Leading Brands, Inc. (LBIX)

F2Q08 Earnings Call

October 6, 2008 11:00 am ET

Executives

Ralph D. McRae - Chairman of the Board, President, Chief Executive Officer

Analysts

Andrew Carron - Private Investor

Ted Aloka - Trident Partners

Steven Brell - Private Investor

Jeff Aronson - Consensus Partners

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the Leading Brands Inc. second quarter earnings conference call. (Operator Instructions) It is now my pleasure to turn the call over to Mr. Ralph McRae, Chairman and CEO. Please go ahead, sir.

Ralph D. McRae

Thank you and good morning and thank you all for taking the time away from what I am sure is a rather stressful day for you, so I’ll try to get through this as smoothly as we can and then open it up for quick questions. I’ll start by reading the Safe Harbor. The company relies upon the Safe Harbor laws of 1933, 1934, and 1995 for all public statements. Statements which are not historical facts are forward-looking statements. The company, through its management, may make forward-looking public statements concerning its expected future operations, performance, and other developments. Such forward-looking statements are necessarily estimates reflecting the company’s best judgment based upon current information and involve a number of risks and uncertainties and there can be no assurance other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the company include but are not limited to general economic conditions, weather conditions, changing beverage consumption trends, pricing, availability of raw materials, economic uncertainties, including currency exchange rates, government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the company’s public announcements.

All financial amounts referred to are in U.S. dollars unless otherwise specified.

Gross revenue for the quarter was $9,306,000 versus $8,323,000 in Q2 of last year, an increase of 11.8%. This is the first comparative quarterly gross revenue growth recorded by the company since the loss of its Hansen Energy Drink distribution rights and reduction of [inaudible] revenue associated with the consolidation of its two bottling plants almost five quarters ago.

Driving this growth were increased sales of the company’s proprietary branded beverages, which rose 32.5% over Q2 of fiscal 2007. Gross profit margin before discounts and sliding fees for the quarter increased to yet another record of 43.2% from 42% last quarter and up a remarkable 36.7% from 31.6% in Q2 of the previous fiscal year. One of the most significant drivers in this percentage margin growth was continued improvement in the company’s bottling operations.

Net loss for the quarter before other income improved to $283,000, or $0.01 per share. That is material progress from a loss of $1,459,000, or $0.08 per share in Q2 last year.

The company produced a positive EBITDA before non-cash stock-based compensation and other income of approximately $150,000 in Q2, something not achieved for seven previous quarters. That improvement in financial performance is a direct consequence of increasing sales and gross margin in concert with reduction in fixed overheads and SG&A expenses. Discounts, rebates, and sliding fees rose to $1,413,000 from $1,107,000 in the same period last year. Non-cash stock-based compensation expense for the quarter was $93,000 and $162,000 year-to-date. SG&A expenses were $2,549,000, down 16.8% from $3,063,000 in the same quarter of fiscal ’07.

Reductions in SG&A costs continued through this past quarter and will expand well into Q3. For the first six months of the year, gross revenues were $18,620,000 versus $18,881,000 in the first two quarters of fiscal 2007. The company’s year-to-date net loss was $838,000 versus $1,644,000. EBITDA before non-cash stock-based compensation, other income year-to-date was a virtual break-even.

Cash and available credit at quarter end was approximately $2.7 million, a decrease from about $3.4 million at the close of Q1. Much of that change was due to a reduction in [available bank margins]. The company worked down inventories and receivables over the summer from the seasonal build-up in the spring and also what appears to have been a temporary increase in the value of the U.S. dollar against the Canadian dollar in the quarter as the company holds its cash in Canadian currency.

As stated during previous conference calls, our internally established goal this year was to reduce the company’s break-even from approximately $4 million in gross sales per month to around $3 million, while continuing to grow our brands. We strove to accomplish through a combination of the factors identified above. In Q2, we came very close to reaching our target, well ahead of schedule. Fixed costs will continue to be addressed as we work through the balance of this year.

During our last quarterly conference call, I speculated that our gross margin before discounts and slotting fees would hover around the 40% level for the next quarter or so, before additional margin enhancement initiatives work their way fully through our system. I was pleasantly surprised that margins actually grew through the summer but at this juncture, anything around 40% is in line with our expectations.

The Canadian economy, where the majority of our business is generated, remains quite strong. Although we anticipate some general consumer pull-back over 2009, a more economically conservative Canada should be somewhat protected from the financial difficulties currently being experienced in the United States and Europe. What is important for our company is to continue to control costs and margins while keeping our healthy beverage brand portfolio relevant and in-demand by our customers.

