Chairman’s Message

Thursday 28 October 2010Graham_Clegg

 

As Founding Chairman I am proud to say that after 26 years in business New Image is a leading New Zealand health food exporter, selling overseas in excess of 90% of its products. The group adds value to New Zealand’s agricultural commodities and employs or assists thousands of people with their businesses.

This year has had its share of successes and share of challenges. That’s business.

The one disappointment I continue to have is that many New Zealanders do not have a good grasp of what direct selling, or multi level marketing, is and the opportunity it offers. This is one of the factors I believe is behind the New Image share price’s continuing under-performance. While they accept the “multi-level manufacturer to wholesaler and/or agent to retail chain” for selling goods, they do not interpret direct selling as a similar chain, another distribution channel. Nor do they see the good potential in it for people to make a living. My desire is that someone in the NZ media will - like the business media in Australia has done - take a thorough, researched look at how the direct selling sector works, perhaps by starting with the Direct Selling Association of New Zealand and its Code of Practice ( and ethics), which offers both consumers and sellers greater protection than the standard retail model.

Researchers will find a multibillion dollar industry around the globe, in nearly every country, with millions of people successfully taking part in it, and that is the real story to tell. The international business world understands the marketing power of the direct selling model. This is evidenced this month by the US $19 billion bid that L’Oreal, the world’s largest cosmetics maker, may make for Avon Products, the world’s largest direct selling company.

I am delighted to report that in April this year New Image Group was in the Top 100 direct selling companies in the world. Out of the approximately 10,000 direct selling companies worldwide, New Image was ranked at number 86 by revenue in the world’s “Top 100” list compiled by the leading industry publication, Direct Selling News.
We also achieved a number of other significant awards as follows:
  • We received the 2009 Deloitte New Zealand Fast 50 award, as one of the fastest growing fifty companies in New Zealand
  • We received the 2009 Deloitte award for the fastest growing retail or consumer products business in Auckland and the Upper North Island
  • We received the Natural Products NZ 2009 Exporter of the Year Award
  • Associate company Somnaceutics received the Natural Products NZ 2009 Cawthron Innovation in Science & Technology Award and
  • We were a finalist for the Air New Zealand Cargo 2010 Auckland Export Award.
All in all, very fine achievements for New Image for which we can all be proud. There are many direct selling businesses in New Zealand. New Image is one of the pioneers, a member of the Direct Selling Association of New Zealand and a proud signatory of its published Code of Practice and ethics.

Financial Highlights

Our Top 100 global ranking was one of the year’s highlights. Another is that the group has come through the unsettled global economic times in good financial shape.

As could be expected, our full year revenues for the year to the end of June were down. From $98.1 million the previous year to $81.3 million. But $10.6 million of that drop relates to the revenues being affected through adverse exchange rate movements when translated into New Zealand dollars. While revenues were 17% down in New Zealand dollars, they were only 6% down in the local currencies of our Asian markets.

Encouragingly FY10 second half revenues were 3% up and NPAT 5%, reflecting the group’s growth trend.

Net profit after tax for the year was $7.4 million, compared with $15.5 million the previous year. As anticipated in last year’s annual report, this result was in part due to substantial increased costs in developing new markets and products. This includes the substantial capital investment in the company’s ready-to-drink long life colostrum beverage, COL+. We have refocused our strategy with COL+, and it is now finding success with the assistance of traditional wholesalers who have established distribution channels and marketing expertise. This means that New Image is not required to meet the marketing investment required to support products sold at retail.

The group ended the year with an improved equity ratio lifting to 70% up from 60% in 2009 and even better, we ended the year with $18.9 million cash reserves.

Dividend

On the back of the group’s financial position I am pleased to advise the Board has resolved to maintain the full year dividend for FY10 at the same level as the previous year, when the payment of a dividend was made for the first time as a listed company. A dividend of half a cent a share will be paid in December 2010, making a total, fully imputed dividend for the year of one and a half cents. That represents a distribution percentage of 49% of after tax profit and a gross dividend yield of 7.1% based on the current share price.

