Low used electronics pricing in China, margin compression and inflation conspired to cut Sims Lifecycle Services’ profits in half during the 2023 fiscal year, executives said.
Sims Lifecycle Services (SLS) brought in 325 million Australian dollars (about $211 million U.S.; all dollar amounts below in U.S.) in revenue during the 2023 fiscal year. That was down 0.5% from the previous year.
But earnings collapsed during this past fiscal year, which ended June 30, 2023. SLS’ underlying earnings before interest and taxes (EBIT) were just over $5 million, down nearly 50% year over year, according to a company presentation.
SLS is the ITAD and data center decommissioning arm of metals giant Sims Limited. In disclosures and an Aug. 14 conference call with investors, executives at Sims Limited said SLS greatly boosted the number of electronics it resold last year, but prices that Chinese buyers were willing to pay remained lackluster.
“The reality is that the Chinese recovery is slow and China is currently the main driver of the price SLS receives for resold units,” Stephen Mikkelsen, chief financial officer for Sims Limited, said during the Aug. 14 call. “A recovery is not likely to occur until the end of this calendar year or early calendar 2024.”
In terms of the slightly lower revenue, SLS pointed to a decline in resale prices caused by China’s renewed COVID-19 lockdowns, followed by a slow recovery in price, the presentation stated. In terms of the lower profits, SLS said it faced margin compression and inflationary pressures.
Despite the tough market conditions, SLS reported a large increase in the number of electronics it resold and redeployed during the fiscal year, “despite the impact of supply chain constraints and delayed refresh rates from hyperscalers,” according to a press release. SLS repurposed 3.8 million units, up from 2.7 million during the prior year, or an increase of nearly 41%.
At the same time, SLS shrunk its workforce quite a bit last year. It averaged 726 employees, down 15% from the 2022 fiscal year.
Clearer skies on the horizon
During the Q&A portion of the Aug. 14 call, Mikkelsen said the financial results haven’t shaken leadership’s confidence in SLS’ business.
“I think in our view, the long-term outlook or the medium-term look out for that market is good,” he said. “Data centers are growing exponentially. They need repurposing recycling. We have a good position in that market. And you see our repurposed units grew by about 40-odd percent over that period.”
He also noted that SLS isn’t consuming cash, even in this market. But, Mikkelsen acknowledged, the business model is reliant on a recovery in China.
“The reality is that right now under the business operating model, it needs China to come out and grow some more,” he said. “We haven’t seen a further deterioration. The prices are just, I guess, languishing [at] what we think is probably at the bottom of the market, and we’ll need China to recover.”
Looking forward, Sims Limited CEO Alistair Field, who plans to retire next month, noted during the August conference call that the rise of AI is driving the need for computing power at data centers, which benefits SLS.
SLS, which operates sites around the world, accounted for about 3% of Sims Limited’s underlying EBIT and about 4% of its sales revenue during the 2023 fiscal year.
The impact of the Chinese market was also cited by Iron Mountain, which is also in the data center decommissioning and component resale space, as holding back financial results.
In a first-quarter 2023 ITAD market survey conducted by E-Scrap News and Compliance Standards, company leaders indicated low pricing remained a challenge early this year. But they’ve also expressed optimism that conditions will improve. The second-quarter 2023 survey is now open for participants, who will receive exclusive insights from the results.