Mead Johnson Nutrition's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.26.12 | About: Mead Johnson (MJN)

Mead Johnson Nutrition (NYSE:MJN)

Q4 2011 Earnings Call

January 26, 2012 9:30 am ET

Executives

Kathy A. MacDonald - Vice President of Investor Relations

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

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

Analysts

Jason English - Goldman Sachs Group Inc., Research Division

David Driscoll - Citigroup Inc, Research Division

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

Robert Moskow - Crédit Suisse AG, Research Division

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

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Operator

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

Kathy A. MacDonald

Thank you, and good morning. Welcome to Mead Johnson's Fourth Quarter Conference Call. With me today are Steve Golsby, our Chief Executive Officer; and Pete Leemputte, our Chief Financial Officer.

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

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

In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change.

Given that we are in the midst of the earnings reporting season, we will be respectful of your time. And I will now turn the call over to Steve.

Stephen W. Golsby

Thank you, Kathy, and good morning, everyone. As you read in our press release, we concluded 2011 with continued strong performance and delivered an exceptional year of sales and earnings growth.

Fourth quarter non-GAAP earnings of $0.52 per share on 14% constant dollar sales growth were in line with our expectations. As expected, higher dairy prices, greater demand generation investments and the timing of pension settlement expense and tax accruals more than offset the benefit of sales growth in the quarter. Our fourth quarter results brought full year non-GAAP earnings to $2.79 per share, an increase of 15% from the prior year.

Let me highlight some of our key achievements in 2011. First, we delivered 14% constant dollar sales growth on a full year basis, setting a new growth record for the company in recent times. This growth was led by our Asia/Latin America segment, which posted 22% growth excluding foreign exchange, and now accounts for 66% of our global sales, up from 61% in 2010.

In the markets where we compete, our sales grew at the highest rate of any of the 5 major global competitors during the year. Sales in China/Hong Kong grew over 40%, and it became our top global market in 2011, with sales of over $1 billion. The North America/Europe segment grew by 3% from a combination of both volume and price. The majority of this growth came from the United States despite continued declines in birth and formula consumption.

We delivered gross margins of 63% for the year, a drop of only 40 basis points from 2010 despite inflationary pressures on our product costs that approached 12%. Higher pricing and record productivity helped to mitigate the commodity headwinds, which were largely seen in the second half of the year. Our supply chain team exceeded their productivity goal by delivering over 4% savings on cost of goods sold.

We continue to invest competitively in sales force expansion, advertising and promotion, marketing and research and development and have seen results in market share gains measured on a value basis across Asia/Latin America.

We completed our global SAP implementation and shared service transition in October. This was the final step on our road to full independence from Bristol-Myers Squibb. The successful execution was the result of a tremendous effort led by dedicated employees around the world. This project is a critical cornerstone of our plans to drive global operational efficiencies and reduce general and administrative spending from 8.5% of sales in 2011 to 6.5% by 2015.

In the fourth quarter, we opened our third Mead Johnson Pediatric Nutrition Institute in Guangzhou, China, adding to the existing institutes in Latin America and the U.S. These centers provide additional capabilities to develop nutritional science and new products, and facilitate strong relationships with key scientific and regulatory stakeholders around the world.

In December, we announced the decision to build our first Asia spray dryer and technology center, which will be located in Singapore. This is the biggest capital expenditure in our company's history and is needed to support the future growth of our fast-growing Asia region.

Finally, I announced a number of management changes at year end, designed to support the company's ambitious growth plans. Kasper Jakobsen, who most recently served as the Head of our Americas business and previously led our Asia region was named our Chief Operating Officer, a newly created position to oversee our global commercial operations. Additionally, I appointed Charles Urbain, previously President of Asia and Europe, to the new role of Senior Vice President, Stakeholder Relations and Chief Development Officer in recognition of the importance of business development to complement our superior organic growth.

