Mead Johnson Nutrition Company (MJN)
October 13, 2011 10:30 am ET
Kathy A. MacDonald - Vice President of Investor Relations
Stephen W. Golsby - Chief Executive Officer, President and Director
James Jeffrey Jobe - Senior Vice President of Global Supply Chain
Peter Kasper Jakobsen - President of Americas Operations
Peter G. Leemputte - Chief Financial Officer and Senior Vice President
Matthew Chapple - General Manager
Charles M. Urbain - President of Asia & Europe Operations
Tim Brown -
Dirk H. Hondmann - Senior Vice President of Global Research & Development
Kathy A. MacDonald
Good morning, and thank you for joining us today. My name is Kathy MacDonald, and I'm the Vice President of Investor Relations at Mead Johnson. It is my pleasure to welcome you to our Investor Day.
For those who are joining via webcast, I wish you could see this room in Chicago, as the attendance has nearly doubled since our first investor day in 2009. We have a very full agenda this morning, aimed at providing you with insights into our strategies and latest innovation.
Before we get started, if you haven't already done so, please silence all electronics devices. I also need to remind you that we have forward-looking statements in our presentations today. So I ask that you read our Safe Harbor statement which addresses both forward-looking statements and non-GAAP financial measures.
Please note that presentations will be available on our website at meadjohnson.com. For those in the room, we will provide you a memory card which includes copies of the presentations at the end of today.
So without further ado, I am pleased to introduce our President and CEO, Steve Golsby.
Stephen W. Golsby
Thank you, Kathy, and good morning, everyone. Thank you for joining us. Today, along with several members of our management committee, I will share the next steps we're taking to ensure continued growth and success, including our focus on premium innovation, geographic expansion and children category penetration.
Additionally, Tim Brown, Senior Vice President, North America; and Matthew Chappell, Senior Vice President, Greater China, will provide you with greater visibility into our top 2 markets.
Before I provide a brief overview, I'd like to recognize 3 members of our Board of Directors who are with us this morning. Our Chairman, Jim Cornelius; and our Independent Directors, Howard Bernick and Anna Catalano, all of whom are at the back of the room.
Before I begin, let me introduce our new Mead Johnson corporate brand identity, which will provide a distinctive visual look to each of our presentations this morning. This new visual identity will help us present the Mead Johnson brand consistently to all our stakeholders, from healthcare professionals and consumers to investors and across key global initiatives from our Mead Johnson Pediatric Nutrition Institutes to our corporate social responsibility activities.
The new tagline, nourishing the best start in life, is inspiring and tightly linked to our mission.
Although our business has changed dramatically over the last 100 years, our commitment to pediatric nutrition has been unwavering. We have a proud history of science-based innovation that has benefited generations of infants and children and improved health outcomes.
Mead Johnson is unique in that we're the only global company with a singular focus on pediatric nutrition. Our vision quite simply is to be the leading nutrition company for babies and children.
Today, in the markets in which we compete, we are #1 by value in infant formula and #2 in children's nutrition. And clearly, we're competing very effectively against a number of much larger and more diverse companies.
At our first investor day in 2009, which was also our first year as a public company, we introduced our formula for growth. The 7 drivers we outlined and shown here continue to be the foundation of our business strategy.
Our Enfa family of brands is the world's leading franchising pediatric nutrition, and we have several other powerful brands that are trusted by healthcare professionals and parents. We offer more than 70 products to meet the nutritional needs of pregnant and breast-feeding mothers, precious infants and growing children.
About 80% of our business is behind products for healthy infants and children. The other 20% is for those with special needs, including our solutions products for intolerance and mild allergies and our specialty products for premature infants, severe allergies and children born with metabolic disorders.
Our founder, Edward Mead Johnson, began to expand the business beyond the United States long before most other companies, and we have since pursued a strategy of selected geographic expansion on a systematic basis.
The green highlighted countries are the newest members of the Mead Johnson family: India, Russia and Saudi Arabia. The blue green is Brazil, which has a long-established children's business together with the new infant business.
And as you can see, the gray highlighted areas include potential future geographic opportunities. For example, the continent of Africa.
With our singular focus on pediatric nutrition, our strategy and business model are clear. We focus on our leadership in the infant and young children's category, where nutritional science is most critical.
We have a solid foundation in developed markets combined with an expanding strong presence in emerging markets from where the majority of our growth will be derived. With leading-edge science and high-quality standards, we're focused on delivering superior products at premium prices. And we have leading capabilities to drive demand through healthcare professionals, direct to parents and in partnership with retailers and pharmacies.
We have a strong record of delivering growth. But since our IPO, we have accelerated our growth and delivered record sales and profitability. 2011 will be another record year. There are few companies that have our enviable track record for financial performance, particularly during these challenging times.
I'm pleased to preannounce our third quarter results. We will deliver about 11.5% sales growth, excluding the effect of foreign exchange. And although we're still closing the quarter, we expect to deliver a non-GAAP EPS between $0.76 and $0.78 per share. We are reiterating our full year expectation for sales growth of at least 14%, excluding the impact of foreign exchange, and are raising our non-GAAP EPS guidance by $0.03 to the range of $2.73 to $2.78 per share. We're pleased with the continued strong growth of the business, and Pete will provide you with further details during his presentation.
There are many other accomplishments since our 2009 IPO: An acceleration of our geographic expansion in emerging markets, while stabilizing market share in the U.S, and a significant increase in our investments in demand creation; the development of our Pediatric Nutrition Institute; the successful commercialization of the flow of innovative products and a strong pipeline of future innovation; the separation of our infrastructure from Bristol-Myers Squibb with all markets running on a single SAP platform; and the last of our transitional service agreements to shortly expire. And we have strengthened our global talent pool to ensure that we can execute our strategies with excellence as a high-performing independent company.
While we've created lean corporate functions, nearly 80% of the 1,300 employees we've hired in the past 2 years are focused on demand generation activities, the majority of whom are in our sales force to support our geographic expansion. And even with the significant changes and challenges the organization has gone through and the war for talent in many of our high-growth markets, I'm proud to report that annual employee retention rates remain greater than 95%.
One of the benefits of becoming an independent public company was the opportunity to tie compensation solely to the performance of Mead Johnson. Our pay for performance plan includes metrics for revenue growth, profitability and controllable working capital, and rewards global performance while also recognizing individual accountability. By increasing the amount of executive compensation tied for long-term performance and through our equity plan, we are driving performance consistent with the interest of our shareholders.
Since the initial $24 stock price at the time of our IPO in February 2009, our stock has appreciated approximately 200%, and has delivered returns well in excess of the market and our peer set. We've clearly been very gratified by the investor confidence in our strategy and our growth.
Since the company's inception, Mead Johnson has been a socially responsible company. Our citizenship activities extend across the full range of corporate responsibility. Serving the marketplace, which includes building trust through our commitment to the highest business standards and to quality, as evidenced through our investment in our Mead Johnson Pediatric Nutrition Institute.
Protecting the environment exemplified by the introduction of our value packaging system, which results in 50% to 60% less waste, and our use of landfill gas to meet a significant portion of our energy needs in our Evansville, Indiana manufacturing facility. And nurturing communities, at the center of which is our new global charitable signature program, A Child's Best Start. The program is dedicated to improving nutritional care for children without parental care living in vulnerable circumstances around the world.
While our past performance gives us credibility, what is it that gives us such confidence that we can continue to drive high performance and create strong shareholder value?
Firstly, we operate in a large and growing industry with very favorable demographics and fundamentals for profitable growth. In the next 5 years, the infants and children's nutrition category is expected to grow at an average annual rate of 8%, creating significant headroom for Mead Johnson growth.
Given our business model, strategies and capabilities, we would expect Mead Johnson to grow slightly ahead of the industry. Kasper and Charles will share with you how the fundamental demographics and economic trends combined with our successful strategies give us such confidence in our future performance.
Dirk will share how we continue to use science and innovation as a key industry differentiator and fuel for growth. In fact, we have the strongest innovation pipeline and innovation capability in our 106th year history, and we will continue to invest at least 2.5% of sales in research and development. Jeff will share how we ensure the highest standards of quality essential to maintaining the trust of millions of parents and healthcare professionals, and how we drive continuous productivity in order to create funds for investment while growing our profitability.
You'll hear how we use the ARE model, which stands for acquisition, retention and extension, to meet the full range of nutritional needs for mothers, infants and young children thereby, capturing the maximum value from our loyal customers. You'll hear how we're placing emphasis on 3 particular building blocks for growth: Innovation, geographic expansion and the developments of the children's nutritional supplement category.
Let me finish with a few headlines attached to these 3 building blocks of our growth strategy. Shown here as a global percentages of dollar sales for products sold at premium versus non-premium prices.
Today, the global infant formula market is largely a premium market, reflecting the fact that it is often the sole source of nutrition and as a result, parents will not compromise on quality.
The children's category has seen a significant shift with premium products growing from less than half of category sales to nearly 60% over the past 2 years. And keep in mind that these 2 years were during the severe global recession. With the quality and scientific innovation that goes into our products and the premium pricing and reputation of our brands, we are well positioned in light of this trend.
As I've already stated, we operate in a $24-billion industry poised to grow to $37 billion by 2016. While all regions are expected to contribute to that growth, nearly ¾ of the $13 billion increase over this period is expected to come from the emerging regions of Asia and Latin America, with those regions projected to account for 60% of the global industry sales by 2016.
