Can Conviviality recover from its week of woe?

The City is not the most forgiving place, but Conviviality’s week of woe would have tested the patience of Job. On 8 March, Conviviality issued a profit warning that its EBITDA would be 20% lower than forecast due to an “arithmetic error” and a downgrade in margin forecasts for its wholesale arm, which includes suppliers Matthew Clark and Bibendum.

Conviviality’s shares slumped from 300p to 97p - less than the 100p it floated for in 2013 - wiping more than £350m off the value of the shares. Shares failed to spring back in the days that followed, despite senior executives snapping up roughly £750k worth of shares as a show of faith since its half-year results on 29 January. A second update on 13 March confirmed full-year adjusted EBITDA would drop by £15m to around £56m.

The next day it suspended its shares altogether, as it emerged that an upcoming tax bill of £30m due at the end of March had also not been accounted for, and that PwC had been called in. An £8m dividend was cancelled later that day.

It’s a disaster for what was, until recently, one of the booze sector’s biggest success stories - in November 2017 it was trading at an all-time high of 426p.

So what has gone wrong? How can it be sorted out? And is there a danger it will go bust?

Sources say there have been red flags over recent months. The first was CEO Diana Hunter’s announcement, in Conviviality’s half-year results back in January, that margins had been affected by a “significant increase in purchases from large national account customers”.

The logic was that selling more volume at a cheaper price to bigger customers was all part of consolidating the market. So long as it was cash generative and overall profits rose this wasn’t a problem, albeit margin erosion spooked the City.

Cash control

Finance blogger Investor’s Champion has pointed out that trading updates from hospitality brands have been “generally poor” so far this year. And pressure exerted by large national accounts may have run “all the way down the supply chain”, one source speculates. “When restaurants launch a survival campaign, they go to all their suppliers to get prices down. It’s easy to join the dots.”

Conviviality also spent the past six months issuing a swathe of winding-up orders, sparking press speculation it was struggling with bad debt, though a Conviviality spokeswoman said it was “a very low number of winding-up orders given the scale of our customer base.”

Shore Capital analyst Phil Carroll suggests a wider malaise in management. “We believe management information reporting has been insufficient, as well as the structure of the reporting chain to higher level management, resulting in gaps in financial expertise where it has been required.”

Another industry source says poor cash management is likely to blame. “You’ve got to get the cash in quick and pay it out at the right pace, particularly when you come out of Christmas.” The source adds that while the £5.2m arithmetic error is “just incompetence”, the added knock to full-year projections could be down to a number of additional factors, including higher than expected overheads, and IT overspend, as well as product mix adjustments from customers.

Staff turnover has also raised eyebrows. CFO Andrew Humphreys stepped down in October 2017, followed by MD Mark Aylwin in January. Since last year the logistics and HR director have also left, though an insider insisted there was “a very motivated workforce on the ground”.

Can it recover?

To Carroll “the systems and controls issue is very fixable”, though it will need “time and a significant period of results delivery. “We believe the business model works and remains relevant. Conviviality commands a strong route to market so has value, with the potential to generate more value.”

After all, it’s not as if Conviviality isn’t growing. Its revenues were up 9.2% to £836m over the first half. If you keep the sales line going while reducing the stockholding, it should generate cash.

But the tax bill complicates things. Calling in PwC is rarely a good omen, and though Conviviality stresses it is “currently in compliance with its banking covenants” and expects the issue to be “satisfactorily resolved”, it admits there is “no guarantee” of a positive outcome.

Carroll fears “short-term funding alongside further liquidity pressure could result in the business being insolvent and, therefore, going into administration.”

Even if its cash troubles are resolved, it’s likely any expansion plans will be put on hold. “Unless they get investors to open their wallets,” says one insider, “how can they fuel the growth their high share price was based on? The whole edifice suddenly gets a bloody big question mark against it.”