Let me now provide some additional commentary on our performance in our 2 operating segments in 2011, and then conclude with our latest thinking on expected growth in 2012. Starting with Asia and Latin America, I've already noted the constant dollar sales in China/Hong Kong grew in excess of 40% in 2011, with the vast majority of the increase from higher volumes. These markets now account for just under 30% of our total sales. As we mentioned at our Investor Day last fall, we expect 2012 growth rates in China/Hong Kong to be below the levels seen in 2011. We estimate that about 75% of our recent volume gains came from increased market share in the quarter from overall market growth.

From a planning perspective, while we will continue to grow share, we can't anticipate that the magnitude of share gains seen last year will continue indefinitely given the competitiveness of the category. And while there's no doubt that food safety concerns in China have led some parents to move toward premium brands such as Enfamil, we cannot predict that this trend will continue at the same rate. As a result, we currently anticipate that growth will return to more normal levels in 2012, while still being well above the mid-teen average expected for the Asia/Latin America segment.

Note that by the end of 2011, we were fully resourced in 241 cities in China. The new cities we entered in the last 18 months contributed about 15% of our volume growth, with the majority of growth coming from established cities. In 2012, we expect to continue our geographic expansion into an additional 50 cities through our disciplined Step Change program.

Importantly, our Asia/Latin America growth goes well beyond China/Hong Kong. In this segment, we saw a dozen markets growing in double digits. As Kasper presented at our Investor Day, Latin America has targeted sales of $1 billion by 2015. We are well on our way to achieving that goal, with the Latin America regional sales growth in the mid-teens and Brazil growing rapidly to become our eighth largest sales market in 2011.

In the North America/Europe segment, annual sales was 3% favorable to the prior year on a constant dollar basis. I should note that about a point of this growth came from a liquid adult private label nutrition product we manufactured for U.S. retailers in the second half of the year. Excluding these private label sales, constant dollar growth of 2% came mainly in the U.S. from product innovation launched in 2010, along with the benefit from a competitive late 2010 product recall.

In reflecting upon the full year, I'm pleased with the gains made in the U.S., where pricing and increased market share more than offset the continued decline in the birth rate and lower infant formula consumption. However, this segment is not without its challenges as we enter 2012. Most of you are aware of the media issue in late December concerning several infant formula brands, including Enfamil Newborn. The FDA and CDC ultimately issued a joint press release 9 days after the story first broke, which stated that there was no contamination found in sealed containers of our product, entirely consistent with the results from our own exhaustive quality testing protocols.

While it is very difficult to quantify the impact at this early date, we believe that misleading headlines and the resultant uncertainty caused some moms to switch from the Enfamil brand and others to start on an alternative formula. We responded quickly with appropriate activities, including an extensive e-mail communication, reassuring millions of mothers about the 2,300 quality and safety checks we perform to ensure the integrity of every product that we ship to market.

And we've now begun a broader mass-market campaign, including TV advertising, focusing on our quality testing and the fact that we are the #1 brand recommended by pediatricians in the U.S. While there was no noticeable impact on our fourth quarter sales given the late December timing, we expect to see lower market share potentially into the third quarter of this year, as those babies who switched were started on another formula age into heavier consumption period.

Let me also highlight 3 other factors that will drive U.S. results. First, we expect that the birth rate and infant formula consumption will continue to fall in 2012, reducing industry sales by a further 2% to 3%. Second, keep in mind that we gained market share from a late 2010 competitor's recall that favorably helped our first half 2011 revenues. That benefit dissipated as we moved through last year. Our first half comparisons in the U.S. for 2012 will suffer as a result.

Third, there are a number of WIC contracts that are open for bidding in 2012. The biggest contract that we currently hold is in California, which accounts for more than 14% of total WIC births. California was rebid late in November, and I am pleased that we retained this contract, which will roll over effective August 1. We have 2 other contracts that account for a total of 7% of WIC births that have yet to be bid with a rollover date of October 3.

While these factors in the U.S. will have the greatest impact on segment results, we do expect to see some modest growth in Europe. You'll recall that in the second quarter of 2011, we implemented SAP in this market and moved to a new distribution model, where we hold more inventory centrally rather than at our distributors. The absence of this inventory correction will contribute to growth in 2012.