Again, Mead Johnson is well positioned, given that over 2/3 of our business is already in these high-growth regions and that we have significant additional potential to expand our geographic footprint.
Among our many success stories, China deserves particular attention. In 2011, China/Hong Kong will become the largest market within Mead Johnson. While the majority of our growth in 2011 comes from core cities, our "Step Change" Program, a city expansion, is delivering great success and we will continue to expand our presence in the coming years.
We will add approximately 50 cities this year and have full resources in at least 400 cities by 2015. Matthew Chapple will explain how he and his team have been able to execute with excellence and establish leadership in this key market.
While China will continue to be the keystone of our growth, we're also investing in other high-growth markets. Kasper and Charles will highlight Brazil and India respectively and share our encouraging progress.
Previously, I've talked about the significant shift of the children's category to premium products. You will hear about some of our efforts to accelerate growth in this category and capitalize on the opportunity, which is presented by long term usage of growing up milks due to their superior nutritional profile and supported by growing family incomes.
By the end of the morning, I hope you'll share in our excitement about the future and our confidence in the sustainable success of Mead Johnson. We are operating in a highly attractive category, have a proven business model and capabilities and are focused on the most compelling strategic priorities to build our global leadership position.
I shall come back later to wrap up and lead a Q&A session. But now I shall hand over to Kasper Jakobsen, President of the Americas.
Peter Kasper Jakobsen
Thank you, Steve, and it's my pleasure to join you here today to share with you an overview of our business in the Americas.
The Americas, as you may have surmised, encompass 2 very different regions: North and Latin America with very different dynamics. And after my brief lead-in, I'll hand over to Tim Brown, our Senior Vice President for North America, to share with you a few more details of his own about the U.S. role in our global portfolio, our current business performance and our plan to grow that business in the immediate future.
Before I do so, let me briefly discuss our main challenges and opportunities in each of the 2 regions.
In North America, we are faced with an unprecedented weakness in the economy. As this economy has led to increased uncertainty around jobs or fear of losing your jobs, families right across the U.S. are choosing to delay pregnancies, causing the overall number of birth in the country to decline rather rapidly. People are also trading out of our category sooner, making the switch to milk as soon as possible. In a moment, Tim will provide you with the details on the impact of these current trends and how they have affected our quarter 3 results, which we announced this morning.
However, despite these adverse dynamics, we're optimistic about the longer-term prospects of our business. Eventually, the economy will turn around and confidence will come back and birth will again begin to grow. When this occurs, we'll be in a strong position to benefit from this turnaround, as we see a growing appetite for all our products including our children's products and our specialty and solutions products in this country.
In Latin America, the picture is rather different. We have exciting opportunities. Strong GDP growth is creating job opportunities for women across the region. Bear in mind, across this region, maternity leave is typically limited to only one month and many women are self-employed. So when these women reenter the workforce, they're highly motivated to spend on credible alternatives to breastfeeding, and we're well positioned right across the region of Latin America to benefit from this trend.
I'll now turn things over to Tim, who will share our focus, our priorities and the progress in our U.S. business. And in a moment, I will then come back to give you a similar overview of our business in Latin America. Tim, if you’ll join us?
Thank you, Kasper. Good morning, everyone. As Kasper shared, my name is Tim Brown and I'm Senior Vice President of Mead Johnson North America. I'm going to take the next 15 minutes to brief you on the strategies and in innovations that are driving our U.S. business.
To begin, let me talk about the role that U.S. plays in the global market. First, the U.S. has a relatively high number of births. Obviously well below China, but large for the developed world.
Further, overall consumption and particularly infant consumption, stands well above most other countries. On the other hand, we can see that the children’s segment is underdeveloped relative to other markets such as France and Thailand, and we believe there’s an important opportunity to further develop in this category. I'll talk about that further.
Taking together the large number of births, the high infant consumption and the relative premium pricing means that the U.S. accounts for 21% of the global $24 billion pediatric nutrition industry.
Given Enfamil's strong U.S. market position, that makes the U.S. a very important contributor to Mead Johnson. Another significant role the U.S. plays, as noted at the bottom of this slide, is to serve as the lead market for innovation. That's achieved largely through a regulatory process that moves more quickly in the U.S. than in other countries, as well as in R&D and commercial capability in which we here invest.
As Kasper said, the U.S. market has been challenged over the last several years. Although we are optimistic of an eventual return to growth and want to position Mead Johnson for market share leadership when that occurs.
With the recession, we have seen birth rate decline since 2007. The latest official data from CDC goes only through December 2010, but we also have WIC participation numbers for the first half of 2011. That segment has declined up about 3% year-on-year.
At present, we don't expect the birthrate to turn positive in 2012. Consumption for baby both as a function of increased breast feeding as well as earlier transition to solid foods have also affected the market size, and you can see that in the graph at the bottom where we show Nielsen-tracked market sales.
In our last 12-week read, Nielsen sales showed a year-on-year decline of about 2%. In overall, the U.S. market has declined 15% since 2007. However, there are reasons for optimism. On the demographic side, we'll see -- we see a large number of women of childbearing age, and this number will grow by a little more than a million over the next 2 years.
And further, demographers have tracked that the intended ideal family size has not decreased, suggesting that the majority of women are deferring having babies rather than deciding to have fewer babies overall. Finally, supporting that latter point, data from the last 5 recessions going back over 50 years, shows a post recession birthrate bounce back.
The Women, Infants, Children, or WIC Program, plays a key role in the U.S. and in our business. During 2010, 52% of babies born in the U.S. took part in this program, which industry supports through rebates to the government. The percentage of babies enrolled in the program grew during the recession, but appears to have leveled off.
Mead Johnson holds contracts representing a little over 40% of WIC Program berths, making us the segment leader, and that's a position we've maintained through 2011.
As a supplemental nutrition program, WIC does not provide for all of the babies' feeding needs and thus we estimate that 8% to 10% of the U.S. net sales come from consumers in this program. We also see a share benefit among non-WIC consumers in the states where we hold a contract. WIC contracts covering 40% of births will be up for renewal in 2012, with contract implementation for all of them occurring in the second half of the year and mostly all in the fourth quarter.
Before going into our key strategies for growth, I'd like to take just a minute to topline U.S. results during 2011. Overall, Nielsen data demonstrates that we've experienced nearly 2 points of share growth versus last year on a year-to-date basis through mid-September. On a retail sales basis, for the same period, this has translated to a 3.4% increase year-over-year.
Notwithstanding the challenging quarter we just reported this morning, I can tell you that our Nielsen share for the third quarter, while somewhat declined versus the first half of the year, remains more than a point above last year for the same period. This decline was not unexpected, as consumers gains during our competitor's recall aged out of the category.
In addition, our Nielsen sales outperformed last year by almost 2%, and this was for the 12 weeks of the quarter up to mid-September and excludes the last weeks of September for both years because of our competitor’s 2010 recall, which led to reduced availability of their product.
Now to give you a brief overview of our strategies for growth, I'll start from the bottom of these building blocks, which is premium innovation, and specifically that we aim to lead the market in both innovation pace and quality. Secondly, we continue to surround consumers with our proven demand generation model. This begins with building support and recommendations from healthcare providers, and then making sure post-hospital discharge that we surround consumers at home, on-the-go and in-store with easy access to information and support in choosing the feeding method and products that are right for their babies.
Finally, as you might recall from my first slide, a very important opportunity -- a very important area of opportunity for us is expanding our children's business by extending the time that loyal consumers remain within our franchise. And I'll cover each of these strategies in turn.
First of all, I want to discuss our rapid acceleration of innovation in the U.S. over the past 18 months. You see here a selection of the new products and packaging that we've brought to market since February 2010. Starting with the liquid form of our Gentlease product, we then added a patented second prebiotic to our base formula. Last summer, we launched our staging concept and a tub refill system, both of which were novel to the U.S. market, and since then, we've brought forth a number of specialty as well as packaging innovations.
This graph at the bottom shows the growing proportion of our products that are either new, reformulated or in a new package. At this point, roughly 2/3 of our total dollar sales are from these innovations. It's a remarkable transformation of how both customers and consumers see our lineup.
Given the large number of consumers who choose to begin feeding formula in hospital, it is particularly important we have a strong presence in the neonatal intensive care unit, or NICU. Serving the NICU well is important to us for a number of reasons, including the increased rate of prematurity, which has now eclipsed 12% of all births in the U.S., as well as the institutional and peer influence of the neonatologist community.
Neonatologist use of our products credentials our entire product line to other doctors, and leads to increased overall use and share gains. Importantly, the NICU represents an opportunity for us to bring our best science to the most fragile and vulnerable babies. Most notably in March of this year, we launched the first commercially sterile liquid human milk fortifier. And as it sounds, this is added to breast milk to increase the nutrient content to the particular needs of very low birth weight babies.
We've also launched 2 premature formulas, including a novel 24-calorie high-protein formula and, just a few weeks ago, a 30 calorie formula. These innovations over the past year round out our NICU offering as the most advanced portfolio of any manufacturer in the world. And not surprisingly, we've seen a significant strengthening of our NICU presence this year.
We've also brought innovation to what we would term the routine side of our business. In August of last year, we launched Enfamil Newborn, a product which included a protein ratio adjustment for newborn sensitive digestive system, as well as a higher level of vitamin D for babies who consume less volume. And we've seen terrific pick up of this product. By February of this year, nearly 1/3 of babies consuming formula in hospital were nourished by Enfamil Newborn. And further, cumulative sales surpassed $35 million in the first 12 months in market. For those of you who know the consumer space, only about 6% to 8% of new product launches achieve greater than $20 million in the first year so we're extremely pleased with newborn's progress. In fact, retail sales continue to grow and surpassed $45 million during the third quarter.
