Member Article

Profit warnings double in first half of 2014 in Yorkshire

The number of profit warnings issued by Yorkshire PLCs doubled in the first half of 2014, as pressure on pricing and contract delays dented expectations.

According to EY’s latest Profit Warnings report, there were 18 warnings in Yorkshire, the highest first half total since 2009, compared with nine during the first six months of last year.

There were 10 warnings in the region in Q2 2014, up on the eight recorded in the previous quarter and significantly up on the two during the corresponding period in 2013.

During the first half of 2014, Yorkshire’s chemicals and industrial engineering sectors produced the highest number of warnings with three and four respectively, while businesses across seven other FTSE sectors also issued warnings.

Quoted companies in the wider UK recorded 137 warnings in the first six months of 2014, up 9% on the same period of last year and the highest first half total since 2011.

Hunter Kelly, restructuring partner at EY in Yorkshire, said: “All the evidence is that a more sustainable recovery is taking shape, with real business investments being made as well as consumption growth.

“However, for businesses in Yorkshire and Humberside, translating these conditions into profitable growth remains a challenge, with pressure on pricing and delayed contracts still being key issues for management to grapple with.

“It would appear that the recovery hasn’t fully eradicated the austerity mind-set of companies or consumers. Moreover, the relatively low level of insolvencies during the recession means that some businesses are competing in highly competitive marketplaces where price is still the key determinant, lowering the normal level of returns.

“Other challenges are the strength of Sterling and pricing pressures as the supermarkets seek to push price cuts down the supply chain.

“Low growth in international markets and low inflation will also be hurdles to overcome, so operational and financial fitness will be vital to ensure Yorkshire companies make the most of growth opportunities.”

The UK picture

Pricing and competitive pressures are clearly affecting the country’s businesses. In the first half of the year, 19% of profit warnings cited competitive or pricing pressures, compared with 7% in 2013.

Adverse currency movements triggered over 20% of profit warnings in the first half of 2014, compared with just 3% last year.

Consumer goods manufacturers, in particular, found themselves in the crossfire of pricing, currency and competitive pressures. The percentage of companies warning in the consumer goods industries has almost doubled, from 9% in the first half of 2013 to 16% over the same period this year.

FTSE sectors issuing the highest number of profit warnings in Q2 2014 were support services (7), software & computer services (7), household goods (4) and electronic & electrical equipment (4).

Hunter Kelly commented on the outlook for H2 2014: “There might be a goodwill factor from the current good weather and the strength of Sterling helping to pay for overseas holidays.

“However, for business there is still significant capacity chasing the orders that are out there. In some sectors the capacity has been eliminated, with house building struggling to source some inputs.

“Whereas, for others the picture is somewhat different, and this will lead to some businesses being unable to fulfil their growth potential as they fight in a price war.

“In the capital markets, central bank actions have helped to quash volatility, pushing asset prices to pre-crisis highs.

“However, the countdown to a new monetary policy era will bring new tests and greater volatility and companies need to think carefully about their capital needs and allocations.

“M&A could provide companies with an answer to the growth conundrum. We expect deal volumes to stabilise after several years of decline, with the potential for a modest increase. However, we will continue to see higher values driving sentiment in M&A across all sectors.”

This was posted in Bdaily's Members' News section by Clare Burnett .