Vtech 2002 Annual Report Download - page 7

Annual Report 2002 5
This should allow VTech to now move forward with a strategy that
combines proven excellence in product development and cost-
effective manufacturing with a new customer-centric approach that
stresses the integral importance to our operations in supply chain
management, market research, customer service, branding and
marketing.
Back in Profit
In line with our strategy to focus on profitability, Group turnover
declined 28.1% to US$959.8 million. This reflects a 18.7% reduction
in sales of our telecommunication products, as we shifted our focus
to the higher margin models. It also results from a decline in sales of
electronic learning products (ELPs), which faced strong competition
from other producers and where we have been undertaking a
comprehensive redesign of our product range.
Partly as a result of the shift in orientation, profits nonetheless
rebounded. From a loss of US$215.0 million in our 2001 financial year,
VTech reported net earnings of US$11.2 million for 2002. This is the
result not only of our success in increasing the proportion of higher
margin products in our sales, but of reducing our operating costs
(excluding restructuring and impairment charges), which are now 38.
7% lower than they were in our 2001 financial year. Substantially
lower levels of provisions and write-downs also contributed to the
improvement, as the restructuring entered its final phase. Finally,
a new approach to managing the inventory cut working capital
requirements, boosting cash flow.
Significant Improvement in Financial Position
The difficulties we faced in the 2001 financial year saw a deterioration
of the balance sheet which is now behind us, as strong cash flows
have enabled us to reduce debt dramatically to a comfortable level.
Net operating cash in-flow for the year was US$146.8 million. Total
interest bearing liabilities as at 31st March 2002 stood at US$95.8
million, down by 61.6% as compared to 2001, while net debt was
US$32.5 million down by 83.2%. This gives VTech a total debt to
shareholders’ funds of 107.2% and an interest coverage of 2.6 times.
One of the main contributors to this dramatic improvement to our
financial position is the large reduction in stocks and debtors, which
fell from US$382.8 million at the end of the last financial year to
US$223.3 million at the end of this year. This freeing of cash-flow was
the result of much hard work on the part of our telecommunication
products business in particular, as it permanently reduced inventory
held in our supply chain through tighter management.
Leaner and Smarter Operations
In the financial year 2002, telecommunication products remained as
VTech’s major source of revenue, accounting for 69.8% of the Group
turnover at US$670.0 million. In order to drive bottom line growth,
we cut production of loss-making models and focused on higher
margin products. VTech’s share of the US fixed-line telephone market
remained dominant. In January 2002, we announced the launch of the
industry’s first 5.8GHz cordless phone model, a technological
breakthrough that reaffirms our lead in R&D. This new platform would
allow us to build on the success of the 2.4GHz model.
To improve profitability further, the telecommunication products
business conducted a radical overhaul in the way it handles inventory,
subjecting the entire supply chain to intense – indeed daily – scrutiny.
This resulted in a major reduction in inventory held to the equivalent
of around two month’s sales, as a result of better demand forecasting.
As importantly, it has improved relations with the retailers who carry
our products through raising reliability of supply.
Moving further in the direction of our customers, we conducted
considerable research among the retailers who purchase our products,
in an effort to understand their requirements better. This has led us to
reorganize our sales and marketing operations in the United States
according to a new customer-centric model, with specific teams now
closely serving the needs of the 20 leading customers who account for
the vast majority of our sales. We are now co-operating with these
business partners on sharing point-of-sale data, supply chain
management, in-store arrangements and promotional programs. This
will benefit sales, costs and product development.
Electronic learning products faced a tougher challenge, with turnover
down 33.5% over 2001 to US$193.7 million. Although the ELP market
continues to grow, as a complement to the personal computer market,
VTech has recently faced strong competition in the United States. To
counter this pressure, we have made a major commitment to returning
to our roots in this market, in which we are the pioneers. Extensive
market research we commissioned from the Omnicom Group showed
that VTech retained tremendous brand equity in the 6–11 years old
category that was severely underutilized. While we remain the world’s
leader, we had for some years failed to respond to changes in the
market. We currently began to re-focus our business back towards this
higher margin category, around our original concept of combining
education with entertainment. The result has been the exceptionally
rapid development, based on sound consumer research, of a new
range of products targeting precisely this area, across the spectrum
from education to entertainment. We achieved this while at the same
time making substantial cost reduction through a streamlining of
operations, reducing inventories and reigning in accounts receivables.
In a year when the contract manufacturing industry was severely
shaken by a precipitous fall in demand, VTech’s contract manufacturing
services (CMS) performed extremely well, maintaining profitability on
turnover which fell by 27.0% to US$92.8 million. This solid performance
testifies to the high regard in which we are held by some of the world’s
leading brand names and the deep, co-operative relationships we have
built with our customers. It also reflects the success of the New
Product Introduction program that we put in place during the year,
Letter to Shareholders