It looks like 1998 will be another "Interesting and Challenging Year" for Amway.
The following is the PR Newswire release from AAP.
Story Filed: Friday, January 08, 1999 05:22 AM EST
HONG KONG, Jan. 8 /PRNewswire/ -- Amway Asia Pacific Ltd. (NYSE: AAP; ASX: AMW) reported net sales for the three months ended November 30, 1998 of $118 million, a decrease of 30.4 percent from $169 million in the first quarter of last year. The Company also reported a net loss of $3.4 million compared to net income of $8.5 million for the first quarter last year. The net loss per share for the first quarter was $.06; in the first quarter of last year, the Company reported earnings per share of $.15. The net loss for the first quarter benefited from a $1.2 million reduction of the sales return reserve to reflect the lower level of sales returns in China and a $1.1 million reduction of cost of sales related to the overaccrual of China's royalties in prior years. Without these favorable adjustments, the net loss for the first quarter would have been $.10 per share.
Steve Van Andel, Chairman of Amway Asia Pacific, stated, "The adverse currency and economic environment in Asia resulted in a general decline in purchasing power and contributed to the weaker performance in our markets. The Company recorded sales declines in all markets; this primarily reflects disappointing sales in China and from higher priced items, particularly in Malaysia and Taiwan, despite a high level of promotional activity. These promotions, which we undertook in other markets as well, due to weak economic conditions, also adversely affected margins. However, despite all of these factors, the Company generated operating income for the first quarter. In the second half of last year, the Company implemented price increases in all markets; this benefited the first quarter results somewhat and is expected to benefit margins in the future if currencies stabilize."
President Dick DeVos commented, "The net loss was primarily due to the slow pace of sales in China, resulting in the inability of China to leverage costs at its lower sales level. Sales for the first quarter in China, including Hong Kong, were 46.1 percent lower than the first quarter of last year. However, the increase in the net loss for China in the first quarter, as compared to the first quarter last year, was significantly less than the sales decline. This principally reflects the two favorable adjustments in China plus our continuing efforts to reduce costs and offset, to some degree, the reduction in gross margin related to increased promotional activity. The number of employees in China has decreased almost 40 percent as compared to the first quarter of fiscal 1998. Separately, the inability to receive any tax benefit from the loss in China also contributed to the Company's overall net loss. Absent China's results, the Company would be operating at a profit."
Mr. Van Andel added, "Rebuilding the sales momentum in China has proven very challenging due to the government's prior ban on direct selling. The ban, and the adverse publicity which accompanied the ban, was powerful and pervasive, making our current recruiting efforts extremely difficult. We believe it will take a period of time and require ongoing positive endorsements from the government and the media to regain the confidence of the general public. We remain firmly committed to the China market and, in an effort to assist the sales representatives, the Company began a more aggressive education effort in December. We are also conducting an image building media advertising campaign focused on Beijing, Shanghai and Guangzhou."
Difficult currency comparisons also continued to adversely impact the
Company's results. In the first quarter of fiscal 1999, the local
currencies of four of the Company's markets -- Australia, Malaysia, New
Zealand and Taiwan -- declined by more than 10 percent, relative to the
U.S. dollar, compared to the first quarter of last year. Without the
effect of these currency devaluations, sales for the first quarter
would have declined 22.8 percent. Gross margin also continued to be
adversely impacted since many of the Company's products are purchased
from Amway Corporation in U.S. dollars. In addition, for the first
quarter, the Company recognized $3.2 million in exchange losses, as
compared to $1.5 million in the first quarter of last year, much of
which resulted from marking Thai baht hedged positions to current
market value; in the first quarter, the Thai baht, as compared to the
U.S. dollar, strengthened in relation to the level when the hedge was
initiated.
Sales
Sales in the Greater China region were $48 million in the first
quarter, a decrease of 31.6 percent. China, which includes Hong Kong,
generated sales of $19 million, a decline of 46.1 percent, primarily
due to the greatly reduced sales momentum after the three month ban on
direct selling activities ended in July. Sales for China included a
$1.2 million benefit from the reduction of the sales return reserve.
Without this benefit, sales for the region and for the market would
have declined an additional three percent.
