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Mead Johnson Nutrition (NYSE:MJN)

Q4 2012 Earnings Call

January 31, 2013 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

Matthew C. Grainger - Morgan Stanley, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

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

Jason English - Goldman Sachs Group Inc., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Amit Sharma - BMO Capital Markets U.S.

David Driscoll - Citigroup Inc, Research Division

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

Operator

Good day, ladies and gentlemen, and welcome to the Mead Johnson Nutrition Fourth Quarter and Full Year 2012 Earnings Conference Call. My name is Karissa, and I will 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 fourth quarter conference call. With me today are 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 reports 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 as of any subsequent date.

While we may elect to update forward-looking statements at some time 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, everyone. As you've likely read in our press release, we delivered strong and improved performance in the fourth quarter in both operating segments and, for the full year, delivered at the top end of our projected sales range while exceeding our EPS guidance.

Fourth quarter sales grew by 7% on a constant dollar basis, with 5% from organic growth and 2% from our Argentine acquisition. The Asia/Latin America segment delivered growth of 9%, while successfully completing the reduction of distributor inventory in China.

The North America/Europe segment returned to positive growth of 4% as we continue to gain profitable non-WIC market share. Fourth quarter non-GAAP earnings of $0.72 per share were up $0.20 from 2011, and put us above the top end of our guidance as we recognize one additional penny from prior year's tax adjustments.

Our fourth quarter results brought full year non-GAAP earnings to $3.08 per share, an increase of 10% from 2011.

Let me highlight some of our key achievements for the full year. Firstly, on an annual basis, we delivered 7% constant dollar sales growth, while overcoming significant challenges in our 2 largest markets. Our Asia/Latin America segment, which delivered 12% growth, excluding foreign exchange, now accounts for 70% of our global sales, up from 67% in 2011.

While we fully acknowledge the first half challenge we faced in China, we made excellent progress in recovering market share in the second half, with further gains in the fourth quarter. And importantly, distributor inventories were restored to normal levels by year end.

In 2012, China/Hong Kong sales grew by 5% on a constant dollar basis and reached almost $1.2 billion, double the level of sales from 2009, the year of our IPO.

The other markets of the Asia/Latin America segment contributed organic growth of 12%, which was further enhanced by our acquisition in Argentina. We grew market share across these businesses, which now accounts for 40% of our total sales.

Latin America delivered the strongest growth among our regions and we are on track to achieve $1 billion in sales by 2015.

We completed our Argentine acquisition in March, the transition has been smooth and we are very pleased with the progress, including the fourth quarter launch of premium Bebe Plus with our clinically supported science.

Turning to the North America/Europe segment, constant dollar sales were 3% lower than 2011 as a result of lower birth and consumption and the impact of the misleading media event late in 2011. However, the impact of that media event is now behind us. And by the end of 2012, our non-WIC market share had completely recovered and indeed, stand slightly above the level seen before the event.

Enfa, the #1 global brand in the pediatric nutrition industry achieved a major milestone in 2012, exceeding $3 billion in sales, and we introduced significant products and packaging innovations that reflect the breadth and strength of our science.

We increased DHA to expert-recommended levels in our children's products in key Asia and Latin America markets, and we introduced several new liquid products, including EnfaGrow Ready-to-Drink toddler milk in the U.S.

The Singapore spray dryer and technology center is on track to start up in the second half of 2014. This 3-year, $300 million investment, will be the first company-owned spray dryer in Asia and will support our strong growth projections in the region. We delivered a record 5% savings in cost of goods sold from productivity initiatives. This effort was critical in helping to mitigate the impacts on margins from high single-digit commodity inflation and lower production volumes.

We increased investments in advertising and promotion by $50 million, raising our demand-creation spending from 13.6% of sales in 2011 to 14.2% in 2012. We made excellent progress in the first year with of our 5-year plan to reduce general and administrative costs by driving global operating efficiencies.

In addition, we reduced our effective tax rate by 250 basis points in the past year, with further improvements expected in 2013.

