GLG Life Tech Corporation Announces Third Quarter 2011 Results China Highlights
Vancouver, British Columbia, Nov. 14, 2011 -- GLG Life Tech Corporation, the vertically-integrated leader in the agricultural and commercial development of high quality stevia and all natural and zero calorie food and beverage products, announces financial results for the quarter ended September 30, 2011.
Revenue from AN0C for the third quarter was $1.0 million -- The Company's consumer products business, AN0C, had sales of $1.0 million in the third quarter of 2011. The average revenue per bottle was higher by 3.8% for the third quarter compared to the second quarter as it reflected the change in product mix and the reduced level of promotional activities that were undertaken in the second quarter to support the launch of the new AN0C brand the RTD products. The first sales of vitamin enriched waters began in the third quarter, and were on average sold at a higher price than the RTD teas. The objectives of the promotional campaigns were to encourage consumers to try the AN0C beverages through lower retail pricing and to reward our distributors through volume purchases.
Key Developments in China Consumer Products AN0CTM Joint Venture -- Since the launch of the AN0C's original Ready-to-Drink (RTD) teas in March, AN0C has re-introduced its RTD teas in a new custom branded bottle in the third quarter to better differentiate AN0C's product, and launched six flavours of zero calorie vitamin enriched waters. The new improved taste of AN0C's RTD teas is sweetened with AN0C Stevia Solution's Dream Sweetener. Vitamin enriched water is a relatively new beverage category in China, however, AN0C has brought in new distribution partners that specialize in vitamin enriched waters ! and the initial feedback from the market for this product has been encouraging. AN0C experienced production issues with its main OEM Bottler in September. Potential batches impacted comprised approximately 200,000 cases of RTD tea that had been shipped and 85,000 cases of vitamin enriched waters that were identified at the OEM plant and were not shipped. Total of approximately 10,000 cases were found to be substandard, comprised of 3,000 cases that were shipped and 7,000 cases that were not shipped. In the long term interest of maintaining the high-quality image and reputation of the AN0C brand, additional production orders were withheld until we had the confidence that production issues had been resolved and a fair settlement was reached with our OEM Bottler. As a result, some new product launches such as soft drinks and juice milk have been delayed until the 2012 in time for the next peak summer sales season. AN0C has launched a zero calorie tabletop product recently and plans to launch functional health drinks in the fourth quarter of 2011 through its existing and new distributors.
New stevia formulation company - AN0C Stevia Solutions - The Company created a new subsidiary, AN0C Stevia Solutions Company, to focus on providing naturally sweetened zero and reduced calorie food and beverage formulations to customers outside China. The solutions and formulations will be all natural - natural sweeteners, natural flavours and natural colours, for use in zero or low calorie beverage and food products. The Company also announced the launch of AN0C Stevia Solutions' first product line -- the Dream Sweetener series. Using GLG's BlendSure and other natural ingredients, the Dream Sweetener product line (which initially consists of 10x, 30x, 60x, and 100x the sweetness of sugar) was formulated to maintain the best taste while replacing sugar or artificial sweeteners in different beverage and food applications. Core advantages of Dream Sweetener products include: 1) tastes like cane sugar ! and has no aftertaste, 2) provides a consistent sweetness for much easier formulation for a food and beverage company, 3) easy to handle, unlike typical stevia extracts which come in a light powder form, 4) can reduce the time to market for food and beverage companies since the major formulation challenges (aftertaste & consistency of taste) with high purity stevia extracts have been overcome, and 5) is more cost efficient at large volumes.
Revenue
AN0C Consumer Products Business
The Company's consumer products business, AN0C, had sales of $1.0 million in the third quarter of 2011. In the approximately six months of sales activity (end of March through September 30th) AN0C has sold approximately 29.1 million bottles of its RTD teas and 1.3 million bottles of vitamin enriched waters. A series of factors contributed to the reduction in sales in the third quarter. The three major factors that impacted our sales through September 30, 2011 were as follows:
1.Weather -- The summer has been more moderate in China compared to last year and industry wide sales of RTD teas and other beverages that usually sell well during the hot weather were adversely impacted.
