Ecoya Ltd [ECO.NZ] was listed on the NZX on May 3 of this year after an IPO and prospectus that kicked off in November 2009.
Its 2010 full year results, a loss of NZ$2.35 million, is on track according to management and sales are going according to plan.
The company has stated that it doesn't expect profit for at least the next 3 years.
Ecoya will be heavy on marketing and image and expect these two elements to help them establish a strong brand and hopefully sales and profit will eventuate.
I am naturally skeptical of a company that isn't making money from the get go and wanted to know more.
I didn't have to go looking for a contact as a mistake that I made with some figures from the 2010 result analysis got Ecoya's PR person onto me and I hooked up this Q & A with Geoff as a result.
The Q & A was conducted via email while Geoff was in North America on a sales trip for ECO and I want to thank him for taking the time to do this while he was busy with his business.
The Q & A
Share Investor - What was the primary reason you decided to buy into Ecoya and why list on the NZX when the money raised was only comparatively small and could have been found privately?
Geoff Ross - We choose to invest in Ecoya for many reasons. We saw a growth category, an ability to scale up relatively easily, a global opportunity, high margin, and a business that fitted with our skill set in high end consumer brands. Also the CEO of the business was a person we had worked with before and we rated highly. He had created a good product and got the business off to a good start.
We chose to list on the NZX because even though a small raise as it provided a good structure for our capital requirements – a fair valuation and the warrants to raise further capital as our business grows. Being a listed company also gives a credibility when operating in international markets. You are taken with a degree of seriousness when dealing with large clients such as department stores and also your key suppliers.
SI - You seem to be satisfied by the 2010 full year profit out earlier this month, is it fair to make any comparisons, good or bad, with previous years given the youth of the company and the rapid growth of Ecoya from a very small base?
GR - I think it is very important to make comparisons with previous years, even when young. Our goal is to double the size of the business each year. That is the trajectory we want to show in a high growth business such as this and that is what we want to report to our shareholders.
S I - How well did you think the Ecoya IPO was received by investors and the market in general?
GR - I would say OK. Previous shareholders of 42 Below had a good experience with us and were positive toward Ecoya because of our prior relationship. Investors outside this group are still pretty cautious at present. I would say that we got a better response from Institutions than I thought. And a weaker response from retail than I thought we would get. I would say this year is a very tough one for IPO’s. We got ours away, but I would suspect that further IPO’s, if any, will be slim on the ground this year.
SI - How was the value of the company arrived at, at just under $45 million it seems high given the company has yet to turn a profit and has sales of just over NZ$ 4 million?
GR - We did a huge amount of work on this. Our Investment Banking partners – Cameron and Partners were involved and we created various models. We have internal forecasts out 10 years. These were used in our valuations. We also looked at like valuations in this category – a useful one is a company called L’Occitane which just listed in Hong Kong. Typically valuations in this category are multiplies of Revenue. In our view we believe the value is fair for a growth proposition.
Growth Stories are relatively unusual in this market. A company such as Xero Ltd [XRO.NZ] listed with virtually no revenue. Rather the value is set on the combined prospect of the strategy, the opportunity and the ability of the the management to execute with the capital they now have. A growth company cannot be valued in the same way as say an old established Telco with limited growth prospects.
SI - Do you think the company has raised enough cash to allow it to pursue its stated aims and will it need more, apart from the exercising of the 2 warrant tranches, as the company develops?
GR - Yes.
SI - Why were pro-forma financial results used in the Ecoya Prospectus instead of the actual results, isn’t that misleading investors?
GR - By law you have to put in financial statements through to the end of the financial year you are in (Pro-forma statements) and then prospective numbers for a complete year following this. Which is what we did. We registered our prospectus a little before the end of our financial year – so that remaining period legally required prospective statements (which I understand you are calling pro-forma in this case)
SI - You built up 42 Below and sold it within a very short time-frame before any profits were realized. Is it going to be the same scenario with Ecoya and if not how will it be different?
GR - We will also grow Ecoya very quickly. We have a strategy which is about building the size of our revenue generating asset. In the years ahead we may simply ease off the growth pedal and allow the business to start generating a profit. At 42 Below we had several countries running profitably. However rather than easing off on the growth and allow the company to show a profit we continued with an aggressive growth plan and invest into new markets. If offers are presented, we will entertain them.
SI - The sector in which Ecoya operates is highly competitive, with quite a number of established players, what makes you confident that you can play them at their own game or, as you have stated in the Prospectus, that they would be interested in purchasing Ecoya sometime down the track?
GR - The challenge will not be play them at their own game – rather take a different approach. The battlefields really are brand and sales. We need to build a better looking brand, a better performing brand and a brand with a more compelling consumer story. And in sales we need to be better at it than the rest. We use our own people rather than reps or agencies. We think having your own people accountable to daily targets is a stronger way to build presence than leaving your sales in the hands of another group.
SI - What key elements will allow Ecoya to make inroads on its competition?
