Shock profits warning turns up the pressure on board at Pace

Analysts said heads must roll after the Saltaire-based company said profits would be hit by a combination of inventory build-up, the Japanese tsunami, lower profits at Pace Europe and the surprise closure of the MultiDweller Pace Networks business.

Analysts at Altium Securities said Pace had delivered a list of reasons that contributed to the lower margin expansion, but none of them was credible in its view.

“This statement also stands in stark contrast to the first quarter performance of its two closest peers – Motorola Mobility and Technicolor,” they said in a note, adding that Motorola and Technicolor are bullish on prospects.

“Pace now faces an uphill task in rebuilding confidence and we believe needs a refresh of the leadership team.”

Mr Gaydon and the top management team were locked in meetings with investors yesterday in a bid to convince them the group is on the right track.

The group’s shares plunged 60.8p to 92.1p last night. The fall was exacerbated by doubts over the group’s future performance, especially in the light of the surprise announcement in March that a key US order would be delayed until 2012.

Mr Gaydon said the group had experienced “a disappointing start to the financial year”.

He added that 2011 operating profit will be below management expectations at between £97m and £110m, below previous forecasts of around £127m.

“Although we will now not be able to make up this first-half underperformance in the second half we continue to drive long-term growth and profitability,” said Mr Gaydon.

Analysts raised questions about the timing of the announcement, saying that management should have known about the issues before now.

It is understood the board received the new numbers three days ago.

It held a board meeting on Monday and made the decision to make an unscheduled announcement to the market yesterday morning.

Analyst Eric Burns, at WH Ireland, said: “The statement raises as many questions as it provides answers, not least why what appears to have been in part a first quarter issue was not announced until May and why management are so confident second half margins will bounce back.

“Management credibility will in our view undoubtedly be called into question. Some might struggle to reconcile this statement (some of which seems to be first quarter related) with the relatively upbeat assessment of prospects at the final results on March 8.”

In March, Mr Gaydon said: “We’re feeling very good about the company.

“Conditions across our global markets continue to be positive.

“Overall, the board is confident that Pace has created an excellent platform for growth.”

Pace, which overtook Motorola to claim the top slot in the market last year, said costs had risen because it bought extra components to counter tight supply chains, a situation exacerbated by Japan’s earthquake.

Mr Burns said: “The main culprit appears to be bad inventory decisions stemming from the first quarter which led to Pace purchasing at the wrong time and price.”

Seymour Pierce analyst Ian Robertson said Pace paid a higher price for components in the first quarter, but its customers did not need the products at that time and the extra costs could not be passed on.

“This is not a disastrous statement, but it is a further hit to management and company credibility,” he said.

As a rough guide inventory build-up accounted for 40 per cent of the profit shortfall. The Japanese tsunami accounted for 20 per cent, lower profits at Pace Europe made up 30 per cent and the closure of MultiDweller made up 10 per cent.

Several seaports in Japan, the world’s third largest economy, sustained major damage from the earthquake and tsunami. Most are likely to be out of operation for months.

Pace said profitability at Pace Europe was below expectations, and it will close its MultiDweller division because of insufficient demand.

Pace said it expects first half operating margins to be at around 5.5 per cent.

But it is confident it will return to its medium term eight per cent operating margin target in the second half.

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