Finally, despite cost pressures on gross margin, and incremental demand-generation investments, we delivered 10% EPS growth, leveraging our 7% sales growth.

Now, let me comment upon our outlook for 2013. We look forward to another year of solid sales and earnings growth. Core constant dollar sales are expected to grow in the range of 7% to 8%, which will be reduced by 1% as we exit several low-margin noncore businesses. We intend to further increase investments in demand generation in 2013, funded by higher gross margins, therefore EBIT margins will be near those of 2012.

As a result of these factors, we are initiating 2013 non-GAAP EPS guidance in the range of $3.22 to $3.30, up 7% to 10%, excluding the $0.07 in one-time tax benefit in 2012.

I will now turn the call over to Kasper, who will provide more details on our operating performance. After Pete reviews the financials, I will return to close our prepared remarks and address your questions.

Peter Kasper Jakobsen

Thank you, Steve, and good morning to you all. My comments this morning will provide a bit more color on 2012, as well as our guidance for 2013.

In order to better understand the underlying operating performance of the business, I'm going to focus on constant dollar sales growth of our ongoing core businesses. I will exclude any impact from businesses acquired, exited or divested in 2012.

By this definition, reference 2012 sales growth will exclude the impact of the Argentine acquisition that added nearly 2 points to our top line. In addition, when discussing growth for 2013, I will exclude $40 million in nonrecurring sales from businesses we exited towards the end of 2012.

Following my segment, Pete will provide additional clarification of our financial performance.

Full year 2012 sales growth for the company on this basis was 5%. Our overall growth figures matched double-digit organic growth from South Asia and Latin America. Outside of China and the U.S., on which I'll comment shortly, we gained market share in 7 of our next 8 biggest markets. This included markets in which we've seen challenges in both 2010 and 2011.

For the company in total, we expect that core organic sales growth will accelerate from 5% in 2012 to 7% to 8% in 2013.

While 2012 growth, nearly all came from pricing, we expect an equal contribution from pricing and volume in 2013. Lower anticipated pricing gains reflect lower expected commodity inflation, which in turn will help drive gross margin improvement.

Turning now to our reporting segments in North America and Europe, specifically.

As Steve mentioned, we've now fully recovered from the December 2011 media event in the U.S. Our very profitable non-WIC share is now slightly ahead of where it was prior to this incident. For those of you who track Nielsen data, let me point out that this improvement will not be visible as Nielsen does not differentiate between WIC and non-WIC market share.

During 2012, we renewed our largest WIC contract, which is in California. We do not expect 2012 contract changes to affect 2013 net sales materially. And we have no contracts up for rebidding till the end of 2014. We expect constant dollar core sales for the North America/Europe segment to -- in 2013 to be flat. This compares to the 3% decline experienced in full year 2012. We expect to be able to offset continued declines in consumption in the U.S. market with gains in non-WIC market share.

Our longer-term outlook for the U.S. market remains positive, any strengthening of the U.S. economy will eventually lead to a recovery in birth in per capita consumption. That said, in 2013, we expect U.S. births to remain flat with lower consumption as economic growth remains low.

Discussing now our performance in the Asia/Latin America segment. Organic constant dollar sales growth for this segment in 2012 was 9%, with a 7% contribution from pricing and a 2% contribution from volume. Our businesses in Southeast Asia and Latin America combined are larger than either China or the U.S. And in aggregate, these businesses now account for 40% of the company's revenue. These markets, in total, grew 12% on an organic constant dollar basis, with growth almost being equally divided between price and volume. Our success was broad-based, with a dozen markets growing at double digits.

In Latin America, Mexico, our third-biggest business globally, saw substantial share improvement through the second half of 2012. As did Brazil, Peru, Colombia and several other important South American markets.

In Southeast Asia, Thailand, the Philippines and Vietnam, also growth accelerate based on improved share positions. All 3 now rank amongst our 10 biggest businesses globally.

