I spoke to Todd Woloson, managing director at Greenmont Capital, recently to get a sense of the current investment climate for nutrition companies. Greenmont is a well-known and well-regarded venture fund staffed by industry insiders and focused on wellness and sustainability. Woloson comes to the organization after many successful stints as an entrepreneur, most recently as co-founder and CEO of IZZE Beverage, the maker of all-natural sparkling fruit juices sold to PepsiCo in 2006. NBJ reports more extensively on the complex topic of finance and investment in our current issue.

NBJ: How do you view the current investment landscape?

Todd Woloson: The current environment for early-stage funding in this industry is confused. We’ve been a little bit out of cycle for awhile now. I look at the performance of two stocks—Walmart and Whole Foods—during this downturn. Smart money went long Walmart and short Whole Foods, and smart money was wrong. This is great news for us. The natural & organic consumer is making decisions beyond trade-up or cache. These are real lifestyle decisions, and that leads to a sticky consumer.

NBJ: Is deal flow holding up well?

TW: We’re clearing through the questionable inventory right now. The good companies were able to weather the storm—mostly out of market, with internal rounds of financing. We’ve been calling it a “Darwinian flush,” which is a little harsh but true. Struggling companies are going away. We’re coming more into balance with the market right now. Companies that did weather the storm well have a much more realistic understanding of the capital markets and are far more flexible about how they bring in new capital. We’re excited about the near future. Greenmont just closed on our second deal out of the second fund, with a couple more at turnsheet phase right now. We haven’t seen that in two years.

NBJ: What do you see for the growth prospects of potential investments coming out of the recession?

TW: Slower is the right way. I say that because I have a job, but just think of the Internet bubble going right into the housing bubble. The piper was never paid. You can’t go from one bubble to another and expect any notion of sustainability. Profitability and thoughtful growth are key components to any sustainability story. I kind of believe that the way we’re coming out of this feels right.

NBJ: How do you view current valuations in the marketplace?

TW: Our industry, on the branded side, is worth about 1.3 times sales in the long-term. In the run-up to this last market correction, stuff was going for 4-5 times sales. We were arguably more out of market then than now. We still look at about 1,000 deals a year, but we have to come in at the right time for this flood model to work. Venture funding is only good for a pretty thin sliver of the marketplace. We’re typically the first institutional investor and our typical exit is a strategic acquisition, but I’m hopeful and believe that market conditions are presenting a more viable IPO market. Sustainability is such a hot topic that we could see the public markets getting interested.

NBJ: Any recent industry deals outside of Greenmont that seem especially meaningful?

TW: Carl Icahn coming into Hain Celestial. I view that as big, smart capital moving into this space, which means there’s an increasing understanding that this is where the future lies.

NBJ: Where’s your focus going forward?

TW: Natural products are a stickier market than many predicted. It’s an information-based, logical progression. The more people know about what they’re consuming, the more they want to consume products like these. The best news of this market correction is that this thesis was proven out. To me, it’s fact now. At Greenmont, we’re interested in following this consumer adoption cycle. It starts with basic ingestibles, maybe even with the kids, then starts moving in and around the house, and pretty soon everybody will drive a Prius and have a little windmill on their roof.

Related NBJ links:

Current Issue: Finance & Investment in the Nutrition Industry

The Hain Celestial Group’s Irwin Simon Talks Acquisitions with NBJ

Uptick in Deal Activity Fuels Cautious Optimism for Buyers and Sellers

Hain Celestial Group reported fourth-quarter earnings this week, with net sales of $222.8 million and net income of $6.7 million. For the full fiscal year ended June 30, Hain earned $28.6 million on $917 million in sales. Irwin Simon, Hain’s President and CEO, attributed the company’s strong performance to sales momentum in North America and Europe, and improving consumption trends for healthy foods overall. According to company statements, Hain generated $18 million in sales from new products at Hain Celestial U.S., and recent acquisitions (Sensible Portions, Greek Gods Yogurt) position the company in high-growth categories with natural products complementary to core product offerings.

