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Atrium Innovations: Third Quarter Update Highlights Positive Industry Changes

Atrium Innovations (TSX: ATB) reported third quarter results recently that showed strong organic revenue growth but flat year over year earnings.  More importantly, on the conference call management gave some very important insights as to where their industry is heading.  Let’s first review the results briefly before moving on to how the industry is transforming and why we should pay attention to this.

Third Quarter Review

Organic revenue growth for the quarter came in at 10.6%, with the contract manufacturing segment increasing 15.2% and the retail channels segment increasing 16.2%.  EPS was flat year over year, as the company is bearing the cost of their restructuring and reorganization that is aimed at improving margins and their process in order to successfully navigate the future.  Cash flow per share increased 7.7% to $0.56.

Health Food Store Expanding Presence

Atrium’s retail channel continues to grow at a very healthy pace.  Large retailers that Atrium’s products are well positioned in are opening new stores and as these retailers grow, Atrium will grow with them.  These retailers include…..

Vitamin Shoppe (NYSE: VSI), for example, is experiencing strong sales growth and saw a 14% increase in revenue in the latest quarter.  Furthermore, the company is planning to open 50 new stores in 2013 and 60 new stores in 2014, which speaks to the optimistic industry trends that they are seeing.

Whole Foods (NASDAQ: WFM) is seeing similar positive results and trends.  In its latest quarter, the company experienced revenue growth of almost 11%.  Whole Foods currently has 90 new stores in development.  Over the long term, the company’s view is that its market opportunity is such that 1,000 stores in the U.S. is a reasonable expectation.  Whole Foods currently has 390 stores.  Again, this speaks to the market opportunity and growth of the industry.

More FDA Involvement is a Good Thing

With the growth of the dietary supplement industry, the FDA is becoming increasingly involved.  This is a good thing because it will provide credibility and confidence to the industry and, in fact, legitimacy with consumers.  This will also result in the ability to raise prices.  Good Manufacturing Practices (GMP) regulations are currently being enforced by the FDA in the industry.  This will ensure that marketing claims are in fact true and that there are enforceable quality standards.  Atrium for one has significantly increased its level of testing in the last 3 years due to such scrutiny.

New Markets: Growth Plans

Atrium is experiencing solid growth in the Chinese market, which it entered by partnering up with a local company.  Russia and Brazil are markets that the company is also interested in.

In Russia, the strategy will not be to grow organically although Atrium already has a base there.  Russia is a difficult country to operate in so Atrium will look for a partner as it has done in China.

In Brazil, management has said that it is an easier place to do business.  One brand will be chosen in order to test the market, which will be facilitated by partnering up with local business.

Company Outlook

Atrium expects organic growth of 5-7% in the coming years.  Margins will continue to suffer as one-time costs from the Mucos acquisition in the fourth quarter, and as costs rise due to more FDA regulations.  But again, the FDA involvement is a longer term positive for the company and the industry.

Bottom Line

The dietary supplement market is experiencing strong growth and greater acceptance globally.  Getting to know the players in the industry is a good idea, as it represents a very interesting investment opportunity.

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Fool contributor Karen Thomas does not own shares of any of the companies mentioned at this time.  David Gardner owns shares of Whole Foods.  Tom Gardner owns shares of Whole Foods.  The Motley Fool owns shares of Whole Foods. 

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