Sales in Taiwan were $29 million, a decrease of 17.7 percent, primarily due to the devaluation of the new Taiwan dollar in relation to the U.S. dollar. In local currency, sales in Taiwan declined 7.6 percent, primarily due to the weakened economy in Taiwan and lower than expected sales from the recently introduced Air Treatment System. Pricing for the Air Treatment System has been difficult to sustain in view of the economic downturn in Taiwan.
Sales in the Malaysia-Thailand region were $38 million, a decrease of 32.9 percent, which primarily reflected pressures in the local economies of Malaysia and Thailand due to the Asian currency crisis. Sales also were negatively impacted by the devaluation of the Malaysian ringgit in relation to the U.S. dollar. The stabilization of the Thai baht, in relation to the U.S. dollar, minimized the translation impact from that market for the comparative periods.
In Malaysia, where the economic crisis has resulted in a sharp decline in purchasing power, sales were $17 million, a decrease of 42.1 percent; in local currency, sales declined 31.6 percent. In Thailand, sales were $21 million, a 22.8 percent decrease; in local currency, sales declined 20.4 percent.
Sales in the Australia-New Zealand region were $32 million, a 25.2 percent decrease, primarily reflecting a decline in the local currencies relative to the U.S. dollar in both markets in the region. In Australia, sales were $28 million, a decrease of 23.7 percent sales and, in local currency, sales declined 11.3 percent due to a difficult comparison with the first quarter of last year when distributors were motivated by the launch of the direct fulfillment program, a computerized system for distributors to order and reorder products. In New Zealand, which is experiencing a severe economic decline, sales for the first quarter were $4.5 million, a 33.2 percent decline and, in local currency, the decline was 19.1 percent.
Excluding China, price increases offset approximately 25 percent of the
volume decline, particularly in Thailand, Taiwan and Malaysia.
Core Distributor Force
The total size of the core distributor force, defined as
independent distributors who have renewed their distributorships within
the past twelve months, decreased moderately in all markets except
Australia and New Zealand, which experienced slight increases, and in
Taiwan. The decline in Taiwan was greater than the average due to an
adverse comparison with a renewal campaign last year which
significantly shifted renewals into the first quarter period.
For the first quarter, in relation to the first quarter of last year,
new distributor sponsoring decreased significantly in all markets.
Gross Profit
For the first quarter, gross profit as a percentage of sales
decreased to 56.7 percent from 61.0 percent last year primarily due to
the negative impact of foreign currency in Malaysia, Thailand and
Taiwan, which pay for their purchases from Amway Corporation in U.S.
dollars. Gross profit included a $2.3 million benefit from the
favorable adjustments in China mentioned previously.
Given the economic conditions in the regions and due to a desire to
maintain market share and assist distributors, the Company has not
passed through to distributors a significant portion of its cost
increases. Margin declines have been particularly significant for
products in the Home Tech and Personal Care line for this reason.
Operating Expenses and Operating Income
Total operating expenses, including distributor incentives,
increased as a percent of sales during the quarter to 54.7 percent from
51.2 percent last year, primarily as a result of significantly lower
sales levels, as well as the lack of absorption of operating expenses
in China.
The decreases in distributor incentives and distribution expenses were in line with the lower sales level for all markets. Selling and administrative expenses decreased less than the overall decline in sales due to the fixed facility, information systems and employee infrastructure in China, along with additional sales, promotional and training efforts in China, Thailand and Australia.
Operating income was $2.3 million. Because of the adverse economic
environment in the Malaysia-Thailand region and the impact which this
has had on its operating results, the contribution to operating income
by the Malaysia-Thailand region has decreased to a level which now
approximates the same contribution as the Australia-New Zealand region.
Operating income for the quarter included a net loss for the Greater
China region.
Other Income, Net
For the first quarter of fiscal 1999, the Company recorded a net
loss in Other income-net, due to the recognition of $3.2 million of
foreign currency exchange losses. These exchange losses related
primarily to hedging transactions in Thailand and the revaluation of
U.S. dollar holdings in Taiwan.
Interest income declined due to the lower level of cash balances. The
comparison of Other Income also was impacted by a one-time gain of $600,
000 from the liquidation of partnerships in the first quarter of last
year.
Taxes
Income taxes for the first quarter were three times the level of
pre-tax income primarily as a result of the loss in China for the first
quarter of this year, for which the Company receives no tax benefit.
The comparison of Taxes was negatively impacted by a $600,000 tax benefit received in the first quarter of last year from the liquidation of AmwayAsia Pacific Enterprises Inc.
