Balfour Beatty 2016 half-year results

BALFOUR BEATTY PLC RESULTS FOR THE HALF-YEAR ENDED 1 JULY 2016

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17 August 2016

DELIVERING BUILD TO LAST BENEFITS

Financial Highlights

·      Order book £12.4bn, up 7% at constant exchange rates (CER)³ whilst maintaining disciplined bidding practices

·      Underlying revenue £4,024m, down 6% at CER

·      Underlying profit before tax of £7m (2015: £130m loss)

·      Net cash of £115m, following continued working capital discipline

·      New pension deficit payments plan agreed in principle

o  £182m to be paid over 8 years (previous agreement: £376m)

·      Dividend reinstated with interim payment of 0.9p

Build to Last Highlights

·      Phase One targets on track

·      Increased safety observations and a reduction in Lost Time Injury Rate indicate greater staff engagement on safety

·      Continued simplification of the Group

o  improved systems, processes and controls driving greater visibility and control

·      Further actions to upgrade leadership

·      Maintained focus on cost and cash conscious culture

Leo Quinn, Group Chief Executive, commented: "We are now starting to see tangible benefits from the transformation of Balfour Beatty.

"Eighteen months into the first phase of Build to Last we have delivered our second successive half of underlying profitability and remain on track to achieve our initial targets of £200m cash in: £100m cost out. By concentrating on our selected markets, we are growing our order book within a control environment which ensures that our business decisions lead to sustainable profit and cash growth.

"We have maintained a strong balance sheet and expect Balfour Beatty to make further solid and measurable progress. As a result we are able to reinstate the dividend as planned.

"By the end of 2016 we will have successfully completed Phase One. Over the following 24 months, I am confident we can reach industry-standard margins and then build on the foundations Build to Last has put in place to deliver a Balfour Beatty with market-leading strengths and performance over the longer term."

Notes:

¹ from continuing operations

² before non-underlying items (Note 7)

³ Constant Exchange Rate (CER) is calculated as growth in local currency terms

⁴ includes £73 million at HY 2016 relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received. The cash is expected to be received in the second half. 

Analyst/investor enquiries:

Peter Young

Tel. +44 (0)20 7216 6824

[email protected]

Media enquiries:

Louise McCulloch

Tel. +44 (0)20 7216 6846

[email protected]

Tulchan Communications:

David Allchurch

Tel. +44 (0) 207 353 4200

[email protected] 

Analyst presentation:

A presentation to analysts and investors will be made at Numis, The London Stock Exchange Building, London EC4M 7LT at 09:00 (UK time) on 17 August 2016. There will be a live webcast of this presentation on: www.balfourbeatty.com/webcast

2016 HALF-YEAR RESULTS ANNOUNCEMENT

·     GROUP CHIEF EXECUTIVE'S REVIEW

·     RESULTS OVERVIEW

·     BUILD TO LAST

·     DIVISIONAL OPERATING REVIEWS

·     OTHER FINANCIAL ITEMS

GROUP CHIEF EXECUTIVE'S REVIEW

2016 is the year in which the fundamental changes made to Balfour Beatty by the Build to Last transformation programme can be seen to deliver positive results.

The business has reported an underlying profit for the second successive half and the order book is showing growth in our selected markets.  We are on track to deliver our £200 million cash in and £100 million cost out targets.  As a result, the dividend has been reinstated, as planned.

Looking back to the start of 2015, business performance had deteriorated as a decade of forced growth culminated in an overly complex business, poor contract discipline and unaffordable overhead costs. Whilst the sale of Parsons Brinckerhoff in late 2014 provided liquidity to the balance sheet, the cash situation for the Group remained a challenge.

To tackle the root causes of these problems and create a platform for future growth, the Build to Last programme was launched in early 2015, beginning with a 24-month 'self-help' phase.  Senior leadership was systematically upgraded; immediate steps taken to strengthen governance, controls and processes; actions taken to simplify the Group; and Phase One targets of £200m cash in and £100m cost out established. 

Build to Last addresses the Group's performance as it affects all stakeholders - customers and suppliers, employees and subcontractors, investors and communities - by driving measurable improvement.  The steps that are being taken are often, in themselves, simple and straightforward.  However taken together they are transforming Balfour Beatty against four goals: Lean, Expert, Trusted and Safe.

As a result of the actions taken, the ability to manage and control the financial performance of the Group has been greatly enhanced; new disciplines are in place, delivering essential change to the way Balfour Beatty operates; financial systems have been overhauled providing a greater level of visibility and control within the business; and by the end of 2016 the Phase One targets will have been achieved. 

Markets and Outlook

Balfour Beatty is a business which operates across multiple geographies and segments (Construction Services, Support Services and Infrastructure Investments).  As such it is less exposed to a downturn in a single market.

As yet there is little sign of impact on Balfour Beatty's markets from the UK's decision to exit the European Union and, given the late cycle nature of the construction industry it is too soon for clarity as to what, if any, direct impact the decision will have.

Balfour Beatty's Infrastructure 2050 paper, published in July (www.balfourbeatty.com/Infrastructure2050) sets out the long-term infrastructure requirements for the UK and how they can be met.  Balfour Beatty has called on the UK Government to minimise uncertainty and recommit to major projects such as the High Speed 2 rail project, Highways England investment programme, South East airport expansion, new nuclear build and flood defences over the medium term.  In doing so, it will provide the construction industry with a backdrop which will allow skilled workers and their capabilities to be retained in the industry and training for new apprenticeships and graduates to continue apace, mitigating any restrictions on labour movement which may result from leaving the European Union.

The transformation of Balfour Beatty over the last 18 months means that management has much greater visibility and control over the business than was the case prior to Build to Last.  This means that the strengthened leadership team is much better positioned to adjust and respond to changes in market conditions in the UK or elsewhere. 

