Winner Medical third quarter net sales increase 34% to $41.5 million

Aug 10 2011

Winner Medical Group Inc. (Nasdaq: WWIN; "Winner Medical" or the "Company"), a leading manufacturer of medical dressings, medical disposables and non-woven fabric made from 100% natural PurCotton® products in China, today reported consolidated financial results for the third quarter ended June 30, 2011.

Fiscal Third Quarter and Nine Months 2011 Results (in millions of USD, except per share data)

Mr. Jianquan Li, chairman and chief executive officer of Winner Medical, commented: "the strong sales increase in Japan, Europe and North and South America, especially in Brazil, reflects customers' recognition of our quality products and timely delivery service, as well as deeper penetration into various regions around the globe. In addition, during the third quarter of fiscal year 2011, sales of our PurCotton® products rapidly increased, as we continued to have success expanding distribution channels in China and as more Chinese consumers become aware of and use our products."

Mr. Li continued, "Despite pressure brought on by rising cotton prices , we still managed to grow gross profit dollars while minimizing cost pressure on gross margins. We will continue to adjust our business portfolio to carry higher gross margin products and reduce costs where appropriate to offset renminbi appreciation, inflation as well as raw material price fluctuation."

Third Quarter 2011 Unaudited Financial Results

Winner Medical reported net sales of $41.5 million, an increase of 34% as compared to the same period last year, due to higher pricing and strong reorders of medical and PurCotton products. Sales increased 52% year-over-year in China to $9.0 million, driven by increased sales of PurCotton products. Sales to Europe remained strong year-over-year at $16.1 million, a 30% increase compared to the same period last year, reflecting the Company's continuing effort to maintain existing customers and add new customers. Exports to Japan grew 47% as a result of larger orders and higher selling prices. Sales to North and South America remained steady, increasing 19% year-over-year to $7.5 million, which is notable for an increase in orders from Brazilian clients, who is increasing its reliance on imported products demand. Cost of sales increased by $8.2 million, to $30.2 million, for the reporting period. The increase of cost of sales was mainly attributable to a higher average purchasing price of cotton, the Company's primary raw material, during the reporting period as compared with the same period last year.

Gross profit increased 27% to $11.3 million compared to the third quarter of fiscal 2010. Gross margin decreased to 27.2% as compared to 28.9% in the same three-month period of 2010. The decrease in gross margin was attributable to an increase in the cost of cotton. The Company continues to adjust its business portfolio by developing and marketing advanced medical products as well as PurCotton® jumbo rolls and retail products, which carry higher gross margins.

Selling, general and administrative expenses increased to $7.3 million in the third quarter of fiscal 2011, from $5.3 million in the same quarter of 2010. Adjusted selling, general and administrative expenses (non-GAAP), which exclude share-based compensation expenses, were $7.2 million versus $5.0 million for the same period of 2010. The increase was primarily due to higher salary and leasing expenses for the PurCotton retail business and R&D expense for advanced and sophisticated products.

The income tax provision for the third quarter of fiscal 2011 was $0.6 million, compared to $0.3 million for the same period in 2010, representing an effective tax rate of 14.1% for this reporting period, versus 9.3% in the same period last year. The comparatively lower effective tax rate for the three months ended June 30, 2010 was due to an income tax provision for the filing and settlement of income taxes while there was no such adjustment for this reporting period.

Net income attributable to Winner Medical increased by 2% to $3.4 million, or $0.14 per basic share, compared to net income of $3.4 million, or $0.14 per basic share, for the third quarter of fiscal 2010. This slight increase in net income was primarily due to an increase in sales and net income from medical products offsetting the net loss from the PurCotton® retail business, which recorded a loss of $0.9 million during the reporting period. The PurCotton® retail business is still in its start-up stage, and requires a significant investment before it can be expected to contribute profits.

Excluding the non-cash share-based compensation expenses and realized gain on commodity financial instruments, adjusted net income (non-GAAP) was $3.4 million for the third quarter of fiscal 2011, a decrease of 5% from $3.6 million in the same period of 2010. The adjusted basic earnings per share (non-GAAP) was $0.14 for the three months ended June 30, 2011 versus $0.15 per share for the comparable period last year.

Nine Months Fiscal 2011 Unaudited Financial Results

Net sales were $108.5 million, an increase of 25% compared to the same period last year. This increase was primarily driven by stronger sales from North and South America, particularly the United States and Brazil, and from the China market for medical products and PurCotton® products. Meanwhile, the Company maintained a steady double-digit sales increase in the European and Japanese markets.

Cost of sales increased 28% to $78.3 million, compared to $61.1 million in the same period in fiscal 2010. Cost of sales as a percentage of net revenues were 72.2% and 70.4% for the nine months ended June 30 in fiscal 2011 and 2010, respectively. This increase was mainly attributable to increased raw material prices, particularly for cotton.

Gross profit increased 17% to $30.1 million compared to the same period in fiscal 2010. Gross margin decreased to 27.8% as compared to 29.6% in the first nine months of fiscal 2010. The decrease in gross margin was attributable to the increased cost of cotton, the core raw material for the Company, and lower sales of high margin protective medical products, which were higher that year were due to the outbreak of H1N1 virus.

