US infant formula group Mead Johnson has lowered its full-year sales outlook, citing a slowdown in Chinese demand.

In its second-quarter earnings release today (26 July), Mead Johnson reduced its full-year sales guidance to a range to 8-9%, down from 9-11%. The company did however restate its full-year profit target of $3.04 to $3.14 per share.

CEO Stephen Golsby said the company expects a slower growth rate in the second half due to "slower growth in China".

"While expecting weaker third-quarter growth, we remain confident that we will exit the year with improved market share in China and that our strategies and execution will deliver strong earnings performance," Golsby said.

For the second quarter, Mead Johnson said net income totalled US$165.8m, up from $132.1m last year. Net sales rose to $1.01bn, from $932m.

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Mead Johnson Delivers Strong Earnings; Second Quarter Constant Dollar Sales Up 11 Percent

GLENVIEW, Ill.--(BUSINESS WIRE)--Jul. 26, 2012-- Mead Johnson Nutrition Company (NYSE: MJN) announced today its financial results for the second quarter ended June 30, 2012.

Net sales of $1,012.3 million in the quarter were up 9 percent versus the second quarter of 2011. Excluding the unfavorable impact of foreign exchange, sales increased 11 percent.

GAAP net earnings of $0.81 per diluted share for the second quarter of 2012 were up 27 percent from $0.64 per diluted share a year ago.
Non-GAAP(1) net earnings of $0.83 per diluted share increased 15 percent from $0.72 per diluted share for 2011.

The sales increase was driven by the Asia/Latin America segment with constant dollar growth of 16 percent with a majority of the markets achieving double-digit gains. For the North America/Europe segment, sales were flat excluding the unfavorable impact of foreign exchange.

Earnings benefited from strong sales growth, reduced IT and other separation expenses following the prior year SAP implementation, balance sheet re-measurement gains from foreign exchange and a lower effective tax rate. These benefits were partially offset by lower gross margins largely driven by higher commodity costs, higher demand-generation investments and the recognition of pension settlement expense.

Full-year non-GAAP EPS is expected to be in the range of $3.04 to $3.14. Including specified items estimated at $0.09 per share, full-year GAAP EPS guidance is $2.95 to $3.05.

(1) See "Non-GAAP Financial Measures" and the reconciliation of GAAP and non-GAAP results included in this release.

"Our sales and earnings growth continued to be strong in the second quarter," said Chief Executive Officer Stephen W. Golsby. "Sales growth was broad-based across Asia and Latin America and included the first full-quarter from our Argentine acquisition. The majority of markets in this segment reported double-digit growth on a constant dollar basis. China/Hong Kong continued to deliver strong sales growth; however, we expect lower growth in the second half of the year in light of recent data indicating both a slowdown in the China category and a decline in Mead Johnson's market share. In the North America/Europe segment, we saw a significant improvement in the U.S. business compared to the first quarter. We are particularly encouraged by strengthening market share amongst three-month old babies who will age into a higher consumption period during the second half. We increased global demand-generation investments to drive sustainable growth while benefiting from lower general and administrative spending, including significantly lower IT and other separation expenses. While mindful of the challenging economic environment and slower growth in China, we remain on track to deliver strong earnings growth in 2012."

Second Quarter Results
Net sales for the second quarter totaled $1,012.3 million, up 9 percent from $932.0 million a year ago. Sales benefited 8 percent from price, 3 percent from volume, reduced by 2 percent from foreign exchange. Earnings before interest and income taxes (EBIT) for the second quarter totaled $248.3 million, up 22 percent from $203.7 million a year earlier. The EBIT increase was driven by sales growth, lower IT and other separation expenses following the 2011 SAP implementation, favorable balance sheet re-measurement gains from foreign exchange and lower performance-based compensation accruals. These factors were partially offset by lower gross margins, higher demand-generation investments and the earlier recognition of pension settlement expense compared to the prior year.

Gross margin was down 150 basis points versus the second quarter of 2011. The decrease was from higher commodity costs and unfavorable manufacturing variances, largely attributed to lower production volume in our North America/Europe segment, partially offset by higher pricing and productivity gains. Investment spending for advertising and promotion, sales force expansion in growth markets and research and development increased compared to the prior year. Foreign currency balance sheet re-measurement gains, mainly at our European manufacturing entity, were largely offset by pension settlement expense recognized in the second quarter of 2012 compared to the fourth quarter of 2011. The effective tax rate for the quarter was 25.9 percent versus 29.6 percent a year ago. The decrease in the effective tax rate was attributable to a change in geographic earnings mix and to higher manufacturing incentives.

Net earnings attributable to shareholders for the second quarter of 2012 totaled $165.8 million, or $0.81 per diluted share, compared with $132.1 million, or $0.64 per diluted share, a 27 percent increase from the prior-year quarter. In addition to EBIT increases, the second quarter of 2012 benefited from a lower effective tax rate.
On a non-GAAP basis, which excludes specified items, the net earnings attributable to shareholders totaled $171.2 million, or $0.83 per diluted share, compared with $148.7 million, or $0.72 per diluted share, a 15 percent increase from the same quarter a year ago.

