The Latest Insight from Ascendant Partners, Inc.





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The Organic Food Industry

Opportunities and Challenges in the Organic Food Industry

In our last issue, we shared with you our view of the agribusiness and food production supply chain and the drivers of value. In this issue, we will discuss how the organic and natural food industry has evolved and the opportunities and risks in the organic and natural food industry supply chain. In addition, we've highlighted several transactions in the organic and natural food supply chain. The organic and natural foods industry has experienced phenomenal growth due to several factors.
 
Ascendant Insight.


The challenge and opportunity for the industry will be continuing to grow through reaching more consumers and engaging those consumers more often, what is often referred to as sales velocity. Companies will also have to ensure necessary and consistent supply.  As  companies and retailers look to organic foods, they will also look for ways to lower costs and compete on price to win customers which could lower overall industry margins. Others are looking at ways they can increase their presence upstream or downstream in the supply chain. Gaining a secure supply or creating an identifiable brand may be important to remain competitive in the market. The industry supply chain tends to lag with demand as ingredient suppliers struggle to find producers who can ensure adequate supply. Inadequate input supply has affected companies who use almonds in their products over the last year as the California drought impacts production.  The price spread of organic and conventional corn also reflects tight supplies with organic corn trading at 2-4x the price of conventional corn prices.

Through the years, Ascendant has had the pleasure of helping several companies that provide three examples of companies addressing the opportunities and challenges in the industry supply chain. We have worked with a poultry processor that integrated to the consumer with a brand that answered the consumer needs for an antibiotic free and vegetarian-fed chicken product. By moving from unbranded to branded, the company was able to grow margins and increase volume. An organic private-brand milk company is currently working to secure land for producing organic milk. By securing the land, this organic milk company will be able to better ensure a supply that meets organic standards which has been difficult as dairy producers hesitate to make the investment in organic dairy herds with limited organic forage production. Finally, we've worked with a non-GMO sorghum processor that secures product through grower contracts ensuring its milling facility will have enough product that meets its customer's stringent product standards. Processors who aren't wedded to a brand and can meet the demanding customer qualifications is an integration opportunity away from the retail shelf space. Further, steps to insure compliance with organic or other industry standards serves as barrier to entry for those who believe in the organic food industry. 
 
From our offices in Denver, we have had a front row seat to much of the innovation and evolution occurring in the industry. We look forward to following this evolving industry and helping its constituents prosper. Opportunities await for companies that can successfully navigate consumer trends while simultaneously avoiding the risks of a fast-evolving industry.

Transaction Profiles.

This quarter's transaction profiles showcase several organic, natural or "better for you" companies including Noosa Yoghurt, The Hershey Company, and Enjoy Life Foods. Several of these transactions involve strategic buyers acquiring companies to position themselves with the changing consumer preferences. In the case of Noosa Yoghurt, a private equity firm acquired the company.



Valuations remain strong in the new year for well-run companies, that address identifiable trends, and have a track record of growth as investors look to deploy capital. CEO confidence has improved and small-business optimism has reached its highest level since October 2006. Trends across all industries bode well for companies seeking capital and the agribusiness and food industries are no different.

is Acquired by Advent International - November 2014

Deal Terms: Undisclosed
                        $75MM in Sales in 2014


Noosa Yoghurt, a Bellvue, Colorado company, was acquired by Advent International, a Boston private equity firm. Noosa Yoghurt offers an excellent example of a company that has experienced tremendous growth and has reached a point of needing additional capital to reach a larger geography and grow their product lines. Advent International is a large private equity group with experience investing in and growing consumer products groups. Noosa has experienced tremendous growth in its five year history and in 2014 announced a $5MM plant investment to expand on its 5,000 store distribution.

 & Krave Jerky - January 2015

Deal Terms: Undisclosed

While the deal terms have been undisclosed, some have speculated Hershey purchased Krave Jerky, its first purchase outside the candy aisle, for $200 to $300MM. Not bad for a four year old company started by winemaker in search of a convenient protein snack during his marathon training. The acquisition is important for Hershey as it will allow them to enter into a new food category, meat snacks, that is growing at a healthy 10% or more per year. Krave is coming out on the other side of an investment similar to Noosa as Alliance Consumer Fund, a consumer product investment fund,  invested in Krave in December 2012.

