Mead Johnson Nutrition Company (MJN)

MJN 
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Mead Johnson Nutrition (MJN)

Q2 2011 Earnings Call

July 28, 2011 9:00 am ET

Executives

Kathy MacDonald - Vice President of Investor Relations

Peter Leemputte - Chief Financial Officer and Senior Vice President

Stephen Golsby - Chief Executive Officer, President and Director

Analysts

Amit Sharma - BMO Capital Markets U.S.

Diane Geissler - Credit Agricole Securities (USA) Inc.

Terry Bivens - JP Morgan Chase & Co

Robert Moskow - Crédit Suisse AG

Jon Andersen - William Blair & Company L.L.C.

Bryan Spillane - BofA Merrill Lynch

Edward Aaron - RBC Capital Markets, LLC

Rohini Nair - Deutsche Bank AG

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Mead Johnson Nutrition Second Quarter 2011 Earnings Conference Call. My name is Tahisia, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Kathy MacDonald, Vice President, Investor Relations. Please proceed, Kathy.

Kathy MacDonald

Thank you, and good morning. Welcome to Mead Johnson's Second Quarter Conference Call. On the call are Steve Golsby, our CEO; and Pete Leemputte, our CFO. While I'm in Chicago, both Steve and Pete will speak to you from Asia.

Before we get started, let me remind everyone that our comments will include forward-looking statements about our future results, including statements about our financial prospects and projections, new product launches and market conditions that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Keep in mind that our actual results may differ materially from expectations as of today due to various factors, including those listed in our annual report on Form 10-K for 2010, quarterly reports on Form 10-Q, current reports on Form 8-K and registration statements, in each case, as filed with or furnished to the Securities and Exchange Commission, and our earnings release issued this morning, all of which are available upon request or on our website at meadjohnson.com.

In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Given that we are in the midst of the earnings reporting season, we will be respectful of your time and keep our call to 45 minutes.

I will now turn the call over to Steve.

Stephen Golsby

Thank you, Kathy, and good morning, everyone. At a recent Investor Meeting, I was asked what factors I consider to be important in leading a successful global company. I shared a number of thoughts, including the need to ensure that we, as the executive leaders, understand the dynamic nature of the business, avoid the risk of isolation from the marketplace, and travel regularly to review our businesses and meet with the members of our worldwide team. Pete and I are here with the entire management committee to review our operations and the execution of our strategies across Asia, our largest and fastest growing region, and where 6 of our top 10 markets are located.

As you likely read in our press release, Mead Johnson delivered exceptional sales growth of 22% on a reported basis in the second quarter or 18% measured in constant dollars, with strong performance in both operating segments.

Non-GAAP earnings was $0.72 per share, up 14% from the prior year, came from both strong sales growth and robust gross margins, offset in part by growing investments in demand generation, operating costs to support our growth, and a higher effective tax rate that Pete will address shortly.

Turning to our 2 operating segments, I'll keep my comments brief and focus on key performance highlights. Sales for the Asia/Latin America segment grew by 30% on a reported basis, and 24% excluding the impact of foreign exchange. China and Hong Kong continue to lead sales growth in this segment. The majority of our growth in China came from market share gains and in our established cities. While we project strong growth continuing in China, we do not expect to continue to gain share at this rate indefinitely, given the competitive nature of the market.

Our emerging market growth story isn't based on China/Hong Kong alone nor indeed solely on our strong Asia performance. In Latin America, nearly all our markets are growing at strong double-digit rates. I recently returned from a visit to Peru and Columbia, where Mead Johnson holds the #1 and #2 positions, respectively. And where we are confident of being able to deliver sustainable growth driven by favorable economic and demographic trends and the proven strength of our business model and strategies.

In the North America/Europe segment, second quarter sales growth was 8% on a constant dollar basis, up from 5% in the first quarter. There are 2 key factors behind this increase that are important to emphasize. First, the second quarter of 2010 was the lowest quarterly sales level of the year for this segment and reflects the period before the launch of key product innovations in the U.S. Second, in the second quarter of this year, we saw our point to [ph] sales growth from pipeline sales as more U.S retail outlets adopted our newborn product and the value box refill system.

While we are greatly encouraged by the improvement in our year-over-year U.S. market share, we remain concerned by the continuing decline in the market. We have not yet seen any convincing signs that the U.S. birthrate has bottomed out. Indeed, since our last conference call, the Center for Disease Control issued provisional data for the second half of 2010 that showed a further birthrate decline of over 2% versus 2009. While that's a lower rate of decline, then the 4% drop in the first half of 2010, the most recent information we have through April comes from the number of infants enrolled in the WIC program. And that shows a continued drop in participation. A sign that overall birth in 2011 may be lower by a further 2%. So the bottom line is that we expect tough market conditions in the U.S. for the remainder of 2011 and into 2012.

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