The Malaysian government recently announced its intention to suspend
the corporate income tax in that country for the 1999 tax year; this
adjustment was not reflected in the tax rate assumption for the first
quarter results.
Second Quarter and Fiscal 1999 Outlook
The Company expects that fiscal 1999 will be extremely challenging
given the extent of economic contraction being experienced in most of
its markets. The economic turmoil will likely lead to further
reductions in domestic demand, which will continue to make the business
environment less favorable. Malaysia, Thailand and Taiwan are the most
seriously impacted of the Company's markets; however, the Asian
economic crisis has affected most of the Company's markets to varying
degrees. The Company also expects continued volatility in currency
exchange rates, but not to the degree experienced in the prior year.
As a result of these factors, the Company expects sales and operating results for the remainder of the year to continue to be weak, with the Company generating minimal operating income. The second quarter is expected to be weak, with results comparable to the reported results for the first quarter of fiscal 1999. Certain currencies have strengthened relative to the U.S. dollar, but they have stabilized at significantly lower levels compared to the same period last year, resulting in a continued high degree of negative currency comparisons. In particular, margins are expected to be adversely impacted since the Malaysia-Thailand region was historically the Company's most profitable region and Taiwan historically generated strong sales. Without the strength in these markets, the Company is unable to fully absorb China's cost structure at the current sales level.
Despite these factors, the Company is hopeful of some improvement in both sales and net income in the second half of the year, as compared to the first half of the year, if price increases in Thailand and, to a lesser extent, Malaysia can be effected and cost reductions can be achieved in China and Taiwan. The ability to implement these measures is dependent on the severity of the local economic conditions in each market and the ability of the Company to raise prices and reduce costs, while supporting its distributor base and maintaining market share. As noted previously, the Company is deferring price increases in Taiwan; in addition, the Company is reducing planned price increases in Malaysia. Separately, the Company will benefit if a tax holiday for the fiscal year is granted in Malaysia. The Company also expects a VAT refund in China, although not at the level in previous years.
Until the Company's China operations become profitable, the lack of any tax benefit from the losses sustained in China and the inability to use any of the tax holiday otherwise available to Amway China, will result in a continuation of the Company's high effective tax rate and will negatively affect net income. While sales in China would have to increase substantially for Amway China to break even, any growth in China's sales would absorb more effectively that market's cost structure and reduce the negative tax implications of a loss in China.
In China, the three-month government ban on direct selling ended in July 1998 but has resulted in a slow start under our new mode of operations. The hostile environment towards all direct selling operations, and the significant amount of negative publicity about direct selling prior to and during the ban, has created a mood of uncertainty among sales representatives and in the customer base which is adversely impacting sales and recruiting efforts. Given these factors and the high degree of promotional activity thus far this year, the Company is not yet in a position to determine what the sales level will be in China for fiscal 1999. A further cost reduction program in China is planned for the second quarter of fiscal 1999 and will require a one-time implementation cost of approximately $0.6 million. This program will provide an annualized cost savings estimated at approximately $7.2 million, with a net expense reduction of approximately $3.0 million expected for fiscal 1999. However, despite these savings, China is expected to record a net loss for the remainder of the fiscal year.
Certain events which positively affected results in China in the first quarter will not impact the quarterly results for the remainder of the year. The first quarter of fiscal 1999 included a reduction of the sales return reserve to reflect the lower level of sales returns; further significant reductions of the sales return provision in fiscal 1999 are unlikely. The first quarter also benefited from a favorable adjustment to cost of sales; this benefit was a one-time adjustment and, except for a slight reduction in royalty expense, will not affect the Company's quarterly results for the remainder of the year.
In addition, in the first quarter, a significant portion of China's sales was the result of promotions to reduce inventories, which had built up in advance of the sales ban; these promotions will end in February 1999.
In Taiwan, weakness in the economy is expected to negatively impact sales, particularly higher priced items such as the Air Treatment System which was introduced in the first quarter of the fiscal year. Price increases, which were originally scheduled for the second and third quarters of fiscal 1999, have been deferred in order to support our distributor base and maintain market share. Translated sales and net income are expected to be negatively impacted by the lower value of the New Taiwan dollar, relative to the U.S. dollar, for the remainder of the year.
