Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Mead Johnson Nutrition (NYSE:MJN)

Q1 2012 Earnings Call

April 26, 2012 9:30 am ET

Executives

Kathy Ann MacDonald - Acting Corporate Controller and Vice President of Investor Relations

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

Peter Kasper Jakobsen - President of Americas Operations

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

Analysts

Matthew C. Grainger - Morgan Stanley, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Varun Gokarn - Goldman Sachs Group Inc., Research Division

John Baumgartner

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

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

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Alexis Borden - Citigroup Inc, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Mead Johnson Nutrition First Quarter 2012 Earnings Conference Call. My name is Shikwana, and I will be your coordinator for today. [Operator Instructions] I would Now like to turn the presentation over to Kathy MacDonald, Vice President, Investor Relations. Please proceed, Kathy.

Kathy Ann MacDonald

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

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

Keep in mind that our actual results may differ materially from expectations as of today due to various factors, including those listed in our annual report on Form 10-K, quarterly 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 noted in our press release issued earlier today, we delivered strong first quarter results. Constant dollar sales growth of 9% was in line with our expectations. The continued excellent performance in both Asia and Latin America was partially offset by an anticipated decline in the North America/Europe segment.

Non-GAAP earnings of $0.82 per share were up 8% from $0.76 per share in the first quarter of 2011. Earnings increased due to sales growth, a favorable foreign exchange comparison and a lower effective tax rate, partially offset by lower gross margins and higher demand generation investments.

In the first quarter, we completed the acquisition of an 80% equity interest in the SanCor Bebé infant formula and children's nutrition business. This joint venture gives us the leading market share position in Argentina, the third largest market in Latin America, and a strong platform for growth throughout the Southern Cone of South America.

As stated in the past, that after we completed the SAP implementation and the actions to achieve full standalone status, we would have more resources available to consider business development growth opportunities to complement our compelling organic growth strategies. Our business development focus will be on tuck-in deals like this one that allows to further strengthen growth with a primary focus on emerging markets.

Since Kasper will share our operating segment results shortly, let me provide an update on our full-year guidance. We continue to be very positive about our outlook for the year and expect our annual constant dollar sales growth to be in the range of 9% to 11%, up from our previous guidance of 7% to 9%. About 1.5 points of this increase is driven by the acquisition in Argentina with the remainder from modestly higher expectations for growth in our emerging markets.

We currently estimate that the non-GAAP EBIT margin, as a percentage of sales, will be at or slightly above the 23.6% level seen in 2011 with demand generation investments accelerating for the balance of the year.

For the full year, non-GAAP EPS is expected to be in the range of $3.04 to $3.14, up $0.04 from our prior guidance.

I will now turn the call over to Kasper, who assumed the role of chief operating officer for the company earlier this year. I will return at the conclusion of our prepared remarks to wrap up and address your questions.

Peter Kasper Jakobsen

Thank you, Steve, and good morning, everyone. I'll focus my comments on the operating performance and the expectations of our 2 segments.

Starting with Asia and Latin America, first quarter sales for this segment grew 21% on a constant dollar basis versus the prior year with just over $700 million and now accounts for 71% of our global sales. Absent the 2-week contribution from the Argentine joint venture following the closing in mid-March, sales increased 20%. Higher volumes were the key driver of our first quarter results, adding 16% to our top line with pricing accounting for the remaining 5% of growth. We will not talk in any detail about our specific plans in Asia and Latin America, but we expect pricing will make a bigger contribution to sales growth in the near future when compared to that seen in recent quarters.

Our pricing actions, often accompany pricing -- product innovations, sorry, which frequently have higher costs so this does not always translate into higher margins. And we will carefully watch the impact of higher pricing on sales volumes.

Turning to some geographic detail, sales growth in China/Hong Kong continued at rates above the segment average. But as expected, modestly below the very high rate of growth in the prior year. Market share remains at levels above those seen in the first quarter of 2011, a sign of the strength of the Mead Johnson in infant brands in the world's largest market.

Strong double-digit growth was also seen in the majority of markets outside of China and Hong Kong, In Southeast Asia, we've seen solid results in the first quarter with stronger growth in Vietnam and Thailand. Sales in Latin America grew at a strong pace led by Brazil and the Indian markets. We've made good progress in building our infant formula business in Brazil over the last 2 years, although the sales base remains quite small.