Commercial success depends on making sure that consumers understand our products and their advantages, and thus our business model focuses on surrounding consumers with easy access to information and support. That starts with making sure that healthcare providers, whether in hospitals or pediatricians offices, understand our product lineup, how they differ from the competition and what benefits those differences bring.
We execute on a range of tactics and touch points with materials to educate and inform healthcare providers about pediatric nutrition in general, and Mead Johnson products in particular, so they can recommend Enfamil. In September, we began commercializing a new claim that Enfamil is the #1 brand recommended by pediatricians. That's especially meaningful to consumers who trust their doctor and will follow his or her specific recommendation.
However, winning with consumers directly is also important, particularly as many choose to breast feed for some period of time before switching to formula. Plus, they may not be in consultation with a physician or nurse when they make that switch. Accordingly, we execute a range of marketing vehicles to inform and support consumers on product selection and use. These vehicles include mass media and direct mail, newspaper inserts and coupons help drive consumers into store, consumers seeking a deeper level of information will find it on enfamil.com. And given the importance of mobile media with this demographic, our digital presence, like our new ExpectingBaby iPhone app, supports consumers on the go.
Finally, shopping frequency for our consumers is generally less than a week, and each time they stand at the shelf there’s another opportunity to win or lose the purchase decision. Winning at shelf with the right assortment, merchandising and promotion makes a significant difference in our commercial success.
So to expand a little further on our efforts to strengthen retail presence, I wanted to share successes from this past year. Market-wide our new items gained 31,000 incremental retail shelf spacings, a little more of that was in Wal-Mart. In the grocery channel, we've shipped over 21,000 secondary displays, not only do these displays complement our shelf presence, aid in finding our product and provide additional point of sale information, they can also help reduce out-of-stocks. In their summer reset, Target added over 4,800 linear feet of incremental shelf space for Enfamil products.
Finally, e-commerce is a rapidly growing channel, and as you can see from the chart, our sales are growing at a 60% CAGR.
As a way to share with you our innovation and how we brought it to the market, let me show you a television ad from Newborn and our staging concept, which we first began airing in quarter one of this year.
John, can you please run the commercial?
This helps further explain our staging concept: it begins with the newborn product, for instance through 3 months; our infant product, which is intended for babies to pick up after that; and our toddler product appropriate for ages 1 year and up.
And this leads me to our final building block, which is to extend usage into our toddler and children's products. This is an important part of Mead Johnson's business in the rest of the world but a relatively small category in the U.S. And we see great opportunity to build our business by taking consumers who are so loyal and trusting of Enfamil and making sure they continue to use Enfagrow as their babies age.
Our product is the #1 brand in the powder segment and leverages our business model. And as you can see while it's still a relatively small, we have experienced significant year-over-year growth.
We've also began more active support of our milk modifier business for older children. Choco Milk and Cal-C-Tose make milk more flavorful and appealing to children and therefore increase the likelihood of them drinking more, which doctors recommend.
Choco Milk in particular is the #1 brand in Mexico. So over the past year, we've been expanding the opportunity for U.S. Hispanics, particularly those of Mexican descent, to find that product in their preferred retailer. It leverages our existing retail relationships and distribution capabilities. As you can see, this market is big, conservatively estimated at $170 million in size and it's growing, so we're excited about expanding this part of our portfolio.
Now I want to share with you how we're brining Enfagrow to market. Importantly, nearly 1/3 of our consumption comes from the Hispanic community, so you'll see a Spanish-language version of this commercial.
John, can you please run this commercial?
To summarize, we will aim to lead the market in the pace and quality of innovation, that begins with the highest quality of specialty products that help us win in the NICU, but also includes the broader range of products for full-term infants. This will strengthen our competitive position in hospital, as well as ensure that healthcare providers can recommend our products with confidence.
We'll continue executing our proven demand generation model, which surrounds consumers with information and support to help us win in home and in-store. We'll leverage consumer loyalty to extend usage into toddlerhood.
Finally, we are confident of an eventual return to return to growth in the U.S. market. And thus we intend to strengthen our market position, so that when the category rebound does occur, Mead Johnson Nutrition is best poised to take advantage of it. Thank you for your attention this morning. I'll now turn it back over to Kasper. Kasper?
Peter Kasper Jakobsen
Thank you, Tim. Let me now take you through a few more slides that will discuss how we will address the opportunity and what strategies we will use to do so in Latin America.
As we move forward, you'll see that our strategies reflect the fact that Brazil and Mexico account for nearly 2/3 of the region sales and approximately half of all births in Latin America. That said, I want to point out that there are several other opportunities in Columbia, Peru and Argentina, all represent significant opportunities of meaningful scale for us. Reflecting this view, we'll continue to make strategic investments across most markets in the region to take advantage of these. And will do so while staying focused on building our business in our largest markets.
Let us briefly review the positive fundamentals that underpin our growth. Key growth drivers include a uniquely high birthrate in the region, which combines with a relatively low but rapidly growing category penetration. Across the region, GDP growth and increased employment are producing an increasingly affluent middle class. Reflective of this growing affluence in the middle class, we are seeing the premium segments growing faster than the category as a whole.
And as I alluded to earlier, women are entering the workforce in ever larger numbers, making breast feeding difficult or impossible. If these trends will give us confidence in our stated strategy of focusing on providing high-quality, premium nutrition to the market, and this clear focus allows us to bring our best technology to market across the region. Additionally, healthcare professionals right across Latin America are increasingly realizing the risk to health outcomes associated with providing cow's milk to infants prematurely.
The strength of these underlying fundamentals are ultimately reflected in accelerated category growth. And consistent with this growth, we have established $1 billion sales ambition for Mead Johnson in Latin America. We are committed to achieving this ambition by the middle of the decade. It's rooted in our commitment to meaningful investment and it's based on the many great people that we employ throughout the region who leverage our competitive positions for stronger growth, a growth that has significantly accelerated since 2009.
So with the region already an important growth driver for Mead Johnson, let me now tell you how we intend to sustain this growth. In his opening, Steve took you throughout global growth strategy. In the following slides, I hope you'll recognize how this global strategy is being executed across Latin America as well. I'll provide examples of individual growth initiatives that will help bring these individual building blocks to life.
In the last year, we've launched several important premium initiatives, including the expansion of our partially hydrolyzed comfort variant of Enfamil to all countries across the region, the introduction of our globally successful bag and box packaging format in Mexico and the introduction of several new specialty products designed specifically for the neonatal units within the hospitals.
We also have a commitment to continue our investment in midsized markets as I've said. We already hold strong market share positions in many of these by focusing on executing our global acquire, retain and extend model. We've successfully driven strong market share gains in many of these markets as you can see from the slide.
Columbia, where we, within the last 2 years, have improved our position from the #4 player in the market to the #2 position provides perhaps the best example of how this global model works everywhere. Our approach to geographic expansion is best exemplified by the approach we are taking to expanding our infant formula business in Brazil. I want to stress that we continue to grow our base nutritional supplement business in double digits and have, in fact, grown share over the last 12 months. But while we do so, we are making good progress on building an infant formula business in a defined number of major metropolitan areas. In both São Paulo and Rio de Janeiro, Enfamil is now the fastest-growing infant formula brand. As we go forward, we'll systematically expand our geographic reach. We will ensure that as we expand, we will retain both ability to execute with excellence and we will retain full visibility on growth in our already established markets.
Our commitment to growing the children's category is reflected in our successful launch of our Enfagrow brand in a bag and box format across the region. Over the past 12 months, we have, in addition to that, maintained our #1 position in the large market for milk modifiers in Mexico. We currently hold approximately 2/3 of that category sales.
Before I finish by summarizing the Americas part of our exciting story, I'd like to give you a small sample of how we are using consumer advertising across Latin America to accelerate the growth of our Enfagrow franchise.
John, could you help us again?
Peter Kasper Jakobsen
John, can you help me advance the slide? So as I wrap up, let me just summarize the key takeaways from Tim's and my own presentations here today. In North America, we recognize the headwind created by the current economic environment and its negative effect on the birthrate. But, I want to stress, we also believe that birth will ultimately recover and parents will -- as parents realize more job security. And when that happens, we want to be in the strongest possible competitive position to benefit from such a recovery and we are implementing the strategies necessary to put ourselves in that place. With regard to Latin America, the outlook is more immediately positive due to the underlying favorable dynamics in the marketplace and the effectiveness of our global demand creation model. We have talented teams that are working across both regions to make sure we maximize our potential. And in Latin America, we are reflecting this in an inspiring $1 billion sales ambition.
So I thank you for your attention. I hope that helps give you a better understanding of our business across the Americas. And I now want to hand over to Charles Urbain and Matthew who will give you a look at our Asia business. Charles?
Charles M. Urbain
Well good morning, everyone. It's a real pleasure to be here to talk about our very exciting business in Asia. Today, I'll focus on the underlying drivers of this business as well as a little bit about our South East Asian business, and turn it over to Matthew to talk about China. Today, we won't talk about Europe due to time constraints but I'd be happy to take questions on Europe if there are any.
