China-Biotics, Inc. (Nasdaq: CHBT) ("China-Biotics" or "the Company"), a leading developer, manufacturer and distributor of probiotics products in China, reported its unaudited financial results for the third quarter and nine months of its 2011 fiscal year ended December 31, 2010.
Third Quarter FY2011 Highlights
Net sales increased 39.0% y-o-y to $32.4 million;
Bulk products sales increased 142% y-o-y to $14.3 million;
GAAP net income was $13.3 million, or $0.59 per diluted share;
Excluding the non-cash changes in the fair value of convertible notes, non-GAAP net income was $10.4 million, or non-GAAP diluted EPS of $0.47;
Cash and cash equivalents were $132.3 million.
Mr. Jinan Song, China-Biotics' Chairman and CEO commented, "We are pleased to report a solid third quarter as our successful strategic shift from retail to bulk products continues to show positive results. As dairy producers introduce greater quantities and varieties of value-added products to the market, our core probiotic cultures are gaining greater acceptance due to reliable product safety, good technical service, and competitive pricing. Furthermore, additive probiotics for the animal feed market are also expanding due to tighter government regulations on the overuse of antibiotics."
"We are also seeing more yogurt producers embracing functional probiotic additives in their products as dairy consumers in major cities are looking for better nutritional benefits. Chinese consumers are increasingly using probiotics due to their rising health consciousness."
"Our successful transition from business-to-consumer model to business-to-business model enables us to increase operating leverage and lower overall operating expenses. With strong free cash-flow generation and a healthy sales growth record, we successfully redeemed our only interest-bearing convertible debt and substantially reduced total share counts as well as enhanced our long-term shareholders' value," Mr. Song added.
Third Quarter FY2011 Financial Results
Net sales in the third quarter of fiscal year 2011 increased by 38.9% to a quarterly record of $32.4 million from $23.3 million in the third quarter of fiscal year 2010. The increase was primarily due to the increased sales volume in the bulk additive and culture products, which accounted for 44.5% of total quarterly net sales. Bulk net sales increased to $14.7 million from $5.9 million in the same quarter last year. Retail net sales increased by 4.0% to $18.1 million from $17.4 million in the previous year. As of December 31, 2010, the Company maintained a total of 15 retail outlets in operation with a plan to close more outlets in the future. In light of the ongoing wage hikes and rise in rents, the Company continues to shift the sales channel for its retail products from outlets to established distributors. Management will focus on direct sales of the Company's bulk additive and culture products to institutional customers.
Gross profit increased 28.3% to $21.2 million from $16.5 million in the same period of fiscal year 2010. Gross margin was 65.4% compared with 70.9% in the same period of fiscal year 2010, and up from 64.8% in the second quarter of fiscal year 2011, respectively. The year-over-year decrease in blended gross margin reflects the continuing product mix change as lower-margined bulk additive and culture products account for a larger portion of total sales.
General and administrative (G&A) expenses amounted to $3.2 million, compared with $1.5 million in the previous year's third fiscal quarter. The increase of general and administrative expenses was primarily due to an increase in legal and professional fees, and staff costs. As of December 31, 2010, the Company had a total of 459 employees, compared with 475 as of December 31, 2009 and 447 as of September 30, 2010, respectively. G&A expenses as a percentage of net sales were 9.9% in the third quarter of fiscal year 2011, compared with 6.4% for the third quarter of fiscal year 2010.
Selling expenses for the third quarter of fiscal year 2011 were $3.9 million, compared with $4.1 million in the third quarter of fiscal year 2010. Selling expenses as a percentage of revenue decreased to 11.9% for the third quarter of fiscal year 2011 from 17.8% in the third quarter of fiscal year 2010. The decrease in actual selling expenses and selling expenses as a percentage of revenue, partially reflected the savings resulting from selling the Company's retail products through established distributors instead of increasingly more expensive retail outlets.