We've concentrated on the emerging premium category in pharmacies and focused our efforts on Rio de Janeiro, São Paulo and, recently, Belo Horizonte. As we expand, we'll continue to invest in our infant formula business in Brazil over the next few years. We're also excited about the potential of our new SanCor Bebé business in Argentina. There are approximately 700,000 annual birth in-country, about 1/3 the numbers are seen in Mexico with per capita GDP running at approximately the same level in both markets. Yet, infant formula and children's nutrition product consumption is about half the level seen in Mexico. This disconnect indicates the growth potential of the Argentine market with consumption increases expected over time.

Our joint venture owns the market-leading SanCor Bebé and Bebé Plus [ph] brands. The JV, which is 80% owned by Mead Johnson as Steve mentioned, will marry the product portfolio, research and development and marketing expertise of Mead Johnson with the manufacturing, distribution capabilities, local market knowledge and market-leading position of SanCor. We expect the joint venture to pursue growth in Argentina and serve as a base for further expansion in the Southern Cone markets.

Wrapping up the discussion on Asia and Latin America, we expect annual sales growth to be in the upper-teens for the segment on a constant dollar basis compared to the mid-teen guidance previously provided. The SanCor Bebé acquisition will add just over 2 points to full-year segment sales growth with existing markets accounting for the remainder of the improvement.

Turning now to the North America/Europe segment. We recorded a sales decline of 11% on a constant dollar basis. Volume was down 14% driven by the U.S. market with pricing gains of 3%. These results were largely as we expected back in January. This is the toughest quarterly comparison we will face in 2012 with 3 key factors driving the volume decline.

Let me highlight each, noting only the first quarter impact but how we see trends moving through the remainder of the year. Firstly, about half the shortfall was due to the one-time benefit that accrued to us in 2011 from a competitor's recall. That benefit was most pronounced in the first quarter of last year. It dropped off in the second quarter and had little impact once we had moved into the second half. As a result of this factor, we continued to impact our year-over-year comparison in the coming quarter but at a somewhat reduced level.

Secondly, about 1/4 of the decline resulted from market share temporarily lost due to the misleading headlines and media reports in late December concerning several infant formula brands including Enfamil Newborn. The FDA and CDC ultimately found no fault with our products, but the uncertainty caused some parents to switch away from the Enfamil brand. We launched a mass-market campaign in the first quarter to reassure all parents of the quality and safety of our brands and to remind them that Enfamil is the #1 brand recommended by U.S. pediatricians. The campaign has been successful. And by the end of the quarter, sales of our newborn product had recovered to pre-December levels. We are confident of a share recovery as the December and January cohort of babies age out of the category during the third quarter. Please do keep in mind that market share is, however, likely to fall further in the near term before recovering as many of the infants switched to other brands are now moving into heavier consumption periods.

As a result, the unfavorable market share impact in the second quarter may be more pronounced than in the first. Finally, there is evidence that overall category volumes continue to fall. The most recent CDC data from the first half of 2011 showed a continued 2% decline in the number of infants born in the U.S. compared to the same period in 2010. This is supported by a more recent available WIC participation data and is a sign that the birth rate has still not bottomed out. Recent consumption has caused a further drop in category volume, bringing the total volume decline to as high as 3%.

In summary, the sales performance of the North America/Europe segment will improve as we move through the second half of the year. On a full-year basis, our sales guidance remains unchanged with a decline expected in the mid-single digits. As many of you probably have noticed in our press release, there was a significant drop in the North America/Europe segment profits in the first quarter versus the prior year. This was largely expected. Pete will explain this in more detail in a minute, but a number of factors reduced gross profit, most notably, reduced our U.S. non-WIC sales volumes, which carry higher gross margins. The lower sales volume led to reduced fixed cost absorption plus we saw the impact of significantly higher dairy costs.

Also note that the cost of the mass media campaign in the U.S. reduced earnings. Recognizing the importance of protecting EBIT margins in an environment of rising costs, we've notified our U.S. customers we are raising prices slightly more than 4% effective June 1. This is in addition to the 4% increase taken last August. We're not counting on the full benefit to flow through to earnings as retailer and consumer support may prove necessary in the near-term. But we are committed to margin recovery, and our earnings guidance for the year anticipates that.

So to wrap up, I'm very pleased with how the year has begun, with excellent growth from the emerging markets of Asia and Latin America and steady progress anticipated in the developed markets of North America and Europe.

Let me now turn the Pete -- turn the call over to Pete, who will provide you with some further financial highlights. Pete?