In the Malaysia-Thailand region, sales are dependent on the strength of the local economy and the purchasing power in each market, which could result in double-digit declines in U.S. dollar net sales for the remainder of the fiscal year. In Thailand, the rate of the sales decline is dependent on the extent of economic contraction and whether economic conditions will continue at the present lower level. In Malaysia, the value of the Malaysian ringgit, in relation to the U.S. dollar, has decreased sharply, negatively impacting both the translated value of the U.S. dollar sales and increasing the cost of products purchased from Amway Corporation. Although the income contribution from Malaysia is expected to decline sharply, the net income impact on the Company is reduced due to the minority interest holdings.
In the Australia-New Zealand region, results are impacted by the contraction in the local economy of each market; Australia's economy is expected to slow substantially from the level in 1998. The Company anticipates that the negative currency comparisons for the region, in relation to the U.S. dollar, will continue to negatively impact translated sales and income for the remainder of the year.
Available cash for the remainder of fiscal 1999 is dependent on the extent of planned capital expenditures in China and a decrease in the cash balances in Malaysia, Thailand and Taiwan where the devaluation of the local currencies has reduced the translated cash balances held in those markets. Capital expenditures for fiscal 1999 are expected to be $31.7 million, including $22.7 million for China, principally for the expansion of the Guangzhou manufacturing facility.
At November 30, 1998, the Company had 56,441,960 shares of common stock outstanding.
The quarterly dividend will be reviewed at the Board of Directors
meeting on January 13. Although the determination of the dividend is
at the discretion of the Board, management's recommendation is to
continue the suspension of the dividend. The conditions in the fourth
quarter of last fiscal year and the outlook for fiscal 1999, which
resulted in the suspension of the dividend, have not changed. The
performance in the first quarter of fiscal 1999 was not strong and,
given the continued uncertainty surrounding the economic situation in
Asia and the capital required in China, management believes that it is
prudent to preserve cash at this time. In addition, further borrowing
would be required to continue the dividend at its prior level.
Risks and Uncertainties in Forward Looking Statements
The statements contained in this release that are not historical
facts are forward looking statements. These forward looking statements
involve risks and uncertainties with respect to the Company's markets.
With respect to operations in China in fiscal 1999, these risks and
uncertainties include: (i) the ability of the Company to manage
effectively transition issues associated with the modification of its
distribution system under the new government directive and the
regulatory environment at the local and provincial level as the Company
implements its new mode of operations, (ii) the possibility of
governmental action restricting the ability of the Company to sell
existing inventory not manufactured at the Guangzhou facility and (iii)
the Company's ability to rapidly expand its capacity to manufacture in
Guangzhou products previously imported on a test marketing basis. The
Company expects to start production of several new skincare products in
the Personal Care line, as well as new products in the Nutrition and
Wellness line, in April 1999. Operations in China can also always be
adversely affected by new government regulations or other government
action; in addition, because of the Company's relationship with Amway
Corporation, a U.S. company, the Company can be affected by changes in
the U.S.-China relationship.
In addition, the forward looking statements contained herein are
subject to other risks and uncertainties with respect to the Company's
markets, which could cause results to differ materially such as,
without limitation, a worsening of economic turmoil in the Company's
markets, such as the occurrence of further adverse currency volatility
in the markets in which the Company operates, the creation of adverse
government regulations or the occurrence of adverse government action
in the Company's markets related to either the Company's Sales and
Marketing Plan or its products, import or price restrictions in any of
the Company's markets, the possibility of adverse publicity in the
Company's markets, the difficulty in passing on the full impact of the
cost increases to distributors, given the economic situation in the
Company's markets, and a deterioration of the Company's positive
relationship with its distributor leadership. The most significant
uncertainty, with respect to currencies that impact the Company, is
whether the Chinese yuan will be devalued against the dollar; that
could in turn lead to further weakening of other Asian currencies.
Given the current economic turmoil in many of the Company's markets,
the possibility of political unrest is also a concern. The Company
believes the negative regulatory environment in Malaysia has become
more stringent, partly in response to the declining economic situation
in Malaysia. For example, the Malaysian government has informed the
direct selling industry that by December 31, 1999, direct selling
companies should increase to 80 percent the percentage of locally
sourced products sold as a condition to their continued operations in
Malaysia. The Company continues to work with the Malaysian government
to confirm that its planned increases in local manufacturing and
packaging, which will not increase sales of local products by its
affiliate by 80 percent, will be acceptable and will not result in an
enforcement action. Discussions to date with the Malaysian government
have been constructive and the Company believes it will reach a
satisfactory resolution with regard to local sourcing; however, there
can be no assurance that this local sourcing regulation will not
adversely impact the Company. Results could differ materially from
what is presented in the forward looking statements if these
regulations are made applicable to the Company.
