By Powerscourt on 07/05/2020
Even as China roars back to life, the Bank of England expects the economy to shrink by 25% in the second quarter. In what it calls an illustrative scenario, the Bank says it sees the economy shrinking by 14% for the year in what is described as the worst recession for 300 years. Its May meeting voted to leave interest rates unchanged at 0.1%.
Major US stock indices fell Wednesday as declines in financials and industrial stocks pulled the rug out from under an earlier tech-led rally. US data Wednesday showed private employers laid off 20 million workers in April. But better than expected Chinese export data helped lift Asian markets.
Fears are growing over the growing chill between the world’s economic superpowers, the US and China, fueled by recriminations about how the virus was handled by China in the critical early weeks. Any previous hopes of a multilateral approach to economic recovery have faded amid allegations on both sides that each country deliberately unleashed the virus.
Reuters estimates that China had a trade surplus with the US of $23 billion in April compared to $15 billion in March.
The UK government took an uncharacteristically apologetic tone at the daily coronavirus briefing on Wednesday, as figures showed deaths in the UK had now passed 30,000, the second highest in the world after the US, which itself has recorded over 70,000 deaths. The UK Prime Minister said in parliament he “bitterly regretted”, in particular, the crisis within care homes, and it emerged that testing limits had fallen short of their goal for a fourth day.
The grim figures threaten to overshadow the UK Government’s plan to outline its approach to relaxing the lockdown.
Boris Johnson will on Sunday set out what he describes as Phase 2 of the fight against coronavirus, which is expected initially to be guarded, with construction among the industries encouraged to reopen, but with detailed social distancing roadmaps outlined for other sectors. Other European countries are slowly moving to relax restrictions.
WHAT ARE COMPANIES SAYING?
Consumer and Retail
The clothes retailer announced yesterday that it will reopen up to 800 stores in North America by the end of May. Sonia Syngal, CEO since March, said: “Our goal is to be responsibly aggressive. Every retailer will have its own opening strategy, but suffice it to say we are looking to open where we’re legally allowed to open as soon as we can. Our approach to reopening balances the fact that taking care takes time, with the urgent need to restore the economy and provide the opportunity for our teams to come back to work.”
The retailer said a doubling of ecommerce revenues in the last four weeks has offset about a third of its lost store sales. The company said as well as health of staff, customers and suppliers, its priority is maintain cash. It has furloughed 88% of all staff, Executive Directors have taken 25% pay reductions and there will be no bonuses for 2020 and 2021. It has also agreed the majority of the three month rent deferrals it requested. CEO Julian Dunkerton said: “We continue to work hard so that the business can emerge stronger from this extraordinary period. It will take time to return to normality, for now we remain open for business online through superdry.com, our stores in Europe have begun to reopen.”
The Coca-Cola bottler reported “weaker results” in March as a result of lockdowns affecting the out-of-home channel. The company said it has taken decisive actions to reduce costs and re-prioritise investments. CEO Zoran Bogdanovic said: “After a strong start to 2020, March and especially April have been more difficult. he strong performance in January and February ensured that we entered this crisis from a position of real strength with sound business fundamentals and a solid balance sheet.”
The world’s largest brewer, known for Budweiser, Corona and Stella Artois, said global sales volumes were down 32% in April. The company said its on-premises channel had been badly affected by lockdown measures, a channel which had represented abut a third of global volume in 2019. It also highlighted “early signs of recovery” in markets such as China and Korea with “steady reopenings”.
InterContinental Hotels Group
The hotel operator has seen revenue per available room fall 55% in March with an expected fall of 80% in April. The company says it can last 18 months with empty hotels. CEO Keith Barr said: “Covid-19 represents the most significant challenge both IHG and our industry have ever faced.”
The ticketing platform said it has experienced a “significant impact on trading” in the first quarter, with UK and European passenger numbers down more than 95%. The company said it is “confident” it can navigate “even an extended downturn” with significant liquidity headroom. CEO Clare Gilmartin said: “In recent weeks we have seen disruption to our business due to COVID-19, and are grateful to our frontline staff in particular for helping our customers over this period. We remain confident that the long-term growth opportunity for our business remains unchanged, and are committed to our long term growth plans.”
The retailer saw a significant increase in sales in mid-March, reflecting demand for products to support children’s education and mindfulness materials during lockdown. It said strong online demand has continued during lockdown, with sales up more than 300% on the period last year. The company has reviewed capital investment plans, is in ongoing discussions with landlords, has reduced marketing spend and senior managers have taken 33% pay reductions, with the chairman waiving 100% of fees.
Financial Services & Real Estate
The private equity giant yesterday announced a first quarter loss of $1.28bn ($2.31 per share). It also reported a dividend of 13.5c a share. In a statement, co-CEOs Henry Kravis and George Roberts said: “Since February, we have seen more uncertainty and volatility than at any time since the financial crisis. KKR navigated the quarter well and our results bear testament to the strength of our business model.
