HBG sets new course and takes EUR 166 million provisions
- Strategic reorientation initiated
- Full Potential Programme aimed at identifying and establishing benchmark profit improvement programme
- Introduction of value-based management, providing insight into value creation
- Introduction of percentage of completion method of accounting, enhancing transparency
- Rearrangement and adjustment of portfolio of activities: divestment of business units failing to make adequate long-term contributions to results
- Focus on cash-generating and cost-saving measures
- In connection with change of direction, provisions totalling EUR 166 million
- Forecast operating result for 2000 before provisions: EUR 90 million; forecast net loss for 2000: EUR 68 million, due to provisions
Key figures as at 30 June 2000
- Turnover: after provisions EUR 2,441 million - before provisions +11%
- Net profit: after provisions EUR -102 million - before provisions EUR 64 million [inc. 36 million PoC*]
- Net profit as % of shareholders’ equity:after provisions –39% - before provisions 25% [inc. 13% PoC*]
- Net profit per ordinary share:after provisions EUR –2.92 - before provisions EUR 1.83 [inc. 1.03 PoC*]
- Order book at year-end 2000 expected to be at record level [EUR 5.2 billion]; good quality and diversity
*recognised according to the percentage of completion method.
Rijswijk, the Netherlands – HBG, Hollandsche Beton Groep nv, has embarked on a drastic change of course. This centres on the strategic reorientation, which will be completed at the beginning of 2001. With these changes, the Board of Management aims to focus the Group and the individual group companies more keenly on the product/market combinations which have profitable growth potential and match the capabilities of HBG most closely. It is also the aim to make further improvements in the quality of the workforce and the production processes. The Group is introducing a benchmark programme, along with a system of value-based management, with the object of increasing management accountability. This package of measures will lead to greater shareholder value. With this strategic reorientation, the Group has set itself the target of ranking among the top international construction companies in terms of profitability and will divest activities which do not make a structural and sustainable long-term contribution to profits.
HBG will take provisions amounting to approximately EUR 166 million. As a result, HBG expects to post a net loss of EUR 68 million for 2000 as a whole [1999: EUR 63 million net profit]. HBG nevertheless proposes to declare a dividend on a par with that for 1999 [EUR 0.73 per ordinary share of EUR 0.91] at the shareholders’ meeting in May 2001.
The provisions have been included in the operating result as exceptional items [EUR 154 million] and in extraordinary income/expenses [EUR 12 million]. They include provisions for write-downs in the case of several participating interests and losses on a number of major contracts of Wayss & Freytag Ingenieurbau, the expected costs in connection with the reorganisation of this group company, write-downs on several projects in the German property portfolio, an increase in the provision for risks relating to costs and claims in respect of completed contracts and a provision for the expected costs connected with the implementation of reorganisations and repositioning in accordance with the Group’s new direction. Of the total provisions of EUR 166 million, approximately EUR 70 million will result in negative cash flows in 2001 and ensuing years.
Operating result for 2000: approximately EUR 90 million
The forecast operating result before exceptional charges amounts to approximately EUR 90 million, applying the percentage of completion method for recognition of results. Under the completed contract method of accounting, which was used up to the end of 1999, the operating result would have worked out at EUR 78 million [EUR 102 million].
The Board of Management is satisfied with the good performances of the group companies in the United Kingdom, Ireland and Belgium. The group company HAM continues to maintain its excellent position in the world dredging market. In the Dutch market, road construction is doing well and good returns are being achieved in property development, as well as by the construction of the 'Waarde & Riant' Homes developed by HBG. The consultancy and engineering results are also of a good level.
Using value-based management and accountability, the Board of Management will be formulating targets for the Dutch group companies HBG Bouw en Vastgoed [construction and property] and HBG Civiel [civil engineering] with the object of bringing about a drastic improvement in the trailing results in several regions on major general construction and housing projects and on major infrastructure projects, respectively. This will also be the case for Interbeton [projects outside Europe] and HBG Constructors in the United States, where opportunities in the rapidly growing infrastructure market call for investments to be made. An intensive benchmark programme, under which HBG group companies have to become the best financial performers in their respective markets, will provide further support for profit improvement.
The Board of Management is convinced that the Group can operate successfully in Germany, Europe’s biggest construction market. HBG operates in this country with the group company HBG Bau in the general construction market and with Wayss & Freytag Ingenieurbau in the civil engineering market. HBG is also active in the property development market. The previous drastic reorganisation of the general construction companies is beginning to pay off. The general construction contracts secured by HBG Bau in the first six months hold out good prospects in terms of both volume and margins. In the second quarter, however, the Group was faced with setbacks at Wayss & Freytag Ingenieurbau. This led the Board of Management to implement a similar package of measures to that which has proved successful in the case of HBG Bau. The associated reorganisation costs form part of the overall provisions.
Further expansion of business units offering greater value creation
As part of the strategic reorientation, initiatives will also be taken to bring about a further strengthening of the excellent position in the UK market for projects under the private finance initiative scheme and expansion of the land entitlements in the Netherlands, which already support the construction of 12,000 new homes. Moreover, HBG will be playing a more prominent role in the upstream and downstream parts of the construction process – covering the entire spectrum from the development stage through to maintenance and facility management – especially in the case of multidisciplinary infrastructure projects. To this end, it will be necessary to further expand the Group's consultancy capabilities.
Changes in the financial control of group companies
The Board of Management will assess the performance of the group companies more effectively, thanks to the implementation of the measure of Economic Profit Realised [EPR] as part of value-based management.
With effect from the beginning of 2000 – in line with a general trend in the industry – HBG will be recognising profit on contracts according to the percentage of completion method. Previously, profits were not recognised until completion, except in the case of projects of extended duration. Losses will continue to be recognised as soon as they are identified. The change in accounting policy results in the recognition of additional profit of EUR 36 million net, which has been shown as extraordinary income in the projection for 2000 as a whole. The implementation of the new accounting policy enhances the transparency which HBG seeks to introduce. In the context of accountability, HBG believes it to be important that management remuneration should be related to the agreed benchmark.
Cash-generating and cost-saving measures
The cash flow for 2000 will amount to EUR 80 million [EUR 156 million], which is equivalent to EUR 2.29 [EUR 4.58] per share. This cash flow is the balance of a net loss of EUR 68 million, depreciation totalling EUR 88 million, an adjustment in respect of non-cash-flow expenditure of EUR 96 million [part of the provisions of EUR 166 million] and the effect of introducing the percentage of completion method. The balance sheet ratios will be affected by the measures which have been taken, but continue to give clients and shareholders more than adequate financial security. The solvency ratio as at year-end 2000 will be approximately 20%. HBG accords top priority to strengthening the balance sheet and restoring the solvency ratio to a level in excess of 25%. A start has accordingly already been made with a drastic programme of cash-generating and cost-saving measures.
Year-end 2000 order book at record level: EUR 5.2 billion.
HBG is forecasting an order book of EUR 5.2 billion as at year-end 2000 [EUR 4.8 billion]. The increase is connected with substantial orders for dredging projects in South-East Asia and new construction contracts in the United States. On the basis of the volume and the good quality of the order book, HBG aims to achieve a net profit margin of approximately 2% in 2001.
It is the intention to put a resolution before the General Meeting of Shareholders to be held in May 2001 withdrawing the protective preference shares which were issued earlier this year.
Arno C. Pronk at HBG Public Relations, telephone +31 70 3722121.