Charlie’s growth strategy delivers results
27 February 2006
Charlie's growth strategy delivers results
Charlie's Group (NZX: CHA) has successfully completed its first reporting period as a listed company, doubling the size of its core business through growth and acquisition, and taking a range of initiatives on new products, distribution and marketing.
The most recent highlight was the acquisition of premium beverage maker Phoenix Organics - a fully-integrated manufacturer, marketer, distributor and exporter with the leading position in healthy organic juices, honey sweetened carbonated soft drinks and sparkling fruit waters.
The group overall achieved a 34 percent increase in operating revenue to $8.050 million for the nine months to 31 December 2005 (compared with unaudited figures for the same period in 2004). The Charlie's brand increased operating revenue by 12 percent to $6.714 million for the nine months. Phoenix (acquired effective 1 December 2005) contributed $1.217 million in operating revenue in the key December month - 35 percent ahead of its unaudited sales in December 2004. Charlie's brand operating revenue for December was $1.042 million.
Charlie's was acquired in a back door listing on 13 July 2005 by Spectrum Resources Limited, which purchased Charlie's Trading Company Limited and changed its name to reflect the business of that company. The acquisition has been treated as a reverse acquisition for financial reporting purposes, as required by financial reporting standards, recognising that Charlie's shareholders retained the controlling interest following the transaction. The group results therefore include nine months trading of Charlie's Trading Company, 5.5 months of Charlie's Group (previously Spectrum Resources), and one month of Phoenix Organics.
The group posted a net deficit after tax of $140,000, reflecting the continued investment in growth and development.
Earnings before interest, tax, depreciation and amortisation (EBITDA) were negative $87,000, and earnings before interest and tax (EBIT) negative $232,000.
Phoenix Organics contributed $348,000 of EBIT following its acquisition. December is traditionally the peak month for beverage sales. The Charlie's brand had an EBIT loss of $26,000 in December after one-off expenses totaling $247,000 associated with the introduction of new products (see below).
The group's development programme included:
- Establishing a fully-integrated supermarket distribution network under its control
- Developing a range of new products and bringing them to market
- Undertaking a major marketing programme based on the Charlie's brand.
$1,120,000 was invested in the ongoing development of a supermarket distribution network, expanded to 350 outlets during the period under review, providing significant additional capacity for sales volumes and revenue. Charlie's supermarket distribution capability will integrate the Phoenix product range during the June half-year. The integration, along with increasing unit sales, will reduce the ongoing variable overhead associated with distribution to supermarkets.
Direct expenditure of $526,000 was invested in new product development and introductions to the market. A range of products were introduced to market for the first time in New Zealand - Not From Concentrate Tomato, Grapefruit and Pineapple juices; and Not From Concentrate Fruit Smoothys made from Spirulina, Passionfruit, Berry and Feijoa. The Charlie's product range was rationalised by dropping nine poor contributing lines representing turnover of approx $1,701,000 on an annual basis.
The new product launches, mostly one month from the end of the period, more than doubled the Charlie's offering to 34 variants. Sales results since launch have been very positive, with the 1 litre smoothys range achieving an average rate of sales 27 percent higher than Frucor's new McCoy's 1 litre smoothie range. (Source: AC Nielsen data current four weeks to 29 Jan. 06 - average rate of sales ($) - Chilled Category.)
A major marketing campaign was undertaken to launch the new product variants and provide clear differentiation between Charlie's products and those of competitors. This was based on brand values contributing to the HONEST proposition, expressed through the tagline "The juice, the whole juice, and nothing but the juice."
The group's new advertising programme has achieved a positive response, establishing Charlie's with the highest level of brand awareness in the juice category. (Source: Colmar Brunton - Post TV Research - Jan. 06)
Phoenix Organics is highly complementary to the existing Charlie's business, including fully-owned manufacturing, warehousing and distribution facilities. The group has commenced integration of the Charlie's and Phoenix operations, and anticipates that this will be complete in approximately 12 months. The Phoenix vendors remain actively involved in the business, and in the integration process.
Phoenix will provide access to a robust route distribution system catering to more than 3,500 premium and super premium cafes, and retail outlets in New Zealand and Australia. It has 540 in-store branded fridges in New Zealand and Australia, compared with Charlie's 120 prior to the acquisition. The group plans to increase the size of this distribution system over time as the businesses are integrated.
Phoenix has also developed a range of exporting opportunities based on the strong intrinsic appeal of its products, being organic and manufactured in New Zealand. Phoenix Organics range has been sold in Australia since 2001, and is also sold in small volumes in Singapore, Malaysia and Korea. First shipments to Dubai and Canada were confirmed during the period to December 2005 and completed in January 2006. Other export opportunities are now being addressed across the group.
Trading conditions during the period were in line with the continuing trend of increased demand for premium brands offering healthy juice and carbonated drinks. The total New Zealand supermarket and service station market for non-alcoholic cold beverages is approximately $560 million annually, and is growing at 9.3 percent, based on scanned retail price data in 2005.
The period under review saw a significant expansion of the company's balance sheet, with net proceeds from share placements totaling $10.031 million to part fund the acquisition of Phoenix Organics and for other development and expansion. Since 31 December the company made a further placement of $2.5 million (before issue costs), of which $2 million is related to completion of the Phoenix Organics acquisition. The company remains in a strong financial position and currently has no debt.
No dividend has been declared for the interim period, as the Board believes it remains appropriate to retain cash at this stage of the company's development.
Performance in the 15 months to 30 June 2006 will reflect revenue growth in all segments of the business. The trend of increasing demand for healthy, convenient and functional drinks remains in place. The group is well positioned to both lead and benefit from this trend.
The group will continue its programme of new product development under both the Charlie's and Phoenix Organics brands. Building distribution across all channels, along with planning and executing the integration of Phoenix, will remain high priorities during the remainder of the current period and into the next.
Based on results achieved for the period under review and sales in the first six weeks of the current half-year, and given normal trading patterns, the directors anticipate that the Group will at least break even for the 15 months to 30 June 2006.