The Doppler Report Announces That It has Initiated Investment Coverage of:
WTAA INTERNATIONAL, INC. (“WTAA” on OTC-BB)
1027 South Rainbow Blvd, Unit 391, Las Vegas NV 89145
Phone: (877) 280-WTAA Fax: (800) 676-0067
Web Site: www.wtaa.com E-Mail: wtaa@jupitercapital.com
WTAA International, Inc. (“WTAA” on OTC-BB) was created for the purpose of exploiting and developing the enormous growth opportunities presented in the bottled water and licensing industries in North America. Bottled water is a huge business, with sales in the United States last year of approaching $6 billion. However, product licensing is by far bigger, representing about $120 billion in sales.
WTAA (pronounced “WA-TAH”) is bringing the concept of licensed products, images and logos to the small bottled water industry (www.wtaa.com/Products/label.htm). Rather than spend millions of dollars and years of time building a national brand, the Company will use icons and images that everyone knows, combined with co-packaging agreements to immediately serve markets coast-to-coast.
To be successful and profitable, WTAA International is focused on becoming one of a handful of water companies that operates throughout North America. However, WTAA does not intend to get bogged down by trying to sell its water directly to every major retail chain. Rather, WTAA believes that its real customer is the much more concentrated nation-wide broker-distributor network, one that can be effectively handled with a small number of sales people intent on building relationships rather than simply pushing products.
WTAA International also differentiates itself from its competitors in that it only sells purified water, not spring water, so it is not burdened by huge shipping costs over great distances as is the case with brands like Evian and Perrier. Also, because there is excess manufacturing capacity readily available throughout North America, WTAA will, with few exceptions, sub-contract to co-packers for the bottling process.
Another key segment of WTAA International’s strategy is the belief that a small package program is best combined with a strong home and office bottled water program that brings higher margins and greater long term impact to the value of the company. Accordingly, the company plans to acquire and consolidate existing “home and office” bottled water operations in strategic markets throughout the Sun Belt States and Western Canada.
We are comfortable that the company’s management team is certainly capable of implementing WTAA’s business plan. Steve Nickolas, WTAA’s Chief Marketing Officer, and a twenty-year veteran in the bottled water industry, formed APANI Bottled Water Company, Inc. in Phoenix during the 1990s. He took the company from start-up to $15 million in annual sales in just two years, showing the demand for custom bottled water programs, especially those using licensed images.
SOME INTERESTING FACTS ABOUT THE BOTTLED WATER INDUSTRY
Bottled water has the distinction of being the fastest-growing segment in the North American beverage industry, with total sales during 1999 in the US and Canada of approaching $6 billion. During 1999, consumption in the United States averaged 15.5 gallons per year per person…compared to Italy, with the highest per capita consumption in Europe, which averages 31.5 gallons per person per year.
According to Beverage World’s “1999 State of the Industry Report”, bottled water sales are growing at an annual rate of over 12% per annum, more than four times the growth rate for soft drinks. Beverage Marketing Corporation, a respected industry research company, projects North American bottled water market value of $10 billion by 2004.
The North American bottled water industry is dominated by a handful of multi-national players. The five largest companies control 70% of the market. The remainder of the market consists of a large number of highly-fragmented small, regional players offering about 1,900 different brands of water.
Bottled water products are sold through a variety of distribution channels, including grocery store chains, convenience stores, restaurants, vending machines and other retail outlets. Market research has shown that consumers tend to choose bottle water products based on convenience, image (brand identity) and price.
Only about ten companies are able to offer nation-wide sales, marketing and distribution of popular brands of bottled water. Of these ten, few have focused on the fastest-growing niche markets that are becoming more apparent as the industry continues to mature – such as licensing. Of all the bottled water firms in North America, WTAA is the only company using licensed images to market its products at this time. Licensing is a huge industry, with sales in North America totaling over $120 billion.
SELLING WATER CAN BE A VERY PROFITABLE BUSINESS !!
It’s hard to believe just how profitable selling water can be!
According to WTAA, selling small bottled water products in plain, ordinary containers typically yields gross margins of about 18% to 20% of gross revenues. However, when you add a licensed name or image to bottled water products (as WTAA International is doing), the gross margins jump to between 35% and 40% after paying the licensing fees and royalties. The costs go up only slightly (about five cents more per bottle), yet the custom label and packaging allows WTAA to price these products more along the lines of what the market will bear, rather than the traditional “cost-plus” approach.
The five-gallon home and office segment of the business is where the biggest gross margins are – typically 55% to 65% of gross revenues in a well-managed company, with profit margins in the range of 15% to 20%. Based on WTAA’s estimated sales of $32 million for 2001, that translates into EBITDA of $6 million for FY 2001.