In its initial 18 months, the Build to Last transformation programme has driven measurable improvements.  By the end of 2016 Balfour Beatty will have achieved its Phase One targets and laid the foundations for future growth.  Over the following 24 months, the Group expects each of its businesses to reach industry-standard level margins and thereafter deliver a Balfour Beatty with market-leading strengths and performance. 

RESULTS OVERVIEW

Unless otherwise stated, all commentary in this section is on a continuing operations basis only. Non-underlying items within continuing operations continue to include the trading results of certain legacy Engineering Services (ES) contracts and Rail Germany. These ES contracts were classified as non-underlying items in 2014 as they relate to poor legacy management and in regions where ES withdrew from tendering for third-party work. Rail Germany was presented within non-underlying items as the Group remains committed to exiting all its Mainland European rail operations.

GROUP FINANCIAL SUMMARY

Underlying revenue from continuing operations, including joint ventures and associates, (underlying revenue) declined by 1% (6% at CER) in the first half to £4,024 million (2015: £4,085 million) as a result of a more disciplined and selective approach to bidding introduced in 2015. Within this, Construction Services was flat (5% decline at CER) at £3,177 million (2015: £3,177 million) as growth in the US offset an expected decline in the UK. Support Services, as expected, declined 11% in the period due to the phasing of contract and regulatory cycles.

The underlying profit from continuing operations was £5 million (2015: £120 million loss), primarily due to losses within Construction Services being substantially lower at £60 million (2015: £209 million).

The Group recognised net finance income in the first half of £2 million (2015: £10 million net cost), primarily due to a foreign exchange benefit of £12 million. Including non-underlying items, this resulted in total losses before tax, from continuing operations, of £21 million (2015: £150 million). The total loss for the first half, including discontinued operations, was £11 million (2015: £150 million).

The Group order book increased by 13% (7% at CER) to £12.4 billion from £11.0 billion at December 2015. The Construction Services order book increased by 15% (7% at CER) to £9.1 billion, driven by growth in the UK and Far East. The Support Services order book increased by 6% to £3.3 billion due to good growth in transportation whilst utilities remained stable.

Earnings per share

Underlying earnings per share from continuing operations was 2.0 pence (2015: 19.4 pence loss), which along with a non-underlying loss per share from continuing operations of 4.0 pence (2015: 2.6 pence) gave a total loss per share for continuing operations of 2.0 pence (2015: 22.0 pence). Total loss per share, including discontinued operations, was 1.6 pence (2015: 21.9 pence).

Cash flow performance

The total cash movements in the period resulted in a reduction to the Group's net cash position, as expected, to £115 million (FY 2015: £163 million), excluding non-recourse net borrowings. A continued strong performance in cash management across the Group and cash generated by the Investments business was offset by cash outflows associated with completing historical problem contracts, operating losses in the period and pension deficit payments.

Operating cash before movements in working capital and pension deficit payments was an outflow of £71 million (2015: £219 million). Including the outflow from pension deficit payments of £29 million (2015: £28 million) results in an operating cash outflow before movements in working capital of £100 million (2015: £247 million). Total cash used in operations was £99 million (2015: £36 million). In addition, tax refunds of £8 million were received (2015: £6 million).

Cash flows associated with the Investments portfolio generated a cash inflow of £37 million in the first half (2015: £48 million). This does not include £73 million to be received on completion of the sale of the Building Schools for the Future (BSF) portfolio by the Investments business, expected in the second half.

¹ before movements in working capital and pension deficit payments

² excluding infrastructure concessions (non-recourse)

Working capital

The working capital position has remained in line with December 2015 which has resulted in a negligible cash inflow of £1 million (FY 2015: £178 million). The Group remains focused on working capital management.

Movements in the Group's due from / due to construction contract customers balances, which reflect the net unbilled contract position and traded profit and loss for each individual construction contract, generated a slight working capital inflow of £22 million including provisions (FY 2015: £313 million). There are two offsetting drivers behind this reduced inflow: beneficial cash inflow relating to negative working capital positions on construction contracts, offset by cash outflows on settlement of problem contracts where the loss was recognised in prior periods.

The working capital position held as trade and other payables generated a £25 million working capital outflow (FY 2015: £236 million). The large outflow in prior year related to the quicker settlement of creditors as a result of the Build to Last transformation step change and cash outflows on historical loss-making contracts. Trade and other receivables was held broadly consistent in the first half of 2016 only creating an outflow of £10 million (FY 2015: £74 million inflow). The decrease from the full-year 2015 inflow is due to a significant focus on debtor collection in the prior year.

Including the impact of foreign exchange and disposals in the period, negative (ie favourable) working capital decreased to £879 million at 1 July 2016 (FY 2015: £890 million).

¹ including provisions

Net borrowings

The Group's net cash position at 1 July 2016, excluding non-recourse net borrowings, was £115 million (FY 2015: £163 million). The reduction from the December position reflects the operating outflows during the first half of 2016 offset by the net proceeds from investing activities. Average net borrowings in the first half were £68 million (2015: £16 million). Non-recourse net borrowings held in wholly-owned infrastructure concessions increased to £388 million (2015: £327 million). The balance sheet also includes £99 million for the liability component of the preference shares.

Pensions - triennial valuation

The triennial funding valuation of the Balfour Beatty Pension Fund (BBPF) is currently being carried out, with a valuation date of 31 March 2016. Ahead of the conclusion of the valuation and funding plan, the Company and the trustees have agreed the key commercial principles of the journey plan for the BBPF to reach self-sufficiency during 2027 (some three years earlier than previously planned).

