Deyu Agriculture Corp. (OTCBB: DEYU) ("Deyu" or the "Company"), a Beijing, China based vertically integrated producer and distributor of organic and non-organic corn and grain products, announced its financial results for the second quarter ended June 30, 2011.
Second Quarter 2011 Financial Highlights:
"We are quite pleased with our second quarter results," said Jianming Hao, Deyu's Chief Executive Officer and Chairman. "Our corn division, the foundation of our business, more than doubled its sales and our simple processed grains division improved its revenues more than 500%, driving our total revenue to over 180%. We also continued to see growth in our newest business segments, unpacked grains and bulk flour and rice sales, and we finished construction of a new warehousing, processing, and logistics center. Our priority in 2011 has been promoting our brand name and products regionally, and increasing customer purchases on a per store basis. We are glad to see this strategy continue to work well for us this past quarter while we continued to utilize our regional strengths and environmental resources in Shanxi Province, our extensive production capacity, our established network of farmer agents, our steady supply of quality crops from excellent farmland, our bank loans and our efficient distribution network to gain further leverage in China's agriculture sector. As we head towards 2012, we are confident that we can maintain our progress while we strive to provide our expanding customer base with what we believe to be delicious, healthy grain products."
2011 Second Quarter Financial Results
In the second quarter of 2011, Deyu had sales of $52.0 million compared to sales of $18.5 million in the second quarter of 2010, an increase of $33.6 million or 182%.
Net sales from Deyu's corn division increased $18.7 million, or 117%, from $16.0 million in the second quarter of 2010 to $34.7 million this past quarter. This increase is mainly attributable to the expansion of the Company's operations and sales force; the quality of our sales personnel, leadership and strategies; the strengths and influences derived from increases in the Company's sales channels and retail stores; and the quality of products and promotions on name brand campaign and discounted prices.
Revenue from the Company's simple processed grains division improved $14.2 million, or 578%, from $2.5 million in the second quarter of 2010 to $16.6 million in the second quarter of 2011. Net sales from the Company's unpacked grain business, which was added during the first quarter 2011 as part of its simple processed grain division, generated revenues of$7.7 million in the second quarter of 2011. This business utilizes Deyu's retail network and sales channels to attract customers with selective purchase quantities and unique grain varieties.
Deyu also introduced the bulk purchase and wholesale of rice and flour as part of its business operations in first quarter of 2011, and this segment generated revenues of $8.9 million in the second quarter of 2011. The Company is continuing to utilize its strengths and resources to develop this business section, which comes with low maintenance costs, and the bulk purchase and wholesale of rice and flour is gradually becoming a stable part of the Company's revenue and net income. Deyu believes that this business will eventually develop into and combine with "the China Grain Trading Center" project of Hebei YuGu Grain Co., Ltd., a company which the Company shall form with an unrelated third party.
Revenue from Deyu's deep processed grain division in the second quarter of 2011 was $0.8 million. This division is still in a development stage in terms of business and product development, market research, branding and improving consumers' understanding and acceptance of deep processed grain products.
Cost of Sales
Deyu's cost of goods sold was $43.1 million in the second quarter of 2011 compared to $13.7 million in the second quarter of 2010, an increase of $29.4 million, or 214%. Cost of goods sold mainly consisted of cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs. The rise in cost of goods sold was primarily due to the 182% increase in net revenues during the last quarter. As a percentage of net revenue, cost of goods sold increased 8.6%, from 74.3% in the second quarter of 2010 to 82.9% in the second quarter of 2011. This increase in the cost of goods as a percentage of net revenue is attributable to the decreased margin of 16.8% in Deyu's corn division and a lower margin of 8.8% in its bulk purchase and wholesale of rice and flour division.
Gross Profit & Gross Margin
As a result of Deyu's increases in net revenues and cost of goods sold, the Company's gross profit improved $4.1 million, or 88%, from $.4.7 million in the second quarter of 2010 to $8.9 million in the second quarter of 2011. On the other hand, Deyu's gross profit margin decreased 8.6%, from 25.7% to 17.1% when comparing the same periods. This decrease was due to the decreasing margin of Deyu's corn division of 16.8% and the lower margin of 8.8% in the Company's bulk purchase and wholesale of rice and flour division.
