Mead Johnson sales climb 8% in 2013

Mead Johnson Nutrition Co. (NYSE: MJN) announced its financial results for the fourth quarter and year ended Dec. 31, 2013.

“We are pleased with our strong 2013 performance as we achieved sales growth at the top end of our guidance range and earnings that exceeded expectations,” said Chief Executive Officer Kasper Jakobsen. “Sales growth was strong in both Asia and Latin America with broad-based market share gains in growing markets. We also saw share gains in Canada and in the U.S. non-WIC business, which partially offset lower category consumption in the U.S. We delivered strong gross margin improvement from higher pricing and productivity. This enabled us to substantially increase our investment in demand creation, while delivering 10 percent growth in earnings per share on a non-GAAP basis.”

Fourth quarter results
Sales for the fourth quarter of 2013 totaled $1,060.7 million, up 8 percent from $981.1 million in the prior-year quarter. Sales benefited 6 percent from volume and 5 percent from price, reduced by 3 percent from foreign exchange. Gross margin for the fourth quarter of 2013 was 63 percent, up 190 basis points from the fourth quarter of the prior year. The gross margin improvement was primarily driven by price increases and productivity, which more than offset higher dairy costs. The increase in sales and gross profit was partially offset by record levels of advertising and promotion spend and higher pension settlement expense. Earnings before interest and income taxes (“EBIT”) for the fourth quarter of 2013 totaled $205.2 million compared to $189.7 million in the prior-year quarter.

The company's effective tax rate (“ETR”) was 18.9 percent in the fourth quarter, compared to 23.8 percent a year ago. The low fourth quarter 2013 ETR includes a non-recurring benefit related to the decision to permanently invest certain prior years' foreign earnings and profits abroad.

Net earnings attributable to shareholders totaled $153.2 million, or $0.75 per diluted share, in the fourth quarter of 2013, compared to $134.2 million, or $0.66 per diluted share, in the prior-year quarter.

On a non-GAAP basis, excluding Specified Items, net earnings attributable to shareholders totaled $157.9 million, or $0.78 per diluted share, for the fourth quarter of 2013, compared to $146.7 million, or $0.72 per diluted share, for the same quarter a year ago.

Fourth quarter segment results
In the fourth quarter of 2013, the company expanded the number of reportable segments to three as it separated the Asia/Latin America segment into two reportable segments: Asia and Latin America. The North America/Europe reportable segment remains unchanged.

The Asia segment reported sales of $544.2 million for the fourth quarter of 2013, up 19 percent from $457.4 million in the prior-year quarter. Sales increased 16 percent from volume and four percent from price, reduced by 1 percent from foreign exchange. Six percent of segment growth in the fourth quarter of 2013 was attributed to China distributors' inventory reductions, which occurred in the prior-year quarter. Volume growth was also driven by share recovery in China, category growth in the segment and a temporary benefit from competitors' supply disruption. EBIT for the Asia segment totaled $182.9 million in the fourth quarter of 2013, up from $134.1 million for the same quarter a year ago. The increase in EBIT was due to higher sales and improved gross margin, partially offset by continued investment in demand generation.

The Latin America segment reported sales of $215.8 million for the fourth quarter of 2013, up 5 percent from $206.1 million in the same period of the prior year. Sales increased 6 percent from volume with 10 percent price increases more than offset by an 11 percent foreign exchange decline. Higher inflation that accompanied a strengthening of the U.S. dollar in key markets drove pricing and unfavorable foreign exchange. Volume growth was driven by share gains across most markets and continued category growth. EBIT for the Latin America segment totaled $50.1 million in the fourth quarter of 2013, down from $53.3 million for the same quarter a year ago. Sales growth was more than offset by higher investments in demand generation.

The North America/Europe segment reported sales of $300.7 million for the fourth quarter of 2013, down from $317.6 million in the fourth quarter of 2012. Price contributed 3 percent, which was more than offset by an 8 percent volume decline, due in part to the 2012 exit of certain non-core businesses. The impact was mitigated by share gains in both Canada and the U.S. non-WIC businesses. EBIT for the North America/Europe segment totaled $60.8 million in the fourth quarter of 2013, down from $88.9 million in the fourth quarter a year ago. The EBIT decline was primarily driven by higher investments in demand generation and lower sales, which were partially offset by improvements in gross margin.