WTAA IS COMBINING LICENSING AND CUSTOM LABELS TO DIFFERENTIATE ITS PRODUCTS AND ACHIEVE HIGHER MARGINS IN THE BOTTLED WATER INDUSTRY
Rather than go head-to-head with the big bottled water companies (Evian, Perrier, Naya and Suntory), WTAA’s strategy is to address niche markets using unique licensed images and customized package designs. By using licensed images from the entertainment industry (popular TV shows and movies) on its bottled water products, WTAA will move into the $120 billion licensing market (with much higher margins) as opposed to being just another company in the $6 billion bottled water industry.
By using licensed images, WTAA believes that its products will achieve immediate brand name appeal without the time and expense of developing its own.
WTAA International intends to follow the proven program of owning and managing numerous licenses and properties so as to provide retailers and customers with a variety of familiar images from which to choose. While no single license or image will appeal to everyone, most people have a favorite movie, TV program or entertainment property that they prefer. WTAA is simply applying the proven success of licensing to the bottled water industry which, up to this time, has not utilized this method of marketing products.
All of the company’s products and all of its support material will carry the name of its branded product, which is “WTAA”. Each custom bottled water label will feature the “WTAA Button” (www.wtaa.com/products/wtaa.htm), much like the familiar “Intel Inside” or the “Dolby Sound” logos. On every product and in all advertising / promotional materials, the WTAA logo will be clearly positioned so that the consumer will always know who manufactured the product and the company that stands behind it. This also happens to be the Company’s stock symbol, which was selected as the brand name because it is easy to remember.
Exclusive multi-year license agreements have been completed with Sony Pictures, Universal Studios, Viacom/Paramount, Global Icons, the U.S. Ski Team and others. There has been strong interest from national retailers in carrying these products. WTAA currently sells about 12 bottled water labels, and has the rights to sell products featuring “Dawson’s Creek” (a popular TV series with about 8 million viewers per week), “Star Trek”, “The Grinch”, “Woody Woodpecker / Team Gordon NASCAR”, “Rocky & Bullwinkle”, “The Flinstones Viva Rock Vegas”, the “Universal Monsters”, the “Hollywood Sign” and the famous “Walk of Fame”, with negotiations underway on many other licensed properties.
Initially WTAA plans to produce its small packaged products thru co-packaging arrangements with a variety of bottled water producers. Given the abundance of small companies who are producing at levels well below their capacity, WTTA International has successfully negotiated attractive co-packing fees. The other advantage of this approach is that it gives the company production in different parts of the country
Such arrangements are already in place in Southern California, Grand Rapids MI, Dothan AL, Santa Ana CA, Phoenix AZ and Calgary (Alberta). Other co-packaging relationships will be added on an as-needed basis.
In pursuit of higher margins, WTAA is taking very specialized and collectable bottled water products and pricing them based on “what the market will bear” rather than the cost-plus basis used by everyone else. By spending a little extra money to customize the package (special tops, shapes, colors and labels only add about five cents to the production cost of each bottle) and featuring popular entertainment industry images on the labels, WTAA believes that it can price its bottled water products at a hefty premium to generic products.
This segment of WTAA International’s business is projected to generate sales of $18 million in fiscal 2001. From these sales, the Company estimates a gross profit of over $5.7 million and a net profit of over $2.7 million.
THE CALIFORNIA BOTTLING CO. (CBC) ACQUISITION
IS VERY POSITIVE FOR THE FUTURE GROWTH & PROFITABILITY OF WTAA
WTAA International is in the process of finalizing negotiations for an option to acquire California Bottling Company, Inc. (www.CBCwater.com/), the largest contract producer of bottled spring water in California. CBC’s management team has grown revenues by over 30% per annum during the last three consecutive years, and earnings are well above industry averages. CBC clientele includes Albertson’s, K-Mart, Wal-Mart, and Shasta Beverages, among others.
Completion of the California Bottling acquisition will have a dramatic impact on the financial future of WTAA and its ability to qualify for the NASDAQ Small Cap market. Not only will WTAA benefit from CBC’s revenues and earnings, but also production costs will be reduced by a minimum of 25% on WTAA’s small package products. The CBC acquisition will also provide WTAA with a key strategic position within the highly prized and populous California market.
For 2001, WTAA International projects that CBC’s gross revenues will reach $12 million to generate a gross profit margin of $2.8 million, EBITDA of $2 million and an after-tax profit of $0.75 million.
HOME & OFFICE 5-GALLON BOTTLED WATER PRODUCTS ARE VERY LUCRATIVE
The home and office delivery system was the primary source of bottled water consumption up to the time of the introduction of small package products in the early 1990s. Since then, this segment of the industry has had considerably slower growth than it experienced in the 1980s. At the same time, there has been tremendous consolidation of the medium to large bottled water companies by large multi-nationals such as Perrier, Suntory Water Group and US Filter.
