American Dairy Posts Sluggish Q4

American Dairy Inc. (ADY - Snapshot Report) swung to a fourth-quarter net loss of $27.0 million, or $1.34 per share, from a net profit of $25.1 million, or $1.42 per share in the year-ago quarter. Excluding special items, adjusted loss per share came in at $1.29, which was way behind the Zacks Consensus Estimate for a profit of 3 cents per share. The disappointing results were primarily caused by sluggish revenue and gross profit performance.

American Dairy is a leading producer and distributor of premium infant formula, milk powder and soybean, rice and walnut products in China. The company, which operates through its wholly owned subsidiary Feihe Dairy and other subsidiaries, has 200 milk collection stations, two dairy farms and seven production facilities. The company has capacity to produce approximately 1,234 tons of milk powder per day and a distribution network of over 95,000 retail outlets across China.

The Beijing-based company posted a 44.8% decline in sales to $44.0 million from $79.6 million in the year-ago period. American Dairy also recorded a gross loss $3.0 million during the quarter, compared to a gross profit of $36.6 million in the prior year quarter.

Both revenue and gross profit were adversely affected by cross-territory selling by the company’s distributors, which disrupted regular sales patterns. Moreover, in an effort to control cross-territory selling, American Dairy offered greater incentives to distributors and sold off excess inventory as lower margin raw milk powder.

Operating expenses during the quarter increased 6.4% year-over-year to $28.9 million primarily due to higher sales and marketing expenses reflecting increased promotional activities. However, sluggish sales and gross margin performance led to an operating loss from continuing operations of $31.9 million during the quarter, compared to an operating profit of $9.4 million in the year-ago quarter.

American Dairy ended the quarter with cash and equivalents of $48.9 million, compared to $11.8 million in the prior-year period. During 2009, the company recorded a cash inflow of $39.0 million related to the divestment of a subsidiary, Heilongjiang Moveup Co. Ltd. American Dairy formed Moveup in Oct 2007 to acquire Ausnutria Dairy (Hunan) Co. Ltd., a deal which fell through as a result of regulatory issues.

The company also raised long and short-term debt with a combined worth of $89.2 million, and received $63.0 million through a private placement of 2.1 million shares of common stock to Sequoia Capital. American Dairy primarily deployed the cash generated towards capital expenditure, including biological assets ($84.3 million) and repayment of short-term debt ($80.4 million).

Looking ahead, the company expects sales from branded formula products to exceed $70 million in the first quarter of 2010. Moreover, American Dairy has augmented its network by more than 5,000 points of sale on a sequential basis during the fourth quarter, which is expected to boost the company’s presence in southern China in 2010.

Meanwhile, the Zacks Consensus Estimate on the company’s earnings for the first quarter of 2010 has reduced by 22 cents over the past month to 42 cents per share as 1 of 3 covering analysts lowered expectations. For 2010, the Zacks Consensus Estimate currently stands at $1.73 per share, which moved down by 53 cents over the past month.

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