Mead Johnson profits drop in Q2

Mead Johnson profits drop in Q2

China/Hong Kong business returned to positive volume growth after three consecutive quarters of decline.

Mead Johnson Nutrition Co. (NYSE: MJN) announced its financial results for the quarter ended June 30, 2013.

Sales of $1,055 million for the second quarter of 2013 increased 4 percent on both a reported and constant dollar basis, up from $1,012 million in the prior-year quarter. Sales growth was 8 percent in the Asia/Latin America segment, partially offset by a 4 percent decline in the North America/Europe segment due to the impact of businesses exited in late 2012.

Excluding the impact of non-core businesses exited in late 2012, sales growth in the second quarter of 2013 was 5 percent compared to the same quarter a year ago. On the same basis, sales for the North America/Europe segment, which included most of the non-core businesses, were in line with the prior-year quarter.

GAAP net earnings in the second quarter of 2013 were $0.80 per diluted share, compared to $0.81 per diluted share a year ago.

Non-GAAP net earnings were $0.84 per diluted share for the second quarter of 2013, compared to $0.83 in the prior-year quarter, driven by higher sales and gross margin, with these benefits largely offset by higher demand-generation investments.

Mead Johnson expects its full-year non-GAAP EPS to be in the range of $3.22 to $3.30. Absent any incremental impact related to the China antitrust review, we expect GAAP EPS in the range of $3.16 to $3.24.

“We are encouraged by our revenue growth in the quarter. It allowed us to increase demand-generation investments,” said CEO Peter Kasper Jakobsen. “Our China/Hong Kong business has returned to positive volume growth after three consecutive quarters of decline. We are fully cooperating with the Chinese regulatory authorities in the ongoing probe. We expect to meet with them again in the near future with the objective of reaching a final resolution. We remain confident in our long-term prospects in this important market. Sales growth was strong across South Asia and Latin America, with a majority of markets showing increases in market share. In the North America/Europe segment, we saw higher non-WIC market share in the U.S. offsetting lower category consumption. Importantly, we made significantly higher investments in demand generation throughout our global operations in order to drive future growth.”

Second quarter results
Sales for the second quarter of 2013 totaled $1,055.3 million, up 4 percent from $1,012.3 million in the prior-year period. Price and volume each contributed 2 percent to sales growth. Earnings before interest and income taxes (EBIT) totaled $231.6 million compared to $248.3 million in the prior-year quarter. EBIT in prior-year quarter benefited from significant transaction gains related to foreign exchange. The second quarter EBIT declined despite higher sales and gross margins, as we expanded investment in demand creation. Advertising and promotion spending rose to 16 percent of sales.

Gross margin for the second quarter of 2013 was 63.6 percent, up from 63.2 percent in the second quarter of 2012. The improvement was mainly in the North America/Europe segment.

Net earnings attributable to shareholders totaled $162.2 million, or $0.80 per diluted share, in the second quarter of 2013, compared to $165.8 million, or $0.81 per diluted share, in the prior-year quarter. The effective tax rate (“ETR”) was 25.3 percent in the second quarter, compared to 25.9 percent a year ago. The lower ETR was primarily attributable to management's assertion that certain current-year foreign earnings and profits are permanently invested abroad.

On a non-GAAP basis, which excludes Specified Items, net earnings attributable to shareholders totaled $171.0 million, or $0.84 per diluted share, for the second quarter of 2013, compared to $171.2 million, or $0.83 per diluted share, for the same quarter a year ago.

Second quarter segment results
The Asia/Latin America segment reported sales of $757.4 million for the second quarter of 2013, up 8 percent from $702.0 million in the second quarter of 2012. Sales increased 6 percent from volume and 2 percent from price. Price increases in Venezuela and Argentina helped mitigate high inflation in these markets and accounted for 2 percent of the segment's growth and 1 percent of the total company growth. Category growth combined with higher market share drove the increase in sales volume. Compared to prior year, China sales volume increased, after three quarters of decline. Sales volume also increased in Hong Kong versus the second quarter of 2012, but was down relative to the first quarter of 2013, as the impact of new export restrictions became more evident. EBIT for the Asia/Latin America segment totaled $239.6 million in the second quarter of 2013, compared to $239.9 million for the same quarter a year ago. The benefit from higher sales was offset by lower gross margins from country mix and increased investment in demand generation.

