Balfour Beatty PLC BBY Q3 Interim Management Statement

  Balfour Beatty PLC (BBY) - Q3 Interim Management Statement

RNS Number : 6040Q
Balfour Beatty PLC
08 November 2012




News Release



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.



Trading

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.



Operating performance

Order book

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

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 
financial performance.

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.



Construction Services

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 
has decreased.

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.



Support Services

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.



Infrastructure Investments

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.



Financial position

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.



Outlook

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.



                                     ENDS



Conference call

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.



Analyst/investor enquiries:

Basak Kotler

Balfour Beatty plc

Tel 020 7216 6924



Media enquiries:

Rebecca Salt

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 
   services.

   

   Balfour Beatty employs 50,000 people around the world.



                     This information is provided by RNS
           The company news service from the London Stock Exchange

END


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