Synutra Reports Second Quarter and First Half Fiscal 2011 Financial Results

QINGDAO, China and ROCKVILLE, Md., Nov. 4, 2010 /PRNewswire-Asia/ -- Synutra International, Inc. (Nasdaq: SYUT), a leading infant formula company in China and a producer, marketer and seller of nutritional products for infants, children and adults, today announced financial results for the second quarter and first half of fiscal 2011, ended September 30, 2010.

Second Quarter Fiscal 2011 Financial Overview

• Net sales were $41.2 million
• Gross profit was $8.9 million
• Gross margin was 21.6%
• Loss from operations was $26.1 million
• Net loss attributable to Synutra International, Inc. common shareholders was $21.2 million, or $0.37 per diluted share

Mr. Liang Zhang, Chairman and CEO of Synutra, commented, "The second quarter of fiscal 2011 was very challenging for Synutra.  The premature development allegations, which drove a considerable decline in our market share, left a deep and lasting impact on our business.  We are proud, though, of our response to this very difficult situation.  We took the initiative to reach out to the proper authorities to verify the quality of our products and stem further consumer panic, we mobilized our sales team and call center to handle customer concerns and we have provided our distributors with more discounts and promotional activities to maintain the strength of our distribution channels.  We also directly confronted the source of these erroneous media reports, Phoenix Satellite Television, who then issued a formal public apology."

Zhang continued, "Today, we are cautiously optimistic about our ongoing recovery.  Following the melamine crisis, our management team demonstrated that they are capable of returning Synutra to profitability.  We are confident that through the dedication and commitment of this same team, Synutra will rebuild its market presence and recapture its previous long-term growth momentum."

Second Quarter Fiscal 2011 Financial Results

Net sales were $41.2 million in the second quarter of fiscal 2011, compared to $65.3 million in the second quarter of fiscal 2010.  Net sales from the Company's branded powdered formula segment were $37.3 million, or 90.5% of net sales in the quarter, compared to $42.0 million, or 64.3% of net sales, in the prior year period. For sequential comparison, in the first quarter of fiscal year 2011, net sales from the branded powdered formula segment were $79.2 million, or 94.6% of net sales. Net sales of the Company's Super series infant formula accounted for 54.3% of the volume of sales and 66.9% of the net sales of the powdered formula segment for the second quarter of fiscal year 2011.  This compares to 65.3% of the volume of sales and 74.5% of the net sales of the powdered formula segment in the first quarter of fiscal year 2011. By volume, sales of powdered formula products was 6,443 tons in the second quarter of fiscal year 2011. This compares with 8,364 tons in the first quarter of fiscal year 2011.

Net sales from Other Products, which mainly consist of raw milk and surplus milk powder sold to industrial customers, was $2.9 million, or 7.1% of net sales, in the second quarter of fiscal 2011, compared to $22.6 million, or 34.5% of net sales, in the prior year period, and down sequentially from $4.5 million, or 5.3% of net sales, in the first quarter of fiscal 2011.  

Gross profit was $8.9 million in the second quarter of fiscal 2011, compared to $12.3 million in the prior year period, and down sequentially from $46.4 million in the first quarter of fiscal year 2011.  Gross margin in the second quarter of fiscal 2011 was 21.6%, up from 18.8% in the prior year period, and down sequentially from 55.3% in the first quarter of fiscal 2011.  This reflects the impact of the media event and the Company's efforts around recovery. In order to regain market share, the Company granted more discounts to distributors, which led to a decrease in average selling price.  The Company also provided more free product, which were used in promotional activities such as buy four get one free, than in prior quarters to distributors, which led to the cost increase.

Loss from operations was $26.1 million in the second quarter of fiscal 2011, compared to a loss of $16.3 million in the prior year period.  For sequential comparison, in the first quarter of fiscal year 2011, operating income was $16.3 million.  Selling and distribution expenses increased 18.2% to $12.2 million in the second quarter of fiscal 2011 from $10.3 million in the prior year period.  Advertising and promotion expenses increased 95.2% to $14.7 million in the second quarter of fiscal 2011 from $7.5 million in the prior year period. General and administrative expenses increased 70.5% to $8.4 million in the second quarter of fiscal 2011 from $4.9 million in the prior year period.  Increases in operating expenses primarily reflect the Company's increased distributor promotion efforts at the time of the premature development accusations, as well as a continued shift in the Company's marketing strategy toward a more consumer-centric effort, as well as charitable donations made during the quarter.

Net loss attributable to Synutra International, Inc. common shareholders was $21.2 million, or $0.37 per diluted share in the second quarter of fiscal 2011, compared with a net loss of $14.0 million, or $0.26 per diluted share, in the prior year period.

