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WLL
WLL
WLL - Wellco - Trading Update And Cautionary Announcement
WELLCO HEALTH LIMITED
(Registration No: 2005/005805/06
JSE code: WLL
ISIN: ZAE000071841
("Wellco" or "the Company")
TRADING UPDATE AND CAUTIONARY ANNOUNCEMENT
TRADING UPDATE
Wellco would like to advise shareholders that the results in relation to
earnings and headline earnings for the year ended 28 February 2007 are
anticipated to be lower than the prior year ended 28 February 2006.
At this time the consolidated earnings and headline earnings are expected
to reflect a loss of between R8.14 cents per share and and R9.56 cents per
share for the financial year ended 28 February 2007. Shareholders are
advised that the information in this trading statement has not been
reviewed or reported on by Wellco`s auditors. Wellco will update
shareholders once more indicative information is available.
Earnings and headline earnings will be lower for the following reasons:
- The company has incurred a significant loss of approximately R2m in
its trade support of a specific retail distribution channel. This loss
is a function of unfavourable trading terms and fixed co-operative
advertising commitments that are prescribed by this specific retailer
before distribution of our products in their stores. These terms had
been inherited from the purchased subsidiary in June 2004. The pre
trading year co-operative advertising commitments represented
approximately 40% of the total anticipated advertising budget of
R4.5m.
- The integration and related restructuring of the brand Nutrimax,
acquired in April 2005, has placed immense pressure on the company
from a cash flow and a resource perspective. The product range had to
be repackaged and reformulated, resulting in major returns of R0.5m of
non - compliant Medical Control Council stock from the trade. In
addition the time taken to complete the new repackaging and
reformulation meant that the Female range was only launched in
September (5 months after acquisition) and the Nutritional Bar range
was only launched in May 2007 (one year after acquisition and in the
new financial year).
- The significant investment in JSE listing related structures has meant
a `top` heavy executive team and related non-added value costs. These
costs attributed to the management of the company`s listing status
approximated R0.8m.
- The launch of the KGB export markets has not met the initial timelines
presented by the licensees in the United Kingdom, Brazil and the
United States / Canada. This has had an unfavourable effect on export
revenues.
- There have been significant write-offs of the packaging stock relating
to the old Herbology and Superstars ranges. The new Herbology range is
now being distributed in the company`s retail channels.
- With a desire to reduce the fixed cost component attached to sales
related support costs, Wellco outsourced the logistics, warehousing
and distribution to a third party supplier. At approximately 7% of net
sales, the price of this variable cost strategy has been excessively
high in the context of the sales base.
Wellco has experienced significant pressure on its cash resources due to:
- A certain major retailer, who accounts for 35% - 40% of the company`s
domestic sales revenue, pushing payment terms beyond 120 days. When
the average supplier requires 30 days payment this places the company
in a credit squeeze and has accounted for the necessity of the company
to place shares during the financial year and extend credit
facilities.
- The high fixed cost component attached to the head count and human
resource element of the overhead structure allows the company very
little space to manage its tight cash flow environment.
Further to our announcement of the 22 February 2007, whereby Wellco had
entered into a supply agreement worth USD4 million and would require the
supply of a licensed malaria prevention product to a European humanitarian
and medical foundation, we confirm that one of the conditions precedent,
being the payment by the purchaser of a deposit for 50% of the full
purchase price, has not been honoured.
Despite requests for clarification Wellco has received no confirmation of a
payment date and Wellco has thus terminated the agreement forthwith. Should
any payment be received we will inform shareholders. Significant cost had
been incurred in procuring this contract over the last 9 months.
Due to the difficult trading circumstances that Wellco finds itself in,
being adverse profitability and tight cash flow constraints, the board of
directors has initiated a turnaround programme that will restore corporate
value and seek sustainable profitability. The main measures supporting this
turnaround strategy include:
- Retrenchment of approximately two thirds of the staff complement.
- Relocation to a new warehouse and distribution site and bringing this
function in house, with a potential saving from 7% to approximately 3%
of net sales.
- Reducing the executive board members of the subsidiary and the holding
company. This will see the resignation of Andile Khumalo and Terence
Wynne.
- A reduction of the fixed overhead costs by approximately 50% per
month.
- Seeking an outsourced sales representation function for the Wellco
products on an agency model, where costs are variable based on net
sales achieved.
- Review of all trading channels and urgent negotiation of trading
terms.
- Termination of all thirty party product development (non proprietary
retail brands such as Woolworths) and withdrawal from joint venture
product development projects.
- Refinancing of the overdraft facility into a term loan and the
adoption of a debtor and invoice based financing model.
This turnaround programme requires the immediate injection of cash to cover
current working capital requirements and fund the approximate R3m - R4m
credit gap that the company is experiencing. The board is considering
certain mezzanine debt structures and a potential share placement. Other
capital structuring and value protection initiatives are also being
considered, including the potential sale of certain brands.
The board will advise the shareholders once these initiatives are
finalised.
CAUTIONERY
Shareholders are advised that the company has entered into negotiations,
which if successfully concluded may have a material effect on the price of
the company`s securities.
Accordingly, shareholders are advised to exercise caution when dealing in
the company`s securities until a full announcement is made.
Johannesburg
12 June 2007
Designated Advisor
River Group
Date: 12/06/2007 13:34:23 Produced by the JSE SENS Department.
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