Chinese infant formula maker Synutra International reports fiscal Q2 earnings of US$8.5M; CEO cites effectiveness of consumer-centric marketing strategy

QINGDAO, China and ROCKVILLE, Maryland , November 9, 2011 (press release) – Synutra International, Inc. (NASDAQ:SYUT - News), ("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 and first half of fiscal 2012 ended September 30, 2011.

Mr. Liang Zhang, Chairman and CEO of Synutra, remarked, "We are pleased to return to profitability with net income of $8.5 million, an important milestone in the continued recovery of our powdered formula sales from the hormone allegations. We believe our sustained recovery is driven by the effectiveness of our consumer-centric marketing strategy, which has led to sales growth while controlling advertising and promotional costs. There is still room for improvement through margin expansion. However, we believe our three consecutive quarters of improvement demonstrate that our recovery is long term and sustainable. We are focused on quality, a topic that continues to grow in prominence among China's consumers, and we are differentiated by our end consumer-centric marketing, which strengthens our distribution reach. Over the long term, we are confident that these factors will help differentiate us among China's fragmented infant dairy market to strengthen our future growth momentum."

Mr. Weiguo Zhang, President and Interim CFO of Synutra, commented, "We are pleased by our steady trend of improvement, shown by our powdered formula sales adjusted for the June quarter shipment delay. As we discussed last quarter, $16.6 million of net sales were shifted from the June quarter into the September quarter. Financially, this translates into approximately $9 million of gross profit and would have lowered the net loss in the June quarter to approximately $3 million and the net income of the September quarter to approximately $2 million. Adjusted for this delay, our powdered formula sales performance has gradually but consistent improved in revenue, margins and profitability. We believe this is noteworthy as Synutra's performance is best tracked through powdered formula sales. We occasionally choose to enter into imported whole milk powder sales, when market dynamics present an opportunity to increase shareholder returns and strengthen cash flows. However, our core business, powdered formula sales, continues to climb steadily. We are encouraged by this achievement and look forward to building upon this trend of steady growth to further enhance shareholder value."

Net sales rose to $99.1 million for the second quarter of fiscal 2012 from $43.8 million in the first quarter of fiscal 2012. Net sales from the Company's branded powdered formula segment were $79.1 million, or 79.9% of net sales in the quarter, compared to $40.2 million, or 91.8% of net sales, in the previous quarter. The increase includes $16.6 million of sales recognized in July instead of the June quarter due to shipment delays but primarily reflects the steady recovery of branded powdered formula sales. The shift in revenue mix was primarily driven by the Company's decision to enter into $16.0 million of imported whole milk powder sales as recent pricing trends allow such transactions to enhance cash flows. Net sales of the Company's Super series infant formula accounted for 56.7% of the volume of sales and 68.2% of the net sales of the powdered formula segment for the second quarter of fiscal year 2012 compared to 58.4% of the volume of sales and 70.4% of the net sales of the powdered formula segment in the previous quarter. By volume, sales of powdered formula products increased 79.8% to 8,115 tons in the fiscal second quarter from 4,513 tons in the previous quarter.

Net sales from Other Products, which generally consists of imported whole milk powder and raw milk sold to industrial customers, was $19.7 million, or 19.9% of net sales, in the second quarter of fiscal 2012, compared to $3.1 million, or 7.0% of net sales in the previous quarter.

Gross profit was $42.0 million in the second quarter of fiscal 2012, compared to $16.1 million in the previous quarter. Gross margin in the second quarter of fiscal 2012 was 42.4%, compared to 36.7% in the previous quarter. As sales volume continues to grow and selling costs decrease as a percentage of net sales, the Company expects margins to continue to strengthen but at a more gradual pace to converge towards a long term normalized range.

Income from operations was $15.0 million compared to a loss from operations of $9.9 million in the previous quarter. Total operating expenses were $27.0 million, compared to $25.9 million in the previous quarter, reflecting the Company's focus on a consumer-centric marketing strategy that leads to lower advertising and promotional expenses. Selling and distribution expenses were $12.3 million, compared to $12.5 million in the previous quarter. Advertising and promotional expenses increased 14.8% to $8.0 million, compared to $7.0 million in the previous quarter. General and administrative expenses were $6.7 million compared to $6.6 million in the previous quarter.

Net income attributable to Synutra International, Inc. common stockholders was $8.5 million in the second quarter of fiscal year 2012, or $0.15 per diluted share, compared with a net loss of $9.6 million, or $0.17 per diluted share, in the previous quarter.

First Half Ended September 30, 2011 Financial Results

Net sales for the first half ended September 30, 2011 increased 14.3% to $142.8 million from $125.0 million in the prior year period. Net sales from branded powdered formula products increased 2.4% to $119.3 million, or 83.5% of net sales, in the first half ended September 30, 2011, from $116.5 million, or 93.2% of net sales, in the prior year period.

Net sales from Other Products, which consist mainly of imported whole milk powder and raw milk sold to industrial customers, were $22.8 million, or 15.9% of net sales, in the first half of fiscal 2012, compared to $7.4 million, or 5.9% of net sales, in the prior year period.

Gross profit was $58.1 million in first half of fiscal 2012, an increase of 5.1% from $55.3 million in the prior year period. Gross margin was 40.7% in the first half of fiscal 2012 compared to 44.2% in the prior year period.

Operating income was $5.2 million in the first half of fiscal 2012, compared to an operating loss of $9.8 million in the prior year period. Net loss was $1.1 million in the first half of fiscal 2012, or $0.02 per diluted share, compared with a net loss of $11.1 million, or $0.20 per diluted share, in the prior year period.

Balance Sheet

As of September 30, 2011, the Company had cash and cash equivalents of $36.7 million and restricted cash of $63.1 million, including current and non-current portion.

Conference Call Details

The Company will hold a conference call on Thursday, November 10, 2011 at 8:00 am 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:


+1 (646) 254-3515


Conference ID:


20852220

The replay will be accessible through November 16, 2011 by dialing the following numbers:

United States Toll Free:


+1 (866) 214-5335


International:


+1 (718) 354-1232


Conference ID:


20852220

A webcast 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 - News) 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, 2011, this network comprised over 670 independent distributors and over 900 independent sub-distributors who sell Synutra products in over 72,000 retail outlets.

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