Interim Results
20 November 2003 - 8:51PM
UK Regulatory
RNS Number:2895S
Vtech Holdings Ld
20 November 2003
Vtech
VTech Holdings Limited
(Incorporated in Bermuda with limited liability)
INTERIM RESULTS ANNOUNCEMENT
FOR THE SIX MONTHS ENDED 30TH SEPTEMBER 2003
PERFORMANCE HIGHLIGHTS
- Group revenue decreased by 13.8% to US$404.1 million
- Net margin from operations (excluding lawsuit settlement) improved from 3.4%
to 4.3%
- Net profit from operations (excluding lawsuit settlement) rose by 8.1% to
US$17.4 million
- Interim dividend of US3.0 cents per share
- Net cash of US$73.3 million
UNAUDITED INTERIM RESULTS
The directors of VTech Holdings Limited (the "Company") announce the unaudited
results of the Company and its subsidiaries and associates (the "Group") for the
six months ended 30th September 2003 together with the comparative figures for
the same period last year as follows:
CONDENSED CONSOLIDATED INCOME STATEMENT
(Unaudited) (Audited)
Six months ended Year ended
30th September 31st March
2003 2002 2003
Note US$ million US$ million US$ million
Revenue 2 404.1 468.7 866.5
Cost of sales (272.5) (317.0) (577.5)
Gross profit 131.6 151.7 289.0
Selling and distribution costs (73.4) (81.9) (166.8)
Administrative and other operating (21.5) (33.6) (65.7)
expenses
Research and development expenses (15.7) (16.6) (31.0)
Gain on settlement of a lawsuit - 34.0 34.0
Operating profit 2 & 3 21.0 53.6 59.5
Net finance income/(costs) 4 0.2 (1.3) (1.0)
Share of results of associates - (0.4) (0.2)
Profit from ordinary activities before 21.2 51.9 58.3
taxation
Taxation 5 (3.8) (1.5) (17.4)
Profit from ordinary activities after 17.4 50.4 40.9
taxation
Minority interest - (0.3) (0.1)
Profit attributable to shareholders 17.4 50.1 40.8
============ ============ ============
Dividend 6
- Interim 6.8 3.4 3.4
- Final 4.5
Earnings per share (in US cents) 7
- Basic 7.7 22.2 18.1
- Diluted 7.7 22.2 18.1
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements have been
prepared in accordance with the requirements of the Rules Governing the
Listing of Securities on The Stock Exchange of Hong Kong Limited (the
"Listing Rules") including compliance with International Accounting Standard
34 - Interim Financial Reporting adopted by the International Accounting
Standards Board.
The same accounting policies adopted in the 2003 annual financial statements
have been applied to the interim condensed consolidated financial
statements.
2. SEGMENT INFORMATION
The principal activity of the Group is the design, manufacture and
distribution of consumer electronic products. The telecommunication and
electronic products business is the principal business segment of the Group.
Revenue represents turnover of the Group derived from the amounts received
and receivable for sale of goods and rendering of services to third parties.
Primary reporting format - business segments
(Unaudited)
Six months ended 30th September
Revenue Revenue Operating Operating
profit/(loss) profit/(loss)
2003 2002 2003 2002
US$ million US$ million US$ million US$ million
Telecommunication and electronic 402.9 467.5 23.5 55.6
products
Other activities 1.2 1.2 (2.5) (2.0)
404.1 468.7 21.0 53.6
============ ============ ============ ============
Secondary reporting format --- geographical segments
(Unaudited)
Six months ended 30th September
Revenue Revenue Operating Operating
profit/(loss) profit/(loss)
2003 2002 2003 2002
US$ million US$ million US$ million US$ million
North America 310.8 386.1 16.3 51.8
Europe 78.1 61.3 5.0 1.5
Asia Pacific 11.8 17.7 (0.5) 0.2
Others 3.4 3.6 0.2 0.1
404.1 468.7 21.0 53.6
========== ========= ========== ============
3. OPERATING PROFIT
The operating profit is arrived at after charging the following:
(Unaudited)
Six months ended 30th September
2003 2002
US$ million US$ million
Depreciation 9.4 13.6
Loss on disposal of tangible assets and leasehold land 0.6 1.0
========== =========
4. NET FINANCE INCOME/(COSTS)
(Unaudited)
Six months ended 30th September
2003 2002
US$ million US$ million
Interest expense (0.1) (2.3)
Interest income 0.3 1.0
0.2 (1.3)
========== =========
5. TAXATION
(Unaudited)
Six months ended 30th September
2003 2002
US$ million US$ million
Company and subsidiaries
Hong Kong 3.4 1.2
United Kingdom - (0.1)
USA 0.2 0.3
Other countries 0.2 0.1
3.8 1.5
========== =========
Tax on profit has been calculated at the rates of taxation prevailing in the
countries in which the Group operates.
