UK contractor Carillion has issued another profit warning, saying that it thinks that its profits for the year to 31 December, 2017, will be “materially lower than current market expectations”, having initially issued a profit warning in July.
It said this week that it now expected that a combination of delays to certain PPP (public-private partnership) disposals, a slippage in the start date of a significant project in the Middle East, and lower than expected margin improvements across a small number of UK Support Services contracts – partially offset by cost savings initiatives realised in the fourth quarter – would lead to the fall in profits.
Carillion was providing an update on discussions with its financial stakeholders, trading and its intention to seek to defer the testing of its financial covenants.
In October, Andrew Davies – CEO of fellow UK firm Wates – was appointed CEO of Carillion, starting next April, and Alan Lovell was then given the role of non-executive director from the beginning of November. Lovell has a track record of turning around failing firms.
Carillion said that since July, it had been focused on reducing costs, collecting cash, executing its disposals programme and implementing its new operating model.
It said these self-help measures would serve to reduce the group’s average net debt over time, but that they would not be sufficient to enable it to achieve its target net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of between 1.0 to 1.5 times by the end of 2018.
It said that the board was, therefore, in discussions with stakeholders about “a broad range of options” to reduce net debt further, and repair and strengthen the group’s balance sheet.
It added that this would require some form of recapitalisation, which could involve a restructuring of the balance sheet. The board expects to begin steps to implement the chosen option during the first quarter of 2018, with further details in due course.
It pointed out that in its interim results on 29 September, 2017, it had confirmed that it was forecast to be in compliance with its financial covenants as at 31 December, 2017. It said that as it indicated then, compliance with its financial covenants was dependent on achieving its underlying forecasts, which assumed that the normal pattern of receipts and payments continued alongside the completion of a number of PPP disposals and settlement receipts on contracts.
The board was said to have kept under continuous review the risk that receipts from contract claims and/or disposals forecast to be received during November and December 2017 might slip beyond 31 December, 2017.
It now expects that a combination of delays to certain PPP disposals, the slippage in the start date of the Middle East project, and lower than expected margin improvements across a small number of UK Support Services contracts, although partially offset by cost savings initiatives realised in the fourth quarter, would lead to lower profits.
Given the impact of delays in receipts and disposals, the group said it now expected full-year average net borrowing in 2017 to be between £875 million (€978.73 million) and £925 million (€1.03 billion).
Based on its latest forecasts, the Carillion board said it now expected a breach of its loan covenants as at 31 December, 2017. Following discussions with its principal lenders and with their support, the board concluded that it was necessary to amend the relevant agreements to defer the test date for both its financial covenants from 31 December, 2017, to 30 April, 2018, which it said was based on EBITDA for the 12 months to that date, by which time it expects to be implementing its recapitalisation plan.
Carillion said it had now started a process to seek the consents necessary to make this amendment.
Interim CEO Keith Cochrane said, “While we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.
“Constructive dialogue is continuing with our financial stakeholders, and I am grateful for their support. I remain focused on addressing this issue before my successor, Andrew Davies, takes up the role on 2 April, 2018.”