City snapshot: European Commission objections delay UK trade credit rescue package

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The government’s multibillion-pound trade credit insurance rescue package is being delayed by EU state aid rules, causing a cash flow crisis for food and drink wholesalers as they re-stock hospitality businesses days before their planned reopening.

The Grocer can reveal that the European Commission has raised objections to the UK government’s £10bn trade credit underwriting plan, causing a delay to the implementation of the scheme, which has been designed to keep supply chains moving throughout the Coronavirus crisis.

The Association of British Insurers confirmed to The Grocer that the European Commission, in charge of giving final approval under EU state aid rules, has unspecified issues with the scheme as it stands.

An ABI spokeswoman said: “We are very disappointed with the EU Commission’s objections to certain elements of the UK scheme, which has caused delays. We are working with insurers and the government to work through this to ensure businesses can get the cover they need.”

The blow follows Boris Johnson’s announcement on 4 June that a Trade Credit Reinsurance Scheme would provide temporary state support by underwriting the trade credit insurance market.

The agreement to provide trade credit insurance, using up to £10bn of government guarantees, for the rest of the year - and backdated to 1 April - was hailed as providing “essential cover” according to a statement issued by the Treasury at the time.

However, The Grocer can reveal that the delay has led major trade credit insurer Coface to reduce or cancel its coverage for a number of food and drink wholesalers across July, August and September.

Coca Cola European Partners is among the food and drink suppliers using Coface. As a result the soft drinks distributor has been forced to require a number of its wholesale partners to shift to pro-forma terms and to remove credit facilities because of the reduction in trade credit insurance coverage.

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Morning update

Associated British Foods continued to see strong grocery growth through the third quarter, but overall revenues were hit by the closure of its Primark retail estate.

The quarter ending 20 June saw constant current revenues at the group slump 39% to £2.6bn taking constant currency group revenues for the first 40 weeks of its financial year down 13% to £10.2bn.

However, it said its grocery division benefited in the third quarter from increased sales volumes through the retail channel which more than offset weaker foodservice demand.

Following flat revenues in the first half, third quarter revenues were 9% ahead of last year, with increased retail volumes, and margin and operating profit were strongly ahead.

Twinings Ovaltine revenues were ahead of last year. Good Twinings sales, particularly in the US, France and Australia more than offset a small decline in Ovaltine sales which were affected by reduced demand in out-of-home and convenience channels.

AB World Foods, Jordans and Dorset cereals, Ryvita, Silver Spoon and Acetum all delivered much higher sales as they benefited from the increase in consumption at home.

At Allied Bakeries an increase in Kingsmill bread volumes was more than offset by the expected decline in private label bread volumes, though the bread division’s operating loss was lower than last year.

Notably it is exiting its Co-op contract in April 2021 to deliver to thousands of stores across the UK which has “always been one of our more challenging accounts” as the parties were unable to “agree a way forward that makes financial sense”.

Sugar revenues, which fell 1% in the quarter at constant FX, were held back by lower Illovo export volumes in the quarter due to COVID-19-related logistical constraints at borders and ports in Africa.

Primark stores were closed for most of the third quarter, meaning revenues relate just to the short period of trading before the stores closed in mid-March and the sales at the end of this quarter as stores have progressively reopened.

Primark sales fell 75% in the quarter to just £582m.

However, nearly all Primark stores are now trading again and ABF estimates that, absent a significant number of further store closures, adjusted operating profit for Primark, excluding exceptional charges, will be in the range £300-350m for the full year compared to £913m reported for the last financial year.

Overall, as profitability improves in its sugar, grocery, agriculture and ingredients businesses, ABF expects the group to return to cash generation in the final quarter. With Primark trading again, current expectations are that the year end net cash balance, before lease liabilities, will be in excess of £750m.

Packaging giant DS Smith has “demonstrated its resilience” to post a rise in annual pre-tax profits despite the disruption and economic uncertainty caused by the coronavirus outbreak.

Total revenues for the year to 30 April fell 2% to £6bn, while adjusted operating profit was up 5% to £660m and profit before tax rose 5% to £368m.

The group said performance for the first 10 months of the financial year was robust, with an impact, albeit relatively limited (around £15m), in the final two months of the year from the Covid-19 pandemic.

2019/20 also saw the group complete the disposal of its plastic packaging business for £436m to reinforce its focus on sustainable fibre-based packaging, and begin operations in our new build corrugated packaging plant in Indiana.

Corrugated box volumes in the first five months of the second half grew as anticipated, significantly ahead of the first half of the year, ahead of the market.

Since the start of the Covid-19 pandemic, it has seen a reduction in our overall box volumes during April and May due to weakness in the industrial customer categories when the crisis was at its peak.

