Synutra Sees Return to Profitability as it Continues to Recover from September 2008 Melamine Incident

The Company’s powdered formula segment recorded a gross margin of $16.7 million, or 41.6% from net sales of $40.1 million, which was offset by a loss of $3.8 million on other sales of $56.5 million.

10 Feb 2010 --- Synutra International, Inc., a leading infant formula company in China and a producer, marketer and seller of nutritional products for infants, children and adults, reported financial results for the Company’s third quarter and nine months ended December 31, 2009.

Company Continues to Increase Revenues and Maintain Market Share

Revenues for the third fiscal quarter ended December 31, 2009 reached $96.80 million, an increase of over 400% from $17.7 million in the year-ago third quarter. The increase is primarily due to the absence of the Company’s U-Smart product series in the year-ago third quarter after the Chinese government found that eight lots of Synutra’s U-Smart series of formula products along with certain products of 21 other manufacturers had been contaminated with melamine in September 2008. Since the product recall, the Company has been steadily regaining the lost market share from the incident through a series of strategic initiatives, including new marketing and sales programs, sales of its premium line of Super series infant formula products, which accounts for the majority of segment sales, and sales of surplus milk powder to industrial customers.

On a sequential basis, revenues in the third quarter increased 48.2% from $65.3 million in the second quarter ended September 30, 2009. The increase was primarily due to continued gains in sales of Synutra’s powdered formula products and sales of surplus milk powder to industrial customers. According to data released by the Ministry of Commerce’s Commercial Information Center (CIC), the Company’s market share has stabilized at approximately 7.0% for the fiscal quarter ended December 31, 2009, representing a significant increase from the 3.4% as reported in October 2008, the month immediately following the melamine contamination incident.

The Company’s powdered formula segment recorded a gross margin of $16.7 million, or 41.6% from net sales of $40.1 million, which was offset by a loss of $3.8 million on other sales of $56.5 million, which mainly included industrial surplus milk powder on revenue of $53.4 million for the fiscal quarter ended December 31, 2009, representing a significant improvement from fiscal quarters that immediately followed the product recall. The improvement of gross profit over the same period in 2008 was driven primarily through sales of the Company’s premium line of Super series infant formula products. The sales of Super series infant formula accounted for approximately 59.6% of the volume of sales and 70.9% of the net sales for the segment for the fiscal quarter ended December 31, 2009. The Company believes that the increasing sales of its Super series infant formula has led the segment in market recovery and helped to stabilize the Company’s market position.

The Company generated a gross profit of $12.6 million during the third fiscal quarter compared to a loss of $9.8 million in the year-ago quarter. For the third fiscal quarter, the Company reported a net loss attributable to common shareholders of $9.7 million, or $0.18 per fully diluted share, compared to a year-earlier net loss of $49.3 million, or $0.91 per fully diluted share. On a sequential basis, net loss attributable to common shareholders in the latest quarter decreased from $14.0 million, or $0.26 per fully diluted share, in the quarter ended September 30, 2009.

CEO Sees Continued Market Share Gains and Return to Profitability

Liang Zhang, Chairman and CEO of Synutra, commented, “The quarterly gains in revenues and market share are clear signs of the success of our recovery efforts. During the past quarter, we focused on streamlining management tools and systems to ensure efficiency and transparency. As a result, we have been able to optimize our inventory levels both on the production side and in the distribution channels. We also redeployed significant resources to support increased promotional activities to our consumers and beyond the distribution channels, by our field promoters in the communities and our nutrition education professionals at the medical and healthcare facilities. With the direct impact of the 2008 melamine incident behind us, sales of our industrial surplus milk powder abating as our inventory levels are restored to reasonable levels, and with the success of the comprehensive recovery effort and new sales initiatives, I have reason to believe that we will be on track for growth and profitability in the near future and we continue to strive to regain our leadership position in the market in the months ahead.”

Revenues for the nine months ended December 31, 2009 decreased by 12.7% to $209.5 million from $239.8 million in year-ago period. The Company’s gross profits for the nine month period ended December 31, 2009 increased by 46.2% to $44.5 million from $30.4 million for the same period in the previous year. For the nine month period, the Company reported a net loss of $33.7 million, or $0.62 per diluted share, compared to a net loss of $83.4 million, or $1.54 per diluted share, for the same period in the previous year. The decrease in the Company’s nine-month revenues was a result of the lingering impact of the product recall carried out in late 2008 as well as a greater proportion of rebates to distributors and the additional product discounts provided to distributors beginning August 2009 as compensation for certain product promotion activities that were previously handled by the Company.