ady 2010 q2 presentation final
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AMERICAN DAIRY, INC.(Feihe International)
Investor Presentation
September 2010
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This presentation includes statements that constitute forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. These statements relate to future events or to our future financial performance, andinvolve known and unknown risks, uncertainties and other factors that may cause our actual results, levels ofactivity, performance, or achievements to be materially different from any future results, levels of activity,performance or achievements expressed or implied by these forward-looking statements. These statementsinclude, but are not limited to, information or assumptions about revenues, gross profit, expenses, income,capital and other expenditures, financing plans, capital structure, cash flow, liquidity, management’s plans,goals and objectives for future operations and growth. In some cases, you can identify forward-lookingstatements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,”“believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparableterminology. You should not place undue reliance on forward-looking statements since they involve knownand unknown risks, uncertainties and other factors which are, in some cases, beyond our control and whichcould materially affect actual results, levels of activity, performance or achievements. Certain of theinformation contained herein concerning economic trends and performance is based upon or derived frominformation provided by third-party consultants and other industry sources. We have not independentlyverified and cannot assure the accuracy of any data obtained by or from these sources.
The forward-looking statements contained in this presentation are made only as of May 2010, and AmericanDairy, Inc. is under no obligation to revise or update these forward-looking statements.
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Safe Harbor Statement
Business at a Glance
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We are a leading producer and distributor of infant formula, milk powder, soybean and walnut powder products in China
Headquartered in Beijing
Over 47 years of operating history
Processing facilities in Heilongjiang, Shanxi and Hebei provinces, with processing capacity of 1,250 tons of milk powder per day
Packaging and distribution facilities in Kedong, Heilongjiang province and Langfang, Hebei province
Dairy farms in Gannan and Kedong
We are the first and only NYSE-listed Chinese dairy company
Our brands, Feifan, Feiyue and Feihui, are among China’s most recognized brands
History of product excellence achieved through secured source of quality milk and stringent quality control
Covers all market segments
Nationwide presence, with focus on tier 2 and 3 cities
Over 95,000 retail outlets across China
Presence in 29 provinces, including all tier 1 cities except Shanghai
Company History
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1962 20052003
• Quotedon OTC
• Listed on NYSE Arca
• Langfang distribution center commenced operation
• Brought in 8000 Australian Holstein cows
• Melamine crisis broke, ADY passed all gov. inspections
2008 2009
• Feihe, as a SOE, began operations
• Acquired tangible assets of Nutricia, wholly-owned subsidiary of Royal Numico in China
2006 2007
• Raised $18.2M of 7.75% Convertible Notes
• Raised $80M of 1% Guaranteed Senior Secured Convertibles Notes due 2012
• Restructured 1% Guaranteed Senior Secured Convertibles Notes due 2012
• June 8, 2009: Listed on NYSE main board
• Began capacity expansion project in Gannan and Longjiang facilities
• Raised $63 M with Sequoia for 2.1 M shares
• Began construction on two international accredited organic dairy farms in Gannan and Kedong
1997
• Chairman Leng led Management Buy Out
Capital Market Summary
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NYSE: ADY
Price (as of 8/19/2010): $7.35
Shares outstanding (as of 6/30/2010): 22.3 million
Market Cap (as of 8/19/2010): $163.7 million
Revenue Net Income
16.4
8.3
1719.6
35.4
(15.0)-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
2006 2007 2008 2009 1H09 1H10
$U
S (m
illio
ns)
$U
S (m
illio
ns)
* 3Q10E revenue guidance: >$55M
115.1163.9
193.2
271.1
155.0 133.6
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2006 2007 2008 2009 1H09 1H10
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Company Highlights
Large Market Opportunity with Long-Term, High-Growth Prospects
A Leading Infant Formula Brand in China
Stringent Quality Control with State of the Art Equipment and Facilities
Nationwide Sales Force with Regional Distribution Centers
Vertically Integrated Business Model – High Barriers to Entry
Experienced Management Team with Proven Track Record
Strong Financial Position and Profitability
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Company Overview
0.0
50.0
100.0
150.0
200.0
250.0
2002 2004 2006 2008 2010E 2012E
RM
B (
bill
ion
s)
Drinking Milk Infant Formula
2
95
611
46
10396
87
9 1217
44
95 93
0
20
40
60
80
100
120
India China Thailand Japan France U.K. U.S.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1998 2008 GDP Per Capita
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China is the second largest infant formula market behind the U.S., but is expected to grow to $12 billion by 2014 (surpassing the U.S.)