So as we look at the building blocks of Asia, we continue to build on strong foundations of innovation in our infant formula business, geographic expansion, which is focused on India and we continue to be a market leader in the premium segment.
The headlines from the Asia really are that China remains strong, we're growing in Southeast Asia and our India business, our "seed" business in India is showing promise. Looking at the market, it's a huge market. It's really about half of the global dollar market. If you can see the 2 segments, China/Hong Kong and the rest of Asia are both large and both growing in double digits.
As you look at the demographics, the births are overwhelmingly impressive, around about 35% of global births are in Asia. About 52 million births and of that 80% are in India and China. Obviously China more developed, India in a very early stage of market development.
Mead Johnson has been in Asia for many years, as Steve pointed out, we started geographic expansion in the Philippines in the 1950s and then moved our footprint into Thailand, Hong Kong, Indonesia, Malaysia, Singapore and most recently into China and India. We have strong positions in Southeast Asia. We're #1 or 2 in the premium segment in most markets in Southeast Asia. Very sound business in China. As you can see, our combined Hong Kong/China business is a very strong competitive business, and so are the seeds in India.
The socioeconomics are favorable and while the birth rates per capita are not all on the right side, if you will, of the median, what is really encouraging or has the potential for us is that the per capita consumption is relatively low to other markets around the world. That combined with, as Kasper mentioned, more women in the workplace, a much improved knowledge of nutritional options, that sort of mix of fundamentals will drive this business on a sustainable basis.
So if we look at our performance, in Asia over the last 10 years, the bottom half of the bar is the Southeast Asia performance and the top piece is the China performance. And I think what you'll see from that is both parts of this business have grown remarkably over the last 10 years. The China business has grown tenfold, and the Southeast Asia business about 5 fold. So both pieces of this business are growing very impressively. This is underpinned by great execution capabilities, a lot of experience and history in these markets and teams with very dedicated people implementing our proven model.
Looking at what underpins everything, we have a resonant consumer proposition. our brand health tracking studies tell us that we have salient attributes on the key areas that we emphasize as a company, as a brand, and these attributes really resonate with the psychographic target that we aim at, which is known as the "Achiever Mom". And all that is underpinned by excellent execution of what is a simple model acquisition through extension, retention in our franchise and we execute that very well throughout Asia.
If you look at the market structure, you can see a stark difference in the structure between China and Southeast Asia and the global market. You will see that China is 90% premium. If you went back 5 or 6 years in China, it would've been quite different. The premiumization of China has probably occurred in the last 3 or 4 years, most notably after the melamine crisis, and is continuing to premiumize even as we go out into the more rural parts of China. Southeast Asia is somewhat different, about 40% is in the premium segment. 60% is in the non-premium segment. So there is room for premiumization, as we see these economies grow, we’ve seen strong growth in some of our premium segments and our brand does very well in those segments.
India. Just a few words about India. We're very early in our effort in India, and the category in India is in the very early stage of evolution. We're in 18 cities. We are focused on building capabilities, getting to move about the market and trying to get Indian regulators to recognize that ingredients like DHA will benefit the population immensely. Today DHA, which is a key part of Mead Johnsons' differentiation is not allowed in India and so we're attempting to get that through the regulators right now. But we're happy with our progress, we're right on target with where you want to be in sales and we have a lot of hope for this market going forward. All the ingredients that make our proposition resonant are very present in India, in fact, perhaps even more so than in China. So that "Achieving Mom" and the desire for the child to be the best is particularly strong in India. So we have a lot of hope for this business. We're starting to register share in Nielsen and in the cities we’re in we have a reasonably decent single-digit share.
So looking at the -- finishing with children, as you can see, this highlights the market structure that I was talking about earlier on. Children become far more significant in Southeast Asia, so as you move South from China, children is a far more significant piece of the overall market we compete in and that's for a couple of reasons. It’s highly developed and has been for many years and people stay in infant a little bit less in Southeast Asia than they would in North Asia. As you can see on the right hand side of the chart, Mead Johnson has had a very successful few years and is the market leader in children's in the countries in which we compete.
That's pretty much it for me. I want to cede the platforms to Matthew. Matthew Chapple is our Senior Vice President China. He's also our -- sorry Greater China, and he also manages our China business as the General Manager. So Matthew?
Okay. Thank you, Charles. Good morning. It's a pleasure to have the opportunity to share the China story with you today. I think as everybody knows, China is a large market, large country and it's also a large category of infant formula that's growing, and underpinned by a huge number of births, 16 million.
Interestingly, the one-child policy works for us, not against us, in the sense that when mothers and fathers only have one child, they really put a high priority in giving that child the best start in life, and that is really a perfect fit between what we do and what China's mothers and fathers want. So as a result, as you saw in Charles' charts, more than 90% of the category today is already premium or super premium. Which means that where there are like-for-like products they sell at the same or very similar prices to those that we sell at in the U.S. Which makes sense because the products are basically the same.
It's a very attractive fast growing and profitable category, and so any category with those characteristics attracts a lot of competition. And this one is no different, it's highly competitive and fragmented. But of course, while that's a challenge, it's also an opportunity over time because in the medium to long-term the category mask can consolidate. Of course, it's a large country, geographically vast, which makes it difficult and complicated to manage. But if you do it well, there's a lot of opportunity, both in the high-tier cities and lower tier cities, which are growing together with the middle class.
So those are the characteristics of the market. The model that we use to operate in China is a pretty straightforward one, actually, you see it here on the right-hand side of the page. It begins with developing and energizing people, our team. Around a compelling science-based proposition and then most importantly, executing that well, executing with excellence is a real focus for us. A key part of that is expanding into new cities in a step-by-step way, a program I think you've heard Steve and Pete talk about before; we call it Project "Step Change". And then lastly, as we grow and as we become bigger and bigger in China, increasingly ensuring that we have solid and sustained relationships with all the relevant key stakeholders, the government, the media, our various business partners is really, really important as you get big in China as it is everywhere but particularly in China.
This is the story of us in China. We've been in the market for 18 years, which is similar to most companies of our type. We are headquartered, we began in Guangzhou, which is the southern part of China, about 3 hours from Hong Kong. We have a headquarters there as well as our manufacturing facilities are all based together there. We’ve recently expanded our manufacturing capacity a little bit to keep up with demand, which as you know is growing. And today, we covered 240 cities in our "Step Change" Program. So what that means is that we have 240 cities that are fully resourced, which means that we have the right number of sales people, we have the right amount of A&P for those cities. We do, however, call on 1,000 cities roughly but we don't fully resource all of them. We focus on the higher priority, top 240 cities. That's what we call Project "Step Change". That's up from about 28 cities 3 or 4 years ago or pre-IPO.
One of the things we're most proud of in China is not necessarily the size of the business per se but the fact that we've achieved steady and I hope sustained growth. You'll see that on the next page when we talk about market share, very important. And today, we have an organization of about 200 full-time employees, headcount and non headcount. People that are fully engaged in our business and that's growing as the business grows.
So this is our market share chart for China, including Hong Kong and you see on this space is we are a clear #1. But what's more important to me about this chart, when I look at the business, is that that line is going up in a pretty steady way. We don't like to see too much fluctuation, too much up and down in things like market share or our sales. And we really strive for steady, sustained growth, important everywhere but particularly so in China.
So how do we do it? We are doing well, there's no doubt. And the way we do it is through this model and I now want to iterate just briefly the different elements of this model, starting with people. This is our leadership in China, our leadership team. The first thing you'll probably notice here that everyone on this page, other than myself, is Chinese. We like it that way. In fact, I'm the only non-Chinese person in the organization. And we think that's a good way to be when you're operating in China.
The organization is pretty much -- like any organization chart you might see with one little twist. You see on the left-hand side there, we have 4 regional general managers. We used a model in China to organize and to operate what we call 1-4-1, or 1 country, 4 regions, 1 system. So this model recognizes the obvious and that is that China is one country, but we divide the country, because it's so big, into 4 regions, North, South, East and West. And then each of those regions, we have a very senior and often experienced, seasoned general manager running the region, and those general managers are leveled like medium-sized country general managers are in our system and they run operations that are the size of medium- to large-sized countries actually. And the job is just the same as any other general manager in our company. They execute the strategy in their region. So that's 1 country, 4 regions but we also know that the history of China pre-1949 was one of many regional losses, many regional leaders or warlords, running around the country doing their own thing. So we want 4 regional general managers, not 4 warlords running around the country doing their own thing. And so we have 1 country, 4 regions, but only 1 system. And the rest of the people that you see on this page, the people that are in the national system, under which the 4 regional general managers work. And so it's a matrix organization, but a team that works together in a highly collaborative way and I would say very much a high-performing team and a key part of our success.
This team has an average tenure of 8 years with our company. And overall, our turnover rate is relatively low in China, 9%. And that's good, it's a sign of an engaged and motivated group.
So we engage and motivate that group behind our compelling science-based proposition. At the heart of that is the idea of helping provide the best start in life. And that's -- there’s really a perfect match between what we offer and what Chinese mothers and fathers want for their one child. In particular, our DHA clinically proven brain development benefit is very compelling for Chinese mothers who place a high value on children's education and development in general.
Next month, we will have the full board of Mead Johnson in China for the grand opening of our Pediatric Nutrition Institute, and assuming it's finished on time. Stephen, I promise it will be. It will definitely appear for next year, exactly. But it will be finished, and it's a magnificent institution that's attached to our factory. And you'll hear more about that later in Dirk's presentation, a very powerful platform for us in China.
