Nearly one-in-five UK-listed companies issued a profit warning in past year

• EY-Parthenon report reveals that 49 profit warnings were issued by UK-listed companies in Q2 2024, the lowest quarterly total since Q2 2021
• A fifth of profit warnings in Q2 2024 were from companies in the FTSE Industrial Support Services sector
• Rising costs were cited by more than a quarter of businesses as a key driver behind warnings in Q2 2024

UK-listed companies issued 49 profit warnings between April and June 2024, the lowest quarterly total since 2021, according to EY-Parthenon’s latest Profit Warnings report.

The report found that profit warnings from UK-listed companies fell 26% compared with Q2 2023. The highest number of Q2 warnings recorded by EY-Parthenon was in 2020, when 166 were issued.

Despite a decrease in the number of quarterly profit warnings, the proportion of UK listed companies issuing a warning over the past year stands at 18.4%, exceeding the peak level observed immediately after the 2008 global financial crisis. This high level can be attributed to a significant number of 'new' companies issuing warnings for the first time within a 12-month period. During Q1 2024, 61% of profit warnings came from companies that had not issued one for the past 12 months, and during Q2 2024 this figure stood at 50%.

In the last year, 35 companies have issued at least their third warning in a 12-month period, just one less than last quarter. Of these companies, 12% have already gone into administration or a debt restructuring process, while 9% have been sold or are in a sale process.

Leading factors behind many Q2 profit warnings included contract issues which were cited in 29% of warnings. As companies contended with increasing labour and supply expenditure, cost pressures rose as a key factor in profit warnings for the first time in more than 12 months and were cited in more than a quarter (27%) of Q2 profit warnings.

Jo Robinson, EY-Parthenon Partner and UK&I Turnaround and Restructuring Strategy Leader, said: “An unprecedented rollcall of global elections and geopolitical risks means that an element of uncertainty remains, potentially exerting further pressure on spending and growth. We can expect the economy to continue to recover, but slowly and unevenly.

“We have started to see more companies coming back to the restructuring table because they haven’t made the fundamental changes needed to adapt their operations and balance sheets to new demand, cost and competitive realities. Refinancing is a growing risk, with many companies surprised by the added levels of due diligence and time needed to refinance in this market.

“We expect all of this to drive a slow uptick in restructuring, but without necessarily a big upsurge in administration appointments, as more companies tackle their issues through restructuring plans and consensual agreements with creditors. The profit warning cycle may have turned, but we are at the start of the restructuring one.”

FTSE Industrial Support Services accounted for a fifth of all warnings in Q2 2024

While overall profit warnings fell in Q2 2024, there were a number of sectors where warnings remained high, revealing persistent and developing challenges. 

Companies within FTSE Industrial Support Services, which encompasses business service providers, industrial suppliers and recruitment companies, issued 10 warnings in Q2 2024, accounting for 20% of all UK profit warnings during the period. Of the 19 warnings issued by the sector in 2024, eight have come from business services providers, seven from recruitment and training companies and four from industrial suppliers.

Warnings were also seen across FTSE Software and Computer Services (5), Retailers (4), Household Goods and Home Construction (4) and Finance and Credit Services (3).

Dan Hurd, EY Partner, Turnaround and Restructuring Strategy, said: "The FTSE Industrial Support Services sector is heavily reliant on business and public sector spending and is particularly vulnerable to economic fluctuations and cost-cutting measures. With 19 warnings so far in 2024, companies have cited decreased sales, challenging contract negotiations, and budgetary pressures as key concerns.

“Cost increases in labour, equipment, and debt, alongside necessary investments in supply chain improvements and new technologies, have compounded the financial strain. Recruitment companies, as business confidence indicators, have notably issued 12 profit warnings in the last 12 months.

“The sector's challenges are exacerbated by complex outsourcing contracts and cost inflation, with nearly half of the warnings in H1 2024 mentioning higher costs. Companies are therefore having to actively manage the risks on existing contracts whilst learning from the past and trying to avoid the pitfalls of overly aggressive pricing strategies on new work.”