Feihe International, Inc. Reports Third Quarter 2010 Financial Results

Conference Call to be Held Today at 9:00 am ET

BEIJING and LOS ANGELES, Nov. 8, 2010 /PRNewswire Asia-FirstCall/ -- Feihe International, Inc. (NYSE: ADY; "Feihe International" or the "Company") (formerly known as American Dairy, Inc.), one of the leading producers and distributors of premium infant formula, milk powder and soybean, rice and walnut products in China, today announced financial results for the third quarter of 2010.  The Company will hold a conference call today at 9:00 am ET.

Third Quarter 2010 Financial Highlights:

• Exceeding guidance, revenue of $61.1 million in 3Q10 vs. $72.1 million in 3Q09, up 17.1% sequentially from $52.2 million in 2Q10:      
  • Revenue from branded milk powder products was $40.9 million in 3Q10 vs. $55.9 million in 3Q09, up 16.8% sequentially from $35.0 million in 2Q10;
  • Revenue from raw milk powder was $14.4 million in 3Q10 vs. $9.2 million in 3Q09, up 5.7% sequentially from $13.6 million in 2Q10;
• Gross profit of $27.3 million in 3Q10 vs. $37.0 million in 3Q09, up 47.9% sequentially from $18.5 million in 2Q10;
• Gross margin was 44.7% in 3Q10 vs. 51.3% in 3Q09, up from 35.4% in 2Q10;
• Net income of $3.6 million in 3Q10 vs. net income of $11.1 million in 3Q09, up from net loss of $(20.7) million in 2Q10; and
• EPS per diluted share was $0.16 vs. $0.52 in 3Q09, up from a loss of $(0.92) in 2Q10.

Mr. Leng You Bin, the Company's Chairman and Chief Executive Officer, stated, "We are continuing to make measurable progress with our operations across our sales and marketing to our dairy farms.  Our results of $61.1 million in revenue and $3.6 million in net income are excellent indications of our footprint in the Chinese milk powder space.  We are continuing to make improvements including strengthening our team through training of existing talent and recruitment and adjusting existing retail sales points to drive greater profitability.  We believe that we are well positioned to execute our strategic initiatives to grow sales at existing retail outlets throughout the remainder of the year and capitalize on market opportunities."  

The decrease in revenue in the third quarter of 2010 compared to the third quarter of 2009 was primarily attributable to a decrease in sales of milk powder and an increase in sales of raw milk powder, which has a lower gross profit margin, as well as increased competition from new competitors entering into the Company's industry and old competitors aggressively attempting to reclaim market share.  The revenue in the third quarter of 2010 increased 17.1% sequentially from $52.2 million in the second quarter of 2010, primarily reflecting the Company's efforts to increase sales of existing retail points and targeted new sales points.

Gross profit was $27.3 million in the third quarter of 2010 compared to $37.0 million in the third quarter of 2009, up 47.9% sequentially from $18.5 million in the second quarter of 2010.  Gross margin for the third quarter of 2010 was 44.7%, compared to 51.3% in the third quarter of 2009, up from 35.4% in the second quarter of 2010.  Gross profit in the third quarter of 2010 was lower than gross profit in the third quarter of 2009 primarily due to changes in the Company's revenue mix and increased costs of raw milk supply.  

Income from continuing operations was $2.0 million in the third quarter of 2010, compared with income from continuing operations of $4.0 million in the third quarter of 2009, up significantly from a loss of $(24.0) million in the second quarter of 2010.  Sales and marketing expenses decreased 31.8% to $18.7 million in the third quarter of 2010 from $27.5 million in the third quarter of 2009, and decreased 36.7% compared to $29.6 million in the second quarter of 2010, primarily reflecting a decrease in promotional fees and the Company's efforts to improve the effectiveness of its selling expenses.  General and administrative expenses increased 8.4% to $6.1 million in the third quarter of 2010 from $5.7 million in the third quarter of 2009, primarily reflecting increased salary offset in part by a decrease in professional service fees.

The Company recognized other income of $1.4 million during the third quarter of 2010.  In the third quarter of 2009, the Company had other income of $5.4 million.  The lower other income was primarily attributable to a decrease of government subsidy of approximately $6.1 million from the third quarter of 2009, offset in part by a decrease in interest and finance costs of approximately $1.3 million from the third quarter of 2009.

Net income attributable to the Company for the third quarter of 2010 was $3.6 million, or $0.16 per diluted share, compared to net income attributable to the Company of $11.1 million, or $0.52 per diluted share, in the third quarter in 2009, but improved significantly from net loss attributable to the Company of $(20.6) million, or $(0.92) per diluted share in the second quarter of 2010.