Let me now comment on our business in China. As Steve mentioned, our 2012 revenue in China, including Hong Kong, grew 12% -- grew 5%, sorry, on a constant -- in constant dollars. We continue to recover market share in the fourth quarter of 2012, which saw average share up a point on the third quarter, and we exited the year with distributor inventory levels reflective of our current improved market share and with no further reductions expected in 2013.

We continue to see a higher-than-normal level of discounting activity in the marketplace during the fourth quarter. We do not anticipate that this will change in the current quarter as promotions are common around Chinese New Year. We will continue to prioritize equity building advertising in China. That said, we will continue to ensure our pricing remains competitive, and allows us to protect our market share position.

Despite the share gains we made in the third and fourth quarters of 2012, it is important as you develop your expectations to remember that we enter 2013 at market share levels well below those seen in the first quarter of 2012.

Now before I hand the call over to Pete, I want to emphasize the expected impact of China's top year-over-year comparisons on 2013 total company results. Our very high market share and sales in China in the first quarter of 2012, combined with the inventory build we saw in the second quarter of 2012, means that total company comparables in the first half of 2013 will be tough, with year-over-year growth expected to be in the low single digits.

Comparisons in the second half of 2013 will be correspondingly easier and we feel confident in our full year guidance and in our ability to grow the Asia/Latin America segment in double digits on a full-year constant dollar basis.

I'll now turn the call over to Pete, who will provide further financial highlights.

Peter G. Leemputte

Thank you, and good morning, everyone. I will first bridge from the core organic growth rates that Kasper discussed to total expected sales growth in 2013. The rest of my comments will focus on profitability and liquidity.

Kasper indicated that we plan constant dollar sales growth in 2013 between 7% and 8% for our core business. However, this will be reduced by 1% as we exited several noncore businesses, which generated $40 million in revenue in 2012. As a result, total sales measured on a constant dollar basis will increase from 6% to 7%.

Note that the noncore sales made only a small contribution to earnings in 2012. The vast majority of the noncore sales were related to the contract manufacturer of U.S. adult private label products and the changes in our European business. Therefore, while we anticipate flat core sales in North America/Europe, total constant dollar sales for this segment will be down about 3%, including the noncore impact.

Importantly, sales from the emerging markets in Asia and Latin America are not affected, and total sales growth for that segment will be at or slightly above 10%, just as Kasper noted.

Turning to foreign exchange. If current exchange rates continued through the remainder of the year, we would expect currency impacts to reduce sales by about 0.5 percentage point, with an unfavorable impact on earnings per share of a $0.01 or $0.02.

The greatest exposure form foreign exchange in 2013 will continue to come from Latin America, particularly in Venezuela and Argentina, where the risk of a significant devaluation of the bolivar and the peso, respectively, is possible.

We delivered gross margins of 61.9% for the full year in 2012, in line with our previous guidance. That's down from 63% in 2011, with higher dairy and commodity costs along with unfavorable manufacturing variances and lower U.S. production volumes, more than offset higher prices and strong productivity efforts.

For 2013, we are expecting gross margins to average near 62.5%, solid progress from 2012. Cost of goods sold inflation is expected to moderate from the high single digits to the low to mid-single digits this year. As a result, pricing contributions will be smaller than 2012, but we will continue to push for a strong productivity.

Keep in mind that we face $0.04 to $0.05 per share in additional cost as we start to add manufacturing staff at the new Singapore dryer in advance of startup. This temporary factor will also be seen in the first half of 2014 until the plant becomes fully operational.

In 2013, these start-up expenses reduce gross margins by about 30 basis points. Operating expenses in 2012 stood at 38.7% of sales, down from 39.3% in 2011. As was already noted, advertising and promotion increased by 60 basis points, but was more than offset by a 100-basis-point decline in general and administrative, or G&A spending.

You will recall, our target is to ultimately drop G&A from 8.5% of sales in 2011 to 6.5% by 2016. So we achieved half of that goal in the first year. The elimination of duplicate share service cost, following the SAP implementation, was one factor at work.