Balfour Beatty will make cash contributions totalling £182 million over the next eight years; under the previous agreement cash contributions totalled £376 million over the same period. These payments include the contributions related to the Scottish Limited Partnership (SLP) structure established in 2015. The Company will also transfer additional assets into the SLP worth up to £87 million by 2019. As part of this agreement, a new investment strategy will be established, aimed at increasing return without increasing risk. The Company has agreed to amend the existing dividend sharing mechanism such that if the dividend cover ratio falls below 3x in 2016, 2.5x in 2017 or 2x from 2018 onwards, funding to the BBPF will be accelerated.

Dividend

The Board took the decision to suspend the dividend in 2015, to ensure balance sheet strength was maintained during the initial stages of the transformation programme. The Board recognises the importance of dividends to its shareholders.  Following the demonstrable progress made by the Group over the last 18 months and the expectation of further solid and measurable progress, it has decided to reinstate the dividend at an appropriate level.

The Board is therefore declaring an interim dividend of 0.9p, with a ratio of interim to final dividend to be approximately 1:2. The Board anticipates a progressive dividend policy going forward.

BUILD TO LAST

The Group launched the Build to Last transformation programme in early 2015 as a framework to drive continuous improvement for all stakeholders against four goals - Lean, Expert, Trusted and Safe - as measured by cash/EBIT, employee engagement, customer satisfaction and Zero Harm. Rapid action was taken to remove management layers and upgrade leadership and governance through a simplified Group structure. As a result Balfour Beatty is stabilising and making significant progress on its four goals:

Lean

Group net cash at 1 July 2016 was £115 million, reflecting the anticipated outflow as work is undertaken to complete the historical problem projects.

A continuing focus on cash management and ongoing improvements to the financial systems and controls will continue to drive improvements to the Group's cash management processes. During the period a new Group consolidation system has been introduced and the process to transfer data from the ERP to the finance consolidation system automated.

The weekly cash flow performance reconciliations are now generated automatically, leading to a significant improvement in the business' ability to forecast cash flow. As a result draw-down on debt facilities can be managed more effectively.

The Group remains on target to deliver the Phase One target of £100 million cost out, with annualised savings worth £88 million already delivered. 

During the period IT services which had previously been delivered through a sub-optimal out-sourcing agreement were successfully brought back in-house, resulting in a more responsive and effective IT operation and annualised savings of approximately £5 million.

The business continues to improve efficiency - identifying cost-effective ways to exploit the scale of the business, improve services to customers and support front-line activities.  A new Site Mobilisation Hub was piloted in the period across 30 new contract awards before being rolled out in June to all new UK contract start-ups. On average a new site is set up or closed down each day.  Poor site mobilisation leads to delays in the schedule, increased costs and dissatisfied customers; as a centre of excellence the new Hub will have a material impact on project delivery by ensuring that new sites are able to function efficiently and effectively from day one.

Centralisation of UK support functions continues to drive a more effective and efficient organisation by standardising practices and increasing automation. 200 HR policies have been reduced by 75% through simplification of processes and removal of duplication.  The number of payrolls operated in the UK had reduced from 32 to 13 by July 2016 with further consolidation planned.  At the same time the accuracy of the process has increased from 95% (Dec 2015) to 99.2% (1 July 2016).

In the US, the construction and infrastructure businesses have been brought together under a single leader and the leadership team upgraded.   Plans are now being executed to unify the back office functions (IT, legal, finance etc.) to provide high-quality, efficient support for the front-line business along a similar model to that deployed for the UK operations in 2015.

Work has continued to simplify the Group and a number of disposals have been made of non-strategic businesses:

·              Balfour Beatty Infrastructure Partners, an independently managed infrastructure fund business focusing on secondary opportunities, was disposed of to Wafra Investment Advisory Group, Inc.

·              Balfour Beatty Investments' sole project in Australia was sold and Balfour Beatty staff and pipeline transferred to Infrared.

·              The divestment of Balfour Resource Group, a healthcare facilities planning consultancy that became part of Balfour Beatty through the Centex acquisition was also completed in August.

Expert

Balfour Beatty's breadth of expertise is a strategic strength in the markets in which it operates.

During 2015 considerable progress was made in upgrading the quality of senior management across the Group, new executive Directors took up their posts and the Board was further strengthened with the appointment of a new Chairman and new non-executive Directors.

The new UK support functions (HR, IT, finance etc.) are not just leaner and more efficient but the quality of the service and support provided to the front-line businesses has improved significantly. The new structure provides added control and attracts higher calibre individuals better able to lead teams, drive performance and monitor and embed the new processes and controls within the businesses.

Within the business units and the support functions, progress continues to be made in upgrading the layers of management below the executive committee.  Regular talent reviews are carried out with high potential individuals identified and helped to develop their careers.

A similar process is now underway in the US businesses which will deliver similar benefits to those seen in the UK.

Project management excellence is at the heart of high-quality project delivery.  The Project Manager competency and assessment programme, started in 2015, is being rolled out across the UK business, this will provide a central database of the competencies and skills of each individual, allowing the business to easily identify and match the Project Manager to the contract complexity and risk.   The programme is currently being piloted in the US business.

A new redeployment tool is being used in the UK construction businesses to identify appropriate opportunities for staff when their current project concludes.  This aids retention of skilled individuals within the business and has reduced redundancy and recruitment costs.

A leadership group of Balfour Beatty's engineers has been created allowing sharing of best practice and a mechanism for shared problem-solving.  Representatives from each part of the UK business attended a conference focused on understanding the capabilities within the business which has driven increased collaboration and better use of Balfour Beatty's capabilities ranging from design, manufacturing, site support and digital capability.

A similar focus on the commercial expertise within the business has enabled better sharing of best practice and a forum for senior commercial professionals to identify training and development opportunities.  As a result Balfour Beatty has been able to hire its first apprentices into this discipline.

A leadership development programme has been launched, initially in the UK regional construction, Power & Rail businesses.  The programme works with the leadership teams to actively improve and measure the culture and climate they create in their business and how they work together as a team.  The objective is to increase the leadership capability and boost colleague engagement in the business.