Finally, let me comment upon our outlook for 2012. We look forward to a year of solid sales and earnings growth. It's very early in the year, and there is more uncertainty than usual given the present conditions in the U.S. market. Nevertheless, we currently expect constant dollar sales growth for the company to be in the range of 7% to 9% for the full year, with Asia and Latin America growth in the mid-teens, while North America/Europe is expected to decline in the mid-single digits for the reasons described a few moments ago.

We are initiating 2012 non-GAAP EPS guidance in the range of $3 to $3.10, up 8% to 11% relative to 2011. Gross margin will be around 63% for the full year, flat with 2011, as higher pricing and productivity offset dairy and cost inflation, particularly for North America.

And we expect to see total operating expenses of around 39.3% as seen in 2011. We intend to take the majority of the savings from reductions in general and administrative spending and reinvest them back into the business to sustain our strong growth.

I'll now turn the call over to Pete to provide you further highlights, and I will return to wrap up and take your questions.

Peter G. Leemputte

Thanks, Steve, and good morning, everyone. I'll walk down our income statement, providing some additional detail on our fourth quarter results and highlight trends that we currently forecast for 2012.

Starting with our top line, as Steve mentioned, constant dollar sales grew by 14% in the fourth quarter, basically in line with our full year 2011 results. The growth was largely driven by our Asia/Latin America segment, which saw a sales growth of 18%, excluding the impact of foreign exchange, with 14% from volume and 4% from price.

We also reported 6% growth from our North America/Europe operations in the fourth quarter, almost equally split between volume and pricing. This was driven by a number of factors. About 2/3 of the segment's higher sales originated in Europe. We had started to reduce distributors' inventory during the fourth quarter of 2010 in anticipation of the SAP launch and new distribution model in 2011. That made the comparison easier this past quarter.

In October 2011, we launched our patented Dual Prebiotics and our plastic tub and value refill box system in Canada, increasing volumes there. And as Steve mentioned, we have some sales from the manufacturing of private label adult nutrition products for retailers. As you would expect, these sales carry a significantly lower gross margin than our core product offerings.

Absent these factors, our U.S. business was down by 1% in the fourth quarter. The benefit of the August price increase was evident at about 4%, with volumes down about 5%, reflecting a tougher comparison against a competitor's recall in the prior year.

Looking forward, we expect 2012 sales growth for the company to run between 7% to 9% excluding foreign exchange, down from 14% in 2011. Asia/Latin America at constant dollar sales should grow in the mid-teens versus 22% last year. Lower but still impressive planned growth in China/Hong Kong is the key driver. North America and Europe sales are expected to decline by the mid-single digits versus growth of 3% in 2011, reflecting lower births and consumption, as well as lower average market share, as Steve outlined earlier.

We expect that the comparison will be toughest in the first half of the year, possibly into the third quarter, until babies who switched from Enfamil because of the December media issue start to age out of the category. And remember, we also had captured a higher number of babies in the first half of 2011 from a competitor's recall in late 2010.

Note that volume will remain critical to our sales growth in emerging markets in 2012. It will be partially offset by the U.S. For the company in total, pricing gains should average about 4% compared to 3% last year.

There was continued strengthening of the dollar against a number of key currencies in the fourth quarter, including the euro, the Brazilian real and the Mexican peso, reducing sales by 1%. If current exchange rates continue throughout the year, 2012 full year sales would decline by the same 1%. On an earnings basis, foreign exchange is expected to reduce EPS by about $0.06 per share in 2012 versus 2011.

Our gross margin in the fourth quarter was just over 61%, down from 62.3% a year ago and the 63% full year figure. As expected, higher dairy and commodity costs were at work, particularly affecting North America. In addition, we saw unfavorable fixed cost absorption as lower U.S. production rates in the second half of the year rolled through our cost of goods sold.

The lower production volumes were driven by a partial share recovery by a competitor following their late 2010 recall. We are expecting 2012 gross margins to remain around 63% for the full year. Inflation and our cost of goods sold is expected to moderate to the mid- to high-single digit, following 12% inflation in 2011. Higher pricing, strong productivity initiatives and improved manufacturing performance will all contribute and help offset the impact of commodity and conversion cost inflation.

