Amid Brexit Uncertainty, Businesses Plan Ahead

A roundup of recent earnings call comments indicate UK and eurozone firms are preparing for all possible Brexit outcomes.

Editors' note: MarketMinder does not recommend individual securities. The below simply represent a broader theme we wish to highlight.

As March 29—the UK’s theoretical EU departure date—approaches, it remains unclear what shape the UK and EU’s future relationship will take. After Parliament voted down Prime Minister Theresa May’s initial proposal last week, she returned Monday with a three-pronged “Plan B,” vowing to renegotiate the Irish backstop, increase protections for workers and give Parliament more input in an EU trade deal. Parliament is scheduled to vote on this next week, and MPs are racing to tack on amendments that could delay Brexit or torpedo it altogether. So it is an understatement to say a wide range of outcomes remains possible—prolonging Brexit uncertainty. But while media frequently portray businesses as sitting on their hands hoping catastrophe won’t strike, recent earnings calls suggest they have contingency plans to minimize disruption to normal operations—no matter Brexit’s eventual form.

Brexit may be a unique challenge, but coping with such challenges is what businesses do. They can’t afford to be passive—planning and preparing for the future is critical for survival. This includes anticipating the effects of government policy, then identifying and innovating around potential hurdles. Success isn’t guaranteed and surprises are possible, but Brexit isn’t exactly sneaking up. Brits voted to leave the EU over two and a half years ago—a long time for firms to map out scenarios and contingency plans. Recent earnings call comments show many have done just that.

The first is from British Utility firm United Utilities’ earnings call on November 21, 2018.[i]

I think when you look at what we've been doing, along with our sector colleagues, we've been looking at what the implications of Brexit might be. I think, principally, we're looking at materials and particularly chemicals coming in from overseas. So, the sector is working together really to look at what is our demand for materials that we sourced either that through or outside of Europe. And then, more importantly, having identified that as a sector, how do we make sure that we can achieve a continuous supply... So, I think preparations are well in hand in that regard.

The CEO of EasyJet—a UK-based airline operating throughout Europe—said this on a November 20 earnings call:[ii] 

Brexit, we started planning – and this is important. We started planning for the Brexit two years ago. This is not something that we have started focusing on in the last couple of months. And we have planned basically for every scenario that is out there. And we are confident that easyJet will continue to fly with no disruption post March 29, 11 PM.

The specific steps we are taking to ensure our ability to operate are ensuring that the Austrian operation has no reliance on our UK operation, in particular by obtaining Austrian safety certificates where it's required, making sure that our third-party suppliers are Brexit ready and have the required certificates, completing also our plan for spare parts to make sure that they are in the right place post Brexit. So we don't face any risk of custom delays and we're not reliant on the UK certificate spare parts.

Next up is Royal Mail, a UK postal delivery firm. The following comes from November 15’s earnings call.[iii]

If you talk about Brexit, the only thing which company would want on Brexit is certainty. And this certainty will help us to measure better where we will go. One thing I can just assure you, whatever happens, Royal Mail is prepared. We are trading with the world already, we do customs clearance already, we have prepared [General Logistics Solutions, Royal Mail’s international courier services arm] GLS for the worst case, but we'll see what the outcome will be.

AstraZeneca, the London-based pharmaceutical giant, listed some of its preparations in a call on November 8.[iv]

The UK government has confirmed that it will accept EU-tested medicine in the event of no deal. We are working hard to coordinate variation to licenses and thousands of packaging material changes across AstraZeneca. And as the UK pulls away from the EU, we are focusing on the reduction of mutual interdependence, as well as replicating critical production processes both in the UK and the EU.

We are also speaking to the European Union and Member State governments around the acceptance of UK testing standards. Operationally, we have been preparing for Brexit since the referendum in 2016. I want to reassure to you that, overall, Brexit will have relatively limited impact on AstraZeneca. We keep preparing carefully for Brexit to ensure that no patients are denied our medicine.

Lastly, the CEO of Barclays, one of the UK’s four largest banks, stated on October 24, 2018:[v]

I want to update you this morning on Barclays' preparation for Brexit. As you know, our plan for being able to continue to serve clients within the EU beyond March 29 next year is to expand our banking license in Ireland, to build our presence there appropriately, and to transfer all of our branch operations in the EU to Barclays Bank Ireland.

I'm pleased to say that the work to effect that plan is well in hand with the Central Bank of Ireland having approved the business expansion. We, therefore, expect Barclays Bank Ireland in its new incarnation to be fully operational before the UK's exit in March.

Take these executives’ comments with a grain of salt, of course—companies want to present themselves in a good light, and saying, “uh, pass” when asked about Brexit plans probably wouldn’t go over well. But examples abound of firms backing up talk with action. In addition to those mentioned on the calls, UK pharmaceutical company GlaxoSmithKline has been retesting and tweaking its products to comply with EU regulations.[vi] French drugmaker Sanofi has shipped an extra six weeks’ supply of its insulin drugs to the UK already and is testing alternative shipping routes in case its standard routes are snarled.[vii] Many companies (especially manufacturers) are stockpiling raw materials, components and finished goods to ensure uninterrupted production and sufficient inventories in the event of border bottlenecks.[viii] Meanwhile, port authorities are beefing up staffing and storage capacity to avoid said bottlenecks.[ix] We aren’t saying all will be hunky dory no matter what happens. But the perception that Brexit—in whatever form—will necessarily catch businesses flat-footed seems off to us.

That said, getting a resolution soon would be most welcome. The present impasse is frustrating and imposes unwanted costs and delays on many businesses. Stockpiling can be costly, particularly given currently high demand for warehouse space. Setting aside cash and taking out additional loans to fund operations—as many firms are doing—is a sensible precaution but an unwelcome expense.[x] Once politicians settle on something—anything—UK and European firms will be able to respond to a concrete reality instead of spending time and money preparing for a range of possible outcomes.

There are many things about Brexit that remain unknown. But firms’ resilience and resourcefulness are known quantities. Don’t underestimate them. Presently, it seems many are—feeding pessimism and storing up positive surprise if the post-Brexit reality turns out better than feared.

[i] Source: FactSet, as of 1/17/2019.

[ii] Ibid.

[iii] Ibid.

[iv] Ibid.

[v] Ibid.

[vi] “While politicians posture and panic, the 'little people' will get us through a no deal Brexit.” James Bartholomew, The Telegraph, 12/26/2018. 

[vii] “Corporate Europe Faces ‘Unbearable’ Brexit Uncertainty,” Denise Roland and Robert Wall, The Wall Street Journal,” 1/17/2019.

[viii] “Brexit Stockpiling Frenzy Leaves Firms With Few Warehouses.” Daphne Zhang, The Wall Street Journal, 12/6/2018.

[ix] “While politicians posture and panic, the 'little people' will get us through a no deal Brexit.” James Bartholomew, The Telegraph, 12/26/2018. 

[x] “UK manufacturers set cash aside in case of no-deal Brexit,” Jasper Jolly, The Guardian, 1/18/2019.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.