Research and development (R&D) expenses increased to $1.9 million from $0.8 million in the third quarter of fiscal year 2010. R&D expenses as a percentage of revenue were 5.8%, as compared to 3.3% for the third quarter of fiscal year 2010. The Company established a strong research and development team supported by over 10 PhDs and 30 masters' degree holders. Dr. Chungchang Tao, formerly with Coca-Cola's Global Innovation & Technology Center in Shanghai, joined the Company as its R&D Director. Dr. Tao holds a PhD in Biological & Agricultural Engineering from the University of Idaho. In addition, the number of probiotics strains in the Company's proprietary strain library has now increased to over 1,000. The Company will continue to invest in its core technology of bacteria cultures and preservation, while expanding its product line and applications to address specific health problems.
Total operating expenses for the third quarter of fiscal year 2011 were $8.9 million compared with $6.4 million in the third quarter of fiscal year 2010. SG&A expenses as a percentage of revenue was 27.6% in the third quarter of fiscal year 2011 in line with the third quarter of fiscal year 2010.
Operating income increased 21.1% year-over-year to $12.3 million from $10.1 million in the same period of fiscal year 2010. Operating margin was 37.8% in the third fiscal quarter of 2011 compared to 43.4% in the same quarter a year ago.
GAAP net income for the third quarter of fiscal year 2011 increased 26.6% year-over-year to $13.3 million from $10.5 million in the same period of fiscal year 2010. Diluted net earnings per share were $0.59, compared with diluted earnings per share of $0.32 in the same period of fiscal year 2010.
Excluding the non-cash change in the value of convertible notes, non-GAAP net income was $10.4 million, compared with $7.8 million in the third quarter of fiscal year 2010. Non-GAAP diluted earnings per share were $0.44, an increase from $0.32 in the same quarter of fiscal year 2010.
For the three months ended on December 31, 2010, the total shares outstanding on a fully diluted basis were 23,870,598, down from 24,061,575 shares for the three months ended on December 31, 2009. The reduction in diluted share count resulted from redemption of the Company's convertible notes. On December 9, 2010, the Company redeemed $25 million in outstanding 4 percent senior convertible promissory notes for cash before the December 11, 2010 maturity date. The total redemption costs were $25 million of convertible note principal, plus approximately $4.68 million in accrued and unpaid interest. The convertible note principal was equivalent to 2.08 million common shares.
As of December 31, 2010, the Company had cash and cash equivalents totaling $132.3 million, compared with $158.8 million at the end of September 2010. The cash position decrease was mainly due to the redemption of the convertible notes. Total stockholders' equity rose to $203.0 million at December 31, 2010 from $187.9 million at September 30, 2010.
Nine Month Financial Results
Net sales for the first nine months of the 2011 fiscal year were $80.9 million, up 44.9% from $55.9 million in the same period of the prior year. Gross profit was $53.6 million, or 66.2% of sales, up 35.3% from the gross profit of $39.6 million, or 70.9% of sales, in the first nine months of fiscal year 2010. Operating income was $34.0 million, or 42.1% of sales, an increase of 38.8% from $24.5 million, or 43.9% of sales, in the same period of the prior year. Adjusted net income was $28.2 million for the first nine months of fiscal 2011, up from $19.0 million during the same period last year. Including a non-cash change in the fair value of convertible notes, GAAP net income for the first nine months of fiscal 2011 was $43.6 million, compared to $12.8 million in the same period of fiscal 2010. Non-GAAP earnings per share were approximately $1.19 up from approximately $0.94 in the same period of fiscal year 2010.
The Company plans to file its 10Q with U.S. Securities and Exchange Commission on or before February 14.
As of December 31, 2010, China-Biotics had a total number of 51 bulk customers, including 22 additives customers in animal feed, functional foods and pharmaceuticals, as well as 29 customers in dairy cultures. The Qingpu facility produced approximately 20 metric tons of bulk probiotic products during the third quarter of fiscal year 2011. The Company has met previously announced target of annual production utilization run-rate.