2.OEM Production issues - Production issues from AN0C's main OEM Bottler resulted in complaints from distributors regarding product packaging and product appearance quality of the RTD tea products. Potential batches impacted comprised approximately 200,000 cases of RTD tea that had been shipped. Additionally, 85,000 cases of vitamin enriched waters were also impacted by the same production issues, but fortunately these batches were identified at the OEM plant and were not shipped. In the long term interest of maintaining the high-quality image and reputation of the AN0C brand, additional production orders were withheld until we had the confidence that production issues had been resolved and a fair settlement was reached with our OEM Bottler. AN0C maintained the total number of its Tier I di! stributo rs at approximately 600 throughout this OEM production issue, which it expects to leverage for the launch of its new products.
3.RTD Tea Bottle replacement Program - AN0C re-introduced its RTD teas in a new custom branded bottle in the third quarter to better differentiate AN0C's product from other competitors' products. It was initially expected that only July sales would be reduced substantially in order to sell through the inventory of the RTD teas in the old bottles that were currently in retail outlets. As the unusually cooler weather in China continued through the summer and overall inventory for the industry remained high, the sell through of AN0C's RTD teas in the old bottles took longer to sell through the Key Account channels ("KA" includes hypermarkets, supermarkets and chain convenience stores) than originally anticipated. As these KA stores have been slower to switch over to the new bottles, shipments of the new RTD teas in August were also lower than expected. The AN0C sales team has recently been able to open up new distribution channels to speed up the sell through of the remaining old bottles, for example, through government organizations.
The average revenue per bottle was higher by 3.8% for the third quarter compared to the second quarter as it reflected the change in product mix and the reduced level of promotional activities that were undertaken in the second quarter to support the launch of the new AN0C brand and the RTD products. The first sales of vitamin enriched waters began in the third quarter, and were on average sold at a higher price than the RTD teas. The objectives of the promotional campaigns were to encourage consumers to try the AN0C beverages through lower retail pricing and to reward our distributors through volume purchases.
AN0C launched its vitamin enriched water in August into 41 major cities, marking AN0C's entry into a second major beverage category in China. Vitamin enriched water is a relatively new beverage category in China, and there ! are only a few brands on the market. Although the OEM production issues have impacted a significant portion of vitamin enriched water production, AN0C had brought in new distribution partners that specialize in vitamin enriched waters. AN0C management expects that this new category needs more time to grow and gain traction in the Chinese beverage market, however, the initial feedback from the market for this product has been encouraging.
Cost of Sales
AN0C Consumer Products Business
For the three months ended September 30, 2011, cost of sales related to the consumer products business was $0.94 million and includes costs associated with bottling the beverage products, supplies and ingredients used to manufacture the beverages, and shipping the products to the different distribution channels. The average cost of sales per bottle increased 17% in the third quarter compared to the second quarter, as it reflected the addition of the more expensive vitamin enriched waters to the product mix. Product costs represented 83% of the cost of sales for the quarter, down 4% from the second quarter as reduced ingredients costs from refinements in the formulations were offset by higher shipping costs. RTD tea product costs were flat in the third quarter compared with the previous quarter, bottling and packaging costs continue to account for the greatest portion of product costs. RTD tea OEM charges represented 11.7% of its product costs in the third quarter. Starting with our June production run, AN0C has negotiated a 5% reduction in OEM costs. Shipping costs for the quarter represented 16% of cost of sales, which are up from the second quarter as our volume declined. AN0C has lower ingredient costs by utilizing GLG stevia extracts relative to the use of sugar. Higher sugar costs have been often cited by the China beverage industry previously as a cost input that was impacting their margins.
Gross Profit
AN0C Consumer Products Business!
For the AN0C consumer products business the gross profit was $0.08 million or 7.0% of revenues for the third quarter of 2011 compared with 12% for the second quarter. The gross profit margin before shipping costs for AN0C's beverage sales in the third quarter was 17%, which was lower than the second quarter by approximately 6 percentage points and reflects the higher cost of sales per bottle in the third quarter due to the changing product mix of ready to drink tea and vitamin enriched waters. Vitamin enriched waters had just been launched during the quarter and the costs also reflect the start-up launch of this new product line. Lower advertising and promotional expenses in the third quarter were a result of the successful promotional activities undertaken in the second quarter, which have been effective in increasing the brand awareness necessary for a new company and new brand.
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