The Group is currently negotiating with the Hong Kong Inland Revenue
Department regarding a dispute over the offshore income claims made by
certain subsidiaries of the Group in prior years. The aim of the
negotiations is to resolve the dispute amicably. The outcome of these
negotiations remained unsettled as at 30th September 2003.
The Group made a provision of US$11.0 million in the previous year;
representing the directors' best estimates of any liabilities which may
arise on settlement of this dispute. No further provision in this respect
was considered necessary for the six months ended 30th September 2003.
6. DIVIDENDS
(a) Dividends attributable to the period:
(Unaudited)
Six months ended 30th September
2003 2002
US$ million US$ million
Interim dividend declared of US3.0 cents per ordinary share 6.8 3.4
(2002: US1.5 cents)
============ ============
The interim dividend proposed after the balance sheet date has not been recognized as a liability at
the balance sheet date.
(b) Final dividend of US2.0 cents per share (2002: Nil) proposed after 31st
March 2003, which totalled US$4.5 million was approved and paid during the
period.
7. EARNINGS PER SHARE
The calculations of basic and diluted earnings per share are based on the
Group's profit attributable to shareholders of US$17.4 million (2002:
US$50.1 million) and the weighted average of 225.5 million (2002: 225.5
million) ordinary shares in issue during the period. There were no potential
dilutive ordinary shares in existence for both periods presented.
INTERIM DIVIDENDS
The directors have declared an interim dividend for the six months ended 30th
September 2003 of US3.0 cents per ordinary share to shareholders whose names
appear on the register of members of the Company as at the close of business on
29th December 2003. It is expected that the interim dividends will be paid on
8th January 2004.
The interim dividends will be payable in United States cents save that those
shareholders with a registered address in Hong Kong will receive the equivalent
amount in Hong Kong dollars and those shareholders whose names appear on the
register of members of the Company in the United Kingdom will receive the
equivalent amount in sterling pounds both calculated at the rates of exchange as
quoted to the Company by The Hongkong and Shanghai Banking Corporation Limited
at its mid rate of exchange prevailing on 18th December 2003.
LIQUIDITY AND FINANCIAL RESOURCES
As at 30th September 2003, the Group had net cash of US$73.3 million after
deducting the total interest bearing debts of US$2.6 million. Of the amount of
indebtedness as at 30th September 2003, US$0.5 million was repayable within one
year; US$0.5 million was repayable between one and two years; US$0.6 million was
repayable between two and five years and US$1.0 million was repayable after five
years. A majority of the Group's borrowings was denominated in Euro, on a fixed
interest rate basis and secured against land and buildings. The gross debt to
shareholders' funds ratio stood at 1.9% as at 30th September 2003.
The objective of the Group's treasury policies is to mitigate risks and
exposures to the Group due to fluctuations in foreign currency exchange rates
and interest rates. It is the Group's policy not to engage in speculative
activities. Forward foreign exchange contracts are used to hedge against major
exposures.
CLOSURE OF REGISTER OF MEMBERS
The register of members of the Company will be closed from 19th December 2003 to
29th December 2003, both dates inclusive, during which period no transfer of
shares will be effected.
In order to qualify for the interim dividend, all transfers of shares
accompanied by the relevant share certificates, must be lodged with the share
registrars of the Company not later than 4:00 p.m., the local time of the share
registrars, on Thursday, 18th December 2003.
