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42 Below: Geoff Ross

By Jenny Ruth

Monday 27th September 2004

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 Jenny Ruth
Vodka and gin marketer 42 Below listed after a $15 million float in September last year.

In its first full year of operation, the year ended March, sales totalled $4.4 million and the bottom line was a $1.13 million loss. In June, the company said it expects sales for the year ending September to be more than $9 million, beating its $6.43 million prospectus forecast. The company also said it expects to break even in the three months ending March 2005 and that it will be profitable in the year ending March 2006.

However, it is currently burning cash at a faster rate than the prospectus forecast. It expects to have between $5 million and $6 million in cash left by September 30, down from the $10.449 million prospectus forecast.


ShareChat: Will the company need more capital?

Chief executive or chief vodka bloke Geoff Ross: No, is the answer, not with the current business plan which leads us to believe we're managing our capital correctly.


SC: Do you expect all the warrants to be exercised and is that factored into the business plan?

GR: They are in a relatively limited way. Do we expect the warrants to be exercised? The answer is, yes, we do. The better people to answer that question of is the market. The warrants will be exercised if the share price is strong and people will obviously see value in the warrants. Obviously, we have an interest in it, but our sole focus is on the performance of the company. We're quite deliberate in keeping our view of the share price and the warrants completely separate from the company. We don't want to comment on the share price because that's really up to the market.


SC: Do you think it came to the market too early?

GR: I don't think we did. Perhaps if you look at other listings in New Zealand, you would say we were certainly one of the more embryonic companies that came on. I think we were very honest when we came to the market. It's based on a business model that's working. We know that we have a business model that can generate revenue. We believe there's a significant opportunity and we believe we have the skills to execute it. Given those criteria, we left the judgement as to whether people would invest on listing over to them. It's true we didn't have 10 years of trading history or anything like that. Some people did think we were too early to the market.


SC: Given that the prospectus didn't give any profit forecasts, why did you decide to do so in June?

GR: When the prospectus was issued in September last year, there was a great deal we didn't know. We knew we were going to grow and we knew we were going to crack some of these markets, but we didn't know when or to what extent. It was very, very difficult to made predictions. Nine months later, we had more time in the market and were able to say with more certainty when we would come into profit. We didn't have to make the forecast. We do have an obligation to disclose any material developments. Internally, we have forecasts that go out a considerable length of time. We felt we had an obligation to report something as significant as that. We certainly don't want to be the guys that over-promise and under-deliver. The market is particularly hard on those.


SC: What has your winning the SIAL award meant?

GR: We're in discussions with a lot of European distributors. It's given us more credibility in the European market. Prior to that, we were only in the UK. Now we have a huge amount of enquiry from Germany, France, Italy and Russia. Our new development manager is going up on Sunday. He will be away for a month. We would envisage choosing the right distributors in each of those markets by the time he returns.


SC: How many countries are your products currently sold in?

GR: We're in 10 worldwide.


SC: Is this a scattergun approach? Wouldn't you be better concentrating on particular markets?

GR: I should explain our approach a bit more. We're split into two tiers. Tier one is us and our own people and we focus just on four countries: the UK, US, Australia and New Zealand. That's our focus, that's where we invest our own people, our own resources and our financial commitment. We take a significant margin in return for doing that. We do have distributors (in those four countries) but they're not responsible for building our brand and sales, we are. We have distributors who do the physical deliveries. In other countries, we appoint agents. Those agents take on all the costs. We set very clear standards on how they ought to perform. They take on all the costs so it's their people and their investment. We take a margin, of course, but it's a little less than what we've taken in the four countries we focus on. Focus is really important for a small company. We're not going to pretend it's not. We don't want to spread ourselves too thin. Even within the US, we're really only concentrating on four or five key regions. It's not all 50 states. Outside of those key states, we're employing agents. They're markets no as important in the vodka world. If we do nothing else than succeed in those four countries, we will be a huge international business. We're in Iceland. If our sales agent doesn't perform, we're prepared to live with that because we haven't put any money into it. We're focused on those four key markets. Outside of that we've got people who are incentivised for their own reasons to make our brand succeed. Our Singapore distributor is very focused because it's their business model. They need to succeed on our brand's growth.


