Mead Johnson Nutrition Co MJN
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Good day, ladies and gentlemen and welcome to the Mead Johnson Nutrition First Quarter 2013 Earnings Conference Call. My name is Francis, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference call over to Kathy MacDonald, Vice President, Investor Relations. Please proceed, Kathy.

Kathy MacDonald - VP - IR: Thank you, Francis and good morning. Welcome to Mead Johnson's first quarter conference call. With me today are Steve Golsby, our Chief Executive Officer; Kasper Jakobsen, our Chief Operating Officer and designated CEO elect; and Pet Leemputte, our Chief Financial Officer. As we start, let me remind everyone that our comments will include forward-looking statements about our future results, including statements about our financial prospects and projections, new product launches, and market conditions that constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Keep in mind that our actual results may differ materially from expectations as of today due to various factors including those listed in our Annual Report on Form 10-K, quarterly report on Form 10-Q, and current reports on Form 8-K, in each case as filed with or furnished to the Securities and Exchange Commission and our earnings release issued this morning, all of which are available upon request or on our website at meadjohnson.com.

In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some time in the future, we specifically disclaim any obligation to do so even if our estimates change. Given that you are in the midst of the earnings reporting season, we will be respectful of your time and limit this call including Q&A to 45 minutes.

I will now turn the call over to Steve.

Stephen W. Golsby - President and CEO: Thank you, Kathy and good morning, everyone. As you likely read in our press release, Mead Johnson delivered sales growth of 5% on a constant dollar basis in the first quarter. Sales growth was 6% from our core operation, which excludes the impact of several low margin non-core businesses that we exited late last year. We are very pleased with these results as we had expected a lower rate of sales growth due to the tough comparison to China's record results in the first quarter last year.

While China performed as expected with continued sequential share gains, that Kasper will discuss in a minute, the higher than anticipated sales are attributed to Hong Kong. Sales in Hong Kong were particularly strong, prior to the March introduction of new regulations that limited exports to China. The Asia/Latin America segment delivered growth of 7%, with 5% from organic growth and 2% from our 2012 Argentine acquisition. The North America/Europe segment had another quarter of positive sales growth, excluding the impact of the non-core businesses that we exited in 2012, sales growth for the segment is 5%.

Overall, sales for the first quarter set a new company record and reflect a very solid start to the year. First quarter non-GAAP earnings of $0.85 per share were up from $0.82 in 2012. Higher sales and a lower effective tax rate helped to fund higher demand-generation investments and a pension settlement expense.

We are reaffirming our full year 2013 sales and earnings per share guidance. Annual constant dollar sales from core operations are expected to grow in the range of 7% to 8%, and non-GAAP EPS is still expected to be in the range of $3.22 to $3.30.

I will now turn the call over to Kasper, who will provide more details on the business. After Pete reviews the financials, I will return to close our prepared remarks.

Peter Kasper Jakobsen - EVP and COO: Thank you Steve, and good morning. In order to better explain the underlying operating performance of the business, I will focus on constant dollar sales growth from our ongoing core business.

As I discuss first quarter 2013 performance, I'll remind you that for comparison purposes, we are excluding from the base year quarter non-recurring sales of approximately $10 million from businesses we exited at the end of last year. This revenue relates to third-party manufacturing of the private label products in the U.S. and a smaller, nonviable routine infant formula business in Western Europe, where we are now focusing on winning the allergy segment.

Following my comments, Pete will bridge the core sales numbers to the sales growth rates reported in our earnings release this morning. Our core sales growth of 6% can be attributed to higher pricing, the majority of which was a carryover effect from prior year increases, as we discussed in our last call, for the full year, we expect a more balanced contribution from price and volume. In the coming quarters, we therefore expect to report improved volume growth as our comparisons to 2012 become easier.

Turning now to our reporting segments, in the quarter just completed, the North America/Europe segment excluding the impact of discontinued non-core business from base year 2012 grew 5% due to share gains in higher value segments and despite overall volumes being flat.

Gains in U.S. non-WIC market share helped offset further declines in consumption. Innovation in high-potential product segments helped drive growth, and with solid growth across the portfolio the contributions from Enfagrow, our product for toddlers and from the launch of new liquid offerings are particularly noteworthy.

Overall, we expect continued share gains in high value segments combined with pricing benefits to offset declines in infant formula consumption. Continued momentum behind successful innovations introduced in the second half of 2012 has also allowed us to strengthen market share in Canada and that very significantly over the last six months.