Note that we have mentioned in prior calls that recent dairy price increases have been particularly significant in North America, while Asia had reported some declines since peaking in mid-2011. While we have seen some modest decline for non-fat dry milk in North America over the last 3 months, any benefit has been completely offset by higher lactose and whey prices. So gross margins in the North America/Europe segment will remain under pressure in 2012.

If you look at our year-end balance sheet, you will see that our inventories are up by $94 million compared to the end of September. During the fourth quarter, we purchased an additional 6 months of our 2012 milk requirements for Asia. That accounts for $77 million of the inventory increase. This was done to provide better price stability for 2012 and took into account expert views on future prices. With this advanced buy, we have 10 months of certainty for a significant portion of our Asian dairy cost of goods sold this year.

As expected, operating expenses totaling $382 million in the fourth quarter were up by $33 million or $0.12 per share versus the third quarter. Pension settlement expense accounted for about $0.03 of the increase. Remember that this expense showed up in the third quarter of 2010, so it’s timing factor that doesn't influence our full year comparison.

In addition, we saw a $0.04 drop in foreign exchange balance sheet remeasurement gains relative to the third quarter. A higher level of investment in sales force, marketing and research and development account for the remaining $0.05.

On an annual basis, 2011 operating expense came in at 39.3% of sales. We expect to see a similar spend level in 2012. Now that we are no longer operating on the Bristol-Myers Squibb platform, we will eliminate $12 million in duplicate shared service costs. And we also should see greater leverage of our general and administrative spending or G&A, now as we start to leverage a common global IT platform. We currently intend to reinvest most of these G&A savings back into the business, with the U.S. mass media campaign being one item of particular note. As was the case in 2011, if our sales expectations move higher during the year, we will continue to look at other demand generation investment opportunities to drive further sales growth.

The non-GAAP effective tax rate or ETR for the quarter, was 31.3%, up from 27.3% a year ago. We reforecast our full tax rate each quarter and true up our year-to-date tax accruals to reflect that latest rate. This introduces additional volatility in our quarterly tax rates. When we look at the numbers on a full year basis however, much of that volatility is removed. Our non-GAAP effective rate was 28.5% in 2011, right in line with the 28.6% in 2010. We expect that the effective tax rate will center around 28% in 2012 but could vary from 27.5% to 28.5%. Pulling all these factors together, we forecast that non-GAAP EPS will fall in the range of $3 to $3.10 per share this year.

Classified items reduced non-GAAP earnings by $0.32 per share in 2011, reflecting the heavy investment in our new SAP technology platform. While SAP is fully functional around our global business, we need to finish the effort by installing a few related software applications, but at much reduced cost than in 2011. Classified costs will therefore fall to $0.09 per share in 2012. On a GAAP basis, earnings should range from $2.91 to $3.01 per share this year, up 18% to 22% versus the $2.47 in GAAP EPS in 2011.

Before turning the call back to Steve, I'd like to highlight a few items about our balance sheet and cash flow. Free cash flow, measured as cash from operations less capital expenditures, reached an impressive $523 million last year. We ended 2011 with $840 million in cash, up $245 million from December of 2010. That's after a dividend increase of nearly 16% and the repurchase of about 1.3 million shares of our stock, which consumed $82 million in cash.

Net debt fell 26% during 2011 from $938 million to $692 million. The highest priority for our cash is to grow our business. This is exemplified by capital spending, which is estimated at $220 million in 2012, about double the level from 2011. Depreciation and amortization expense is estimated to grow from $75 million to $83 million.

Including in our capital expenditures is roughly $100 million for our new spray dryer and technology center in Singapore. The total capital cost for this project is $300 million, which will be completed in 2014. Upgrades and other normal capital spending should run around $120 million in 2012, equivalent to about 3% of sales.

