Synutra Reports Second Quarter and First Half Fiscal 2013 Financial Results

Nov 09, 2012, 16:30 ET from Synutra International, Inc.

QINGDAO, China and ROCKVILLE, Md., Nov. 9, 2012 /PRNewswire/ -- Synutra International, Inc. (NASDAQ: SYUT), ("Synutra" or the "Company"), which owns subsidiaries in China that produce, market and sell nutritional products for infants, children and adults, today announced financial results for the second quarter of fiscal 2013 ended September 30, 2012.

Mr. Liang Zhang, Chairman and CEO of Synutra, commented, "Our fiscal second quarter financial results were impacted by a slowdown in sales stemming from the price increase implemented on our infant formula products in the beginning of our fiscal first quarter as our customers have taken advantage of purchasing products at pre-increase pricing levels.  On a sequential basis, our inventory position in the second quarter decreased 11% to $77 million from $86 million in the fiscal first quarter.  Sales orders measured in tons increased 5% to 4,605 tons from approximately 4,380 tons in our fiscal first quarter."

"Since September, we began to adjust our sales and distribution channels to ensure channel inventory control and streamline our retail network for better efficiency.  These actions were based on our assessment of the current market environment for our products which reflects heightened competition and increased levels of cross-territory selling among certain distributors.  As part of this effort, we will focus on top-performing distributors and retail outlets, regain control of the marketing dollars with each of our distributors, and gradually exit from relationships with low performing retailers. Our objective is to implement uniform retail-end pricing and distributor discounts. We expect to reduce our current number of company-authorized retail outlets by over half, to about 25,000, by January 2013. Additionally, we are setting up an inventory tracking system, which will go beyond the distributors to gain better visibility at the retail level. We aim to complete the system by early 2013."

"In the short term, these efforts have compounded the negative effects of the price increase and the seasonal slow-down in the second fiscal quarter ended September 30th. As we expected, distributors have prudently slowed down their orders resulting in low sales volume. We also estimate we may incur expenses in terminating relationships with certain outlets. However, in the two months since the implementation of the sales channel adjustment, we have seen stable sales orders and reduced selling cost, and we expect to gain transparency through our sales channel going forward.  We expect sales in our fiscal third quarter to be in a similar range to our second quarter level with sales expected to pick up in the fiscal fourth quarter and produce quarterly profitability by the end of the fiscal year. We believe the successful implementation of this strategy will lay a solid foundation for strengthening the management of our sales channel and achieving greater sales volume in the long term."

"Over the next year, our efficiency enhancements in the main lines of our infant formula product segment are expected to put us back on solid footing and lay the foundation for continued growth in the coming quarters.  We are also excited about the prospects of our nutritional ingredient and supplements segment, where we are uniquely positioned to capture new customers in new geographic regions."

Formula Sale Performance

3Q12

4Q12

1Q13

2Q13

Net sales of powdered formula segment

99,843

82,549

50,455

50,090

Market share (CIC data)*

5.6%

5.1%

4.9%

4.7%

* Market share data reflect 3-month average of the quarter

 

Financial Results for the Second Quarter of Fiscal 2013 versus the First Quarter of Fiscal 2013

Quarter Ended

QoQ Change

Sep 30, 2012

Jun 30, 2012

 (in USD 000's except per share and percentage data)

Net sales

66,100

53,586

12,514

23%

Cost of sales

48,626

36,285

12,341

34%

Gross profit

17,474

17,301

173

1%

Gross margin

26.4%

32.3%

Selling and distribution expenses  

14,298

13,117

1,181

9%

Advertising and promotion expenses

10,186

6,804

3,382

50%

General and administrative expenses

7,162

7,857

(695)

-9%

Other operating income, net

80

885

(805)

-91%

Total operating expense

31,566

26,893

4,673

17%

Loss from operations

(14,092)

(9,592)

(4,500)

47%

Operating margin

-21.3%

-17.9%

Net interest expense and other income

1,233

3,087

(1,854)

-60%

Income tax expense (benefit)

29,018

(2,903)

31,921

--

Net loss attributable to the noncontrolling interest

(157)

(77)

(80)

104%

Net loss attributable to common stockholders

(44,186)

(9,699)

(34,487)

356%

Income (loss) per share – Basic and diluted

($0.77)

($0.17)

(0.60)

356%

Net sales increased 23% to $66.1 million for the second quarter of fiscal 2013 from $53.6 million in the first quarter of fiscal 2013. Net sales from the Company's branded powdered formula segment were $50.1 million, or 76% of net sales in the quarter, compared to $50.5 million, or 94% of net sales, in the previous quarter.  The sales of branded powdered formula continued to reflect the short-term impact of the 15% price increase on infant formula products implemented on April 1st in addition to the seasonal sales slow down typical during the hot summer months.  Net sales of the Company's Super series infant formula for the second quarter were 46% of the volume of sales and 63% of the net sales of the powdered formula segment compared to 55% of the volume of sales and 71% of the net sales of the powdered formula segment in the previous quarter. By volume, sales of powdered formula products were 4,605 tons in the second quarter which increased from 4,380 tons in the previous quarter.

