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Balfour Beatty books £37m construction loss after 2012 restructure

Balfour Beatty saw a £37m loss from operations in its construction arm after extensive restructuring, but says it has created a “more agile” business that is ready for the upturn.

Balfour Beatty also confirmed today that it is pulling out of the mainland European rail market, and has already sold the Spanish business to its management. It will focus instead on its core markets of transportation, power and energy, water and mining.

The contractor also said it expects UK construction revenue to fall 20 per cent in 2013.

Group revenue for the year ended 31 December 2012, including jvs, was down 1 per cent to £10.8bn (flat at £9.49bn excluding jvs). Underlying pre-tax profit was down 7 per cent from £334m to £310m. Including exceptional items and excluding jvs and PPP sales, group pre-tax profit was down 70 per cent from £246m to £70m.

The UK’s biggest contractor reported costs of £34m this year for the UK restructuring which has seen a change from six to three business streams, office reductions from 75 to 37 and 650 redundancies.

The company said profits have also been affected by a shift to smaller projects and a rise in subcontractor defaults.

When the restructuring is taken into account, the firm booked a £37m loss, down from a £141m profit in 2011.

Discounting the restructuring costs, the division - which includes US and UK operations - saw a 28 per cent fall in profits from £169m to £122m, as revenue fell 6 per cent from £7bn to £6.95bn. The order book was down 6 per cent to £8bn, largely due to a drop in the US. The margin dropped from 2.4 per cent to 1.8 per cent.

The UK construction order book was up 1 per cent, with regional building and civils up 15 per cent as the focus shifted to smaller schemes.

The firm said the restructure has already led to £36m of savings and is set to save £80m by 2015. It said last year that it expects a £50m-75m one-off cost as it looks to make annual savings of £50m across the group.

The contractor is also setting up a second shared services centre in Lancaster, along with the one already in Newcastle, which cost £4m to implement this year.

It said: “The new organisation is more agile, fosters collaboration within the construction business as well as with other divisions, and will ensure that we emerge from the current downturn in UK construction as a more operationally efficient business.”

The UK’s biggest contractor said UK government’s public expenditure cuts and the financial constraints generally in the economy hit the construction sector hard, with fewer big projects coming through. It also said government delays in clarifying key elements of energy policy, such as carbon pricing and strike prices, caused utility companies to defer investment decisions.

It added: ”Towards the end of the year market conditions were further depressed by the growing financial strains on the supply chain and subcontractors, reducing our ability to negotiate terms with them that matched the terms our clients were requiring.”

Outgoing chief executive Ian Tyler said it had been a resilient performance in the face of ongoing challenging markets.

There were £245m of non-underlying items, including £61m of restructuing costs across all UK divisions, with £20m in redundancy costs. Mainland Europe rail divestment incurred £104m. There was no mention of further restructuring or the future of the FM division Workplace, which it is currently considering.

Mr Tyler said there has been good progress in the implementation of measures designed to increase organisational efficiency and are on track to realise the anticipated benefits.

He added: “Furthermore, our growth strategy of focusing on key market sectors and geographies is making headway, and is reflected in the continuing shift in our order book towards economic infrastructure.

“While we still believe that construction markets in 2013 will be challenging, our actions to date and ongoing strategic focus on growth markets position us well for the medium term.”

Balfour Betaty increased the dividend by 2 per cent.

Restructuring costs;

Construction Services UK £34m, where six business units will be streamlined and restructured into one business with three business streams
Support Services UK £7m
Other UK entities £10m; and other non-UK entities £10m.
These 2012 restructuring costs comprise: redundancy costs £20m; external advisers £10m; impairment of land and buildings £5m; other property related costs £11m; pension curtailment cost £2m; and other restructuring costs £13m.

The UK specialist rail manufacturing business was sold during 2011. A loss of £7m arose on the sale which comprises: a loss on the disposal of the rail business operations of £4m.

Divisional performance:

Support services saw a 22 per cent fall in profits to £52m (2011: £67m) as revenue rose 3 per cent to £1.63bn and the order book gained 12 per cent to £5.7bn.
Profitability was lower due to start-up costs on new contracts and some £10m of one-off cost increases on a small number of power sector contracts in Australia and New Zealand

Professional services saw profits up 13 per cent to £98m and a 5.9 per cent margin, with revenue up 1 per cent to £1.67bn. It said the UK market remains extremely competitive, but volumes in the transportation sector have stabilised and even improved.

Infrastructure investment profits were up from £71m to £97m, with £734m worth of assets in the portfolio.

Cash:

Net cash was down significantly, from £340m to £35m. Cash used in operations was £219m (2011: generated £35m). Negative working capital dropped £308m, with the biggest component being £250m in construction services,which Balfour said was due to a move from project financed schemes to to smaller projects “which tend to have less scope for favourable payment terms”, along with a general drop in volumes.

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