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

Stephen W. Golsby

Thank you, Pete. At our 2011 Investor Day, I introduced our new company visual identity and the compelling tagline, Nourishing the Best Start in Life. There's no more inspiring message for the global employees of Mead Johnson than to be reminded of our mission.

I'd like to conclude by acknowledging the exceptional efforts of those employees around the globe, who delivered such strong performance in 2011, and who are committed to continue driving sustainable profitable growth in 2012.

We will now be pleased to take your questions. [Operator Instructions] Operator, please open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Diane Geissler with CLSA.

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

I appreciate the commentary about what happened in North America and the sales commentary especially. But could you just tell us what you're looking for on the bottom line? I mean, some kind of range between the expected earnings loss and then whatever potential advertising campaign you have to do to try to let mothers know that it's safe to use your product? I guess what I'm asking is what would your guidance have been, if it hadn't been for the Cronobacter?

Peter G. Leemputte

We're not going to answer that, Diane. I appreciate the question, understand the reason for it, but there's a lot of moving parts in here. And I will say that the advertising campaign is estimated about $0.03 per share. And just keep in mind, too, we indicated for North America that sales were going to be down in the mid-single digits there. We expect to see some pricing. We increased prices in the U.S., 4% back in August, so we'll get about a half-year benefit of that this year. So that implies, obviously, that the volume decline for North America/Europe is going to be in the high-single digits, if you will. And some of that decline is coming from the fact that we expect the total market to be down another 2% to 3%. We also are comparing against higher share during the Abbott recall for the first half of last year, which is accounting for a couple points, and then it's the residual piece that really is driven by the December issue. But it's still very, very early, and we can't sit back and quantify with precision where that's going to come out.

Operator

Your next question comes from the line of Ed Aaron with RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

Just wanted to ask about the operating expense guidance. The message that we took away from the Analyst Day was that you're going to kind of keep decelerating expenses at the same level but drop through the G&A leverage. And your 2012 assumptions seem a little bit different from that. I'm just kind of wondering, if we interpreted your message the right way, and if so, why 2012 is shaping up to be a little bit different? And then as a quick follow-up, Pete, could you maybe just talk about the quarterly flow of the A&P spending this year? Usually, it's kind of light in the first quarter relative to the rest of the year but with the campaign in the U.S., I'm wondering how much that might change the Q1 percentage?

Peter G. Leemputte

Sure. First of all, your understanding from the Investor Day was absolutely correct. We do intend to use G&A reductions on a percentage of sales basis as the source of EBIT leverage and margin leverage moving forward. When you look at this year, it's January. We have had this event in December, which did lead, related to the prior question, to lower sales growth in North America/Europe than we had anticipated. And keep in mind too, that the advertising campaign is coming through too, that hadn't been anticipated at that point. So we're maintaining flexibility. I think in light of that, our intent is to continue to spend aggressively in the markets that are growing and not cut there. But don't think that we've moved away from that thought, we continue to seek EBIT leverage from G&A. It's just that this particular year, at this point of the year, we're not willing to commit to that.

Operator

Your next question comes from the line of Jason English with Goldman Sachs.

Jason English - Goldman Sachs Group Inc., Research Division

Quick question, some more housekeeping items on guidance. I think you said, correct me if I'm wrong, but the FX would be a $0.06 drag for the full year?

Peter G. Leemputte

Right.

Jason English - Goldman Sachs Group Inc., Research Division

Is that just the translation? Or how should we think about the transaction benefit given the cross rates between the euro and Asian currencies?

Peter G. Leemputte

It's the total EBIT impact for the full year. And if you look at our financial statements, you'll see that we -- I don't know that we break it out in detail, but we had some very significant balance sheet remeasurement gains back in the third quarter. That was on the order of $0.04 a share. Those are not going to recur, so that's a very, very big piece of that $0.06. And the rest of it would just be kind of the translation of our P&L, if you will.

Jason English - Goldman Sachs Group Inc., Research Division

Is there anything noteworthy about the pacing of earnings growth throughout the year?