The 'My Contribution' initiative, which engages all staff directly in Build to Last, was launched in June 2015.  In its first 12 months over 5,000 ideas have been submitted, resulting in well over 800 projects being adopted and driving continuous improvement through empowerment across the Group.

Trusted

Balfour Beatty continues to win landmark contracts with the order book at £12.4 billion at 1 July 2016 and has a strong pipeline of awarded but not contracted work.

During 2015 the 8-gated lifecycle was introduced across Balfour Beatty.  In 2016, the framework has been further refined with the addition of a 'make or buy' decision step being added to promote greater use of internal capabilities. Internal reviews of (the bidding) Gates 1-4 across all UK and US operating units demonstrate compliance with all new processes.

A focus on the early qualifications gates (1-2) has led to a sharp reduction in the value of work which was tendered for and lost, allowing for greater focus on work where Balfour Beatty has a higher chance of success. As a result the UK percentage win rate in the first half of 2016 is almost double that for 2015, with better managed risk profiles and margins maintained.

The rationalisation and upgrading of ERP systems and use of data analytics provides management with access to timely (monthly) financial data on ongoing projects in the UK Construction businesses, facilitating review of phased budgets, forecasts and actuals on a project by project basis.  Previously such data could only be made available after several manual interventions and local data collection making it impractical for management to monitor project progress.  The tool was piloted in June within the US Construction business.

Safe

Maintaining a safe environment for Balfour Beatty's workforce, clients and the wider public is crucial to the business's licence to operate and is always Balfour Beatty's number one priority.

Much of the work that Balfour Beatty engages in is inherently dangerous.  As such it is vital that every member of staff is aware of and respects the risks.  Each week the Executive Committee discuss any accidents or near misses that have occurred in the business and a weekly report shares safety best practice as well as reporting on significant incidents and learnings.  In the event of a major incident a site, or wider, stand-down is held to alert relevant workers and subcontractors, a proper investigation is carried out, lessons shared and corrective actions taken.  Balfour Beatty benchmarks performance and shares best practice within the business and with others in the construction industry; as well as learning from incidents that happen on other companies' sites.

Balfour Beatty takes a proactive approach to safety and works continually to build and improve the safety culture within the business.  Continuous efforts are made to re-engineer processes to design in safety and design out health risks.  The Zero Harm calendar provides a proactive programme for raising awareness on key risks as well as highlighting seasonal risks such as shorter days or the impact of cold weather on maintaining a safe environment.   Safety performance is monitored with a combination of lagging indicators (such as Lost Time Injury Rates) and leading indicators (such as Observations and Executive site visits).

In line with the Build to Last principles both a country and Group-wide approach to safety was adopted.  Group-wide behavioural safety best practice has been established and work is underway to rationalise the business management system to ensure that best practice statements and other tools to support safe operations are always up to date and easily identifiable.

Balfour Beatty continues to target Zero Harm; the management ethos is that all accidents are avoidable.

In May 2016, a Balfour Beatty company was sentenced in connection with its conviction and guilty plea to breaches of Section 3 of the Health & Safety at Work Act 1974 and related health & safety regulations.  The HSE prosecution was in relation to a fatality on the Heysham Power Station project in Lancashire on 14 April 2010. Balfour Beatty received a fine of £2.6 million. The fine was judged on the basis of the new sentencing guidelines published by the Department of Justice and demonstrates the increasingly heavy financial consequences for failures to meet the necessary safety and environmental standards.

DIVISIONAL OPERATING REVIEWS

CONSTRUCTION SERVICES

Underlying revenue of £3,177 million was flat (5% decline at CER) compared to the first half of the prior year (2015: £3,177 million). The revenue growth by region was largely reflective of order book changes in the prior year and foreign exchange movements, as a decline in the UK due to more selective bidding was offset by an increase in the US. Revenue in the US increased by 10% (1% at CER) in the first half due to foreign exchange; whereas revenue in the UK declined by 23% reflecting the 17% decline in the order book in the prior year, as the business became more selective in the work it bid.

Underlying loss from continuing operations was £60 million (2015: £209 million), as losses in the UK more than offset a return to profitability in the US. The losses in the UK are substantially lower than the prior year, but profitability continues to be impacted by the historical contracts which are still being traded through to completion.

The order book increased by 15% (7% at CER) in the first half driven largely by underlying growth in the UK and Far East, and an increase in the US due to foreign exchange. The UK order book increased by 11% to £2.1 billion, despite the continuing focus on selective, disciplined bidding. In the Far East, the order book increased by 33% (17% at CER) due to strong levels of order intake, whereas in the US the order book increase of 15% (2% at CER) was almost entirely driven by foreign exchange movements.

Across the construction portfolio there remain a small number of long-term and complex projects where the Group has incorporated significant judgements over contractual entitlements. The range of potential outcomes could result in a materially positive or negative swing to underlying profitability and cash flow. In the UK, the majority of these contracts are within Major Projects. Outside of the UK this primarily relates to a small number of contracts in Hong Kong, which have been recorded at break-even.

¹ including share of joint ventures and associates

² from continuing operations

³ before non-underlying items (Note 7)

UK

The UK construction business is organised into two business units consisting of:

•      Major Projects: focused on complex projects in key market sectors such as transportation, heavy infrastructure and energy.

•      Regional: private and public, civil engineering, mechanical and electrical engineering and building, providing customers with locally delivered, flexible and fully integrated civil and building services.

As a result of the selective bidding in the prior year, underlying revenue fell in the first half by 23% to £862 million (2015: £1,117 million), predominantly due to a decline in the Regional construction business. The business areas that saw the greatest revenue decline in the period were those that actively reduced their order intake in 2015, in response to historical contract issues, such as London and the South.

