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VMK
VMK
VMK - Verimark Holdings - Audited Results For The Year Ended 29 February 2008
VERIMARK HOLDINGS LIMITED
Registration number 1998/006957/06
Share Code: VMK
ISIN Code: ZAE000068011
AUDITED RESULTS FOR THE YEAR ENDED 29 FEBRUARY 2008
HIGHLIGHTS
- Revenues down 12.8% to R253m
- HEPS down 64.7% to 4.1 cents
- New product introductions highest in the company`s history
- Management changes effected and bearing fruit
- Expenses down and well controlled
Michael van Straaten, CEO of Verimark, said:
"Over the past year, we have made encouraging progress on our recovery strategy
although tangible results have not yet filtered through to the financial
performance. Introductions of new products are at the highest level ever and
expenses are well under control.
"Whilst this process is taking longer than originally anticipated, we remain
confident that the corrective actions and strategies in place will bear fruit.
We are committed to do this in the shortest possible time and believe that the
worsening in the general economic climate will open up more and better trading
opportunities moving forward."
16 May 2008
FINANCIAL REVIEW
Although good progress has been made in certain areas, it is clear that the
turnaround will take longer than anticipated. The reasons for this and the
corrective measures adopted, including expense control and new product
introductions, are detailed in this report.
Headline earnings per share and earnings per share attributable decreased by
64.7% from 11.6 cents to 4.1 cents.
The main reasons for the decrease in profitability were:
Reduction in Sales
The slow rate of new product introductions during the previous financial year
continued to impact negatively on the current year`s sales. Moving forward,
this "lag" will decrease each year as the rate of new product introductions
continues at existing or higher levels.
The increase in the rate of new product introductions referred to in the
previous year`s report continued during the year under review. This resulted in
turnover of new products being the highest ever in Verimark`s history.
Unfortunately, this did not result in the expected increase in total turnover,
given the decision by a major customer to reduce our trading space during the
year under review. Given the foremost progress made in the rate of new product
introductions over the past 18 months, we are confident that we will be able to
increase our trading space in the year ahead.
Reduction in Gross Profit Margin
Although forward exchange controls are used to hedge the business against
foreign currency fluctuations, the rate at which the Rand depreciated in the
second half of the financial year, impacted negatively on gross profits. To
ensure acceptable gross profit margins are achieved in the new year, the selling
prices and configurations of some product offerings are being reviewed.
Expenses
Although total costs were considerably reduced compared to the previous period,
the reduction in sales and the high operational gearing of the business had an
adverse impact on net profit. Finance costs were much higher due to foreign
exchange losses on the hedge contracts and interest on the preference share
liability relating to the consolidation of the Verimark Employee Empowerment
Trust.
Preference share liability and treasury shares
Verimark have consolidated the Verimark Employee Empowerment Trust into the
results as it has been ascertained to be a special purpose entity controlled by
the Group. A preference share liability has been recognised and the shares in
Verimark Holdings Limited controlled by the Trust have been accounted for as
treasury shares and reflected as a reduction in Equity .
OPERATIONAL REVIEW
The financially challenging period reported last year continued in the year
under review. Although good progress was made in some of the problem areas
identified, other areas require additional time to be resolved. The challenges
and level of progress are, as in the past, dealt with using the 5 "P"s of
marketing: Product, Place, Promotion, Price, People.
Product
Verimark selects products by applying the following criteria:
Uniqueness, Quality, Demonstratability, Widest possible demographic demand.
Our product range covers the following categories:
- Household
- Cookware
- Kitchenware
- Cleaning
- Health and Fitness
- Beauty
- DIY and Automotive
- Educational Toys
Identifying and selecting products that will generate exceptional sales volumes
requires skill, experience and "gut feel", and will never be an exact science.
