Trilogy confident of servicing debt while expanding global sales

Trilogy International [NZX:TIL] says its debt will 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 says 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 says other benefits include export logistics that could service the group, international distribution contacts, and increase in scale. He says it is also earnings accretive.

CS Company chief executive Ken Millar and chief operating officer Ray Guilford have been 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 totalling $7 million will be paid to the former owners, which include its senior executives, on the third anniversary if undisclosed profitability thresholds for the 2016 and 2017 financial years are met.

The deal was funded entirely from bank debt which Mr Sinclair says will lift Trilogy's debt to $39, before reducing in the second half. By comparison, shareholders equity in the company is $27.2 million.

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

Trilogy's dividend policy is to pay out 45-55% of after-tax earnings and chairman Geoff Ross says for the 2016 financial year the board expects to pay out 50% 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 says.

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% 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% to $75 million from $36.6 million a year earlier and net profit before tax to range between $10-12 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. In the second half it is expected to contribute about $22 million in revenue and $3.5 million in net profit.

Shareholders were asked to change the directors' fee pool from $A150,000 to $ NZ385,000. Its three independent directors are paid from the existing fee pool while Messrs Ross and 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 Mr Ross says she would no longer be providing consultancy services to the group.

Chief executive Angela Buglass says the company has recently entered into a partnership with an oil supplier in Lesotho, as part of a group wide strategy to diversify its product supplies globally for its best-selling rosehips oil.

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 $US60,000, which will be repaid over time in exchange for getting primary access to the oil in the land-locked country.

"It is 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 Mr Baker says 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.

 (BusinessDesk)

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