SC: What is your view of the Advertising Standards Complaints Board and the rules governing liquor advertising?

GR: We have a responsibility to deliver communications in advertising that's relevant and applying to our target group - young, affluent, urban members of the cocktail elite in cities like New York, London and Sydney. They live in pretty edgy parts of town like Soho or the meat packing district of Manhattan or the Eastern suburbs of Sydney. We have a responsibility to create the right kinds of communications for those kinds of targets. Those types of people aren't the same types of people as the people running the Advertising Standards Complaints Board in New Zealand. Only a small part of our target market is in New Zealand. A much larger part is in Las Vegas and Sydney. Some of the material we create for those markets, which require a certain edge to it, is going to contravene local rules from time to time. We don't apologise for that. We have an obligation to do what's right for the young martini drinker in New York. We're far better qualified to decide on what's required in those markets.


SC: Do you find marketing your own products is different from marketing other people's?

GR: I enjoy promoting my own more than other people's. It's not really different. You go through the same processes and thinking. When it's your own, you live and breathe it more. You get a greater understanding of your brand when it's your own.


SC: What do you think of how the company's shares have been trading recently?

GR: Yes, we're happy, but I don't think I'm the right person to speak to about the valuation. That question is far better directed at members of the investment community. Every chief executive loves to see their share price steadily on the rise.


SC: Is the company going to seriously target the North American market, particularly California, British Columbia and up the coast of Alaska?

GR: We get a lot of questions like that. That comes back to that scattergun approach. We've had enquiry from that part of the world. We're just in Vancouver, San Francisco, Los Angeles and San Diego. We're just in a couple of pockets on the Western seaboard. Yes, I'm sure there are huge opportunities that at some point in our future we will attack, but not right now. We really want to focus on the most influential vodka markets in the world. The first cabs off the rank are those countries. It's tempting, but there's no point in us doing that until we're convinced we have the right support network with bar tenders and consumers creating brand recognition.


SC: 42 Below recently purchased the US Distribution Agent. It appears this business was owned by an employee of 42 Below who is to remain in his original role. Can you please demonstrate how transparency was achieved to the satisfaction of your Board in this transaction?

GR: This agreement was done before we listed and, as a material contract, had to be outlined in the prospectus. Before we listed, we didn't know a lot about the US. We had an entrepreneur who wanted to put their own capital at risk. As a company, we thought that was a good opportunity. It was prudent and meant we didn't have to take on that risk ourselves. It's proven now and we think it's a good idea to take that margin now. Our margin will increase. We've got the security. We're quite reassured by our performance to date and the information we know about that market.


SC: How will the new distribution agreement with Fosters affect the sales volume?

GR: We're really excited about that. We've got two agreements with Fosters. One is with Carlton & United Breweries. They're going to do all our distribution and a lot of our sales work nationally in Australia. It's going to give us huge reach and clout with a lot of buying groups. Coles Myer and Woolworths are obviously key clients with CUB. We will have huge parts of the market opened up for us. It does take a chunk of costs out. We will keep a few key people on, but we won't need so many people over there. The other agreement is with Fosters Brewing International. Through them we've secured duty free relationships in Australia. In October we will be in Brisbane and Perth and then move into Melbourne and Sydney. It's a decent chunk of volume. People are buying the premium brands when they travel because they don't have to pay the excise tax.


SC: What are the costs to 42 Below of the Fosters agreement? Do you expect a positive contribution from the above arrangement during the next 12 months?

GR: There aren't any (extra) costs really. Ongoing there are costs, but they will be less than our current operation. A positive contribution? We haven't mentioned that to the market so I can't go into that amount of detail.


SC: Are there any new products in the pipeline in the next six months?

GR: In the next six months, no. We have got some things waiting in the wings, but we're pretty excited about the horses we've got running at the moment. We're going to focus our resources on backing those. When we're ready, we will have things to put into the market. A lot of the reasearch has been done which is just thinking and time.

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


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