This proposition is very focused on premium and super premium as you saw earlier. It's the largest part of the category and it's growing, and so that's where we choose to focus. We do so with only 17 SKUs or stock keeping units of really focused range of products. We sell those through predominantly the modern key accounts, which also makes our system very efficient and focused.
We have a distribution network of distributors who help us with logistics and sales and distributing those products of only 60. Other companies in the FMCG space may have 500 or 600. And those distributors hold only 5 to 10 days, closer to 5 days of inventory on average. I don't know how much that means to you but it means a lot to me. It means that we have a very lean and efficient system. And when you have only 5 days of inventory, it takes out a lot of latitude for things to go wrong for problems with pricing, returns, those kinds of things.
And then we bring that proposition to life through the ARE model that I think you know already, and it's very important to know because this is what really drives our business and our operation, a hybrid healthcare and FMCG model. And the message we bring to the consumer and to the doctors and nurses through this model is a dual benefit message, one about DHA or brain development and immunity. And then we deliver that to all the touch points, starting with the TV commercials, and the in-store environment, in the healthcare environment, on the can, in a way that's very consistent. And we apply almost a military-type discipline to ensuring that we keep that messaging consistent and strong and uniform across a very large country.
Now turning to project “Step change” or step-by-step city expansion. I think one thing that we told you before but very important to keep in mind is that this initiative is critical for us. However, 90% roughly of our growth still comes from what we call the core cities or the cities that we've been in for more than 1 year or 1.5 years. This is good. This is good because it means the base cities are growing and continue to have lots of potential.
But at the same time, as the economy develops in China, those lower-tier cities are also developing. And many of them are ready for us to go into, and today we're in 240. We go into these cities with a hub and spoke model, so we expand into these cities out of our existing cities and leverage our existing infrastructure. But as I mentioned, while we have 240 “Step Change” cities, we have seeds in a 1,000 cities. And over time, we will expand the spokes into those seed cities.
Our approach to do this is very methodical, actually. We apply a test, learn from the test and then reapply a model. And we typically expand in cities chunks of 30 or 50 at a time. We let those settle. We learn whether the assumptions we had were correct. We apply those learnings to the next phase and then we carry on. As and as a result, I think we have a very high-quality city expansion program and have share growth that's very consistent across all the city tiers. And one of the key challenges in China is balancing how fast you go versus how slow you go. Going too fast can be a problem. Going too slow can be a problem as well, and so we think our approach is quite solid.
The last part of our model is solid and sustained relationships. There are many dimensions to this aspect of doing business in China, but a couple that I want to highlight in this presentation are 2 really special programs that we have. One is with the Ministry of Health in China as our partner.
The Ministry of Health is screening for special disorders more and more these days and have a screening program that screens for several of those. One of which is the PKU disorder. PKU is a very rare disease whereby if children consume foods that contain Phenyl, which by the way is just about every food including breast milk, they can end up with quite severe mental retardation. If they consume foods that don't contain Phenyl, they grow up perfectly normal.
And so in the early phase of life, it's very important. And we have a wonderful product that we call the PKU product that if babies consume, their chances of becoming mentally retarded when they have this disorder are very low. And so we supply this product together with the Ministry of Health free of charge to most of the babies in China that have this problem, and a very, very wonderful, powerful program that's at the heart of our best start in life mission or dream.
The other program is a program we do together with a highly esteemed charitable organization in China called the China Foundation for Poverty Alleviation. This program has been running for 6 years, and it's one of the longest-running, believe it or not, and most sustained CSR programs in all of China. And through this program, we go out into underdeveloped, underprivileged areas, and we give nutrition education together with healthcare professionals and this foundation. And so far, we've reached 1,000 healthcare professionals and 10,000 moms directly. Things like this are really important.
So in conclusion, the current moment is good, but what about the way forward? We think the potential and the way forward looks good as the middle class continues to expand in China. As the lower-tier cities develop, there's a lot of headroom remaining both in those and the base cities for us to grow into.
There are new segments for us to get into. We are quite underdeveloped, as is the entire area underdeveloped, with specialty and solution products in China today, and we're working very hard to develop that segment into the future. It will have good potential in the future. And then lastly, key to the way forward is building strong, solid and sustained relationships with the government and other key stakeholders.
So with that, I'll hand back to Charles for his concluding remarks. Thank you.
Charles M. Urbain
Thanks, Matthew, and thanks for your attention. I think as we've shared, we're a competitive force in a market with strong potential. So while we have [indiscernible] significant birth rates, relatively low consumption. It is a competitive environment, and I hope we've shown you that we're a focused and capable company that is more than capable of holding its own in this very attractive market.
We're due for a break in a few minutes, but I'm going to leave you with an ad for a brand that you don't often hear us talk about. You've seen Tim and Kasper show you ads for our Enfa franchise. But we do have a second platform, if you will, primarily in Asia, which we call the 100% nourished child platform. And it's delivered through a couple of brands, one is called Sustagen, one is called Lactum, and this is an ad for our Sustagen brand in Malaysia.
And so if we have that teed up, I'd like to leave you with that. Thanks very much.
Kathy A. MacDonald
Great. Well, thank you very much. We have a 15-minute break. Please take time to enjoy our innovation booths, which are next door. And there is also food in the breakout room. For those on the webcast, you will hear music during this time. I ask that everybody is back and in their seats promptly. We will start at 11 a.m. Thank you.
Kathy A. MacDonald
Hi, we're running a few minutes late. Can I ask that you please take your seats? Great. In order to keep on schedule, can I ask you to take your seats? Also, please make sure your electronic devices are turned on to silent mode. Our next presenter is Dirk Hondmann, Senior Vice President of Global Research and Development. Dirk?
Dirk H. Hondmann
Good morning. I would like to start by thanking you for the opportunity to talk about the important work that we're doing at Mead Johnson and to share our success story from an R&D perspective.
As Steve shared with you earlier, an important differentiator that sets Mead Johnson apart from competition is that we are the only global company that is solely focused on pediatric nutrition. We are the leaders in science-based pediatric nutrition and recognize breast milk as the gold standard and the source of inspiration for much that we do. Well, part of our long-standing heritage and science-based approach and part of our value proposition is an uncompromising commitment to scientific rigor.
Before the coffee break, you heard about our geographic regions and various markets. This is only on the commercial sides but also in R&D. Over the next 15 minutes, I will focus on the R&D capabilities that we have been building, the overall increase in R&D investments and finish by highlighting a number of recent innovations.
Let me begin by introducing the global footprints that we have for our R&D facilities. Our philosophy is to centralize the research portion of R&D and to regionalize the development portion. Our global R&D center is located in Evansville, Indiana. In addition, we have a number of regional development centers that are collocated with the business teams in Mexico, the Netherlands, China and Thailand.
In 2010, we began the rollout of our Mead Johnson Pediatric Nutrition Institutes, a global scientific and research network anchored by a series of cutting-edge R&D facilities. The first facility opened in the United States last summer, another in Mexico this past January, and the third is scheduled to open in China next month.
The China PNI will provide us with additional important capabilities, including the ability to make prototype products and clinical grade products for clinical testing in China. The PNI will also provide a venue for interaction with Chinese key opinion leaders to discuss the scientific merits of our existing and newly developed products.
We have a strong team of dedicated professionals who are passionate about their contributions. We are very proud that a number of them are recognized experts in a number of important fields, including pediatric gastroenterology, DHA biochemistry and immunology. We truly have a diverse and strong talent base.
On our team, we have 60 PhDs and MDs. In addition, most have some other type of advanced degree as well. The average tenure of our R&D employees is 11 years with many R&D team members with decades of experience complemented with a group of newer talent.
Our internal capabilities are complemented by external collaborations with leading scientific groups and technology providers. We are currently conducting more than 50 joint clinical studies with leading universities and in addition have more than 50 active preclinical and discovery-type studies ongoing at any given moment in time.
This open innovation network approach allows us to be involved with the leading edge in science and technology on a much wider scale and more flexibility. All of this is being afforded by our increased level in investments in R&D.
Over the past 5 years, we have more than doubled our investment in R&D, both in terms of dollars, as well as number of people. Our target investment level is about 2.5% of sales, which believe -- we believe will enable us to deliver on our growth agenda. This percentage is higher than that of most packaged good companies and reflects the needs for clinical studies and extensive regulatory dossiers that are needed to support our innovations and claims.
In building our innovation portfolio, we start with a deep understanding of consumer and healthcare professional long-term needs. Like from the start of new projects, we have a strong integration between marketing and R&D. Key areas of long-term needs are translated into benefit platforms and matched up with areas where we have built and continue to build strength in R&D.
As an example, we have leading expertise in biochemistry of DHA that has been translated into important brain benefits. Our expertise in immunology has been instrumental in establishing our role as leader in pediatric allergy management. On top of internal expertise, we have developed extensive network of external collaborations with the leading experts in relevant science areas.
Besides providing superior science-based functional benefits, we know that the organoleptics, that's taste sensory, and packaging play a key role in gaining consumer preference, certainly when it involves children's products, which is roughly half of our business.
A question we often hear is, "how long does it get to get new products to markets?" Now that really depends on the type of innovation. Since new products with new functional beneficial ingredients often require extensive clinical research and comprehensive regulatory dossiers to support the innovation and claims, many of these type of innovation can easily take 5 to 7 years to bring to markets.