The principal registrar in Bermuda is Butterfield Fund Services (Bermuda)
Limited, Rosebank Centre, 11 Bermudiana Road, Pembroke, Bermuda, the branch
registrar in the United Kingdom is Capita IRG Plc, Bourne House, 34 Beckenham
Road, Kent BR3 4TU, DX91750, Beckenham West, United Kingdom, and the branch
registrar in Hong Kong is Computershare Hong Kong Investor Services Limited,
Shops 1712--1716, 17th Floor, Hopewell Centre, 183 Queen's Road East, Hong Kong.
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
VTech continued to improve its financial performance in the first half of the
financial year 2004 as demonstrated by the improved net profit margin and a
stronger net cash position.
This sound performance reflects continuous good performance of our
Telecommunication Products and Contract Manufacturing Services businesses, as
well as the benefits arising from the initial results of our three-year
strategic plan to turn around the Electronic Learning Products (ELP) business,
through which we achieved tremendous cost savings. Although revenue was lower
than the same period of last year, largely due to lower sales in the US market
of the ELP and Telecommunication Products businesses, VTech is now returning to
its growth path in both revenue and profitability, as the Group's solid
financial footing enables us to begin to expand. We are confident that the
second half of the financial year 2004 will deliver a stronger growth in both
revenue and profitability. In addition, the launch of innovative new electronic
learning products will provide a significant growth potential to rebound our ELP
business in the financial year 2005 and the years beyond.
Group Results
The Group revenue for the six-month period ended 30th September 2003 declined by
13.8% to US$404.1 million. This was mainly due to lower sales in the US market
of the ELP business, as was fully anticipated by management at the beginning of
the financial year 2004. Revenue was also affected by a decline in sales of the
Telecommunication Products business, caused by the absence of revenues from the
discontinued mobile phone business, a shift in the timing of our customers'
seasonal purchasing and interruption of supply of a critical component. In
addition, revenue of Contract Manufacturing Services declined as the worldwide
Electronics Manufacturing Services (EMS) industry suffered from disappointing
end-market demand during the first quarter of the financial year 2004.
Despite the decline in revenue, profit attributable to shareholders on a normal
operating basis rose by 8.1% to US$17.4 million, as compared with the US$16.1
million recorded in the same period of the financial year 2003, excluding the
US$34.0 million exceptional income arising from settlement of a lawsuit recorded
for that period. The improvement was driven by the continuous good performance
of Telecommunication Products and Contract Manufacturing Services businesses. It
was further supported by cost savings achieved at the ELP business, which
successfully reduced selling, general and administrative costs.
Dividend
The continued rise in profitability has further strengthened VTech's financial
position. In line with expectations of the Group's full year results, the
directors have declared an interim dividend of US3.0 cents per ordinary share.
Liquidity Position
The Group's financial resources continued to be strong. As at 30th September
2003, the Group had cash on hand of US$75.9 million. After deducting total
interest bearing debt of US$2.6 million, the net cash position as at 30th
September 2003 was US$73.3 million. The Group has adequate liquidity to meet its
future working capital requirements.
REVIEW OF OPERATIONS
Telecommunication Products
During the period under review, revenue of the Telecommunication Products
business declined by 9.1% to US$299.0 million. The reduction reflected the
absence of revenues from the discontinued mobile phone business. A shift in the
timing of our customers' seasonal purchasing was another reason for the decline
in revenue. This related to a number of factors, including customers' postponing
holiday orders in order to more tightly manage their inventory levels as well as
a difference in the timing of our new product launches. Furthermore, sales
during the comparable period in the financial year 2003 included customers
building additional product inventories in expectation of the October 2002 West
Coast ports labour disruption.
In North America, unit sales of our 2.4GHz analog phones increased markedly due
to the strong demand for our innovative VMIX phone. This was delivered in May
2003 and would have achieved higher revenues if not affected by an interruption
to the supply of a critical component for that product. Sales growth was also
supported by the sustained shift from 900MHz to 2.4GHz cordless phones. The
significant increase in unit sales of our 5.8GHz cordless phones was also
encouraging and confirmed the market's acceptance of this new product line.
