Trilogy confident of servicing $39 mln of debt while expanding global sales, paying dividend

Wednesday 23rd September 2015

Trilogy International, the skincare products and scented candle maker, said its debt would reach $39 million in the first half ending this month, following the $37 million acquisition of privately-held fragrance and cosmetic distributor, CS Company.

Auckland-based Trilogy told shareholders at its annual meeting today that the deal finalised last week had a number of benefits including the opportunity to bring the company's New Zealand distribution in-house at some stage.

Director Stephen Sinclair said other benefits included export logistics that could service the group, international distribution contacts, and increase in scale, and that it was earnings accretive. CS Company chief executive Ken Millar and chief operating officer Ray Guilford were contracted to continue with the company for the next three years.

Trilogy made an up-front cash payment of $34 million and agreed to two deferred payments of $1.5 million due on the first and second anniversary of the acquisition. In addition, earn-out payments that could total $7 million will be paid to the former owners, which include its senior executives, on the third anniversary on achievement of certain undisclosed profitability thresholds for the 2016 and 2017 financial years.

The deal was funded entirely from bank debt which Sinclair which would lift Trilogy’s debt to $39 million by the end of this month, before reducing in the second half. By comparison, shareholders equity in the company is $27.2 million.

Sinclair said traditional debt-to-equity ratios were not appropriate for the high-growth company with both the board and its bank funder confident the debt can be serviced given CS’s good cash flows and the strength of Trilogy’s balance sheet.

CS is the New Zealand distributor for around 60 brands including luxury brands such as Marc Jacobs and Calvin Klein.

Trilogy’s dividend policy is to pay out between 45 percent to 55 percent of after-tax earnings and chairman Geoff Ross said for the 2016 financial year the board expects to pay out 50 percent of Trilogy’s earnings, excluding CS revenue, and after deducting interest to repay debt.

“We still expect to achieve a dividend in the 2016 financial year while still keeping the company growing and servicing debt from the CS acquisition,” he said.

Earlier Trilogy announced revenue and earnings for the September half-year will exceed guidance given in August following strong demand for its products and a weakening kiwi dollar.

Excluding any CS contribution, Trilogy expects revenue for the half-year to rise to $24 million, up $1 million on its August forecast and 57 percent above the $15.3 million a year prior. It’s also forecasting half-year net profit to hit $4.8 million compared to its August forecast of $3.5 million and $1.1 million the year prior.

For the full year to March 31, 2016, including CS, Trilogy expects revenue to rise 104 percent to $75 million from $36.6 million a year earlier and net profit before tax to range between $10 million and $12 million, up from $4.6 million the prior year.

CS is expected to contribute an additional $5 million to group revenue for the Sept.30 half-year and operating profit of $800,000 and in the second half around $22 million in revenue and $3.5 million in net profit.

Shareholders were asked to change the directors' fee pool from A$150,000 to NZ$385,000. Its three independent directors are paid from the existing fee pool while Ross, Sinclair and Grant Baker, who are all part of its largest shareholder The Business Bakery, are paid out under a separate consultancy agreement. The company wanted to pay all directors from the same pool and The Business Bakery consultancy agreement, which saw it paid $680,000 in the 2014 financial year, will be reduced by the equivalent increase in the director fee cap.

Co-founder Sarah Gibbs, who left the board earlier this year, was paid fees of $181,561 as a director and for consultancy services and Ross said she would also no longer be providing consultancy services to the group.

Trilogy said its best-selling product, rosehips oil, had benefited from a sales boost after media reports that the Duchess of Cambridge is an avid user.

Chief executive Angela Buglass said it had recently entered into a partnership with an oil supplier in Lesotho, as part of a groupwide strategy to diversify its product supplies globally.

Trilogy had sourced all its rosehips oil from Chile and it has helped a Lesotho supplier to buy a larger state of the art oil press at the cost of around US$60,000 which will be repaid over time in exchange for getting primary access to the oil in the land-locked country.

“It was an example of impact investing,” Buglass said.

Grant Baker and Trilogy staffer Christie McGregor were responsible for tracking down the best alternative sources for rosehips which thrive in climates with cold winters and hot summers. They visited Lesotho in June to finalise arrangements for the additional supply from there and also from South African suppliers.

The pair flew in by chopper to the mountain villages which were difficult to access by road and Baker said they were greeted by the entire village who live at subsistence level and collect the wild-grown rosehips as a bonus income to their main maize crop.

The shares rose 11 percent to $1.69, and have more than doubled this year.

BusinessDesk.co.nz

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