EBIT margin in the North America/Europe segment as Pete will explain later, improved significantly over the first quarter of 2012. I will ask add that while Europe constitutes a smaller portion of the reporting segment, we are happy to report that we are already seeing an improvement in profitability there as a result of last year's restructuring.

While core sales growth stood at 5% for the first quarter, on a full year basis, we now expect the sales for the North America/Europe segment will be up by about 1%, slightly better than our previous expectations. As you assessed the balance of the year, please bear in mind that the second quarter of 2012 sales were up 11% versus the first quarter of 2012. This means that the year-over-year comparisons will be a little sharper in the coming quarters.

Turning now to Asia and to the Latin American segment, as Steve mentioned, this segment delivered constant dollar sales growth of 7%, 5% from organic growth and 2% from the Argentine acquisition we completed in March of 2012. Pricing contributed 6% and volume 1% to segment growth. The tough China comparables from the first quarter of 2012 had a significant impact on reported volume growth and I remind you that quarter one was our strongest quarter in China last year, driven by higher market shares and some unintended increase in distributor inventory levels.

Within the just completed quarter, China performed as expected and we posted our third consecutive quarter of share improvement since our low in the second quarter of 2012. We are encouraged by this continued progress, and we remain confident in the outlook for China for the balance of 2013. You'll recall that we saw a drop in market share during the second quarter of 2012 that led to a significant increase in distributor inventories. As a result, comparables for China will remain soft in the coming quarter, but since distributor inventories were brought back to normal levels in the second half of 2012 our comparisons in the second half of 2013 will be easier.

Turning now to Hong Kong; in February we highlighted increased uncertainty created by new Hong Kong export regulation. We hold a leading share position in Hong Kong and hence we are paying close attention to the developments there. The likelihood of government action to limit exports was widely discussed in local media ahead of the March 1 implementation date. Consequently, sales in Hong Kong were particularly strong in January and February, ahead of the new regulations going into effect.

In the four to six weeks since the new rules took hold, we have seen a meaningful drop in sales in the territory. As we are still in the early phase post implementation, it's difficult to assess to what degree this reduced level of retail demand will persist through the balance of the year. But we do expect Hong Kong sales in the coming quarters to be below those reported in the first quarter. You can understand our desire to avoid discussing future plans in detail on these calls, so I want to resist the temptation to do so. I can however say that we are working on multiple fronts to ensure we can continue to meet the China consumers' desire for trusted products. As a result, while we remain cautious on the Hong Kong outlook for the full year, I do want to highlight the importance of putting this challenge in the context of strong performance in other parts of our global portfolio, including Mainland China.

I'd now like to spend a few minutes on our businesses in South Asia and Latin America. Collectively, these businesses, which account for approximately 40% of global revenue, once again delivered double-digit sales growth this quarter. Growth was broad-based with a majority of markets seeing increased market share in the quarter. Revenue in Mexico, our third-largest global market grew by double digits, its strongest performance for some time and in South Asia we improved market share in Thailand and Vietnam. Therefore, while we remain cautious about the situation in Hong Kong, we expect strength in other markets to support our expectations for full-year double-digit revenue growth in the Asia/Latin American segment.

Within the quarter we increased investment in demand generation substantially over the first quarter of 2012. This is the main driver of our reported drop in the Asia/Latin America segment EBIT margin.

To wrap up and commenting now on our global business I am pleased with the start we made to the year. As mentioned by Steve, we continue to expect core sales growth to be in the range of 7% to 8% for the year with higher growth rates to be reported in the second half of 2013 when comparisons become easier. We continue to expect full-year non-GAAP EPS in between $3.22 and $3.30.

Now, before I turn the call over to Pete, I'd like on behalf of all of the management of Mead Johnson to express my personal gratitude to Steve for his leadership and guidance over the years. Steve, you are leaving a growing business with a strong team and its best year is yet to come. We are thankful for what you've helped us accomplish and we look forward to your continued involvement as a board member.

I'd now turn the call over to Pete who will provide further financial highlights. Pete?