Corporate and Other expenses increased primarily due to higher pension settlement expense and legal costs.

Full-year results
Sales totaled $4,200.7 million, for the year ended Dec. 31, 2013, up 8 percent from $3,901.3 million a year ago. Sales increased 5 percent from volume and 4 percent from price, reduced by 1 percent from foreign exchange. Gross margin improved 160 basis points for the full year of 2013 versus the prior year driven by higher pricing and productivity. EBIT for 2013 totaled $924.6 million, up from $870.0 million in 2012. The EBIT increase was driven by sales growth and improved gross margin, partially offset by record demand-generation spending and higher pension settlement expense.

ETR for 2013 was 25.1 percent versus 23.9 percent a year ago. The increase was primarily attributed to favorable adjustments in 2012 associated with prior years' tax filings and the administrative penalty related to the China antitrust review, which is non-deductible.

Net earnings attributable to shareholders for 2013 totaled $649.5 million, or $3.19 per diluted share, compared to $604.5 million, or $2.95 per diluted share, for 2012.

On a non-GAAP basis, excluding Specified Items, net earnings attributable to shareholders totaled $687.6 million, or $3.38 per diluted share in 2013, up nine percent from $630.1 million, or $3.08 per diluted share in 2012.

Full-year segment results
The Asia segment reported sales of $2,179.3 million for the full year of 2013, up 11 percent from $1,967.0 million in 2012. Sales increased 8 percent from volume, 2 percent from price and one percent from foreign exchange. Volume growth was driven by market share gains and category growth. EBIT for the segment totaled $795.8 million for 2013, compared to $725.3 million in the prior year. The increase in EBIT was due to higher sales and improved gross margin driven by pricing and productivity, partially offset by higher demand-generation investments.

The Latin America segment reported sales of $861.4 million for the full year of 2013, up 14 percent from $752.5 million. Price and volume each contributed 11 percent to sales growth, reduced by 8 percent from foreign exchange. Higher inflation that accompanied a strengthening of the U.S. dollar in key markets drove pricing and unfavorable foreign exchange. Volume growth was from continued category growth and share gains across the segment. EBIT for the segment totaled $207.2 million in the full year of 2013, compared to $176.0 million in the prior year. The increase in EBIT was due to higher sales and gross margin improvement partially offset by higher demand-generation investments.

The North America/Europe segment reported sales of $1,160.0 million for the full year of 2013, down from $1,181.8 million in 2012. Price contributed 3 percent, which was more than offset by a five percent volume decline. The volume decline was driven by the exit of certain non-core businesses in late 2012 and lower category consumption in the United States. These declines were partially offset by share gains, both in Canada and the U.S. non-WIC business. EBIT totaled $248.5 million for the full year of 2013, up from $246.1 million in the prior year. The increase in EBIT was primarily driven by gross margin improvement mainly offset by higher demand-generation investments.

Corporate and Other expenses increased primarily due to the $33.4 million China administrative penalty, higher pension settlement expense and transaction losses related to foreign exchange.

Outlook for 2014
“We anticipate constant dollar sales growth of about seven percent for the full year 2014,” Mr. Jakobsen said. “Margins will be impacted by higher dairy costs and increased foreign exchange volatility. However, we will continue to invest in demand-generating activities at a level consistent with our growth ambitions. We expect full-year non-GAAP EPS to be in the range of $3.50 to $3.62.” The company estimates Specified Items at $0.06 per diluted share. As a result full-year GAAP EPS is expected to be in the range of $3.44 to $3.56.

The company is planning to adopt mark-to-market pension accounting (MTM) during the first quarter of 2014. The non-GAAP and GAAP EPS guidance does not reflect this change in accounting methodology. The periodic MTM adjustment will be reflected as a Specified Item and therefore excluded from the calculation of non-GAAP earnings. As a result, we expect the change in accounting to have a positive impact on 2014 non-GAAP earnings. This will not, however, reflect a change in the underlying business performance.