Net sales from Other Products, which includes imported whole milk powder and whey protein powder sold to industrial customers, was $14.6 million, or 22% of net sales, in the second quarter of fiscal 2013, compared to $1.0 million, or 2% of net sales in the previous quarter. This increase was due to sales of imported milk powder of $12.1 million in the second quarter of fiscal 2013, compared to $0.2 million in the previous quarter.

Gross profit was $17.5 million in the second quarter of fiscal 2013, compared $17.3 million in the previous quarter. Gross margin in the second quarter of fiscal 2013 decreased to 26% compared to 32% in the previous quarter mainly due to the negative gross margin for the sales of surplus imported milk powder as the Company purchased this product at a higher price than the lower current market price.  Powdered formula margin increased to 43% from 37% in the previous quarter. The sequential increase in powdered formula margins was due to higher distribution levels of free products and an inventory provision for aged imported Super products in the previous quarter.

Loss from operations was $14.1 million, compared to loss from operations of $9.6 million in the previous quarter. Total operating expenses increase 17% to $31.6 million from $26.9 million in the previous quarter. 

Selling and distribution expenses increased 9% to $14.3 million from $13.1 million in the previous quarter.

Advertising and promotional expenses increased 50% to $10.2 million from $6.8 million in the previous quarter, primarily due to increased levels of promotional gifts provided in the quarter and higher advertising expenses in several of the Company's product areas. 

General and administrative expenses decreased 9% to $7.2 million from $7.9 million in the previous quarter.

Fiscal 2013 second quarter income tax expenses increased to $29.0 million compared to an income tax benefit of $2.9 million in the fiscal first quarter.  The income tax expense for the fiscal second quarter includes a $25.4 million charge from an increase in the valuation allowance for deferred tax assets attributable to net operating loss carryforwards of certain PRC subsidiaries and a $3.6 million charge from the derecognition of the income tax benefit for the loss incurred for the fiscal first quarter.

Net loss attributable to common stockholders was $44.2 million in the second quarter of fiscal year 2013, or $(0.77) per diluted share, compared to a net loss of $9.7 million, or $(0.17) per diluted share, in the previous quarter. 

First Half Ended September 30, 2012 Financial Results

Net sales for the first half of fiscal 2013 ended September 30, 2012 decreased to $120.0 million from $142.8 million in the prior year period. Net sales from branded powdered formula products decreased to $100.5 million, or 84% of net sales, compared to $119.3 million, or 84% of net sales in the prior year period. The decrease was primarily due to the short-term impact of the price increase.

Net sales from Other Products, which consists mainly of imported whole milk powder and whey protein sold to industrial customers, were $15.6 million, or 13% of net sales, compared to $22.8 million, or 16% of net sales, in the prior year period.

Gross profit decreased 40% to $34.8 million for first half of fiscal 2013 from $58.1 million in the prior year period. Gross margin was 29% compared to 41% for the prior year period.

Loss from operations was $23.7 million for the first half of fiscal 2013, compared to an operating income of $5.2 million in the prior year period.

Net loss attributable to Synutra International, Inc. common stockholders was $53.9 million for the first half of fiscal 2013, or $(0.94) per diluted share, compared to a net loss of $1.1 million, or $(0.02) per diluted share, in the prior year period.

Balance Sheet

As of September 30, 2012, the Company had cash and cash equivalents of $74.5 million and restricted cash of $74.2 million, including the current and non-current portion. The Company's sequential inventory position decreased 10.7% to $77.1 million from $86.4 million.

Fiscal 2013 Business Outlook

Mr. Liang Zhang concluded, "Based on slower than anticipated sales in the first half of our fiscal year as well as the planned reduction of our distributor base, we are modifying our full fiscal year outlook.  For the full year of fiscal 2013, we currently expect revenue in the range of approximately $300 to $350 million and a net loss of approximately $30 to $50 million, primarily due to the $29 million charge related to the valuation allowance on deferred tax assets this quarter as well as a net loss before income tax of approximately $1 to $20 million. With the successful implementation of our sales channel adjustment, revenue growth in our fiscal second half is expected to be greater than the first half.  Consequently, we expect to achieve some operating leverage and a return to profitability in the last quarter of our fiscal year."