In addition, we had cost controls in place and also had lower bonus accruals than in 2011. For 2013, we expect operating expenses to come in slightly above 39%, obviously higher than 2012. The increase is coming from higher demand generation investments. G&A spending will be relatively flat on a percent of sales basis, as continued leverage of our global infrastructure is offset by normalized bonus accruals.

Finally, EBIT margins for the company are expected to be near the 23.3% seen in 2012, as higher gross margins are used to fund A&P investments.

For 2012, our non-GAAP effective tax rate, or ETR, was 24.3%, including $0.07 per share of prior year's adjustments of $0.06 seen in the third quarter and the final $0.01 in the fourth. Without these prior year items, the ETR for the company was about 26%. That's an impressive 250-basis-point reduction from the 28.5% seen in 2011, based on solid cash and tax funding efforts.

We expect to make further progress in reducing our global tax rate in 2013 as we start to see the initial benefits from relocating our Asian headquarters to Singapore. Our ETR is expected to be about 25% this year.

Before I move onto cash and liquidity, I want to highlight the significant reduction in specified items from $0.32 per share in 2011 to $0.13 in 2012. Including these items, our GAAP earnings per share increased by 19% in 2012. Classified costs have been more significant over the past few years, but the biggest contributor being investments in developing standalone infrastructure, mostly IT systems costs.

With that installation behind us, we expect to see another significant drop in specified cost to about $0.02 per share in 2013. So GAAP earnings should be in the range of $3.20 to $3.28 per share, an 8% to 11% increase from the $2.95 seen in 2012.

Before turning the call back to Steve, I'd like to highlight a few items about our balance sheet and cash flow.

We ended 2012 with over $1 billion in cash, up $202 million from December of 2011. About $160 million of that increase is related to a drawdown against our revolving credit facility. Net debt fell from $692 million to $642 million at year end.

Please note that interest expense is expected to be slightly below $60 million in 2013. The location of our cash is well balanced at the end of 2012, with 52% held in the United States. Free cash flow, measured as cash from operations less capital expenditures, reached a record $568 million last year.

In total, we returned 2/3 of this free cash flow to shareholders, up from 55% in 2011. During 2012, we increased our dividend over 15% to $1.20 per share. And we repurchased about 1.9 million shares of stock, which used $140 million in cash.

In 2012, we also used $159 million, or another 28% of our free cash flow, for the acquisition of an 80% equity position in the new Argentine joint venture. We expect to make the final $26 million in payments on the transaction in 2013.

Capital spending is estimated at $260 million for 2013, up from $170 million in 2012, as we move into the heaviest investment period for the new Singapore spray dryer and technology center. Depreciation and amortization expense is estimated to grow from $77 million to $80 million.

With that, I will now turn the call back to Steve.

Stephen W. Golsby

Thank you, Pete. In summary, we addressed operating challenges in 2012 to deliver very solid growth in revenue and earnings, and our outlook for 2013 reflects an expectation of strong core business performance and value creation to shareholders.

Now, we'll be pleased to take your questions. Operator, please open the line.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Matthew Grainger of Morgan Stanley.

Matthew C. Grainger - Morgan Stanley, Research Division

I wanted to ask first about North America and EU, and profitability there. Margins were unexpectedly strong, I guess, during the quarter. The strongest that we've seen since early 2011. How much of this is a function of a cadence of spending in the quarter as opposed to whether it's a function of cost savings, realization or just simply the cornerback issue lapping as opposed to a sustainable normalization in margins in the region? And can you give us any sense of what range of operating margins you might expect for North America/EU in 2013?

Stephen W. Golsby

Sure. We did see an increase in our EBIT margins of about 7 points in the fourth quarter of '12 versus the fourth quarter of '11. More than half of that came from a reduction in operating expenses on the percentage of sales basis. Part of that was driven by lower bonuses, but also by the timing of just investment spending during the year. There can be quite a bit of quarterly variability there. I would point out, too, though that we also saw higher gross margin as the benefit of lower dairy prices was seen for the first time over the past year. We're not going to give specific guidance for 2013, but if you look at history, and we would strongly recommend you focus on 2011 as the first year where we had cost allocations that follow our new system, but that was 25%. It came down to 21% last year, and we would expect to make progress off the 21% in New Year.