Since the business experienced a challenge in the recent past to introduce
adequate new products, certain management changes were effected to ensure the
proper re-focus of this critical part of the business. Verimark`s product
selection skills, sharpened over the past three decades, ensured that the rate
of new products introduced during the current year is not only back to former
levels but has reached its highest level in our history
This, together with the new products planned for rollout in the first half of
the new year, bodes well for Verimark`s recovery.
Some products introduced during the current year are:
Floorwiz: Microfibre Mop and Wonderbroom
Genesis: Extreme Steam Iron and Vacuum Sealer
My Weigh: Weight loss programme
Maxxus: Vibrating Plate exerciser
Tobi: Fabric Steamer
Twista: Slice and Dicer
V-Ssage: Hand Massager
Skybuster: Remote Control Helicopter
Place (Distribution)
1. Retailers
Although we experienced sales growth at some retailers, we unfortunately saw a
reduction at our largest retail partner. The slower rate of new product
introductions in the previous year impacted negatively on total sales and
resulted in a reduction of trading space allocated by this partner. We are
confident that, given the level of new products introduced in the current year
and those planned for the new year, Verimark will be allowed to recover its
prior trading space.
2. Verimark Direct Stores (company owned and franchise)
In spite of an increase in new product introductions during the current year,
the slowdown experienced during the previous financial period continued to have
a negative impact on sales through our Direct Stores.
While our sales growth recovers through continued new product introductions, we
will continue to evaluate new and bigger stores opportunities and locations as
we are convinced that our Verimark Direct store model does offer exciting growth
opportunities in future.
3. International
As mentioned in prior CEO reports, Verimark`s international expansion is based
on the distribution of our own success proven products and TV commercials as
well as the duplication of our business model.
The challenging period experienced over the previous two financial years
resulted in limited revenues from international trade although we intend to
pursue these opportunities once the business is back on-track.
Promotion
Verimark products are unique and have unique features. To successfully sell this
"uniqueness" requires an effective and continuous explanation (promotional
strategy) to firstly ensure the consumer understands the uniqueness and secondly
develops a need (demand) for the product. To date no better medium exists to
achieve this than through long form television commercials (60 seconds to 28
minutes) - also known as Direct Response Television Advertising (DRTV). Verimark
pioneered this form of advertising 19 years ago.
We have since transformed DRTV into a hugely successful advertising and
promotional medium to maximize demand and sales of DRTV product at Retail level.
Today, Verimark is recognised not only as the company that pioneered DRTV in
South Africa, but also as an international benchmark on the above Integrated
Marketing Strategy.
Other key components of Verimark`s promotional strategy are: print advertising,
the internet (via our website) and in-store demonstrations. This combination
ensures maximum awareness and demand for the products we market.
The increase in demand for television airtime experienced in the past seems to
have stabilised, even starting to reduce, given the worsening of the general
economic climate. This trend will assist Verimark to get sufficient quality
airtime for advertising of older and new products in the coming year.
Price
Verimark`s pricing strategy is to offer the best value for money in terms of
quality products and features. Our strategy is also to align the perceived
value (as created in the mind of the consumer through our marketing efforts)
with the retail selling price of each product.
This strategy contributed to making most of our products (the brand), the market
leaders in their respective product categories. Our passion for quality is
borne out of the fact that each product carries a satisfaction and product
lifespan guarantee - a differentiating factor increasingly appreciated by the
South African consumer.
During the year under review and specifically towards the latter part, the
rand`s depreciation and suppliers` price increases (due to raw material price
increases), resulted in cost of goods increases on most products. As we elected
not to adjust our selling prices for the Christmas trading period, this
"squeeze" also had a negative impact on gross profits.
Selling prices and /or the configuration of some products are in the process of
being adjusted to normalise margins. As price increases have a negative impact
on sales volumes, we prefer to change the configuration of those products to
limit the necessity for price increases. These product (configuration) changes
often go hand-in-hand with the creation of new marketing materials, which
improve sales volumes of older products.