As a result of the focus on bidding for contracts with increased bid margins and more favourable contract terms, the Regional business is now focused on fewer, larger contracts and is reducing its exposure to contracts under £5 million. This allows the business to focus on projects with better pricing and risk dynamics, but also improves the span of control as it operates fewer sites. As a result, the total number of live jobs in the Regional business has reduced from over 400 to approximately 250.

The underlying loss from the UK construction business was £66 million (2015: £145 million), representing an improvement, half on half, from the prior year. The loss in the period was caused by three main factors: additional losses incurred on historical contracts; lower overhead absorption due to the lower revenue base; and gross margin not being recognised on newer projects in the period, as the business is being more conservative and robust in not recognising margin until sufficiently through the life of the project. Stripping out the impact of the additional losses on historical projects, the business would have been close to break-even.

The business continued to make good progress on closing out the 89 problem contracts identified in 2015 with 81% of these projects at practical or financial completion as at June 2016, up from 60% at December 2015. The number of these projects at practical or financial completion is still expected to be greater than 90% by the end of 2016.

The order book in the UK grew to £2.1 billion from £1.9 billion at the year end - the first growth in the UK order book since 2013. The growth is reflective of the conversion of the strong awarded but not contracted pipeline in the first half. There have been a number of notable contract awards in the period including: a £170 million contract to upgrade baggage screening and handling systems for Heathrow Airport; a contract for Highways England for the construction of a proposed lorry area near the M20, worth up to £130 million; and an £82 million contract to build engineering and training facilities at RAF Marham in Norfolk, in readiness for the arrival of the UK's first F-35 Lightning II aircraft in 2018.

US

Underlying revenue in the US grew by 10% in the first half to £1,632 million (1% at CER) whilst the order book increased in the first half by 15% (2% at CER) to £4.7 billion.  Approximately 85% of revenues are generated from the general building market, with the infrastructure market accounting for the remaining 15%; both businesses were stable in the first half.

The US business continued to drive operational focus and business simplification. Both the general building business and the infrastructure business have now been united under a single leadership, which further develops and complements the move to a leaner organisational structure that was started in 2015.

As a result of the actions taken, profit from operations improved to £12 million (2015: £41 million loss). The first half margin of 0.74% was a good performance as profitability recovered from the loss generated in the first half of 2015, and is more reflective of the first half margin achieved in previous years. The business continued to benefit from a focus on overhead reduction but this was offset by write-downs relating to historical issues, particularly in the multi-family housing unit projects.

The order book in the US was relatively stable in the first half at £4.7 billion, as the business focused on winning contracts on improved terms rather than volume growth. Within this, the general building business order book grew, whilst the infrastructure business order book declined as it executed on large, long-term major infrastructure projects. Notable awards in the general building business included a US$276 million contract for a 42-storey mixed-use residential project in downtown San Francisco;​ a US$199 million contract for a mixed-used development in Dallas, comprising a 20-storey office tower and a second 34-storey tower with 253 residential units; a US$196 million contract in Washington for the construction of two 12-storey office towers to be built on top of an existing platform; and a US$126 million contract for The Ohlone College, in California, for the development of three new multi-storey academic core buildings that will house classrooms, laboratories, offices, conference rooms and a library. In August 2016, the infrastructure business was awarded a US$697 million contract for the electrification of the 52-mile Caltrain rail corridor between San Francisco and San Jose, laying the foundations for the operation of high-speed trains from 2020: this was not included in the order book at the half-year.

International joint ventures

Underlying revenue in the Group's Hong Kong and Singapore joint venture, Gammon, was broadly flat on the prior year (1% decline at CER). After including the impact of exchange rates, revenue increased by 8% to £413 million. Within this, revenue from civils projects continued to reduce, following the completion of major projects in 2015, such as the Midfield Concourse at Hong Kong airport, and as others approach completion. This was offset by an increase in revenue from general building, following the mobilisation of a number of major building projects in 2015 and early 2016.

Profits were slightly lower than the prior year at £3 million (2015: £6 million), due to a more conservative approach to recognising profit at the early stages of large projects. Two significant projects are recorded at break-even, where a range of potential outcomes could result in a materially positive or negative swing to underlying profitability. The order book grew by 33% (17% at CER) in the first half, following the award of a number of notable major building projects: a HK$4 billion contract for the redevelopment of Somerset House, in Taikoo Place, into a 48-storey office building; a HK$2.6 billion contract for a residential development project for 12 residential towers and five four-storey houses, which together will provide 857 new homes; and a HK$1.6 billion contract for the construction of the Lee Garden Three Project, which will include 20 floors of office space.

In the Middle East, the order book was stable at £0.5 billion, though excluding the benefit of foreign exchange the order book declined slightly as the business executed on long-term contracts. Losses from operations reduced in the region to £6 million (2015: £25 million). This reflects the continued challenging nature of the region, as had been expected.

Rail

Revenue in the rail business grew by £25 million to £129 million (2015: £104 million) as the business experienced an increase in volumes on a number of large contracts, particularly in relation to Crossrail. Underlying losses in the period were £3 million (2015: £4 million) as the business continued to be impacted by poor contract performance on a small number of historical rail projects. The order book was stable at £0.2 billion.

SUPPORT SERVICES

Support Services performed well, with profitability rebounding to more normalised levels compared to the prior year. Underlying revenue in the period declined, as expected, to £548 million (2015: £615 million), due to the phasing of contract and regulatory cycles. Revenue in the utilities business reduced by 3% to £291 million, whilst the transportation business declined by 18% to £257 million. Underlying profit from operations increased to £11 million (2015: £4 million). The order book increased by 6% in the first half to £3.3 billion (FY 2015: £3.1 billion), due to good growth in transportation whilst utilities was flat.

¹   including share of joint ventures and associates

²   before non-underlying items (Note 7)

The Support Services segment comprises transportation and utilities businesses. Utilities operates across power transmission and distribution and the gas and water sectors. Transportation operates across rail, highways and managed road schemes for local authorities.