First Half Ended September 30, 2010 Financial Results  

Net sales for the first half ended September 30, 2010 increased 10.9% to $125.0 million from $112.7 million in the prior year period.  Net sales from branded powdered formula products increased 37.9% to $116.5 million, or 93.2% of net sales, in the first half ended September 30, 2010, from $84.5 million, or 75.0% of net sales, in the prior year period.  

Net sales from Other Products, which consist mainly of raw milk and surplus milk powder sold to industrial customers, were $7.4 million, or 5.9% of net sales, in the first half of fiscal 2011, compared to $27.1 million, or 24.0% of net sales, in the prior year period.  The change in revenue mix primarily reflects the impact of the melamine contamination incident on the Company's branded powdered formula segment.  

Gross profit was $55.3 million in first half of fiscal 2011, an increase of 73.5% from $31.9 million in the prior year period. Gross margin increased to 44.2% in the first half of fiscal 2011 from 28.3% in the prior year period.

Operating loss was $9.8 million in the first half of fiscal 2011, compared to an operating loss of $26.9 million in the prior year period. Net loss was $11.1 million in the first half of fiscal 2011, or $0.20 per diluted share, compared with a net loss of $24.0 million, or $0.44 per diluted share, in the prior year period.

Balance Sheet

As of September 30, 2010, the Company had cash and cash equivalents of $52.3 million and restricted cash of $26.8 million.

Sales Disruption Overview

As previously reported, in August, the China-based media reported allegations that the Company's infant formula products were linked to hormone-triggered premature development in infants in the Hubei province of China.  On August 15, 2010, China's Ministry of Health announced after testing samples of the Company's products that there was no link between Synutra's infant milk powder products and premature development in infants.  On September 30, 2010, Phoenix TV, one of the original media firms that aired the allegations, delivered a formal public apology for promulgating false claims against Synutra.  The Company's sales have been significantly impacted by these allegations, with market share falling to 4.8% in August 2010 from 6.6% in July 2010 and sales volume falling significantly on a year over year basis in August and September.  

Mr. Zhang stated, in closing, "While we have been significantly and adversely affected by the prematurity event, management is cautiously optimistic about our ongoing recovery. We believe that the positive conclusion of MOH's tests and Phoenix TV's on-air apology laid a solid foundation for the recovery of our brand going forward.  In addition, we expect our sales to our distributors to increase in future quarters.  Based on these factors, management believes that sales and profitability for the following several quarters could improve significantly."

Conference Call Details

The Company will hold a conference call on Friday, November 5, 2010 at 8:00 am Eastern Time to discuss the financial results.  Listeners may access the call by dialing the following numbers:

The replay will be accessible through November 12, 2010 by dialing the following numbers:

A webcast of the conference call will be available through the Company's IR website at www.synutra.com.

About Synutra International, Inc.

Synutra International, Inc. (Nasdaq: SYUT) is a leading infant formula company in China. It principally produces, markets and sells its products under the "Shengyuan" or "Synutra" name, together with other complementary brands. It focuses on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. It sells its products through an extensive nationwide sales and distribution network covering 30 provinces and provincial-level municipalities in China. As of September 30, 2010, this network comprised over 560 independent distributors and over 1,000 independent sub-distributors who sell Synutra products in over 75,000 retail outlets.

Forward-looking Statements

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Synutra International, Inc. and its industry. All statements other than statements of historical fact in this release are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as "anticipate," "believe," "continue," "estimate," "expect," "intend," "is/are likely to," "may," "plan," "should," "will," "aim," "potential," "continue," or other similar expressions. The forward-looking statements included in this press release relate to, among others, Synutra's goals and strategies; its future business development, financial condition and results of operations; the expected growth of the nutritional products and infant formula markets in China; market acceptance of Synutra’s products; adverse effects associated with the melamine contamination incident; impact of the premature development allegations; Synutra's expectations regarding demand for its products; Synutra's ability to stay abreast of market trends and technological advances; competition in the infant formula industry in China; PRC governmental policies and regulations relating to the nutritional products and infant formula industries, and general economic and business conditions in China. These forward-looking statements involve various risks and uncertainties. Although Synutra believes that the expectations expressed in these forward-looking statements are reasonable, these expectations may turn out to be incorrect. Synutra's actual results could be materially different from the expectations. Important risks and factors that could cause actual results to be materially different from expectations are generally set forth in Synutra's filings with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this press release. Synutra International, Inc. undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.

SOURCE Synutra International, Inc.