Yayi Intl (OTC BB:YYIN)

Third Quarter 2012 Results

• Net sales decreased 6.6% to $8.0 million from $8.6 million for the second quarter of fiscal 2012
• Gross profit remained flat at $5.3 million from $5.4 million for the previous quarter
• Gross margin increased to 66.3% from 63.4% for the previous quarter
• Adjusted net loss was $0.8 million compared to an adjusted net income of $0.2 million for the previous quarter

Ms. Li Liu, Chief Executive Officer of Yayi International, commented, "We focused this quarter on building a stronger revenue mix by strengthening our powdered infant formula sales and increasing productivity of existing locations. From late summer to winter of 2011, the government began requiring all distributors to have permits for selling infant formula. This led to the temporary disruption in sales for some of our smaller distributors as they worked to obtain the necessary permits. As of the end of calendar 2011, the majority of our distributors had received the necessary permits. Though this temporary disruption is reflected in our financials, we do believe this regulation will lead to a stronger infant dairy industry in China and higher quality earnings for us over the long run through stronger distributor partnerships. Furthermore, by focusing on productivity, we lowered slotting fees as we slowed entry into new supermarkets to focus on existing locations. Lastly, we are pleased to note that this quarter, our powdered infant formula segment grew by over 30% sequentially in sales. Our recently launched Golden Brand particularly outperformed, with sales growing rapidly to $172,000 for the third fiscal quarter after it was launched in the second fiscal quarter. We have chosen to focus on our infant formula unit for several reasons. First, this is our highest margin product segment. As a result of the shift in revenue mix this quarter towards a higher proportion of infant formula sales, we saw gross margin rise to 66.3% from 63.4% in the previous quarter. Second, China’s infant formula market continues to grow rapidly while it is fragmented and remains troubled by infant dairy product quality crises related to cow milk. This means that there is a significant opportunity for growth and market share gains, especially for goat milk formula. Lastly, 2012 is the year of the Dragon according to the lunar calendar. As Chinese culture considers this to be a particularly auspicious year, analysts predict that China will experience a mini baby boom. We believe that by focusing on our powdered formula infant segment, we will be able to capitalize on these positive market trends to further enhance our sales performance and return for shareholders.”

• Net sales increased 2.7% to $8.6 million from $8.3 million in the first quarter of fiscal 2011
• Gross profit rose 4.1% to $5.4 million from $5.2 million in the previous quarter
• Gross margin increased to 63.4% compared to 62.6% in the previous quarter
• Adjusted net income was $0.2 million compared to an adjusted net income of $0.8 million in the previous quarter

Ms. Li Liu, Chief Executive Officer of Yayi International, commented, "We are pleased to achieve continued revenue growth and adjusted net income of $0.2 million for the second quarter of fiscal 2012. We believe these measures demonstrate that our continued focus on driving profitability by increasing productivity of both our staff and our existing retail locations has been effective. Furthermore, we believe our management team’s consistent focus on improving our operational strategies will also support our long term growth. We recognize that China’s dairy industry continues to remain a volatile market. However, we believe our focus on quality and our ability to adapt to market challenges will enhance our ability to deliver shareholder value in the long run.”

Business Commentary

Ms. Liu remarked, “We believe our management team’s strength lies in our ability to identify market opportunities and shift our strategy to better capture them. China’s dairy market is rapidly-changing, which forms both a challenging but also exciting competitive environment. To succeed in this environment, we believe it is necessary to vigilantly monitor the landscape to recognize how our own strategies can be improved on to better capture the profitability and growth available.”

Ms. Liu continued, “This quarter, we continued to adapt our strategies to build a more efficient business model. We began testing a new distribution model that shifts from province level distributor relationships to city level distributor relationships. As with our direct sales contracts with infant-maternity retail chains, this strategy will streamline our distribution process. Our centralized sales function will directly collaborate and manage the city level distributors. To launch this new initiative, we hosted a conference attended by 68 distributors from 12 provinces. We will begin testing this new model in a few key provinces first and then implement the new model across the nation gradually. Furthermore, we have seen demand for goat milk powder products outside of the infant formula market. To meet this demand, we have increased our offerings for youth and adults and are pleased to see this segment grow significantly. Overall, the benefits of our new initiatives will take time to evaluate but we are focused on increasing efficiency and are excited about their potential.”