Underlying profit from operations increased to £11 million (2015: £4 million). The margin improved to 2.0%, from 0.7% in the first half of 2015 compared to a 1.9% margin for the whole of 2015. Profitability benefited from an improved performance in Transportation and from the Group's focus on taking overhead cost out. 

Utilities revenue reduced by 3% to £291 million, as an expected reduction in Power was only partially offset by growth in Gas and Water. Volumes in Power were lower due to the completion of a number of projects in 2015, particularly in overhead lines, and as several long-term contracts approach completion, such as the Electricity Alliance East for National Grid. Gas and Water revenues increased slightly as new contracts under the AMP 6 regulatory cycle were mobilised, with further volume increases expected in the second half. The order book remained stable in the first half, following an extension to the gas transmission and distribution contract for Bord Gais, in Ireland, through to 2020.

Transportation revenues reduced by 18% to £257 million, due to expected volume declines from rail and highways. Rail revenues were lower following the completion of a rail grinding contract in the prior year. Highways revenues declined due to lower capital spend on a number of contracts for Highways England and completion of the contract for Area 4 during the period. The order book grew by 13%, due to strong order intake in rail and from local authorities. The Rail business was awarded a £170 million two-year extension to its Track Partnership contract with London Underground, to deliver essential track renewal work across the London Underground network. In February 2016, Balfour Beatty was awarded a £245 million seven-year highways maintenance contract for Coventry City Council, Solihull Metropolitan Borough Council and Warwickshire County Council. This unique collaborative arrangement will deliver better value for money, improved service resilience and flexibility in services.

INFRASTRUCTURE INVESTMENTS

The Investments business delivered another strong performance.  It significant progress in simplifying its operations by exiting Balfour Beatty Infrastructure Partners (BBIP), an infrastructure fund run at arm's length and focused on secondary opportunities, and exiting from the Australian market. The business also continued its strategy of optimising value through the sale of mature projects, whilst also continuing to invest in new opportunities and expanding the breadth of assets.

Underlying profit from operations was £70 million (2015: £98 million) due to the reduction in disposal gains as a different mix of assets was disposed. The pre-disposals operating profit increased by £4 million to £18 million (2015: £14 million). A strong underlying operational performance, in particular in North America, as well as lower bidding and overhead costs more than offset lower UK income due to the impact of disposals. Gains on disposal were £52 million (2015: £84 million) from four transactions, including the Building Schools for the Future (BSF) portfolio which comprised seven separate projects. Total cash disposal proceeds were £82 million, with a further £73 million to be received on completion of the sale of the BSF portfolio, expected in the second half. Net interest income was broadly flat at £15 million as income from new projects offset the impact of disposals. Pre-tax result reduced to £85 million (2015: £114 million) as a result of decreased disposal gains.

The Directors' valuation of the Investments portfolio, including the BSF portfolio, was stable at £1,249 million as at 1 July 2016 (FY 2015: £1,244 million), after realising £82 million of cash disposal proceeds and £43 million of distributions, which were partially offset by £45 million of new investments. The number of investments included within the portfolio increased to 75 (FY 2015: 73) as the business continued to invest in new opportunities, but will reduce to 68 on completion of the sale of the BSF portfolio.

¹ before non-underlying items (Note 7)

² subordinated debt interest receivable and net interest receivable on PPP financial assets and non-recourse borrowings

³ includes £73 million at HY 2016 relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received. The cash is expected to be received in the second half. 

New contract wins and financial closes

The Investments business continued to grow with new wins on three new projects where equity will be invested, comprising: two private rental housing projects and one data centre project. Six projects currently remain at preferred bidder, with investment already made into one of these projects, located in London, to begin developing the project to financial close.

The Investments business was also appointed as third-party manager on one fee-based project in the residential sector located in Pennsylvania, as well as being appointed preferred bidder on two fee-based student accommodation projects.  In these fee-based projects no equity will be invested.

UK

The business continues to develop into new sectors and in January 2016 a site was purchased at Manchester New Cross to provide a number of units to the private rented housing sector. Construction is expected to begin following financial close in the second half of 2016.

Financial close was reached on two projects; a hospital project in Ireland and a student accommodation project in Glasgow, Scotland. An additional three projects remain at preferred bidder which are expected to close in the second half of 2016 or early 2017.

North America

In North America, the business continues to expand in the private rental housing market and successfully acquired a stake in one private rental housing portfolio in Mobile, Alabama. The portfolio consists of three properties totalling 320 units.  Balfour Beatty Communities will perform property management services for the portfolio leveraging its existing capabilities.

The Investments business was also named preferred bidder and reached financial close on a data centre project in Borden, Canada. The C$155 million project is located on the Canadian Forces Base in Borden, Ontario and covers the design/construction, financing and maintenance for a new 10,000m² data centre.

Two student accommodation projects remain at preferred bidder.

In addition, the Investments business was appointed as third-party manager on one fee-based project located in Pennsylvania and preferred bidder on two fee-based student accommodation projects located in Oklahoma and Texas. Balfour Beatty Communities will also perform property management services for one of the fee-based student accommodation projects.

Asset sales

The business continued its stated strategy of selling assets at the optimum time to maximise value for the Group. Interests in ten assets were sold in the period, one of which was a partial sale, generating total book gains on disposal of £52 million (2015: £84 million from two assets). The business sold its entire 50% interest in the Wollongong project in Australia, a 30% interest in the M1/A1 project (where the Group retains a 20% interest), its interests in Balfour Beatty Infrastructure Partners and the infrastructure fund, and its interest in the BSF portfolio comprised of seven schools projects. The sale of the BSF portfolio is expected to formally complete in the second half of 2016 following conclusion of the pre-emption process. The profit associated with the BSF disposal was recognised in the first half of 2016 following contract signature.