All turmoil creates opportunity. A couple of years ago, everyone with a few hundred-thousand dollars and an idea could [waltz by the end of the beverage business] and find financing. That is no longer the case. I predict that by early next year, many of our competitors will have fallen by the wayside, unable to reach profitability with funding sources tapped out. There is good opportunity for Leading Brands in that scenario.

In closing, I would like to ask you to reflect upon what we have now achieved in our move to a brand-centric beverage company. Look at our growth, look at our margins, and our proven ability to generate positive cash from operations. Now look at our peers -- the Jones Sodas, the [Weeds], the Clearly Canadians, the Purple beverages, the performing brands of the world and ask yourself this -- is Leading Brands a company deserving of a market cap of $10 million, something less than one quarter’s gross revenue? Because we think not.

Now, having said that, there is only so much that we can do in these turbulent markets to drive an appropriate share price. I was asked during the last call if I was concerned about maintaining our NASDAQ listing and I responded that I was not, given my expectations for our performance in the then upcoming quarter. If it were not for the broader market developments of this past month and the corresponding slide of our share price, I believe that the market would have provided us with the recognition we had earned. I am not now so sure.

In most companies, the reverse split of its shares can be accomplished by a simple board resolution but our articles require that step to be first authorized by shareholders. So as a result, we have determined it best to call an extraordinary general meeting for early December to authorize a reverse share split to make sure that our listing isn't jeopardized. If the market gets us there without it, so much the better but if it doesn’t, we need to put that process in motion now so that we are prepared in any eventuality. You will see that information in the mail shortly.

So with that, I am pleased to entertain any reasonable questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) We do have a question from a private investor, Andrew [Carron].

Andrew Carron - Private Investor

It’s a good quarter. You know, we were all looking for -- $0.01 a share looks pretty good. Profit would have been nice -- $200,000, that’s darn close. I think you would have had a lot of response with, you know, people scared at this time of year, especially on a day like today. It looks like Black Monday to me.

Just in position to marketing, we don’t really see any real advertising out of you guys. I think most of the advertising comes from your product actually being in places where people are, gas stations, convenience stores, superstore -- is there any real marketing plans? Can you reflect upon that for the upcoming quarters?

Ralph D. McRae

Sure. What we want to do is market our product in the locations where the product is easily found, so we think that it’s a lot more productive to run an in-store ad or a flyer for a product in a chain where the product actually is and get people to drive a purchase immediately there.

But also we rely upon a lot of other tried and true things, like public relations, having articles written about the product. You will see that in our monthly product newsletters that you can find on our LBIX website. And also product placements in movies and television shows and those sorts of things. So there’s a lot of things that we do but -- sampling, trade shows is another big one. Getting right to the consumer, right to the product and letting them taste it and getting it available to them so that they can buy it, even if it’s on an impulse basis.

Andrew Carron - Private Investor

Any plans for you guys to -- like you go into say a Chevron, Petro Canada and I know for other companies, competitors, they put on specials, say two for $4. You know, you’re in ice, you’re right by the till, positioning within the current suppliers you have?

Ralph D. McRae

Well, we do do that. I mean, we promote -- I mean, you’ll see that expense in our -- on the second line of our income statement, so no, we do that actively the same as everybody else does.

Andrew Carron - Private Investor

Perfect. Thank you very much.

Operator

Your next question will come from Ted [Aloka] of Trident Partners.

Ted Aloka - Trident Partners

Good morning. Congratulations on an improved quarter. Just a couple of questions that came to mind as you were talking -- what is the breakdown? You are showing 2.7 in cash and credit. How much cash and how much of that is credit?

Ralph D. McRae

At the end of the quarter, it’s about $2 million cash.

Ted Aloka - Trident Partners

About $2 million cash -- okay. Also, just figuring out the end of the September newsletter, you made reference to a possible new product coming in October. I was just wondering if there’s any -- remember at the end of your -- not the October letter but the September letter, you made reference at the very end, stay tuned that we could be hearing of new products. I was just wondering if there’s anything more on that.

Ralph D. McRae

No, I’ll put out a release when it’s ready to go.

Ted Aloka - Trident Partners

Okay. Also, could you give us a little update on both Kroger and 7/11 on the progress and where we are with both of them?

Ralph D. McRae

I’m not going to get into the details of specific accounts because like I say, it’s a very, very competitive market and I just don’t go there.

Ted Aloka - Trident Partners

Would you say that they are both working out to your expectations?

Ralph D. McRae

No, I’m not going to get dragged into a 20-question answer, Ted. Honestly, I think I’ll just leave it there.

Ted Aloka - Trident Partners

Okay, but you got a $0.40 stock, Ralph, that we are all suffering with and it’s not all the market because your stock crashed long before the market crashed, so I’m asking a question that I think the stockholders have a right to have some inkling on.

