Twinlab Cuts $30 Mil. In Spending By Reducing Headcount, Consolidation

Twinlab has reduced spending "by over $30 mil. as a result of...cost reduction initiatives and reorganization activities" undertaken in 2002, President & CEO Ross Blechman said during a March 27 analysts call on fourth quarter and year-end results.

The cost savings "are the direct result of reducing headcount by approximately 45%...streamlining function and processes, and ultimately by consolidating our manufacturing and distribution facilities," Blechman stated.

Personnel reductions were achieved in part by "the sale of non-core businesses" such as Health Factors International and Bronson Labs. Blechman noted the Bronson sale was completed in January 2003.

Through the sale of HFI almost a year ago, Twinlab sold its Tempe, Ariz. manufacturing facility, which led to elimination of roughly 12% of the firm's workforce (¹ (Also see "Twinlab Manufacturing Facility To Be Bought By Anabolic Labs" - Pink Sheet, 8 Apr, 2002.), p. 14 and ² 'The Tan Sheet' March 11, 2002, In Brief).

For the year, however, the cost reductions "were offset by increased insurance costs and additional costs related to the facilities consolidation," CFO and Chief Operating Officer Joseph Sinicropi said. Twinlab recorded $16.8 mil. in 2002 charges related to consolidation activities, he added.

The Hauppage, N.Y.-based firm expects to incur "additional restructuring charges of up to $1 mil., substantially all of which will be recorded in the first half of 2003, $700,000 of which will be a Q1 event," Sinicropi said.

During the fourth quarter, savings were further offset by "increased advertising expenditures to drive future sales," the CFO noted.

The firm "invested an incremental $1 mil. in advertising" in Q4, Blechman said, adding "this investment was continued in the first quarter of 2003 as we anticipate spending an additional $1.5 mil. in advertising compared to a year ago."

Twinlab announced in November plans to devote a large portion of its $7 mil. marketing budget to diet and energy products, including recently introduced ephedra-free versions of its Ripped Fuel , Diet Fuel and Metabolift products (³ (Also see "Twinlab, GNC Ephedra-Free Diet, Energy Products Join Recent Trend" - Pink Sheet, 18 Nov, 2002.), p. 4).

The firm also said it would cease distribution of all ephedra-containing supplements by March 31 due to controversy about the botanical's safety.

While the company expects "a reduction in net sales due to the discontinuation" of ephedra products, it does not anticipate a "material adverse effect on the profitability of the company." Blechman estimated ephedra product sales in Q4 reached "about $4 mil."

Twinlab's net sales for Q4 were $38.3 mil., down 3.8% from the year-ago quarter. For 2002, excluding Bronson and other discontinued operations, the firm recorded revenue of $146.6 mil., a 21.6% decline from last year.

In a March 26 ⁴ earnings release, Blechman noted 2002 sales were "negatively impacted by our continued restructuring efforts."

Other negative factors during the year include a "decrease in sales to a major customer" of about $11 mil., an $8.8 mil. product reclamation charge recorded in the third quarter, "approximately $7 mil. of sales related to non-strategic businesses that were sold, and a significant SKU reduction effort, particularly in our mass channel," the firm reports.

Twinlab's net loss in 2002 was $32.4 mil., compared to a loss of $91.6 mil. in the year-ago period. The loss includes the restructuring charges, "offset by a federal income tax benefit of $6.9 mil. representing a refund received by the company." The firm recorded a Q4 loss of $6.5 mil., up from a loss of $66.8 mil. last year.

When asked about the potential divestment of GNC to NBTY and its impact on Twinlab's sales, Blechman emphasized "we've developed a very strong relationship recently with GNC."

Due to "the combination of the new products that we've introduced, the solid brand name and the fact that we already do business with NBTY," such a sale would have "minimal impact" on Twinlab, he added.

Blechman noted the firm has "initiated ongoing consumer research" to help it develop new products. In addition to the ephedra-free diet and energy offerings, recent product introductions include the Dia-Balance line "to support the needs of diabetics" and Extreme Fuel energy and protein drinks targeting the sports consumer, he said.