Peter G. Leemputte

Thanks, Kasper, and good morning, everyone. As a reminder, I will focus my comments on our non-GAAP numbers. Details on our GAAP results are provided in the press release and our 10-Q, which will be filed later today. Kasper detailed the key drivers of constant dollar sales growth, but let me add a quick comment on the sales impact from foreign exchange. Foreign exchange had practically no impact on our top line during the first quarter. If current exchange rates hold, we would expect the FX to also have limited impact on full-year sales. I'll now concentrate my prepared remarks in profitability for the first quarter and key changes we expect to see as we move through the remainder of the year.

Our first quarter EBIT margin of 25.6% came in 100 basis points below the first quarter of 2011. This was driven by a 230 basis point drop in gross margin, partially offset by a 130 basis point reduction in operating expenses. Gross margins stood at 62.1% and reflected a tougher commodity cost environment compared to the first quarter of last year when we delivered 64.4%. Dairy prices, included in our cost of goods sold, were up 23% for the company versus the year-ago period.

The most significant impact was seen in North America, where nonfat dry milk prices were up 32%, while lactose and whey prices climbed by over 60%. We have seen some moderation in nonfat dry milk as the warmer winter the U.S. has increased milk supply. That will start to provide some earnings benefit late in the year. We don't expect to see any significant relief, however, with whey or lactose prices.

Importantly, gross margins were 100 basis points higher than the 61.1% seen in the fourth quarter. Asian dairy prices, reflected in our cost of goods sold, have moderated since peaking late last year. And the increase in consolidated gross margins on a consecutive quarter basis is all attributed to our emerging markets.

As Kasper highlighted, reduced fixed cost absorption from lower U.S. sales and production volumes was one of the factors reducing gross margins in the first quarter. It is important to note that some of the unfavorable manufacturing performance was related to the timing of maintenance outages in our U.S. plants. We usually shutdown these facilities in the fourth quarter of each year, often during the holiday season around Thanksgiving and Christmas. We delayed our regular fourth quarter 2010 maintenance outage due to strong demand from a competitor's recall with higher demand continuing through the first half of last year. Instead, we extended the normal planned outage for the fourth quarter of 2011 and saw unfavorable cost absorption as a result at that point. The finished goods produced in the fourth quarter largely shipped to customers in the first quarter and shows up as higher cost of goods sold then.

Gross margins for both North America/Europe and the company will improve as we move into the second quarter. And as non-WIC volumes in the U.S. increase during the second half of the year, once the unfavorable impact from the media issue winds down, we will see even further improvement. On a full-year basis, we expect gross margin to be about 10 to 20 basis points lower than our prior guidance of 63%. This reflects lower gross margins from the Argentine joint venture. Remember, SanCor will continue to manufacture products for the new company and will retain some manufacturing profit as a result.

Absent the acquisition, gross margins would continue to center around 63%, the same level as the prior year. Higher commodity costs this year are offset by higher pricing and strong productivity initiatives. The first quarter's operating expense of 36.5% was down by 130 basis points from 2011.

Let me explain a number of the key moving parts. First, we saw the elimination of shared service overlap cost now that our SAP technology platform is operational. We are only using shared service resources from IBM and no longer from Bristol-Myers Squibb.

In addition, we recognized significant foreign exchange balance sheet remeasurement losses in the first quarter of 2011 from U.S. dollar denominated receivables held by our Dutch manufacturing plant. Although still on a loss position this year, these unfavorable foreign exchange impacts did not recur at the same level, leading to a further reduction in operating expenses measured on a percent of sales basis. These 2 benefits were partially offset by higher demand generation investments in advertising and promotion, including the U.S. media campaign that Kasper referenced along with incremental spending for our sales force and research and development.

On an annual basis, we currently forecast operating expenses to be at or slightly above 39%, but well above the 36.5% for the first quarter.

Most of the spending increase over the remainder of the year will focus on additional demand generation investments in Asia and Latin America. Also, you'll recall that we recognized $10 million in pension settlement losses in the fourth quarter of last year. Since our U.S. defined benefit pension plan is frozen, if our annual lump-sum payout to retiring employees exceed the recognized pension expense, accounting rules require us to accelerate the recognition of deferred losses from the plan. We have seen an uptick in lump-sum payouts from longer service employees in recent months. And we expect that the pension settlement expense will start to be recognized earlier this year, potentially starting in the second quarter.

