Firm confirms closure of four regional offices and says it could be as long as three years before margins at the UK construction business recover

Olympic-Stadium-Panorama4-Credit-London-2012

Balfour Beatty is working on the conversion of the 2012 Olympic stadium

Balfour Beatty is to close four of its regional offices, including Bristol and Exeter, in the wake of its latest 拢75m profit warning, the firm has confirmed, and has warned it could take three years before margins in the UK construction business recover.

Today the troubled contractor issued a fresh 拢75m profit warning, its fifth in less then two years (see timeline below), with its share price tumbling 20% on the news this morning.

It said the profit shortfall was spread across its UK construction business 鈥 the same source as the previous warnings 鈥 with 拢30m focused on the M&E business; 拢20m on large London area building projects; 拢15m on the regional construction business; and 拢10m on the major infrastructure projects business, which was flagged as a source of problems for the first time.

Balfour Beatty said it had appointed accountants KMPG to undertake an independent review of the UK construction business, at contract level, to provide 鈥渁ssurance鈥 to its investors.

The firm also announced that executive chairman Steve Marshall, who took on the executive role after the exit of former group chief executive Andrew McNaughton following a 拢30m profit warning in May, would be stepping down from the firm after a new chief executive and non- executive chairman are appointed 鈥 meaning the firm will have effectively lost two chief executives in a year.

Steve Marshall, executive chair of Balfour Beatty

Steve Marshall

Marshall played the leading role in the merger talks with Carillion over the summer that collapsed in acrimony after the two construction giants failed to agree over Balfour鈥檚 planned sale of consultant arm Parsons Brinckerhoff.

The firm said it was close to appointing a new chief executive, with an announcement expected in the coming weeks.

Balfour Beatty management told analysts today that the 拢15m shortfall in the regional construction business was focused on the South-west and Wales regions, with the firm set to close four unprofitable regional offices.

A Balfour Beatty spokesman told 好色先生TV that the Exeter and Bristol offices would close, with the business units merged into one office and relocated to an as yet undecided location.

Two further offices, in Redhill, Surrey, and in Croydon, are also set to close, the spokesman said, leaving the regional business with 17, rather than 20 business units.

He said staff in the four offices were currently under consultation, but would not say how many were at risk of redundancy.

Marshall said the latest write-down was 鈥渙bviously eye-catching, but it obscures the work that is actually going on to heal the business鈥.

Nick Pollard

Nick Pollard

But when quizzed about the 12-18 month time line to get the business on track that was outlined in May, he said there was still 鈥渁 lot of healing work to do鈥 and there would 鈥渄oubtless be work to do beyond that [the 12-18 months] as well鈥.

He said that 鈥渋n practice鈥 the full recovery of the business to a position where its margins were in line with its competitors could take 鈥渢wo years or three years鈥.

, Balfour Beatty has restructured the regional business, with managing director Mark Cutler exiting after just eight months in the role, while the role of regional finance director, currently held by Beverly Dew, will also be dropped when Dew leaves

Balfour Beatty鈥檚 UK construction chief executive Nick Pollard said the move was aimed at 鈥渞emoving a complete layer [of management] in the regional structure, so that we get a much better visibility, control and immediacy of action towards both bidding and execution of work on site鈥.

He told analysts that the problems with the 鈥渉andful鈥 of major infrastructure projects, the source of a 拢10m profit shortfall - the first time the business had been flagged as a source of problems - reflected 鈥渞ecent changes in scope and complexity on the project鈥 and 鈥渢echnical changes, by and large, which are emerging on some jobs that we鈥檙e currently engaged in鈥.