Selling, general and administrative expenses increased by 30% to $19.2 million during the nine months ended June 30, 2011, compared to $14.7 million in the same period of fiscal 2010. Adjusted selling, general and administrative expenses (non- GAAP), which exclude share-based compensation expenses, for this reporting period were $18.6 million, versus $14.0 million for the same period of 2010. The increase as compared to the same period last year was primarily due to higher salary and leasing expenses for the PurCotton® retail business and R&D expense for advanced and sophisticated products.

The income tax provision for the nine months ended June 30, 2011 was $1.3 million, compared to $1.6 million for the same period in 2010, representing an effective tax rate of 12.5% for this reporting period, versus 13.5% in the same period last year.

Net income attributable to Winner Medical decreased by 10% to $9.0 million, or $0.37 per basic share, compared to net income of $1.0 million, or $0.44 per basic shares for the nine months ended June 30, 2010. This decrease in net income during the reporting quarter was mainly due to the realized loss on commodity hedging.

Excluding non-cash share-based compensation expenses and realized loss on commodity financial instruments, adjusted net income (non-GAAP) was $11.3 million for the nine months ended June 30, 2011, an increase of 6% from $10.8 million in the same period of 2010. Adjusted basic earnings per share (non-GAAP) was $0.47 for the nine months ended June 30, 2011, versus $0.47 per share for the comparable period last year.

Other Financial Highlights

Cash and cash equivalents were $17.0 million as of June 30, 2011 compared to $14.8 million as of September 30, 2010. The Company's working capital as of June 30, 2011 was $50.6 million. Total assets were approximately $144.6 million compared to $119.0 million as of September 30, 2010, while total shareholders' equity was $119.3 million and $105.9 million as of June 30, 2011 and September 30, 2010, respectively.

Third Quarter 2011 Operational Updates

Medical Business Update

Medical products' net sales increased to $36.2 million from $28.3 million, or a 28% increase from the same reporting quarter of fiscal 2010. The increase in net sales was mainly attributable to: (1) significant continuing demand from Japan and the addition of new customers in Europe; and (2) steadily increasing sales orders from North and South America, particularly Brazil and the United States.

Net sales generated from Europe increased 30% during the three months ended June 30, 2011, to $16.1 million from $12.4 million during the three months ended June 30, 2010, due to increased sales to existing customers in Europe that were satisfy with our product quality and timely delivery service, as well as the addition of new customers in that region.

Net sales from the Japanese market increased 47% in the third quarter this year, to $6.2 million from $4.2 million during the same quarter last year. The increase was mainly driven by higher selling prices due to an increase in raw material cost and customers increasing their inventory of medical products, especially during and after the earthquake that occurred in mid-March of this year. Modest future growth in the Japanese market is projected to be driven by larger orders and higher selling prices.

During the reporting period, net sales from North and South America increased to $8.6 million from $7.2 million in the same period last year, or an 19% increase. The sales increase is particularly strong in Brazil, an emerging market that is increasing its reliance on imported products due to the Brazilian currency's appreciation and cheaper import costs as compared to higher domestic production cost caused by increasing labor costs and strict labor protection. Net sales in this reporting period were steady, but were not as robust as expected due to the fact that sales to the United States market decreased $0.8 million or 14%, as compared with the same period last year. We believe the decrease is due to the fact that customers in the United States market are more price-sensitive than those in other areas due to the pegged revaluation of the RMB to the US Dollar, and are therefore reducing inventory or switching to low-cost cotton alternatives when faced with raising prices.

Net sales from medical products to the China market reached $3.7 million, from $3.3 million in the reporting quarter, or a 9% increase, due to the Company's continuing effort to broaden and expand its sales channels in China.

PurCotton® Business Update

PurCotton® sales increased 107% during the third quarter of 2011 to $5.4 million as a result of robust jumbo roll orders and growth in the Chinese domestic retail business, including the sale of consumer products in self-operated chain stores, online and in supermarkets in China.

Net sales attributable to the PurCotton® jumbo roll-supply business increased to $4.0 million in the three months ended June 30, 2011 from $2.3 million in the same period last year, an increase of 74%. This large increase was due to increased demand from Chinese customers that use it as a component in hygiene products.

Net sales attributable to the PurCotton® retail business increased approximately $1.1 million to $1.4 million in this reporting period, compared to $0.3 million the same period last year. This growth is attributable to the growth in online and offline PurCotton® retail business, which, as of June 30, 2010, had opened 17 retail stores at that time and had no online sales during that period.

As of August 10, 2011, Winner Medical operates 37 retail chain stores, with 22 in Guangdong province, where the Company's headquarters is located, 10 in Beijing, three in Shanghai and two in Hong Kong. From April 1, 2011 to now, three stores were closed due to unsatisfactory performance. Since launching the customer membership system in our self-operated stores in China in November 2010, approximately 19,000 customer memberships have been recorded. Winner Medical is selling its PurCotton® consumer products online via Taobao.com and its Business-to-Consumer (B2C) online store. In addition, the Company recently started launching products into mid and high-end supermarkets in Shenzhen. PurCotton® products have been receiving positive feedback since launched.

Fiscal Year 2011 Guidance

Winner Medical has increased its forecast of total revenues for fiscal year 2011 to be in the range of $144 million to $152 million, representing a 25%-32% year-over-year increase.