Turning to taxes, the first quarter non-GAAP effective tax rate, or ETR, was 27.5%, down from 29.4% a year ago, primarily due to a change in our geographic earnings mix. We expect the ETR for the full year will fall in a range between 27.5% to 28%. At the end of March, we held cash and equivalents totaling $661 million, down $180 million from December. The Argentine acquisition accounted for about $106 million or 60% of the drop. The total purchase price is set at ARS 851 million, or about USD $196 million, using the exchange rate at closing. We paid ARS 473 million, or USD $109 million, in cash at closing. Since the joint venture held about $3 million in cash, this was recorded as a $106 million use of cash during the first quarter. The remaining ARS 378 million, or about USD $87 million, is payable in 3 installments over the 12 months post closing with the final payment due upon receipt of Argentine regulatory approval of the acquisition.

The peso-denominated notes carry an interest rate of 14% per annum. Although the interest rate is higher than what we would see in the U.S., we chose this partial deferred payment to provide some near-term protection against the significant devaluation of the Argentine peso. Further details on the financing will be included in the 10-Q filed later today. We expect interest expense to run about $64 million for the full year, including this new debt. The other significant driver of the reduction in cash during the fourth quarter came from a $197 million increase in assets and liabilities.

You'll recall that we purchased an additional 6 months of key dairy inputs, or $77 million, for our Asian business in December to provide better price stability for 2012. We consumed cash during the first quarter as we retired the payables from this prebuy. Normal receivable builds on higher sales, seasonal reductions in accrued expenses and the timing of income tax payments account for the majority of the remaining increase. We will recover the majority of this cash outflow during the remainder of the year.

During the quarter, our board of directors raised our quarterly cash dividend by over 15% to $0.30 per share. We also purchased 220,000 shares of our stock at an average price of just over $78 per share, returning an additional $17 million in cash to shareholders. We estimate that capital spending for the year will total about $200 million versus our previous $220 million guidance. This reflects a slight shift in timing for the new Singapore spray dryer and technology center. The multi-year $300 million capital plan for the project remains unchanged. Front-year [ph] depreciation and amortization expense was estimated at $83 million.

Before turning the call back to Steve, let me summarize our latest outlook for the year. We anticipate full year sales growth of 9% to 11%, up from 7% to 9% in January, about 1.5% comes from the Argentine acquisition with higher sales in Asia and Latin America driving the residual gains. Asia and Latin America should grow sales in the upper-teens including the SanCor Bebé acquisition benefit, and North America/Europe is expected to decline by the mid-single digits.

We expect non-GAAP EBIT margins, as a percentage of sales, to be at or slightly above the 23.6% reported in the prior year. The interest expense of $64 million and an effective tax rate between 27.5% to 28%, our non-GAAP EPS should be in the range of $3.04 to $3.14 per share. With regard to the Argentine acquisition, please note that we expect no EPS accretion in 2012. Lower gross margins, investments that we will make to grow the business, and the incremental financing charges this year will result in breakeven performance from this transaction. And finally, we expect specified cost will total about $0.09 per share in 2012. GAAP earnings should therefore be $2.95 to $3.05 per share.

With that, let me turn the call back to Steve.

Stephen W. Golsby

Thank you, Pete. We're very pleased with our sales and earnings performance for the first quarter, and our increased guidance reflects our optimism for the full year. Importantly, we are also continuing to make the investments necessary to ensure we deliver sustainable profitable growth over the long term.

We will now be happy to take your questions. To give everyone an opportunity to participate, we request that you ask one question and if necessary, a clarifying followup. We will then pass it along to the next person in the queue. Operator, please open the line for questions.

Question-and-Answer Session

Operator

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

Matthew C. Grainger - Morgan Stanley, Research Division

So, you may have addressed this in generality already but I was hoping you could provide a quick update on the pricing environment in China and I ask because I've seen a few press reports earlier this month suggesting that you and possibly one of your competitors may have announced formal price increases to the trade. Is that the case? And if so, can you provide us with any sense of the magnitude and how this fits into both your pricing outlook in the larger context of competitive pricing actions in the market?

Peter Kasper Jakobsen

Matthew, this is Kasper. I'll attempt to answer your question. Yes, we can confirm that we have taken pricing in China as has a few other competitors. The price increase we've implemented in China is effective in this month, in fact, in April and is in support of the product innovation. So though I don't want to be specific about the magnitude, I would caution you to just recognize that we don't expect this to necessarily provide incremental earnings as we have accompanied the price increase with investment in our product quality. We also are somewhat cautious about the volume impact of these price increases in China as we recognize the tough environment.

