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Balfour Beatty issues profit warning and warns of difficult year ahead

Britain’s biggest contractor Balfour Beatty has highlighted the worsening state of the UK construction market with a shock profit warning.

The contractor said its 2012 profits will be lower than expected in a gloomy trading statement covering the period 30 June to 7 November that also reveals that its order book had fallen £600M from £15bn at the end of June to £14.4bn by the end of September.

The poorer than expected performance comes as a result of what it described as “difficult trading conditions” that have persisted in its two major construction markets. US construction markets remain depressed, it said, and the performance of its UK construction business is weaker than anticipated. Structural problems in European rail markets added to the challenges, it said.

Construction woes

It said that 2013 would be a “difficult year” for its construction services business.

“In the UK, we are seeing further market deterioration,” it said, adding that its business is continuing to migrate towards smaller contracts in a market with “very few” major projects. It said approximately half of its order book is now in its regional business, up from a third a year ago. The firm has recently restructured its construction division with 650 job losses and said more changes may be necessary.

“The construction market backdrop has become more difficult with the continued absence of the larger complex projects coming to market and a reduction in confidence in the US building market following some encouraging signs earlier in the year. The impact of these issues is evident in current performance and the reduction in our order book which collectively point to 2013 being a difficult year for construction services,” it said..

“We have been managing our business on the basis that market conditions would be tough, and this has been an effective strategy. We will take further action, both operationally and strategically where necessary, to mitigate any adverse impacts on our business.”

It added that it was unable to squeeze the supply chain any further to improve its own margins. “At the same time, the supply chain is suffering which in turn, reduces our ability to negotiate terms that match the worsening market conditions,” it said. “The adverse impact of these recent developments is expected to reduce profitability slightly this year. Looking ahead, there is reduced visibility due to smaller projects and shorter lead times, but in the absence of an immediate improvement in these emerging market conditions, we expect further decline in activity levels and pressure on margins into 2013.”

Rail struggles

Balfour Beatty said its rail construction business also performed below expectations in the third quarter. Activity levels in Italy and Spain have become “critically low”, it said and that this, combined with the increasing commoditisation of work in Germany and the UK, was expected to further profits by around £10M in 2012. We are currently undertaking a review of the operations across our European rail business in the light of these structural factors.

PB steady

But it added that its professional services, support services and infrastructure investments businesses were demonstrating “resilience and strength” in a challenging economic environment, performing in line with expectations.

It said earnings in its professional services business, largely represented by Parsons Brinckerhoff, were in line with expectations, with a decline in the UK being offset by modest growth in the US. We made continued good progress in the rest of the world, particularly in Qatar which is a new and growing market for our Professional Services division.  Last week our business in the North East of the US was disrupted by the impact of Hurricane Sandy, although we do not think it is likely to have a material impact on our financial performance.

The division has maintained its focus on increasing utilisation rates and combined with the successful completion of some large projects in Asia Pacific, this is helping to improve profitability, putting the division on track to achieve its medium-term margin targets.

We have continued to make progress in restructuring our construction operations in both the UK and the US. The reduced structural cost will, in part, offset the impact of volume and margin pressure referred to above.I

The construction market backdrop has become more difficult with the continued absence of the larger complex projects coming to market and a reduction in confidence in the US building market following some encouraging signs earlier in the year.  The impact of these issues is evident in current performance and the reduction in our order book which collectively point to 2013 being a difficult year for Construction Services.

We have been managing our business on the basis that market conditions would be tough, and this has been an effective strategy. We will take further action, both operationally and strategically where necessary, to mitigate any adverse impacts on our business.

In the medium and long term, we are confident that our position in infrastructure markets, our focus and competitive advantage in the transportation, rail, power, water and mining verticals, and our initiatives to access growing markets such as Australia, Canada, Brazil and India will stand us in good stead as well as making the business more robust.

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