Mead Johnson Nutrition Company (MJN)

MJN 
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Mead Johnson Nutrition (MJN)

Q3 2012 Earnings Call

October 25, 2012 9:30 am ET

Executives

Kathy Ann MacDonald - Vice President of Investor Relations

Stephen W. Golsby - Chief Executive Officer, President and Director

Peter Kasper Jakobsen - Chief Operating Officer, Executive Vice President and Director

Peter G. Leemputte - Chief Financial Officer and Executive Vice President

Analysts

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Victoria Watson Collin - Atlantic Equities LLP

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Amit Sharma - BMO Capital Markets U.S.

Robert Moskow - Crédit Suisse AG, Research Division

David Driscoll - Citigroup Inc, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Mead Johnson Nutrition Third Quarter 2012 Earnings Conference Call. My name is Lisa, and I'll be your coordinator 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 Ann MacDonald

Thank you, and good morning. Welcome to Mead Johnson's third quarter conference call. Speaking today will be Steve Golsby, our Chief Executive Officer; Kasper Jakobsen, our Chief Operating Officer and designated CEO-elect; and Pete Leemputte, our Chief Financial Officer.

As we start, 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 provision 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, quarterly report on Form 10-Q and current report on Form 8-K, 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 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 you are in the midst of the earnings reporting season, we will be respectful of your time, and I will now turn the call over to Steve.

Stephen W. Golsby

Thank you, Kathy, and good morning. As you've likely read in our press release, Mead Johnson delivered sales growth of 1% on a constant-dollar basis in the third quarter. As described in our last conference call, we expected a low rate of growth in the quarter. There were 3 key factors that we said would impact our results. First, we described the loss of market share in China and the actions that we would take as a result. Second, we reminded you of higher sales in the third quarter of 2011, attributed to retailer purchases in advance of our Asia SAP implementation. And third, we stated that there would be lower sales in the second half of 2012 of our ready-to-drink children's product in Thailand, resulting from a temporary supply disruption.

Since China is the most significant of these 3 factors, let me offer a few brief comments on that important market. We attribute a significant part of the China market share loss to a double-digit price increase that accompanied the second quarter launch of a product upgrade, raising DHA to expert-recommended levels in our children's products.

Our pricing action was designed to cover 2 years of cost inflation as we did not increase prices in China during 2011. Typically, with a price increase of this magnitude, we will see a temporary drop in market share, but the impact was exacerbated by more aggressive price promotions by competitors.

As a result of lower-than-anticipated share and slower category growth in the food and baby store channels, our distributor inventory have grown. Consequently, we worked with these distributors and constrained sales to levels below retail demand in the third quarter.

While lower market share and distributor inventory reductions in China obviously impacted our sales growth, we are very pleased with the progress on both fronts, with further improvements expected in the fourth quarter. Kasper will provide a more detailed update shortly.

Turning back to our financial results, the reported 1% growth in constant-dollar sales does not provide a full understanding of our underlying performance. When you exclude the impact from distributor inventory reductions in China, eliminate last year's benefit from higher shipments to customers in advance of our Asia SAP launch, as well as the impact from the Thai supply disruption, sales growth for the company in the third quarter would have approached 6.5%.

Beyond China, we once again delivered strong double-digit sales growth in the emerging markets of Southeast Asia and Latin America. One particular highlight was the exceptional organic growth in Latin America, complemented by the strong performance of our recently acquired business in Argentina.

Sales in the developed markets of North America and Europe saw a 4% decline, with tougher comparisons in Europe following our distribution model change in 2011. Our U.S. market share continues to improve, but category sales year-over-year have been influenced by a decline in infant formula consumption and slightly lower births.

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