People
As pointed out under this section of the CEO report two years ago: "As an ideas
company, our most valuable asset is the people who need to continuously create
these ideas". This responsibility rests on management and the disappointing
performance over the previous two years simply emphasises the challenges we face
to ensure that each members of the management team performs optimally. The
management changes that started last year continued into the current year, inter
alia the appointment of Daniel Reichenberg as the Financial Director and company
secretary. Although excellent progress was seen in some areas (new product
introduction), it is now obvious that additional focus will have to be placed on
other critical aspects of the business, where new managers need assistance to
perform.
The new management is committed to return the company to its previous success
records as soon as possible. The next financial year will be a good benchmark
to measure the progress of this commitment.
BUSINESS ENVIRONMENT
The consumer boom experienced over the last few years continued in the greater
part of 2007. This unfortunately did not assist Verimark - an anomaly that
substantiates our view that Verimark`s business model is different from general
retail and consumer goods companies. Macro economic cycles have less of an
impact on Verimark`s trading results, with innovation and the marketing
strategies based on a "recession resistant" direct-sales model being more
important.
Although the general view is that the economy is now in a phase that will impact
negatively on most consumer-focused businesses, we see this tough economic
period as an opportune time to continue the turnaround of the company.
DIVIDEND
As mentioned at our interim results, given the lower level of profitability and
ongoing recovery strategy, the Board considered it prudent not to declare a
dividend for the year under review. We expect that dividend payments will resume
in accordance with the current payout policy of 80% of headline earnings once
the turnaround has been affected.
PROSPECTS
Whilst our efforts over the last year to reverse the current performance did not
show the results we anticipated, we are confident that the essential management
changes made will bear fruit.
These and other corrective actions and strategies are underway and although it
might still take longer than anticipated to show improved financial results, we
are committed to do this in the shortest possible time.
New products sales have been satisfying and on par with our expectations. This
improvement will be reinforced by a number of new products that have already
tested successfully and will roll out early in the new year.
As earlier pointed out, another key challenge for the year ahead is to regain
and improve our trading footprint and we believe that the worsening in the
general economic climate will open up more and better trading opportunities
moving forward.
CONDENSED CONSOLIDATED INCOME STATEMENT
Audited Audited
year year ended
ended February
February 2007
2008
R`000 R`000
Revenue 253 031 290 258
Cost of sales (169 996) (187 750)
Gross profit 83 035 102 508
Other income 4 628 2 147
Selling expenses (23 166) (28 801)
Distribution expenses (3 055) (3 611)
Other operating expenses (47 904) (49 486)
Operating profit before finance costs 13 538 22 757
Finance income 266 572
Finance costs (5 316) (967)
Profit before taxation 8 488 22 362
Income tax expense (4 014) (9 088)
Profit for the year 4 474 13 274
Weighted average number of shares in 110 272 114 272
issue 328 328
Earnings per share (cents) 4.1 11.6
Diluted earnings per share (cents) 4.1 11.6
CONDENSED CONSOLIDATED BALANCE SHEET
Audited Audited
year ended year
February ended
2008 February
2007
R`000 R`000
ASSETS
Non-current assets 21 952 19 800
Plant and equipment 3 647 3 993
Intangible assets 14 317 14 438
Loans receivable 459 698
Deferred taxation asset 621 671
Other Receivable 2 908 -
Current assets 80 823 76 865
Inventory 39 364 37 561
Trade and other receivables 40 641 37 001
Prepayments 133 1 635
Short term portion of loans receivable 239 239
Prepaid taxation 37 187
Bank and cash balances 409 242
