UPDATE 2-Mead Johnson profit up; shares fall on price-fixing woes
Oct 24 (Reuters) - Mead Johnson Nutrition Co, the maker of Enfamil baby formula, reported a 15 percent increase in quarterly profit on Thursday and raised its full-year earnings forecast, but its shares fell amid continued concerns over a price-fixing probe by the Chinese government.
Mead Johnson said it had launched its own investigation into alleged price-fixing by its Chinese subsidiary as a preemptive compliance measure and also said that it was answering requests from the U.S. Securities and Exchange Commission for information on the matter.
Last August, China fined six companies, including Mead Johnson, a total of $110 million following an investigation into price-fixing and anti-competitive practices by foreign makers of baby formula.
Chief Executive Kasper Jakobsen declined to provide more detail on the cases but said that the company had hired external lawyers to help and had "no findings or conclusions at this time."
Shares of Mead Johnson fell 3.5 percent to $79.46 in morning trading, even as the company's quarterly results beat analysts' sales and earnings estimates.
Strong volume growth in China and Hong Kong accounted for most of the company's rise in profit.
"I think some of it's China. There's an ongoing investigation and a lot of ambiguity around what's actually being investigated," said Morningstar analyst Ken Perkins.
"The company is saying they're being pre-emptive by doing their own investigation but the fact that they made note of it is significant ... and we still don't know what's going on," Perkins added.
Mead Johnson said its third-quarter net income rose to $161.6 million, or 79 cents per share, from $140.3 million, or 69 cents per share, a year earlier.
Earnings in the latest quarter were reduced by 11 cents per share by the fine the company paid in the Chinese probe.
Excluding one-time items, earnings were 91 cents per share, beating analysts' average estimate of 80 cents, according to Thomson Reuters I/B/E/S.
Sales rose 14 percent to $1.05 billion. Foreign exchange pushed sales down 2 percent, while higher prices lifted them 4 percent, the company said. Analysts were expecting $998.8 million.
Kasper Jakobsen said Mead had also benefited from competitor recalls in China, which "positively affected our market share in the quarter."
Competitor Danone SA has had a hard time in China this year. In addition to the price-fixing allegations, it had to recall infant formula products in Asia in August due to a health scare stemming from a New Zealand-based supplier, Fonterra. Fonterra said all the tainted product had been withdrawn and there was little or no risk to consumers.
Foreign infant formula is enormously popular in China, and consumers are still reeling from a 2008 scandal in which six infants died and thousands of others were sickened after drinking milk tainted with the toxic industrial compound melamine. Foreign brands, seen as more safe than Chinese ones, now account for about half of total sales.
The price-fixing probe also contributed to public mistrust, and many companies opted to slash formula prices in order to retain the loyalty of Chinese customers.
Mead Johnson raised its forecast for the rest of the year, saying it now expects earnings of $3.30 to $3.37 per share before one-time items, on sales growth of 9 to 10 percent. It previously forecast $3.22 to $3.30 per share on sales growth of about 8 percent.
The increase comes despite the company's forecasts that dairy costs will rise and formula prices will fall in key markets like China.
"The government has been stiff about multinationals charging too high a price in China," said Perkins of Morningstar.
"Combined with the higher costs of dairy, it's hard to understand how much they can actually (raise prices) and grow."