“This quarter, we are also pleased to see that our decision to shift towards driving organic sales has proved effective. In the past few months, we have shifted our focus from breadth of retail presence points to driving same store sales. Through this policy, we have continued to see slotting fees decrease, which in turn translates into a higher selling price. Moving forward, we believe this strategy will continue to drive sales growth while controlling slotting fees costs. In summary, we believe that Yayi has significant potential. Through a dedication to continuous improvement, we aim to better navigate China’s dynamic dairy market to strengthen Yayi’s performance in the long term.”

Fourth Quarter Results:

• Net sales increased 66.6% to $6.2 million from $3.7 million in the prior year period
• Gross profit doubled to $4.1 million from $2.0 million in the prior year period
• Gross margin rose to 66.9% compared to 55.5% in the prior year period
• Adjusted net loss was $0.9 million, or $0.03 per diluted share, compared to a net loss of $2.0 million, or $0.08 in the prior year period

Ms. Li Liu, Chief Executive Officer of Yayi International, commented, "Our 2011 fiscal year has been a productive and noteworthy first step towards our goal of becoming a leading national producer of goat milk formula products. Our portfolio has been streamlined to feature 14 product varieties under the MilkGoat brand as well as 12 additional product varieties targeting infant-maternity stores to better fit the diverse needs of our consumers. We are confident that this dual-pronged strategy will drive our nationwide presence as well as diversify our sales channels."

Ms. Liu commented, "Given current market volatility and the rapidly evolving nature our business, we have elected to provide a quantitative outlook at a later date, as greater visibility becomes available. At the same time, we are cautiously optimistic about the upcoming year and have several new initiatives in place to drive future growth."

Third Quarter Highlights 

• Net sales increased 29.1% to $6.3 million from $4.9 million in the prior year period

• Gross profit increased 13.0% to $3.9 million from $3.4 million in the prior year period

• Gross margin was 61.0% compared to 69.7% in the prior year period Net loss was $0.3 million, or $0.01 per diluted share, compared to net income of $0.5 million, or $0.01 per diluted share, for the prior year period

• Adjusted net loss was $0.1 million, or $0.01 per diluted share, compared to $0.6 million, or $0.01 per diluted share, for the prior year period

Ms. Li Liu, Chief Executive Officer of Yayi International, commented, "We were pleased to achieve year-over-year sales growth despite a challenging business climate and generate $1.7 million of cash from operations during the third quarter. In August 2010, the Chinese media began reporting hormone additions found in domestic infant formula had created health problems for infants throughout China. Though testing by the Ministry of Health later showed these allegations to be unfounded, the news has once again stirred up consumer anxiety and distrust among China’s fragile infant formula industry, which had just begun to recover from the melamine crisis. Despite the challenging environment, we have made significant progress on building a strong foundation for our company’s future growth.”

Ms. Liu continued, “Our portfolio restructuring efforts have begun to yield positive results. We have analyzed our original 58 product varieties to identify the 10 best performing varieties to better concentrate our market development efforts and repositioned ourselves as a premium infant milk powder producer. As with the second fiscal quarter, we have achieved higher net sales with our 10 product varieties than with the original 58 product varieties in the prior year period. Moving forward, we will build upon the success drivers of these products to further enhance our product offerings. We also benefitted from a healthy rise in sales price per unit to $23 per kilogram from $18 per kilogram. Although the market conditions may remain challenging for the next few quarters, we believe that the high quality of our product and the strength of our brand will ultimately translate to strong sales growth and profitability.”

Financial Outlook

The Company is now expecting revenues to be in the range of $26 million to $28 million for the 2011 fiscal year. This forecast reflects the Company’s current and preliminary view, which is subject to change.

