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BALFOUR BEATTY PLC PRELIMAINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008
Overview
2008 was another year of very good progress, driven by the strength of our business with public sector and regulated customers and the performance of acquisitions. The majority of revenues derived from public and regulated customers in the year.
Our order book was £12.8 billion at the end of 2008, benefiting from acquisitions and exchange, with £4.9 billion of further work at preferred bidder stage.
Our cash position remains strong, with average net cash in the year of £239 million. Year-end net cash stood at £440 million (2007: £374 million), before taking account of the consolidation of £143 million of non-recourse net debt held in PPP subsidiaries (2007: £61 million).
We continued to enhance our earnings potential through the acquisition of:
- Balfour Beatty Communities, the market leader in the military accommodation PPP concession market in the US;
- Barnhart, a leading Californian construction management company;
- Dean & Dyball, a leading UK regional contractor;
- Blackpool International Airport; and
- Schreck-Mieves, the German rail engineering company.
Our professional services, facilities management and utilities businesses all grew strongly in the year.
Balfour Beatty now has over £9 billion in revenues, including joint ventures and associates, and a leading presence in selected key markets. We are strong both operationally and financially. Our scale and the resilience of our business model will serve us well in this difficult economic environment. We have a clear strategy for the development of the business and a proven track record of delivery.
Results
Pre-tax profits³ were up 24% at £249 million (2007: £201 million).
Adjusted earnings per ordinary share² were up 14% at 39.9p (2007: 35.0p). Basic earnings per ordinary share were 42.9p (2007: 35.1p).
The Board is proposing a final dividend of 7.7p per ordinary share, making a total dividend of 12.8p for the year, an increase of 11%.
Operating profits from continuing operations² in the building sector increased by 26%, in the engineering sector by 27%, in the rail sector by 3% and in the investments sector by 94%, which includes the impact of the acquisition of Balfour Beatty Communities.
Operating cash flow was, once again, strong and ahead of operating profits. Year-end net cash stood at £440 million (2007: £374 million), before taking account of the consolidation of £143 million of non-recourse net debt held in PPP subsidiaries (2007: £61 million). Strong cash flow and the proceeds of an equity placing offset the impact of net acquisition expenditure of £302 million.
In May 2008, we raised £182 million by successfully completing a placing of new ordinary shares, maintaining our policy of carrying no net debt on the balance sheet and enabling us to continue to take advantage of acquisition opportunities. During the previous eight years, Balfour Beatty’s substantial acquisition programme had been funded from operating cash flow and the proceeds of disposals.
The year-end order book stood at £12.8 billion (2007: £11.4 billion), with £4.9 billion of further work at preferred bidder stage.
Business Sector Performance
Building, Building Management and Services
Profit from operations in the building sector, before exceptional items and amortisation, rose by 26% to £88 million (2007: £70 million).
This reflected full year contributions from Balfour Beatty Construction US, which was acquired at the end of March 2007, and Cowlin and Covion, which were acquired in the second half of 2007, together with the impact of the acquisitions of Dean & Dyball and Barnhart in 2008.
There was very satisfactory organic growth in Balfour Beatty’s established businesses. Performance was held back by a write-down on a large UK building services project pending resolution of income recovery negotiations, and the write-off of a receivable from a property developer.
Our facilities management business, now renamed Balfour Beatty WorkPlace, grew strongly.
Balfour Beatty Construction US performed strongly and Heery International had another good year.
Major projects were secured in the UK from BAA, the Olympic Delivery Authority, BT and in the health and education sectors; and in the US from the Navy, Army and Air Force.
The building sector order book was £6.7 billion by the end of 2008 (2007: £6.1 billion).
The high-quality order book and continued infrastructure expenditure, along with the full-year impact of acquisitions, should drive growth in 2009. While declining volumes and increased competition in some private sector markets will have some impact in the sector, we anticipate making further progress in the year.
Civil and Specialist Engineering and Services
Profit from continuing operations in the civils sector, before exceptional items and amortisation, rose by 27% to £104 million (2007: £82 million).
We had an excellent year in the UK roads sector, both in delivery – for example, the M1 junctions 6a–10 widening project – and in securing major new schemes including the M74, A421 and A46 projects. Connect Plus, in which we are a 40% shareholder, was appointed preferred bidder on the M25 widening scheme.
