Yongye International Announces Fourth Quarter and Full Year 2010 Results

Fourth Quarter 2010 Highlights

• Sales increased 177.0% to $28.0 million
• Gross profit increased 176.1% to $14.9 million
• Operating income increased to $3.5 million from $0.4 million
• Net income attributable to Yongye was $2.2 million, or $0.05 per diluted share, compared to a net loss of $0.1 million in the same period last year
• Adjusted net income attributable to Yongye, which excludes non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, and a change in the fair value of derivative liabilities, was $7.4 million, or $0.15 per diluted share, compared to $3.0 million, or $0.08 per diluted share, in the same period last year*
• The number of independently-owned, Yongye-branded stores increased to 24,036 from 21,925 stores at the end of the third quarter

Full Year 2010 Highlights

• Sales increased 118.3% to $214.1 million
• Gross profit increased 128.9% to $119.3 million
• Net income attributable to Yongye was $48.4 million, or $1.05 per diluted share, compared to $2.2 million, or $0.07 per diluted share, in the same period last year
• Adjusted net income attributable to Yongye, which excludes non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, and a change in the fair value of derivative liabilities, was $54.1 million, or $1.17 per diluted share, compared to $26.2 million, or $0.84 per diluted share, in the same period last year*
• Operating cash flow was $15.9 million compared to ($2.2) million in 2009

"We are pleased to announce strong financial results for the fourth quarter and full year 2010," stated Mr. Zishen Wu, Chief Executive Officer.  "In addition to our sales, earnings, and EPS growth, we achieved positive cash flow from operations for the fourth quarter and full year 2010 and an improvement in our accounts receivable.  We believe that 2010 represents an important turning point in terms of cash flow generation for Yongye as we were able to achieve both robust revenue growth and positive operating cash flow as a result of our improved working capital management."

Fourth Quarter 2010 Results

Revenue for the three months ended December 31, 2010, was $28.0 million compared to $10.1 million for the same period in 2009, an increase of 177.0%. The increase in revenue was driven by higher demand for the Company's products in its traditional markets, and growth in several new markets, which resulted in almost all of such growth coming from an increase in the quantity of product sold while the Company's prices remained relatively stable. In addition, after the acquisition of the Hebei customer list, the Company is selling its products at a higher price directly to lower level distributors in Hebei, which is Yongye's largest regional market in China, representing 29% of sales in the fourth quarter of 2010.  After the acquisition of the customer list, sales from Hebei increased 333% period over period in the fourth quarter of 2010. As of December 31, 2010, Yongye had 24,036 independently-owned branded stores in its network, compared to 21,925 stores at the end of the third quarter and 9,110 stores at the end of 2009.

Gross profit was $14.9 million compared to $5.4 million for the same period last year, an increase of 176.1%.  Gross margin was 53.2% compared to 53.3% in the same period last year. The slight decrease in gross margin was mainly due to non-cash expenses of $0.7 million related to the amortization of the acquired Hebei customer list, which is included in cost of sales.  Excluding these non-cash expenses, fourth quarter 2010 adjusted gross profit was $15.6 million, or 55.6% of sales, which represents a 230 basis points increase in gross margin compared to last year's fourth quarter.  After the acquisition of the Hebei customer list in July 2010, the Company's margin on the sales made in Hebei province increased to 63% excluding these non-cash expenses.*            

Selling expenses were $4.0 million compared to $3.0 million in the same period last year, an increase of 34.5%.  As a percentage of sales, selling expenses decreased 1,530 basis points to 14.4% from 29.7% of sales in the same period last year.  The decline in selling expense as a percentage of sales was due to distributor and staff training activities that were held in the fourth quarter of 2009 versus the third quarter of 2010.  

General & administrative ("G&A") expenses were $7.0 million compared to $1.8 million in the same period last year, an increase of 290.2%.  As a percentage of sales, G&A expenses increased 730 basis points to 25.0% from 17.7% of sales in the same period last year, primarily due to $4.3 million in non-cash expenses related to share-based compensation as a result of the restricted shares granted to management and independent directors in October 2010 in accordance with Yongye's Omnibus Securities and Incentive Plan as approved in Yongye's 2010 Annual Meeting of Shareholders

Research and development ("R&D") expenses were $0.3 million compared to $0.2 million in the same period last year, an increase of 65.0%.  The increase in R&D expense is mainly the result of conducting additional field tests for the Company's products.