As of December 31, 2010, China-Biotics had a total number of 34 retail distributors, including the 4 recently contracted distributors in the Pan-Beijing area selling the Company's retail products in malls, supermarkets, and functional food stores. The Company has also started selling its retail products on the online shopping platform Rokuten.
On December 9, 2010, the Company redeemed $25 million in outstanding 4 percent senior convertible promissory notes for cash before the December 11, 2010 maturity date. The $1,000 principal notes were originally issued on December 11, 2007. The redemption price is 100 percent of the principal amount per convertible note, plus accrued and unpaid interest as of the redemption date of December 11, 2010. The total redemption cost was $25 million in convertible note principal, plus approximately $4.68 million in accrued and unpaid interest.
In November 2010, China-Biotics appointed Dr. Hui S. Chang as Chief Operating Officer of the Company. Dr. Chang brings 15 years of biopharmaceutical project management experience and excellent research capabilities in both the U.S. and China. Dr. Chang holds a PhD in vaccine development focusing on biochemistry and immunology as well as an MBA with concentration in finance and logistics in the vaccine industry from Johns Hopkins University.
In November 2010, a delegation from the Company's research and development department presented at the National Probiotics Research and Development, New Application and Equipment seminar in Hangzhou, China. The seminar was organized and hosted by the National High-Tech Industrialization Association. More than 180 research and development professionals from global industry leaders and other probiotics companies participated in the event.
In November 2010, Growing Bioengineering, a wholly owned subsidiary of China-Biotics, presented at the 2010 Health Ingredients Europe Conference in Madrid, Spain. The bi-annual exhibition is hosted by CMP Information. An estimated 140 exhibitors and over 9,000 visitors presented on subjects such as biotechnology, dietary supplements, and food manufacturing.
Outlook for the Fiscal Year 2011
For fiscal year 2011, management maintains the expectation for net sales to achieve at least 50% year-over-year growth. This target is based on the Company's current views on the operating and market conditions, which are subject to change.
Mr. Jinan Song, Chairman and CEO of China-Biotics, concluded, "Entering into the fiscal fourth quarter of 2011, we are making greater efforts to ramp up the production of bulk products to meet the rising demand from the domestic dairy and animal feed markets. With the ongoing holiday seasons, we also expect strong retail products sales for the quarter. We continue to expand the presence of our retail probiotic products into other key regions in China. We believe that, with the right distributors and sales channels, the market potential for our retail products is much larger in China. With our efforts and market prospects, we are confident to achieve our full year sales target."
The Company will host a conference call at 08:00 a.m. Eastern Time/09:00 p.m. Beijing Time on Wednesday, February 9, 2011, to discuss the fiscal year 2011 third quarter financial results for the period ended December 31, 2010.
The telephone numbers for the conference call are (866) 788-0539 (U.S.) or (857) 350-1677 (International), passcode: 68499662. A live web cast of the call will also be available on the investor relations section of the Company's website www.chn-biotics.com. To listen to the web cast, please visit the site at least 10 minutes early to register, download and install any necessary audio software.
The replay of the web cast will be archived on the website, and investors will be able to access the recording of the conference call until midnight ET on February 16, 2011 by calling (888) 286-8010 (U.S.) or (617) 801-6888 (International) and entering pass code: 95179753.
China-Biotics, Inc. ("China-Biotics" or "the Company"), a leading manufacturer of biotechnology products and supplements, engages in the research, development, marketing and distribution of probiotics dietary supplements in China. Through its wholly owned subsidiaries, Shanghai Shining Biotechnology Co., Ltd. and Growing Bioengineering (Shanghai) Co. Ltd., the Company develops and produces a proprietary product portfolio. Currently, its retail products are sold over the counter, mainly through large distributors, to pharmacies and supermarkets in Beijing, Shanghai, and Jiangsu and Zhejiang provinces. The Company also sells bulk products to institutional customers such as dairy and animal feed producers as well as pharmaceutical companies. In February 2010, China-Biotics began its commercial production in China's largest probiotics production facility to meet the growing demand in China. For more information, please visit www.chn-biotics.com.