Synutra Reports Second Quarter and First Half Fiscal 2013 Financial Results

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.

12 Nov 2012 --- Synutra International, Inc., which owns subsidiaries in China that produce, market and sell nutritional products for infants, children and adults, 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."

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.