Peter G. Leemputte

I think we would expect to see EPS relatively flat by quarter as we move through 2012. There's a lot of moving parts on that. And depending on the timing for advertising campaigns, I just mentioned one for the first quarter here in the United States, but also depending on the time for when we do new product launches, where you might have heavier advertising, that can fluctuate quite a bit from quarter-to-quarter. But I think, from an overall perspective, as it stands now, if you're doing your model building, relatively flat EPS per quarter through the year would make sense.

Operator

Your next question comes from the line of Tim Ramey with D.A. Davidson.

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

Understand the damage control perspective for the mass media campaign, but that's a bit of a deviation from your previous strategy. Can you kind of talk through the thought process there? As you point out, the moms who are concerned about the December media event will kind of be through the system by the third quarter, why does it make sense to heavy up on the spending now?

Stephen W. Golsby

Tim, it makes sense because as a consequence of misinformation, misleading headlines and in our opinion, some inappropriate actions, a large number of parents were highly concerned by what they were hearing, reading and seeing. And as you know, after our own testing and the testing of the FDA and CDC has confirmed that there was no risk from our products. And market research data would show us that the trust in Enfamil has been diminished in the eyes of some consumers, and we need to restore that quickly. We've been in this business for 106 years. We intend to be in it for another 100 years, and we are going to spend whatever it takes to restore the trust in Mead Johnson and our products that we fully deserve, and make sure that they understand our unwavering commitment to quality. And when you see the TV advertising, I think you'll see it's firmly focused on the fact that our products go through 2,300 quality checks, and that we are the #1 brand recommended by pediatricians in the U.S., and we think that's a very important message for our core U.S. business.

Operator

Your next question comes from the line of Eric Katzman with Deutsche Bank.

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess I want to just kind of carping on the U.S., but there is one thing I'm not exactly clear on. Last year, you kind of attributed your market share gains to both your new product’s success, as well as the problems that Similac was experiencing. But this year in terms of the 2012 outlook for the North American business, it's really just been about the comps versus their recall and not really much in terms of new product efforts or success. So I'm wondering if you could kind of talk a little bit more about that especially within the context of more advertising, which you would think would help the new product success that you had last year and I assume into this year.

Stephen W. Golsby

Yes. Firstly, let me reiterate that the additional advertising that we've now mentioned a couple of times is focused solely upon restoring trust among those consumers who were concerned by the headlines that they were reading. And it's only going to run for a few weeks, and then we will revert to our preplanned and existing demand creation programs, which we already know to be effective and competitive. The innovations that we launched in 2010, namely the patented Dual Blend Prebiotics, Enfamil Newborn and the proprietary packaging system have been remarkably successful in the market and have contributed to our growth in 2011, as they will in 2012. We would be confidently reporting our expectation of further share gains absent that year-on-year comparison with the Similac recall, were it not for the December media issue. While it is still early days, as Pete said, that issue is going to have a meaningful downward impact on our business in the United States. You can imagine how we feel about that. But we've got to be realistic and deal with it, and we're going to deal with it with conviction now and spend what it takes to rebuild momentum as quickly as we possibly can.

Peter G. Leemputte

And, Eric, just -- the other thing I would just add is, if you recall in our last conference call after the end of the third quarter, we had said that our market share was up about one full point versus where it was the prior year, which was before the recall, if you will, before Abbott's recall. We actually feel we maintained that or even gained against that in the fourth quarter of last year. But on a full year basis and that's what we're talking about here because we're giving full year guidance, we had somewhere between 2% to 2.5% market share gains in the first quarter or second quarter of 2010 versus the prior year. So on average, while we're still ahead of where we were prior to their recall, on average, you'll see a lower share in 2012 versus 2011 from that factor.

Eric R. Katzman - Deutsche Bank AG, Research Division

Okay. And if I could just follow up quickly. I think, Steve, you mentioned an adult private label nutrition product. I mean, I realize it's very small in the grand scheme of things. But it just seems like a strange product to produce given that it's got to be, as you mentioned, a much lower margin business. Is that just because of excess capacity given the volume declines across the category in the U.S.?

