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Balfour Beatty warns on profits

8 Nov 12 Weaker than expected performance of its UK construction business has prompted Balfour Beatty top warn shareholders that 2012 profits will be lower than previously forecast.

A recent decline orders also indicates that 2013 is set to be another difficult year as well, the company said.

“After a small decrease in the first half in the Construction Services order book, we saw a more significant decline in the third quarter,” the company said this morning. “As a result, even though order intake in our other businesses was stable, the Group order book closed at £14.4bn at the end of September, down from £15.0bn at the end of June.”

With few major contracts to bid for, Balfour Beatty is looking to smaller contracts to feed the business.

The company said: “Approximately half of our order book is now in our regional business, up from a third a year ago. At the same time, the supply chain is suffering which in turn, reduces our ability to negotiate terms that match the worsening market conditions. 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.”

As previously reported, Balfour Beatty is restructuring. On this, the company said: “Our cost efficiency programmes continued to make good progress. Phase 1, which entails savings from indirect procurement and combining transactional accounting and payroll in the UK in a single Shared Service Centre in Newcastle, will reach its run-rate savings of £30m by the end of 2012.

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“Phase 2, the broader programme we announced in March 2012 with a target of £50m annual savings by 2015, is underway. The UK Construction business has made significant progress in restructuring its operations in the quarter. The new operating structure, which will be in place by January 2013, combines six operating companies into one, streamlining the number of locations and creating a more efficient back office with 650 fewer employees. These initiatives constitute the largest portion of the current target savings. The new operating structure will also be more flexible, agile and adaptable to change, should market conditions require.”

The US Construction business is also being restructured, from five regions to three, and Parsons Brinckerhoff is moving the majority of its support functions from New York City to Lancaster, Pennsylvania.

On the outlook for the business, the company said: “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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