GR - Brand design is critical – we need to look great on the shelf and then in peoples living rooms and bathe rooms. Our environmental story is strong – using sustainable soy wax is also strong (most other candles are paraffin based – and lighting a paraffin candle in your living room is like starting a car in your living room) . We will also be doing a lot of the PR and marketing techniques that got 42 Below noticed.
SI - What are you doing to contain costs considering the current economic environment and the focus by other businesses on this important factor or is that not possible given the growth path factored into the company?
GR - It is absolutely important and is of course possible to contain costs. We run a very strong back office. We have an on line system that runs from a cellular hand held in our sales peoples hand through to head office, management accounting and then through to the orders of raw materials. This system allows us to look at any moment what is being sold, what the margin is and what our results are showing at that point. Everything is tracked by the minute.
SI - How has the introduction into the North American market been received and which retailers are selling your range?
GR - I have just come back from the US where I was selling up there. It is very early days, however I would have to say it has been received very well. It is a competitive market with out doubt – however the brand was received very well and the great thing about the US is that it is that much bigger. On my first call the Store (25 Park) agreed to take the brand on and we filled out the order form. The store owner then said – oh we have three more stores, can you replicate the same order for each store. The US has that much more scale to it.
SI - The global body and bath market is estimated in the ECO Prospectus at around US$22 billion. How much of a market share of that revenue do you expect to be selling within the next 5 years?
GR - We haven't released that to the market. I would say that we are not going for a share of the global market – rather a share of some specific markets. These being Australasia (where we aim to be have a significant share within the next 5 years), The US, and parts of Europe. Australia is currently our biggest market and will be for some time as we utilize the ‘home ground’ advantage.
SI - When is the company expected to turn a profit?
GR - Again this timing hasn’t been released to the market. We can say that the company will be investing in growth and that our current plans do take the company into profit. However this date is outside the years prospective financial statements and therefore has not been released.
SI - Marketing seems to be your area of expertise and you have used it to achieve some good results from companies that you have been previously involved with. How much will good marketing play in the growth of Ecoya and is it great word of mouth from current customers who will do most of the marketing for you?
GR - Marketing is vital. And word of mouth a big part of it. However our challenge is to make sure our customers want to talk about the brand to their friends – and their friends want to talk about it when they see it in peoples homes.
SI - Why are you lending shareholder money to directors to buy shares in Ecoya and isn’t there a more appropriate way to incentivize management to do better?
GR - We don’t have big director fees. In fact I would guess that we pay our directors less than any other listed company. In stead we want our directors interests aligned with shareholders – so that means shares. And we want to do this in a way that makes it attractive for very senior people to join our board. To get people of the calibre of Rob Fyfe from Air New Zealand Ltd [AIR.NZ], or Rich Frank, ex head of Disney, you simple can't offer them a small directors fee alone. We looked at ways of rewarding them with shares (rather than big directors fees) and the best solution seemed via a loan to them to purchase those shares. It is a meaningful way to reward directors and it does so with a currency that is the same as all shareholders.
SI - There is a considerable sum of money flowing from Ecoya to related parties for consultancy work and management fees on an ongoing basis. Is that practical given the relatively small capital base that was raised in the IPO?
GR - Yes there are two consultancy fees. One covers myself as Executive Chairman, Stephen Sinclair as CFO and Grant Bakers involvement. We are all on the board and we are all active in management. Currently Ecoya is 100 % of my time. This fee covers all our time and all our directors fees for all three of us. I consider this a nominal fee for three people who are both active in the business and on the board. The other consultancy fee covers our CEO – all of his time and his role on the board. Again it would make him one of the lowest paid CEO’s on a listed company. All of us are there to grow the value of the business and shareholdings, not by pulling big fees. So this is why there are consultancy fees – it covers senior management who aren't being paid by any other means.
SI - Is Ecoya capable of footing it with the big boys, especially as the company gains some sort of scale in terms of customer base and revenue size?
GR - Absolutely. We have paid a lot of attention to our systems and built a platform we can now grow from. You need this in place before embarking on a high growth strategy.
SI - What are your biggest challenges as the company expands?
GR - The challenges will be typical to those in any high growth business. When you double the size of your business each year you need to continually make sure you have the right organizational structure, you are re negotiating contracts to get the benefit of scale, you are watching stock control to make sure you don’t run out and you keep up with demand and you keep listening to your customers.
SI - Any business has inherent risks, especially a start up like Ecoya. How do you manage those risks in the normal business operating environment that changes due to economic cycles and other outside and inside influences?
GR - This is a huge question and could take pages. In short - I think this is part of the role of our board. We have monthly meetings where our results are tracked. We are continually reviewing our FX policy, our financial position VS plan, our product offering VS key competitors, performance of sales people etc.
SI - How much, if at all, has the founding and growing of 42 Below influenced your approach to Ecoya, how it operates currently and how it will operate in the future?
