some large projects in Asia
Pacific, this is helping to improve profitability, putting the division on
track to achieve its medium-term margin targets.
In the US construction market, the positive leading indicators seen in the
five months to March 2012 reversed, with the five subsequent months showing
negative indicators, pushing market recovery further out than initially
envisaged and keeping market volumes at a depressed but stable level. In this
environment, our institutional building business has suffered from weak
federal demand and the general lack of larger complex projects where there is
greater opportunity to differentiate ourselves. In contrast, the prospects for
our civil infrastructure business remain positive with some large design-build
and PPP projects being tendered into the market. Overall, our US construction
business has performed in line with our expectations, although the order book
In the UK, we are seeing further market deterioration. On the one hand, the
business is continuing to migrate towards smaller contracts in a market with
very few major projects. Approximately half of our order book is now in our
regional business, up from a third a year ago. At the same time, the supply
chain is suffering which in turn, reduces our ability to negotiate terms that
match the worsening market conditions. The adverse impact of these recent
developments is expected to reduce profitability slightly this year. Looking
ahead, there is reduced visibility due to smaller projects and shorter lead
times, but in the absence of an immediate improvement in these emerging market
conditions, we expect further decline in activity levels and pressure on
margins into 2013.
We have continued to make progress in restructuring our construction
operations in both the UK and the US. The reduced structural cost will, in
part, offset the impact of volume and margin pressure referred to above.
Our Rail construction business performed below expectations in the third
quarter. Activity levels in Italy and Spain have become critically low. This,
combined with the increasing commoditisation of work in Germany and the UK, is
expected to give rise to a further adverse impact on profits of around £10
million in 2012. We are currently undertaking a review of the operations
across our European rail business in the light of these structural factors.
Cost efficiency update
Our cost efficiency programmes continued to make good progress. Phase 1, which
entails savings from indirect procurement and combining transactional
accounting and payroll in the UK in a single Shared Service Centre in
Newcastle, will reach its run-rate savings of £30 million by the end of 2012.
Phase 2, the broader programme we announced in March 2012 with a target of £50
million annual savings by 2015, is underway. The UK Construction business has
made significant progress in restructuring its operations in the quarter. The
new operating structure, which will be in place by January 2013, combines six
operating companies into one, streamlining the number of locations and
creating a more efficient back office with 650 fewer employees. These
initiatives constitute the largest portion of the current target savings. The
new operating structure will also be more flexible, agile and adaptable to
change, should market conditions require.
The US Construction business is in the process of reducing its operating
structure from five regions to three, with a significant focus on leveraging
resources across a broader geographic base. Furthermore, Parsons Brinckerhoff
has announced plans to move the majority of its support functions from New
York City to Lancaster, Pennsylvania, which is expected to improve its cost
effectiveness from April 2013 onwards. The successful implementation of our
initiatives to date gives us confidence that we will achieve the majority of
the Phase 2 savings in 2013.
Trading has been consistent with expectations in the period. The order book
was stable with an increase in the local authority outsourcing contracts -
including the North Tyneside business services contract - offsetting the
anticipated modest decline in the Utilities (water and power) order book.
Revenue grew year on year in the third quarter; WorkPlace, our facilities
management business, and Utilities were particularly good performers.
Profit performance has recovered from cost increases incurred in the first
half and the division is on track to meet our expectations.
Performance has been resilient given the long-term and stable characteristics
of this business. In the period, we have been working on bringing our
preferred bidder positions in US military housing to financial close. We are
also diversifying the business into new geographies such as Canada, the USA
and Australia, and new sectors such as energy-from-waste and biomass, while
developing investment models in addition to PFI and PPP.
A good example of diversification is the preferred bidder award in August of
University of Edinburgh's £110 million Holyrood Postgraduate Student
Accommodation and Outreach Centre project. The 50-year concession contract
involves the design, build and maintenance of student accommodation facilities
for 1,160 postgraduate students, as well as an outreach centre which will
become the focal point for the University's community-based teaching
activities and continuous professional development courses.
Average net debt for the nine months to the end of September was £15m. This
reduction in cash is a reflection of further working capital outflow in UK
Construction and the delay in the anticipated improvement in US Construction
orders. While we still expect some seasonal recovery in working capital by the
year-end, a significant change in the underlying position is unlikely.
The construction market backdrop has become more difficult with the continued
absence of the larger complex projects coming to market and a reduction in
confidence in the US building market following some encouraging signs earlier
in the year. The impact of these issues is evident in current performance and
the reduction in our order book which collectively point to 2013 being a
difficult year for Construction Services.
We have been managing our business on the basis that market conditions would
be tough, and this has been an effective strategy. We will take further
action, both operationally and strategically where necessary, to mitigate any
adverse impacts on our business.
In the medium and long term, we are confident that our position in
infrastructure markets, our focus and competitive advantage in the
transportation, rail, power, water and mining verticals, and our initiatives
to access growing markets such as Australia, Canada, Brazil and India will
stand us in good stead as well as making the business more robust.
Balfour Beatty will host a conference call for analysts and investors at 8:00
(UK time). To join the call, please dial +44 (0)20 7784 1036 and quote
confirmation code 1896430. A recording of the call and its transcript will be
posted on our website within 24 hours of the event.
Balfour Beatty plc
Tel 020 7216 6924
Balfour Beatty plc
Tel 020 7216 6865
This document contains forward-looking statements which have been made in good
faith based on the information available at the time of its approval. It is
believed that the expectations reflected in these statements are reasonable,
but they may be affected by a number of risks and uncertainties that are
inherent in any forward-looking statement which could cause actual results to
differ materially from those currently anticipated.
Notes to Editors:
1. Balfour Beatty (www.balfourbeatty.com) is a world-class infrastructure
group with capabilities in professional services, construction services,
support services and infrastructure investments.
We work in partnership with our customers principally in the UK,
continental Europe, the US, South-East Asia, Australia and the Middle East,
who value the highest levels of quality, safety and technical expertise.
Key infrastructure markets include transportation (roads, rail and
airports); social infrastructure (education, specialist healthcare, and
various types of accommodation); utilities (water, gas and power
transmission and generation) and commercial (offices, leisure and retail).
The Group delivers services essential to the development, creation and care
of these infrastructure assets including project design, financing and
management, engineering and construction, and facilities management
Balfour Beatty employs 50,000 people around the world.
This information is provided by RNS
The company news service from the London Stock Exchange
IMSEAPFXEDNAFFF -0- Nov/08/2012 07:01 GMT
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