The North America/Europe segment reported sales of $297.9 million for the second quarter of 2013, down 4 percent from $310.3 million in the second quarter of 2012. Sales declined 6 percent from volume offset by a two percent increase in price. Excluding the impact of exiting several non-core businesses in 2012, sales were in line with the prior-year quarter. Category consumption continued to decline in the United States, somewhat offsetting gains in U.S. non-WIC market share and share gains in Canada. EBIT for the North America/Europe segment totaled $73.4 million in the second quarter of 2013, up 3 percent from $72.2 million in the second quarter a year ago. The EBIT increase was driven by improved gross margins from lower commodity costs, productivity and price increases in the United States.

Corporate and Other expenses showed an increase primarily due to transaction gains related to foreign exchange in the prior-year quarter.

Six-month results
Sales for the six months ended June 30, 2013 totaled $2,093.2 million, up 5 percent from $1,998.9 million a year ago. Sales increased 4 percent from price and 1 percent from volume.

Gross margin improved 30 basis points in 2013 versus the first half of the prior year. The increase was driven by lower dairy costs and productivity gains mainly in the North America/Europe segment.

EBIT for the first six months of 2013 totaled $480.7 million, down from $497.1 million in the same period of the prior year. In the first half of 2013, as compared to the prior-year period, higher sales and improved gross margins were offset by higher demand-generation investments, transaction gains related to foreign exchange seen in the prior year, and higher pension settlement expense.

The effective tax rate for the first half of 2013 was 25.5 percent versus 26.7 percent a year ago. The lower ETR was primarily attributable to management's assertion that certain current-year foreign earnings and profits are permanently invested abroad.

Net earnings attributable to shareholders for the first six months of 2013 totaled $334.7 million, or $1.64 per diluted share, compared to $330.0 million, or $1.61 per diluted share, for the same prior-year period.

On a non-GAAP basis, which excludes Specified Items, net earnings attributable to shareholders totaled $345.0 million, or $1.69 per diluted share, in the first half of 2013, compared to $338.6 million, or $1.65 per diluted share, in the first half of 2012.

Six-month segment results
Sales in the Asia/Latin America segment for the first six months of 2013 were $1,512.7 million, up 7 percent from $1,409.3 million in the first half of 2012. Sales increased 4percent from price and 3 percent from volume. Price increases in Venezuela and Argentina helped mitigate high inflation in these markets and accounted for 2 percent of the segment's growth and 1 percent of the total company growth. Despite volume declines in China due to a tough 2012 comparable, share gains in many markets and continued category growth drove volume expansion for the segment. EBIT for the segment totaled $508.0 million in the first six months of 2013, compared to $520.8 million in the year-ago period. The EBIT decline was driven by higher demand-generation investments.

The North America/Europe segment reported sales of $580.5 million for the first six months of 2013, down 2 percent from $589.6 million in the first half of 2012. Sales declined 5 percent from volume, offset by a 3 percent increase in price. Excluding the impact of several non-core businesses exited in late 2012, sales grew by 2 percent, as price and share gains, both in our U.S. non-WIC and Canada businesses, more than offset lower category consumption in the United States. EBIT totaled $124.7 million for the first six months of 2013, up 20 percent from $104.0 million in the same period of the prior year. The EBIT improvement was driven by favorable gross margins from pricing gains, productivity and lower dairy costs.

Corporate and Other expenses showed an increase primarily due to transaction gains related to foreign exchange in the prior-year quarter.

Outlook for 2013
“We expect to deliver constant-dollar sales growth of about eight percent from core operations,” Mr. Jakobsen said. “We anticipate growth across our global portfolio will offset any sales impact from recent price decreases in China. We will continue to invest in demand generation where we see opportunities to accelerate growth.” Mead Johnson expects reported sales growth of six percent. This reflects a two percent impact from discontinued non-core businesses and a strengthening U.S. dollar. Absent any incremental impact related to the China antitrust review, GAAP EPS is expected in the range of $3.16 to $3.24. The Company confirms full-year non-GAAP EPS guidance in the range of $3.22 to $3.30.

 

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