Balfour Beatty could revisit existing contracts to help squeeze £200m in cash via “claims management” and “commercial management” to offset a fall in its working capital, it was revealed in Wednesday’s 2014 full-year results presentation.
The strategy, combined with a plan to cut £100m in overhead costs, is part of the wider “Build to Last” turnaround plan announced earlier this year and has its own slogan: “£200m cash in, £100m cost out”.
The results showed that Balfour Beatty’s working capital – the cash it can call on to pay suppliers – had fallen from £1.2bn in 2009 to £600m in 2014.
But it will need a healthy cash balance to finance the work it’s winning in a buoyant market – and it’s also likely that some of the write-downs it has made on problem contracts will be realised as actual losses and liquidated damages pay-outs to clients.
Presenting the results to the City on Wednesday, chief finance officer Duncan Magrath said: “Clearly working capital management remains an important issue and in the UK there remains some political risk around payment terms. We also need to consider how and when the year end write-downs may convert into cash outflow.”
Balfour Beatty’s tale of woe: how profits have slumped
Adjudicator Peter Gracia FCIOB FCIArb suggested that Balfour Beatty would look closely at any project where the final account was still not settled, chase down sums it is owed in retention, and consider claims for extensions of time and loss and expense.
“Historically they may be dead in the water with any NEC3 claims as the time bar clauses will bite, but it could be open season on any JCT-based contracts,” he said.
The 2014 results showed Balfour Beatty’s continued financial pain over its “legacy” problem contracts. Overall, the group made a loss of £59m on a turnover of £8.8bn. But Balfour Beatty Construction Services UK slumped to a £391m trading loss for 2014 on a turnover of £6.6bn. This sum includes a further £118m profit write-down.
BBCSUK includes the M&E division, Balfour Beatty Engineering Services, which has seen some of the worst problem contracts. The company was candid about the details, saying that a group of contracts in the south-west and London contributed £62m to group revenue whilst generating losses of £88m.
Slides accompanying the presentation also included an explanation for Balfour Beatty’s tale of woe in one graph, showing how it had expanded through 45 acquisitions and a 450% increase in revenue from 2000 to 2011, only to see profits plummet in 2013-14 as operating costs mounted amid lax commercial controls.
“Clearly working capital management remains an important issue and in the UK there remains some political risk around payment terms. We also need to consider how and when the year end write-downs may convert into cash outflow.”
Duncan Magrath, chief finance officer, Balfour Beatty
New chief executive Leo Quinn, in post for just 12 weeks, termed the phenomenon “forced growth”. “It’s fundamentally where a business and the leadership of the business – and that’s the board and the executive – are more focused on driving the top line rather than driving earnings, in the naive belief that if I keep driving revenue I’ll get additional incremental recovery on my overhead and I’ll keep driving a good earnings stream,” he said.
“The reality is that it ends up driving an extraordinarily complex business, the acquisitions don’t get integrated, you take on more and more risk, you lose control, costs get too high and then when you run out of cash and capital you can’t acquire any more to cover everything up. You end up with situations like £8.8bn of turnover and no money in return for it.”
Management consultant Trevor Drury FCIOB, of Morecraft Drury, said that Balfour Beatty’s approach in the mid 2000s – for instance retaining the Mansell brand and regional office structure – had proved costly.
“Buying firms in order to increase turnover and market share is one thing, but the benefits only come from profit on that turnover and the economies of scale by having centralised support services, such as accounts, HR, IT and so on. Rather than achieving these potential economies of scale, Balfour Beatty state that their overhead is 1% above the industry average,” said Drury.
“These companies do not appear to have been integrated properly into the Balfour Beatty culture with a ‘federated’ devolved management model that had ‘poor processes and controls’, plus it was too large and complex to react quickly enough to changing market conditions.”
Overall, the results were received fairly positively by City analysts and commentators, who see the potential for Quinn to turn the business around. Kevin Cammack at Cenkos told Building: “It’s remarkable how quickly they have got on and put processes and plans in place to identify what they need to do.”
Anthony Codling at Jeffries also told Building: “We’re buyers of the stock on the turnaround story – Quinn has a strong track record, he is a charismatic guy and is successful as a leader. This is a classic turnaround when the incoming CEO tries to paint things as the worst possible picture so that when things do improve it comes from the lowest possible base.”