Dairy consumption per capita in China is still significantly lower than in the U.S., Western Europe and more developed Asian nations such as Japan
China’s Infant Formula Market
Dairy Product Consumption
Tota
l Dai
ry C
on
sum
pti
on
Pe
r C
apit
a1
(kg)
Source: (1) Euromonitor. Includes aggregate consumption of milk products, cheese, yogurt, sour milk
drinks and other dairy products.
GD
P P
er C
apita ($
US)
Source: Euromonitor
China’s Drinking Milk and Infant Formula Market
RMB$
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Infant formula accounts for the majority of milk powder sales in China
American Dairy had the third largest market share among domestic players
China’s Infant Formula Market
Milk Powder Sales By Category
61%9%
1%
28%
Infant Formula
Adult Milk Powder
Pregnant Women Milk Powder
Wholesale Milk Powder
Source: AC Nielsen, Roland Berger analysis
Source: Commercial Information Center of China (CIC)
China’s Milk Powder Market Share (June ’10)
Dumex , 16.76%
Mead Johnson , 12.06%
Nestle , 10.58%
Abbott , 7.29%Wyeth,4.72%
Yili , 10.97%
Beingmate, 7.13%
Feihe (ADY) 4.72%
Synutra ,3.27%
Yashili , 2.69%
Wandashan , 3.88%
Others , 15.93%
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Competitive Landscape –Three Groups of Players
Domestic National
Domestic Regional
International
• Dumex• Mead Johnson• Wyeth• Abbott• Nestle
• Feihe• Yili • Synutra• Yashili• Beingmate
• Nanshan• Wandashan• Others
*
*
*
• Proven track record of more than 10 years in the Chinese infant formula market
• Premium and super premium pricing• Perceived superior product quality and superior brand
image• Strong R&D capabilities• Limited reach in tier 2 and 3 cities due to fragmented retail
channels and the lack of modern logistics infrastructure
• Dominant in tier 2 and 3 cities• Gaining market share from foreign producers in tier 1 cities• Strong product mix – low to super premium pricing
• Limited brand recognition• Unstable product quality• Presence in regional market with the potential to
increase scale and gain national presence
Source: Industry interviews, Roland Berger analysis
Market Share
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Our Competitive Advantages
Heilongjiang is China’s premier milk-producing region at 47°north
Situated in one of the three nutrient-rich black soil zones of the world
Natural underground water reserves with a pH level of 8.5
Rich and fertile soil contributes to higher milk yield and quality
The central government allows one infant milk processing facility per county
ADI Feihe’s well-established presence in Heilongjiang limits new entrants
Strong local and provincial government relationships
Favorable pricing offered to incentivize local farmers’ willingness to sign exclusive contracts with ADI Feihe
Contracts with local farmers to access over 200,000 dairy cows
Secured Access to High Quality Milk and State of the Art Production Equipment
The Heilongjiang Advantage
Favorable Government Support
Strong Relations with Local Farmers
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ADI Feihe Dairy Farms
Gannan and Kedong Farms: currently ~15,000 Australian Hostein cows
Average yield of 8-10 tons/yr per cow
ADY is China’s First Vertically Integrated Infant Formula Company
Contracts
Access to over 200,000 cows
Average yield of 4 tons/yr per cow
Over 200 company-owned milk stations across Heilongjiang Province
Limited competition due to government regulation of station locations
Total processing capacity: 1,250 tons of liquid milk/day
Increasing capacity to 1,920 tons/day by August 2010 and to 2,820 tons/day by May 2011
Facilities in Heilongjiang, Shanxi and Hebei Provinces
Sales and marketing force of 1,500 to cover over 95,000retail outlets