GR - It has been a huge influence. There are a lot of similarities between high end spirits and high end home fragrance and bath products. We learnt a lot at 42 Below. We want to use all those learning's going forward.
SI - Do you still have any financial interest in 42 Below?
GR - No.
SI - Who are some of your business mentors/heroes and why?
GR - I think Rob Fyfe at Air New Zealand has done a great job. You can feel and see the improvements in that company, to have done this in a company the size of Air New Zealand and done it so quickly is very impressive – they have now been named best Airline in the world. I think Richard Branson because the Virgin brand always feels fresh and young despite now having been round for a while and being a very large organization. I think John Key is doing a pretty good job (mostly) of running New Zealand as a company.
SI - What company or companies do you admire the most (apart from Ecoya)that you don't have a financial interest in and why?
GR - Wow – heaps. From Apple and Stationary company Smiggle for great use of design. To local success stories like Les Mills, Ice Breaker, and Eco Store.
SI - Are there any particular books , periodicals or websites that you have read that you would recommend to Share Investor readers in terms of business and investing?
GR - I like Wired and Fast Company magazine out of the US. Both usually at the front end of new business and especially at the front end of technology. I also like magazines like Vanity Fair or fashion magazines like Nylon as you keep abreast of popular culture and get a sense for where the next consumer trends are coming from. I like reading stuff that keeps me in touch with what is happening in popular culture and what will therefore drive the next consumer trends.
SI - In my investing experience I have found the level of business leadership in New Zealand wanting – with a few very notable exceptions - when it comes to making good long-term decisions based on sound business skills, the basic understanding of running a business and accountability when it comes to making mistakes and this is often reflected in businesses hiring from an overseas talent pool. What are your views on how we can get good shareholder representation in the boardroom?
GR - I think companies are putting the wrong people on their boards. The two most important qualities in a board I believe are:
- Have people on them who have actually built and run companies. At 42 Below all our board members had built or run their own company. The same is true at Ecoya. Too many boards have people who have never run a company – they are lawyers, accountants or management consultants. These people may have great skill sets, but they should not dominate a board. When this happens then only a narrow set of skills are being deployed at the board. No one is on there who is hungry for growth – rather they are on the board simply as a watch captain, not a driver.
- Have board members who are comfortable challenging each other. A piece of advice I got from Mark Weldon was “Don’t build a board where everyone is the same and therefore likely to have the same opinion – you and the other board members need to be challenged” Too many boards I have seen have career board people and all cut from the same cloth. I can’t imagine there is a great deal of debate going on at their meetings.
SI - What do you see as the strongest and weakest quality of your leadership style?
GR - Strongest – I hope I am a good listener. Weakest – give people a bit much rope.
SI - Where do you see yourself and the business you lead over the next five years?
GR - Ecoya to be the most respected brand in Home Fragrance, Body and Bath. Globally.
SI - Thanks for your time.
Geoff Ross Bio - From various sources
Geoff Ross has an advertising background and started with Saatchi & Saatchi back in the early 1990s. He most famously developed and grew and listed vodka maker/distributor, 42 Below , and sold it to Bacardi in 2006 for NZ$ 138 million.
Along with his wife Justine Troy he tells the Story of 42 Below in the book out this year, Every Bastard Says No - The 42 Below Story.
Geoff bought into Ecoya in 2008 and is currently helping run The Bakery, a platform from which Geoff and others are helping fund high growth business start-ups.
The Bakery has helped underwrite the Ecoya business.
About Ecoya -From 2010 Prospectus
The business operated by Ecoya was established in April 2004. It has experienced strong growth since the 42 Below founders invested in February 2008. During this time a skilled management team has been assembled, along with a platform for continued growth.
Ecoya manufactures and sells a broad range of body & bath and home fragrance products.
Ecoya uses natural ingredients to create environmentally friendly products that perform for the consumer (e.g. soaps, hand & body lotions and hand wash) and their home (e.g. scented candles and diffusers).
Worldwide, many consumer groups are becoming more house proud, paying more attention to their home style and also entertaining more at home. The Ecoya brand, packaging and merchandising will utilise a strong sense of design and aesthetic, which is an important part of meeting the needs of this developing consumer characteristic.
The term that Ecoya uses for a brand with an environmental platform that contains strong design with luxury elements is “Eco Luxe”. Ecoya expects Eco Luxe will be a growing segment within its home fragrance and body & bath categories.
Ecoya is also proud of its origins in Australasia and the Board believes that this provenance adds to the brand story as Ecoya expands into the Northern Hemisphere, as Australasia is perceived as a fresh and ‘New World’ region for fragrances and body & bath care.
Ecoya plans to maximise its international market opportunity. It is already selling its products across Australia and New Zealand in selected gift stores, home stores and department stores (such as David Jones’ 37 stores in Australia and Ballantynes in New Zealand) and in Nuance Group Duty Free in Australia.
Sales are being made in Shanghai (China) and Ecoya currently expects to have its first sales in the USA in May 2010.
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c Share Investor 2010