Archives for Indicators

SIMS Warning is another Sign of a Pending ITAD Sector Reconfiguration

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.

Will Arrow Electronics Focus on Cleaning Up its ITAD Acquisitions?

It’s been a while since the late October release of Arrow’s results for its fiscal third quarter. Arrow Electronics results are important considering it has some 11% direct penetration rate of US enterprise ITAD, and it is therefore relevant in the assessment of the sector. Before we get into one particular interesting piece of information, let’s review the quarter’s results.

Firstly, the company missed its 3Q estimates and its 4Q revenue forecast is now below consensus. It has guided $6.15B-$6.55B and EPS of $1.75-$1.91, versus consensus of $6.65B and $2.01. Needless to say, this was not to the liking of Wall Street.

The company’s CEO, Michael J Long blamed the performance of the Asian economy as a source of the trouble, while Europe did well and the Americas was generally in line with expectations. Although the company saw a 1% revenue rise in enterprise computing business, comprising of hardware and software, the components business struggled, with revenue down 3% year on year.

So what’s in the company’s to-do list? The usual narrative from CEOs that are facing poor financial results. Here’s how the company chief sums up what’s ahead: “We remain committed to continual productivity improvement, and have enhanced our ongoing efficiency initiatives to drive $40 million of expense savings on an annual basis.” In simple terms, it’s all about checking spending and insuring cost reductions.

Impact on ITAD:

With the current environment specifically affecting the Asia business, Arrow will have to naturally focus on avoiding unnecessary spending and it will continue to reduce cost. One particular area of focus may be on its ITAD operations, which the company has been very quiet about. However, some small indicators show that ITAD may be eyed by the company as a place to seek cost-cutting measures.

What Arrow’s data shows is that over the past six years, the company spent money in acquisitions that do not seem to bear fruit on the profitability side. Specifically, from 2011-14, Arrow invested more than $1 billion in cash on acquisitions with no major benefit when reading the sales and profit figures.

From 2011 to 2014, Arrow sales expanded by 6.5% to $22.8 billion, but operating profit fell 7.7% to $880 million. An equity analyst says that EPS rose around 16% because of an almost equivalent decline in shares, and while Bloomberg anticipated a Cash Return on Invested Capital to increase 8.6% for the past twelve months, the actual figure was about 7%.

These figures hint on the acquisitions not boosting the company’s performance, including the many small ITAD firms. Even if the intended goal of the company was to create synergies among its businesses, and ITAD providing an opportunity to close the cycle of its business offerings, it would be difficult to talk about expense savings without anticipating a focus on ITAD.

HPQ’s Poor Performance and Impact on ITAD/Recycling

Echoing the sustained drop in demand for PCs, printers and classic mass IT equipment, HP’s PC/printing unit (NYSE:HPQ) saw its share fall below $13. The company missed its fiscal quarter targets, with sales falling 14% year over year, affecting PCs and printing units. The company delivered bad news to investors as it decided to cut EPS guidance for fiscal year 2016 below consensus.

The company’s PC-related income generated just about $294 million, a massive 17% year-on-year decrease. Same for printing, down 18% to $862 million. And what is telling in this story is that company Chief Dion Weisler does not expect any improvement in the foreseeable future, therefore one has to expect further cuts. The company is facing two major challenges: the first is obviously the permanent issue of customers shifting behavior. Why we already know about the impact of mobile, smartphones and tables on the degrading PC environment, Weisler noted for example the impact that online/mobile document and photo sharing are having of printer sales. The second challenge is forex and the value of the dollar, which are affecting the company prices.

The news did not please Wall Street, which see a longer-term problem for HPQ. Needham issued a downgrade from Buy to Hold, stating the need for real improvement in the underlying business. A Goldman analyst noted that while the company intends to reduce its cost base to partially offset market headwinds, we would need to see evidence of supplies stabilization before becoming meaningfully more positive on HP Inc.’s trajectory.

Some continue to feel optimistic, like Deusche’s Sherri Scribner, who stated we believe the company can outgrow its peers and end markets, driven by market share gains and a focus on profitable growth opportunities. A recovery in supplies is a key driver of free cash flow strength longer term, and while we were disappointed by the push out of this recovery to later in FY-17, we believe [management] has the right tools in place to stabilize this business.”

Impact on ITAD:

From a Compliance Standards’ perspective and specific to the recycling and ITAD spaces, this issue of falling demand is likely to be felt in the medium term. The problems facing HP are not simply specific to that company, but they are broad based and general. Most, if not all companies involved in PCs and in the traditional IT equipment market, are facing a similar market environment. For the ITAD/recycling space, this means product origination, whether intended for the secondary market or for the end-cycle recycling is likely to be constrained. Depending on state of demand in the secondary market, prices could fluctuate up or down accordingly. CS believes that parallel to the brand new market, the secondary market for PCs, printers, and classic IT devices will also follow a decreasing trend over time, in favor of new classes of devices.