Leiner Sees Gross Margins Improve, Brings Manufacturing In-House

Leiner Health Products' gross profit margins continue to improve, with consolidated gross profit margin "returning" to 24.5% for the fourth quarter of fiscal 2006, CEO Robert Kaminski announced during a fourth-quarter and full-year earnings call June 15.

Factors such as customer inventory reductions and Leiner's move away from higher-margin vitamin E products towards joint care products resulted in 16.5% gross profit margins for the first half of the year (¹ (Also see "Leiner Looks To Private Label VMS, Contract Manufacturing For Sales Boost" - Pink Sheet, 6 Feb, 2006.), p. 7). Second half gross profit margins were 23.8%.

The fourth quarter consolidated gross margin for FY 2006 actually managed to edge out the year-ago period's 24%, CFO Rob Reynolds pointed out.

Leiner benefited from growth in its joint care business, which was helped by recent positive press in Consumer Reports, and the successful integration of September's Pharmaceutical Formulation's (PFI) acquisition, according to the execs (² 'The Tan Sheet' Oct. 3, 2005, In Brief).

The firm's march towards "restoration of historical profitability" is being driven in part by the firm's utilization of it manufacturing facilities, according to Kaminski.

Normally outsourced OTC products, such as loratadine and ibuprofen, are seeing a "pretty strong movement" toward in-house pill manufacturing, he said.

Additionally, "our vitamin business has transitioned away from out-sourced soft-gel vitamin E business into in-sourced joint care tablet," Kaminski pointed out.

This trend towards in-sourcing, along with Leiner's acquisition of the bulk of PFI's solid dose pharma business, is "creating a substantial increase in the unit output of our plants," he concluded.

Leiner's increased use of in-house product manufacturing gives the firm greater control over its supply chain, the exec stated. With large retailers such as Wal-Mart and Costco looking to carry as little inventory as possible, the firm has "found that when we're in the driver's seat, we can better service those big customers."

"It also helps our negotiating leverage. I mean, nothing succeeds for us like the option of making [it] ourselves, with respect to negotiating supply contracts with outside suppliers," Reynolds added.

Additionally, bringing the manufacturing inside "gives us the opportunity, in the long term, to compete on a cost basis with our major competitors, who in many cases manufacture on the inside," Kaminski said.

He also pointed out during the conference that contract manufacturing is "gaining traction." According to Kaminski, "we're in deep discussions, and actually have signed contracts with a number of major consumer healthcare companies."

"High quality global joint care raw material sourcing" has also been one of the "principle drivers" behind the firm's comeback, Kaminski stated.

"The company has moved quite aggressively on global sourcing," he said, particularly in regards to the sourcing of joint care products from China. "We've been able to identify and partner with some dynamite sources on glucosamine and chondroitin," Kaminski asserted.

The firm recently announced a joint venture with the quality auditor Schuster Labs, he added. "We have 400 quality people on the ground in China helping us audit plants, create USP quality, ensure quality."

"The global sourcing initiative combined with Leiner's now recognized scale on joint care has put us in a position where the joint care category, in particular, has returned to more normal levels of profitability."

Leiner reported a net income of $.4 mil. for the fourth quarter of 2006 (ended March 25), a $6 mil. drop from the year-ago quarter.

The Canadian division, which represents about 8% of Leiner's overall business, was hurt by the decision of a "key OTC supplier" to sell directly to a number of Leiner's customers in the Canadian market. Fiscal year 2006 sales for the Canadian division were $20 mil. lower than fiscal 2005 sales.

A "modest" increase in U.S. sales - up 3% in Q4 and hitting $614.7 mil. for the fiscal year - partially offset the damage: full-year consolidated net sales totaled $669.6 mil., down from $684.9 mil. in 2005. Net sales for the fourth quarter dipped to $173.8 mil., compared to $174.6 mil. in the prior-year period.

- Katia Fowler