Research by Ernst & Young found dozens of profit warnings issued already this year, as the recession hit hard. Restructuring partner Ian Best looks at the regional picture, and the impact of the credit crunch on West Midlands PLC.
UK PLC issued 117 profit warnings in the first quarter of 2009, as the impact of the credit crisis continues to bear down on cash-strapped companies.
This is the highest first quarter figure since 2001 and the third quarter in a row that UK PLC has issued more than 100 profit warnings, vividly demonstrating heightened distress in the UK economy.
Across the West Midlands, eight profit warnings were issued in the first quarter of this year making up nearly seven per cent of the UK’s total number of warnings – a marked decrease when compared to the final quarter of 2008 which saw the region’s listed businesses issue 15 warnings. However, this is a significant increase when compared to the same quarter last year – which saw five warnings – and double the amount of warnings when compared to the same period two years ago. And the worst of the downturn is yet to come. It is not just the number of warnings that concerns us: the tone of company statements has also darkened. The prospects for 2009 appear as uncertain and as gloomy as at any point in the crisis. Green shoots will find it hard to flourish on such stony ground; we still believe that the worst of the downturn for many companies is yet to come.
Regionally, the highest warning sector was industrial engineering with four warnings followed by software and computer services, support services, travel and leisure and household goods and home construction all recording one warning.
Across the UK, the highest warning sectors were support services (22), media (13), industrial engineering and software and computer services with ten each and general financial (nine).
This broad industry spectrum reflects the growth and spread of the credit crisis into a full-blown recession, now passing down the credit and supply chains from financial services to consumer services and manufacturing, accelerating as consumers retrench.
It was a year of two halves for household goods and home construction.
Overall, more than 60 per cent of the household goods and home construction sector has warned in the last 12 months. However, all but one of the profit warnings from house builders came in the first six months of the period, whilst the vast majority of the household goods profit warnings were issued in the last six months.
The high level of profit warnings and their distinctive pattern is due to the ‘perfect sector storm’; first house builders, and then companies who would furnish and supply those homes, have suffered from falling sales amid a dearth of credit and consumer confidence.
The sector can expect little respite in 2009. Many house builders have adjusted their output, stock levels and balance sheet to the new market realities and should benefit from falling costs this year. However, we cannot rule out further adjustments and write-downs. The big unknowns remain - how far house prices will fall, when lending will pick up and when these variables may recover to pre-crunch levels. On the expectation that the outlook for consumers will not improve in 2009, the prospects for household goods companies are also bleak, especially those supplying furnishings and consumer durables.
In industrial engineering, the number of companies from the FTSE industrial engineering sector issuing profit warnings has risen dramatically in the last six months. The sector reported 19 profit warnings in the last two quarters, compared with just one in the preceding six months. A staggering 16 per cent of the sector warned in Q1 2009 alone, with just under a third of industrial engineering companies warning in the year-to-date.
The increase in the level of profit warnings from industrial engineering companies is symptomatic of a rising level of distress in manufacturing as a whole.
Profit warnings from FTSE Electronic and Electrical Equipment companies have almost doubled year on year, with 22 per cent of the FTSE sector warning in the year to date.
Meanwhile, almost half of automobile and parts companies have warned in the last year. The only bright spots appear to be in high-tech areas and less cyclical areas, for example aerospace and defence, a sector that has seen no profit warnings in well over a year.
Although some industrial engineering companies have reported a pick up in demand in recent weeks, the uncertainty surrounding the UK economy and ongoing funding restraints mean customers remain cautious and future levels of demand uncertain. Governments have promised some aid for specific areas of manufacturing both here and abroad. However, fiscal constraints will limit their ability to intervene. Most companies will have to use their own resources to adjust to new realities and broadening the customer base, communicating proactively with suppliers and managing cash tightly should be the main priorities.
The first quarter of 2009 revealed the increasing breadth and depth of the current downturn and hinted at its difficult legacy.
The toxic mix of the continuing credit crunch, together with a global economic downturn, is exposing corporate frailties and accelerating cost cutting and retrenchment.