Nine Months Ended September 30, 2010

Revenue decreased 14.2% to $194.8 million in the nine months ended September 30, 2010 from $227.1 million in the same period of 2009. Contributions from milk powder products were approximately $140.7 million, or 72.2%, of sales in the nine months ended September 30, 2010, down 28.0% from $195.5 million, or 86.0% of sales, in the corresponding period in 2009. This decrease is largely due to increased competition from new competitors entering into Chinese dairy industry and old competitors aggressively attempting to reclaim market share following the' melamine crisis. Gross profit decreased 37.0% to $84.2 million in the nine months ended September 30, 2010 from $133.7 million in the same period of 2009. Gross margin for the nine months ended September 30, 2010 was 43.2%, compared to 58.9% in the corresponding period in 2009, primarily attributable to increases in the price for both internally and externally sourced raw materials, and also to a decrease in sales of milk powder and an increase in sales of raw milk powder, which has a lower gross profit margin.  Income from continuing operations decreased to a loss of $(19.7) million in the nine months ended September 30, 2010, compared to a profit of $37.8 million in the corresponding period in 2009. Net income from continuing operations for the first nine months of 2010 decreased to a loss of $(11.6) million, or $(0.52) per diluted share, from a profit of $43.2 million, or $2.21 per diluted share, in the prior year period.  Net income attributable to the Company for the first nine months of 2010 decreased to a loss of $(11.5) million, or $(0.52) per diluted share, from a profit of $46.6 million, or $2.38 per diluted share in the corresponding period in 2009.

As of September 30, 2010, the Company had cash and cash equivalents of $22.2 million and total current assets of $161.8 million, compared with cash and cash equivalents of $48.2 million and total current assets of $177.7 million as of December 31, 2009.

This decrease was mainly led by the Company's payoff of bank debt facilities more than borrowed of approximately $23.5 million, expenditure on property and equipment related to the construction of Gannan Dairy Phase II production factory facilities and Longjiang production factory facilities of approximately $15.3 million and expenditure on biological assets of the Company's two farms of approximately $9.3 million, which was offset by the cash provided by operating activities of approximately $21.7 million.

As of September 30, 2010, the Company had a working capital deficit, its current liabilities exceeded its current assets by approximately $24.9 million. The Company has taken various actions to conserve cash, procure financing and improve liquidity. Such actions include reducing working capital requirements in operations through improving the Company's sales process, accelerating accounts receivables collection, strengthening control on operating expenditure and renewing short term borrowings.

Financial Guidance

Mr. Jonathan H. Chou, the Company's Chief Financial Officer, stated, "We are pleased to report three month revenue growth of 17.1% compared to the second quarter of 2010.  Specifically, sales of our branded milk powder products grew 16.8% to $40.9 million compared to the second quarter of 2010.  As we approach the middle of the fourth quarter of 2010, we are confident that we are taking effective measures to continue to improve our operations across all functions.  Based on cash and actual purchase orders received this quarter to date, we project our total revenue will be between $54 million to $56 million in the fourth quarter of 2010."

Conference Call Details

The Company will also hold a conference call on November 8, 2010 at 9:00 am Eastern Standard Time to discuss its third quarter results.  Listeners may access the call by dialing the following numbers:

The replay will be accessible through November 15, 2010 by dialing the following numbers:

About Feihe International, Inc.

Feihe International, Inc. (NYSE: ADY) (formerly known as American Dairy, Inc.), is one of the leading producers and distributors of premium infant formula, milk powder, and soybean, rice and walnut products in the People's Republic of China. Feihe International conducts operations in China through its wholly owned subsidiary, Feihe Dairy, and other subsidiaries. Founded in 1962, Feihe Dairy is headquartered in Beijing, China, and has processing and distribution facilities in Kedong, Qiqihaer, Baiquan, Gannan, Longjiang, Shanxi, and Langfang. Using proprietary processing techniques, Feihe International makes products that are specially formulated for particular ages, dietary needs and health concerns. Feihe International has over 200 company-owned milk collection stations, two dairy farms, seven production facilities with an aggregate milk powder production capacity of approximately 1,250 tons per day and an extensive distribution network that reaches over 90,000 retail outlets throughout China. For more information about Feihe International, Inc., please visit http://ady.feihe.com.

Cautionary Note Regarding Forward-Looking Statements

This document contains forward-looking information about the Company's operating results and business prospects that involve substantial risks and uncertainties. Statements that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements include, but are not limited to, statements about the Company's plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words "may," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "targets," "could," "would," and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, the Company's actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors" in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009 and in other reports filed with the United States Securities and Exchange Commission and available at www.sec.gov. The Company assumes no obligation to update any such forward-looking statements.