Matthew C. Grainger - Morgan Stanley, Research Division

And can you clarify what the nature of the innovation was that was associated with the pricing?

Peter Kasper Jakobsen

Yes, it's a product improvement to our infant formula and Growing Up Milk product range. We refer to it internally as the Smarties [ph] project.

Operator

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

Edward Aaron - RBC Capital Markets, LLC, Research Division

I was hoping you could maybe talk a little bit about the SanCor business? Just help me to get a sense of what you expect a ramp trajectory to look like just in Argentine in general? And then you can discuss how -- what that business is currently growing and then just with the process of converting a mainstream business to a premium business, how long that takes and where do you expect to be in a couple of years?

Peter Kasper Jakobsen

Yes, I'll attempt to answer that. I mean, we are very excited about the acquisition of this majority stake in the SanCor Bebé business. The brand is, by far, the leading brand in Argentina. And as I commented in my opening remarks, the Argentine market is a very substantial market with about 700,000 births a year. Historically, the business has grown at approximately 10% in volume and of course, you're well aware of the inflationary pricing environment in Argentina. So historically, the business has sustained price increases in local currency of approximately 20%. We don't see any reason we should not able to anticipate continuing to take price in line with inflation, and we're excited about the opportunities for synergies as I outlined.

Operator

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

Varun Gokarn - Goldman Sachs Group Inc., Research Division

Hi, sorry, it's Varun Gokarn in for Jason. Just a broader question about how you approach expansion in Latin America, what are some of the criteria you look at when deciding on bolt-on acquisitions there? You mentioned being potentially more acquisitive in the future, and are there any particular geographies or capabilities that you will be focused on in the near-term?

Stephen W. Golsby

We already have a very strong business across Latin America. And Argentina, among the major markets, was the exception, which is why we're so excited by the SanCor Bebé acquisition. All of these markets are experiencing strong growth, driven by buoyant economies, a growing middle class, increased women's participation in the workforce and a growing recognition of the importance of early life nutrition, which is seeing particularly strong growth in the premium segment of our categories across the region. And you will recognize the 3 of our top 10 businesses, Mexico, Brazil and Peru, are in Latin America. But we also have businesses growing in double digits in Columbia, Venezuela, Ecuador and which is why we've said that we're confident of our Latin American business reaching $1 billion in revenue over the next 3 to 4 years.

Varun Gokarn - Goldman Sachs Group Inc., Research Division

And then just one quick followup, if I could. There were some negative press headlines on product safety from one of your multinational competitors in China at the end of March. I'm just wondering if you would see any short-term impact to movement in share that might have been caused by that?

Stephen W. Golsby

No...

Peter Kasper Jakobsen

None, none that we can detect to date.

Operator

Your next question comes from the line of John Baumgartner representing Telsey Advisory Group.

John Baumgartner

Just thinking about the trajectory of the Asian dairy prices right now, is there any interest in your part in, kind of, going further ahead with some of the forward purchases for the Asian milk requirements this year?

Peter G. Leemputte

Good question, John. I think it's something that our chief procurement officer and his staff continually look at. There's no plans right now. I think the prebuy that we completed in December turned out to be a very good economic decision by us. But we will compare our market prices to what we're seeing from our own models, internal models, about the directions we think the market might be moving. But at this point, there is no additional purchases expected.

John Baumgartner

And just one more, if I could. Thinking maybe more conceptually about the market in China, maybe from a longer-term perspective, thinking about local dairy quality, the supply chain. You had the authorities cracking down on some of the illicit practices there, now you have Fonterra going in, raising its investment in local farming. I mean, over time, as you expect the supply of local milk quality to increase, do you view that as impacting the children nutrition market anyhow? Could that maybe narrow the perceived quality gap between multinational product, local competitors? Is it a competitive threat? Is it an opportunity for you to source better quality product locally? How do you think about that market playing on the quality side?

Peter Kasper Jakobsen

We have no intentions in the foreseeable future of changing our -- the sourcing of our dairy materials, in particular, in China. We're aware of some of the initiatives that you outlined, and we will sort of remain engaged. But as I've said, no plans in the foreseeable future and the perception among consumers that international brands and brands with raw material sourced from outside of China being superior, we don't see that perception changing in the near-term.

