Market Analysis Spring 2012 Health, Nutrition & Fitness Report Growth Opportunities Presented by the Current Focus on Healthier Living Kurt Roth Christopher Harned W. Andrew Martin Joseph Pellegrini Director Managing Director Managing Director Managing Director [email protected] [email protected] [email protected] [email protected] +1.312.609.4689 +1.414.765.3908 +1.704.553.6615 +1.704.553.6612 Christopher Sciortino Peter Kies Vinay Ghai Anthony Siu Managing Director Managing Director Managing Director Managing Director [email protected] Co-Head of Equity Capital Markets European Investment Banking Head of Asia Investment Banking +1.312.609.4923 [email protected] [email protected] [email protected] +1.414.765.7262 +44.207.667.8225 +86.21.6182.0980 Please refer to Appendix – Disclaimers and Other Disclosures on page 34. Table of Contents Page Investment Thesis.............................................................................................. 1 Growth Trends in Health, Nutrition & Fitness ..................................................... 2 Factors Driving the Trend Toward Healthier Living .......................................... 17 Selected Health, Nutrition & Fitness Companies ............................................... 24 Comparable Company Analysis ......................................................................... 28 Health, Nutrition & Fitness Deal Activity .......................................................... 31 Baird’s Health, Nutrition & Fitness Transaction Experience .............................. 32 Investment Banking Contact List ..................................................................... 33 The following report has been prepared by the Investment Banking Department of Robert W. Baird & Co. This report is an overview and analysis of industry and consolidation trends and is not intended to provide investment recommendations on any specific industry or company. A complete listing of all companies covered by Baird U.S. Equity Research and applicable disclosures can be accessed at <http://www.rwbaird.com/researchdisclosure>. You can also call 1-800-792-2473 or write: Robert W. Baird, Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. Robert W. Baird & Co. (“Baird”) is a leading middle market focused investment bank serving the M&A and equity financing needs of our clients throughout the U.S., Europe and Asia. Since 2004, we have advised on 376 M&A transactions totaling more than $57 billion and have served as an underwriter on 333 equity offerings totaling more than $85 billion in raised capital. Baird’s balanced buy- and sell-side practice provides expertise for public and private companies, while our dedicated financial sponsor coverage further expands opportunities and financing resources for our clients. Through close coordination between our U.S., European and Asian bankers, we work to optimize opportunities and results for clients in the international marketplace. Approximately one-third of our M&A activity over the past five years has involved international transactions. Please refer to Appendix – Disclaimers and Other Disclosures on page 34. Investment Thesis This Health, Nutrition & Fitness report, created by Baird’s Investment Banking Department, aggregates a wide variety of data related to healthier living in the U.S. while highlighting several sectors with impressive growth prospects. Factors driving greater emphasis on healthy living as well as growth in related products and services include better diets featuring newer sources of nutrition and energy, increased gym memberships and participation in alternative fitness activities, the aging baby boomer population, a more educated consumer, and the need to combat rising healthcare costs. Furthermore, many people have not yet embraced the shift toward healthier living, providing upside potential as attitudes and behaviors change for this group; for example, the percentage of the population not participating in any physical activity or sport over a 12-month period increased for the fourth consecutive year in 2011, reaching nearly one-quarter of the population. Among categories profiled in this report, we are most excited about the growth opportunities for the following: Organic & Natural Food: Even after growing at a low double-digit rate over the past decade, organic and natural foods should achieve further penetration in the massive food market. Trends favoring convenience and better eating habits should continue to drive rapid growth in the category, including for products such as fresh cut and packaged fruits and vegetables. Sports Nutrition: Within the large and steadily growing market for vitamins and nutritional supplements, the sports nutrition segment is projected to