The Company
Headquartered in Hong Kong, Amway Asia Pacific Ltd. is the
exclusive distribution vehicle for Amway Corporation in Australia,
Brunei, People's Republic of China, Macau, Malaysia, New Zealand,
Taiwan and Thailand. Amway Asia Pacific Ltd. is one of the largest
direct selling companies in the region, based on sales of Amway
consumer products offered through a core distributor force of
approximately 646,000 independent distributors at August 31, 1998.
Amway Asia Pacific Ltd. is listed on the New York Stock Exchange (AAP)
and the Australian Stock Exchange (AMW). Current press releases and
SEC earnings filings are available through the Internet at
www.aap-amway.com.
AMWAY ASIA PACIFIC LTD.
Condensed Consolidated Balance Sheet Data
November 30, 1998 and August 31, 1998
(U.S. dollars in thousands)
November 30, 1998 August 31, 1998
(Unaudited)
Cash and cash equivalents $119,279 $157,157
Short-term investments 19,605 143
Inventories 72,673 75,104
Total current assets 256,295 276,902
Total assets $367,200 $387,073
Current liabilities 155,503 174,774
Total liabilities $155,751 $174,958
Minority interests 32,535 36,017
Total shareholders' equity $178,914 $176,098
AMWAY ASIA PACIFIC LTD.
Unaudited Net Sales by Country
First Quarter Ended November 30, 1998 and 1997
(U.S. dollars in millions)
First Quarter Local Currency
1998 1997 % Change % Change
China (a) $ 18.5 $ 34.3 (46.1) (46.1)
Taiwan 29.2 35.5 (17.7) ( 7.6)
47.8 69.8 (31.6) --
Malaysia (b) 17.0 29.3 (42.1) (31.6)
Thailand 20.6 26.8 (22.8) (20.4)
37.6 56.0 (32.9) --
Australia 27.8 36.5 (23.7) (11.3)
New Zealand 4.5 6.7 (33.2) (19.1)
$ 32.3 $ 43.2 (25.2) --
(a) Includes Hong Kong and Macau.
(b) Includes Brunei.
AMWAY ASIA PACIFIC LTD.
Unaudited Consolidated Statements of Income
Three Months Ended November 30, 1998 and 1997
(U.S. dollars and shares in thousands, except per share amounts)
Three Months Ended November 30,
1998 1997 % Change
Net sales $117,710 $169,124 (30.4)
Cost of sales 51,024 65,897 (22.6)
66,686 103,227 (35.4)
Operating expenses:
Distributor incentives 30,686 44,319 (30.8)
Distribution expenses 9,606 13,122 (26.8)
Selling & administrative
expenses 24,072 29,196 (17.6)
Total operating expenses 64,364 86,637 (25.7)
Operating income 2,322 16,590 (86.0)
Other income (loss), net (1,252) 3,094 --
Income before taxes &
minority interest 1,070 19,684 (94.6)
Income taxes 3,471 7,957 (56.4)
Minority interest in net
income of consolidated
subsidiaries 979 3,202 (69.4)
Net income (loss) $ (3,380) $ 8,525 --
Earnings (loss) per share $ ( .06) $ .15 --
Weighted average number
of shares outstanding 56,442 56,461 --
Effective Weighted Average Translation Rates per U.S. Dollar
Three Months Ended November 30
1998 1997
Chinese yuan 8.28 8.28
Hong Kong dollar 7.75 7.74
New Taiwan dollar 33.32 29.68
Malaysia ringgit 3.80 3.22
Thai baht 38.16 37.00
Australian dollar 1.63 1.40
New Zealand dollar 1.92 1.58
SOURCE Amway Asia Pacific Ltd.
01/08/99 /CONTACT: Holly A. Clemente of Amway Asia Pacific Ltd., 616-787-8688/
/Web site: www.aap-amway.com/ (AAP AMW.) CO: Amway Asia Pacific Ltd. ST: China, Taiwan, New Zealand, Australia, Malaysia IN: HOU FIN SU: ERN