Operator

The next question comes from the line of Tim Ramey representing D.A. Davidson.

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

I was struck by the sloppiness [ph] in the margin in North America/Europe, obviously. And I know you were spending money to defend the brand. Can you talk a little bit about how that might evolve for the rest of the year as that business, kind of, renormalizes itself?

Peter G. Leemputte

Sure. Tim, this is Pete. As we mentioned, there were a number of factors that were really influencing the very low margins that we saw in North America/Europe in the first quarter. A good portion of the gross margin decline was coming from the timing impact of planned shutdown. The first quarter we saw the impact from our shutdown late last year. We didn't have a shutdown late in 2010. So I will say that we have some relatively strong confidence that gross margins will be increasing in the second quarter for that segment noticeably. And as I've mentioned I think moving into the second half of the year, you'll also see the benefit as we continue to ramp back up from the media scare in late December in terms of non-WIC market share. And keep in mind, the loss sales year-over-year really are coming from the non-WIC business which carries, as Kasper mentioned, very good solid gross margins. In addition with the price increase that we announced, that will take place in the end of the second quarter, that as well will help some margin recovery. So we're relatively confident that what you saw in the first quarter is somewhat short-term in duration.

Operator

Your next question comes from the line of Jon Andersen representing William Blair.

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

I just have a question on your views on the prospects for a recovery in the U.S. birth rate anytime soon. And then just a follow up on the reduced consumption in the U.S. and whether you think that's also a function of, kind of, macro factors or if there's any kind of change going on in terms of how parents are approaching the category?

Peter Kasper Jakobsen

I will attempt to answer that. I think we've talked to this topic a number of times before. And we've referenced an extensive amount of tracking that we've done of U.S. birth trends and attempting to correlate that with various macroeconomic factors over the years. And what we do know is that the birth rate is a lag indicator of primarily 2 things in the broader economy: economic growth and, particularly, growth in employment. So to the degree that you see improvements in those 2 economic indicators, I think, with some time lag, you will see an improvement in the U.S. birth rate. We've also said that we continue to remain very confident about the long-term potential of the U.S. market, which of course, is a very large market for us and that we continue to make investments in the business consistent with that view of its long-term potential.

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

If I could just do a quick follow-up. If and when we do see, Kasper, to your point, a bottoming and eventual recovery, will the recovery in demand that follows skew WIC or non-WIC or be relatively balanced in your opinion?

Peter Kasper Jakobsen

I don't know that we have a good ability to predict exactly which part of the population will recover first or make the strongest recovery. We got less ability to look back over long-time horizons to anticipate that. I guess our expectations is that it will be fairly even.

Operator

Your next question comes from the line of Leigh Ferst representing Wellington Shields.

Leigh Ferst - Wellington Shields & Co., LLC, Research Division

My question is about Latin America. And, Steve, you reiterated your $1 billion goal there, but I'm wondering if -- but you also said that the SanCor Bebé acquisition boosted your near-term results. Are you looking to reach $1 billion earlier? And/or are you looking for higher growth long-term than you had before in Latin America?

Stephen W. Golsby

We will certainly reach a $1 billion by 2015, which is consistent with previous statements. And we will revise those as we gain experience in Argentina. I think I've mentioned on several earnings calls that we're very proud of the fact that our Latin American business has grown in strong double digits every quarter since our IPO 3 years ago. And we believe that the business in Argentina will grow at comparable rates.

Operator

Your next question comes from the line of Rob Moskow representing Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I seem to remember that, Pete, you had given guidance that foreign exchange will be a $0.06 headwind in 2012 and now on the top line, anyway, you're saying that there's really no headwind anymore. Is there anything going on, on the cost line for foreign exchange that's different? And then also I wanted to get a little more color on China. Could you give us -- maybe you've given it, but could you give us a growth rate for your business in China/Hong Kong and give us a sense if your market share trends continue to get better there or not? And is the category maybe picking up after a little bit of a slow down last year?

Peter Kasper Jakobsen

Let me -- I'll let Pete address the effects part of your question, and I'll just address the China/Hong Kong one by really repeating what we said in the prepared remarks that China/Hong Kong continued to grow at a rate above the segment average. And I think we can also say that -- I think I also said that in the prepared remarks, that our share position in the first quarter of 2012 was higher than it was in the same quarter of the year prior, which was an indication of the continued strength of our business there. We've talked to you extensively about our pride in our ability to execute in China and nothing has really changed in that picture. Pete?