Operator

And your next question comes from the line of Ed Aaron of RBC Capital Market.

Edward Aaron - RBC Capital Markets, LLC, Research Division

I wanted to, just on China, get your two cents on kind of category growth expectations in the high premium segment for 2013. And then how does that compared to what that segment of the market, by your numbers, grew in 2012?

Peter Kasper Jakobsen

Thanks for the question. As we've said in previous public presentations, we do believe that the category in China is certainly growing, but it is growing at a slower rate than it was in 2011. And while none of our sources are perfect, we do believe that Nielsen, in general, provides an accurate portrayal of this trend. We have seen faster growth in the baby store channel than we have in the Nielsen-monitored retail channels. But we don't have a really good aggregation for the total category at this point in time. So I don't know whether we want to give you a specific number.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Okay, is it -- do you think that, that the category will grow faster, slower, about the same, this year versus last year?

Peter Kasper Jakobsen

I don't think we see any particular reason that it should change dramatically in 2013 versus 2012.

Operator

And your next question comes from the line of John Baumgartner from Wells Fargo.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

So just turning back to the U.S., it sounds as though you're holding some positive expectations for the non-WIC market share gains in 2013. And so just in light of that, what's driving your recovery there, I mean outside the Lactum and the Cronobacter related weakness, anything in particular on the pricing front or the products front that you can point here?

Peter Kasper Jakobsen

Well, regarding the non-WIC shares we mentioned in the script, we gained market share in the fourth quarter and our share is now higher than it was before the late 2011 media event. We certainly see some impact from WIC, but I want to remind everybody that the impact from WIC, as you look at Nielsen and our reported sales, is primarily on market share and Nielsen and growth sales for Mead Johnson. But remember that all of our WIC accounts account for less than 10% of our U.S. net sales and has nearly no impact on our earnings. So I think Steve also mentioned in his part of the script, I just want to remind you, John, that we've launched new products in the U.S., particularly we have improved our liquids offering in the infant formula market and we have launched a ready-to-drink toddler product. Both are products launches that we are quite excited about.

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

Great. And then just a follow-up, turning to China, can you quantify how much of that double-digit price increase you are actually able to hold onto as you exited 2012?

Stephen W. Golsby

Yes, the -- I'll take that one. As Kasper mentioned a few moments ago, the promotional environment became more competitive in 2012, including in the fourth quarter. This was expected, we expect that trend to continue in the first quarter. Chinese New Year occurs in February. But in the fourth quarter, net of those promotions, we still achieve an effective price increase in the single digits. And we expect that to continue.

Operator

And your next question comes from the line of Ken Goldman of JPMorgan.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

I just wanted to get a little more color on that promotional environment in China. Is it mainly you dealing back or are your competitors doing the same? I'm asking beyond just the timing of the Chinese New Year. And when do you expect maybe a more normal promotional environment, something along the lines of what you saw in the last couple of years versus what you saw in the last 6 months or so?

Peter Kasper Jakobsen

Okay. I don't know that we can speculate on when there will be a change in the promotional environment or indeed if there will be. We are not seeing a significant worsening of that promotional environment between the last couple of quarters. And we are certainly not driving it. As I mentioned in the script, we tend to prioritize equity building, advertising and activities. We believe that, that's ultimately what's going to drive our growth in China, however, we are committed to defending our market share position and keeping price at a competitive level. Not withstanding that, even in that competitive environment, as Steve just mentioned, we have realized the single digit price increases through 2012.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Is it fair to say, I guess, as a quick follow-up, that the environment still remains a little more competitive than what it perhaps was in the recent past?

Stephen W. Golsby

Yes, I think that would be fair to say.