Balfour Beatty Management, our professional and technical services business, continued to grow strongly.
Our utility business also made good progress during the year and further developed its overseas power transmission business, winning new contracts in Canada and New Zealand. Early in 2009, we were selected as a preferred provider to support National Grid’s U.S. electricity transmission capital investment programme, the first time we have won work with a major UK infrastructure owner in a different geography.
In December, we announced we were partnering with AREVA, a world leader in nuclear power, to ensure effective delivery of a fleet of EPR nuclear reactors in the UK.
Overseas, performance in Gammon, which operates in Hong Kong and Singapore, was steady. In the US, profitability has continued to improve.
There has been a considerable slowdown in Dubai. Our businesses performed well in 2008, with a particular emphasis on infrastructure projects. Our result in Dubai, however, was affected by a cautious view of project recoveries and cash flows.
Major projects were secured in the UK for the Highways Agency, the Scottish Office and Network Rail; in the US for the Texas Department of Transportation and the water industry in California; and in South-East Asia for the Hong Kong Government.
The sector order book increased by 11% to £4.9 billion at the end of 2008.
Our markets in the sector continue to offer significant opportunity. In Dubai, the significant slowdown will depress revenues and cash performance in that market in 2009. Despite this, we have a very strong order book and expect another year of good progress in the sector.
Rail Engineering and Services
There was steady progress in the rail sector in 2008 with profit from operations, before exceptional items and amortisation, rising by 3% to £41 million (2007: £40 million), and revenues exceeding £1 billion for the first time.
There was another good result from our international high-speed rail electrification and power supply business and further improvement in our US business. In the UK, profit was slightly down compared to last year, principally due to some settlements received in 2007.
The acquisition of Schreck-Mieves added a leading position in the trackwork market to our business in Germany and enhances our ability to deliver major, multi-disciplinary projects.
Major projects secured in the year included rail systems work for the Gotthard Base Tunnel in Switzerland and the high-speed Madrid-Levante line in Spain, contributing to a 33% increase in the order book to £1.2 billion at the end of 2008.
In the medium term, the outlook for rail is very positive, as a result of both new requirements and the replacement of ageing infrastructure. In the short term, we anticipate further modest progress in 2009.
Investments
Our PPP concession and non-PPP investment portfolio has grown both organically and through acquisition to become a very significant part of the Group’s business and a major driver of shareholder value.
Profit from continuing operations in the investments sector, before exceptional items and amortisation, increased by 94% to £31 million (2007: £16 million).
There was good underlying concession performance and a first contribution from Balfour Beatty Communities in the US. Acquired in April 2008, Balfour Beatty Communities is a major addition to our investments business and performed well, in line with our expectations at the time of acquisition. The acquisition secured a reliable, long-term profit and cash flow from a high-quality portfolio of PPP military housing concessions, as well as an experienced and successful management team to develop our presence in the growing US PPP market.
We reached financial close on Phase 1 of the £150m Islington Schools for the Future PPP concession. In Singapore, Gammon Capital, our PPP joint venture in South East Asia, reached financial close for the new Institute of Technical Education (ITE) College West.
Preferred bidder status was achieved by Connect Plus, a consortium in which we have a 40% shareholding, for the PPP contract to provide additional capacity and maintain the M25. We were also appointed selected bidder for the £200 million Southwark Schools for the Future programme.
The strong performance of Barking Power continued, driven by the beneficial impact of electricity prices on its revenue and also boosted by insurance recoveries following a generator outage in 2007.
Our strategy to extend our infrastructure investment business beyond the UK PPP market, which began with the acquisition of Exeter International Airport in 2007, continued in May 2008 with the acquisition of Blackpool International Airport. As is the case with Exeter, Blackpool is a well-located regional airport with significant long-term growth potential.
In total, at 31 December 2008, we had committed equity and subordinated debt of £516m across 47 PPP concessions, four of which were at preferred bidder stage.
Financial close is anticipated on three preferred bidder PPP projects in the UK – the M25 widening and two other schemes - in the first half of 2009.
There is a healthy pipeline of UK projects and we expect increased bidding activity in 2009, especially for schools projects.