In response to the pandemic, and conscious of the likely global recession in the coming months, it has undertaken measures to reinforce its financial position and ongoing performance through conserving cash and managing costs.

Capital expenditure will be reduced by 20% from last year, all non-essential expenditure deferred and headcount flexed.

Additionally, it has postponed the payment of dividends until it is clearer on the economic outlook.

CEO Miles Roberts commented: “Our business model is resilient, built on our consistent FMCG and e-commerce customer base. In the short term, however, the impact of Covid-19 on the economies in which we operate is likely to impact volumes to industrial customers and add to operating costs.

“With the current economic uncertainty, we continue to focus on our employees, our customers, our communities and on the efficiency and cash generation of our business and accordingly the Board considers it premature to resume dividend payments at this stage.

“In the medium-term, the growth drivers of e-commerce and sustainability are as strong as ever. The Covid-19 crisis is also expected to accelerate a number of the structural drivers for corrugated packaging and our scale and innovation led customer offering positions us well and gives us confidence for the future.”

The closure of its estate in March has driven pub group Mitchells & Butlers to a loss for the 28 weeks ended 11 April.

Total revenues in the half year period fell to £1bn from £1.2bn in the previous year, while it dropped to an operating loss of £51m compared to a profit of £140m in the previous financial period.

The group’s loss before tax was £121m, compared to a profit of £75m last year.

MAB said it had delivered strong operational performance before lockdown came into place, with like-for-like sales growth of 0.9% before the closures.

It said it took rapid and effective action taken to protect guests and team members and to reduce costs during the lockdown period, including the furloughing of 99% of its staff and reductions in executive pay.

It also agreed new financing arrangements with lenders to provide security and flexibility through the period.

It is working to an early July date for English sites to re-open, with Wales and Scotland following over the next two weeks and have developed a detailed re-opening plan for the business.

The group said it remains “well positioned to benefit from recovery on re-opening”

CEO Phil Urban commented: “The business was performing very well before the enforced closure in response to Covid-19, building on the strengths of our estate of mainly freehold properties, our diversified and well-loved brands and our team’s industry leading operational skills.

“These assets, coupled with our early experience of re-opening in Germany, give us a clear plan for re-opening and ensure that we are well placed to continue to bring people and communities together and to keep Mitchells & Butlers at the forefront of the eating and drinking-out market .”

Finally, Total Produce has announced that trading for the 6 months ended 30 June 2020 has been “satisfactory”.

It said sales have been resilient having regard to the impact of Covid-19 and are now expected to be broadly in line with the first half of 2019.

The group’s strong presence in the global fresh produce industry, the diversity of its operations and products together with the exceptional response from our people have enabled the company to meet the challenges presented by the outbreak.

Total Produce said it expects “satisfactory” results for its 2020 financial year, subject to the uncertainties arising from the ongoing Covid-19 pandemic.

“Total Produce is in a strong financial position and continues to focus on the growth and expansion of the business,” it stated.

On the markets this morning, the FTSE 100 has started the day strongly rising 0.9% to 6,213.8pts.

Early risers include Associated British Foods, up 7.3% to 2,108.7p, Total Produce, up 4.5% to 106.1p and WH Smith, up 2.4% to 1,079p.

Fallers include DS Smith, down 9% to 290.1p, Finsbury Food Group, down 3.3% to 55.6p and Coca-Cola HBC.

Yesterday in the City

The FTSE 100 ended the day down 0.2% to 6,157pts yesterday.

Sainsbury’s ended the day down 2.6% at 203.2p after an 8.5% jump in first quarter sales was tempered by £500m of extra cots related to the coronavirus and a drop in convenience sales as city centre stores lost custom.

Fellow supermarkets Tesco and Morrisons fell 2.1% to 223.3p and 1% to 188.7p respectively on the Sainsbury’s results.

One of the day’s big climbers was B&M European Value Retail, which gained 4.9% to 417p after it posted growth of 27.7% in the first quarter.

Other risers included PayPoint, up 3.5% to 620p, Glanbia up 3.4% to €10.19, Applegreen, up 3% to 345p, Associated British Foods, up 2.6% to 1,964.5p and Compass Group, up 2.4% to 1,139p.

SSP Group, which announced the shedding of 5,000 jobs yesterday as it comes to terms with vastly reduced travel passengers as a result of the coronavirus, fell a further 2.3% to 251.4p.

Other fallers included WH Smith, down 3.9% to 1,054p, McBride, down 3.9% to 60p, Hotel Chocolat, down 3.9% to 300p, DS Smth, down 2.9% to 318.7p and Finsbury Food Group, down 2.7% to 57.5p.