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Andatee China Marine Fuel Services Corporation, a supplier of marine fuel to small cargo and fishing vessels in China, has today announced that net income during the third quarter and first nine months of 2011 declined by $0.3 million and $0.8 million respectively in a comparison with the prior-year periods.

2011 Third Quarter Financial Review

Net income attributable to shareholders during the third quarter was $2.3 million, or $0.23 per diluted share, compared to $2.6 million, or $0.27 per diluted share, in 2010.

Total revenues were $65.8 million, representing an increase of 14.3 percent year-on-year from $57.5 million in the third quarter of 2010. The increase was said to be largely due to increased sales volume and higher global oil prices.

Gross profit for the 2011 third quarter was $6.3 million, compared to $5.8 million in the prior-year period. Gross margin was 9.5 percent compared to 10.0 percent the previous year. The decline was said to be largely due to increased costs of raw materials, which the company managed to partially pass through to its customers during the 2011 third quarter.

Andatee's selling, general and administrative (SG&A) expenses for the third quarter increased by 45.7 percent to $2.8 million, or 4.2 percent of revenues, from $1.9 million, or 3.3 percent of revenues, in the prior-year period.

This increase in SG&A expenses as a percentage of revenues was primarily due to increased compensation expenses for sales employees as a result of increased sales, an increase in promotional expenses to market the company's products produced at the new blending facilities in Zibo City and Panjin City, and expenses for relocating the company's headquarters from Dalian to Shanghai. "The company believes the long-term benefits of these initiatives will more than mitigate any immediate impact on its expense line," Andatee said.

Nine Months 2011 Financial Review

During the first nine months of 2011, net income attributable to shareholders was $5.9 million, or $0.61 per diluted share, compared to $6.7 million in the corresponding period last year. Andatee said the decrease was primarily the result of increased costs of raw materials and higher SG&A expenses incurred.

Total revenues for the first nine months of 2011 were $173.2 million, representing an increase of 31.8 percent compared to $131.4 million in 2010. The increase was attributed largely to increased sales volumes and higher global oil prices.

Gross profit climbed 7.4 percent to $15.7 million from $14.6 million in the prior-year period. Gross margin was 9.1 percent compared to 11.1 percent for during the first nine months of 2010. The decrease was said to be primarily due to increased costs of raw materials.

Operational Review

During the third quarter of 2011, the company's sales volume of its blended fuel products increased by 5 percent to 90,000 tonnes from 86,000 tonnes in the prior-year period. This increase was said to be primarily the result of increased sales of the company's #4 blended marine fuel product, which was supported by additional capacity at the company's new blending facilities in Zibo City, Shandong province, and Panjin City, Liaoning province, and is utilized by smaller fishing vessels. The company currently offers six separate blended fuel products, which service smaller fishing vessels to larger handysize cargo ships.

For the nine months ended September 30, 2011, sales volumes of its blended fuel products increased by 11 percent to 228,000 tonnes from 205,000 tonnes in the prior-year period. This increase in sales volume was primarily driven by overall high demand for Andatee's blended fuel products, increased demand for the company's #4 blended fuel product in the third quarter of 2011, demand driven by the new blending facilities in the Shandong and Liaoning provinces, the expansion of Andatee's existing distribution network, and ongoing efforts in promoting its #1 blended marine fuel product.

"To continue the growth in sales volume through the end of the year, the company remains focused on enhancing its marketing efforts tailored to "retail", or individual, operations and expanding its distribution base in southern China," Andatee said.

Commenting on its new blending facilities, Andatee said: "The company continues to make progress in ensuring that the necessary personnel and equipment are in place at its new blending facilities in Shandong and Liaoning provinces, which began contributing revenues during the 2011 third quarter. Andatee expects these facilities to substantially improve its production capabilities in blending, while also reducing the cost of transporting raw materials from major suppliers in these provinces."

Andatee said that it is also continuing to execute its plan to set up market development offices in large cities. The company stated that it expects to utilize these offices to establish a sales and marketing network in order to pursue 'organic expansion possibilities', such as new supply agreements and customer sales, while also providing a solid foundation to pursue its acquisition-driven growth strategy in neighboring areas around major cities.

Commenting on its new headquarters in Shanghai, Andatee said: "The company is making progress in the relocation of its headquarters to Shanghai, which provides a more central location for management and sales staff. The company has taken a gradual approach to this relocation to demonstrate its commitment to continuing close relationships with suppliers in northern China, while beginning to build new relationships with suppliers in central and southern China. The company will maintain a small staff at offices in Dalian, where Andatee currently has its headquarters."

Market Overview

During the 2011 third quarter, the average international oil price increased to $91 per barrel, compared to $78 per barrel in the prior-year period. Andatee uses oil refinery by-products as raw materials for production, such as tar and heavy diesel, blends the products at its facilities, and then sells its "Xingyuan" brand to customers.

Mr. An said: "We continue to closely monitor the movement of global oil prices, in conjunction with demand for our fuel products. Higher oil prices had a positive effect on our revenues during the 2011 third quarter, but like in the 2011 second quarter, we were unable to pass the entirety of the increase to our customers and suffered some adverse effects from increased raw material costs. However, oil prices did not fluctuate as severely this quarter as they did in the previous quarter, which had a positive effect on our margins and demand for our products during the three months ended September 30, 2011."

Outlook for 2011

In its outlook for 2011, Andatee has raised its net income forecast to between $7 million and $9 million (from between $5 million and $8 million) for the year ending December 31, 2011. Revenue for the year is forecast at between $225 million and $275 million whilst total sales volumes are expected to increase by between 7 percent and 24 percent.

Andatee said the increase in its net income forecast was as a result of a more stable global economic environment causing fewer fluctuations in inventory costs.

Commenting on the outlook for the rest of the year, Mr. An concluded, "Andatee is reiterating its revenue guidance for 2011, but is raising net income guidance for the year as we have seen global oil prices become more stable during recent months, ultimately having a more positive effect on our bottom line. We continue to monitor and attempt to mitigate the effects of the fluctuations in raw material costs on our bottom line. While we are pleased with the upwards of 30 percent growth in revenues for the first nine months of 2011, we remain focused on growing our sales volume and revenues and confident that our improving brand recognition and balanced fleet growth will continue to drive our growth in China's marine fuel market.

"We also continue to identify and evaluate potential acquisition targets based on a strict set of criteria and conservative approach and, when appropriate, will work to acquire target companies with facilities in areas that fit into Andatee's growth plans. We remain confident in the long-term prospects of our industry and will continue to work hard to achieve balanced and stable growth in our business."