Operating income was $3.5 million, or 12.5% of sales, compared to $0.4 million, or 3.8% of sales, in the same period last year.  Excluding non-cash expenses related to share-based compensation for management and independent directors and the amortization of the acquired Hebei customer list, fourth quarter 2010 adjusted operating income was $8.5 million, or 30.3% of sales.*      

Net income attributable to Yongye was $2.2 million, or $0.05 per diluted share, compared to a net loss of $0.1 million in the same period last year.  The Company recorded a non-cash expense related to a change in fair value of derivative liabilities of $198,605 in the fourth quarter of 2010.  Excluding the impact of non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, and a change in the fair value of derivative liabilities, adjusted net income attributable to Yongye for the fourth quarter of 2010 was $7.4 million, or $0.15 per diluted share, compared to $3.0 million, or $0.08 per diluted share in the same period last year.*        

Full Year 2010 Results

Revenue for the twelve months ended December 31, 2010, was $214.1 million compared to $98.1 million for the same period in 2009, an increase of 118.3%. The increase in revenue was driven by higher demand for the Company's products in its traditional markets, and growth in several new markets, which resulted in almost all of such growth coming from an increase in the quantity of product sold while the Company's prices remained relatively stable. In addition, after the acquisition of the Hebei customer list, the Company is selling its products at a higher price directly to lower level distributors in Hebei, which is Yongye's largest regional market in China, representing 29% of sales in 2010.  After the acquisition of the customer list, sales from Hebei increased 428% period over period in the second half year of 2010. Sales from Hebei increased 111% year over year during the year of 2010.

Gross profit was $119.3 million compared to $52.1 million for the same period last year, an increase of 128.9%. Gross margin increased 260 basis points to 55.7% from 53.1% in the same period last year. The increase in gross margin was mainly due to the benefits of economies of scale.    Included in cost of sales are non-cash expenses related to the amortization of the acquired Hebei customer list of $1.3 million.  Excluding these non-cash expenses, full year 2010 adjusted gross profit was $120.6 million, or 56.3% of sales, which represents a 320 basis points increase in gross margin compared to last year.* After the acquisition of the Hebei customer list in July 2010, the Company's margin for the sales made in Hebei province increased to 63% excluding theses non-cash expenses.          

Selling expenses were $40.6 million compared to $14.7 million in the same period last year, an increase of 175.9%.  As a percentage of sales, selling expenses increased 400 basis points to 19.0% from 15.0% of sales last year, due to an increase in advertising expenses mainly resulting from more promotional activities in 2010, as the Company entered into more geographic markets and conducted several nation-wide joint programs with China Central Television ("CCTV"). Also there was an increase in training expenses for various levels of distributors and staff education as well as an increase in transportation expenses due to the increase in sales.

General & administrative expenses were $14.0 million compared to $4.3 million in 2009, an increase of 226.3%.  As a percentage of sales, G&A expenses increased by 210 basis points to 6.5% from 4.4% of sales last year, primarily due to $4.3 million in non-cash expenses related to share-based compensation as a result of the restricted shares granted to management and independent directors in October 2010 in accordance with Yongye's Omnibus Securities and Incentive Plan as approved in Yongye's 2010 Annual Meeting of Shareholders.

Research and development expenses were $4.9 million compared to $1.7 million last year, an increase of 187.1%.  The increase in R&D expenses is mainly the result of more field test areas for different plant and animal products compared to the prior year.

Operating income was $59.8 million, or 27.9% of sales, compared to $31.4 million, or 32.0% of sales last year.  Excluding non-cash expenses related to share-based compensation for management and independent directors and the amortization of the acquired Hebei customer list, full year 2010 adjusted operating income was $65.5 million, or 30.6% of sales.*      

Net income attributable to Yongye was $48.4 million, or $1.05 per diluted share, compared to $2.2 million, or $0.07 per diluted share in the same period last year.   The Company recorded a non-cash item related to a change in fair value of derivative liabilities of $41,212 in 2010.  Excluding non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, and a change in the fair value of derivative liabilities, adjusted net income attributable to Yongye for full year 2010 was $54.1 million, or $1.17 per diluted share, compared to $26.2 million, or $0.84 per diluted share last year.*      

(*) See the table following this press release for a reconciliation of gross profit, income from operations, net income and diluted EPS to exclude non-cash items related to the amortization of the acquired Hebei customer list, share-based compensation, and a change in the fair value of derivative liabilities.  

Financial Condition

As of December 31, 2010, the Company had $42.0 million in cash and restricted cash compared to $65.5 million as of December 31, 2009. Working capital was $124.3 million, compared to $107.8 million at the end of 2009. As of December 31, 2010, the Company had only $0.4 million in long-term debt. Stockholders' equity totaled $225.1 million as of December 31, 2010, compared to $132.6 million at the end of 2009.  