The construction and regeneration group said this morning that about 80% of its construction sites are currently operational albeit with lower levels of productivity in part due to limited availability of building materials. The group has furloughed about 1700 staff and deferred tax payments totalling almost £50m. CEO John Morgan said: “Our decentralised structure has allowed us to adapt quickly to these evolving circumstances and to rapidly adopt new ways of working, which will stand us in good stead for the future. Our strategy remains unchanged, focused on building long-term workstreams in markets that remain attractive.”
Industrials & Transport
The carmaker announced yesterday that it had avoided quarterly losses, posting a $292m net profit in the first quarter. Pretax profit was down 46% from the previous year, with the company highlighting a $1.4bn impact from coronavirus. The company had strong sales of large pickup trucks, which were less affected by lockdown measures. The company also announced that it will start reopening US plants in the next two weeks. CFO Dhivya Suryadevara said: “We believe that we’re positioned well to manage through this because we’ve taken swift actions to preserve liquidity.”
The ride-sharing company yesterday announced that it will be cutting 3,700 jobs, which amounts to approximately 14% of its workforce. CEO Dara Khosrowshahi, who will be waiving his base salary for the remainder of 2020, warned staff of further cuts to come in a staff memo, saying “We are looking at many scenarios and at each and every cost, both variable and fixed, across the company.”
Uber-rival Lyft reported losses of almost $400m on revenue of $955m for the first quarter. The company announced its active rider number has increased 3% year-on-year, despite the impact of the virus. Last week Lyft cut nearly 1000 jobs and furloughed 300 employees, and cut pay for non-hourly employees.
Mitsubishi Heavy Industries
The Japanese engineering company has said it will immediately write-down about $500m when it completes the acquisition of Bombardier’s regional jet division, due to the impact of the virus on aerospace. The company said future cash flows are hard to forecast and as a result it will write off all goodwill and intangible assets from Bombardier to March 2021.
The construction and engineering company announced a proposed capital raise of approximately £100m by a placing of ordinary shares. The bookbuild will be launched immediately. The company said it will use the proceeds for “general corporate purposes” including demonstrating financial capacity “in a sector where clients and suppliers are increasingly scrutinising their partners’ balance sheet”.
The airline group warned that further restructuring across the group is essential. The group reported a first quarter operating loss of €535m. CEO Willie Walsh said: “We do not expect passenger demand to recover to the level of 2019 before 2023 at the earliest,” said IAG chief executive Willie Walsh. “This means group-wide restructuring is essential in order to get through the crisis and preserve an adequate level of liquidity. We intend to come out of the crisis as a stronger group.”
The engineering company announced that it has furloughed more than 4000 employees. CEO Warren East said in his AGM statement: “We are working hard to mitigate the near-term disruption caused by COVID-19 and are making stronger than expected progress on our mitigating actions, giving us confidence that we can now deliver up to £1.0 billion of savings this year. However, we must also take the difficult but necessary decisions to ensure the Group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover.”
The industrials conglomerate announced that first quarter group sales have fallen approximately 20% as a result of factories being shut or partially shut. The company said that robust cash management remains its top commercial priority and it expects £200m savings in the second quarter from capital expenditure and trade working capital actions. CEO Simon Peckham said: “Melrose has a track record of managing its businesses successfully in all market environments and crucially our recent cash generation performance shows we have been able to maintain the strength of the balance sheet to position the Group’s businesses in the best way for the future.”
The two UK telecoms companies will combine under a joint venture between Liberty Global and Telefonica, announced this morning. The deal is one of the biggest since the pandemic hit with the companies saying that together they have an enterprise value of £31bn. Telefonica CEO Maria Alvarez-Pallete said demand for connectivity “has never been greater or more critical”.
The telecoms group reported in line results, saying it is “keeping the nation connected during the Covid-19 crisis”. The company has suspended its 19/20 and 20/21 dividends “to create capacity for value-enhancing investments and managing confidently”. CEO Philip Jansen said: “Our strong and resilient networks, both fixed and mobile, have proved critical to the continuing functioning of the UK economy, providing unrivalled connectivity and services for the nation. Of course, Covid-19 is affecting our business, but the full impact will only become clearer as the economic consequences unfold over the next 12 months.”
The newspaper publisher reported group revenue down 13.1% with print revenue down 15.8% and digital up 4.7%. Since mid-March circulation sales have declined, print advertising revenue has fallen and there have been reduced printing requirements from third parties, cancelled events and lower digital yields. Digital demand has increased with 42m UK online users in March. CEO Jim Mullen said: “Our strategy is now even more relevant than before the crisis so we are accelerating plans to drive digital engagement and capture the customer insight and data that is so key. This will ensure a strong and sustainable future for Reach’s trusted news brands.”
The digital advertising and marketing services company this morning announced continued strong growth in spite of the virus impact in its first quarter update, with revenue up 73% and gross profit up 85%. Executive Chairman Sir Martin Sorrell said digital transformation will accelerate now: “In our view, covid-19 will only accelerate the digital trends we have seen before at three levels – consumers, media owners and enterprise managers. It is effectively and sadly a burning platform that will encourage and drive digital transformation.”
IN THE NEWS
Stocks slip as data show uncertainty of China recovery – Financial Times
Small firms secure £2bn in bounce-back loans in first 24 hours – The Guardian
Banks face £25bn loan default bill – The Times