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Frucor CEO Mark Cowsill

Monday 22nd January 2001

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Following is a ShareChat Investor Interview with Frucor (NZSE: FRU) CEO, Mark Cowsill. The interview was conducted during December 2000 and posted on ShareChat on January 22, 2001.
  1. SC Investor: Friends in England report that they cannot find V in many of the stores they enter, even the ones where V is supposed to be. What's the story with the distribution?

    Mark Cowsill: Distribution in the UK has built up more slowly than planned. We currently have a drive going to increase our customer base. At the end of September 2000 we had 25% weighted distribution and 32% at December 31. Our target is 50% by early summer. We will have around 35 people on the ground during late winter to chase new customers. Suggest your friends try Tescos, BP, WHSmith Travel or Alldays as a range of options.

  2. SC Investor: Is there going to be more thorough explanation of how sales are doing in the UK? Only two announcements I've heard from FRU in the past are 1) Sales ahead of forecast by 10% and; 2) Sales behind forecast by 10%. Both these stats don't really mean anything until the volumes are known.

    Mark Cowsill: An update was given on 18 January 2001. We will not be disclosing volumes as these are commercially sensitive during the early stages of a product launch. Therefore the Directors believe it is not in the best interest of shareholders.

  3. SC Investor: How much money does FRU have to market V in Europe? I think V/Frucor marketing is excellent but does it have enough marketing dollars to compete with the larger (well, I assume larger) marketing budgets of the UK drink marketeers?

    Mark Cowsill: Our philosophy is to match the market on our advertising spend, subject to our volume and market share objectives.

  4. SC Investor: Congratulations on the strong start Frucor has made as a listed company. In the energy drink V I am convinced you have a product that is a winner. However what concerns me, particularly in Europe is the distribution and marketing side. It is no use having a great product if there isn't enough of it in the shops. Could you outline to us the steps which are being taken to ensure that this product received maximum exposure in its new markets.

    Mark Cowsill: See the answers to the first and third question. The key to success is about striking a balance between distribution and marketing. But yes you're right, unless there is a threshold level of distribution, marketing spend will be wasted. Per the points above, we have re-doubled our efforts to get product in the shops. And this is a lesson we will take into any new markets we enter.

  5. SC Investor: Frucor clearly sees a bright future for the energy drink market. What characteristics do these drinks have that would have one believe in ten years they will be more than a past fad?

    Mark Cowsill: Energy drinks are a functional beverage, meaning they perform a function other than just re-hydration. "V" has been in NZ for three and a half years and continues to grow strongly. Energy drinks have been in Europe for 13 or so years and are continuing to grow.

    The best parallel is Gatorade in the USA which has been around for 40 years or so and still is growing. What's more its market share in the USA is over 80%.

  6. SC Investor: The energy drink market is a rather young one, should it still exist in ten years time what will have distinguished the winners from the losers?

    Mark Cowsill: Please refer to the previous question and answer.

  7. SC Investor: Frucor is highly leveraged, and dependent on NZ based cash flows to meet debt servicing requirements. To what level can Frucor tolerate NZ interest rate increases, and the associated consumer spend slow down?

    Mark Cowsill: Quite the contrary, Frucor is conservatively leveraged, when you consider a market capitalisation of NZ$250 million and borrowings at $58 million. A good measure is interest cover and if you refer to Page 23 of the Prospectus you will see that the forecasted ratio is 9.4 times. That means that interest cost can be paid 9.4 times out of EBITDA.

  8. SC Investor: What macroeconomic factors have the most (if any) effect on your sales and margins?

    Mark Cowsill: The most critical factors are the exchange rate with A$, US$ and GBP. We currently buy US$ and sell A$ with GBP being neutral.

  9. SC Investor: What was the reasoning behind arranging for "V" to be contract packed in Europe? Given the low value of the kiwi dollar wouldn't it be more profitable for Frucor to package their product "down under" and export it to the UK from here like Montana is doing with its wines?

    Mark Cowsill: The reason for contract packing in Europe is to ensure high levels of customer service. With a fast moving consumer product like "V" sales can fluctuate very quickly. Wine companies have a wide range of products so can get a level of substitution. We have one product only - "V" 250ml can, and we cannot afford to let down our customers.

  10. SC Investor: General prospectus assumptions listed an estimated exchange rate of NZD/GDP of 0.325. The actual exchange rate is some 15% different from this. In FY2001 will this difference (given the high cost of advertising in the UK media) be positive or negative for Frucor? Do you have a currency hedging policy to mitigate these effects?

    Mark Cowsill: Overall the exposure on the British pound is relatively neutral (see my answer to question eight). Yes we do have a policy for hedging.

  11. SC Investor: Now that Frucor are moving into more overseas markets, and hence a lot more revenue will come from these countries, what is your policy/plan on hedging given the current weakness in the NZD and comments from Goldman Sachs of a Kiwi Dollar comeback. A 20% move from 40-48c is possible.

    Mark Cowsill: Please see the answers to questions eight and ten above.

  12. SC Investor: Looking into the future, what do you think the long term average earnings growth at Frucor is likely to be closer to (for say 5 years) 10%, 15%, 20% or 20% plus?

    Mark Cowsill: We are not in a position to disclose this. However refer to the Prospectus to get a feel of historical numbers and the projection for 2001. We do however remain confident that Frucor is an attractive "growth story" as one looks forward.

  13. SC Investor: Did the recent fuel crisis (road blockages) cause you distribution problems in UK/Europe? I have heard that your European advertising has been excessive and has been likened to "running before you have learnt to walk" What is your European cash flow like? When will you break even?

    Mark Cowsill: The fuel crisis in the UK has a minor effect on retailing but nothing that could be measured.

