Jenny Ruth: Change afoot at Certified Organics

Has Certified Organics morphed yet again? Managing director David Warrick concedes that its purchase of the New Zealand Nature Company could be interpreted as yet another reverse takeover.

Certified Organics has been struggling in its pre-NZ Nature incarnation since the middle of 2001, trying to build a business around its pine-based natural weed killer and mold treatment products.

It emerged from the reverse takeover of AQL, the shell of Aquaria 21, which itself sprang from Mount Charlotte Holdings which was created out of the wreck of Regal Salmon.

The legacy of that history is that accumulated losses had reached $60.5 million by June 30, the company's $599,000 net loss for the six months ended June is just the latest contribution to that pile.

NZ Nature does have the virtue of being an established business, actually producing profits from its sales, something Certified Organics hasn't yet managed, and having a track record.

The prospectus for the rights issue which partly funded the NZ Nature purchase shows its sales in the year ended March were $4.2 million and its pre-tax profit was $1.15 million.

That was a decline from the previous year's $4.6 million sales and $1.35 million net profit which the prospectus attributes to a margin squeeze due to the strong dollar and an increase in fulltime staff salaries.

The latest year's result was a big improvement on 2003 when the company's pre-tax profit of $887,000 was struck on sales of $3.6 million.

NZ Nature sells locally-made consumer products, such as footwear, clothing made from merino and possum wools and silks, cosmetics and alternative health products, educational toys and Kiwiana, through the internet. About half its sales are exports of which 70 per cent are made in North America.

Warrick says there's "a relatively loose emotional umbrella" over the two companys' products. "They're environmentally sensitive and primarily New Zealand-sourced. Certified Organics products have been stocked by rural supplies companies but sales through that avenue have never been satisfactory.

The company has instead focused on end-users, such as commercial kiwifruit growers, who buy in bulk. The board has certainly not given up on trying to commercialise Certified Organics products, says Warrick.

"The board's put a lot of time into it over the last year. The new members of the board, Wayne Cartwright, who became chairman in October last year, Steve Bridges in December, and more recently Roger Gower, have been vastly more involved in the business."

Warrick hastens to add that's not a criticism of the previous board, just that the new members have had more time to devote to the company.

Cartwright is professor of strategic management in the Department of International Business at Auckland University.

While the pre-NZ Nature purchase Certified Organics is not yet profitable, it does appear to be making incremental progress, only not as much as Warrick hopes.

Sales did increase in the latest six months by 10 per cent. It's just that its first quarter sales had jumped 96 per cent after the South Australian Government re-ordered a shipment of the company's Organic Interceptor weedkiller, a sale worth more than $250,000.

The South Australian Government has been testing the product on an infestation of branched broomrape, a particularly nasty parasite, and is awaiting Australian Federal Government funding to launch a full eradication programme.

Obviously, things went awful quiet for the company in the second quarter.

The company said it had been upgrading its retail marketing approach in New Zealand and had been "working to rectify deficiencies". It has also launched another retail product, Organic Interceptor No More Mold to complement its weedkiller.

It also seems to be making inroads into the Australian market and into the commercial agricultural market here. It only has regulatory approval to sell its weedkiller commercially here but is working on getting approvals in other markets including Australia.

A similar pattern happened last year. Although the full-year's sales were up 18 per cent to $884,000, its first-half sales had been up 79 per cent and the company had then been "confident of holding that level of increase above the previous periods trading through to year end".

Another sign that this is not a reverse takeover is that NZ Nature's vendors, Ben van Dyke and Miranda Wood van Dyke, won't have an ongoing management role in the business beyond the changeover period.

Certified Organics has appointed Julia Carr to run the business from its Nelson headquarters. Warrick says Carr recently returned home after selling a business in Britain.

The van Dykes do still have a stake in the business. Certified Organics is paying $5 million for the business but only $3.05 million is in cash and the rest is in its own shares. "That's an expression of confidence from their perspective," Warrick says.

Scraping together the money to pay the Van Dykes looks like hard work. The company had aimed to raise up to $3.2 million from its one-for-two rights issue but only managed to raise $2.49 million.

Shareholders took up only 11.2 million of the 58.9 million new shares offered. A further 16.6 million shares were taken up by underwriter Dorchester Capital and a further 17.5 million were successfully auctioned to professional investors.

Warrick says the major shareholders, including founder Rodney Innes, have put all their available cash into the business and simply can't afford to provide more.

Ahead of the rights issue, the company had also placed eight million shares, raising $440,000, with John Sorensen's Fenway Holdings. Sorensen brokered the original deal that created Certified Organics and gained about 19 per cent in the process as a kind of success fee. However, he lost no time in selling out; his holding falling below 5 per cent by mid-2002.

Warrick said the company made up the shortfall by securing a $1 million loan from Westpac. The fact that a major bank is now prepared to lend to the company highlights the benefits it should reap from the NZ Nature purchase.

"It's the first time anyone's been willing to do that and that's from someone who really does understand financing on a cashflow basis. The NZ Nature Company is cash generative, although it has significant seasonality, and that changes our situation almost from day one," Warrick says.

Certified Organics headquarters: Ground Floor, Building 5, Central Park, 666 Great South Rd, Penrose.
Profile: Markets pine-based products including Organic Interceptor weedkiller.
Market capitalisation: $7.06m.
Latest results: Made a $599,000 net loss on $504,000 in sales for the six months ended June 30, an improvement on the $640,000 net loss on $458,000 in sales in its previous first half.
Management: David Warrick who has previously worked for Rentokil and Excell Corp.
Major shareholders: The van Dykes with 18.86 per cent, Dorchester Capital with 11.05 per cent, Rodney Innes family trust with 7.83 per cent, Stuart Innes family trust with 3.74 per cent and director Joe Wallis with 3.92 per cent.