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| Jenny Ruth's Column | | For archival copies of Jenny Ruth's Column click here... | | | | 15th October 2006 | According to vending machines franchisor VTL Group, it is on the brink of transforming itself from a tiny company into a medium-sized one.
Its annual report says that, once it exercises an option to swap a US$6.6 million (NZ$10 million) convertible note into a controlling stake in US associate All Seasons, its annual sales will jump from $48.5 million in the year ended June to almost $300 million. It expects to exercise the option this year, although it could wait until January 2012 to do so.
All Seasons is the fourth largest vending company in the US but it has been making losses since VTL bought into it in late 2004. It was largely responsible for the $9.8 million net loss VTL reported last year, and that was after a $9.2 million one-off gain from selling its existing US operations to All Seasons.
All Seasons contributed a further $3 million loss to this year’s result, dragging down VTL’s overall net profit to $2.3 million. Since VTL’s stake is 17.1 per cent, that implies All Seasons net loss for the year was nearly $18 million.
All Seasons has been managed by co-founder of VTL John Hotchin since June last year. VTL chairman Gary Stevens, who also sits on All Season’s board, says the US company has been profitable at the EBITDA (earnings before interest, tax, depreciation and amortisation) level for several months. It is selling six franchises worth more than US$250,000 each a month and will make a net profit after tax in the current year if current progress continues, he says.
Because All Seasons is a private company, full details of its financial position aren’t available but it seems safe to assume it is extremely debt heavy. The latest information in early October was that it had repaid US$5 million in bank loans and expects to repay a further US$4 million in December.
Just last month, VTL’s stake was diluted from 18.9 per cent when All Seasons raised new equity from selling a third party a 10 per cent stake.
And back in February, VTL provided All Seasons’ banker with a US$1.5 million letter of credit as additional security and another shareholder provided another $1 million letter of credit. It was also revealed back then that each of Hotchin and the other VTL co-founder Mervyn Doolan’s private trusts held US$1.23 million of All Seasons’ debt.
Stevens says he isn’t able to give actual figures but once All Seasons sells its remaining non-core assets, "we will be very comfortable with the debt level – it’s something that the company can easily carry."
Since Stevens and Doolan gave a presentation at a conference to promote the new SciTech Index, which VTL has joined, VTL shares have taken flight. From trading as low as 47 cents in July, they had risen to $1.01 last week, giving the company a $30.8 million market capitalisation.
Even so, Stevens reckons VTL’s finance company subsidiary Nathans Finance is worth at least that much on its own. Certainly, Nathans is the only profitable part of VTL currently. The vending operations lost $8.7 million in the latest year while the finance company made just over $5 million.
A significant feature of Nathans’ activities is that it is lending to franchisees on long-term contracts but financing that by selling shorter-dated debentures and bonds, not a very comfortable position to be in at a time when three finance companies have collapsed.
Stevens says the company is working on a plan to both address this mismatch and to widen Nathans’ activities beyond the VTL group.
VTL has another problem which is likely to dramatically reduce reported profits. It sells franchises on six-year terms with a further six-year right of renewal and currently books all the proceeds upfront, rather than over the life of the franchise contract. Inland Revenue certainly disputes VTL’s practice and is reviewing VTL’s 2002, 2003 and 2004 accounts.
In any case, new accounting standards, which VTL has to adopt by the year ending June 2008, mean it will have to change to booking profits over the life of its franchise contracts.
In Stevens’ view, VTL’s growth projectory should be sufficient to take care of that problem. | | You can buy a transcript of the interview behind this column ($5) or subscribe to a year’s worth -- 48 interviews ($100) by emailing: info@jennyruth.com | |
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