Floods see Pace issue third profits warning

Stuart Hall
Stuart Hall
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TV technology group Pace yesterday reported its third profits warning of the year, after devastating floods in Thailand hit a key supplier.

Shares in the Saltaire-based group slumped 13 per cent to a two-and-a-half year low, shedding 12p to close at 80p.

Pace warned operating profits for 2011 will be hit by up to $9.5m (£6m) after its major hard drive supplier Western Digital was forced to suspend production in Thailand.

Flood waters submerged Western Digital’s facility in the Bang Pa-in Industrial Park in Bangkok, also affecting its plant at Navanakorn Industrial Park.

The disaster forced Pace to revise its earnings forecast for the third time this year, after warning over the Japanese tsunami in May and a delayed US order in March.

It said the “worst case impact” – a $9.5m earnings hit – means 2011 operating profits are likely to fall below previous guidance of $150m (£95.4m) to $170m (£108.1m).

“Because Western Digital is the major supplier of hard disk drives to Pace, this will negatively impact expected shipments of products with hard disk drives from this supplier during the remainder of this year,” said the company.

Hard drives are a key component in Pace’s personal video recorders (PVRs), allowing users to store TV programmes digitally to watch when they please.

Flooding has hit industry across Thailand, a global hub for computer component manufacturing, affecting electronics firms including Sony, Toshiba and Apple.

“This is not (just) a Pace issue, (it’s) an electronics industry issue,” said Pace chief financial officer Stuart Hall.

“This is an act of God and something completely out of the blue that’s affected the whole industry. This is a disaster of unprecedented scale.”

He said the hard drive shortage will affect about 300,000 of the one million PVRs Pace had expected to ship during its fourth quarter, from October to the end of December, adding the company is looking for alternative supply.

As Pace outsources its manufacturing, the firm had not insured against the incident. Asked if Pace could have done much to mitigate the impact or prepare for it, Mr Hall said “not a lot in reality”.

Western Digital supplies 60 to 65 per cent of the 3.5-inch hard drives found in Pace’s PVRs.

Mr Hall said the hard drive market is dominated by Western Digital and its rival Seagate, with 47 per cent of components used in hard drives produced in Thailand.

While Seagate’s plants have not been directly hit, it has also warned of production problems as many of its component suppliers have been affected.

“They are absolutely dominant, these two suppliers,” said Mr Hall, adding they command a market share of up to 80 per cent. He added the hard drive supply issue will roll into 2012. “It’s not a quick issue. It absolutely will impact the first quarter (of next year).”

“What we do not know moving forwards is how this has affected the world capacity because Western Digital do not know this themselves.”

But Mr Hall said as one of Western Digital’s major customers, Pace has “a good voice in how we are moving forwards and are at the top of the priority queue”.

Pace, which has customers including Comcast and AT&T, installed high-profile former Asda chief executive Allan Leighton as chairman in May to restore investor confidence.

He is due to report the outcome of a strategic review on November 17.

Stockbroker Altium Securities said it was “another natural disaster, another profit warning” from Pace. “Confidence in management remains fragile due to three profit warnings,” said analyst Arun George. “The near-term catalyst now rests on a well-defined growth plan from the new chairman’s strategic review on November 17, which will be the first step towards rebuilding investor confidence.”

However, Ian Robertson, hardware and equipment analyst at Seymour Pierce, said: “This is not something that Pace could have foreseen, nor something that it could really have found many ways to work around.”

He added: “The sales are not being lost to competitors as everyone is in the same boat, as it were.”

Analysts at house broker Royal Bank of Scotland said: “Given Pace does not manufacture (and so does not have a significant inventory build) the impact on cash should be approximately in-line with the profitability impact and no worse, however at this stage it is difficult to quantify the likely impact for 2012.”

Devastation caused by monsoons

The worst floods in Thailand in 50 years have killed nearly 300 people and damaged more than 700,000 homes.

The monsoon floods started in late July, most severely around the Chao Phraya river, which runs through Bangkok, and have affected nearly three million people with estimated damage of up to $5.1bn (£3.2bn).

Flooding has hit industry across the region, slashing Japanese car makers’ output by about 6,000 units a day and forcing Sony to delay the launches of some cameras and lens kits. Companies including Apple and Toshiba have also warned over the floods.

Analysts at Royal Bank of Scotland said: “We believe the impact of the floods in Thailand could be substantial to the PC, gaming and set-top box supply chain. While we believe the European semiconductor suppliers are less likely to suffer given their low exposure to PCs, we believe it is unlikely they would be immune.”