South West sees increase in profit warnings

Listed companies in the South West issued 15 profit warnings in the first six months of 2023– an increase of 66 per cent when compared to the same period in 2022.

According to the latest EY-Parthenon Profit Warnings report there were eight warnings in the first quarter and seven in the following three months.

Listed businesses in the consumer goods sector issued almost half of the South West’s profit warnings as the sector faced pressure from supply chain headwinds and a fall in consumer spending due to the rising cost-of-living.

Lucy Winterborne, EY-Parthenon partner in turnaround and restructuring strategy in the South West, said: “Businesses across the South West and around the country have faced challenging conditions across the first half of the year due to persistent economic uncertainty, lower consumer spending and rising interest rates .

“Conditions may remain challenging for some time to come, however an increasing number of businesses are forecasting some level of growth this year as overheads such as energy costs gradually fall. Those businesses that took action early to reshape and restructure will see a level of protection from high inflation rates. Those that haven’t made changes will likely find it hard to navigate the next few months of economic uncertainty and turbulence.”

Nationally, profit warnings issued by UK-listed companies between April and June 2023 marked the highest second quarter total in three years, with 66 warnings issued.

The report found that warnings from UK-listed companies have risen year-on-year for the seventh consecutive quarter, the longest run of consecutive quarterly increases since 2008.

The highest number of second quarter warnings recorded by EY-Parthenon was in 2020, when 166 were issued.

Persistent inflation and rising interest rates have played a significant role in second quarter warnings, driving a tighter and more expensive lending environment.

Changing credit conditions were cited in one-in-five profit warnings in during the quarter, the highest proportion since quarter two 2008 and up from one-in-ten  in quarter 2022.

Jo Robinson, EY-Parthenon partner and UK turnaround and restructuring strategy leader, said: “The sustained rise in profit warnings over the last two years reflects the extraordinary mix of challenges faced by UK businesses over that timeframe. It’s now clear that the effects of these low-growth conditions are spreading to nearly all corners of the UK economy, and this quarter we’ve seen earnings pressure extend up the value chain into the mid-market.

“Rising interest rates have significantly changed credit conditions for companies that need to refinance, and businesses have started to feel the effect of a more expensive borrowing environment, especially in sectors where credit availability has been a key driver of activity. The number of businesses that had previously locked in low interest rates has postponed some of the challenges, but not indefinitely. We’ll likely see credit cost and availability play an increasingly significant role in restructuring activity as more businesses encounter a markedly different refinancing landscape.

“Insolvency activity typically peaks nine to twelve months after a profit warning peak. Conditions are likely to remain challenging and those businesses best placed to persevere will be those that can reshape their operations to withstand further shocks and capitalise on growth.”