Stephen W. Golsby

I think it's a very – it’s an understandable question and, I think, because we've only been a public company for 3 years, you're unaware of a little bit of our history. In early 2004, we divested the Boost adult nutritional product to Novartis, which has subsequently been acquired by Nestlé. We retained a significant manufacturing capability, which we are now leveraging on private label contracts, assuming that they make commercial sense. It's limited in scale, and I emphasize, these are adult nutritional products. We have no intention whatsoever of producing private label products for the pediatric nutrition category.

Operator

Your next question comes from the line of David Driscoll with Citi Investment Research.

David Driscoll - Citigroup Inc, Research Division

Want to discuss a little bit about China. I think you said in your prepared comments -- well, in the press release, it says, China was up something in excess of 40% for 2011. And then, Steve, I think you gave some numbers, and I think they translate that, of that 40%, 10 points of it comes from the underlying market and then the share gains would be the residual 30 percentage-plus points that then add up to the 40% growth within the market. First, if I have -- do I have that correct?

Peter G. Leemputte

You do.

David Driscoll - Citigroup Inc, Research Division

Okay. Now what I'm really interested in understanding is what are the fundamental assumptions on share gains in 2012 in China? I think what you described was a segment average of mid-teens, and that China would grow something north of that. That leaves a lot to be -- a lot open right there, given the 40% number in 2011. So can you talk about what your expectations are for share gains? And kind of how do you arrive at those conclusions?

Peter G. Leemputte

Sure. We're not going to give, David, as you might imagine, specific numbers out there especially at this point in the year. But if we grew -- if you sit back and look at, just do some math, when you look at the Asia/Latin America segment, China accounted for about 45% of the total sales of that segment. It grew at 40% last year. 30 of those points were coming from, we believe, from market share gains. And we would expect to see growth in the high-single digits, low-double digits again for the industry in 2012. So I don't think we're really anticipating much change from that. But all I would say is, we would expect it to revert to something closer to maybe what we had prior to this year. So you can sit back and do the math, we're taking Asia/Latin America segment down from 22% to the mid-teens. That could be 15%, 16%. And I think I've given you enough information to help take a look at it. And remember, we're just -- this is what our planning assumptions are for right now.

David Driscoll - Citigroup Inc, Research Division

I understand. One follow-up. Maybe, Steve, you could just talk a little bit about how you achieved the share gains, and maybe that would just provide a lot of insight on the business going forward.

Stephen W. Golsby

Yes. I mean, I think we've been growing share consistently for a number of years built on the very strong brand proposition that resonates particularly well with Chinese consumers: our science, our quality and our innovation. And although it's less attractive to talk about it, sort of executional excellence, blocking and tackling across a highly complex continent and a growing number of cities. That's fundamentally behind our competitiveness. In 2011, we saw a particular boost, if you like, to that momentum coming from the various quality issues that local -- some local companies were suffering, from some of the regulatory actions that the government took in order to address food safety concerns, from the Japanese nuclear disaster, which impacted the Japanese and some formula brands that are particularly strong in some areas of China and notably in Hong Kong. So nothing particularly new to report, David. We continue to invest competitively. A&P roughly 20% of sales, so there was no particular surge in our investment, just the maintenance and a very high degree of commitment to executing at the highest standard.

Operator

Your next question comes from the line of Rob Moskow with Credit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I was just looking at consensus expectations and also my own about the progression of quarterly earnings. And it implies an extraordinary amount of EPS growth in fourth quarter. I just want to know, is there anything about how you phase your SG&A or just your business, that would hurt your ability to have a fourth quarter loaded kind of year, some companies that we follow do. Is that how you guys look at the phasing of earnings?