Wall Street responded favorably to the news, sending Hain’s stock up about 4%. Analysts also responded favorably to improved guidance from Hain for FY2011 by raising their estimates for sales and earnings per share. Hain upped its revenue guidance for FY2011 to $1.025-$1.05 billion, and earnings per share guidance to $1.24-$1.31.

NBJ spoke to Simon a few weeks ago in reporting our current issue on the finance & investment climate for nutrition companies. When asked about his company’s strategic response to the economic downturn, Simon said: “When the turndown hit a year and a half ago, we saw the consumer trading down and buying private label, so we knew we had to take our products to other classes of trade. Our model shifted to go out to more and more of the mass market. At the same time, we continued to work closely with Whole Foods on innovation, new products, and pricing to make sure there was value there. Whole Foods is our biggest retail customer today, so that was clearly important. There’s good growth among the mass market, good growth among club stores, and we are absolutely seeing growth come back in certain retail supermarkets.”

Two industry analysts would concur with this optimistic outlook. Scott Van Winkle of Canaccord Genuity sees reaccelerating growth for Hain. “I’m expecting much better sales and earnings performance over the next 12 months,” said Van Winkle. Andy Wolf of BB&T Capital Markets thinks the company’s recent moves in the U.K. will turn that business around to at least break-even status. “Hain is really well positioned to have a good turnaround in the next couple of years,” said Wolf. “The stock performance has lagged, but we think it could play catchup.”

Wolf also sees the investment in Hain by Carl Icahn—Icahn owns about 5.65 million shares representing about 14% of the company—as a way to bring more financial acumen to an already well-run company. We asked Simon about that investment from Icahn. “I think Carl Icahn is a smart guy,” said Simon. “He likes what we’re doing and likes our brands. I look at him as an opportunistic investor. This is one of his first forays into this category. I think he walked around Whole Foods, saw our presence there, and that’s what got him excited.”

NBJ tackles consumer research in our next issue, slated for publication in September. We’ll focus our critical eye on the modern wellness consumer, and strategies to best utilize research to meet a complex array of global consumer demands.

Related NBJ links:

The Hain Celestial Group’s Irwin Simon Talks Acquisitions with NBJ

2010 Healthy Foods Report

2010 Nutrition Industry Overview Archived Web Seminar

NBJ tackles the complex topic of finance & investment in the nutrition industry with our next issue, now on its way to the printer. As we digest all of the research and trending that surfaced in the reporting of that issue, expect some discussion in the coming weeks on the blog about such topics as holistic investing, moving upstream through the murky waters of deal flow, and the modern challenges of being a nutrition entrepreneur. Today, though, let’s talk about the equity markets.

I spoke to Scott Van Winkle of Canaccord Genuity and, on a separate call, Andy Wolf of BB&T Capital Markets to gain some visibility into smart money’s opinion of the road ahead for nutrition stocks. Excerpts from those conversations follow below.

NBJ: Let’s look at the major industry categories in nutrition and talk about year-to-date performance. How about natural & organic foods?

Scott Van Winkle: In general, healthy-living stocks have outperformed the market this year. Natural & organic has the best sector performance, up about 12%. These stocks didn’t start to come back until later in the cycle, but now they are beginning to reflect improved growth in the category.

Andy Wolf: Natural & organic is about 80-90% recovered, in terms of underlying growth trends. It’s really come back as a category. You can see it in the industry numbers and in the company numbers. There’s been a little bit of channel play, and you can still see some slack in demand at conventional stores, but that too is starting to show a rebound. The demand never went away for natural & organic, but in the recession, even dedicated users were worried about finances. Now most of them have made the budget allocation and returned to the category.

NBJ: And supplements?

SVW: Supplements are down about 12%, but the 40% move in NBTY improves that number dramatically. Supplements performed well last year with strong industry trends, and those trends persist, but investors lack faith. Strong category growth brings increased competition, and as we anniversary the jump in sales from swine flu, people expect a slow down. Vitamins were up 18% in October/November 2009. That kind of growth was obviously driven by the cold and flu season, in turn driven by swine flu.

