New £30M profit warning by Balfour Beatty costs McNaughton his job

The resignation of Balfour Beatty Group chief executive Andrew McNaughton this week came after it became clear that, despite huge amounts investment to restructure the troubled business, recovery was taking longer than anticipated.

Antony Oliver
07 May 2014

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Balfour Beatty this week issued its third profit warning in last 18 months prompting an immediate 16% fall in the share price. Just a year ago it down-played profit expectation by £50M. This week profit expectation was cut by another £30M with poorer than expected performance the Construction Services division largely to blame.

“Today’s trading update is once again disappointing,” said executive chairman Steve Marshall. “The Board is committed to rapidly addressing the root causes. As a result, action is being taken to improve operational delivery in the UK construction business.”

Marshall also said the group was committed to off-loading the Parsons Brinkerhoff design business provided, he said, a sale “could deliver attractive shareholder value and make Balfour Beatty a simpler and more focussed Group going forward”.

“When I arrived the imperative was to deal thoroughly and swiftly with performance across the management of the business. This was a high priority and related to a loss of direction and contact with the front line and the need to remove confusion about what was important."

Nick Pollard, chief executive Balfour Beatty construction services

The firm reported a fall in its order book in the first quarter, reduced to £12.9 billion compared with £13.4 billion at the end of 2013 with growth in the Professional Services business more than offset by reductions in the Construction Services and the Support Services order books – although the latter was expected.

According to Balfour Beatty UK Construction Services chief executive Nick Pollard the profit warning is largely down to two key underperformances in its regional building division which is £10M down on expectation and its engineering services mechanical and electrical engineering (M&E) business which is expected to £20M down on profit forecast. 

The latter M&E business will now be run by Pollard after incumbent managing director Phil McGuire stepped down.

Both businesses turned over in the region of £300M but, explained Pollard, particularly in the m & e business which operated largely as a tier 2 subcontractor, the market was not recovering as fast as had been expected.

“In reviewing the business our considered view was that we were being over-optimistic about the expected level of profit and workload,” he said. 

However, Pollard insisted that following the recent business restructure, which saw new managing directors brought in to drive performance, the majority of the UK construction business was now performing to expectation. 

“When I arrived the imperative was to deal thoroughly and swiftly with performance across the management of the business. This was a high priority and related to a loss of direction and contact with the front line and the need to remove some confusion about what was important in delivering great construction work. The team has done a great job. We now have strong relationships with key customers, restoring their confidence and removing volatility of performance.”

New appointments such as bringing Mark Cutler in from Barhale to run the regional contracting business, appointing Network Rail project manager Uma Shanker as chief operating officer and putting Stephen Tarr in charge of infrastructure had restored market confidence. 

“While we would love to see a bigger pipeline of public work coming from the National Infrastructure Plan, the [infrastructure] business is in good order,” Pollard insisted. “We are very clear about where the business is going – delivering great customer relationships and being operationally excellent in everything we do.”

The group’s latest strategic review has made it clear that sale of the Parsons Brinckerhoff (PB) business is now desirable provided the right price is achieved. In the five years since Balfour Beatty bought the business it has been clear that while the design business has remained successful, the group struggled to properly integrate the services for clients.

“PB has grown and been successful in its own right but it hasn’t delivered any material competitive advantage for the group.” explained Pollard. 

“It is a fact that some customers prefer a different model to this one stop shop,” he added. “The group has quite correctly identified that PB has market value. But if the business does not attract significant value then we would not sell it – it is not like we need the cash.”