The average selling prices of our high-end cordless phones declined gradually
reflecting the normal price trend of consumer electronics products. To counter
this price trend, VTech is increasingly introducing new products targeting
specific consumer segments. The VMIX phone is a leading example. With unique
features including programmable ring tones and changeable plates, it has
appealed strongly to teenagers in the United States and resulted in high levels
of demand from retailers.
We also continued to improve our cost structure to maintain margins. To this
end, we have initiated a number of six sigma projects to improve our
manufacturing, procurement and distribution operations.
Geographically, we are on track in expanding our presence in the European
market. Significant progress was made during the first half of the financial
year 2004 and we will continue to work closely with the Swissvoice Group and
deepen our relationships with some of the best names in European
telecommunications, to which we are already a key supplier.
Electronic Learning Products
Although revenue for the first six months declined by 33.6% to US$57.0 million
as compared with the corresponding period of last year, we were able to show a
strong improvement in profitability due to strengthened cost control. The ELP
business progressed well on its road to recovery.
Despite steady sales in Europe, where VTech remains a market leader in many
categories, sales in the United States continued to face challenges and revenue
in this market declined, as anticipated by management at the beginning of the
financial year 2004.
The reduction was mainly due to a lag effect from the previous financial year
when shelf space for VTech's electronic learning products was reduced. The
continued erosion of the Electronic Learning Aid market due to the popularity of
personal computers and hand held games for children between the age of 6 and 12
was also a factor.
Despite lower revenues, we saw a significant improvement in the profitability of
the ELP business in the first half of the financial year 2004, mainly owing to
the cost rationalisation initiatives implemented in the previous financial year.
The improvement in profitability clearly indicates the success of the first
stage of the three-year strategic plan to revitalise the ELP business that we
announced in June 2003. During the first half of the financial year 2004, the
business benefited from the wide-ranging measures undertaken in the previous
financial year to create a much leaner operating structure. The improvement
enabled the business to deliver substantially better net margins.
We have now begun to focus on the second phase of the revitalisation strategy,
which is to lay the foundation for a recovery in revenues through developing new
product lines and revamping completely our existing product ranges. A unique new
product category, TV Learning System --- a platform that leverages the video
game format to educate, has been developed. This new product line was previewed
by major customers in the United States in October 2003 and received a very good
response. We strongly believe that when we launch these new products in the
calendar year 2004, we will be able to achieve a significant rebound in revenue
in all our major markets, including the United States.
In addition to these initiatives in our core markets, we have begun to enter the
booming China market during the first half of the financial year 2004,
distributing a line of 16 specially designed products in the key cities of the
affluent Pearl River Delta region adjacent to Hong Kong. The initial response
has been encouraging.
Contract Manufacturing Services (CMS)
The CMS business made important advances during the first half of the financial
year 2004 and maintained stable profitability, despite revenue declining by
10.6% to US$48.1 million.
The decline in revenue resulted mainly from a shortfall in orders in the first
quarter of the financial year 2004 that was caused by low end-market demand.
Orders began picking up starting from the second quarter of the financial year
2004, however, as confidence returned. A slow recovery has been discernible in
the worldwide EMS industry during the calendar year 2003, following two years of
decline that began in the calendar year 2000.
In July and September 2003, we were able to achieve the targets we set out at
the beginning of the current financial year to attain ISO13488 and TS16949
certifications. These certifications open a new avenue of growth for the
business as they give us entry into the production of medical equipment and
automotive products, which are important niche markets in the EMS industry.
Our client base remained stable during the period as we continued to reap the
benefits of our Design for Manufacturing Programme, which helps customers to
achieve cost savings in their products through our involvement in the process
from the early design stage. In recognition of our outstanding customer service,
the CMS business was given "Excellent Commitment and Partnership" Award by
Nissei Electronics Industry Co Ltd in October 2003.
Outlook
The second half of the financial year 2004 has started well and we expect the
financial year 2004 to show a strong improvement in our financial results. The
economic environment in the US market appears to be more positive than it was at
the beginning of the financial year 2004. This should combine with positive
developments at the Group to allow us to look forward to growth in both revenue
and profitability in the financial year 2004.