New investment

The Investments business continued to make substantial equity investments in the portfolio, with £45 million invested in the period (2015: £64 million), including £8 million into the infrastructure fund before its sale. The bulk of the remaining investment was in seven projects: Kennedy Street student accommodation in Glasgow, Woodland View hospital, New Cross Manchester, Cambridgeshire Street Lighting, Birmingham Bio Power, Welland Waste Wood biomass and Mobile, Alabama.

The Investments business continues to see significant opportunities for future investment in its core geographic markets in the UK and North America, across both its existing market sectors and as it continues to grow into new adjacent sectors.

DIRECTORS' VALUATION OF THE INVESTMENTS PORTFOLIO

In overall terms, the Directors' valuation rose slightly to £1,249 million at the half year, with the number of projects in the portfolio increasing from 73 to 75. This includes £73 million relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received as at 1 July 2016.

The portfolio yielded £43 million from distributions during the period with the sale of investments realising £82 million, including £48 million for the sale of the Group's investment in the infrastructure fund, with a further £73 million to be received on completion of the BSF sale. The Wollongong sale realised a gain of £2 million relative to the Directors' valuation with all other sales being at values consistent with the Directors' valuation. Total investment during the period amounted to £45 million.  Projects included in the Directors' valuation for the first time increased the value by £2 million.  The unwinding of the discount increased the portfolio value by £47 million.

Operational performance movements resulted in a £20 million reduction in value with the most significant components being lower inflation (in the year, as well as forecast), lower forecast deposit interest rates, lower forecast lifecycle costs and an increase in the assumed tax burden for potential purchasers. In line with Government announcements the UK corporation tax rate has been reduced to 17% from April 2020.  Foreign exchange movements increased the value of the portfolio by £54 million, with the majority arising as a result of the fall in the value of sterling against the US dollar following the EU referendum.

Following on from the OECD BEPS project's recommendations in relation to the tax deductibility of interest expense in 2015, HM Treasury and HM Revenue and Customs issued their consultation on detailed policy design and implementation in May 2016.  These proposals preserve the concept of the public benefit exemption put forward by the OECD and also include other helpful measures to protect public infrastructure projects such as PPPs.  The proposals and their application are however complex and still under development.  Further clarity will be needed before the impact on the Directors' valuation can be fully evaluated.  Balfour Beatty is actively engaged in the consultation process and will remain so in the run up to new legislation.

¹ includes £73 million relating to the BSF portfolio of seven schools projects, as the disposal proceeds had not been received. The cash is expected to be received in the second half. 

OTHER FINANCIAL ITEMS

Non-underlying items

Pre-tax losses from non-underlying items for continuing operations were £28 million (2015: £20 million). This included a £25 million charge relating to revised legal guidelines and settlements. This largely relates to a reassessment of potential liabilities on historical health and safety breaches following new sentencing guidelines introduced earlier this year. There were also £9 million of provisions released in respect of Trans4m Ltd and £9 million of costs incurred relating to the Group's Build to Last transformation programme (2015: £12 million).

Significant other non-underlying items included: amortisation of acquired intangible assets of £4 million (2015: £5 million), £4 million (2015: £1 million) trading losses on certain legacy ES contracts, a gain of £3 million on the disposal of Balfour Beatty Infrastructure Partners, an additional £3 million gain (2015: £15 million) on the disposal of Signalling Solutions Ltd, and an impairment charge of £2 million on land held at Blackpool Airport.

Taxation

The Group's underlying loss before tax from continuing operations for subsidiaries of £13 million (2015: £138 million) resulted in an underlying tax credit of £7 million (2015: £4 million charge). The tax credit principally arises due to re-recognition of UK deferred tax assets in the year.

Discontinued operations

During the first half, further additional cash consideration relating to historical tax matters was received for the sale of Parsons Brinckerhoff amounting to £2 million.

Goodwill and intangible asset

The goodwill on the Group's balance sheet at 1 July 2016 increased to £896 million (FY 2015: £844 million). The increase of £52 million relates to movements in foreign exchange rates.

The Group performed an assessment to identify indicators of impairment relating to goodwill allocated to cash-generating units (CGUs). This included a review of internal and external indicators of impairment and consideration of the year-to-date performance of the relevant CGUs and any changes in key assumptions. The result of this assessment did not identify any indicators of impairment which could reasonably be expected to eliminate the headroom computed at 31 December 2015 and therefore no impairment charges were recorded in the first half of 2016.

The stabilisation and recovery of Construction Services UK to more normal levels of performance remains a key assumption underpinning the cash flow forecasts used to assess the recoverable amount of the related goodwill at the previous financial year end.

A full detailed impairment review will be conducted at 31 December 2016.

Pensions

Net retirement benefit liabilities reduced to £96 million (FY 2015: £146 million), with the Group's principal pension scheme moving into a surplus position of £27 million. The Group recorded net actuarial gains on those schemes of £22 million (FY 2015: £86 million net losses), primarily driven by a strong performance from return-seeking assets and the interest rate hedging strategy, more than offsetting an increase in liabilities due to falling long-term interest rates in the period.

ENDS

Responsibility statement

We confirm that to the best of our knowledge:

· the condensed Group financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting;

· the interim management report, as required by Disclosure and Transparency Rules 4.2.7R and 4.2.8R, includes a fair review of:

·      important events during the half-year ended 1 July 2016 and their impact on the condensed Group financial statements;

·      a description of the principal risks and uncertainties for the second half of the year; and

·      related parties' transactions and changes therein.

