The UK’s biggest contractor is seeking its second chief executive in two years, with industry sources expecting Balfour Beatty to look outside construction for its next leader.
Andrew McNaughton stood down as group CEO this week as the contractor announced a third profit warning in 18 months on Tuesday.
Mr McNaughton left the firm after a £30m profit warning in the group’s UK business, with Balfour Beatty Engineering Services continuing to underperform.
BBES managing director Phil McGuire has also resigned. His responsibilities will be taken over on an interim basis by UK construction services chief executive Nick Pollard following a review of the BBES business.
Mr Pollard said BBES had been expected to have a slower recovery than other divisions as it was predominantly for tier two work, which was still reliant on work picking up for tier one contractors.
“When we reviewed the business and its contracts portfolio it was holding operational and commercial forecasts that appeared increasingly difficult to fulfil.”
It was a “simple fact of corporate life” that Mr McNaughton had decided to resign, he said.
Balfour Beatty said poor trading conditions for BBES had continued from 2013 into 2014 in an “extremely challenging first quarter” with problem contracts and low orders.
The group has announced three profit warnings in 18 months, the first of which came under former chief executive Ian Tyler’s leadership in November 2012.
One senior source at a rival contractor said: “It is very unfortunate for Andrew, he had only been doing it for [what felt like] 10 minutes. It’s very difficult to put those issues right; with the size of the business it’s like an oil tanker to turn around.
The source added: “My guess is they are probably going to need to be seen to look outside the construction industry [for Mr McNaughton’s successor]. They will need to trawl the market and be seen to be choosing the best possible person.”
A source at a second major contractor told Construction News: “It’s common knowledge they’ve had difficult times. It has been restructuring for a long time, and that in itself causes problems. They’ve had a few bad jobs, as we all have. Balfour Beatty is a big machine and it needs a lot of work to keep it ticking over.”
The managing director of a subcontractor that works for Balfour Beatty said: “There has been so much change at Balfour Beatty in the past few years. I think they’ve become too focused on the internal structure of the company instead of looking outward to the market – there comes a point where there has to be a tipping point.”
Drop in Balfour Beatty’s share price on day of announcement
Maximum 2014 profit now expected for group
Profit warnings issued by Balfour Beatty since November 2012
Decline in Balfour Beatty’s order book in Q1 2014 compared with the end of 2013
Fall in pre-tax profits from £147m in 2012 to £32m in 2013
Kier chief executive Paul Sheffield and Costain CEO Andrew Wyllie were linked with the role as potential internal industry candidates, but multiple sources said they expected Balfour Beatty to look outside the industry for its next group chief.
A second source close to Balfour Beatty said: “The UK construction business has been through a long period of review, which inevitably means distraction for senior people within the business, which won’t have helped.
“Andrew was in a bit of a race to stabilise the business and to win the confidence of the markets. It’s easy to pass judgement on what he had or hadn’t done, but he was in a tough position.”
Panmure Gordon analyst Andy Brown said he was surprised to see Mr McNaughton depart, adding he had been a “sensible CEO… not afraid to roll his sleeves up and get things done”.
Liberum Capital analyst Joe Brent said the contractor had told analysts and investors that it would take another 12 to 18 months to turn the business around.
However, he said the problem contracts in construction had mostly been signed in 2012 and early 2013 and that it was positive that management was “thinking boldly about portfolio change”.
Balfour Beatty non-executive chairman Steve Marshall has been appointed as executive chairman and will take on the duties of an interim chief executive as the contractor’s board starts the search for Mr McNaughton’s long-term successor.
Asked how long it would take to replace Mr McNaughton, Mr Pollard said: “I have no idea how long it will take for the board to go to the market.”
He said this was “exactly why” Mr Marshall would step up to the role in the short term and put time and energy into the leadership of the group.
“Eighty per cent of BBCSUK is working hard and in good shape,” Mr Pollard said. “We have some fantastic opportunities and a really good pipeline.”
The group brought forward an interim management statement to reveal the profit warning at the same time as it announced it would consider the sale of Parsons Brinckerhoff, which it bought for around £380m in 2009 (see box).
It also announced its order book had fallen in Q1 2014 to £12.9bn compared with £13.4bn at the end of 2013, with increases to its professional services order book more than offset by reductions in the construction services and the support services.
Proposed consultancy sale fuels ‘panic’ claims
Analysts have questioned whether a Balfour Beatty sale of Parsons Brinckerhoff would be a ‘panic’ move, as the contractor posted a £30m profit warning on Tuesday.
Balfour Beatty said it was considering the sale of its consultancy firm Parsons Brinckerhoff, which it bought for around £380m in 2009.
Analyst Howard Seymour at Numis Securities said the timing of the announcement was a surprise and that “investor concern is that this is a snap decision and could reflect balance sheet concern”.
Panmure Gordon construction and support services analyst Andy Brown said the announcement “seemed panicked”.
But Balfour Beatty said the combination of professional services and construction capabilities had not added “material competitive advantage” in the market.
Mr Pollard said: “We don’t need to sell… but it makes good sense for the value for shareholders.”
VolkerWessels chief financial officer Naomi Connell warned that it was still “a tough time for construction companies”, while Osborne chairman Andrew Osborne said publicly listed companies were forced to listen to shareholders who demanded action.
Mr Pollard added: “The saddest thing about today’s announcement is that it inevitably draws the focus towards a small part of the business that is not performing.
“I see the work that has been done to restore the BBCSUK business. I absolutely see a future for BBES… quite a few competitors have pulled out of the sector.”
He said he was “quietly confident that the business will flourish”.
Volatility and risk had been reduced in the UK business, he added, but warned that he would “be a fool to say we will never have another loss-maker” as construction is a “risky business”.