Anticipates favorable market conditions in China for continued growth in 2012
Affirms 2012 Financial Guidance
Shifts focus entirely to the China domestic market
Deer Consumer Products, Inc. (Nasdaq: DEER) (website: http://www.deerinc.com/), a leading provider of “DEER” branded household consumer products to Chinese consumers and a leading vertically integrated manufacturer of small household and kitchen appliances for global customers, announces today financial results for the second quarter ended June 30, 2012.
Our revenue for the three months ended June 30, 2012, was $45.0 million, which was consistent with our results for the three months ended June 30, 2011. The average selling prices of our products increased 150% in the second quarter of 2012 compared to our average selling prices in the second quarter of 2011. The increase in our selling prices conforms to our strategy of maintaining healthy profit margins across all of our product lines. We also increased our sales to the China domestic market to $45.0 million for the three months ended June 30, 2012, a 54% increase from $29.2 million in the same period of 2011.
We shifted our growth strategy to focus exclusively on China domestic markets, which offer higher profit margins than international markets. As a result, we reported no sales in South America, Asia, Europe, Middle East, Africa and the US in the quarter ended June 30, 2012. We are also transforming our business to focus on creating and marketing our own brand domestically.
Q2/2012 GROSS PROFIT MARGIN
Our gross margin increased slightly to 29.2% for the three months ended June 30, 2012, compared to 29.1% for the same period of 2011. Our gross margin is higher in the China domestic market compared to the export market because products generally sell at much higher prices at China retail and wholesale outlets than in international markets. We also are continuing to improve the efficiency of our manufacturing operations and further benefitting from economies of scale by producing motors and other primary components of our products in-house.
Q2/2012 OPERATING EXPENSES
Selling, general and administrative expenses for the three months ended June 30, 2012, were $5.6 million, an increase of $1.7 million, or 42.3%, from $3.9 million for the same period of 2011. Selling expenses for the three months ended June 30, 2012, increased by 44.3%, or $1.3 million, in comparison to the same period of 2011 due to a significant increase in advertising expenses. Associated selling expenses include advertising to expand our market share, increase brand awareness and to help generate the significant increase in sales. We retained Han Han, a famous writer in China, as our product spokesman. We also retained Shanghai Dingxiang Advertising Company to promote our dehumidifier products in Beijing, Shanghai, Hangzhou and Nanjing. The expenses incurred for our factory representatives and in-store promoters who promote our products directly to consumers at retail locations remained minimal.
Q2/2012 NET INCOME Second quarter net income was $5.7 million, a decrease of 22% from Q2/2011. Fully diluted earnings per share were $0.17, an EPS decrease of 22% from Q2/2011. The decrease in net income was primarily due to the increase in our advertising expenses incurred to expand our market share and increase brand awareness.
Q2/2012 CASH FLOWS
As of June 30, 2012, we had $9.40 million in cash and equivalents on hand. Our principal liquidity demands are to help increase our sales in China by adding capacity, to improve sales distribution infrastructure, to purchase inventory and for general corporate purposes. We anticipate the cash we have on hand as of June 30, 2012, as well as the cash that we will generate from operations, will satisfy these requirements.
MANAGEMENT COMMENTS ON 2012 SECOND QUARTER FINANCIAL RESULTS
Bill He, Chairman & CEO of Deer, commented: “Deer is pleased to report its financial results for the second quarter of 2012. In 2010, Deer entered China’s domestic markets with a strong push by putting its ‘DEER’ branded products on the shelves of retail locations across China. In 2012, Deer is continuing to expand its store presence across China and is adding additional in-store promotional staff to further enhance sales. Deer currently has access to approximately 4,000 retail locations across China and has developed a well-recognized brand by working with various retail channels.
We believe China remains the world’s largest and fastest growing consumer retail market and continues to experience strong domestic demand for small household appliances. There are approximately 35,000 retail locations across China that Deer could potentially penetrate. Deer has significant growth potential in China.”
CHINA DOMESTIC MARKET EXPANSION STRATEGIES
Mr. He continued, “Chinese consumers have experienced relatively strong positive real income growth in recent years. We believe rising standards of living will result in an increased demand for quality consumer goods, such as small appliances. We plan to fully take advantage of this market opportunity by targeting our high quality products to these middle income Chinese consumers, whose numbers continue to grow, and by providing exceptional customer service.
We expect our higher gross margins to continue over time as most of our revenue is being derived from the higher margin China domestic markets. We believe that we will be able to manage SG&A growth along with our significant revenue growth to maintain and enhance net profit margins.”
Mr. He continued, “In the short-term, we will continue building the solid reputation of our ‘DEER’ branded products to be the number one food preparation appliances brand by 2013. We also plan to focus sales of our high margin products, including our dehumidifier, vacuum cleaner, water filters and air purifier, to first and second tier Chinese cities that are experiencing strong economic growth.
Over the course of the coming quarters, we plan to position ourselves as a high-end innovative brand in China and expand our ‘DEER’ brand to include complete integrated household appliance systems for the kitchen and bathroom.
We have also made significant progress on our Wuhu manufacturing plant facility, by breaking ground to complete our new manufacturing plant. We are pleased with our construction progress.”
AFFIRMS 2012 FINANCIAL GUIDANCE
In 2012, Deer anticipates revenues from the high margin China domestic sales will continue to surpass export sales. Deer provides 2012 revenue guidance of between $270 and $290 million, net income guidance of between $45 million and $47 million, and targets EPS (Earnings per Share) between $1.37 and $1.42.
3-YEAR INSIDER SHARE LOCKUP, TOTAL MANAGEMENT COMMITMENT
As disclosed previously, Deer’s entire management team has voluntarily entered into 3-year share lockup agreements, which prohibit them from selling any shares to the general public through at least 2013. The lockup agreements represent approximately 47% of Deer’s entire outstanding shares. Deer management’s vested interests are aligned with those of Deer’s public shareholders. Deer has been led by its original founders since the inception of its operating business 17 years ago.
About Deer Consumer Products, Inc.
Deer Consumer Products, Inc. is a NASDAQ Global Select Market listed U.S. company with its primary operations in China. Deer has a 16-year operating business as well as a strong balance sheet. Operated by Deer’s founders and supported by more than 100 patents, trademarks, copyrights and approximately 1,000 staff, Deer is a leading provider of “DEER” branded consumer products to Chinese consumers and a leading vertically integrated manufacturer of small home and kitchen appliances for global customers. DEER’s product lines include series of small household and kitchen appliances as well as personal care products designed to make modern lifestyles easier and healthier.
Safe Harbor Statement
All statements in this press release that are not historical are forward-looking statements made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. There can be no assurance that actual results will not differ from the company’s expectations. You are cautioned not to place undue reliance on any forward-looking statements in this press release as they reflect Deer’s current expectations with respect to future events and are subject to risks and uncertainties that may cause actual results to differ materially from those contemplated. Potential risks and uncertainties include, but are not limited to, the risks described in Deer’s filings with the Securities and Exchange Commission.