Gross margin for Deyu's corn division was 16.8% in the second quarter of 2011 compared to 21.6% in the second quarter of 2010. This lower margin was attributable to price competiveness in the beginning of the harvest season of corn along with ample provision in the market. The Company believes that this margin will improve in following periods due to Deyu's strengths of inventory quantity, warehousing capacity, improved procurement and security of supply.
Gross margin for the Company's simple-processed grains division was 17.7% in the second quarter of 2011 as compared to 52.6% in the second quarter of 2010. This decrease is a reflection of the lower margin of 8.8% in Deyu's newly added business of bulk purchase/wholesale of rice and flour, and the margin of 27.9% in its unpacked grain business sold in supermarkets being included in this division. Since consumer agriculture products cannot reflect price increases of purchase costs in time, the Company discounted some models of products, which is in line with Deyu's strategy of increasing its market share in the relevant markets.
Deyu's unpacked grain business, a recent addition to its simple processed grain division, generated a gross margin of approximately 27.9%, which was lower than the margin of three months ended March 31, 2011. This is a result of an increase in the quantity of goods sold, including a higher percentage of common types of grains with lower margins.
Deyu's other recently added business, the bulk purchase and wholesale of rice and flour, had a gross margin of approximately 8.8% in the second quarter of 2011. This margin is consistent with the Company's margin during the three months ended March 31, 2011.
Gross margin for Deyu's deep processed grain division was 18.7% in the second quarter of 2011. The Company established its deep processed grain division during the second half of 2010 through acquisitions and research and development and this segment is still in the mode of market development. Right now, the Company is promoting discounted prices in order to gain ground in the market and is in the midst of testing new production lines and manufacturing plants to support increased production of these products. Accordingly, most of Deyu's deep processed grain products were produced through outsourcing this past quarter. All of these factors contributed to a weakness of cost controls. Deyu believes that its deep processed grain division's margins will improve once all of the Company's new lines and manufacturing plants are up and running and more fully developed.
Deyu's net income increased $0.2 million, or 8%, from $2.9 million in the second quarter of 2010 to $3.1 million in the second quarter of 2011.
"Our goal for the rest of 2011 is to continue to develop our corn, simple and deep processed, and non-processed and unpacked grains divisions," remarked Mr. Hao.
"We will continue to rely on our strengths, competitive edges and loyal support of our corn customers to keep up revenues. Moreover, our solid relationships with several banks in China and our current bank funds leads us to believe that we will not need to shift capital from our corn division in order to develop our unpacked grains business. In our view, the momentum we are gaining from our simple and deep processed grain products, along with our expanding distribution network and growing brand name recognition, will also facilitate the development of our unpacked grain business. We are also taking steps to improve our website platform on TaoBao Mall, particularly its wholesale features, in an effort to foster high order volume and improve our cash flows.
Since we have been successful in promoting and selling our products through all of our distribution channels and networks, including our B2B and B2C ecommerce platforms, and our name brand is becoming more well known, to further support our growth, we are also carefully planning to build more warehouses and plants, and we are also looking to acquire companies who either fit in or expand our product lines. We believe that enacting these strategies will further ease the requests from retail stores and many of our wholesalers. Our continuous growth relies on our ability to meet the rising demand for our current products and expanded product lines and as we head into 2012, we believe we have sound strategies in place to help us sustain our progress."
About Deyu Agriculture
Deyu Agriculture Corp. is a vertically integrated producer, processor, marketer and distributor of organic and other agricultural products made from corn and grains operating in the Shanxi Province of the People's Republic of China. The Company has access to over 109,000 acres of farmland in the Shanxi Province for breeding, cultivating, processing, warehousing, and distributing grain and corn products. Deyu's deep-processed grain division was created in 2010 and its business is conducted through Detian Yu, Deyufarm and its subsidiaries, by producing and distributing instant grain vermicelli, instant millet beverage, and buckwheat tea to wholesalers and supermarkets underneath the brand name, "Deyufang". Deyu has an extensive retail distribution network of more than 10,000 retail stores across China. The Company's web site is located at www.deyuagri.com.