The manufacturer and distributor of confectionery and bakery products Beta Brands has posted a drop in Q2 sales, ended 30 June, to C$16.1m from C$17.6m year on year.

Net of products associated with the Life Savers brand, revenue was C$15m in the current Q2 and C$15.6m in the Q2 2001. Revenue for the H1 2002 was C$31.6m versus C$33m in the H1 2001.

Sales to Canadian customers decreased to C$8.2m during the Q2 2002 from C$10.2m in the Q2 2001, primarily due to lower volumes and margins associated with the Life Savers brand, and reduced shipments to one of the company's largest Canadian distributors, to accommodate its inventory reduction plans. Beta Brands sold the Canadian rights to the Life Savers brand to Kraft Foods in December of 2001 but continues to manufacture Life Savers products for Kraft under a two-year co-pack agreement. Beta Brands' sales to US and international customers for the Q2 rose to C$7.9m compared to C$7.4m a year earlier.

Operating EBITDA was a loss of C$0.24m for the Q2 2002, compared to US$1.2m for the corresponding period in the prior year. Operating EBITDA for the H1 was a loss of C$0.4m versus earnings of C$1.8m year on year. Q2 net income totalled C$0.21m or C$0.01 per share compared to net income of C$0.88m or C$0.02 per share for the Q2 2001. Current quarter net income was positively impacted by a C$2.5m foreign exchange translation gain as well as reduced interest and finance fees.

The net loss during the H1 2002 decreased to C$2m from a net loss of C$4.7m in the corresponding period in 2001, primarily due to a foreign exchange translation gain and reduced interest expense.

Focused on objectives

"Despite the decline in our quarterly sales, we remain focused on our business objectives of growing top line revenue through new product introductions and US sales growth as well as improving and updating our manufacturing processes," said John Lambert, president and CEO. "Due to the seasonal nature of our business, sales revenue has historically increased during the Q2 of the calendar year."

The company has continued to focus on expanding its line of bakery products with the launch of two new flavours of Champagne brand crackers for the US market. In addition, its ongoing focus to increase capacity utilisation in its bakery operation has resulted in significant orders for private label crackers from new customers including a major US distributor and a US grocery retailer. Sales of bakery products have increased about 16% during the H1 compared to the corresponding period last year.

Beta Brands has also launched a new high-volume tub programme for a number of marshmallow and jube products to a major club store retailer. During the Q2, it launched a line of Spider-Man confectionery and bakery products in Canada and the US under a licensing agreement. The company also began introducing a new Breath Savers line of peg top packaged products to the trade, which it expects to begin shipping in Q3 2002. These products will leverage Breath Savers strong brand identity and will initially target grocery, drugstore and mass merchandiser distribution channels.

Productivity improvement initiatives continued during the Q2 at the company's London facility where work on a new mogul line and four new packaging lines is progressing. Installation of the packaging lines and the mogul line are expected to be completed in the company's Q3 ended 30 September 2002. These installations represent a very significant investment in manufacturing processes and are expected to increase throughput and increase margins.

Gross margins declined during the quarter from C$3.4m or 19.2% of sales to C$2m or 12.5% of sales during the current quarter. Gross margins for the H1 2002 were C$4.1m or 12.9% of sales compared to C$6m or 18.4% of sales for the corresponding period in 2001. These reductions were primarily due to lower shipments and reduced margins related to Life Savers, unfavourable product mix, and increased raw material and maintenance costs. Management is taking aggressive and concerted action to address the controllable issues.