Ralph D. McRae

Well, I’ve given you my answer, Ted.

Ted Aloka - Trident Partners

That’s the best you can do?

Ralph D. McRae

That’s what I’m going to do.

Ted Aloka - Trident Partners

All right. Well, that’s why your stock is $0.40. Thanks.

Ralph D. McRae

Okay.

Operator

(Operator Instructions) And there is a question from a private investor, [Steven Brell].

Steven Brell - Private Investor

Good morning. I noticed that the slotting fee number has gone up significantly and I was wondering if you could give some explanation of why that was and whether it is expected to continue in the next quarter and how it breaks down between the U.S. and Canada.

Ralph D. McRae

I’m just contemplating the breakdown between the U.S. and Canada right now, so give me a moment.

Steven Brell - Private Investor

Sure.

Ralph D. McRae

It’s not just slotting fees. It’s discounts and rebates as well, so what we do is we set a percentage target of sales that we do promotions within. Now, two things in that quarter that are worthy of note -- one is that we had some slotting come on for a very big new account, so that’s probably a couple hundred thousand of that. But the other thing that’s in there are promotions and sometimes the promotion expense and the sale does not occur in the same quarter and there is some overlap on that in that quarter and one third thing was there was a specific promotion that one of our people put on where it was not tied directly to a sell-through and I don’t think it was the smartest promotion that we in the history of this company ever engaged in, and that’s in there as well and it’s something that we’ve addressed but again, for me it was something that I was pretty disappointed in.

Steven Brell - Private Investor

Okay.

Ralph D. McRae

So there’s some stuff in there. That number you will see definitely come down in the third quarter.

Steven Brell - Private Investor

And just a quick -- well, I’m still interested in the Canada/U.S. numbers. You had --

Ralph D. McRae

I’m sorry. It’s probably 75% Canada, 25% U.S.

Steven Brell - Private Investor

Okay, and just correct me if I’m wrong but I think you focused on this last time, that when you do incur a slotting fee, I’m not speaking about the promotions now but an actual slotting fee, that that gets expensed over a 12-month period or some --

Ralph D. McRae

Yes, it does, with one exception and that exception is, and what we’ve been trying to do more of late is negotiate slotting fees driving reductions on the shelf, price on the shelf. So basically asking retailers to take that slotting fee and invest it against on-shelf promotions for the introduction of products. So when that occurs and they do that, it sometimes requires us to take that expense further up in the cycle.

Steven Brell - Private Investor

Further up meaning?

Ralph D. McRae

Well, we have to expense it when it’s occurred, so if we tried it -- if we try to convert the slotting fees into a promotional expense, and not all retailers will go for this, then we have to incur that expense when it actually happens, not in a 12-month period of time.

Do you see what I’m saying? I don’t know if I explained that --

Steven Brell - Private Investor

Yeah, just one final thing on that -- is there some number that you have handy as to the amount of slotting fees that have yet to hit the numbers? In other words, how much will hit next quarter and beyond?

Ralph D. McRae

I don’t have that. We don’t break that out.

Steven Brell - Private Investor

Okay. Thank you, Ralph.

Operator

(Operator Instructions) A question from [Jeff Aronson] of Consensus Partners.

Jeff Aronson - Consensus Partners

Good morning, Ralph. I was looking at your numbers this morning and trying to figure out now what your gross revenues were but what the change in the net revenues were and by my calculation, your net revenues for branded products seem to be up about 50% from last year but it’s a hard calculation to do, given the way the numbers are down. I wonder if you could confirm that I was close.

Ralph D. McRae

I don’t know how you get that number. Could you explain to me how you get it and I could perhaps address it?

Jeff Aronson - Consensus Partners

Well, I tried to figure out what the gross revenues were for branded products and then I subtracted off the slotting fees and promotions, which I assume all go with the branded products.

Ralph D. McRae

Yes, that’s correct.

Jeff Aronson - Consensus Partners

And it seems to go from last year’s number up to this year, it shows a 50% increase in net revenue for branded products. I don’t know if you keep those numbers --

Ralph D. McRae

I don’t look at that number but it seems to me that that would be high. I mean, we are looking at a branded sales of 32.5% and I don’t know that -- no, I couldn’t get to that number.

Jeff Aronson - Consensus Partners

Okay. When you say branded sales of 32%, you are talking about the increase?

Ralph D. McRae

That’s the increase.

Jeff Aronson - Consensus Partners

Okay. All right, well, it was worth a try.

Ralph D. McRae

Sorry.

Operator

(Operator Instructions) There appears to be no further questions at this time. Please continue.

Ralph D. McRae

Okay. Thank you for taking your time away from I’m sure what’s a busy day and we’ll talk to you here again shortly.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your lines.

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