At the Telecommunication Products business, the problem of component supply for
our VMIX phone has been resolved and the pent up demand should result in strong
sales for this product line during the second half of the financial year 2004.
The business will also benefit as the timing issues that held back revenues
during the first half of the financial year 2004 contribute positively in the
final six months.
In September 2003, we delivered the world's most advanced cordless phone
handset, the i5801, which features a large, colour, high resolution LCD screen,
customisable picture caller ID and a recordable musical ringer. This
revolutionary design helped the handset to win the "Grand Award" at the 2003
Hong Kong Electronic Industry Association Awards for Outstanding and Innovative
Products.
Building on this, VTech will introduce more products, including those that
target specific consumer segments in the second half. The VMIX II cordless
phone, the second generation of VMIX phone, will maintain momentum in the
teenage segment. This will be supported by the launch of our 2.4GHz and 5.8GHz
bundles in February 2004. We will also launch our first data networking
products, a market that offers considerable growth potential in the second half
of the financial year 2004.
The ELP business will continue to reap the benefits of its more efficient
operating structure, which we will seek to enhance further. This will ensure
that the strong profit improvement seen in the first half of the financial year
2004 will continue to the end of the financial year 2004. Our existing products
are selling well in Europe and the launch of our unique new product, TV Learning
System, which targets children aged between three and seven years old will offer
significant potential for VTech to regain shelf-space in the United States and
grow revenues in all major markets in the financial year 2005.
CMS is forecast to benefit from the recent rebound in outsourced manufacturing
and to demonstrate improved revenue growth as the recovery from a disappointing
end-market demand takes effect. We will also continue to benefit from the
increasing tendency for companies outsourcing to seek integrated solutions to
their needs, a service VTech now offers. We expect to achieve modest revenue
growth from our existing business lines, while entering the medical equipment
and automotive products markets. In addition, we will begin to implement the
cell-based manufacturing process already used successfully by VTech's other
businesses to drive further gains in productivity.
In the second half of the financial year 2004, the Group will also expand its
presence in mainland China through our electronic learning products, as we move
beyond the Pearl River Delta to the cities of the Yangtze River Delta and
Beijing.
In addition to geographic expansion across China with electronic learning
products and in Europe with telecommunication products, we intend to leverage
our core competencies in technology, global distribution networks and brands to
enter new product categories where we believe we have competitive advantages. In
doing so, we intend to combine in-house and outsourced resources in the design
and manufacturing process to minimise both capital expenditure and risk.
Last but not the least, I would like to thank my fellow directors and senior
management, as well as all VTech employees for their ongoing commitment to
ensure continued improvement for the Group. Likewise, my thanks go out to our
customers and business partners for their invaluable supports.
PURCHASE, SALE OR REDEMPTION OF LISTED SHARES
The Company has not redeemed any of its shares during the six months ended 30th
September 2003. Neither the Company nor any of its subsidiaries has purchased or
sold any of the Company's shares during the period under review.
AUDIT COMMITTEE
The Audit Committee has reviewed with management the accounting principles and
practices adopted by the Group and discussed internal control and financial
reporting matters including the unaudited interim consolidated financial
statements for the six months ended 30th September 2003.
The members of the Audit Committee comprised Mr. Raymond CH'IEN Kuo Fung, Mr.
William FUNG Kwok Lun and Mr. Michael TIEN Puk Sun, all are independent
non-executive directors of the Company.
CODE OF BEST PRACTICE
In the opinion of the directors, the Company has complied with the Code of Best
Practice as set out in Appendix 14 of the Listing Rules throughout the period
under review except that certain independent non-executive directors of the
Company are not appointed for a specific term.
PUBLICATION OF DETAILED RESULTS ANNOUNCEMENT ON THE WEBSITE OF THE STOCK
EXCHANGE OF HONG KONG LIMITED
All the financial and other information of the Company required by paragraphs 46
(1) to 46(6) of Appendix 16 of the Listing Rules will be subsequently published
on website of The Stock Exchange of Hong Kong Limited in due course.
By Order of the Board
Allan WONG Chi Yun
Chairman
Hong Kong, 19th November 2003
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR NKKKNCBDKNDB