Second Quarter Segment Results
The Asia/Latin America segment delivered net sales of $695.2 million for the second quarter of 2012, up 14 percent from $611.6 million in 2011. Sales benefited 9 percent from price, 7 percent from volume, reduced by 2 percent from foreign exchange. The segment benefited from the first full quarter of sales following the March 2012 acquisition of an 80 percent equity interest in Argentina's leading infant formula and children's nutrition business. EBIT totaled $237.5 million, up 13 percent compared with $209.8 million for the year-ago quarter. EBIT increased from sales growth partially offset by higher demand-generation investment spending.

The North America/Europe segment reported net sales of $317.1 million for the second quarter of 2012, down 1 percent from $320.4 million in 2011. Sales benefited 5 percent from price, offset by a 5 percent decline in volume and a 1 percent reduction from foreign exchange. The volume decrease reflected lower U.S. market share, as well as lower category consumption and births. The U.S. market share was lower in comparison to the prior year when we benefited from a competitor's recall and due to the current year impact of the unfounded media reports in December 2011 of alleged product contamination. EBIT for the segment totaled $74.6 million, down 14 percent compared with $86.4 million for the year-ago quarter. The decline in EBIT was primarily due to higher commodity costs and unfavorable manufacturing variances attributed to lower production volumes in the U.S.

Corporate and Other expenses decreased from lower IT and separation costs, the elimination of duplicate shared service costs during the SAP implementation completed in late 2011, foreign currency balance sheet re-measurement gains and lower performance-based compensation accruals. These factors were partially offset by the recognition of pension settlement expense. Similar pension settlement expense was recognized in the fourth quarter of the prior year.

Six-Month Results
Net sales for the six months ended June 30, 2012, totaled $1,998.9 million, up 9 percent from $1,831.8 million a year ago. Sales benefited 6 percent from price and 4 percent from volume, reduced by 1 percent from foreign exchange.
Gross margin was down 190 basis points versus the first six months of 2011 due to higher dairy costs in the North America/Europe segment. Manufacturing variances were also unfavorable, largely attributed to lower production volume in our North America/Europe segment. These increased costs were partially offset by higher pricing as well as productivity gains.

EBIT for the first half of 2012 totaled $497.1 million, up 17 percent from $426.3 million a year earlier. The EBIT increase was driven by sales growth, lower expenses related to the SAP implementation completed in 2011 and the elimination of duplicate costs from the overlap in shared service providers and favorable foreign exchange. These factors were partially offset by lower gross margins, higher demand-generation spending and the timing of pension settlement expense.

The effective tax rate for the six months ended June 30, 2012 was 26.7 percent versus 29.2 percent a year ago. The decrease in the effective tax rate was primarily attributed to a change in geographic earnings mix and to higher manufacturing incentives.

Net earnings attributable to shareholders for the first half of 2012 totaled $330.0 million, or $1.61 per diluted share, compared with $278.2 million, or $1.35 per diluted share, a 19 percent increase from the prior-year period. Net earnings for the six months ended June 30, 2012 benefited from the EBIT increase and a lower effective tax rate.

On a non-GAAP basis, which excludes specified items, net earnings attributable to shareholders totaled $338.6 million, or $1.65 per diluted share, for the first half of 2012, compared with $305.5 million, or $1.48 per diluted share, an 11 percent increase from the same period a year ago.

Six-Month Segment Results
The Asia/Latin America segment had net sales of $1,396.5 million for the first half of 2012, up 18 percent from $1,188.5 million in 2011. Sales benefited 11 percent from volume and 7 percent from price. The majority of the markets in the segment delivered double-digit constant dollar sales growth driven both by price increases and higher volumes. Sales also benefited from the Argentine acquisition which closed in March 2012. EBIT for the segment totaled $516.5 million, up 21 percent compared with $426.6 million for the year-ago period. The EBIT increase was primarily related to sales growth and improved gross margin, partially offset by increased demand-generation investments.

The North America/Europe segment reported net sales of $602.4 million for the first half of 2012, down 6 percent compared with $643.3 million in 2011. Sales benefited 4 percent from price, offset by a 9 percent decline in volume and a 1 percent reduction from foreign exchange. Segment sales declined from lower U.S. market share, as well as lower category consumption and births. Market share was lower in comparison to the prior year when we benefitted from a competitor's recall and due to the current year impact of the unfounded media reports in December 2011 of alleged product contamination. EBIT totaled $108.3 million, down 40 percent compared with $179.3 million in the same period a year ago. The EBIT decrease was attributed to lower sales, higher dairy costs and unfavorable manufacturing variances.

Corporate and Other expenses decreased from lower IT and separation costs, foreign currency balance sheet re-measurement gains and the elimination of duplicate shared service costs incurred during the SAP implementation project completed in 2011, partially offset by pension settlement expense triggered earlier than in the prior year.

Outlook for 2012
"We are pleased with our strong second quarter results; however, we anticipate slower growth in the second half of 2012. Annual constant dollar sales are now expected to grow in the range of 8 to 9 percent compared to the 9 to 11 percent sales growth anticipated earlier in the year. Slower growth in China is partially offset by an improvement in our U.S. business. Our full-year non-GAAP earnings are estimated in the range of $3.04 to $3.14 per share," Mr. Golsby noted. "Lower sales growth in China is partially offset by favorable foreign currency balance sheet re-measurement gains and a lower sustainable effective tax rate. We estimate the effective tax rate will be in the range of 26 to 27 percent. While expecting weaker third quarter growth, we remain confident that we will exit the year with improved market share in China and that our strategies and execution will deliver strong earnings performance."

Original source: Mead Johnson Nutrition