Investor Interview with Certified Organics

Certified Organics is the latest transformation of a long line of failed companies from Aquaria 21 to Queen Charlotte Holdings and Regal Salmon.

In its current incarnation, the company is trying to market a natural pine-based weed killer called Organic Interceptor (an alternative to chemical products such as Round Up). While it has gained distribution through major consumer oriented chains including The Warehouse, Mitre 10, Palmers Garden Centres and Placemakers, sales have been slow to build and the company is still making losses.

In early May, it announced it had won an initial order from the South Australian state government worth $250,000, using a variation of the product to kill the seeds of a particularly nasty parasite. That initial order may turn into many millions of dollars worth of revenue a year over a 10 to 15 year period.

ShareChat: Why is the North American joint venture taking so long?

Certified Organics managing director David Warrick: This is a big project for any company, getting into North America. For a company of our size, it's disproportionately so. The key issue for us is being able to provide our prospective partners with resource. They've done their own market analysis and have identified the level of investment they need to put into the product registration and launch. Their view is that investment will be some $US10 million to $US15 million. $US30 million is the estimated value of the joint venture, based on our contributing intellectual property.

SC: Will it be a 50/50 partnership?

DW: Cash demands a premium. That level of investment obviously requires a level of return. They need a reassurance from us about sufficient product volume. Regrettably, growth in the US will not be a New Zealand export industry. There's not the raw material supply available out of New Zealand. Yes, we have a lot of pine trees, but a lot of that gets exported as logs. It doesn't get converted to pulp and paper. The factory that we use here already imports some raw materials to ensure continuity of supply. We will have to find a source elsewhere. We're going through a tender process and have been doing so for some months now to develop that alternative sourcing.

SC: Are there still two prospective US partners?

DW: There are two prospective partners. One is a marketing partner and the other is the financial and distribution partner. Progress in the US will still require registration and, if we were able to commit today, we would probably be selling in 2006. It's that sort of time scale.

SC: Has there been any progress in Europe or Japan?

DW: We announced some distribution agreements in Europe early in 2003 and later on. Both of those are with companies who are going through product registration as we speak. The Swiss based partner is currently conducting Italian national registration. The German partner is spearheading EU registration. That's a longer and more complicated process. As far as Japan is concerned, we really expect to be making an announcement about Japanese distribution and market time scale a little later this year. Japan isn't a traditionally well-known market for organics, but it appears to be catching up extremely fast. They're particularly keen on the fast-acting nature of the products that we sell. As they same themselves, they're an instant gratification society.

SC: How is progress in Australia?

DW: We have approval to sell in Australia in the domestic or retail pack size market. We're most of the way through getting commercial size registration. However, the under-resourcing of (the Australian product registration authority) appears to be hampering their ability to process not just our's but everybody's registrations at present. We've appointed an Australian distributor, a master distributor who is currently heavily involved in presentations to retail distributors in preparation for a full market launch into Spring 2004. It will mean we start selling to them in May and June. They will then take us into the commercial market, probably through a network of relationships with some other existing players. The indications that we've had from the distributor mean that our Australian sales will match if not exceed those we've made in New Zealand this year, even though this will only be the launch year in Australia. It's important for the shareholders to understand we're increasingly no longer dependent on a single market.

SC: Were any of the 2003 sales made outside of New Zealand?

DW: Yes. They were at a relatively low level. That reflects the winding down of the informal distribution relationships we've previously had for Australia.

SC: What progress have you made in the commercial market in New Zealand?

DW: Because we're a pretty resource limited operation, we've taken a very targeted approach to the commercial market. We've looked at which end-users we consider could receive the greatest range of benefits from using Organic Interceptor and have targeted them. That's meant we've done a lot of development work over the last couple of years, particularly in Kiwifruit but also increasingly with olives and wine grapes. It's an interesting challenge for us to maintain that focus but also not to turn away what interest that comes through the door. For example, we've had, for us, substantial sales to a ginseng grower here which is not what we necessarily expected but has worked well for us and for them. We're involved with avocados, asparagus, maize, dairying, organic dairy farms who need to control the weeks that cows don't cope with. What's rapidly become apparent is that the end-user interest in what we have to offer is going to be much wider in the overtly conventional market than ever it will be in purely organics. Conventional as in those who don't profess to follow organic or sustainable practices and who would normally use hard chemicals. We're gaining some significant interest from conventional growers who are coming up against resistance in their principally export markets in terms of pesticide residues. European supermarkets are now fed up with their local monitoring authorities continually hammering them for pesticide residues. Those supermarkets are now putting the onus to restrict pesticides back on the suppliers. That's a key issue for the New Zealand export industry. We're able to give them an easy tick in that box through the use of Organic Interceptor.

