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Businessexcellence July 07 68 quarter that was larger than the operating income for the whole of last year,” says Cameron, adding tongue in cheek that, considering the previous year’s sales performance, “that’s not a stellar achievement, but it is a welcome improvement.” So what changed? “When you come into a business you first have to ask ‘is anything broken?’,” he says. “Does it have good systems and processes? Natrol didn’t have Just how good those results are can be seen in the figures for the first quarter of 2007; net sales were up 10.5 percent to $18.7 million; gross profit margin improved to 47.0 percent from 40.7 percent the previous year; and first quarter net income was up to $340,000 from $73,000 in the same quarter of 2006. It was the fifth consecutive quarter of operating profitability. “The company generated operating income for the “The company generated operating income for the first quarter that was larger than the operating income for the whole of last year”

July 07 Businessexcellence 69 anything broken. It needed some spring cleaning.” It also needed a new strategy. “Our goal was to grow the company and get it to a position where our shareholders, customers and employees view it as an outstanding company. To achieve what we needed in the first year, we had to do three things. First was to get the company profitable and get better control of our costs. Then, to support our growth plans, we needed to acquire new brands that leveraged our existing infrastructure. Finally, we had to expand internationally as this represents most of the potential for market growth in the next five to ten years.” The new management team found that Natrol had plenty of capacity. What it didn’t have was enough scale. “We can more or less double our sales without necessitating the same increase in headcount, in manufacturing facilities or sales force,” observes Cameron. “We needed to find some brands that would allow us to leverage our competencies: access to 54,000 retail stores, efficient manufacturing capability, and an understanding of how brands work in this marketplace.” Identification of suitable targets was based on what Cameron refers to as Natrol’s three planks: product quality, natural ingredients, and cuttingedge science. “We are a high-quality manufacturer,” he says. “We’re extremely diligent with our QA and QC processes, we are very selective in the suppliers we use, and we have excellent labs to ensure our products meet high standards and lead the market. That’s an important plank.” So Natrol acquired the Nu Hair® and Shen Min® brands from Biotech Corporation in October 2006, closely followed by an exclusive licensing agreement for the US distribution of Promensil® and Trinovin® from Novogen Limited, an Australian-based biotechnology company. Nu Hair and Shen Min are natural hair regrowth products, Promensil is a menopausal supplement, and Trinovin helps maintain prostate and urinary health. “We were able to assume the manufacturing of those products, immediately creating economies of scale and, given the similarity in customers, we effectively leveraged our sales and distribution infrastructure.” Natrol announced in June the acquisition of MRI (Medical Research Institute), a premier brand in sports nutrition, sold in GNC stores in the United States. Its revenues were about $21 million last year, Cameron says, and it’s “quite profitable.” The acquired brands are a good fit with Natrol’s planks, Cameron points out. “Our Nu Hair and Shen Min products are the leading natural supplements in hair re-growth. Promensil has 22 clinical trials supporting the effects it has in menopausal women. MRI is a science-based company and its strength is that it supplies superior supplement technology to the sports nutrition market. If we see a business out there that focuses on strong science, natural ingredients and quality, and it can leverage our infrastructure, it’s an acquisition candidate.” For a company with international sales representing less than ten percent of its revenues, international expansion was an obvious priority. This was achieved first with the opening of a wholly owned subsidiary in the UK in May 2006, headed up by a 25-year industry veteran, Margaret Peet. Last month, Natrol also established a presence in Asia, with the announcement of a joint venture with a group of Chinese businessmen in Hong Kong for sales, marketing and distribution, to target the Chinese and Hong Kong markets. But Natrol’s progress has not been purely external. Improvements in products and process are continually being made. “From a science perspective, we have been working on unique delivery systems which can be used across a range of products. We filed a patent in January for a novel method of controlled ingredient release,” says Cameron, explaining that controlling its release rate can maximize the benefits obtained from a supplement. “Most supplements tend to be released quickly, so if you want to have all the benefits of that supplement over an extended period of time, you need to slow down the rate of release.” The best example of that, he says, is melatonin, which helps people sleep. “There’s no point in having a sleeping tablet that helps you sleep for three hours and then you wake up. We’ve filed a patent where we coat the outside of the tablet with some melatonin so it impacts you immediately, and then the rest of tablet is slowly released over an eight hour period.” The requirement for natural ingredients is growing in importance for customers, says Cameron, and this presents a challenge since many supplements, while based on naturally Natrol