We complement these type of innovations with innovation of enhanced products or packaging. This innovation can help to keep our offerings fresh and require far less time to get to markets with active portfolio management in place to support a balanced approached to marketplace innovation management.
The key determinant for speed to market is regulatory approval. So how difficult is it to get regulatory approval? Well, the Pediatric Nutrition Institute industry is highly regulated. Governments around the world are implementing exacting standards of quality, safety and efficacy.
Mead Johnson is and has been delivering on the highest standard for quality and safety. And the threshold to allow claims for new ingredients are shifting in many markets, and we welcome clear, well-defined requirements. Given our strong scientific base, we are well equipped to operate in an environment that well defines evidence-based hurdles .
These are some examples of recent innovations that have come to markets and that demonstrate our ability to translate science into nutritional solutions that parents and healthcare professionals want to buy. I will further illustrate a number of these on the next slides.
As first example, I want to show these 2 graphs that illustrate the long-term benefits of DHA fortification if given at the right level. The graph on the left, labeled executive function, shows that children who consumed Enfamil with DHA from 0 to 12 months have better test scores when they were tested when they're 4 to 5 years of age. And executive function really relates to activities for which you need frontal cortex, so things like planning or reasoning or problem solving. These results are very important and exciting as to demonstrate the long-term positive effects of the right early childhood nutrition. The graph on the right, labeled vocabulary, shows a very similar pattern when children are tested when they were 5 years of age.
And my second example is Nutramigen, our hypoallergenic formula. Nutramigen is the gold standard for the treatment of severe cow milk protein allergies, but we are finding it may even do more than that. We are proud to be involved in pioneering research, not only for healthy infants but also for those at risk for serious diseases.
The TRIGR pilot study shows that infants genetically at risk for developing type 1 diabetes that were given Nutramigen either in addition to or in place of breast milk showed a decrease in the appearance of antibodies that are often associated and precede the development of type 1 diabetes.
The full follow-on TRIGR study is now ongoing in 15 countries and is involving more than 2,000 children and is large enough to adequately determine that a Nutramigen can decrease the risk of type 1 diabetes. The larger study will conclude in 2017 when all the children will reach 10 years of age. We look forward to the results of the larger study. And of course, we'll be optimistic about the role nutritional intervention may play in the role of type 1 diabetes.
My third example is about breast milk. As I mentioned earlier, breast milk is the gold standard and source of inspiration for much of the work that we do at Mead Johnson. We're involved in a research collaboration that aims to much more systematically understand how the composition of breast milk affects health outcomes at 3 centers, one in the U.S., one in Mexico and one in China. We follow individual mothers with their children to see how the composition of breast milk, genetics and diet affects health outcomes. By supporting the study, we are actively advancing and better understanding pediatric nutrition.
Let me share one example that to be honest was a surprising finding for us. Looking at the U.S. cohorts, it was found that the vitamin D levels measured in the serum of infants was often much lower than the recommended levels, especially in newborn babies. Vitamin D levels were insufficient and sometimes even deficient. In order to address these low levels of vitamin D, as Tim already showed you, we launched a formula specially reserved for newborn babies, that amongst others has higher levels of vitamin D.
Having increased our investment in R&D since 2005, we're now seeing tangible benefits and expect these benefits to be sustainable in future years. This picture gives you an impression of new product lines in 2010 and the first half of 2011. We still have a number of innovations planned for the remainder of '11, so watch this space.
In conclusion, we've built an R&D organization at Mead Johnson Nutrition with world-class talent and capabilities. On the basis of a tradition of innovation, we've significantly increased the R&D investments and have generated a robust innovation pipeline that will deliver on our growth objectives and on our mission to help give infant children the best start in life.
Thank you for your attention, and I will now hand over to Jeff Jobe, our Senior Vice President of Global Supply Chain.
James Jeffrey Jobe
Thank you, Dirk. Over the next few minutes, I will provide an overview of our global supply chain. I'll be covering our global manufacturing network, our sourcing priorities, our productivity process, our distribution network and our quality program. Mead Johnson's global supply chain footprint is designed to provide an optimal utilization and the required flexibility. To accomplish this, the network has global spray drying capabilities to produce formula for multiple regions at central location to maintain the optimal utilization, while blending and finishing is located in our larger markets to provide the locally required flexibility for our customers.
Our eighth internal plants provides the majority of our capacity however, we use third parties to provide additional capacity and flexibility to optimize our costs. Recent enhancements to our network -- to our global footprint include the creation of bag and tub and bag and box packaging capability that Tim spoke of this morning, along with the acquisition of a third-party manufacturing plant in Brazil to support our Latin America expansion plans. And they work with our third -- our joint venture partner in Saudi Arabia around the construction of the new plant there to support our ambitions in the Middle East. These complement our internal plans in Michigan, Mexico, the Netherlands, China, Thailand and the Philippines along with our third-party partners in Iowa, Malaysia and Australia.
We have an efficient and flexible manufacturing process. The primary manufacturing process is to produce powdered infant formulas and children products. Infant powder are manufactured in a 3-stage process, as you can see from the top diagram. It starts with the liquid processing, moves onto spray drying and then ends with blending and finishing. Children's products are manufactured and generally just use the third stage, which is dry blending and finishing.
We have quality control built in, in each stage and are monitored throughout the process.
Spray drying capacity expansion has a longer lead time and requires higher investment assets by either Mead Johnson or a third party and is to leverage globally. Blending and finishing capacity expansion has lower capital investment and shorter lead time allows us to focus investment closer to the customer. Mead Johnson also has liquid infant formula manufacturing capacity in Evansville where we produce infant formula in nurse sets, plastic nurse sets, plastic 8-ounce bottles and steel cans.
Due to the high investment and long lead time for spray drying, we need to have a long-term view on our capacity requirements. In late 2008, we entered into a long-term agreement with a third party in Australia to support our Asia growth. We are ramping up that capacity now, but we'll require additional capacity based on our growth plans in the 2013, 2014 timeframe. We are in the final stages of a build versus lease decision. Several considerations such as a global flexibility, optimization of the supply chain in Asia, transportation and logistics costs and also the finances are part of that decision, so we plan to have a decision by year end.
Just for your reference, it may not be very clear, but at the bottom, there is a diagram that kind of shows you -- for those of you who haven't seen an infant formula spray drying plant, the magnitude of a spray dryer and the complexity of it, and you can see the little red portion is kind of the magnitude of the size of this plant.
Mead Johnson's baseline capital expenditure has been approximately 3% of net sales. We target that capital to support our key priorities of growth, productivity, quality and infrastructure maintenance. The past few years, we've had additional capital expenditures to support the required build out of the Mead Johnson standalone capabilities, post-IPO. That ramps down by 2012.
Our decision on a path forward on the spray dryer capacity expansion could, depending upon our decision, impact CapEx in the '12, '13 and '14 timeframe. And to build a plant would increase our capital over that period in the $250 million to $300 million range. And as I've said, we plan on having that decision by year end.
Cost of goods is comprised roughly of 70% raw and packaging materials, driven by dairy at 29%, agricultural products make up 22% and primary packaging, which consists of cans, pouches and tubs, around 16%. We expect overall inflation in raw and packaging materials is going to be around 7% net of productivity in 2011.
For those of you who may have been following us and could compare this slide to the 2010 information, you would see that the 2011 dairy piece has increased as a percentage of the pie. That's really due to the continued trend of increasing prices in the dairy market. This has been across all geographies and all categories of dairy whether it be whole milk, skim milk, whey protein concentrate lactose, non-fat dry.
The agricultural spend is weighted toward agricultural oil, such as palm, soy, coconut and sunflower. These tend to move with the overall agriculture commodity sector. The other large piece of the agricultural spend is ARA, DHA which is tied to a fixed-price contract.
In the primary packaging, our costs are influenced by tin, aluminum and plastic markets. Our marketing -- our material sourcing priorities for Mead Johnson are to first and foremost secure supply, assure competitive costs, minimize price volatility, drive productivity and enable innovation. We do this through long-term agreements with our suppliers. We include productivity clauses in our agreements. We tie costing to indexes. Where appropriate, we do hedging and always partner with our suppliers for productivity. The remaining 28% of the pie is conversion cost, which is made up of primarily of labor, maintenance, quality supply, depreciation across our global network.
With raw and pack being the majority of our spend, we do a lot of work here to leverage that spend. The majority is consolidated into large global or regional suppliers. As you can see from the chart, 19 suppliers make up 70% of our global spend, 12 of those are what we call global suppliers, which mean they supply more than one of our major regions, and then we have 7 large regional suppliers. This allows us to maximize our global and regional volume leverage for costs, but it also allows us to assure that we can work with large or stable vendors to assure supply.
Dairy is the single largest spend category. Within dairy, the largest spend is whole milk and skim milk powder for Asia. Recently, we've seen some softening in the dairy market. However, if you look at the trend over time, it's upward, which is reflective of most commodity markets. This is driven primarily by growing demand in emerging markets such as China. As of now, we do expect the overall average dairy price to be higher in 2012 versus '11. Pete will provide more perspective on this in his presentation.
Mead Johnson has a structured global productivity process for not only cost of goods but for all -- so all non-cost of goods sold. Our target is to drive 3% cost of goods productivity year-on-year. We're on track for that in 2011, just as we performed in the years past. We operate using a concept of productivity pipeline. So today, we're focused primarily on the projects for 2012 and 2013 while we're executing the plans already established for 2011.