In the US military housing market, the long-term nature of our contracts provides strong visibility of earnings and there are further business development opportunities both within and outside the military accommodation PPP market.
While the current economic environment presents challenges for project financing, we remain confident about the future and anticipate further growth.
Exceptional Items & Amortisation of Intangible Assets
The Group has recorded a net exceptional gain after tax of £33 million (2007: £7 million). The single biggest component of this was a £60 million gain from a reduction in past service pension liabilities in certain sections of the Balfour Beatty Pension Fund. This resulted from measures to limit future increases in salary used for defined benefit pension purposes. This change is part of the work being performed to manage the impact on the Group of the liabilities that arise from the pension schemes.
During the year £6 million of reorganisation costs were incurred, largely resulting from the acquisition and integration of businesses.
The tax impact of these items is a net charge of £15 million, in addition to which there was a one-off write-off of deferred tax balances of £6 million in the year, as a result of changes in tax legislation from the 2008 Finance Act relating to the phased withdrawal of industrial building allowances.
Charges for the amortisation of intangible assets have increased to £27 million (2007: £9 million) due to the impact of acquisitions, with a related tax credit of £7 million (2007: £3 million).
Other Financial Information
Average cash in the second half of the year was £254m, although year-end cash was significantly greater at £440m. The year-end position benefited from favourable movements in exchange rates from holding significant cash balances in the US in US dollars, although as the US dollar cash position is broadly hedged, this will be offset, assuming exchange rates stay at the year-end level, by a £70 million outflow in September 2009 when the hedges mature.
Investment income, net of finance costs, reduced from £23m in 2007 to £19m in 2008, before exceptional items. An increase in interest income from net investment hedging of £6m was more than offset by a reduction of £8 million in the net return on pension scheme assets and liabilities.
We expect a further reduction in net investment income in 2009, as a result of a reduced pension return, a reduction in our hedging programme and lower interest rates.
The pension deficit reduced in the year to £261 million, impacted by a £60 million gain from reduction in past service liabilities, net actuarial losses of £62 million and employer contributions net of the service cost of £25 million.
Strategy
Our goal is to deliver consistent, long-term growth to our shareholders.
We do this by striving to remain, or to become, the leading provider of high-quality infrastructure in each of our markets.
Construction is a local business and knowledge of local labour and material supply is critical. We believe one of our main differentiators is the depth and breadth of our expertise, gained from operating in mature economies in the UK, mainland Europe, the US, Middle East and Far East, combined with our local knowledge in each market.
Over time, our aim is to move towards a business model where our business activities in the US have the same scale and depth as the UK, while continuing to develop businesses in other parts of the world. Following our recent acquisitions, the US now accounts for approximately one quarter of the Group’s revenues and profits³.
We constantly evaluate our strategy and analyse what makes us successful in order to select the business areas in which to concentrate our financial and management capital. In 2006, we set out four principal areas of strategic focus that we believed would help drive medium and long-term growth and help us deliver our goals, and these still remain priorities. We have made substantial progress in each area.
UK infrastructure - Following our acquisitions of Birse in 2006 and Cowlin in 2007, we acquired Dean & Dyball, a well-established contractor in southern England and Wales, in March 2008. Together with Mansell, which we acquired in 2003, this has substantially enhanced our regional coverage across the UK and we have successfully integrated these businesses into the Group.
Professional services - Balfour Beatty Management, our UK-based professional services business, and Heery International in the US, continue to grow. In the UK, Balfour Beatty Management plays an important role, supporting cross-Group activities for a number of our sophisticated, major customers. As customers’ demand for a higher-level, integrated presence at the top of their supply chain increases, professional services will become a much more significant part of the Group.
Infrastructure investment - We are a leader in the UK private finance and PPP market, currently with 25 concessions and a further four at preferred bidder stage.
Following the acquisition of Balfour Beatty Communities (formerly GMH Military Housing) in 2008, we are a market leader in the most developed PPP market in the US – military housing – and are well-positioned to exploit the Group’s expertise by undertaking privatisation projects in other sectors. By the end of 2008, Balfour Beatty Communities was responsible for 17 military housing privatisation projects covering family housing at 44 military bases and one unaccompanied personnel project. Since we acquired the business, it has added five projects to its portfolio.