TOTAL ASSETS 102 775 96 665
EQUITY AND LIABILITIES
Total equity 48 590 61 305
Share capital 368 381
Share premium 26 730 37 621
Retained earnings 21 492 23 303
Non-current liabilities 11 821 81
Preference share liability 11 821 -
Interest-bearing liabilities - 81
Current liabilities 42 364 35 279
Trade and other payables 28 359 19 421
Provisions 42 42
Short-term portion of non-current 5 906 6 071
liabilities
Interest-free liabilities - 1
Taxation 477 -
Bank overdraft 7 580 9 744
TOTAL EQUITY AND LIABILITIES 102 775 96 665
CONDENSED CONSOLIDATED CASH FLOW STATEMENT
Audited Audited
year year ended
ended February
February 2007
2008
R`000 R`000
Cash flows from operating activities
Cash generated by operations 20 994 16 954
Dividend paid (6 285) (23 954)
Finance income 266 572
Finance costs (4 399) (967)
Taxation paid (3 337) (26 444)
Net cash inflows /(outflows) from 7 239 (33 839)
operating activities
Cash outflows from investing activities (1 992) (4 141)
Acquisition of plant and equipment to (1 864) (3 769)
maintain operations
Acquisition of intangible assets to (152) (389)
maintain operations
Proceeds from disposal of plant and 24 17
equipment
Cash (outflows)/inflows from financing (2 915) 5 530
activities
Repurchase of own shares (treasury (10 904) -
shares)
Proceeds from issue of redeemable 10 904 -
preference shares
Decrease in loans receivable 239 239
Increase in other receivable raised (2 908) -
Interest-bearing liabilities repaid (6 023) -
Interest-bearing liabilities raised 5 778 5 301
Interest-free borrowings repaid (16) (14 757)
Interest-free borrowings raised 15 14 747
Net (decrease)/increase in cash and 2 332 (32 450)
cash equivalents
Cash and cash equivalents at beginning (9 502) 22 948
of year
Cash and cash equivalents at end of (7 170) (9 502)
year
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Share Retained Total
capital premium earnings
R`000 R`000 R`000 R`000
Balance at 28 February 2006 381 37 621 34 026 72 028
Profit for the year - - 13 274 13 274
Total recognised income and 381 37621 47 300 85 302
expenses for period
Dividend paid - - (23 997) (23 997)
Balance at 28 February 2007 381 37 621 23 303 61 305
Profit for the year - - 4 474 4 474
Total recognised income and 381 37 621 27 777 65 779
expenses for period
Dividend paid - - (6285) (6 285)
Treasury shares held by VEET (13) (10 - (10 904)
891)
Balance at 28 February 2008 368 26 730 21 492 48 590
ACCOUNTING POLICIES
The accounting policies used in the preparation of these results are
consistent with those in the previous period and in accordance with
International Financial Reporting Standards ("IFRS") and its
interpretation adopted by the International Accounting Standards
Board (IASB), IAS 34, the Listings Requirements of the JSE Limited
and schedule 4 to the Companies Act.
Audited Audited
year year ended
ended February
February 2007
2008
Profit per financial statements 4 474 13 274
Adjustments:
Profit (Loss) on sale of assets (7) 22
Headline earnings 4 467 13 296
Headline earnings per share 4.1 11.6
(cents)
The total number of shares in issue at 28 February 2008 was 110 272
328 (2007 : 114 272 328)
Prior year comparatives have been restated, where necessary.
GENERAL
These results have been audited by KPMG and their review opinion is
available on request from the company secretary at Verimark
Limited`s registered office.
The Group`s annual report will be available by the end May 2008
On behalf of the Board
Michael van Straaten Dr J T Motlatsi
Chief Executive Officer Chairman
Johannesburg, 16 May 2007
Directors:
M J van Straaten (CEO), D N Reichenberg (FD), Dr J T Motlatsi*, J M Pieterse*
*Non-Executive
Company Secretary: D N Reichenberg
Registered office: 67 CR Swart Drive, Corner CR Swart Drive and Freda Road,
Bromhof 48, Randburg, 2154
Postal address: Verimark Holdings Limited, PO Box 78260, Sandton 2146
Email address: investors@verimark.co.za
Website: verimark.co.za
Transfer secretaries: Computershare Investor Services (Proprietary) Limited
Auditors: KPMG Incorporated
Sponsor: PSG Capital (Pty) Ltd
Date: 16/05/2008 14:25:01 Produced by the JSE SENS Department.
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