'Race to bottom' leaves O'Rourke with £246m loss
Laing O’Rourke founder and chief executive Ray O’Rourke said he “regrets joining race to the bottom” as he revealed the firm turned in losses of £246m for the financial year to March 2016.
In a letter to clients and staff sent before Christmas, O’Rourke said the £3bn-turnover contractor was having to report the major loss due to the impact of several problem jobs – including huge losses on a Canadian PFI hospital job.
He said: “We all know that when recession starts, our industry in particular enters a race to the bottom – regrettably Laing O’Rourke joined in.”
His letter said that the firm had taken steps to turn around its performance and was set to return to profit in the current financial year to March 2017.
He also set out plans for the firm to become a £4bn turnover business within four years and restated the firm’s commitment to investing in offsite manufacturing.
He added: “In making this announcement, I want to assure all our stakeholders that our company is adequately financed, has returned to profit in FY17 and is therefore well positioned to move forward from these less than satisfactory results”.
He made no mention of the contractor’s planned sale of its £1.5bn-turnover Australian business – a process the firm kick-started back in January this year but has since gone quiet.
Ray O'Rourke's letter in full
It is with humility that I have to report our first loss in 15 years of trading as Laing O’Rourke.
In the trading period to 31 March 2016 the Group made a loss of £245.6m. The genesis of this deterioration in profitability is rooted in the fact that coming out of a recession that had a negative impact over some six years (2009-14), it would have been difficult to avoid the severe headwinds our industry has endured through this period, which drove margins down to painful levels, alongside revenue reductions.
In October 2010 the austerity measures announced by government in the UK had a big impact on our forward order book (£2.7bn was removed from our pipeline across Health (PFI/PP/Procure21), Schools (BSF) and Military Accommodation (Metrix)) against which we had made our Final Investment Decision (FID), to proceed with our major Manufacturing Facility at Steetley, Nottinghamshire.
We all know that when recession starts, our industry in particular enters a race to the bottom - regrettably Laing O’Rourke joined in.
I want to assure all our stakeholders that our company is adequately financed, has returned to profit in FY17, and is therefore well-positioned to move forward from these less than satisfactory results
I can reconcile the losses to a number of projects that are now complete and handed over and a particularly difficult large project in Canada, on which I am pleased to announce we are on track to deliver the project in accordance with the mutually agreed revised timetable.
Nevertheless, in the period 2010-16, we have continued to invest in our people, manufacturing, digital technology and engineering excellence, based on our firm belief that this is the future; I am pleased to say we continue to believe in this strategy as the market in the UK dramatically improves with the advent of the New Nuclear Programme, High Speed 2, Heathrow Runway and Terminals, Thames Tideway and the government’s drive for more living accommodation – 1 million more homes by 2020.
In addition to this, our Australian business has continued to perform well over the past year, securing significant infrastructure projects mainly through collaborative contracts, in markets that also have record spends forecast up to 2020 and beyond. These welcome developments are reflected in our record order book.
As a private company, the responsibility for its performance rests with me as founder. In making this announcement, I want to assure all our stakeholders that our company is adequately financed, has returned to profit in FY17 and is therefore well positioned to move forward from these less than satisfactory results.
The following chronology is pertinent in order to provide clarity as to our future plans:
In summer 2015, we acknowledged a number of our major projects taken during recessionary years in the UK were loss-making. There were a number of contributing factors, including inadequate pricing, supply chain failures, coupled with difficult contract conditions, with a number of clients also facing the impact of austerity.
The Board, together with the Executive Leadership Team, resolved to “clear the decks” and focus on a number of key areas, to return the group to profitable trading in FY17 (31 March 2017).
We resolved not to change strategy and to continue our pursuit of DfMA, Digital Engineering and Engineering Excellence, in order to drive improvements in productivity, quality and schedule.
Our order book success continues to demonstrate that the market is attracted to our delivery model.
The addressable pipeline of projects we have in the group – Australia; Middle East; UK – exceeds £45bn, with a £10bn backlog of secured and preferred contracts.
Given we are in this unusual place, I feel committed to give our Stakeholders guidance on our anticipated revenue flows for the coming years:
- FY17 - £3bn
- FY18 - £3.4bn
- FY19 - £3.7bn
- FY20 - £4bn
I am delighted that having returned to profit at the half year, we are on track to report a profit for the full year in line with trading plans set at the start of 2016 and are in a position to grow profitability in the coming years.
I extend a particular thanks to all our people past and present, without whom none of this success would have been possible.
Through this announcement, I take the opportunity to thank all our Stakeholders for the tremendous support they have given us as we navigated through these difficult trading conditions.