CHINA: Synutra cuts forecasts again after Q3 results

By Michelle Russell | 12 February 2013

  • Net loss of US$13.3m
  • Operating profit slides to $632,000
  • Net sales up 11%
The increased cost of whey protein powder and an inventory write-down weighed on results

The increased cost of whey protein powder and an inventory write-down weighed on results

Chinese infant formula group Synutra International has again cut its full-year financial forecasts after reporting a loss in the third quarter of its fiscal year.

In the three months to the end of December the company booked a net loss of US$13.3m compared to earnings of $10.3m last year. The increased cost of whey protein powder and an inventory write-down weighed on results. Operating profit slid to $362,000 from $21.4m in the prior year.

Net sales fell nearly 36% to $73.2m. Synutra increased prices in April and also decided to focus its sales process on margins over quantity, it said.

Synutra pointed to improvement quarter-on-quarter, with sales and its bottom line improving in the third quarter compared to the previous two months.

However, Synutra cut its annual forecasts again, after readjustments in November and August.

It now expects revenue in the range of $275m to $280m and a net loss of $65m to $67m. Previously, the company expected sales of $300m to $350m and a net loss of $30m to $50m.

Show the press release

 

Synutra Reports Third Quarter and First Nine Months of Fiscal 2013 Financial Results

 

QINGDAO, China and ROCKVILLE, Md., Feb. 8, 2013 /PRNewswire/ -- Synutra International, Inc. (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 third quarter and first nine months of fiscal 2013ended December 31, 2012.

Mr. Liang Zhang, Chairman and CEO of Synutra, commented, "Our fiscal third quarter results reflected the beginning of recovery from the sales slowdown attributable to the retail price increase implemented in our fiscal first quarter. The modest sequential revenue growth was driven by higher consumption of branded infant formula products in the winter months as compared to the summer months, as well as increased sales orders from distributors in anticipation of the Chinese New Year holiday in early February. Sales orders measured in tons increased by 28% to 5,875 tons from 4,605 tons in the fiscal second quarter and gross margin increased to 43%, a sequential improvement largely due to the reduction of lower-margin industrial sales in our revenue mix, less free products provided to distributors and a change in the redemption policy in our customer loyalty program."

"We believe the retail price increase we implemented in 2012 on our branded infant formula products are gaining broader consumer acceptance at the retail level and we continue to improve operational efficiency in our business.  As discussed last quarter, in light of a maturing infant formula market in China along with intensified competition among multinational and domestic infant formula brands in China, we shifted our strategy from focusing on rapid brand expansion to a focus on the better management of our sales channels and retail outlets.  We made clear progress in recent months implementing the "Gold Mining" program, adjusting our sales management approach to focus on margins instead of quantity, and with increased attention on store yield and efficiency.  At the end of our fiscal third quarter, the number of retail outlets served decreased significantly from approximately 63,000 to 27,000.  In tandem with these changes, our sales force is becoming more streamlined, better equipped, and ready to take on the competitive challenges of today's infant formula market.  This adjustment will serve us well in the long-term, improving the overall health of our sales channel system and improving greater operating efficiency and profitability."

"Moving forward, we expect sustained levels of growth in China's infant formula for the foreseeable future and believe the operating adjustments we recently implemented will better position Synutra for long-term success in China's branded infant formula category.  Further, we are well positioned in our nutritional ingredient and supplements segment for rapid growth. Our shipment of chondroitin sulfate to third-party customers increased significantly in the first nine months of our fiscal year over our prior period and we expect this category to contribute more meaningfully to our revenue performance in the coming quarters.  We are pleased to expect a return to profitability in our fiscal fourth quarter and believe we have improved our growth prospects for our shareholders," concluded Mr. Zhang.

Formula Sale Performance


4Q12

1Q13

2Q13

3Q13

Net sales of powdered formula segment

82,549

50,455

50,090

62,390

Market share (CIC data)*

5.1%

4.9%

4.7%

4.9%

* CIC is the Commercial Information Center of China. Market share data reflect 3-month average of the quarter

Financial Results for the Third Quarter of Fiscal 2013 versus the Second Quarter of Fiscal 2013


             Quarter Ended


QoQ Change


December 31,

2012

September 30,

2012




 (in USD 000's except per

share and percentage data)






Net sales

73,228

66,100


7,128

11%







Cost of sales

41,717

48,626


(6,909)

-14%

Gross profit                                    

31,511

17,474


14,037

80%

Gross margin

43.0%

26.4%










Selling and distribution

   expenses

14,488

14,298


190

1%

Advertising and promotion

   expenses

9,910

10,186


(276)

-3%

General and administrative

   expenses

6,967

7,162


(195)

-3%

Other operating income, net

216

80


136

170%

Total operating expense

31,149

31,566


(417)

-1%







Income (Loss) from operations

362

(14,092)


14,454

-103%

Operating margin

0.7%

-21.3%










Interest income, interest

   expense and other income (loss),

   net

2,844

1,233


1,611

131%

Income tax expense (benefit)

10,971

29,018


(18,047)

-62%

Net income (loss) attributable

   to the noncontrolling interest

(183)

(157)


(26)

17%







Net income (loss) attributable

   to common stockholders

(13,270)

(44,186)


30,916

-70%







Income (loss) per share -

   Basic and diluted

($0.23)

($0.77)


(0.54)

-70%













Net sales increased 11% to $73.2 million for the third quarter of fiscal 2013 from $66.1 million in the second quarter of fiscal 2013. Net sales from the Company's branded powdered formula segment were $62.4 million, or 85% of net sales in the quarter, compared to $50.1 million, or 76% of net sales, in the previous quarter.  By volume, sales of powdered formula products were5,875 tons in the third quarter which increased from 4,605 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 $10.6 million, or 14% of net sales, in the third quarter of fiscal 2013, compared to $14.6 million, or 22% of net sales in the previous quarter. This decrease was due to sales of imported milk powder to industrial customers of $6.1 million in the third quarter of fiscal 2013, compared to $12.1 million in the previous quarter.