"Over the longer-term, we expect continued growth in our business.  We continue to expect significant annualized growth in China's dairy industry for the foreseeable future and we believe we have meaningful opportunities to expand our market position with our existing product line as well as develop new products for new markets."

These forecasts reflect the Company's current and preliminary view on the market and operational conditions, which are subject to change.

Conference Call Details

The Company will hold a conference call on Monday, November 12, 2012 at 8:00 a.m. Eastern Time to discuss the financial results. Listeners may access the call by dialing the following numbers:

United States Toll Free:   

+1 (855) 500-8701

International:                   

+65 6723-9385

Conference ID:                 

38467130

A webcast and replay 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 through its operating subsidiaries 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 all provinces and provincial-level municipalities in mainland China. As of September 30, 2012, this network comprised over 680 independent distributors and over 730 independent sub-distributors who sell Synutra products in over 63,000 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; the safety and quality of Synutra's products; 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.

 

 Synutra International, Inc. 

 Consolidated Balance Sheets 

 (Dollars and shares in thousands, except per share data) 

 (Unaudited) 

September 30, 2012

March 31, 2012

ASSETS

Current Assets:

Cash and cash equivalents

$

74,521

$

64,793

Restricted cash

62,978

30,425

Accounts receivable, net of allowance

47,075

38,753

Inventories

77,174

75,499

Due from related parties

7,453

12,262

Income tax receivable

35

227

Receivable from assets disposal

-

1,037

Prepaid expenses and other current assets

17,881

16,320

Deferred tax assets

7,653

17,827

Total current assets

294,770

257,143

Property, plant and equipment, net

129,749

134,902

Land use rights, net

10,007

10,198

Intangible assets, net

4,363

4,377

Restricted cash

11,229

21,019

Other assets

3,059

1,367

Deferred tax assets

3,425

18,907

TOTAL ASSETS

$

456,602

$

447,913

LIABILITIES AND EQUITY

Current Liabilities:

Short-term debt

$

155,755

$

86,614

Long-term debt due within one year

50,725

40,831

Accounts payable

45,473

70,927

Due to related parties

1,888

1,655

Advances from customers

6,263

5,991

Other current liabilities

40,504

40,560

Total current liabilities

300,608

246,578

Long-term debt

98,746

92,745

Deferred revenue

4,213

4,377

Capital lease obligations

7,680

4,726

Other long-term liabilities

6,166

2,395

Total liabilities

417,413

350,821

Commitments and contingencies

Equity:

Common stockholders' equity

Common stock, $.0001 par value: 250,000 authorized; 57,301 and 57,301 issued and outstanding at September 30, 2012 and March 31, 2012, respectively

6

6

Additional paid-in capital

135,440

135,440

Accumulated deficit

(125,505)

(71,620)

Accumulated other comprehensive income

28,726

32,201

Total common stockholders' equity

38,667

96,027

Noncontrolling interest

522

1,065

Total equity

39,189

97,092

TOTAL LIABILITIES AND EQUITY

$

456,602

$

447,913

 

 Synutra International, Inc. 

 Consolidated Statements of Operations 

 (Dollars in thousands, except per share data) 

 (Unaudited) 

 Three Months Ended September 30, 

 Six Months Ended September 30, 

2012

2011

2012

2011

Net sales

$

66,100

$

99,053

$

119,686

$

142,810

Cost of sales

48,626

57,054

84,911

84,732

Gross profit

17,474

41,999

34,775

58,078

Selling and distribution expenses

14,298

12,328

27,415

24,789

Advertising and promotion expenses

10,186

8,042

16,990

15,050

General and administrative expenses

7,162

6,672

15,019

13,251

Other operating income, net

80

70

965

180

Income (loss) from operations

(14,092)

15,027

(23,684)

5,168

Interest expense

3,934

3,872

7,490

7,284

Interest income

590

612

1,077

923

Other income, net

2,111

107

2,093

572

Income (loss) before income tax expense (benefit)

(15,325)

11,874

(28,004)

(621)

Income tax expense

29,018

3,257

26,115

208

Net income (loss)

(44,343)

8,617

(54,119)

(829)

Net income (loss) attributable to the noncontrolling interest

(157)

92

(234)

242

Net income (loss) attributable to common stockholders

$

(44,186)

$

8,525

(53,885)

(1,071)

Earnings (loss) per share - basic and diluted

$

(0.77)

$

0.15

(0.94)

(0.02)

Weighted average common stock outstanding - basic and diluted

57,301

57,301

57,301

57,301

 

SOURCE Synutra International, Inc.



RELATED LINKS

http://www.synutra.com