Mead Johnson Upbeat On China Outlook After Series Of Setbacks
This article was originally published in The Tan Sheet
Executive Summary
The infant nutritionals firm has put a poorly timed price increase behind it and is optimistic about the effects of a Hong Kong limit on formula exports on China sales. Additionally, a recall of Danone baby nutrition products in Asia is expected to benefit Mead Johnson over the next 9 to 12 months.
After several setbacks in China, Mead Johnson Nutrition Co. sees blue skies ahead thanks partly to a sales rebound following the implementation of Hong Kong’s infant formula rule and a competitor’s recalls.
Chief Financial Officer and Executive VP Peter Leemputte told analysts at the Barclays Capital Back-to-School Consumer Conference Sept. 3 that Mead Johnson has recovered the China market share it lost in mid-2012 after implementing a poorly timed price increase (Also see "In Brief" - Pink Sheet, 17 Sep, 2012.).
The infant nutritionals company surged to 40% growth and more than $1 billion in sales in China/Hong Kong in 2011, which made for a challenging comparison in 2012, when Mead Johnson’s growth in the country fell to 5% as sales to distributors slowed due to high levels of inventory at retailers.
Mead Johnson's Enfakid A+ infant formula sold in Asia
Image courtesy of Mead Johnson Nutrition
Now, Leemputte says Mead Johnson is sanguine on the second half of 2013 and “we continue to believe in the long-term growth prospects in China/Hong Kong driven by rising incomes for families that moved into the middle class and the science-based innovation that we intend to bring to the marketplace.”
Mead Johnson also hopes China will finally scrap its one-child-per-family policy that has forced infant formula marketers to grow via geographic penetration in the country rather than on the back of organic population growth (Also see "Mead Johnson Eyes China’s One-Child Policy, Hong Kong Formula Rule" - Pink Sheet, 1 Apr, 2013.).
The Glenview, Ill.-based company is persevering against the Hong Kong government’s limit, begun March 1, 2013, on the amount of formula products consumers can take out of the territory, where Mead Johnson holds a leading market position (Also see "Sales & Earnings In Brief" - Pink Sheet, 29 Apr, 2013.).
Thus far, the impact of the export limit “has settled out at a rate better than we originally anticipated,” Leemputte said.
But Mead Johnson does still face the wild card of China’s infant formula price-fixing investigation that forced the firm and others to lower prices for several products; Mead Johnson dropped the prices of several stock-keeping units in China 7% to 15% and paid the government a $33 million penalty to resolve the case (Also see "In Brief: NAD trims BPI claims, formula price-fixing in China, FDA warns Formulife and identifies spiked supplements, NBTY’s consumer redress" - Pink Sheet, 12 Aug, 2013.).
Leemputte said the company expects a degree of volatility in upcoming financial figures for China given the price cuts across the market. But thanks to higher growth in the U.S., Mead Johnson expects 2013 gross margins to remain steady.
Danone’s Pain, Mead Johnson’s Gain
Also working in Mead Johnson’s favor in Asia is Danone’s August recall of infant formula products in seven Asian countries – Cambodia, China, Hong Kong, Malaysia, Singapore, Thailand and Vietnam – plus New Zealand, following a warning about possible bacterial contamination of a supplier’s ingredients.
The allegedly affected ingredient batches from Fonterra Co-operative Group in New Zealand eventually were found free of clostridium botulinum bacteria, but Danone acknowledged in an Aug. 30 release that the recalls already undertaken “have had a significant impact on the Baby Nutrition division’s sales in Asia.”
Paris-based Danone sells nutritionals including Dumex infant and young children formula products in Asia and Aptamil and Nutrilon formulas worldwide.
The company entered the pediatric nutritionals space in 2007 with the acquisition of Royal Numico, and in 2012 the baby nutrition division recorded sales of about $5.6 billion, up 11.6% year over year (Also see "Danone Enters Infant Formula Market With Numico Acquisition" - Pink Sheet, 16 Jul, 2007.). China was the firm’s largest contributor to baby nutrition growth in 2012, followed by Indonesia and Australia, according to Danone’s annual report.
Credit Suisse analysts in an Aug. 30 research note said they expect Mead Johnson’s Enfa formula brand products in Asia, as well as Nestle SA’s Wyeth Nutrition business, to benefit directly from the Danone recalls. They project Mead Johnson will realize $32.5 million in additional sales and a 3-cent bump to earnings per share.
In reporting its second-quarter financials, Mead Johnson leaders said they expected the China price decreases to take a bite worth $55 million to $65 million out of annual sales. For the first six months of 2013, the company reported sales of $1.51 billion in the Asia/Latin America segment, up 7% over the year-ago period.
During the Barclays Capital conference, Leemputte spoke highly of Danone and its ability to overcome the formula recalls. “They’ve managed the company well and we would expect that any share impact they might see would be relatively short-lived and that they’d bounce back quickly,” he said.
The Credit Suisse analysts said they foresee a surge in marketing spending by Danone to regain lost market share. But reclaiming that share likely will take 9 to 12 months as the cohort of babies born during the recall age out of the infant formula category.