Gross profit was $31.5 million in the third quarter of fiscal 2013, compared $17.5 million in the previous quarter. Gross margin in the third quarter of fiscal 2013increased to 43% compared to 26% in the previous quarter. The increase is primarily attributed to the decrease in the lower-margin industrial sales of whole milk powder and whey protein powder in the net sales mix. Powdered formula margin increased to 52% from 43% in the previous quarter. The sequential increase in powdered formula margins was due to a change in the redemption policy of our customer loyalty program and the decrease in free products provided to distributors in the fiscal quarter ended December 31, 2012.

Income from operations was $362 thousand, compared to loss from operations of $14.1 million in the previous quarter. Total operating expenses were $31.1 million, compared with $31.6 million in the previous quarter. 

Selling and distribution expenses were $14.5 million, compared with $14.3 million in the previous quarter.

Advertising and promotional expenses were $9.9 million, compared with $10.2 million in the previous quarter. 

General and administrative expenses were $7.0 million, compared with $7.2 million in the previous quarter.

Fiscal 2013 third quarter income tax expense decreased to $11.0 million from an income tax expense of $29.0 million in the fiscal second quarter.  The income tax expense for the fiscal third quarter and previous quarter includes a $11.1 million and $25.4 million charge from an increase in the valuation allowance for deferred tax assets attributable to certain PRC subsidiaries, respectively.  As of December 31, 2012 the net balance of our deferred tax assets is nil.

Net loss attributable to common stockholders, including the $11.1 million of valuation allowance for deferred tax assets, was $13.3 million in the third quarter of fiscal year 2013, or $(0.23) per diluted share, decreased from a net loss of $44.2 million, including $25.4 million of valuation allowance for deferred tax assets, or $(0.77) per diluted share, in the previous quarter.

First Nine Months Ended December 31, 2012 Financial Results
Net sales for the first nine months of fiscal 2013 ended December 31, 2012 decreased to $192.9 million from $257.2 million in the prior year period. Net sales from branded powdered formula products decreased to $162.9 million, or 84% of net sales, compared to $219.1 million, or 85% of net sales in the prior year period. The decrease was primarily due to the significant purchases by distributors prior to our retail price increase effective April 1, 2012, and the short-term impact on orders as we implemented the Gold Mining program as noted above.

Net sales from Other Products, which consists mainly of sales of imported whole milk powder and whey protein sold to industrial customers, were $26.2 million, or 14% of net sales, compared to $37.0 million, or 14% of net sales, in the prior year period.

Gross profit decreased 37% to $66.3 million for first nine months of fiscal 2013 from $105.4 million in the prior year period. Gross margin was 34% compared to 41% for the prior year period. The gross margin decline was primarily attributable to increased cost of whey protein powder and inventory write-down for imported Super series.

Loss from operations was $23.3 million for the first nine months of fiscal 2013, compared to an operating income of $26.6 million in the prior year period.

Net loss attributable to Synutra International, Inc. common stockholders was $67.2 million for the first nine months of fiscal 2013, including $36.5 million of valuation allowance for deferred tax assets, or $(1.17) per diluted share, compared to a net income of $9.2 million, or $0.16 per diluted share, in the prior year period.

Balance Sheet
As of December 31, 2012, the Company had cash and cash equivalents of $41.7 million and restricted cash of $82.0 million, including the current and non-current portion.  Net account receivables decreased from $47.1 million on September 30, 2012 to $45.2 million on December 31, 2012, while our sequential inventory position increased 3% to $79.2 million from $77.2 million.

Fiscal 2013 Business Outlook
Mr. Liang Zhang concluded, "For the full year of fiscal 2013, we currently expect revenue in the range of approximately $275 to 280 million and a net loss of approximately $65 to 67 million, including $36.5 million of valuation allowance for deferred tax assets.  In the fiscal fourth quarter, we expect revenue of approximately $82 to 87 million and a net profit of $1 to 3 million."  

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, February 11, 2013 at 8:00 a.m. Eastern Time to discuss the financial results. Listeners may access the call by dialing the following numbers:

United States Toll Free:

 +1 (855) 500-8701

International:

+65 6723-9385

Conference ID:

86670804

A webcast and replay of the conference call will be available through the Company's IR website atwww.synutra.com.

About Synutra International, Inc.
Synutra International, Inc. (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 December 31, 2012, this network comprised over 660 independent distributors and over 690 independent sub-distributors who sell Synutra products in approximately27,000 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.

 

Original source: Synutra

Sectors: Baby food, Emerging markets, Financials

Companies: Synutra

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