realize the fastest growth over the next several years, helped by established appeal among athletes at many levels as well as broadening of demand to include routine exercisers. Nutrition & Energy Bars: The market for food bars that offer nutrition and convenience experienced high single-digit percentage growth in recent years, including during the recession. Category expansion is expected to remain robust due to the widespread desire to lead healthier lifestyles, ongoing product innovation, and growing demand for convenient, healthy snacks for on-the-go consumers. Fitness Devices: Greater focus on healthy living among consumers has helped create a market for GPS-based fitness devices that facilitate participation in various activities, including running, cycling, and golf. Increased demand for the integration of technology into active lifestyles has fueled several years of 20%+ growth for this category. The market for recreational GPS devices should experience further expansion as technology continues to improve and as consumer awareness of their applications grows. Alternative Fitness: Alternative fitness programs emphasizing functional fitness have gained popularity over the past decade, reflecting growing demand for relevant and impactful content, techniques, and instruction. Examples of alternative fitness activities include P90X, CrossFit, Zumba, TRX Suspension Training, Spinning, Pilates, and yoga. Consumers are more focused on efficacy, leading to greater interest in innovative programs such as these. Alternatives satisfy demand for cross-fitness programs that place less emphasis on strict cardio-versus-strength approaches. In addition, recent surveys suggest a shift toward group activities such as Spinning, yoga, and Zumba, particularly among younger participants, whose heavy usage of social media has increased interaction among peer groups. Based on substantial long-term growth potential, well positioned companies in all of these segments should represent attractive investments, either as acquisition targets or through stock offerings for companies that currently are private or owned by financial sponsors. Furthermore, more mature categories such as fitness centers, fitness equipment, and bicycling equipment should witness further consolidation as better operators seek to enhance lower growth outlooks by capturing stronger properties. Robert W. Baird & Co. 1 Growth Trends in Health, Nutrition & Fitness U.S. HEALTH, NUTRITION & FITNESS MARKET Easily recognizable trends and consumption patterns point to healthier living in the U.S., including better diets, more exercise, and greater use of vitamins and supplements. In this report, we have chosen to divide the Health, Nutrition & Fitness market into two categories: Nutrition and Recreation/Fitness. Estimated Market Size Long-Term Nutrition ($ in billions) Growth Rate Vitamins & Nutritional Supplements $28.1(1) 4% Natural & Organic Food $39.0(1) 7% Functional Beverages $16.0(2) 3% Nutrition & Energy Bars $0.9(3) 8% Total $84.0 Recreation/Fitness Fitness Centers $20.3(4) 7%(9) Commercial Fitness Equipment $1.0(5) 5%(9) Consumer Fitness Equipment $4.5(5)(10) 3%(9) Bicycles & Supplies $5.2 (6) Fitness Devices $1.1(7)(10) 16% Alternative Fitness $8.0(8) 6% Total $40.1 Overall Total $124.1 (1) Nutritional Business Journal. (2) Datamonitor. (3) Mintel International February 2011 Nutrition and Energy Bars Report. (4) IHRSA Global Reports. (5) SGMA Tracking the Fitness Movement 2011. (6) National Bicycle Dealers Association. (7) ABI Research. (8) IBISWorld and Robert W. Baird & Co. estimates. (9) Historical average for 2002-2007 (prior to economic downturn) shown in absence of third-party estimates. (10) Estimated consumer purchases, assuming 35% mark-up on wholesale sales. The Nutrition category includes three segments representing more than $80 billion in aggregate U.S. retail sales. Over the past decade, annual percentage growth across these businesses averaged in the high single digits, including 5% growth for vitamins and supplements, 7% increases for functional beverages, and double-digit expansion in natural and organic food as well as nutrition and energy bars. Over the next several years, growth is projected to decelerate in each of these segments while remaining above the average growth for food and beverage products. The segments included in our Recreation/Fitness Category generate about $40 billion in annual U.S. sales, led by fitness centers. While the fitness centers segment has achieved solid growth over the past decade, smaller categories such as fitness devices and alternative fitness appear likely to achieve leading growth rates in the future. Robert W. Baird & Co. 2 Growth Trends in Health, Nutrition & Fitness NUTRITION