Chief Executive’s review

Pre-tax profit* was up 24% at £249m (2007: £201m). Adjusted earnings per ordinary share* were up 14% at 39.9p (2007: 35.0p). Basic earnings per ordinary share were 42.9p (2007: 35.1p).

Operating profits from continuing operations* 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 £440m (2007: £374m), before taking account of the consolidation of £143m of non-recourse net debt held in PPP subsidiaries (2007: £61m). Strong cash flow and the proceeds of an equity placing offset the impact of net acquisition expenditure of £302m.

In May 2008, we raised £182m 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 £12.8bn (2007: £11.4bn), with £4.9bn of further work at preferred bidder stage.

Balfour Beatty is working on the Islington Building Schools for the Future PPP concession.

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.

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.

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.

Work was successfully completed on the M1 widening project junctions 6a – 10.

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.

Our core skills are becoming increasingly focused on three areas: engineering and construction, professional and support services and investments. These cover the key aspects of the construction life cycle including intellectual capital, financial capital, labour, execution and maintenance.

By applying these skills to become the partner of choice for sophisticated infrastructure owners in our chosen disciplines and geographies, we believe we will:

• achieve industry-best margins in our contracting and engineering activities;
• provide much of the upfront thinking and management skills required to deliver complex, integrated projects; and
• secure substantial, sustainable equity returns from our long-term investment portfolio.

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 profits.

Our customers’ requirements are evolving. Increasingly they seek to partner with a trusted supplier and to eliminate unnecessary engagement with multiple suppliers which accentuates both risk and cost.

A supply chain partner who can integrate knowledge and expertise across a range of disciplines and manage risk on behalf of its customer offers the greatest added value.

Our proven capability to integrate professional and support services, engineering and construction and investment skills is generating a growing range of large-scale opportunities.

As demonstrated in the case studies in the Integrated Capabilities section, this is becoming more common in our major customer relationships. Sophisticated infrastructure owners increasingly value the opportunity to outsource both the management and delivery of complexity.

Our customers are also driven by the need to manage and control costs and recognise the benefits that early engagement, partnership and long-term relationships can bring.

Our integrated capability, together with the strength of our balance sheet and our proven track record, will continue to be key differentiators in the markets in which we operate.

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. 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.

We will keep you updated on our progress in this crucial area.

Zero Harm is a major new safety initiative launched in 2008.

As outlined at the start of my review, we have delivered another strong performance in 2008.

We benefited from continued growth in infrastructure expenditure, particularly in education and healthcare. Further information on the markets we operate in is set out in the Markets section. The majority of our revenues are derived from public and regulated customers, who tend to invest in upgrading and building new facilities and infrastructure assets throughout the economic cycle. Our performance is covered in greater detail in the Operating review, and, as in previous years, we report our results by our business divisions of: Building, Engineering, Rail and Investments.

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 a rising 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.