Peter G. Leemputte

Yes. I mean, and really that question, Rob, I think the reason that the gains would be seen in the fourth quarter is because the fourth quarter of 2011 was so low. We did see a very significant drop in our EPS in the fourth quarter versus the third, so it's $0.52 versus, I believe, $0.78 -- or $0.79, excuse me. And that came from the timing of spending for advertising and promotion, to some extent, sales force adds, et cetera. It also came because of the impact of dairy costs in the fourth quarter, the North America had really started to come through. And it was also driven by the SAP implementation. So we said in our third quarter call, that we had roughly $13 million in sales above what we normally would have seen because of the SAP launch in Asia in October of last year. And obviously, that came out of the fourth quarter. So you had a number of unusual items like that. There can be quite a bit of volatility based on the timing of campaigns for advertising, particularly in markets outside the U.S. that can drive variability quarter-to-quarter. But I do think too that, when you're sitting back and reporting for this year, we would expect that some of those should moderate significantly. We would revert to a steadier profile. But I don't think there's anything out of the ordinary, if you will, that would be considered repetitive for 2012 on a quarterly basis.

Stephen W. Golsby

Maybe I can just add, because you referenced other companies you follow. I want to be clear that our sales don't have that volatility in them. We would expect our sales to grow slightly quarter-to-quarter, all other things being equal. There's no particular seasonality in our business. And I want to emphasize, there are no changes in our practices from quarter-to-quarter particularly at the year end.

Robert Moskow - Crédit Suisse AG, Research Division

Got it. And one follow-up. I look at your Asia/LatAm segment quarterly, and I try to grow it sequentially. Because I look at it as a segment of your portfolio that keeps getting more and more consumers, keeps getting more and more distribution on a sequential basis. If this is -- it's dropped from third to fourth. I know there's some onetime issues there. From here though, is there anything to indicate that it can't grow sequentially from here?

Peter G. Leemputte

No. And the drop in the fourth quarter, just for the record again, is largely driven by the higher shipments in third quarter in advance of the SAP implementation. The only other thing too, I would mention, Rob, is we're talking about that excluding foreign exchange impacts, which could be quite variable depending on what happens in the marketplace.

Operator

Your next question comes from the line of Bryan Spillane with Bank of America.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just 2 questions. First, on the WIC contracts that, I guess, the one that you renewed or was renewed in California, can you just talk at all about how competitive that process was? Or if there's been any change, I guess, in terms of the competitive dynamics in terms of the bidding and whether there's any change in your -- the economics of that for you?

Stephen W. Golsby

I understand the question. You’ll understand that we're not allowed to speak about WIC pricing or pricing strategy for antitrust purposes. I can, however, say that in a market that has declined as a consequence of lower births and lower consumption, the WIC bidding process is very competitive. We're delighted to have retained the California contract.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And then the 2 contracts, the 2 states that you hold now, that are still up for bid, which ones are those?

Stephen W. Golsby

Louisiana and one of the consortia for Arkansas, New Mexico and North Carolina.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And when will those -- when will the decisions be made on those?

Stephen W. Golsby

They'll be made during the first half of this year but the contracts won't become effective until the beginning of the fourth quarter, I believe.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Okay. And then Pete just, or Steve, just in Brazil, you touched on the growth rate there. Could you just give us an update on where you stand today in terms of some of the metrics on market share penetration rates? I mean, there's been very good growth in that market for you. And just trying to understand, where you stand in terms of your penetration rates.

Stephen W. Golsby

Yes, we're very excited about it, but I'm glad you've given us the opportunity to calibrate expectations. You probably know that we've been in the Brazilian market for several decades with a children's nutritional supplement under the brand Sustagen. Because of the economic growth and because of the success of our strategies, that business is growing in double digits and provides the foundations of our business in Brazil. The infant formula category is at a very, very early stage of development but it is growing rapidly. In São Paulo and Rio de Janeiro, Enfamil is the fastest-growing infant formula brand. And in fact, we've reached a double-digit market share in the areas that we -- where we are present but it is still a very small category. So we're in the -- we're building not only the equity of our brand and our organizational capabilities but we are making the category. And if you look at the demographics and you look at the economic projections for Brazil, you can understand why we're very excited about the long-term prospects.

With that, having run over our time, I'm being given the signal that we should bring the Q&A session to a close. So on behalf of the management team, thank you once again for your attendance on this call and for your engagement in our company, and we look forward to seeing you all soon. Thank you, operator. We'll finish the call.

Operator

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

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