Operator

And your next question comes from the line of Jon Andersen of William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

Just have a follow-up question on the U.S. I think 2013 is first time in a long time that I think you called for flat birth. Just wondered if you could add a little bit of color on what you may be seeing in terms of leading indicators, just maybe hitting on some points versus the U.S.? Secondly, is consumption subject to similar trend?

Peter Kasper Jakobsen

I think the last couple of calls, John, we've talked about a slowing rate of decline in the negative trend we have seen on total birth in the U.S. We believe that, that coupled with some economic growth, even if it's not strong, should stabilize the absolute number of birth that occurs in 2013. But I want to highlight that there's a fair amount of uncertainty around that prediction. We've also seen a constant decline over the last 3 or 4 years in consumption on a per capita basis. We do believe that, that's probably going to continue in 2013, as I mentioned in the script. But we believe we can offset the impact of that with anticipated market share gains, particularly in the non-WIC segment.

Operator

And your question comes from the line of Tim Ramey of D.A. Davidson.

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

Just wanted to drill down a little bit on some of the timing differences you mentioned in China for the first half inventory levels and the comps being difficult. Is that likely to produce a down quarter or just a moderated quarter? I know you don't like to give quarterly guidance, but if you could give us some help on that.

Peter G. Leemputte

I assume you're talking sales. I mean, as Kasper said, I think we expect to see sales growth in the first half in the low single digits. You're absolutely right that the comps are tough for China, so that's going to show up in Asia/Latin America segment. And given the importance of China to us, it also affects the overall company. But the first quarter will be tough because we're comparing against noticeably higher share that we had going into 2012, we're comparing against lower share going into 2013 than we had going into 2012. And the second quarter is when the share decline was seen. So we still have some impact from that, but then we also saw the distributor inventories build, and that's going to drive that. But overall, it's very low single-digits that we're expecting in the first half for the company's growth.

Operator

And your next question comes from the line of Jason English of Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

First one, real quick, use of cash. Share repo used to be only for options offset. But you obviously stepped it up this year. Does this reflect a change in philosophy or were you just being opportunistic?

Peter G. Leemputte

We were being opportunistic in light of what had happened to the stock price during the year. We took advantage of it and continued to believe in our long-term growth. And we'll continue to be opportunistic depending on market situations. If we get ahead of ourselves a little bit on future employee equity awards, that's okay too. But it really isn't a change, dramatic change, that we're going into here.

Jason English - Goldman Sachs Group Inc., Research Division

Thanks for that and then one more. China's step-change program, can you update us in terms of how many cities you're now fully resourced in and what your expansion plans are for 2013?

Peter Kasper Jakobsen

I think, Jason, what we really want to say is that we've given a commitment that we will aim to achieve a full presence in about 400 cities by 2015. And we are not straying away from that. That's still our goal, we are on track and we are confident that we will get there.

Stephen W. Golsby

And just to remind you, the numbers we've used before, Jason, which remains true, we are currently in about 240 cities, and remember that we define that as cities in which we have full sales and marketing presence and demand creation spend.

Jason English - Goldman Sachs Group Inc., Research Division

That's helpful. So it's comparable to your 2011 number of around 240, I think?

Peter G. Leemputte

I would point out though that, that increase to the 240 occurred very late in the year. So most of the year was spent, really, getting them up and running.

Operator

And your question comes from the line of Diane Geissler of CLSA.

I will take the next question from Eric Katzman of Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess my role here is to ask about non-China, non-U.S. business. How much did you spend on the other markets? I think you had initially indicated 2012 maybe $0.08 to $0.10, where did that come in? And how much spending on those new markets or non-China emerging markets will occur in 2013?