AW: Supplements have had a multi-year run as consumers adopt these healthy lifestyle choices. People want to live better and feel better. Supplements also enjoy a countercyclical demand. As unemployment goes up and consumers lose more health-care benefits, more people use supplements as a substitute for doctor visits—which are down, by the way. It’s a prophylactic approach. Demand looks robust to me across all sales channels for supplements.

NBJ: What are you seeing for multi-level marketers (MLM) and ingredient suppliers?

SVW: Ingredients are up about 3% through the end of July. Last year, the farther down the supply chain you were from the consumer, the likelier you were to see your customers deload or reduce inventory. Ingredient suppliers had a tough time in 2009. There weren’t a lot of new product launches, and customers were cleaning out their inventories. There are signs of more aggressive ordering now, so the fundamental businesses are stronger than they were coming out of last year.

As for MLMs, they’re up about 5%. These stocks outperformed early, because their business was stronger on a relative basis. With weak economics, everybody buys less, but there’s more unemployment and more people looking for part-time work. In a weak economic cycle, more new distributors come online, even though their average sales level drops. Net-net, MLMs were less impacted by global economic issues.

NBJ: What about functional foods?

AW: Functional foods have really lagged. Why? Mix. Most functional products are sold through conventional stores, and demand hasn’t picked up as well in the mass market. I don’t see a real recovery for functional foods until the broader economic recovery is more firmly entrenched sometime in 2011.

NBJ: Looking ahead, where do you see the best performance and the biggest challenges?

AW: The big issue for 2011 is converts. For 20 years now, consumers have been moving, in one way or another, from conventional to organic. The demand curve is still there, but all of the core customers have already come back. Whole Foods Market and other retailers are seeing new customers come into the channel, but for that to continue, well, the economy will have something to say about that as well.

SVW: Retailers are in a very good position in general. They are demanding price concessions from suppliers, and suppliers are giving them. Whole Foods Market and Vitamin Shoppe are in good position, thanks to this competitive advantage over suppliers. Over the next six to 12 months, I think the MLM sector is going to perform quite well. Natural foods will perform well. Supplements will tread water due to Wall Street’s impression of decelerating growth.

Related links:

Quick Take on NBTY Acquisition

2010 Healthy Foods Report

2010 Direct-to-Consumer Selling in the Nutrition Industry Report

There is a very clear takeaway from the cover story in September’s Consumer Reports (CR): Modern media thrives on fear. Modern media thrives on any number of heightened human emotional responses, but fear is one of the biggies. Add in a health scare, and you can (presumably) sell lots of magazines.

In a piece titled, “The 12 Most Dangerous Supplements,” CR profiles several adverse outcomes from consumers of supplements who ingested tainted or overhyped products that sent their bodies into dramatic disarray. One man in Signal Mountain, Tenn. took a general health supplement overloaded with selenium and his fingernails fell off. A woman in Bartlesville, Okla. took colloidal silver to fight Lyme disease and her skin turned blue. A man in Janesville, Wis. took Hydroxycut to lose five pounds and developed acute hepatitis. These are tragic outcomes, worthy of spotlight, and certainly worthy of a healthy dose of fearmongering to prevent repeat occurrences.

What seems less worthy is the prominence of this coverage, and the sure-to-become-viral nature of its impact. My father just emailed me a link to the story this morning, and the issue has barely hit the stands. Watch the nightly news this week, and you’ll have to fight back an impulse to clear out your medicine cabinet.

From my perspective, what’s most newsworthy about the news from CR is the immateriality of the supplements in question, a so-called “dirty dozen.” Colloidal silver? Kava? Coltsfoot? These are not mainstream supplement products. This is, yet again, a bright spotlight choosing to shine on the dark alleys and niche markets of the industry.

