SYUT 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 30^th. 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."

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

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 1^st 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:

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.

SOURCE Synutra International, Inc.