 & Enjoy Life Foods - February 2015

Deal Terms: Undisclosed
                        $40MM in Sales                      
Mondelez International acquired Enjoy Life Foods as it works to restructure its company which included spinning off its Kraft Food business in 2012. Mondelez, a global snack-food company, sought Enjoy Life because of its gluten-free and non-GMO better for you snack-food offerings that converge with the overall consumer trends of moving to healthy snack-food choices. Enjoy Life, with $40MM in sales, offers Mondelez good growth potential as it enters the allergen-free category, which according to Mondelez and AC Nielsen has grown at 30% annually.

Earnings Spotlight.


The earnings spotlight highlights several companies in the natural food, commodity processing, and protein industries.

 

WhiteWave Foods (WWAV) - WhiteWave reported earnings for its year ended 12/31/2014. Revenue for the year, including and excluding acquisitions, grew 35% and 12%, respectively. Its organic milk group grew 12% in Q4 and despite tight supply which is expected continue in 2015. The company sees 2015 results as similar to 2014 with low double digit revenue growth supported by over $300MM in capital investments.     

 

Boulder Brands (BDBD) - The company continued to be impacted by inventory re-balancing and declines in its Smart Balance business. Looking to 2015, the company hopes to position it's Smart Balance spread as higher oil spread while its competitors lower their oil content, which the company believes will appeal to current consumer trends. Additionally, the company looks to increase the distribution of its frozen food lines, Udi's and Evol. 

 

Treehouse Foods (THS) - 4Q results disappointed the company as an unexpected inventory reduction from one of its mass merchant customers impacted results. For 2015, the company continues to look for acquisition opportunities in the better for you snacks, asceptic and recart soup, and packaging technologies. 


ADM (ADM) - ADM's 4Q results were strong with 9% ROIC from 6% in 4Q 2013. ADM continues to reshape its business as it intergrates the Wild acquisition and completes its cocoa and chocolate sales. ADM sees a shift in customer needs and responding by position itself to increase it's pace of innovation and ingredient R&D activities.

Bunge (BG) - Bunge 2014 results were similar to 2013 with lower operating income in the agribusiness division offset by higher operating income in sugar and bioenergy business. Looking to 2015, the company sees favorable results in the agribusiness and sugar and bioenergy businesses as increased grain flows and Brazilian regulation support growth.

The Andersons (ANDE) - Ethanol margins helped the company deliver record earnings in 2014. The Andersons also purchased Auburn Bean & Grain during 4Q. With locations in Michigan, Auburn adds approximately 18MM bushels of storage capacity. 
  

 
 

 
Tyson Foods (TSN) - The chicken segment continues to provide robust earnings for Tyson's Q1 2015 results. While beef, on the other hand, continues to struggle with high consumer prices and low supply. The Hillshire integration continues on track and the company was able to increase volume and prices for its prepared food segment during the quarter.

Hormel (HRL) - Sales increased 7% to $2.4B in Hormel's Q1 2015 results. Management increased their annual guidance to investors because of their strong Q1 results. The Jennie-O Turkey segment generated an impressive 56% growth in operating profit due favorable turkey prices, lower input costs, and increased sales of their value-added product lines. Results were also helped by better than expected hog supplies from the mild winter as the inventory recovers from PEDv.

Sanderson Farms (SAFM) - Similar to Tyson, the chicken business helped lift Sanderson's Q1 earnings. Near record Georgia dock whole bird prices and renewed demand from the food service sector drove results fro the chicken segment. The Palestine facility is in production and expected to be full capacity over the next year. They have also announced plans for a 1.25MM bird per week big bird deboning facility in St. Pauls, NC. 

 
 
Thank you for allowing us a moment of your time this quarter. If you would like to discuss this or other topics or if you have suggestions for future issues, please don't hesitate to reach out to us. Our goal, as always, is to add value for you. Any replies will go directly to Ascendant.

- The Ascendant Partners Team