Packaging and distribution facilities in Kedong (Heilongjiang) and Langfang (Hebei)
Company-Owned Milk Collection
Stations
State of the Art Processing Facilities
Nationwide Distribution
Secured Access to Milk
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Our Geographic Footprint
Production Center, Gannan Production Center, Baiquan Production, Distribution & Packaging Center, Kedong
Dairy Farm, Kedong
Dairy Farm, Gannan
Corporate Headquarters, Beijing
Production Center, Qiqihaer
Packaging & Distribution Center, Langfang
Production, Distribution & Packaging Center for Walnut and Soybean Products, Shanxi
Hebei Province
Shanxi Province
Chengdu
Heilongjiang Province
Beijing
Shanghai
GuangzhouShenzhen
Tier-1 cities
Dairy farm construction
Logistics Center, Chengdu and Wuhan
Longjiang
Tier 1 cities
Dairy farm construction
Production facility under construction: Gannan: +700 tons/day by Aug 2010Longjiang: +900 tons/day by May 2011
Wuhan
Nationwide Marketing and Support
Educational Materials Events and Displays
TV and Media Advertising Call Center and Baby Club Membership
We are capitalizing on additional market share opportunities in today’s dynamic market by adopting an aggressive but cautious sales and marketing strategy
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Comprehensive Product Offerings
Infant Formula Products Covering Mid-to-High-End Market Segments
Feifan Premium Series
FeiyueMedium-High Series
FeihuiMedium Series
RMB 198 - 218per 900g tin
RMB 148 per 900g tin
RMB 87 per 900g tin
RMB 52 - 78per 400g bag
RMB 48 per 400g bag
RMB 32 per 400g bag
Adult Formula Products Other Products
Prenatal Formula Adult Formula
Rice Cereal
Soybean Powder
Walnut Powder
Wholesale Milk Powder
AstroBabySuper Premium Product
RMB 308- 368per 700g tin
Soft launched on May 6, 2010
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Growth Initiatives
Strengthening Human Resources
Development
Improving Nutrition Education
Department
Enhancing Customer Services and Improving
Market Intelligence
Improving Operating Efficiency at Each
Retail Point
We are committed to become the leading infant formula manufacturer
Continue Leadership in Quality Control
Strengthening Brand Equity
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Experienced Management Team
You Bin LengChairman, Chief Executive Officer
Over 20 years in the dairy industry and ADI Feihe Chairman for more than seven years
Bachelor’s degree in food engineering from Northeast Agriculture University and an EMBA from Peking University
Roger Hua LiuVice Chairman, Secretary
More than 16 years in C-level positions with extensive finance and accounting experience
Bachelor’s degree in finance and economics from Xian JiaotongUniversity and Shenzhen University
Jonathan H. ChouChief Financial Officer
More than 20 years of finance and banking experience in the U.S. and Asia Pacific
Former Asia Pacific CFO of Honeywell International and AP CFO Lucent Technologies
Awarded “China's Top Ten CFOs of 2008” award by CFO World Magazine and holds MBA from Fuqua School of Business at Duke
Guilang ZhangSpecial Assistant to the Chairman
Over 15 years of experience in sales and marketing
Former General Manager of Want-Want China Holdings' Want Zai (Hot Kid) business, led the company to become China's number one dairy drinks company by net profits from 2003-2006.
Bachelor's Degree in Economics from National Chung Hsing University in Taiwan and EMBA from Tsinghua University in Beijing
Judy Tu, Esq.Vice President
Over 10 years of experience in operating Chinese companies with background in U.S. law
J.D. from Loyola Law School, Attended University of California, Berkeley
A licensed attorney in the State of California.
