The consumers demand for raw& processed nuts products has stayed strong and grown in the past several years as indicated by companies’ sale volumes while the growth may be slowing down. Fluctuation in raw material nuts’ price, which has been influenced by demands or other planting related factors, caused uncertainty in profits of companies.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• The consumers’ demand for raw& processed nuts product has stayed strong and grown in the past several years but the growth may be slowing down.
• Industry’s demand seems to be more complicated and have been influenced by mixed factors.
• Volatility in price of raw material nuts, which usually exert direct impacts on processed nuts products’ price, caused uncertainties in financial performance of companies and created a challenge for companies in managing their inventory of raw materials.
• The slowing growth in demand and thus decreased sales volume may be playing more important factor in shrinking in profitability for many companies in this sector than volatility in raw nuts’ price.

 

Causes behind the trend

• The strong demands for nuts products, especially from consumers, probably can be traced to the changes in consumers’ lifestyle, which has been focused on natural and healthy food/protein. Continuing growth in demand may play a role behind the increasing in raw material nuts’ price in 2015 and 2016. There may be some other reasons. However, as it is in other sector in food industry there are too many uncertainties for a company to manage its profitability when raw materials’ price goes up.

 

Industry Future

If things continue this way and the supposed increase in sales stimulated by lower price did not come as expected (it seems it is in this situation), companies’ profits will be hurt eventually.

General Financial Performance of Companies In the Sector

Our company data indicate that demand for nuts products both from consumers or industry has been strong and naturally growing in the past several years. The organic annual volume growth rate to retailers/wholesalers is 11%, 1%, 5% and 6% for 2018, 2017, 2016 and 2015 respectively. The growth in demands for nuts products seems to be independent with the selling prices, which present 8%, 0%,-8%, and 1.5% growth for 2015, 2016, 2017 and 2018 respectively. In fact, it may just be opposite since it seems that the demand for the processed nuts products has significantly influence the price of raw nuts, which in turn impact the processed nuts’ price under the intensive competition along the value chain in this nuts industry. We see, during the fiscal 2015 and the first quarter of 2016 when demands increased at a rate of 4-5%, companies had experienced increasing raw-materials price, primarily almonds. However, starting from second quarter of 2016 until 2017 when the demands slowed down, the raw almonds’ prices decreased significantly and then walnuts’ price followed almonds to fall as well.

It seems the changes in raw material nuts’ price can be reflected quickly to the market price of processed products no matter whether an individual company is ready or not in terms of its inventory costs of raw materials. However, the extent to which changes reflected in the processed products’ price is different. In this sector, it seems there is usually an increasing pressure on profit margin when raw-material nuts’ price increases. But it has also a favourable influence on companies’ margins when raw-material nuts’ price go down even though it will cause a decrease in processed products’ price in the market.

There is obviously a delay between changes in the company’s raw nuts costs that they are going to use to calculate their margins and the changes in the market price of those raw products. Therefore, when the book costs of raw nuts of companies reached the peak in 2016, the market price for those types of raw nuts has gone down and thus the market price for processed nuts products as well. This is why we see the lowest the gross margins (around 14%) from the performance of companies in 2016. We also see the highest gross margin in fiscal 2017, which is around 17%, due to the continued decrease of raw material nuts’ costs.

Correspondingly, the typical operating margins for companies in this sector are 5,5% and cash inflow margins are 3.3%.

According our analysis, a typical ratio of enterprise price/adjusted EBI sis around 25 with interest/EBI ratio of 11%.  

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