Synutra Reports Third Quarterand First Nine Months of Fiscal 2014 Financial Results

11 Feb 2014 --- 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 third quarter and first nine months of fiscal 2014 ended December 31, 2013.

Mr. Liang Zhang, Chairman and CEO of Synutra, commented, "We are pleased with our strong performance in the third quarter as we achieved better-than-expected results in both sales growth and earnings. The sequential increase in our branded powdered formula segment sales benefitted from seasonality effects and the early timing of the Chinese New Year, but more fundamentally, was backed by the successful execution of our Goldmining Strategy and effective marketing efforts for our specialty formula products. Our distributors increased shipment volumes and we effectively managed our gross margin pressure from rising raw material costs."

"In 2013, there were changes in the competitive landscape of China's infant formula market and continued public scrutiny of dairy companies' product quality and marketing conduct. Amidst the new market environment, Synutra differentiated itself in several ways. First, as a provider of safe and nutritious products, we continue to upgrade our production standards to comply with evolving regulations. Over the long term, our French drying facility will provide a sustainable, secure supply of high-quality raw materials. Second, as the only licensed domestic producer of medical-purpose specialty formula, we are uniquely positioned to capitalize on marketing and sales in the medical channel. This advantage has helped us regain our growth momentum. Third, in light of the Chinese government's support of industry consolidation among domestic dairy companies, the strength and quality of our brands have positioned Synutra as a favorable partner for strategic growth opportunities."

"As we enter the last quarter of our fiscal year, we will maintain our focus on prudently monitoring raw material purchases, driving greater efficiency in our operating infrastructure, and delivering profitable results." concluded Mr. Zhang.

Net sales increased 14% to $101.0 million for the third quarter of fiscal 2014 from $88.6 million in the second quarter of fiscal 2014. Net sales from the Company's branded powdered formula segment were $86.2 million, or 85% of net sales in the quarter, compared to $71.7 million, or 81% of net sales, in the previous quarter. By volume, sales of powdered formula products were 6,449 tons in the third quarter, compared to 5,004 tons in the previous quarter. The increase was driven by the positive effects of the Company's Goldmining strategy, discount incentives and brand diversification, as well as seasonally higher consumption of formula products. This increase in volume was offset by a small decrease in average selling price of powdered formula products, which decreased to $13,360 per ton from $14,319 per ton in the previous quarter mainly due to an extra 2.5% discount to incentivize distributors to accelerate shipments, and the increased contribution from our lower priced adult formula products which are popular gifts for the winter holiday season. Overall, discounts and rebates to distributors and retail stores remained at low levels.

Net sales from Nutritional ingredients and supplements, which is comprised of external sales of chondroitin sulfate to third parties, was $6.3 million, or 6% of net sales, in the third quarter of fiscal 2014, compared to $5.3 million, or 6% of net sales in the previous quarter. This segment performed in line with expectations and revenue recognition is timed according to terms of annual supply contracts with major customers.

Net sales from Other Products, which includes imported whole milk powder and whey protein powder sold to industrial customers, was $8.6 million, or 8% of net sales, in the third quarter of fiscal 2014, compared to $11.6 million, or 13% of net sales in the previous quarter. Synutra expects to continuously incur ancillary sales of raw milk powder/ whey protein powder due to its production methods, and such sales may vary from quarter to quarter.

Gross profit was $40.3 million in the third quarter of fiscal 2014, compared to $38.9 million in the previous quarter. Gross margin in the third quarter of fiscal 2014 was 40%, compared to 44% for the previous quarter. Powdered formula margin was 50%, down from 53% for the previous quarter, due to the rising cost of raw milk powder, as well as a higher portion of lower-margin adult formula sold in the fiscal third quarter.

Selling and distribution expenses were $12.5 million, compared with $13.5 million in the second quarter of fiscal 2014.  

Advertising and promotional expenses were $9.8 million, compared with $10.8 million in the previous quarter, reflecting reduced expenses on advertising.

General and administrative expenses were $6.5 million, compared with $5.8 million in the previous quarter.

Income from operations was $11.9 million, compared to income from operations of $8.9 million in the previous quarter.

Net income attributable to common stockholders was $10.0 million in the third quarter of fiscal year 2014, or $0.17 per basic share, compared with a net income of $6.1 million, or $0.11 per basic share, in the previous quarter.

Nine Months ended December 31, 2013 Financial Results

Net sales for the first nine months of fiscal 2014 ended December 31, 2013 increased to $271.8 million from $192.9 million in the prior year period. Net sales from branded powdered formula products increased to $225.9 million, or 83% of net sales, compared to $162.9 million, or 84% of net sales in the prior year period.

Gross profit increased 74% to $115.3 million for the first nine months of fiscal 2014 from $66.3 million in the prior year period. Gross margin was 42% compared to 34% for the prior year period.

Income from operations was $27.7 million for the first nine months of fiscal 2014, compared to a loss from operation of $20.7 million in the prior year period.

Net income attributable to Synutra International, Inc. common stockholders was $20.8 million for the first nine months of fiscal 2014, or $0.36 per basic share, compared to a net loss of $67.2 million, or $(1.17) per basic share, in the prior year period.

Balance Sheet

As of December 31, 2013, the Company had cash and cash equivalents of $61.6 million and restricted cash of $123.8 million, including the current and non-current portion.  Net account receivables decreased to $18.1 million on December 31, 2013 from $26.3 million on September 30, 2013 while the Company's sequential inventory position increased 22% to $91.8 million from $75.3 million during the same period.  Total debt was $295.2 million, including $101.5 million of short-term debt and $46.5 million of long term debt due within one year, a decrease from the total debt of $308.5 million as of September 30, 2013, which included $103.4 million of short-term debt and $79.4 million of long term debt due within one year.