Ingram Micro: Damn you Europe for our ghastly margins

Sales soar globally, but forex, retail PC price erosion weigh

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Weaker margins in Europe due to forex losses and cut-throat retail pricing was the only major blip in an otherwise decent end to the calendar 2014 for Ingram Micro. It was not a vintage year though.

Sales in Q4 bounced 18 per cent to $13.95bn: Technology and Other Solutions grew ten per cent to $11.2bn and Mobility shot up 60 per cent to $2.8bn, though there was a bit of rounding off by the company here.

Q4 gross profit was $775m, up nine per cent year-on-year, but gross margin was down 44 basis points to 5.56. This is the lowest margin Ingram has posted outside of a recession, said analysts.

Despite rising sales, general and admin (S,G&A) costs, a goodwill write-down and re-org expenses, operating income rose to $200.9m from $172.6m a year earlier.

Interest repayments went up to $23.3m from $13.2m, and the cost of foreign currency exchange rates was $5.4m versus $1.7m, leaving pre-tax profits at $171m, up from $153m. After tax, net income came in at $119m compared with $112.2m

The addition of a 14th week helped out, but even so “growth was supported by solid demand across all regions, accompanied by accelerated growth rates in strategic areas of mobility, supply chain solutions and cloud,” said chief beanie Bill Hume in an analyst call.

Sales were up 28 per cent to $6bn in North America, where the economic recovery continues. All units benefited, Ingram said. In Europe, $4.2bn worth of revenues represented a three per cent hike or eleven per cent in local currency.

The hot spots this side of the pond came from small- and medium-sized customers in the UK and southern Europe, with “pockets of strength” in the region including networking, storage, data capture and mobility.

“The region realised incremental saving from our organisational effectiveness programme during the quarter, however ... the strengthening US dollar, [product] mix and competitive pricing pressures led to disappointing European [margins],” said Hume.

“The majority of the decline was related to our lower contribution from Europe due primarily to the rapid strengthening of the US dollar, a greater mix of consumer sales and increased pricing competition.”

Expanding further on the point, chief operation man Paul Read said retail PCs caused margins to dip, but he noted that that business is “cooling off ... channels were pretty much full at the end of last year and it’s taken a good part of this quarter to burn up”.

“I think naturally, there’s a slowing down of that type of business anyway,” he added, “we’re seeing vendors also increasing prices to account for the foreign currency movements. We could expect to see some stabilisation here”.

“Q4, I think, was quite an abnormal blow-out for us on the retail side, the consumer space. No doubt, the foreign currency movements have affected demand, pricing and all of those aspects. We've got vendors who are changing back end rebate programs, we’ve got price increases from vendors, we’ve got bid programs on retail that are different, that are driving competitive dynamics.”

Operations in Asia Pacific grew to $2.96bn from $2.38bn as the once-troubled Australian business, hit by a botched ERP upgrade, returned to profit and the China revenue decline was halted.

In Latin America, sales hit $763.7m from $681.5m.

HP and Apple accounted for 12 and 11 per cent of global sales respectively, Ingram’s largest vendors in the quarter.

For calendar 2014, Ingram reported sales of $46.48bn, up nine per cent year-on-year, but operating income crossed the finishing line at $487.2m from $514.8m, hit by $93.5m restructuring costs, three times higher than prior year.

More hefty interest repayments of $77.7m, versus $59.16m also contributed to a 14 per cent fall in net profit to $266m.

The company expects to realise $80m of annual savings from this year onwards related to the restructure that saw Ingram rejig units and reduce the workforce. ®


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