Synutra Reports Second Quarter Fiscal 2014 Financial Results

11 Nov 2013 --- Synutra International, Inc., which owns subsidiaries in China that produce, distribute and sell nutritional products for infants, children and adults, announced financial results for the second quarter and first half of fiscal 2014 ended September 30, 2013.

Mr. Liang Zhang, Chairman and CEO of Synutra, commented, "We are very pleased with our second quarter performance, particularly given that the summer months are seasonally slower periods for our business and recent industry events added to sales volatility.  The tailwind of the successful Gold Mining Strategy continued to strengthen our pricing power with the distributors, which offset the sequentially lower volume and rising raw material costs.  Our gross margin remained stable on a sequential basis while net margin improved over last quarter as we continued to exert tight control on sales and general administrative expenses."

"In addition to the steady execution of our existing production and distribution, we're making progress on our new drying facility project in Brittany, France. On the financing side, we have received preliminary approval from a leading Chinese bank to fund the majority of the project investment in the form of project financing. On the construction front, we received a key construction permit in the fiscal second quarter and have also engaged industry leading engineering and equipment vendors. We are expecting the final regulatory approval, the environmental impact report for the project in December and construction is scheduled to commence shortly after that. The strategic importance of this project has become more and more evident as China's infant milk formula industry, with the increased involvement from the Chinese government, puts more and more emphasis on premium-quality materials, advanced quality control techniques, and professional execution. We expect this project to create tremendous value for both our customers and shareholders in the long term."

"This quarter the Chinese government continued to introduce measures to address product quality concerns and to improve the image of domestic brands. We welcome the heightened scrutiny from the government, media and consumers alike as we remain focused on the superior quality and safety standards of our partners, manufacturing practices, and retail products, as well as ensuring reasonable pricing on our various product lines for our Chinese consumers.  As we gain greater confidence in our ability to control discounts while sustaining our shipment volume among fierce market competitions, we remain confident in our opportunities in the second half of the year.  We expect our top line for the third quarter fiscal 2014 to be in the range of $85 to $90 million, and net income to be in the range of $7.5 to $8.5 million," concluded Mr. Zhang.

Net sales increased 8% to $88.6 million for the second quarter of fiscal 2014 from $82.2 million in the first quarter of fiscal 2014. Net sales from the Company's branded powdered formula segment were $71.7 million, or 81% of net sales in the quarter, compared to $68.1 million, or 83% of net sales, in the previous quarter.  By volume, sales of powdered formula products were 5,004 tons in the second quarter, compared to 5,744 tons in the previous quarter. The decrease is due to the seasonality we usually experience in July and August, the reluctance to order by distributors and stores after the regulatory changes in June and the promotional campaigns launched by competitors as two market leading brands had bacteria contamination issues in August. This decrease in volume was offset by an increase in average selling price of powdered formula products, which improved to $14,319 per ton from $11,852 per ton in the previous quarter mainly due to lower levels of discounts and rebates to distributors and retail stores.

Net sales from Nutritional ingredients and supplements, which is comprised of external sales of chondroitin sulfate to third parties, was $5.3 million, or 6% of net sales, in the second quarter of fiscal 2014, compared to $6.3 million, or 8% of net sales in the previous quarter.  We continue to execute under long term purchase orders signed with major customers, and the quarter to quarter variance reflects the timing difference of shipments.

Net sales from Other Products, which includes imported whole milk powder and whey protein powder sold to industrial customers, was $11.6 million, or 13% of net sales, in the second quarter of fiscal 2014, compared to $7.7 million, or 9% of net sales in the previous quarter. Synutra expects to continuously incur ancillary sales of raw milk / whey protein powder due to its production methods, and such sales may vary from quarter to quarter.

Gross profit was $38.9 million in the second quarter of fiscal 2014, compared to $36.1 million in the previous quarter. Gross margin in the second quarter of fiscal 2014 remained stable at 44% from the previous quarter. Powdered formula margin also remained at 53% from the previous quarter, the higher end of the Company's historical range, as the higher average selling price was offset by increased raw material cost, mainly the cost of raw milk powder.

Income from operations was $8.9 million, compared to income from operations of $6.9 million in the previous quarter.

Selling and distribution expenses were $13.5 million, compared with $14.8 million in the first quarter of fiscal 2014.  The sales expense ratio was lower in the fiscal second quarter as the fiscal first quarter reflected a onetime compensation cost related to the Company's restructuring of its sales team as part of the Gold Mining Strategy. 

Advertising and promotional expenses were $10.8 million, compared with $8.5 million in the previous quarter, reflecting Synutra's limited participation in promotional activities in August 2013 after the aforementioned contamination event affected competitors.

General and administrative expenses were $5.8 million, compared with $6.5 million in the previous quarter, reflecting less bad-debt expenses.

Net income attributable to common stockholders was $6.1 million in the second quarter of fiscal year 2014, or $0.11 per basic share, compared with a net income of $4.8 million, or $0.08 per basic share, in the previous quarter.

First Half Ended September 30, 2013 Financial Results

Net sales for the first half of fiscal 2014 ended September 30, 2013 increased to $170.8 million from $119.7 million in the prior year period. Net sales from branded powdered formula products increased to $139.7 million, or 82% of net sales, compared to $100.5 million, or 84% of net sales in the prior year period.

Gross profit increased 116% to $75.0 million for first half of fiscal 2014 from $34.8 million in the prior year period. Gross margin was 44% compared to 29% for the prior year period.

Income from operations was $15.8 million for the first half of fiscal 2014, compared to a loss from operation of $21.1 million in the prior year period.

Net income attributable to Synutra International, Inc. common stockholders was $10.8 million for the first half of fiscal 2014, or $0.19 per basic share, compared to a net loss of $53.9 million, or $(0.94) per basic share, in the prior year period.

Balance Sheet

As of September 30, 2013, the Company had cash and cash equivalents of $77.5 million and restricted cash of $130.2 million, including the current and non-current portion.  Net account receivables increased to $26.3 million on September 30, 2013 from $24.7 million on June 30, 2013 while the Company's sequential inventory position decreased 6% to $75.3 million from $79.9 million during the same period.  Total debt was $308.5 million, including $103.4 million of short-term debt and $79.4 million of long term debt due within one year, a decrease from the total debt of $317.6 million as of June 30, 2013, which included $116.4 million of short-term debt and $90.8 million of long term debt due within one year.