The 5-gallon home and office water industry is dominated by a handful of multi-national firms and a large number of small and medium-sized family-owned businesses with sales of less than $10 million per year. This industry is deeply fragmented, and offers extraordinary opportunity for consolidation.
A number of the small and mid-size home and office water businesses have turned to co-packaging as a means of filling production capacity and increasing their overall profitability. With little emphasis on building their own brand identity through sales and marketing many of these firms struggle to find a place in the market that provides them with long-term growth potential.
WTAA International has identified numerous acquisition targets that remain in the small to medium-sized home and office market, particularly in the Southwestern United States and Western Canada. We understand that the company has developed a shortlist of about 65 targets that meet the basic criteria:
· In business for 3 to 5 years.
· A customer base of at least 3,000 to 5,000 clients.
· Are profitable generating a positive cash flow or are on the verge of break-even.
WTAA is planning to acquire small companies with great fundamentals that are struggling in fragmented regional markets. By purchasing these firms and then consolidating administrative and accounting functions, WTAA can reduce labor costs and focus sales / marketing efforts to achieve greater local market penetration. Overall, WTAA believes that they can reduce the operating costs of these companies by 20% to 30% - a significant savings. Gross profit margins in this segment of the business are generally in the range of 50% to 65%, which will have a significantly positive impact on the bottom line of the company.
WHAT’S A FAIR VALUE FOR WTAA INTERNATIONAL ??
There are a few ways of looking at market valuations for publicly traded bottled water companies.
First, recent acquisitions suggest that the large multi-national water companies are willing to pay about 1.6x to 1.8x revenues when making strategic acquisitions.
Based on WTAA’s projected gross revenues of $32 million for FY 2001, that would suggest a potential market valuation on the order of $51 to $57 million (between $2.30 and $2.60 per share, based on 20 million shares fully-diluted).
Looking at the question another way, the International Bottled Water Association (IBWA) has reported that the average P/E ratio for publicly traded bottled water companies was 17.2x in 1998, and forecast to increase to about 20x this year.
Based on WTAA’s projected EBITDA in FY 2001 of $6.1 million, a 17x multiple suggests a market capitalization for WTAA International of about $48 million (roughly $2.20 per share).
However, at current prices ($0.53/share), WTAA’s fully-diluted market cap is only $11.1 million, representing a P/E multiple of about 4x, suggesting that WTAA is significantly undervalued relative to other publicly-traded bottle water companies.
MANY BIG NEWS RELEASES EXPECTED OVER THE NEXT FEW MONTHS
Based on the pace of business development to date and the market potential, management believes that the company will be able to provide investors with a steady flow of big news releases. Some of the announcements rumored to be made this fall are:
· Announcement of six new licensing agreements (all of which have strong market appeal) with a major film studio; we understand that the deals have been signed and paid for, but the announcement has not been made.
· Similar deals with at least two other big Hollywood movie studios.
· A preferred supplier agreement with Canada’s largest food stores.
· Completion of a licensing agreement with North America’s premiere toy manufacturer.
With all this in the works, can a deal to license Pokemon images from Nintendo be far behind?
Also in the works is a major financing (about $7 million) that will fund the cash portion of the California Bottling Co. acquisition, pay for advance royalties on licensing deals, initiate advertising and promotional campaigns, and provide working capital. We understand that WTAA has been in negotiations with GE Capital, Prudential, two private funds, and one of the large multi-national water companies. Management is very sensitive to dilution, and intends to do the financing in stages.
WTAA SHARE STRUCTURE & RECENT TRADING PRICES
Shares Issued & Outstanding: 13,660,224
Fully Diluted: 20,989,988
Trading Float: ~ 2.8 million
52-week Range: US$0.13 to US$2.88
Last Trade (September 5, 2000): US$0.50
According to recent SEC filings, WTAA’s officers and directors control (directly and indirectly) about 6.0 million common shares, plus an additional 300,000 preferred shares (convertible into common shares at a 10:1 ratio). Additional information on WTAA’s capital structure can be found in the latest 8-K report (http://www.freeedgar.com/Search/ViewFilings.asp?CIK=1102709&Directory=1072588&Year=00&SECIndex=103&Extension=.tst&PathFlag=0&TextFileSize=201270&SFType=&SDFiled=&DateFiled=6/12/2000&SourcePage=FilingsResults&UseFrame=1&OEMSource=&FormType=8-K12G3&CompanyName=WTAA+INTERNATIONAL+INC+%2FFL%2F)
WTAA has about a dozen market makers – about equally divided between major national brokerage houses and smaller, regional brokers. Listed on the OTC-BB in 1998, WTAA hopes to apply for a NASDAQ Small Cap listing in 2001, based on successfully financing and closing the California Bottling Company acquisition.
For Additional Information, please contact, Andrew Rockandel:
Jupiter Financial Services Inc.
Telephone: (877) 280-WTAA(9822) E-Mail: wtaa@jupitercapital.com |
