- Brickmaker sees first-half sales down sharply
- Second-half recovery weaker than expected
- Shares make new post-Covid lows
Less than a week after insulation and building products firm SIG (SHI) cut its full-year profit forecast due to ‘challenging and variable’ market conditions, brickmaker Forterra (FORT) has posted an equally downbeat trading update blaming ‘challenging conditions’ for an 18% drop in first-half revenue.
UNCERTAINTY RULES
One of the biggest problems manufacturing businesses have to confront is uncertainty in demand as it makes it difficult to know whether to speed up or slow down production.
Most managers would rather know which way the wind is blowing so they can adjust their operations – and cost base – to suit the conditions.
Therefore, ‘variable’ or ‘challenging’ conditions are something of a nightmare for firms, especially if they produce quasi-commodity goods like bricks.
In Forterra’s case, sales for the six months to the end of June are expected to be down around 18% on the same period last year, and while there has been an improvement in the market, it has been weaker than the firm expected.
At the start of the year, management saw demand falling 20% in the first half ‘followed by a meaningful recovery strengthening into the second half’, but that scenario has clearly changed.
The firm is now predicting just a ‘modest’ recovery, with demand for its products ‘subject to significant uncertainty with rising interest rates widely expected to adversely impact the demand for new homes for the foreseeable future’.
DIFFICULT DECISIONS
The situation is made trickier still by the fact company decided to build up its stock levels by £30 million during the half, so it could deliver to customers at short notice.
However, with the new Desford factory adding to output there is a risk inventory levels will continue to grow so the Howley Park factory has been mothballed.
The firm now faces a tricky balancing act as it continues to ramp up production at Desford even though it only sees a ‘modest’ improvement in demand.
Moreover, management cautioned that higher borrowing, inventory build and rising interest rates would drive an increase in financing costs, which isn’t ideal at a time when sales are so sluggish.
Forterra shares fell 4% to a new post-pandemic low of 155.6p in mid-morning trading
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