Diamond Foods of US needs to acquire in healthier snacks outside nuts
- February 03, 2009
||FY profit forecast announcement, January 2009
||candidates include Glisten (UK), The Nut Company (Holland), Bakalland (Poland)
||Diamond Foods Inc (USA), no.2 domestic packaged nuts producer
||public shareholders (Glisten); Pfeifer & Langen (The Nut Company), founders (Bakalland)
||continued growth momentum through European expansion
||acceptable valuation, timing, margin pressures
||Diamondâs US market share is 6,5% in nut snacks (Emerald) and 25% in popcorn (Pop Secret)
Diamond Foods has emerged from obscurity to be the fastest âgrowing packaged nuts producer in the US, and the no.2 player in that market after Kraftâs âPlantersâ. A walnut growersâ marketing co-operative in California, that went public in 2005, the groupâs sales have tripled in the last decade. Its portfolio and sales channel diversification in 2008, however, suggest that Diamond is over-investing in the US market; overseas acquisitions could make more strategic and financial sense for the group. There are plenty of âbetter-for-youâ snack producers for it to acquire, in Europe alone.
Before 2004, Diamond was a sleepy producer of culinary walnuts and other nuts, with sales equally split between retail and non-retail customers. With the acquisition in that year of Emerald Snacks, and the subsequent purchase of Pop Secret in 2008, retail sales have jumped to 75% of the groupâs total; snacks alone are to constitute 25-30% of total sales in FY 2009.
Overall, Diamondâs retail sales have booked a CAGR of over 20% in last five years, with the top line forecast to hit US$ 600 mln in FY 2009. At the same time, driven by the segment growth of retail and snacks, the groupâs EBITDA has grown even more sharply, reaching 6% of sales in FY 2008; with the addition of the high-margin Pop Secret business, that margin should exceed 10% in 2009. So Diamond's non-organic growth potential is strengthening.
So far, we believe that Diamond is placing too much emphasis on further growth in its domestic market. Its US$ 190 mln cash acquisition of Pop Secret in 2008, from General Mills, has broadened the portfolio and generated growth, but microwave popcorn is a clear departure from the groupâs mission of healthier snacking, as well as from selling more of its growersâ nut harvests.
Furthermore, in terms of sales channels, Diamondâs penetration rate already exceeds 80% of US supermarkets. The group is now pushing hard in other channels, like airlines and the non-scanning value channel; but is the âgame worth the candleâ in terms of growth potential and profitability in those markets ? Does Diamondâs increased marketing spend get rewarded through them ?
In our view, given the trajectory of Diamondâs portfolio mix and business model in general, the groupâs strategy should focus on foreign markets. Diamond is the biggest US exporter of walnuts to Europe and Pacific Rim, and its international division contributes 20% of total sales. The basis therefore exists for the group to expand more aggressively overseas, in particular through acquisition in Europe.
On top of sales momentum, Diamond has the balance sheet strength to justify further acquisitions. Itâs true that the Pop Secret purchase left the group with US$ 200 mln in net debt in Q1 2009. However, with FY 2009 EBITDA set to double to over US$ 60 mln, the net debt multiple will still be modest; besides which, some companies are now cheap to buy.
What's more, Diamond's debt headroom is heightened by the quality of its EBITDA. The consumer trend to healthier snacking is on the group's side; plus half of Diamondâs branded sales are in culinary nuts, which are counter-cyclical when the consumer trades down to home preparation.
There is no shortage of acquisition candidates for Diamond across Europe, where the trend for healthier snacking is at least as strong as in the US. In the UK, Glisten is a fast-growing company, with a natural snacks division that includes the premium nuts brand Dormen. In Holland, The Nut Company is building a pan-European brand proposition, including the market leader in Germany, Ueltje. In Poland, Bakalland is the market leader in culinary nuts and dried fruit, and has a premiumisation trend.