Peter G. Leemputte

I think you're talking about what we call our seed markets, which would be comprised of Russia, India, Brazil, for the formula side of the business, and Saudi Arabia, our joint venture. And we spent about -- had a loss of about $0.10 a share coming from those, which was similar to what we had seen in the prior year. We continue to view those as investment markets. We would hope to be making some progress in the pipeline obviously, but that could very well be turned around and reinvested back in the business in the New Year. So we wouldn't necessarily expect to see a big change from the $0.10 level.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. So still $0.10. And then just a follow-up, can you kind of just describe the -- if the promotional intensity in China is above where it was years ago but kind of, I guess, consistent the last couple of quarters, I kind of -- I find it hard to believe that it would be the multinationals who've traditionally been very disciplined, including yourself, around category competitive dynamics. So where is the additional promotion coming from in that market?

Stephen W. Golsby

I think it's broad-based and I think it includes the multinational competitors as we described on previous calls oftentimes to support relaunches or to support the clearance of products that will be replaced by those relaunches. And I think, we've talked about a slowdown in the category and I think in any market, including in China, when that occurs, given the price that the China market represents, you're going to see a tendency towards more promotion. But as Kasper said, we're not expecting it to intensify during 2013.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess if I could just sneak in a last one. So to the extent that the pricing that you implemented earlier in China caused some surprising elasticity along with the economy there weakening, on the reverse side, as the industry promotes, are you seeing a pickup in volume in some of the areas that had been initially hit back in, I guess, it was the second quarter of 2012?

Peter Kasper Jakobsen

No, I don't think we are seeing any particular impact on volume. I think at the end of the day the -- particularly the infant formula business is relatively volume inelastic but obviously, you can shift between manufacturers and brands.

Peter G. Leemputte

I think just to add, build on what Kasper said too, if you're question is, are we seeing volume improvement as our price promotion increase. And I think the answer to that is yes, the improvement in sales for the Asia/Lat Am segment that you see in the fourth quarter relative to the third, is showing evidence of that.

Peter Kasper Jakobsen

Yes, Eric, just to be clear, I was referencing total category in China. I wasn't referencing Mead Johnson, specifically.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. So -- I'm sorry, so I'm a little bit confused. So the pickup in the price promotion is helping your business gain -- recover some share category, at least in infant formula, isn't picking up. But I thought that the elasticity hit in the second quarter of last year was more in the children's product. And so, that's, I guess, kind of more to the point. Is that category seeing any pickup from the promotion that the industry is putting back in?

Stephen W. Golsby

Yes. All right the children's category is a more discretionary product category and as a consequence, will always be a little more price-elastic. Although, it is inelastic compared to most consumer products categories. But remember the share loss we suffered in the first half of the year, and described in full in previous calls, was due to a very significant price difference between our brands and major multinational competitive brands for a short period of time. And those types of differences in price are not expected to occur again in the future.

Operator

And your next question comes from the line of Amit Sharma of the BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

Just want to focus on the Latin American segment. So you mentioned that you liked it to be $1 billion in the sales by 2015. So as that segment becomes a larger contributor to overall sales growth, how should we think about its impact on margins? I mean, given that most of the market in that segment are non-premium? And my view is that your operating structure there is not as bad as it is in Asian markets?

Peter G. Leemputte

We do a pretty good job at trying to maximize margins in the Latin America region. They are a little bit lower than what we see in Asia. But it's not significant and I don't think it's -- there's so many moving pieces when you look at margins moving forward. I would not highlight that as one that would necessarily cause a big change for the company.

Amit Sharma - BMO Capital Markets U.S.

And as a quick follow-up. Last call, you mentioned you're entering into the Catalina couponing project, is that a meaningful impact in the quarter?

Peter Kasper Jakobsen

I mean, obviously, we do detailed analysis of all of our demand creation spend and we've been in the Catalina program for 6 months of every year for the last few years. That period typically runs from September, October, through March. And we obviously believe that it's a worthwhile activity for us.

Operator

And your next question will come from the line of David Driscoll of Citi Research.

