Balfour Beatty has told analysts that it expects to avoid increasing supply chain costs as the market picks up – thanks to its weighting towards the smaller, regional contracts that ironically led to a profits warning earlier in the year.
At its half-year results this week, the company said that regional orders were up, with contract wins in the last four months worth around £400m, while major schemes such as HS2 were still some way off.
Speaking to analysts, chief financial officer Duncan McGrath commented that “pressure is building on the supply chain and will at some point come through”, while group chief executive Andrew McNaughton said: “The shift towards the regional contracts as opposed to larger fixed contracts benefits that [pressure management], because we can be better attuned.
“You are bidding them on a shorter time cycle, so you’re not locking yourself into the kind of impact of increasing costs in the supply chain.
“So as we see the shape of the business going forward we’re better placed as that market ticks up and cost increases come on.”
The half-year results showed that group-wide revenue for the first half was £4.32bn, down from £4.4bn (excluding joint ventures) in the first half of 2012, while the group reported a pre-tax loss of £6m, compared to a £92m profit in the first half of 2012. Underlying pre-tax profit was down 70% at £45m, compared to £150m in the first half of 2012.
The results reflected a £17m UK restructuring cost and a £41m loss in its UK construction services division after problems were identified in a number of smaller contracts, particularly in the south.
Balfour Beatty last month won a £121m contract to build this hotel, leisure and apartment complex in North Greenwich, London
McNaughton told the analysts: “As a result of the restructuring we saw some of our management distracted from the practice [on planning, cost estimating and commercial governance] they’ve had in the past. Therefore it’s a re-placement, or putting back into place, the standard of rigour of those.
“The actions were taken several months ago… and we’re seeing, for example, improvements in our commercial performance on the outcome of projects, improvements in timely operational delivery. And we’re also seeing improvements in the margin coming into the order book.”
McNaughton said that if volume picked up in 2014, Balfour Beatty would expect to return to its historic margins level of 2.8-3%.
Balfour Beatty has closed its Doncaster office and its offices in Rochdale and Dartford are in the process of being wound up, but Nick Pollard, newly appointed chief executive of Balfour Beatty Construction Service UK, insisted that no more office closures are planned in the UK.
“[There are] no further plans to close delivery units,” he said, adding that it would be “stupid as a regional business” not to keep “flexing its shape”.
Following the results, Balfour Beatty’s share price slipped by 7%, according to the FT.
