Corporate Yorkshire sees highest number of profit warnings since 2009

Hunter Kelly, restructuring partner at EY
Hunter Kelly, restructuring partner at EY
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CORPORATE YORKSHIRE issued the highest number of profit warnings for five years in the first six months of 2014, raising concerns that companies are struggling to generate profits in the post-crisis economy.

According to new research from EY, there were 18 warnings in Yorkshire - the highest first-half total since 2009 – compared with nine during the first six months of last year.

The Big Four accountancy firm said pressure on pricing, contract delays, weak international markets and a strong pound dented expectations.

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 mindset 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.”

Corporate Britain is this week expected to highlight the negative impact of the strong pound and weaker international growth with BAE Systems, Diageo and Rolls-Royce set to confirm that billions of pounds have been wiped off the value of sales, The Sunday Times reported.

Goldman Sachs, the US investment bank, calculates that earnings estimates for Britain’s most international stocks aee already down by 10 per cent this year, the newspaper said.

“They take a hit when they translate when they translate their foreign profits made in euros or dollars back into the relatively strong pound, and they have suffered as growth in the global economy has been slower in the first half of the year than in the UK,” the newspaper reported Sharon Bell, European equity analyst at Goldman Sachs, as saying.

There were 10 warnings in Yorkshire in the second quarter of 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 per cent on the same period of last year and the highest first half total since 2011.

EY said 19 per cent of profit warnings cited competitive or pricing pressures, compared with 7 per cent in 2013.

Adverse currency movements triggered more than 20 per cent of profit warnings in the first half of 2014, compared with just 3 per cent 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 per cent in the first half of 2013 to 16 per cent over the same period this year.

Yorkshire corporates must be prepared for a new wave of volatility as central bankers start to unwind the extraordinary measures used to combat the global financial crisis, not least a rise in the cost of borrowing.

Hunter Kelly, of EY, said: “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.”