He said that on these jobs there were 鈥渁dditional works and additional costs鈥, adding: 鈥淭here鈥檚 an opportunity on some of those to turn that position round, but that will require a lot of hard work and it will require the agreement of additional revenue with our customers.鈥

鈥淭hat鈥檚 something we will be working on over the coming weeks and months and until such time as that revenue is clearly likely to be secured, the position we鈥檝e struck is the right one.鈥

Speaking more generally about the firm鈥檚 problem projects, Pollard said: 鈥淚n terms of the projects that are now on our list of problem projects, the issues are broadly similar.

鈥淭hey relate to operational issues in the field, a shortage of key resources or that under tender, a proposition that was originally conceived was ill-balanced or ill-judged in some way and therefore at the end of those projects has given us problems.鈥

Pollard added: 鈥淲hen you hit a bump in the road, when you hit a problem on one of those contracts and an end date slides or you have to do some additional work because you find something was done wrong in a previous phase of the project, then that incurs extra costs and unfortunately it is dumped on you.鈥

鈥淲e need to get to the back end of those legacy contracts and into the smooth water of more normal trading.鈥

Quizzed by analysts on whether the appointment of KPMG to review the firm鈥檚 contracts indicated a 鈥渂reakdown in trust within the organization鈥 and a failure in the 鈥渃ore skill set that contracting companies should have in order to be able to profitably execute and deliver contracts鈥, executive chairman Steve Marshall said: 鈥淲e have to speak plainly. The company has had a series of surprises. And it has been surprised itself. So it isn鈥檛 about trust between any part of the company.

鈥淭he problem is we have all been surprised by what has happened in this business and therefore, certainly, I and the board judge that the right thing to do to give the company the assurance it needs and, frankly, the investors the assurance they need is to have an independent review鈥.

Marshall said KPMG would report to the board before the end of the year.

Kevin Cammack, analyst at Cenkos, said the profit warning was 鈥渁pocalyptic鈥. 鈥淚鈥檇 like to think it鈥檚 deck-clearing for the new chief executive where we are told the appointment is at 鈥榓n advanced stage鈥 but I fear it is not.鈥

He said the appointment of KPMG, emphasized the 鈥渟heer lack of confidence and controls in anyone and anything鈥 in the UK construction business.

鈥淜MPG鈥檚 appointment is basically to re-assure external investors and of course because they no longer have confidence in anyone internally,鈥 he said, adding: 鈥淗orse, stable door and bolted spring to mind.鈥

鈥淚鈥檓 speechless really and unsure where Balfour Beatty goes from here. Carillion are unlikely to come back with the Parsons sale agreed and due for shareholder approval in October 鈥 whilst the only 鈥榗ertainty鈥 of value now is the PFI portfolio.

鈥淎 full break-up of the group may be the best may forward 鈥 but clearly a lot depends on the new chief executive and market confidence in him.鈥

Stephen Rawlinson, analyst Whitman Howard, said the latest profit warning was a 鈥渂ombshell鈥 and brought the total profit shortfall announced this year to around 拢150m.

He said: 鈥淭hat is just in the UK and we are asked to believe that all is okay in the rest of the world.

鈥淭he new chief executive is promised very soon and we do not know what he will make of contracts outside the UK.

鈥淭he company grasps at straws by mentioning its priorities, the likely departure of chairman Steve Marshall once the dust has settled and that there is hard work going on to get the UK right.

鈥淲hat might Carillion be thinking now, close shave or another opportunity to have a pop?鈥

Balfour Beatty鈥檚 profit warnings

November 2012: 拢10m

  • Deterioration in performance of UK construction business

April 2013: 拢50m (This rose to a 拢60m shortfall in end of year results)

  • 拢38m focused on regional construction; 拢12m on major building projects 鈥 the further 拢10m deterioration was focuse don M&E business and major building projects

May 2014: 拢30m

  • 拢20m focused on M&E business; 拢10m on major building projects

July 2014: 拢35m

  • Focused entirely on M&E business

September 2014: 拢75m

  • 拢30m focused on the M&E business; 拢20m on major building projects; 拢15m on regional construction business; and 拢10m on the major infrastructure projects business