When a company’s business unit operates in a non-core industry, it is not so difficult to assume that the business unit may be the target of adjustments when things go bad. I used to work for a publication. My job back then was to do research and data analysis for customers who paid for advertisement in the magazine. It was a sort of an incentive plan that provided the customer great value for their spending with the company. But research was not core. It was certainly added value that management identified, but when revenue and profit dropped, a new management team came along, and the rest went as you expected. Cost cutting started with downsizing or eliminating non-core functions, and my research unit was the first to go.
This brief background is what I often use when I talk to managers of units that are not the backbone of the parent company. And in the ITAD space there are many such cases. I put SIMS as part of this group of companies, whereby the core businesses is in selling ferrous and non-ferrous recycled metals. Obviously there are some proven synergies between the business of selling recycled metals and acquiring these metals. Part of the origination path is the ITAD space, where the company invested in a unit that specializes in IT asset acquisition, as a way to feed its recycling systems.
Although there are no immediate indications of severe cost cutting in SIMS’ ITAD business, the company’s latest profit warning begs the question as to whether this unit will be spared from what’s to come. Our assumption is that its ITAD business will get hit as well.
On November 20, 2015, Sims Metal Management issued a worrisome profit warning that called for no-growth in earnings in the second half of 2016. The company also sees a $230 million impairment change, a situation that originates from the company’s Asia market performance. SIMS top Managers blame the September to November 30% fall in ferrous prices for the expected no-growth forecast, while copper and aluminum too fell 15% and 10% respectively.
As a result of the metal market losing momentum, the company is looking to reorganize to cut cost. Although the company mentioned a scaling back of global operations, it will focus greatly on North America. Among the steps envisaged, the company is looking to cut 800 jobs, and will stop operating 35 facilities, primarily in the US heartland. These facilities may be up for sale.
Consequences on ITAD:
It is too early to state with certainty that SIMS ITAD business will be badly affected by the weakness in the company’s core business. But I would be shocked if it is not. Regardless, there are a lot major companies out there who operate non-core ITADs with performance problems not to anticipate a reconfiguration of the ITAD space in the midterm. From HP to Arrow and SIMS, these companies’ ITAD operations look set for pending adjustments that promise changes in the competitive landscape.