On behalf of the Board

Leo Quinn                                              Phil Harrison

Group Chief Executive                        Chief Financial Officer

16 August 2016

Forward-looking statements

This announcement may include certain forward-looking statements, beliefs or opinions, including statements with respect to Balfour Beatty plc's business, financial condition and results of operations. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other various or comparable terminology. These statements are made by the Balfour Beatty plc Directors in good faith based on the information available to them at the date of this announcement and reflect the Balfour Beatty plc Directors' beliefs and expectations. By their nature these statements involve risk and uncertainty because they relate to events and depend on circumstances that may or may not occur in the future. A number of factors could cause actual results and developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, developments in the global economy, changes in UK and US government policies, spending and procurement methodologies, and failure in Balfour Beatty's health, safety or environmental policies.

No representation or warranty is made that any of these statements or forecasts will come to pass or that any forecast results will be achieved. Forward-looking statements speak only as at the date of this announcement and Balfour Beatty plc and its advisers expressly disclaim any obligations or undertaking to release any update of, or revisions to, any forward-looking statements in this announcement. No statement in the announcement is intended to be, or intended to be construed as, a profit forecast or profit estimate or to be interpreted to mean that earnings per Balfour Beatty plc share for the current or future financial years will necessarily match or exceed the historical earnings per Balfour Beatty plc share. As a result, you are cautioned not to place any undue reliance on such forward-looking statements.

INDEPENDENT REVIEW REPORT TO BALFOUR BEATTY PLC 

 Introduction 

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 1 July 2016 which comprises the Condensed Group Income Statement, the Condensed Group Statement of Comprehensive Income, the Condensed Group Statement of Changes in Equity, the Condensed Group Balance Sheet, the Condensed Group Statement of Cash Flows and the related explanatory notes.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules (the DTR) of the UK's Financial Conduct Authority (the UK FCA).  Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 

 Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

As disclosed in Note 1.1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK.  A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion. 

Conclusion 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 1 July 2016 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA. 

Stephen Wardell

for and on behalf of KPMG LLP 

Chartered Accountants 

15 Canada Square,

London E14 5GL

16 August 2016 

Condensed Group Income Statement

For the half-year ended 1 July 2016             

Condensed Group Statement of Comprehensive Income

For the half-year ended 1 July 2016             

⁺ Re-presented to show the share of comprehensive income/(loss) relating to the Group's joint ventures and associates separately from the rest of the Group.

^{^} Recycling of revaluation reserves to the income statement on disposal has no associated tax effect.

Condensed Group Statement of Changes in Equity

For the half-year ended 1 July 2016

Condensed Group Balance Sheet

At 1 July 2016     

Condensed Group Statement of Cash Flows

For the half-year ended 1 July 2016             

¹ Before non-underlying items (Note 7).

Notes to the financial statements

1.1 Basis of accounting

The condensed Group financial statements for the half-year ended 1 July 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 Interim Financial Reporting as adopted by the European Union. The condensed Group financial statements should be read in conjunction with the financial statements for the year ended 31 December 2015, which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The condensed Group financial statements have been reviewed, not audited, and were approved for issue by the Board on 16 August 2016. The financial information included in this report does not constitute statutory accounts for the purposes of Section 434 of the Companies Act 2006. A copy of the Group's audited statutory accounts for the year ended 31 December 2015 has been delivered to the Registrar of Companies. The independent auditor's report on those accounts was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

The condensed Group financial statements have been prepared on the basis of the accounting policies set out in the Annual Report and Accounts 2015 except as described in Note 1.4 below.

1.2 Judgements and key sources of estimation uncertainty

The Group's principal judgements and key sources of estimation uncertainty remain unchanged since the year-end and are set out in Note 2.26 on pages 105 and 106 of the Annual Report and Accounts 2015.

1.3 Going concern

Having made appropriate enquiries and reviewed medium-term cash forecasts, the Directors consider it reasonable to assume that the Group has adequate resources to continue for a period of not less than 12 months from the date of this report and, for this reason, have continued to adopt the going concern basis in preparing the half-year condensed Group financial statements. Refer to Note 22.

1.4 Adoption of new and revised standards

The following revised standards have been adopted in the current period and do not have a material effect on the Group:

·   Amendments to the following standards:

o  IFRS 11 Accounting for Acquisitions of Interests in Joint Operations

o  IAS 1 Disclosure Initiative

o  IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation

o  IAS 16 and IAS 41: Agricultural: Bearer Plants

o  IAS 27 Equity Method in Separate Financial Statements

o  Improvements to IFRSs (2012 - 2014).

1.5 Accounting standards not yet adopted by the Group

The following accounting standards, interpretations and amendments have been issued by the IASB but had either not been adopted by the European Union or were not yet effective in the European Union at 1 July 2016:

·   IFRS 9 Financial Instruments

·   IFRS 14 Regulatory Deferral Accounts  

·   IFRS 15 Revenue from Contracts with Customers

·   IFRS 16 Leases

·   Amendments to the following standards:

o IAS 7 Disclosure Initiative

o IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses

o IFRS 2 Classification and Measurement of Share-based Payment Transactions

o IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

o IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exemption.

The Directors continue to assess the impact of IFRS 9, IFRS 15 and IFRS 16 but do not expect the other standards above to have a material quantitative effect.

2 Exchange rates

The following key exchange rates were applied in these financial statements.

Average rates

Closing rates

3 Segment analysis

Reportable segments of the Group:

Construction Services - activities resulting in the physical construction of an asset.

Support Services - activities which support existing assets or functions such as asset maintenance and refurbishment.

Infrastructure Investments - acquisition, operation and disposal of infrastructure assets such as roads, hospitals, schools, student accommodation, military housing, offshore transmission networks, waste and biomass and other concessions. This segment also includes the Group's housing development division which moved from Construction Services from the second-half of 2015.

3.1 Income statement - performance by activity from continuing operations

^{^} Presented before non-underlying items for underlying operations (Note 7).

3 Segment analysis continued

3.1 Income statement - performance by activity from continuing operations