    We do not breakout sales and profits by country because of commercial sensitivity (see A2). To say our UK adspend has been excessive is a little overstated. When launching a new product, retailers, particularly powerful chains as those in the UK require a level of support to list the product. We invested what we felt was appropriate to give V an adequate "share of voice" in a crowded market and to meet this particular requirement of our channels. Could we have wished for more distribution penetration ahead of running ads etc? For sure. But I'd contend that we have been responsible in where the spend has been made and how it's been phased.

  14. SC Investor: Besides "V", do you plan to launch any of your other products into overseas markets? Eg NZNatural, H2Go, Kokomo & gforce.

    Mark Cowsill: We continue to review our options for new product launches in overseas markets. Australia presents the best opportunity where we have just established our own sales and distribution operation out of the old Spring Valley business. This provides Frucor with an excellent platform to expand its range and revenues in Australia.

  15. SC Investor: Will "V" ever be spun off into a separately listed entity on the NZSE or other international markets? At what point would this be considered?

    Mark Cowsill: This is a very good question when you consider the changes proposed for Fisher & Paykel. Any decision to sell part or all of the business would have to be done taking into account the best interests of the shareholders. "V" continues to have very considerable growth opportunities in the future.

  16. SC Investor: What is your next launch country for V? Do you have plans for the US market?

    Mark Cowsill: We do not disclose which countries we are considering. Soon as we have made a firm decision and at a time it does not undermine the launch we will be advising the market.

  17. SC Investor: What's been the biggest challenge in breaking into the UK market?

    Mark Cowsill: Distribution. See the answer to question one.

  18. SC Investor: For UK sales of V what percentage of retail outlets have you covered on the route trade compared to NZ and Australia? What is your target?

    Mark Cowsill: Our target in the UK is 50% weighted distribution, it currently is 32%. We do not have specific numbers in NZ or Australia but both would be well over 50%, with New Zealand the highest.

  19. SC Investor: With increased competition in the energy drinks market how will V maintain the edge over its competitors?

    Mark Cowsill: Continued marketing investment behind the brand is critical. We also continue to monitor consumers attitude towards the product and therefore make sure that the product and our marketing program is relevant to the target market.

  20. SC Investor: Is V for sale if one of the big beverage manufacturers wanted to buy it?

    Mark Cowsill: Please refer to question and answer fifteen.

  21. SC Investor: I am a shareholder and an occasional drinker of V. As a Kiwi in the UK, I have noticed that V is starting to appear in more supermarkets in my local area of West London. However, I have also noticed new competitor products (not red bull) also appearing.

    Mark Cowsill: There are a wide range of energy drinks in the market in the UK. There are only a few that are investing in advertising to the extent of "V". We are very happy with how V has performed against the non-Red Bull competition, both existing and new, in the accounts where it is sold. It bodes well for the potential for V as we crack the distribution issue.

  22. SC Investor: What affect are these other products having on V's market share? Also are you intending to market any other Frucor products in the UK?

    Mark Cowsill: See the previous answer. V's share has been slowly improving as you find when one new one appears, another disappears. At this point in time we are 100% focused on the "V" opportunity.

  23. SC Investor: There hasn't been much talk of the Pepsi franchise which Frucor bought off Lion Nathan. Many accounts of the state of the Pepsi brand in New Zealand have been negative. Please detail Frucor's strategy to grow Pepsi's market share and profitability.

    Mark Cowsill: Pepsi sales are trading behind budget and we will be addressing that. There's no doubt that there is work to do to re-build the Pepsi brands in NZ. But if you look elsewhere in the world, there are geographies where the franchise is very healthy. PCI, our partners, will be investing behind the brands to build consumer awareness and preference. The business is currently profitable and we will be looking to improve that profit in the future.

  24. SC Investor: Why did Frucor purchase Pepsi off Lion Nathan? Do you hope to regain lost ground against Coke?

    Mark Cowsill: Please refer to the previous question and answer. The business added contribution to Frucor on Day 1. Financially it was a good deal for us. Also, we expanded our fleet of cold sales equipment significantly which was an important strategic move for us. And it filled out our product range which has enabled us to access more customers than we had previously.

  25. SC Investor: Just Juice and Fresh Up. Two great brands, but it seems that "speciality" juices are eroding into their shelf space in supermarkets and service stations. I know Frucor owns the "Stefans" brand, but are there any future plans to release more "freshly squeezed" and boutique juice brands into the market? How is Stefan's market share of the freshly squeezed market doing?

    Mark Cowsill: Our Juice business overall is static, with sales for the six months to December 2000 of $36 million being in line with the previous year. Chilled juices are growing and we have a number of initiatives in place to improve our revenues from this sector. We have a new product development program which releases new products at regular intervals during the year.

  26. SC Investor: Have you thought of releasing a mineral water that has the same sophistication as a brand like "Evian" for the club market?

    Mark Cowsill: We have identified water as a target market for Frucor. In November 1999 we acquired the H2Go brand from Lion Nathan and in October 2000 we launched Mizone, a flavoured Sportswater. We will continue to review opportunities including "premium" products. Mizone has achieved 15% market share in petrol stations within 9 weeks of launch which is a very encouraging sign for our water business.

  27. SC Investor: Your McCoy's Grape Juice is one of the best on the market. Have you considered bottling it in smaller bottles (instead of just the cartons) and marketing it towards health conscious people on the go?

    Mark Cowsill: I agree McCoy Grape is great! We have just recently launched McCoy Cranberry in a 250ml glass bottle. We need to limit the range that we sell or else it will clog up our chillers and in fact increase costs. I suggest you try McCoy Cranberry, full of Vitamin C!!

ShareChat thanks Mark Cowsill for taking part in this Investor Interview.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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