Here at NBJ, we thrive on research and quantitative results to fundamentally drive our colorful, insightful and qualitative commentary. In fact, CR cites our sizing of the overall supplement market ($26+ billion in 2009) in the first paragraph of the story. Here are a few more stats:

Top 3 Supplements by 2009 Sales Volume
Multivitamins, $4.8 billion
Sports powders & formulas, $2.5 billion
B vitamins, $1.2 billion

Dirty Dozen Supplements by 2009 Sales Volume
Kava, $20 million
Bitter orange, $20 million
Yohimbe, $10 million

The other nine are too small to track independently, so we lump them into an Other Herbs & Botanicals bucket.

To its credit, CR has a serious and important mission to protect consumers from the likes of colloidal silver and other supplements with dangerously inaccurate label claims. I do not mean to disparage CR’s right and duty to report a story like this. What I do want to suggest, for CR and the rest of the modern mainstream media to hear with wide-open ears, is this: The supplement industry is too big and too nuanced now to paint with one coarse brush. There is earnest and important research happening around the 12 least dangerous supplements, whatever those might be, and reporting of that nature might be more useful, though less frightening, to a population of consumers looking to stay healthy in a broken health care system.

Let’s talk more about the $2.5 billion market for sports supplements, which CR rightly highlights as more prone than others to adulteration. And let’s talk more about the supplements CR profiles as popular and “likely” safe. There are some material sales levels at play here, so I’ll close with a few more stats:

CR’s 11 Supplements to Consider by 2009 Sales Volume
Calcium, $1.2 billion
Cranberry, $78 million
Fish oil, $976 million*
Glucosamine sulfate, $803 million**
Probiotics, $527 million***
Psyllium, $89 million
Pygeum, $7 million
SAMe, $123 million
St. John’s wort, $57 million
Vitamin D, $425 million

*NBJ tracks a collective fish/animal oil.
**NBJ tracks glucosamine with chondroitin.
***CR lists lactase and lactobacillus, which NBJ does not track independently.

As always, NBJ welcomes your comments below.

Related NBJ links:

‘09 Sales Growth Sputters in Every Nutrition Category as Economy Takes its Toll

2010 Nutrition Industry Overview Web Seminar

Supplement Research

I spoke with Scott Van Winkle of Canaccord Genuity this week to parse the pending acquisition of NBTY, Inc. by the Carlyle Group, an asset manager based in Washington, DC with more than $90 billion invested in companies and real estate across the globe. NBTY is a leading manufacturer and marketer of nutritional supplements, with 22,000 products sold worldwide under a host of brand names, including Nature’s Bounty and Puritan’s Pride.

The deal has support of NBTY management and is expected to close late this year. Carlyle offered $55 per share, a significant premium over the current stock price, for a total transaction cost approaching $3.8 billion. Or so I thought. “The irony is that it’s really not much of a premium to the stock price from April of this year, when NBTY traded at $51,” says Van Winkle. “It’s only 8% above the three-month high for the stock.”

According to Van Winkle, Carlyle’s valuation of NBTY on an absolute basis is not that expensive at 8.6 times EBITDA. Relative to peer companies, the valuation places a slight 5-10% premium on NBTY compared to market prices for Herbalife, NuSkin and a host of supplement companies. The bottom line, however, is actually how little such a big deal says about the state of the nutrition industry.

“This is a financial deal,” says Van Winkle. “If you look at all the businesses you can buy, and you’re going to use leverage, you need cash flow to service that debt. NBTY generates a ton of cash and has done so very consistently over the years. They’re a market leader, so this is a very easy deal at this valuation to justify financially. That’s the game here. This isn’t a strategic play. It’s a financial investment.”

I did ask Van Winkle about the finance & investment climate across the broader industry, a topic NBJ will explore in detail with our next issue, and he hinted at a general lack of confidence from investors in supplement companies. “We are seeing lower valuations,” says Van Winkle. “Back in spring 2009, supplements started growing 10% in the mass market, where NBTY does business. Any time you have a big acceleration in growth that’s hard to justify, you want to discount that level of growth.”

Related NBJ links:

June/July 2010: Nutrition Business Overview

2010 Nutrition Industry Overview Web Seminar

Is New Product Development Finally Picking Up Steam in the U.S. Nutrition Industry?