As we benchmark this program -- we’re a top-tier program that benchmarks externally, driven by our year-on-year ability to drive 3-plus percent productivity. We have a very strict definition of what we count as productivity, so we can assure the benefits are sustainable year-on-year and are not just onetime benefits.
So in on this slide -- end this slide by saying, productivity is truly embedded in our culture, but it's not just in the supply chain culture, it's across all aspects of the Mead Johnson business.
Our distribution model for products is not unique and nor is it a core competency for Mead Johnson. Therefore, we strive to outsource and partner where possible to maximize effectiveness and reach of this piece of the spend. Our distribution model is to outsource both warehousing and transportation. This is done globally, so the model would look relatively the same, obviously different players in the U.S. as it would in China, as it would in Mexico, as it would in Europe. And the typical model would be to have products moved from our plants to a third-party warehouse, and then via a third-party warehouse to either directly to retailers or to a distributor or even to the hospitals and clinics.
Mead Johnson's quality program maintains proven quality system to drive continuous process and product improvement while maintaining compliance with a very dynamic regulatory environment. It includes audits to ensure compliance. It also includes change controls to ensure that changes are implemented in a controlled and coordinated manner. Additionally, Mead Johnson has -- maintains a thorough food safety program, which provides proactive surveillance of emerging risks, assessments of those risks, routinely monitoring of the manufacturing operations in all of our suppliers and interactions on a routine basis with the external regulatory bodies on a global basis.
To deliver safe, compliant products, our quality organization provides the bridge between R&D and the supply chain to assure that the products are aligned not only with our specs but with our consumer expectations. Starting at the very beginning of research, quality is involved in the selection of suppliers of the ingredients. The quality organization stays involved throughout the process of each stage of development and manufacturing to ensure that new and existing products are safe and compliant with regulations where they're sold, as well as our products meet the physical attributes of both color, taste, odor, mixability that our consumers expect.
So in summary, we are enhancing our global network to support growth and innovation. We're optimizing the supply chain capabilities and costs by leveraging our global supply agreements, driving relentlessly around productivity. We partner where it's appropriate to optimize our manufacturing distribution capabilities. And last but not least, we have an unwavering commitment to quality.
With that, I'm going to turn it over to Pete Leemputte, our senior VP and CFO. Thank you.
Peter G. Leemputte
Thanks, Jeff, and good morning, everyone. You've already heard about many of our growth initiatives from the presenters that preceded me this morning. And my objective today is to highlight how we intend to leverage that future sales growth into even greater bottom line earnings. But in addition, I'm also going to provide some commentary on our preliminary third quarter numbers, as well as a few early thoughts on 2012.
Most of you are aware that Mead Johnson's proud history of strong growth, and 2011 has continued that story with the highest growth rate in sales and EPS seen in recent years. We're maintaining our projection of a 14% increase in constant dollar sales growth for the year. And we have raised our full year earnings guidance to a range of $2.73 to $2.78% per share, an increase of $0.03 in both the bottom and top end of our range. And importantly, the midpoint of that range represents a 14% increase in EPS, which is consistent with our sales growth.
Let's start with our preliminary non-GAAP third quarter results. Our financial records are not yet closed, so these figures are subject to change. Final results will be released on October 27, and we'll hold our normal earnings call on that date.
Sales on the quarter are coming in around $934 million, an increase of 15% on a reported basis, about 11.5% excluding foreign exchange. While earnings should be in the range of $0.76 to $0.78 per share, up about 35% from the prior year. The year-over-year EPS growth is attributable to a number of moving factors from both periods, but it's led by higher sales, favorable foreign exchange, a lower tax rate. And all those are partially offset by higher commodity costs and operating expenses.
I'm going to cover the details on that year-over-year comparison in 2 weeks. But regardless, the EPS figures are higher than what many of you had anticipated for the third quarter. So let me highlight 4 key items that reflects new information versus our earlier expectations. First, we realized about $0.03 in balance sheet remeasurement gains from a strengthening dollar in the third quarter of 2011. Keep in mind, the negative translation impact of a stronger dollar will be seen in the fourth quarter reducing this benefit somewhat.
Second, a lower year-to-date effective tax rate increased third quarter EPS by about $0.03 per share compared to our earlier expectations. Note that this reflects the tax benefit not only for the third quarter earnings but also on the first half as well.
Third, we experienced higher cost of about $0.03 this past quarter from additional airfreight costs to rebalance inventories across the globe, in part to support growth in China and also in advance of our Asian SAP lunch, and we also saw some manufacturing inefficiencies. All of these higher costs are nonrecurring items.
And finally, last year, we had a $0.03 pension settlement charge in the third quarter associated with our U.S. defined benefit pension plan. We currently expect the 2011 expense to materialize in the fourth quarter.
The net impact of these 4 items increased earnings by about $0.06 to $0.07 in the quarter. On a full year basis, the favorable impact should be about $0.03 per share, and that accounts for the majority of the increase in our earnings guidance.
Operating performance, excluding these, items is largely consistent with our earlier expectation. Turning to our segments, you can see that the emerging markets of Asia and Latin America continued to post exceptionally strong performance with 25% constant dollar sales growth. Note that we went live on our new SAP technology platforms in Asia last week.
Some customers increased purchases to ensure adequate inventory ahead of that transition. Absent this factor, constant dollar sales for the segment grew about 22%. Sales for North America and Europe were down by about 9% versus the prior year, excluding foreign exchange and were down about $22 million versus the second quarter. Much of this was expected. Note that in the prior year, sales peaked in the third quarter, so this is the toughest quarterly comparison we face.
Two factors drove the high level of sales last year. First, our largest competitor in the U.S. faced a product recall in September of 2010, and we had very strong shipments as a result. Second, we launched SAP in North America in the fourth quarter of 2010, and some U.S. customers increased inventories last September in advance of that change, just as we saw in Asia this year.
Since we have now lapped the recall, the underlying decline in the U.S. market also starts to become evident. In addition, we had several other factors that affect both the prior year and prior quarter comparison. The babies who switched or started on Enfamil as a result of the recall, have now aged out of the category. And that competitor regained some of their lost share once they fully reentered the market. But our market share remains at levels above those immediately prior to the recall driven by product innovation.
There were also some timing factors at work. We phased out of one WIC contract in Indiana during the quarter, but we didn't see the full phase in on a new contract for New England states that should be completed in the fourth quarter. In addition, note that we established sales reserve for goods in transit but not yet delivered to customers by the end of every month. We had a heavier amount of product in the transit pipeline at the end of the third quarter this year that was delivered in early October.
It's clear that our constant dollar sales growth in 2011 is running at a rate double the level seen on average from 2006 through 2010. Importantly, it's coming from volume gains as opposed to higher pricing, which was the more important driver of sales growth in the recent past, particularly in 2008 and 2009 when we raised pricing in response to a near doubling of dairy prices.
In the last 2 years, higher pricing has largely come from Asia and Latin America. It's proven more challenging to push pricing in North America given the weak market, but we increased U.S. list prices by 4% in early August although promotional activity could reduce that benefit somewhat. Though we're proud of the 11% volume increase this year, it is 5x the average of that delivered from 2006 through 2010 and more than double the level seen last year. As a result, we don't believe this impressive level of growth will be sustained indefinitely.
And finally, given the economic uncertainty of the last month or 2, we are asked more frequently, "What happened to growth during the recession of 2008 and 2009?" As you can see in this slide, our total unit volumes fell by 2% in 2009. But let's take a look at the segment data to get a clearer understanding of the underlying trend.
That 2% volume decline in 2009 originated in the North America/Europe segment where volumes fell 10%. But during this past recession, we continued to see solid overall growth in the emerging markets of Asia and Latin America. In fact, of the top 10 markets in this segment, only 2 saw a drop in sales in 2009, and those were the Philippines and Indonesia, both markets with a smaller premium segment.
None of us can predict if there will be another global recession. We certainly haven't seen signs of one to date, but if recent history is a guide, the industry should not shrink in emerging markets if a downturn materializes. Given that almost 3 quarters of our sales are now outside the United States, the strength or weakness of the dollar obviously impacts our financial results.
In general, the unfavorable translation impact from the strengthening dollar will predominate over time by reducing sales and reported earnings. So as I just pointed out with our preliminary third quarter results, we can also see a more immediate impact from the remeasurement of our balance sheet, which in the current environment proved to be a positive factor.
As you can see in the table on the left, the dollar has strengthened in the past month against many currencies but most notably against the Mexican peso and the Brazilian real. Mexico is our third largest market. And given the magnitude of the dollar's move against the peso, that market will see a larger negative translation hit from current exchange rate as they continue throughout 2012.
So there's 2 important factors that reduced the impact of a stronger dollar on our earnings. First, as you can see in the pie chart on the right, the blue-shaded portion, almost 60% of our sales are in United States with no exposure, in Hong Kong with the currency pegged to the dollar or in China, where the dollar is expected to continue weakening against the renminbi over the longer term. That effectively means our true FX exposure really rests with the remaining 40% of the sales shaded in green.
Second, we have limited sales in Europe and no sales in Australia, but we have a high cost of goods sold exposure as plants in these markets manufacture product for our Asian operation. In other words, we hold a short position with both -- against both the euro and Aussie dollar. As a result, a strengthening dollar against these 2 currencies provides a favorable translation impact.
If current exchange rates were to hold throughout 2012, we estimate that year-over-year earnings negatively impacted by about $0.06 per share, split almost equally between translation impact and the absence of the balance sheet remeasurement gains we reported in Q3.