We reached financial close on our first PPP project in Singapore.
We will continue to apply the skills we have acquired in PPP to the wider non-PPP infrastructure market, in particular where there are attractive opportunities to take management control and improve the quality of assets in markets and sectors that are familiar to us. The acquisition of Blackpool International Airport in May 2008 is the latest example of this.
International markets – The acquisitions of Balfour Beatty Construction US in 2007 and of Balfour Beatty Communities and Barnhart in 2008 were major steps in implementing our strategy of building a high-quality, domestic business in the US, with the capacity to integrate financing, professional and technical services, project delivery and long-term facilities management.
The Board and Senior Management
We have made a number of significant executive appointments to provide the platform for continuing successful growth:
Anthony Rabin became Deputy Chief Executive in March 2008, having held the position of Finance Director since 2002. He is responsible for the management and development of our infrastructure investment businesses.
Duncan Magrath succeeded Anthony as Finance Director, having been Deputy Finance Director since 2006.
Andrew McNaughton was appointed Chief Operating Officer, with effect from 1 January 2009, reporting to Ian Tyler and taking over responsibility for all our construction, engineering and rail activities outside the US.
Within our US construction and engineering business, Jim Moynihan, who has responsibility for Heery, Balfour Beatty Infrastructure and Balfour Beatty Rail, and Robert van Cleave, chairman and CEO of Balfour Beatty Construction US, report to Ian Tyler. Bruce Robinson, president and CEO of Balfour Beatty Communities, reports to Anthony Rabin.
We also made two non-executive appointments:
Hubertus Krossa was appointed to the Board as a non-executive Director in September 2008. His extensive international operating experience, combined with his knowledge of the UK business environment, will be of great value to us.
Graham Roberts was appointed to the Board as a non-executive Director from 1 January 2009, and will become chairman of the Audit Committee from 5 March 2009. Graham is finance director of The British Land Company PLC and brings valuable financial and commercial experience to the Board.
Safety & Enviroment
Safety has always been an important part of how we do business and remains at the top of our agenda, encompassing both the safety of our own people and the communities in which we operate. Our new safety commitment – Zero Harm by 2012 – is being communicated to all our employees, partners, sub-contractors and customers around the world. Our aim is no risk of death or serious injury to our workforce and no risk of injuries of any kind to the public.
We have made good progress in safety and our Accident Frequency Rate (AFR) in 2008 was down to 0.20. We can do better and aim to eliminate completely the risk of doing serious harm. Zero Harm is, ultimately, about managing and designing risk out of everything we do.
Outlook
Our high-quality order book, the full-year impact of acquisitions and continued infrastructure expenditure by public and regulated customers should drive progress in 2009. We anticipate reaching financial close on three preferred bidder PPP projects in the UK in the first half of 2009. We operate in a number of markets which are likely to benefit from additional infrastructure projects arising from economic stimulus packages.
The majority of our work will continue to be with public sector and regulated customers. We are seeing a general slowdown in private sector work, and more of a slowdown in the Middle East, which represents a modest part of our business. While the difficult economic environment will have some impact on our businesses and creates greater uncertainty, we anticipate making progress in 2009.
-ENDS-
Enquiries:
Balfour Beatty
Ian Tyler, Chief Executive
Duncan Magrath, Finance Director
Duncan Murray, Director of Corporate Communications
Tel: 020 7216 6800
Pelham PR
Andy Cornelius
Gavin Davis
Tel: 020 7337 1514
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This document contains forward looking statements which have been made in good faith based on the information available at the time of its approval. It is believed that the expectations reflected in these statements are reasonable, but they may be affected by a number of risks and uncertainties that are inherent in any forward looking statement which could cause actual results to differ materially from those currently anticipated.
Notes to Editors:
Balfour Beatty is a world-class engineering, construction, services and investment business, well-positioned in infrastructure markets which offer significant long-term growth. We work in partnership with sophisticated customers who value the highest levels of quality, safety and technical expertise. Our skills are applied in appropriate combinations to meet individual customer need. Balfour Beatty’s financial position, with significant net cash and with strong operating cash flows, offers continuing flexibility to add additional capacity and expertise to the business mix and to make appropriate investments in PPP and other long-term growth opportunities.
www.balfourbeatty.com
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