Ms. Liu added, “We have chosen to adjust our guidance due to the recent turbulence of China’s infant formula market, which has created a challenging environment for implementing our transformation strategy. AQSIQ’s inspections have disrupted our normal manufacturing schedules and the roll out of our supermarket-focused distribution strategy has been slower than expected in the second half of calendar 2010. To adapt to the challenges we have encountered, we plan to refocus our efforts on infant-maternity stores to capitalize upon their greater repeat sale potential and shorter sales cycle. This will allow us to boost our short-term sales as we continue to execute on our long-term supermarket expansion plan.”

“Furthermore, we believe the recent scandal will change the competitive landscape of China’s infant formula market and create opportunities for market share gains as less established players in the goat milk segment may be forced to exit the market. We expect more visibility after March 2011 when the approval process for new licenses is finalized. In the meantime, we are confident that our dual-pronged approach of developing infant-maternity stores while continuing to execute on our supermarket penetration strategy will build a solid foundation for our future growth momentum and profitability.”

Second Quarter Highlights

• Net sales increased 53.5% year-over-year to $8.4 million

• Gross margin expanded 100 basis points to 65.8% from 64.8% for the three months ended June 30, 2010

• The Company reported a net loss of $0.5 million compared with net income of $1.2 million for the three months ended September 30, 2009.

• Adjusted net income was $0.3 million, or $0.01 per diluted share, for the three months ended September 30, 2010 compared with $1.3 million, or $0.05 per diluted share for the three months ended September 30, 2009

"We are delighted to see continued revenue growth, and especially continued improvement in gross margin on a sequential basis of our new product portfolio," said Ms. Li Liu, Chief Executive Officer of Yayi International. "During the quarter, we added a key national distributor of branded dairy formula and renewed our contract with an important national food distributor, which we believe will strategically position us for strong future sales growth. In addition, we seized the opportunity arising from renewed public concerns about the safety of cow milk formula, as we launched our new series of products for infants and toddlers. We have enhanced our sales and marketing efforts at infant-maternity stores and expect them to result in greater market share in the infant formula segment in the following quarters.”

Business Outlook

Yayi International has continued to expand its distribution network and has thus far as of November 7, 2010 signed sales contracts with distributors for an aggregate expected sales value of approximately $76 million (value-added tax included).

Due to the heightened government inspection of milk products, the Company decided to postpone the date for installing equipment at its milk collection stations in Fuping to January 2011. Moreover, the Company believes the Jinghai facility in Tianjin will be subject to more stringent inspection following the newly issued guidance by the General Administration of Quality Supervision, Inspection and Quarantine of China regarding the safety and quality of dairy products, which will lead to a delay of more than six months for the completion of the project.

“While the first two quarters seemed soft due to the ongoing business transition, we are delighted to see solid sales momentum and growing public awareness of our goat milk products. We remained optimistic about delivering solid results in the remaining quarters as our sales are seasonally skewed with peak season normally ranging from September to February,” said Ms. Liu. “As we augment market penetration, we are committed to quality control initiatives that continuously ensure that our practices ranging from the collection of raw goat milk and production to processing and packaging to meet the most stringent national safety standards. While we have postponed the commencement of production at the new processing plant in Tianjin in order to ensure that we meet the heightened quality requirements, and suspended the installation of processing and central system pipelines at our new raw milk processing facility in Shaanxi Province as the local government is conducting exploration work for the discovered ancient artifacts on the site, we remain optimistic about our current capacity meeting the existing demand.”

Because of the ongoing ramp-up of sales following the restructuring of the product portfolio, as well as the upcoming peak season that hampers the predictability of sales, the Company is carefully assessing its sales guidance of between $58.6 million and $65.9 million for the fiscal year ending March 31, 2011 and will provide updates as its business continues to evolve. Nonetheless, the Company is working diligently towards meeting the guidance.

Fiscal 2011 First Quarter Highlights

• Net sales increased 65.5% to $7.6 million from $4.5 million for the three months ended March 31, 2010.
  
• Gross margin improved 80 basis points to 64.8% from 64.0% for the three months ended March 31, 2010.
  