Recent Developments

• In March 2011, the Company announced that it has partnered with Stanford University to jointly develop innovative programs to help address rural poverty, education, nutrition and health issues in China.
• In January 2011, CCTV honored Mr. Baosheng Tong, the Company's Chief Scientist, naming him the "2010 Person of the Year for San Nong."
• In November 2010, Yongye's Shengmingsu plant and animal nutrient products received the "Special Houji Award" at the 17th Annual China Yangling Agricultural Hi-Tech Fair (the "CAF").  
• On November 18, 2010, Yongye's technology as well as its research and development received the "2010 Award for Excellence in Science and Technology" from the All-China Federation of Industry and Commerce (the "ACFIC Award").  

Business Outlook

For full year 2011, the Company expects revenues of between $315 million and $325 million, representing an increase of 47.1% and 51.8% over 2010's revenue of $214.1 million. The Company expects adjusted net income attributable to Yongye, which excludes non-cash expenses related to share-based compensation for management and independent directors, the amortization of the acquired Hebei customer list, and a change in the fair value of derivative liabilities, of between $80 million and $82 million, representing an increase of between 47.9% and 51.6% over 2010 adjusted net income attributable to Yongye of $65.5 million. The Company has a year-end target of at least 30,000 for the number of independently-owned, branded stores selling Yongye's Shengmingsu products.  

Mr. Wu concluded, "Our lignite coal resource project, for which we expect final government approvals by the end of 2011, and our new state-of-the-art production facility, which has begun normal operations, position us to effectively meet our anticipated increase in future market demand.  The strong demand for our products has been driven by the efficacy of our product in helping Chinese farmers improve yield as well as our innovative, integrated marketing approach which educates and trains the Chinese rural community on the appropriate and most effective use of agricultural nutrients like ours.  We have established long term cooperative relationships with tier-one media in China, such as Farmer's Daily and CCTV, and Shengmingsu is rapidly becoming a nationwide recognized brand among Chinese farmers. We believe that Yongye has built a solid business foundation in its market and is now the largest liquid agricultural nutrient product provider in China. We look forward to continuing to strengthen our market leadership position in 2011 and beyond."

Conference Call

The Company will host a conference call at 8:00 a.m. Eastern Time on Tuesday, March 15, 2011, to discuss its fourth quarter and full year 2010 results. To participate in the live conference call, please dial the following number five to ten minutes prior to the scheduled conference call time: (866) 759-2078. International callers should dial + 1 (706) 643-0585. The conference pass code is 50180885. For those who are unable to participate in the conference call at the time of the call, a replay will be available for 14 days after the call is held. To access the replay, please dial (800) 642-1687. International callers should dial +1 (706) 645-9291. The replay pass code is 50180885.

Use of Adjusted Financial Measures

GAAP results for the three and twelve months ended December 31, 2010 include non-cash items related to the amortization of the acquired Hebei customer list, management share-based compensation expenses, and the change in fair value of derivative liabilities.  To supplement the Company's condensed consolidated financial statements presented on a GAAP basis, the Company has provided adjusted financial information excluding the impact of these items in this release. It is a departure of U.S. GAAP; however, the Company's management believes that these adjusted measures provide investors with a better understanding of how the results relate to the Company's historical performance. A reconciliation of the adjustments to GAAP results appears in the table accompanying this press release. This additional adjusted information is not meant to be considered in isolation or as a substitute for GAAP financials. The adjusted financial information that the Company provides also may differ from the adjusted information provided by other companies.

About Yongye International

Yongye International is a leading agricultural nutrient company headquartered in Beijing, with its production facilities located in Hohhot, Inner Mongolia, China. Yongye produces and markets two lines of organic nutrient products: a liquid nutrient product which is sprayed on plants and a powder nutrient product which is added to animal feed. Both products are sold under the brand name "Shengmingsu," which means "life essential" in Chinese. The Company's patented technologies and formulas allow it to create products that increase crop yields and improve the health of livestock. The Company sells its products primarily to provincial or regional level distributors, who then channel those products to a carefully selected network of over 24,000 independently owned, Yongye branded stores or directly to rural farmers and government farms in China. For more information, please visit the Company's website at http://www.yongyeintl.com.

Safe Harbor Statement

This press release contains certain statements that may include "forward-looking statements." All statements other than statements of historical fact included herein are "forward-looking statements." These forward-looking statements are often identified by the use of forward-looking terminology such as "believes," "expects" or similar expressions, involving known and unknown risks and uncertainties. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the risk factors discussed in the Company's periodic reports that are filed with the Securities and Exchange Commission and available on the SEC's website (http://www.sec.gov). All forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these risk factors. Other than as required under the securities laws, the Company does not assume a duty to update these forward-looking statements.

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