Peter G. Leemputte

Yes, with regard to foreign exchange, I think you're absolutely right, Rob. When we were giving guidance back in January, we said that the sales impact from foreign exchange was going to be a decline of sales of about 1%, and we're seeing it as being neutral now. There's no financial benefit to our earnings that comes from a weaker dollar, if you will, slightly weaker dollar. And it ties into the mix of currencies that we have and what's going on. In fact, most of that $0.06 degradation from foreign exchange was coming from these balance sheet remeasurement gains that we saw in the second half of 2011, in the absence of those. But if anything, I think, foreign exchange was a slight negative to us in the first quarter because the dollar weakened against both the euro and the Mexican peso and we shift from both of those markets into either into Asia in the case of Europe or other Latin American Markets in the case of Mexico. And we saw balance sheet remeasurement losses that had not been anticipated back in January.

Robert Moskow - Crédit Suisse AG, Research Division

And, Kasper, can I ask a follow up? I understand you're not really giving us the category trends in China/Hong Kong. But there was some comments last year about the category might be slowing a little bit. Do you even -- do you -- what is your sense of confidence that those numbers are meaningful? Like, it seems like everyone is reporting very strong numbers, and was the Nielsen data helpful in that regard or not so helpful?

Peter Kasper Jakobsen

Well, I think that it's one of the sources of information that informs our understanding of the market. And we are seeing a moderating of the growth rate in China. It's not overly dramatic but certainly, the market grew at a slightly slower rate in the first quarter. Pete, do you want to add to that?

Peter G. Leemputte

I'll just point out too, if you look at the Nielsen data, that actually did -- I mean, the data that we look at would suggest that volume growth was pretty weak for the industry last year in the Chinese market. It's hard though quite honestly to rely just on Nielsen too because this baby store channel, we think, has picked up a little bit of share and so it's very difficult for all of us to get a true sense of what's going on in the overall market.

Operator

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

Alexis Borden - Citigroup Inc, Research Division

This is Alexis Borden in for David this morning. Quick question about, kind of, advertising and product promotion, it looks like it increased 13% this quarter, and how much was that kind of weighted towards the U.S. business versus, kind of, like, your emerging markets business?

Peter G. Leemputte

The vast majority of it was in the emerging markets business, and it's the timing of some spending. I would say that we did invest behind that U.S. media campaign. We spent about $7 million or $8 million on that in the U.S. as well. So that was one factor at work.

Alexis Borden - Citigroup Inc, Research Division

And was that necessarily -- not necessarily compared to last year, how would you compare that year-over-year, would you say?

Peter G. Leemputte

I'm sorry, for which? For the U.S.?

Alexis Borden - Citigroup Inc, Research Division

For the U.S., was that higher? Because you said the majority of the increase was from, kind of -- at the emerging -- with the 7% to 8% -- $7 million to $8 million, excuse me, kind of, match -- it's, how would you compare that to last year, I guess?

Peter G. Leemputte

For North America/Europe, advertising and promotion spending was not up by that full amount of $7 million or $8 million. There is also samples that are included free samples that were given out in doctor's offices or sent to moms at home here in the U.S. that was included in that and given lower births, obviously, that's down slightly.

Kathy Ann MacDonald

Operator, I think we have time for one more question.

Operator

You have a question from the line of Ed Aaron representing RBC Capital Markets.

Edward Aaron - RBC Capital Markets, LLC, Research Division

I just wanted to ask a question on the, kind of, the pricing that was taken in China. You sounded, I guess, a little bit cautious that there might be some volume impact from that. But if the higher pricing is being driven by innovation, I guess, cautious do your volumes might sort of imply that the consumer wouldn't fully appreciate your innovation for whatever reasons. So I guess what I'm trying to get a sense for is whether you think that the investments behind quality that you're making over there are going to be visible to the consumers to the point where they value your products more than what they did previously?

Peter Kasper Jakobsen

Yes, don't misinterpret it. The comment on volume was about a relatively short-term impact, if any. And secondly, we are very confident in the innovation we've launched in China and indeed, over time, we have seen that we have been able to take price increases in China without materially affecting demand for our product as long as it's supported by strong innovation, which it is.

Stephen W. Golsby

Operator, with that, we will close the call. Thank you, all, for your continued interest in Mead Johnson. We look forward to seeing you soon.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mead Johnson Nutrition's CEO Discusses Q1 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts