Mead Johnson Nutrition Reports First Quarter 2017 Results

CHICAGO–(BUSINESS WIRE)–Mead Johnson Nutrition Company (NYSE: MJN) today announced its financial
results for the quarter ended March 31, 2017.

Highlights are as follows:

• Net sales were 8% below the prior year quarter on a reported basis and
  5% below the prior year quarter on a constant dollar basis.⁽¹⁾
• Gross Margin was 62.6% for the first quarter 2017, which was 130 basis
  points below the prior year quarter on a GAAP basis and 150 basis
  points below the prior year quarter on a non-GAAP basis. Benefits from
  lower dairy costs and price increases were more than offset by higher
  costs for new premium products, increased trade investments and
  adverse foreign exchange.
• Advertising and Promotion increased 6% in the first quarter compared
  to the prior year quarter, primarily as a result of investments to
  support product launches and the channel transition in China.
• Selling, general and administrative expenses decreased 3% in the first
  quarter compared to the prior year quarter primarily due to beneficial
  foreign currency translation.
• Earnings before Interest and Income Taxes (EBIT) was 3% higher in the
  first quarter compared to the prior year quarter. Reduced gross profit
  from lower sales and adverse foreign exchange in the first quarter of
  2017 were less than the impact of the prior year Venezuela charges.
  Excluding Specified Items and the impact of foreign exchange, non-GAAP
  EBIT was 22% below the prior year quarter due to lower sales and
  reduced gross margin.
• In the quarter, the company’s effective tax rate (ETR) was 8.1%,
  primarily reflecting the timing of foreign tax credit recognition
  associated with the repatriation of foreign earnings.
• Earnings per Share (EPS) for the first quarter of 2017 was $0.65
  compared to $0.39 in the prior year quarter. Excluding Specified
  Items, non-GAAP EPS on a constant dollar basis for the first quarter
  of 2017 was $0.80, which excludes $0.06 of adverse foreign currency
  impacts, compared to $0.87 in the prior year quarter.

Kasper Jakobsen, Chief Executive Officer, said “Our first quarter of the
year results were much as expected. Comparisons to last year were
impacted by one-time events in both the base year period and the current
period. While we are addressing challenges across the business, we
importantly remain on track in China, where our new products continue to
deliver strong growth for us and the channel transition to an online
model in Hong Kong continues to accelerate.”

⁽¹⁾ Constant dollar figures exclude the impact of changes
in foreign currency exchange rates and are reconciled in the tables in
the body of this earnings release and in the schedules titled
“Reconciliation of non-GAAP to GAAP Results.” Non-GAAP results exclude
Specified Items. For a description of Specified Items and a
reconciliation of non-GAAP to GAAP, see the schedules titled
“Reconciliation of non-GAAP to GAAP Results.”

• In Asia, first quarter sales were 13% below the prior year quarter on
  a reported basis. Sales were negatively impacted by adverse foreign
  exchange, mainly in China. On a constant dollar basis, sales were 10%
  below the prior year quarter driven by volume declines. China was
  impacted by lower cross-border trade, reduced demand for locally
  manufactured products and lower promotional activities related to the
  Chinese new year. Such declines were partially offset by improved
  market share within growing channels, including the successful launch
  of imported premium products and a shift to e-commerce in the Hong
  Kong channel. Market share weakness and retail inventory adjustments
  continued to negatively impact sales volume, particularly in the
  Philippines.
• In Latin America, first quarter sales were 3% below the prior year
  quarter on a reported basis. Sales were negatively impacted by adverse
  foreign exchange, primarily in Mexico. On a constant dollar basis, net
  sales were 6% above the prior year quarter. Price increases across the
  segment, most noticeably in Mexico, more than offset the impact of
  market share losses following competitive pricing in Colombia.
• In North America/Europe, first quarter sales were 3% below the prior
  year quarter on a reported basis and 2% on a constant dollar basis.
  Sales in the U.S. were below the prior year quarter due to current
  year market share weakness and the beneficial timing of 2016 retail
  shipments. In the U.S., price increases taken in the second quarter of
  2016 benefited the first quarter 2017 comparison. In Canada, sales of
  infant products increased compared to the prior year quarter.

• First quarter EBIT was 3% above the prior year quarter on a reported
  basis. Excluding Specified Items, non-GAAP EBIT on a constant dollar
  basis was 22% below the prior year quarter primarily due to reduced
  gross profit from lower sales. EBIT was also adversely impacted by a
  lower gross margin percentage compared to the prior year quarter as
  higher costs for new premium products, increased trade investments and
  adverse foreign exchange were only partially offset by benefits from
  lower dairy costs and price increases. EBIT in the quarter was also
  negatively impacted by increased advertising and promotion spending,
  primarily in Asia. Fuel for Growth resulted in approximately $4
  million of lower operating expenses in 2017 compared to the prior year
  quarter.
• In Asia, first quarter EBIT decreased 31% on a reported basis and 27%
  on a constant dollar basis when compared to the prior year quarter.
  The decrease in EBIT was primarily due to lower sales and the
  Company’s strategic investments to reshape the product portfolio and
  channel mix in China and the adverse dynamics in the Philippines
  referenced above.
• In Latin America, first quarter EBIT decreased 2% on a reported basis
  but increased 13% on a constant dollar basis when compared to the
  prior year quarter. The improvement on a constant dollar basis was
  driven by increased sales while the adverse impact of foreign exchange
  was predominantly due to the depreciation of the Mexican Peso.
• In North America/Europe, first quarter EBIT decreased 16% on a
  reported basis and 15% on a constant dollar basis. The decrease in
  EBIT was primarily due to reduced gross profit from lower sales and
  higher advertising and promotion investments in support of the Enfa
  product line in the U.S. compared to the prior year quarter.
• Corporate and Other expenses for the first quarter were 50% lower than
  the prior year quarter on a reported basis. The prior year quarter
  included $78.2 million of charges associated with the devaluation and
  impairment of assets in Venezuela. Excluding the impact of Specified
  Items, Corporate and Other expenses were in line with the prior year
  quarter.

Cash Flow Items and Liquidity

• Cash and cash equivalents were $1,724.4 million at March 31, 2017
  compared to $1,795.4 million at December 31, 2016. The company’s net
  debt was $1,253.4 million at March 31, 2017, consisting of debt of
  $2,977.8 million less cash and cash equivalents.
• Cash generated from operating activities was $196.4 million for 2017
  compared to $160.1 million in the prior year period. Cash flows for
  the quarter ended March 31, 2017 benefited from lower receivables of
  approximately $23 million, primarily in China.
• Cash used in investing activities included capital expenditures of
  $48.5 million for the first quarter of 2017 primarily related to
  production facilities in North America, Latin America and Europe.
• Cash used in financing activities was $74.6 million for 2017 compared
  to $77.0 million in the prior year. Dividend payments were lower in
  2017 due to the retirement of shares repurchased during 2016.
  Long-term debt was approximately $3.0 billion as of March 31, 2017 and
  December 31, 2016.
• The Company had restricted cash of $152.5 million as of March 31, 2017
  in anticipation of finalizing an acquisition of assets from Bega
  Cheese Limited.
• Interest expense, net, for the three months ended March 31, 2017 was
  $27.1 million, an increase from $26.2 million in prior year period due
  to an increase in the floating interest rate on our fixed-to-floating
  swaps for the 2019 and 2020 notes.

Outlook

In view of the proposed merger agreement with Reckitt Benckiser Group
plc (RB) announced on February 10, 2017, we will not be hosting an
investor conference call to discuss this quarter’s or subsequent
financial results. In addition, given the proposed merger, we believe
the previously-issued guidance for Mead Johnson as a standalone entity
is no longer applicable. The transaction, which is subject to customary
closing conditions including regulatory approvals in several
jurisdictions and approval by both Mead Johnson’s and RB’s shareholders,
is expected to close in the third quarter of 2017.

Kasper Jakobsen continued, “We expect significant benefits from the
proposed merger with Reckitt Benckiser, including benefits from scale,
potential geographic expansion, and increased resilience within a
diversified group to help strengthen our business. Hence, our 2017
annual earnings guidance is no longer applicable and will not be
updated.”

About Mead Johnson

Mead Johnson, a global leader in pediatric nutrition (“Mead Johnson” or
the “Company”), develops, manufactures, markets and distributes more
than 70 products in over 50 markets worldwide. The Company’s mission is
to nourish the world’s children for the best start in life. The Mead
Johnson name has been associated with science-based pediatric nutrition
products for over 100 years. The Company’s “Enfa” family of brands,
including Enfamil^® infant formula, is the world’s leading
brand franchise in pediatric nutrition. For more information, go to www.meadjohnson.com.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this release are forward-looking as defined in the
Private Securities Litigation Reform Act of 1995. You can identify these
forward-looking statements by the fact they use words such as “should,”
“expect,” “anticipate,” “estimate,” “target,” “may,” “project,”
“guidance,” “intend,” “plan,” “believe” and other words and terms of
similar meaning and expression. Such statements are likely to relate to,
among other things, a discussion of goals, plans and projections
regarding financial position, results of operations, cash flows, market
position, product development, product approvals, sales efforts,
expenses, capital expenditures, performance or results of current and
anticipated products and the outcome of contingencies such as legal
proceedings and financial results. Forward-looking statements can also
be identified by the fact that they do not relate strictly to historical
or current facts. Such forward-looking statements are based on current
expectations that involve inherent risks, uncertainties and assumptions
that may cause actual results to differ materially from expectations as
of the date of this release. These risks include, but are not limited
to: (1) the ability to sustain brand strength, particularly the Enfa
family of brands; (2) the effect on the Company’s reputation of real or
perceived quality issues; (3) the effect of regulatory restrictions
related to the Company’s products; (4) the adverse effect of commodity
costs; (5) increased competition from branded, private label, store and
economy-branded products; (6) the effect of an economic downturn on
consumers’ purchasing behavior and customers’ ability to pay for
product; (7) inventory reductions by customers; (8) the adverse effect
of changes in foreign currency exchange rates; (9) the effect of changes
in economic, political and social conditions in the markets where the
Company operates; (10) changing consumer preferences; (11) the
possibility of changes in the Women, Infants and Children (WIC) program,
or participation in WIC; (12) legislative, regulatory or judicial action
that may adversely affect the Company’s ability to advertise its
products, maintain product margins, or negatively impact the Company’s
reputation or result in fines or penalties that decrease earnings; and
(13) the ability to develop and market new, innovative products.

In addition, this release contains certain statements with respect to a
transaction involving the Company and Reckitt Benckiser Group plc that
are also forward-looking as defined in the Private Securities Litigation
Reform Act of 1995. Certain risks and uncertainties related to the
transaction include, but are not limited to: the possibility that the
transaction will not be consummated or delays in consummating the
transaction; adverse transaction on the market price of the Company’s
common stock and on the Company’s operating results because of a failure
to complete the transaction; negative effects relating to the
announcement of the transaction or any further announcements relating to
the transaction or the entrance into or consummation of the transaction
on the market price of the Company’s stock; unanticipated difficulties
or expenditures relating to the transaction; legal proceedings
instituted against the Company and others in connection with the
transaction; disruptions of current plans and operations caused by the
announcement and pendency of the transaction; potential difficulties in
employee retention as a result of the announcement and pendency of the
transaction; and the response of customers, distributors, suppliers and
competitors to the announcement of the transaction.

For additional information regarding these and other factors, see the
Company’s filings with the United States Securities and Exchange
Commission (the “SEC”), including its most recent Annual Report on Form
10-K, which filings are available upon request from the SEC or at www.meadjohnson.com.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made. The
Company undertakes no obligation to publicly update any forward looking
statement, whether as a result of new information, future events or
otherwise.

Additional Information and Where to Find It

This communication may be deemed to be solicitation material in respect
of the transaction. In connection with the transaction, Mead Johnson
will file a proxy statement and other materials with the SEC. INVESTORS
AND SECURITY HOLDERS ARE ADVISED TO READ THE PROXY STATEMENT AND OTHER
RELEVANT MATERIALS WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT MEAD JOHNSON AND THE TRANSACTION.

Mead Johnson’s investors and security holders will be able to obtain a
free copy of these documents filed with the SEC at the SEC’s website at http://www.sec.gov.
In addition, investors will be able to obtain, without charge, a copy of
the proxy statement and other relevant documents (when available) at
Mead Johnson’s website at www.meadjohnson.com
or by contacting Mead Johnson:

Investors: Kathy MacDonald, 312-466-8900, kathy.macdonald@mjn.com;
or

Media: Christopher Perille, 312-466-5814, chris.perille@mjn.com

Participants in the Solicitation

Mead Johnson and its officers and directors may be deemed to be
participants in the solicitation of proxies from Mead Johnson
stockholders with respect to the transaction. Information about Mead
Johnson officers and directors and their ownership of Mead Johnson
common shares is set forth in Amendment No. 1 to the Company’s Annual
Report on Form 10-K, which was filed with the SEC on March 13, 2017, and
in other documents filed with the SEC by Mead Johnson and its officers
and directors. Investors and security holders may obtain more detailed
information regarding the direct and indirect interests of the
participants in the solicitation of proxies in connection with the
transaction by reading the preliminary and definitive proxy statements
regarding the transaction, which have been or will be filed by Mead
Johnson with the SEC.

^(a) The numerator for basic and diluted earnings
per share is net earnings attributable to shareholders. Net earnings has
been reduced by dividends and undistributed earnings attributable to
unvested share based incentive plan awards. The denominator for basic
earnings per share is the weighted-average shares outstanding during the
period. The denominator for diluted earnings per share is the
weighted-average shares outstanding adjusted for the effect of dilutive
stock options and performance share awards.

Mead Johnson Nutrition Company
Financial Information
(UNAUDITED)
Reconciliation of Non-GAAP to GAAP Results

This news release contains non-GAAP financial measures, each of which is
listed in the tables below. The items included in GAAP measures, but
excluded for the purpose of determining the non-GAAP financial measures,
include significant income/expenses not indicative of underlying
operating results, including the related tax effect and, at times, the
impact of foreign exchange. The non-GAAP measures represent an
indication of the company’s underlying operating results and are
intended to enhance an investor’s overall understanding of the company’s
financial performance and ability to compare the company’s performance
to that of its peer companies. In addition, this information is among
the primary indicators the company uses as a basis for evaluating
company performance, setting incentive compensation targets and planning
and forecasting of future periods. This information is not intended to
be considered in isolation or as a substitute for financial measures
prepared in accordance with GAAP. Tables that reconcile non-GAAP to GAAP
disclosure follow below.

Constant Dollar

Certain measures in this release are presented excluding the impact of
foreign currency exchange (constant dollar). To present this
information, current period results for entities reporting in currencies
other than United States dollars are translated into United States
dollars at the average exchange rates in effect during the corresponding
period of the prior fiscal year, rather than the actual average exchange
rates in effect during the current fiscal year. The company believes
that these constant dollar measures provide useful information to
investors because they provide transparency to underlying performance by
excluding the effect that foreign currency exchange rate fluctuations
have on period-to-period comparability given volatility in foreign
currency exchange markets.

Contacts

Mead Johnson Nutrition Company
Investors:
Kathy
MacDonald, 312-466-8900
kathy.macdonald@mjn.com
or
Media:
Christopher
Perille, 312-466-5814
chris.perille@mjn.com

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