Directors

Taking a look at the Board, we are delighted to have among us one of Australia’s experienced and respected direct selling executive, Nigel Sinclair, who joined the board as a director in August last year. Nigel is on the board of the Australian Direct Selling Association.

In December 2009, long-standing director Alan Stewart was appointed to the newly-created position of Deputy Chairman. Alan has provided enormous support to me and the board over many years and I am delighted he agreed to accept this new role.

In May this year the company’s Vice President Asia Pacific, N H Chua, was appointed as an executive director of the company. Malaysia-based Mr Chua has worked side-by-side with me for 21 of the company’s 26 years to drive the group’s development through direct selling channels in Asia. Mr Chua is highly regarded for his ability to develop leadership and establish successful direct selling infrastructures in Asia. With Alan, Nigel, N H Chua, fellow director Max Parkin and myself, I believe New Image has a well-balanced and highly experienced board. It is strong on governance and has the policy settings and strategies to carry New Image forward to reach the ambitious goals we have set for the future.

Following the departure of Chief Executive Stephen Lyttelton on October 1, the chief executive responsibilities have been merged in with my position. As executive chairman, and with N H Chua, I am responsible for the group’s international direct selling activities. With the majority of the group’s annual revenue being earned overseas the company’s head office functions are focused on supporting its international distributors. We have a strong senior management team to maintain other head office functions.

Review of Operations

Reviewing our operations, I am happy to report new operating offices opened in Thailand and Cambodia this year, increasing our market presence to 12 countries. Those countries include New Zealand, Australia, Malaysia, where we both have a regional and country office, Indonesia, Singapore, Philippines, Taiwan, where we have three offices, Hong Kong, South Africa, and Japan.

Full year NZ dollar revenue for Taiwan showed 16% growth (or 33% growth in local currency) to $32.5 million. However, Malaysian revenue of NZ$35.5 million was 37% down (or 28% down in local currency) on the previous year. Taiwan and Malaysia made up approximately 83% of the company’s revenue.

In Malaysia there has been some unauthorised discounting into retail stores of the lead Alpha Lipid LifelineTM product. We have moved swiftly to tackle this and now, together with the launch of New Image’s enhanced weight management product and programme, we anticipate Malaysian revenues will return to growth.

New Image Group has three Auckland-based production and distribution facilities:
  • At Avondale, we have a specialised dairy-registered powder blending and packing plant. This unit packs all of our the direct selling product range, the infant formula range and contract packs for other major New Zealand retailers.
  • At Penrose, we have a liquid manufacturing plant for the production of COL+ and tableting facilities. This plant is of pharmaceutical grade and it is where the key piece of innovative technology, a high pressure processing plant, has been installed.
  • At Mangere Bridge, as well as the head office, we also have a warehouse facility.
Our strategy to further invest in our own production capacity has seen a $1.3 million upgrade of the Avondale dry powder blending plant and the addition of the latest high-tech, automated can filling line with gas flushing.
This upgrade, together with the restructuring of the brand sales marketing division has resulted in substantially increased forward orders for our fortified infant formula product range. New Image is in a fantastic position to meet the demand from Asia for infant formula from New Zealand. Not only can we produce it in time lines considerably lower than the current industry standard, but we can offer our clients a service from brand concept to market ready product, canned, labelled and meeting compliance obligations.
As a result we are experiencing increasing demand from numerous international private label customers.

Innovation: New Product Development

New Image continues to be at the forefront of innovation in the sector. Our data shows us there is increased demand from Asian communities for nutritional and dairy-based products from developed world food sources.

From our in-market research, three product categories have been identified for our new product development focus - immunity, weight management and skin care.

We have expanded our in-house R&D capability to seven scientists. Their focus is on accelerating the development of a unique range of our next generation products based on colostrum and particularly its benefits related to adult stem cell stimulation.

A recent addition to our scientific team, Dr Gill Webster, is an internationally renowned immunologist and is assisting in enhancing the existing range of immune-related products as well as new biologic product development, leading the growing trend away from management of disease to restoring the body’s ability to optimise its functionality on prevention.

We were pleased in August to receive full patent protection of our unique bio-active delivery system, which is an integral feature of our top selling Alpha Lipid LifelineTM fortified breakfast beverage. Other patent applications are pending in the stem cell-enhancing area and around colostrum extracts.

During the year, in Taiwan, the company successfully trialled the patented sleep enhancing milk product, called Sleeptime, in association with biotechnology company Somnaceutics. Production in New Zealand is now being ramped up. More DNA-identified cows are being added to the special dairy herds that produce the milk containing a high level of sleep-enhancing peptides that are used for this natural sleep facilitating product.

Acquisition of skin care company Living Nature

A timely opportunity has arisen for the company to take a 50.01% controlling shareholding in Living Nature Limited. New Zealand-based Living Nature has led the world in developing natural, safe and effective skin care products for more than 20 years, using unique New Zealand bio-active ingredients.

Living Nature has a modern, highly specialised manufacturing plant based in Kerikeri. Living Nature has the production capacity for substantially increased sales, including a new and significantly expanded New Image Bio-Rejuv skin care range, containing colostrum and sold through our direct selling channel. Living Nature has strong growth potential in both New Zealand and Australia and currently sells its own range through third party distributors in the United Kingdom, United States, Australia and throughout Europe. There is also the potential for increased sales in Asia, supported by our own established contacts in the region.

The redevelopment of the Living Nature range, together with new marketing and sales initiatives, including the introduction of technologically advanced display units and a soon-to-be-announced new promotional strategy, will strengthen Living Nature’s growth. These activities, together with the support of New Image, will make the Living Nature acquisition an exciting one and add $6 million plus to our annual revenues.

Social media tools

We are currently trialling new online technologies to accelerate the speed at which we can open our new country markets. The application of social online media to support our direct selling distribution channel is also being embraced. A global search is also underway to identify and implement the most advanced direct selling, geneology tracking software system to support our growth aspirations.

Omegatrend

You may have noted a media story recently about the Australia’s Fair Work Ombudsman investigating Omegatrend. We met in legal chambers recently to enable the facts to be clarified surrounding the financial affairs of Omegatrend International while under New Image Group ownership.

This has been a protracted affair since New Image bought Omegatrend from an insolvency accounting firm and discovered subsequently the full extent of its financial problems and its dysfunctional business model.
As shareholders you may know about this dispute and the Board has again signalled in the Group’s 2010 Annual Report that it does not believe that the claim is with foundation and no provision has been made.

Outlook

FY11 Q1 revenue results
FY11 first quarter revenue is 9% down on the first quarter for last year, with Taiwan 14% ahead and Malaysia 32% behind. For New Zealand and Australia, I am pleased to report that revenue for the quarter has lifted by 27%, which is a turnaround from previous years. Revenues for this period are the highest for Australasia in the last decade.
Note revenue for the first quarter for Malaysia was influenced by the Muslim Holy Month of Ramadan and October’s sales to date are 30% ahead of the previous month. The brand business, made up mostly with infant formula, is 30% ahead.

There are several key factors which give the board confidence to anticipate a reasonable lift in revenues and profitability for the year to the end of June 2011. These include the opening of new country markets, increasing demand for our infant formula range, expanding manufacturing capabilities, growth through acquisition as evidenced by our Living Nature purchase, growing consumer confidence generally and the recently revised GDP forecasts of 4% to 8% for the group’s main Asian markets.

The strength of our science capabilities also gives us a competitive advantage to develop and market a high value-added product portfolio. Profit improvement strategies to identify cost savings and other operational efficiencies have been implemented and are achieving sound results.

The previously announced proposal to float the company’s Malaysian subsidiary on the Malaysian stock exchange is progressing with the potential for the float to incur in the next financial year. The float is designed to meet the strong desire of distributors in the region to invest in New Image.

Brand and third party manufacturing sales look set to continue their growth path through FY11. There are good prospects for the company’s fortified infant formula range, nutriceutical supplements and COL+, sold now through wholesalers in China and other East Asia markets.