Before moving off sales, I want to reiterate a few points about WIC exposure as we move into 2012. We currently hold WIC share of about 41%. And as you can see in the middle of this table, we've had quite a few smaller contracts come up for bid in 2011. But in total, we've maintained our share position at the 41% level. As Tim pointed out earlier, there a number of key contracts that come up in 2012, and that can introduce an additional element of volatility into our sales.
Keep in mind, however, that WIC contracts account for less than 3% of our global net sales. The last time the industry saw changes in manufacturers for large contracts was in late 2006, early 2007. California came up first, and the contracts switched from Abbott to us. Conversely, Abbott took the next 2 large contract for the Western States Consortium or WSCA and for Texas. There is a limited amount of capacity for the U.S. industry. And economics would tell you that any manufacturer would want to ensure they use more of that capacity for their higher-margin, non-WIC business. So equilibrium should generally return over time if there is a sudden shift among manufacturers for large WIC contracts.
Jeff showed you the trend lines for spot prices for some of our key dairy components. I've taken those trends and shown them on a 7-month lag, which better reflects the timing on when spot prices show up in our cost of goods sold. A couple points are obvious looking at this chart. First, you can see that dairy prices in our cost of goods sold will be higher in the second half of the year in most of our markets.
Second, North American dairy prices shown by the gold line have risen very significantly. Non-fat dry milk is up over 30% this year. So our North America/Europe segment will show the greatest impact from higher dairy prices in the second half. That's not new information for most of you, but it bears repeating. If you look at the 2011 year-end price for North American non-fat dry milk and compare it to the average cost for the full year, you'll understand that North America will also continue to see noticeable headwinds moving into 2012.
Finally, while there's been a fair amount of volatility in dairy costs much like other commodities, the overall trend has been an upward one since 2009. And there is no reason at present to indicate that trend will change. While some pressure has come off of Oceania and European dairy cost, and more recently, we've seen some modest reductions in North America, at this point we only have visibility to our cost of goods sold into the first quarter.
In general, our goal is to maintain healthy growth margin. And we try where possible to offset the impacts from commodity inflation through higher pricing, but that's not the only lever we have. Productivity is also important. Jeff has already described our target to reduce COGS each year by 3%. We've done that successfully in recent years, and we continue to plan and meet that target moving forward.
Importantly, we don't view COGS productivity by itself as a source of the EBIT leverage. While we'll always target the highest growth margin possible, there's too much underlying volatility in commodity costs to count on that. Instead, our productivity initiatives serve as an important factor to help dampen that volatility in an inflationary environment.
So let's move on to operating expenses where we believe we have an important leverage point. Operating expenses shown here on a percentage of sales basis have increased since our early 2009 IPO. You can see the increase in advertising and promotion spending as one key driver moving from 12.8% of sales to about 14%. And within the selling, general and administrative category or SG&A highlighted in gold, we also have made heavier investments in marketing and sales force additions.
Looking forward, we will not leverage R&D, A&P, marketing or sales force spending. They serve as the key drivers of growth, and these organic investments provide excellent returns for our shareholders. Instead, the key source of EBIT leverage within operating expenses will be from general and administrative spending or G&A. So let's take a deeper look at that.
This slide breaks out the SG&A category I just showed into G&A and all other spending. And please note that other category also includes some FX impact, so you can see some volatility in that portion of it.
On a percentage of sales basis, general and administrative spending grew by 130 basis points from 2008 to 2010, peaking last year at 8.8%. We've had to increase G&A at a faster rate than sales, as we've built our standalone infrastructure and worked to establish shared service capabilities independent of Bristol-Myers Squibb.
We intend to drive G&A reductions more forcibly moving forward, and have targeted G&A at about 6.5% of sales, a decline of about 200 basis points from current levels by 2016. Let me quickly highlight where that leverage will come from. For the first time in our history, we have a global operation on a common IT platform. We largely completed the SAP installation in the U.S., Europe and Latin America and the Philippines, and Asia went live last week. We've never had an integrated IT system in Asia before, and that capability should help us better leverage future G&A spending.
The IT platform we've installed is truly a global one, and we sought to prevent too much customization in individual markets. That's evident since we've reduced the number of legacy software applications from over 700 at the time of our IPO to 135 by early 2012, an 80% reduction. Having a global platform can help us optimize where we perform work, locally, regionally or even globally.
In 2010 and 2011, we have been operating off dual-shared service platforms for IT, finance and indirect procurement, one being the Bristol-Myers Squibb and the other, our new IBM platform. That costs us about $20 million in duplicate expense this year. That $20 million will go away in 2012, but there is underlying volume and inflationary increases from IBM and base services that reduces the benefit to a little more than half that level.
As it stands today, we operate with the highest EBIT margins among the global players in this category. The data available through public filings on the nutrition businesses of our competitors is fairly limited, but we believe that much of the EBIT margin benefit is at the gross margin line with our productivity program being an important contributor. We also believe that our investment levels in research and development, sales force, advertising and promotion and the like are competitive with these peers. And we remain committed to maintaining and even increasing investments in the future.
Another key source of longer-term earnings leverage should come from a lower effective tax rate. Prior to the IPO, all of our earnings were repatriated to the U.S., effectively subjecting them to the highest tax rate of any market in our portfolio. While we certainly need cash in the U.S. to cover interest payments on our $1.5 billion of debt and to fund our dividend payment, we have made good progress on keeping more of our cash offshore.
In 2010 and 2011, we had planned on repatriating about 60% of our global earnings. The 40% kept abroad has been the key driver behind the reduction in our effective tax rates over the last few years.
In order to further reduce our global tax burden, more of their earnings will have to originate in lower tax markets. As you can see at the bottom of this slide, many of our largest markets operate with statutory tax rates at or above 30%, including the 4 highlighted here, which represents the second, third, fourth and fifth largest markets for Mead Johnson. So this is a reasonably tough challenge. But while we're confident we can reduce our tax burden, it will take time, and we're not likely to see any meaningful reduction next year.
It is our intent to grow earnings at a faster rate than sales, absent larger fluctuations in commodity costs. We recognize that the high multiple we carry reflects the solid growth prospects for the business and highlights the need to leverage sales growth through our bottom line. We also believe that our trading multiple is warranted, given our strong performance.
As I've already detailed, the most significant sources for future earnings leverage will be G&A and taxes. But it's also important to balance earnings with investments in our business. We continually look at opportunities for growth whether for demand generation in existing markets for entering new seed markets or investments in the sustainable innovation pipeline. So don't be surprised if we make decisions over time to take some portion of our tax G&A -- and G&A savings and reinvest that back into our business.
We're not only focused on delivering earnings growth but also strong and stable free cash flow, and we've been pretty successful at it. Over the 3 years shown here, our free cash flow has averaged just under $400 million annually and represents 96% of our GAAP earnings.
One area that we had identified for improvement before our IPO was controllable working capital, which we define as customer receivable, net inventory and accounts payable. We measure performance not only in the basis of reduced cash investments but also on a percentage of sales basis.
And you can see we've made excellent progress dropping from 15% of sales in 2008 to 9% in 2010. While it's tougher to get improvements off the current low base without endangering stock out from lower inventories, we will continue to push for further optimization whenever and wherever possible.
Our first priority for use of cash is to pursue growth whether in the form of capital projects or acquisitions, but we also like to discipline that comes from returning cash to shareholders. As you can see, our dividend payout ratio currently falls below the median for other key food, beverage and consumer comparables. We intend to increase dividends at a rate in excess of earnings to narrow this difference over time. And while dividend growth has greater focus for us, we also intend to buyback stocks from time to time in the marketplace with the current objective being to offset the impact of shareholder dilution from employee stock awards.
Let me wrap up today with a summary on early thoughts for 2012. We'll be providing 2012 guidance in our late January conference call, but as we see it today, we have a relative balance between favorable tailwinds and unfavorable headwinds.
I've spoken about most of these items, so I'm not going to repeat them now. But let me highlight the fact that EBIT margins for our Asia or Latin America segments were 33.5% in 2010, 400 basis point higher than North America and Europe. That gap has widened further in 2011 due to our ability to pursue higher pricing in emerging markets and the faster rise in dairy cost we've experienced in North America. We will continue to see a favorable impact on consolidated EBIT margins in 2012 as the Asia, Latin America segment contributes to an ever increasing share of our sales.
And with that, let me turn the podium back to Steve for a quick wrap up.
Stephen W. Golsby
So it just leaves me to make a few closing remarks and then we're going to move on to take your questions.
Quite simply, our vision is to be the leader in our chosen field. Nothing could be more inspiring for our leadership and our people than driving a successful global company that's winning in the marketplace while making an important difference to the lives of infants and children.
We believe that Mead Johnson is extremely well positioned to deliver sustainable profitable growth and superior shareholder value through our strong brands and science-based products, innovation capabilities and pipeline, proven business models, expanding presence in high-growth markets, unwavering commitment to quality, talented people and financial strength.
While we're driving many initiatives across our business, our focus in 2012 will be to invest, to drive growth in core markets, nurture new markets and products for future growth, drive productivity for investment and profitability and develop our people and capabilities to execute with excellence.
This concludes our formal presentation. Thank you for your attention. For those in Chicago, we're going to start the Q&A in just a few minutes when the presenters gather at the front of the room.
And with that, we will close the webcast. Thank you.