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Board of Directors
You Bin LengChairman, Chief Executive Officer
Over 20 years in the dairy industry and ADI Feihe Chairman for more than seven years
Bachelor’s degree in food engineering from Northeast Agriculture University and an EMBA from Peking University
Roger Hua LiuVice Chairman
More than 16 years in C-level positions with extensive finance and accounting experience
Bachelor’s degree in finance and economics from Xian Jiaotong University and Shenzhen University
Sheng Hui LiuDirector, Vice President of Finance
Over 10 years of extensive financial knowledge and experience at ADI Feihe
Degrees in economics and accounting from Northeast Agriculture University and Country Cadre Institute of Ministry of Agriculture
Kirk G. Downing, Esq.Director
Over 25 years of experience practicing law
Attorney licensed in the State of California
James C. Lewis, Esq.Director
Over 30 years of experience practicing law
Attorney licensed in the State of Utah
Neil N. ShenDirector
Founding and Managing Partner of Sequoia Capital China Co-founder of Ctrip .com International (Nasdaq: CTRP) and Home Inns and Hotels
Management (Nasdaq: HMIN) Bachelor's degree from Shanghai Jiao Tong University and Master's degree from the School of
Management at Yale University
Sean ShaoDirector, Audit Committee Chair
Over 20 years of extensive finance and audit experience Extensive experience as an independent director and as an executive officer in U.S. public
companies operating in China Holds a CPA license issued by the American Institute of Certified Public Accountants Bachelor's degree from East China Normal University and Master's degree from the
University of California, Los Angeles
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Revenue Performance
Quarterly Revenue
Achieved 40% organic growth for fiscal 2009 over fiscal year 2008
$U
S (m
illio
ns)
Revenue
$U
S (m
illio
ns)
113.8
41.2
72.1
43.4
81.4
52.2
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Q1 2009 Q2 2009 3Q 2009 4Q 2009 1Q2010 2Q2010
* 3Q10E revenue guidance: >$55M
115.1
163.9193.2
271.1
155.0 133.6
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2006 2007 2008 2009 1H09 1H10
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Consistent Margins and Expanding Cash Flow
Gross Margin Operating Cash Flow
Maximize branded products mix which would improve operating cashflow and gross margin as all branded products sales are based on “cash on delivery”
44.2%
39.3%
48.2% 47.2%
35.4%
0%
10%
20%
30%
40%
50%
60%
2007 2008 2009 1Q2010 2Q2010
Gross Margin
11.1
-4.4
29.9
17.219.5
14.6
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
2006 2007 2008 2009 1H2009 1H2010
$U
S (m
illio
ns)
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Product Portfolio: Revenue Contribution
Continuing to focus of product mix after Sept 2008 Melamine Crisis
2Q 2010 Revenue Contribution by Product
2Q 2009 Revenue Contribution by Product
2Q 2008 Revenue Contribution by Product
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Selected Balance Sheet Items
(USD in millions) As of June 30, 2010
Assets
Cash and Cash Equivalents $12.69
Inventories, Net 58.3
Property & Equipment (1) 188.8
Biological Assets 54.4
Total Assets $421.8
Short Term Debt
Current Maturities of Long-Term Debt 7.3
Notes and Loans Payable 45.5
Long Term Debt, Net of Current Portion 28.5
Shareholder’s Equity 151.4
Total Liabilities & Equity $421.8
(1) Includes Net Property and Equipment and Construction in Progress.
In September 2009, the Company paid down $34.0million, or 75%, of the $46.0 million outstanding ofits 1% Guaranteed Senior Secured ConvertiblesNotes due 2012. The remaining payment,approximately $11.5 million, was completed at theend of October 2009. Additionally, the Company's7.75% Convertible Notes due 2009 were fullyconverted as of October 2, 2009 and the Companyhas no convertible notes remaining.
On August 26, 2009, the Company closed privateplacement transaction with Sequoia Capital,through which the Company issued 2.1 millionshares of common stock to Sequoia Capital for anaggregate purchase price of $63.0 million.
Simplified Capital Structure with No Convertible Notes
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Company Highlights
Large Market Opportunity with Long-Term, High-Growth Prospects
A Leading Infant Formula Brand in China
Stringent Quality Control with State-of-the-Art Equipment and Facilities
Nationwide Sales Force with Regional Distribution Centers
Vertically Integrated Business Model – High Barriers to Entry
Experienced Management Team with Proven Track Record
Strong Financial Position and Profitability
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Thank You!
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Key Financial Items
Dec 31, 2008 Dec 31, 2009 June 30, 2010
Sales 193.2 271.1 133.6
Gross Profit 76.0 130.7 56.9
Sales & Marketing 50.7 105.1 57.9
G&A 19.0 20.5 12.6
Operating Income 6.3 5.1 (22.1)
Government Subsidies 6.8 21.2 9.2
Net Income 17.0 19.6 (15.0)
Diluted EPS 0.97 0.97 (0.68)
Key Income Statement Items
FY2008 FY2009 June 30, 2010
Loss on Disposal of Biological Assets 0.3 1.7 8.6
Operating cash flow 29.9 17.2 14.6
Investing cash flow (32.3) (48.4) (30.8)
Financing cash flow 0.7 65.7 (20.9)
Key Cash Flow Items
(USD mn)
(USD mn)