Peter G. Leemputte - EVP and CFO: Thank you, Kasper and good morning, everyone. I'll start with some brief comments on the impact of non-core businesses on sales growth, and then move on to discuss foreign exchange, profitability and liquidity. In the first quarter, we reported constant dollar sales growth of 6% for our core operation. The impact from the non-core businesses exited late last year reduced our growth rate by 1%. So, total sales in the first quarter grew by 5%. The full year non-core impact is also expected to reduce sales growth by 1%. Therefore, reported constant dollar sales are expected to grow by 6% to 7% in 2013.

Turning to foreign exchange, in our last call, I noted that our greatest currency exposure was in Venezuela and Argentina and that we expected foreign exchange would reduce sales growth by about 0.5 point in 2013. The Venezuelan Government devalued the bolivar by about 30% in February, and we also saw the Argentine peso weaken at a rate of about 5% in the first quarter, a trend we expect to continue through the remainder of the year.

The impact of these two currencies was included in our prior earnings guidance. Please note, however, that a more significant devaluation of the Argentine peso and a further devaluation in Venezuela remain a distinct possibility and presents some downside risk to our numbers for the year.

At this point, we expect foreign exchange to have no impact on our full year sales in 2013. The change relative to our prior guidance is attributed to a weakening of the dollar against a few key Asian currencies, most notably the Thai baht and the Chinese renminbi.

In the first quarter, we delivered a gross margin of 62.3%, 20 basis points better than the same quarter last year and in line with our expectation. Equally important, our first quarter gross margin was up 120 basis points from the fourth quarter of 2012.

Let me offer some comments on dairy, which accounts for about 30% of our product costs. Dairy prices included in our first quarter cost of goods sold as expected fell to the lowest level seen in the last year and a half. In the next two quarters, we will see modest dairy increases in our cost of goods sold. Given the seven month lag between what happens in the spot market and our COG, all these movements really reflect spot price trends seen in the second half of last year or in the first month of 2013.

More recently, the Oceania spot price trends have been unfavorable, reflecting a drought in New Zealand, and whole and skim milk spot prices were up by as much as 30% during the month of March. In Europe, prices have started to rise, but at a much slower pace, reflecting unseasonably cold weather. U.S. milk prices have not yet increased, but that remains a possibility looking forward. We expect the recent increase in dairy costs to be reflected in our cost of goods sold during the fourth quarter. A greater impact is likely in 2014, although expected higher pricing should help mitigate the impact.

Annual cost inflation should now be in the mid-single digits, but thanks to a strong productivity pipeline, we still anticipate our average full year gross margin to approach 62.5%, solid progress from 61.9% in 2012. Kasper mentioned the higher level of demand generation investments in the first quarter of 2013, an example of that was seen with the Company's advertising and promotion spend at 13.9% of sales in the first quarter, noticeably higher than the same quarter a year ago. During the remaining of the year we expect the pace of our investment spending for advertising and promotion to pick up relative to the first quarter and A&P on a full year basis should exceed the 14.2% of sales in 2012.

On a full year basis, we currently expect total operating expenses to exceed 39% of sales, up from 38.2% in the first quarter and from 38.7% in 2012. In addition to more significant demand generation investment we have an impact albeit at much smaller from two other factors. First, the devaluation of the Venezuelan bolivar generated foreign exchange balance sheet re-measurement losses of about $0.01 per share. This occurred in the first quarter and had been anticipated in our previous guidance.

Second, pension settlement expense had a $0.02 unfavorable impact in the first quarter. This expense is triggered under accounting rules for our frozen defined benefit pension plan, when lump sum payments exceed annual pension expense, thereby forcing the immediate amortization of any deferred expenses for those retirees.

Last year, the expense was triggered in the second quarter. We expect that full year pension settlement expense will be up versus earlier expectation by about $0.01. On a full year basis, we expect EBIT margins to be relatively flat to 2012 with higher gross margins being reinvested back into the business.

Turning to taxes, our non-GAAP effective tax rate or ETR, for the first quarter was 25.6%, nearly a 200 basis point reduction from the 27.5% seen in the first quarter of 2012. The decision the hold more of our international earnings outside the U.S. is the main driver. We should be able to make further progress from reducing our global tax rate and expect the full year ETR to be around 25% for 2013.

Before moving to our balance sheet and liquidity, I wanted to note that our expectation for full year non-GAAP EPS in the range of $3.22 to $3.30 per share would imply on average, that we would see quarterly EPS in the range of $0.79 to $0.82 per share for the next three quarters. That's obviously down from $0.85 seen in the first quarter. This is largely due to a ramp up in demand generation investment during the remainder of the year.