• The Company reported net income of $0.03 million, or $0.001 per diluted share, compared to a net loss of $1.4 million for the three months ended March 31, 2010.
  
• Excluding debt issuance costs and accretion of debt discount from the Company’s Series A warrants and stock-based compensation expenses, adjusted net income available to common shareholders was $0.2 million, or $0.007 per basic share and $0.004 per diluted share for the three months ended June 30, 2010 compared with adjusted net income of $1.9 million, or $0.07 per basic and diluted share for the same period of 2009.
  
• As of August 10, 2010 Yayi International has signed sales contracts with the distributors with an aggregate expected sales value of approximately $75 million (value-added tax included).
  
• Added 1,080 retail outlets in China, significantly broadening its distribution network since the Company rolled out a new product portfolio at the beginning of this year. Expanded its executive team with the addition of Mr. Bao Zhou as Marketing Director, effective May 11 2010.

"We are pleased to report a solid quarter with robust sequential growth as we expanded our distribution channel and focused on marketing our new product portfolio," said Ms. Li Liu, Chief Executive Officer of Yayi International. "While our business is on the verge of rapid growth, we have maintained focus on quality control, especially our raw goat milk sources. With 10 dairy farms, 20 self-owned mechanized milk collection stations, 65 cooperated and self-owned milk collection centers, we are confident that our ‘Milk Goat’ branded products are of premium quality due to our vertically integrated production process and quality control measures.”

Recent Events

On August 7, 2010, following recent cases where cow milk formula might have been linked to the alleged premature onset of puberty in children, Tianjin Municipal Supervisory Bureau for Quality and Technology declared that Yayi International’s goat milk products are qualified based on its extensive field sample testing. The Company prohibits the use of artificial hormones in its farming practices to avoid disrupting the natural lactation period of dairy goats. Dairy goats do not lactate between November and February, providing them with sufficient time to rest, grow and restore energy, which in turn ensures higher quality goat milk when lactation season begins. In addition to adhering to natural production methods, the Company has introduced quality control standards that are often more rigorous than national standards, guaranteeing the high quality of its goat milk products when shipped from the factory.

Business Outlook

Yayi International continues to expand its distribution network and has thus far as of August 10, 2010 signed sales contracts with distributors following a successful distributor conference in January 2010 for an aggregate expected sales value of approximately $75 million (value-added tax included). The Company’s sales are seasonal with peak season normally starting from September to March. Therefore, the Company reaffirms its previous guidance for the new fiscal year ending March 31, 2011 of net sales between $58.6 million to $65.9 million.

“We are delighted to gain strong sequential sales momentum from the previous quarter and expect renewed public concerns about the safety of cow milk formula to act as a potential catalyst for consumers to switch to our premium goat milk formula products. We see that as a great opportunity for us to continue our marketing activities in the next few quarters to enhance public awareness of the benefits of goat milk and to expand our distribution channels to further build out our presence, especially in the infant formula market,” said Ms. Liu.

For the three months ended January 31, 2010, net sales decreased 40.8% to $3.9 million from $6.6 million for the same period of fiscal year 2009. The decrease was mainly because of a shift in product mix and reduced sales efforts in the fourth quarter of fiscal year 2009 and the first quarter of fiscal year 2010 when the Company consciously restrained its marketing activities for old products and previously planned product introductions such as goat milk tea drinks, goat milk tablets and coffee mate, in preparation for the launch of its new product portfolio in January 2010. Although the new product lines have been available for less than a month, they contributed to 33.8% of Yayi International's total net sales for the first quarter of fiscal year 2010 partially supported by very favorable market reactions following the Company's major TV commercials on China Central Television (CCTV).

Following a successful distributor conference in late January 2010, as of March 17, 2010, Yayi International has signed more than $30.5 million sales contracts as part of our sales target. The sales contracts amount is almost doubling the value of sales contracts for the comparable period in 2009. Consequently, the Company reaffirms its previous guidance for fiscal year ending October 31, 2010 of net sales between $43.9 million and $58.6 million.

Source: PR Newswire (March 18, 2010)