Cleaning products group warns of lower profits and higher debts for 2022

Manchester-based cleaning products group, McBride, said it expects profits for the current year, to June 30, 2022, to be up to 65% lower and debt to be higher.

It is also experiencing problems from rising raw materials prices and its distribution networks, it said in a trading update today.

On July 14, this year, as a result of both the uncertainty surrounding the volatile input cost environment and the success and timing of pricing actions, the board said that, at that time, it would not be offering guidance on the outlook for the current financial year, 2022.

Although only seven weeks into the new financial year, McBride said the previously highlighted raw material environment remains extremely challenging, both in terms of exceptional price increases and supply availability.

More recently, and in line with the general trading environment experienced by others, the group has also started to experience distribution challenges, particularly in the UK and Germany as a result of the shortage of HGV drivers, which has impacted on both transport availability and cost.

Also, as previously indicated, the group continues to discuss margin recovery actions with its customers, mostly across liquids categories. McBride’s approach has been to seek a variable pricing surcharge to sales contracts, based on certain key commodity prices.

The board’s view on input costs for the new financial year remains in line with prior estimates. In terms of customer pricing, although discussions have resulted in agreement for price increases, the effective start dates for price increases are later than targeted.

The first half of fiscal year 2022 is now expected to see EBITA at approximately break even, with profits, therefore, heavily weighted towards the second half of the year, with the business exiting the year with run-rate profit levels in line with the average of the past few years.

As a consequence, the board expects adjusted profit before tax for financial year 2022, to be 55%-65% lower than current market consensus for full year 2021, and for net debt at June 30, 2022, to be 5%-10% higher than full year 2021 consensus.

Current market expectations for the full year 2021, are for an adjusted profit before tax of £19.7m, and a net debt, including IFRS 16, of £121.5m

McBride said the short term challenges facing the business have no effect on the ongoing execution of the group’s Compass strategy, as outlined at its capital markets day in February 2021, nor its mid-term ambitions.

The group continues to operate within its banking covenants and its liquidity and cash flow remain robust.

McBride expects to publish its annual figures for 2021 on September 7.

Shares in the company slumped almost 20% in early trading and by 10am today were still down by 9.7% at 75.57p.

Russ Mould, investment director at Manchester investment plantform AJ Bell, said: “Central bankers seem content to let inflation run hot and accept a period where increases in the cost of living run above their two per cent target, not least as it helps to flatter nominal GDP numbers and thus debt-to-GDP ratios, but companies are already feeling the pressure that can build if inflation runs fast and loose for long, as McBride’s monster profit warning makes clear.

“The manufacturer of cleaning liquids, powders and aerosols has flagged that full year profits will now come in at less than half the level expected by analysts, higher raw material and distribution costs, as well as problems sourcing sufficient supply of both materials and truck drivers.

“McBride is putting up prices, but these will take effect later than hoped, at least from the company’s point of view. Consumers – and central bankers – will take note, as that means price increases further down the line for them to meet or at least mull over.”

He added: “McBride’s difficulty in putting up prices quickly enough to compensate for higher input costs are a reminder to investors that pricing power is a key attribute for any firm to have, even if markets are currently being remarkably tolerant of, and generous to, companies which do not make profits and almost seem to lose more money the more customers they grab.

“If inflation does take hold, promises of future profits after the current dash for market share and critical mass may well look less attractive. Investors may shy away from such profitless prosperity and instead focus on companies which can demonstrate their ability to protect margins and still generate profits and cash flow.

“McBride’s role as a contract manufacturer, or at least a maker of own-label cleaning agents for retailers, means it does not have any pricing power from brands, as it has no brands of its own.

“Many of its customers are larger and have more muscle when it comes to pricing discussions. And there are other suppliers who can be used as a bargaining chip by customers for good measure.”

Russ Mould

He said: “McBride, therefore, looks like a classic study for Porter’s Five Forces, a framework that investors could do well to bear in mind if inflation really does take hold. The analysis, first outlined by Michael Porter in the Harvard Business Review in the 1970s, outlines the five threats to any company’s competitive position and thus its ability to charge the prices it wants, and not just the prices customers are prepared to pay.

“They are: The fight for market share within a given industry; the threat posed by new, disruptive market entrants; the threat posed by product substitution; the bargaining power of raw material suppliers; the bargaining power of buyers

“For the moment, it looks like McBride is the meat in the sandwich between suppliers and buyers and its profits – and share price – are being squeezed accordingly.

“The company is, therefore, warning for the year to June 2022, even before it has published its results for the year to June 2021 – they are due in September. A further sign of how tough times have become is the board was still confident enough to be sanctioning share buybacks in May – a programme which looks to have done little for the share price after today’s slump, like so many other buybacks schemes.

“Management’s estimate that adjusted pre-tax profits will come in 55% to 65% below consensus implies an adjusted pre-tax profit for the year to June 2022, of around £12m compared to forecasts of £19.7m and analysts’ anticipated out-turn for the year to June 2021, of £12.7m.”