SC: What percentage of total sales in 2003 were commercial?

DW: About 20%. That's really from a standing start of zero in the previous year. Included in that is the first of our successes in the local council market.

SC: Have you gained any further council contracts?

DW: We have a couple of tenders out at the moment but don't expect to hear for another couple of months. We don't have our own sales resource here. Those contracts are ones that we tender for as a sub-contractor to a main service provider. We've previously done a lot of development work, particularly around the North Shore in Auckland. However, that work won't develop into a contract opportunity until such time as the contract comes up for tender.

SC: Why is sales momentum so slow?

DW: We've previously talked about our position in Australia where we didn't make a big push on sales pending the signing up of the right partner. We're very happy that we now have that right partner and that will have a very significant impact on our sales, but the length of time it took to select and finalise negotiations meant that we didn't make the sales there that we had hoped for earlier in the year.

SC: Why did it take so long?

DW: Partly because the partner we wished to work with wanted to unwind one of their previous projects before committing fully to ours. We had a number of expressions of interest from significant players in the Australian retail market. At the end of the day we chose not to go with those because we wanted to work with a distributor for whom Interceptor and associated products that we can offer is going to be their main focus, rather than potentially a small part of a portfolio which receives insufficient attention. That's the risk of dealing with some of these really major players. Equally, we need to work with partners who have the capital and the distribution. The style of partners that we're choosing in our key overseas territories is going to be different in nature in each of those territories. The best example of that is the US where our intended market entry is purely a domestic user-directed approach, whereas the German partner we're working with is a major distributor of agrichemicals, particularly to the local authority market in Germany. That's where they would see the biggest potential. Our intended Japanese partner provides us with both retail exposure and commercial agricultural market entry.

SC: But why are sales building so slowly?

DW: This time last year we were looking at a New Zealand sales expectation for 2003 of around the $1.25 million upwards level. (Actual sales in 2003 were $751,000, up from $741,000 in the previous year.) That was based upon us selling directly into our individual distributors in New Zealand, The Warehouse, Mitre 10 etc. After that forecast was published, the board made the decision to appoint a master distributor for New Zealand. That inevitably involves them taking a margin our of that sales revenue. I wouldn't want to say what level it would come to (if a master distributor hadn't been appointed) because it would give competitors and idea of how much the distributor made. I don't think our shareholders would want that. It would be fair to say that the 2003 season sales were hampered by the weather. I'm sure investors are fed up with hearing about external factors, but I do remember The Warehouse talking about poor seasonal products giving them a significant problem in their sales numbers. The very wet weather we had in New Zealand did hamper sales. That again is one of the reasons we're pleased to have spread our risks through the launch into Australia.

SC: Do any of the rural suppliers take the product?

DW: That's an interesting one. Interceptor weed killer is listed with all the major rural suppliers. I'm undecided as to the value that those listings provide us. We feel that our end-user-focussed approach is the way to generate sales. The rural distributor may be a distributor, but in truth, they're not a sales generation machine. These rural suppliers are really struggling with where they do add value.

SC: What is breakeven revenue now?

DW: We finished 2003 with sales of $751,000. Continued development in the New Zealand market, particularly the interest we're getting on the commercial side, together with indications we've had from Australia, including the significant trial run of our seed eradicator by the South Australian government, should mean that we deliver a sales result in 2004 that's between two and three times the level of last year.

SC: What's the current cash position and will you need to raise further cash in the meantime?

DW: We ran a small placement at the end of last year. That money has gone into progressing the joint venture, particularly tendering for supply, and also into significant investment in the seed eradication project in South Australia. The placement was at 7 cents a share. (On May 12, the shares were trading at 13 cents.) It's fair to say shareholders, certainly those who've come in from previous incarnations, have had a desperately rough ride. Those who have bought into the vision of Certified Organics have, up until now, suffered from the early development stage that the company was at at the time of the flotation (backdoor listing).