David Driscoll - Citigroup Inc, Research Division

A couple of -- really, just one question, maybe a little bit long-winded. Apologies for it, but I want to establish at least some framework around what's happening in China and pricing. So, Steve, by my calculations, the Asian/Lat Am segment for the company has seen a cumulative price increase since 2006 of just over 40%. In your North American and European segment, that same number would be something like 17%. So very dramatic differences in where the pricing has come over a long period of time. When I just look at the Chinese market today, and I get quotes and try to bring it wrapped to a U.S. dollar price and making the adjustment for the smaller U.S. can size, a like-for-like price would be something like $30 for a U.S. can size in China versus $24 on just about any website I go to today for Enfamil in the United States, about a 25% premium for that Chinese product. So the simple point is that, why shouldn't we be more concerned about this promotional activity in China as an ongoing issue? In the quarter, I think you're segment -- that segment margins were down 150 basis points. And I just want to hear your logic about your concern or not concerned about that absolute price point and why it wouldn't be logical for it to come under pressure given the U.S. margin structure and pricing structure?

Peter Kasper Jakobsen

Well, David, I appreciate the question. It's a complicated question, obviously, to talk through. But I think by and large, there are not huge differences around the world on a price-per-kilo basis. Now some of the differences are obviously impacted and exaggerated by differences in exchange rate. So that it's very, very difficult to do an accurate comparison on a U.S. dollar basis per kilo. And you must bear in mind that there are significant barriers to implication in many of these markets that reduces the possibility of train shipments, if that's what you are alluding to. Pete, I don't know if you want to expand.

Peter G. Leemputte

Sure. Just a couple of points I would make. Number one, the 40% inflation over the period of time you quoted is equivalent to 6% per year and we all have to keep in mind that in emerging markets, inflation has been running, probably about that rate. So we are not trying to get price increases faster than the overall rate of inflation in these markets. And we all know, too, that wages are going up in China, et cetera. So -- and then with regard to the price that you mentioned in China, you have to keep in mind that shelf price in China includes a 17% value added tax. That accounts for most of the difference between the 2. It's a difference in taxation systems between the United States and China.

Kathy Ann MacDonald

I'm sorry, we've got a lot of people in the queue and we're running out of time. Operator, who's next on the line?

Operator

Your next question will come from the line of Diane Geissler of CLSA.

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

I wanted to ask you about your -- the non-WIC business and your success in picking up business on that line. And also, just how the -- some of the media reports we've heard recently about hospitals limiting formula going home with new mothers, et cetera, how that impacts your customer generation model?

Peter Kasper Jakobsen

Thanks, Diane, for that question. Well, I think our pickup in market share in the non-WIC segment really reflects 2 things. It reflects the fact that the cohorts of babies that were affected by the late 2011 media event have aged out of the category. So we've got some tailwinds because of that as we had explained to you, I think, right through the whole year of 2012 that this would turn. And secondly, we obviously continued to make operational improvements in the U.S. business, which we feel have a positive impact on our competitiveness. Answering your question around hospital sampling, let me just remind you, that's not new. We've been managing this trend through several years really. And we don't believe that it will sort of have a material impact in the short term at least on the business. There was a national survey recently, which asked the consumers or parents what they thought about this, and I just want to mention that just over 97% of parents agreed that hospital should provide a full educational information on both infant formula and breast-feeding, in order to allow mothers themselves to make a more informed choice. So I guess there'll be some balance to that discussion going forward.

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

Okay. So just clarify going back to the non-WIC, is that just a snap back to prior market shares? And I guess why wouldn't 2013 sales and profits then, at least on a core business, excluding the contract manufacturing that you're getting out of, why wouldn't 2013 look a lot like 2011?

Peter Kasper Jakobsen

Well, I think we did, in the prepared script, say that we expected market share -- non-WIC market share to strengthen through 2013. What you should bear in mind is the fact that one of our competitors were very negatively affected and we positively benefited from their recall in the base year 2011. So I guess that would be the major variance.

Kathy Ann MacDonald

Thank you. I want to turn this back to Steve because he has a few last minute prepared remarks before we close the call.

Stephen W. Golsby

Not prepared remarks. Simply to thank you for joining us for the call today and we look forward to seeing you in the near future. Thank you, operator.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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