Mead Johnson Nutrition Company MJN, a renowned provider of pediatric nutritional products, reported first-quarter 2015 results with adjusted earnings per share (EPS) of $1.09, ahead of the Zacks Consensus Estimate by a nickel. Adjusted earnings also steered ahead of the prior-year quarter number by 6.9%.
Including the impact of certain one-time items, reported net earnings came in at $207.4 million or $1.02 per share, up 2.5% or 2% year over year, respectively.
Net Sales
Net sales in the reported quarter totaled $1.094 billion, down 1.7% y/y (up 3% at constant exchange rate or CER). The top line also missed the Zacks Consensus Estimate of $1.135 billion. Price positively impacted sales in the reported quarter by 3%, which was outweighed by a 5% unfavorable foreign exchange impact. Overall, volume growth was flat owing to tough prior-year comparisons in the company’s U.S. and China businesses.
Segments in Detail
Currently, the company has three reportable segments – Asia, Latin America and North America/Europe.
Sales in Asia (representing 53.1% of total sales) declined 2% y/y (flat at CER) to $581 million. The company experienced protests about cross-border trade in Hong Kong, which negatively affected the segment’s volume in the quarter.
The segment's growth was also influenced by strong comparison, since in the first quarter of 2014, the company had benefited from competitors' supply disruptions in several Asian markets.
In Latin America (10.7%), sales dropped 3.8% y/y (up 13% at CER) to $204.4 million. Excluding the impact of inflationary price increases in Venezuela and Argentina, sales increased 5% at CER. Reported sales of this segment were adversely affected by foreign currency translation, particularly in Venezuela, where benefits of price increases were outweighed by the impact of currency depreciation.
In North America/Europe (28.2%), sales inched up 0.3% (up 3% at CER) to $309 million. Sales growth at this segment was driven by price increases that took place in 2014. Moreover, gains in infant and children's market share were partially offset by the timing of retailer purchases and a strong prior-year quarter which included WIC contract gains.
Margins
Gross margin during the reported quarter expanded 40 basis points (bps) to 64%. This improvement in the first quarter's gross margin was primarily driven by price increases and lower dairy input costs.
Adjusted operating margin expanded 50 bps y/y to 27.2% on account of a 7.3% decline in advertising and promotion related expenses to $144.4 million, and a 4.4% decline in research and development expenses to $25.9 million. However, selling, general and administrative expenses increased 2.3% to $232.4 million.
Balance Sheet and Cash Flow
Mead Johnson exited the quarter with cash and cash equivalents of $1.434 billion, compared with $1.298 billion as of Dec 31, 2014. Long-term debt was $1.512 billion, compared with $1.504 billion of Dec 31, 2014. As of Mar 31, 2015, the company generated operating cash flow of $274.5 million against the year-ago equivalent of $197.6 million.
Guidance
Mead Johnson has reiterated its adjusted EPS guidance for full-year 2015. The company continues to expect adjusted EPS in the range of $3.90 to $4.00. The current Zacks Consensus Estimate for EPS is pegged at $3.97, which lies within the company's guided range.
Moreover, the company now expects 2% sales growth for 2015, which includes adverse foreign exchange of 5% (lower than the earlier guidance of 3% sales growth for 2015, which included adverse foreign exchange of 4%). The current Zacks Consensus Estimate for 2015 revenues is pegged at $4.549 billion.
Our Take
Mead Johnson posted mixed financial results in the first quarter of 2015, with bottom line exceeding the Zacks Consensus Estimate and the top line missing the same. With reference to the company’s performance across all its segments, the quarter’s result was rather disappointing. The company delivered negative sales growth in two of its three segments, while sales growth in North America/Europe segment was not reasonably up to the mark.
However, management believed that a strong year-over-year comparison of its business in U.S. and China was responsible for this unimpressive sales growth.
Per management, the company’s investment in demand-generation activities continues to be strong. Further, management expects to increase this investment to support strategic initiatives in the coming quarters. Currently, Mead Johnson is creating production capacity and flexibility for its China business to support consumer preference for fully imported products.
We believe Mead Johnson's diverse geographic portfolio that has earlier enabled the company to deliver continued solid revenue growth in a challenging global economic environment, will eventually help it return to a positive growth trajectory.
Zacks Rank
Currently, Mead Johnson has a Zacks Rank #3 (Hold).
Some Better-ranked medical products stocks are LeMaitre Vascular, Inc. LMAT, SurModics, Inc. SRDX and Vascular Solutions Inc. VASC. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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