Can Mead Johnson sustain China growth to offset emerging troubles?
The infant nutrition and vitamin firm announced its financial results for the quarter and nine months ended September 30, 2016.
Gross sales were 2% below the prior year quarter on a reported basis and 1% higher on a constant dollar basis.
Net sales were 4% below the prior year quarter on a reported basis and in-line with the prior year quarter on a constant dollar basis.
However, the company said: “Momentum behind new product launches in China and price increases within each segment offset competitive challenges.”
The company now expects full year net sales of 6% to 7% below the prior year on a reported basis and 2% to 3% below the prior year on a constant dollar basis. It also revised down its 2016 EPS guidance to $2.80 from $2.87.
“Sales may be lower due to market share weaknesses in several markets, notably in the US, as well as continued macroeconomic challenges in several emerging markets,” it said.
In Asia, sales were 3% below the prior year quarter on a reported basis, with negative currency translations, notably in China, hitting the numbers.
Sales were negatively impacted by adverse foreign currency translation, mainly in China. On a constant dollar basis, sales were in-line with the prior year quarter.
In Asia, EBIT decreased 13% on a reported basis and 7% on a constant dollar basis when compared to the prior year quarter.
Nevertheless, the company told investors it had experienced strong sales growth in China, “reflecting positive momentum from our new product offerings and recovery of prior quarter customs clearing delays.”
CEO Kasper Jakobsen said: "We continue to make progress against our global plan. Most critically, we have made substantial progress in China. We are operating in a challenging global environment and it is now clear that our growth will occur more slowly than we had planned. In this environment, we have chosen to revise our full year guidance for both top and bottom line numbers."
China slowdown?
Despite his optimism, some analysts are questioning the long-term growth prospects in China, and if they can paper over the cracks emerging elsewhere
SiG analyst Pablo Zuanic said “We remain sidelined, and worry about one-time benefits in China in 3Q being reversed in 4Q.”
He pointed out that the likes of Nestle and Danone all experienced a China downturn in Q3, and questioned if it was just a matter of time before Mead Johnson experienced the same.
Meanwhile Citigroup’s David Driscoll added: “It appears China contributed +5pp to constant-currency Asia segment sales growth…unfortunately however, once one issue appears to be on the mend, Mead is experiencing challenges in other markets, including the Philippines and the US.”
In Latin America, sales were 13% below the prior year quarter on a reported basis, while In North America/Europe, sales were down 1%.
Jakobsen added: "Given known headwinds over the next year, we anticipate only modest improvements to both our underlying sales and earnings per share in 2017. In this context, continued strong performance against our expense reduction targets will support our investment in longer term growth initiatives and protect our 'best in class' level of profitability.
“In the longer term, underlying fundamentals for our core category are still supportive of our growth ambitions. Hence, we remain committed to making the necessary investments in our future."