Capital spending consumed $78 million in cash during the first quarter. Half of which was the result of high payables at year-end 2012. Capital spending expectations remain unchanged at $260 million for the year, with the Singapore spray dryer driving a considerable portion of our full year investment. Depreciation and amortization expense is expected to be around $80 million.

During the first quarter, we reduced total debt by $67 million, with repayments on our revolver as well as the small portion of the debt incurred for the acquisition in Argentina. We now expect interest expense to run at about $55 million for the year or savings of about $0.01 per share versus our earlier expectation.

Cash balances dropped by $25 million from last December, largely as a result of our debt repayment. Net debt now stands at $626 million, down from $658 million at year-end 2012.

During the first quarter, our Board of Directors announced a 13% increase in our quarterly cash dividend from $0.30 to $0.34 per share. We also purchased 300,000 shares of our stock, returning an additional $23 million in cash to shareholders.

With that, I will now turn the call back to Steve.

Stephen W. Golsby - President and CEO: Thank you, Pete. So in summary, we delivered a very solid performance in the first quarter and remain positive about our outlook for the full year. As you're aware, I shall retire as CEO of Mead Johnson at our annual meeting of stockholders next week. I look back on the nine years during which I've been privileged to lead this great Company with pride. The business has been truly transformed, and since our 2009 IPO, we've been able to create significant value for our shareholders, more than tripling our market cap.

While our performance in recent years has been strong, I'm confident that under Kasper's leadership and with the support of an outstanding Board, leadership team and global workforce, the future for Mead Johnson is even brighter. The fundamental drivers of our business, our strategic focus and our superior business model, give me great confidence and I'm delighted to have been nominated to continue to serve as a Director of the Board and retain a connection to the Company.

Finally, I'd like to thank our shareholders and the analyst community for their personal support and, more importantly, their support of Mead Johnson over the last four years. I wish you all continued success.

Now, we'll be pleased to take your questions. Operator, please open the line.

Transcript Call Date 04/25/2013

Operator: Ken Goldman, JPMorgan.

Ken Goldman - JPMorgan: I just wanted to make sure I understood the guidance for the second quarter, my head spinning a little bit with the earnings this morning. Were you talking about maybe perhaps the second quarter Street numbers are little bit higher than what you would looking for right now?

Peter G. Leemputte - EVP and CFO: I think what Kasper spoke on, first of all, was the fact that the comparisons are going to remain tough in the second quarter. If you look at for North America/Europe segment through the last three quarters of the year sales are actually up 8% versus the level we saw in Q1. So that makes that comparison a bit tougher. Then for the Asia-LatAm segment, remember we still have a tough comparison in China until it turns around in the second half.

Operator: Matthew Grainger, Morgan Stanley.

Matthew Grainger - Morgan Stanley: Question on China. We've heard from some of your competitors that the rate of underlying consumption at least as far as they're observing it may have accelerated by a few hundred basis points over the course of the past quarter or two. Do you see any similar evidence of higher underlying demand in Mainland China or I guess alternatively, do you think there has been any measurable pantry stocking by Chinese consumers that may have occurred as Hong Kong sales spiked in the early part of the year?

Peter Kasper Jakobsen - EVP and COO: We are not seeing any noticeable change in consumption in the China market, and I think given the characteristics of the category, you wouldn't really expect to see why fluctuations in consumption on a quarterly or monthly basis. At the end of the day, it is quite a stable category that is sort of driven by the number of babies born into certain segments of the population. So, we haven't seen any dramatic change. We still think the market remains very attractive, it's growing, but we wouldn't profess a view that that growth has accelerated in recent months or quarters.

Matthew Grainger - Morgan Stanley: Just with respect to the risk of inventory perhaps having built up at the consumer level over the course of the past two or three months?

Peter Kasper Jakobsen - EVP and COO: We don't see any evidence of that. We spoke a little bit to the dynamic, obviously, ahead of the announcement of the Hong Kong export restriction. I think there was sort of relatively unique situation that affected positively probably the first couple of months of this year, but in the greater scheme of things and given the size of the market in China, we don't believe that that should be something that shouldn't be easily absolved.

Operator: Tim Ramey, D.A. Davidson.

Timothy Ramey - D.A. Davidson & Co.: Pete, what was the actual share count for the quarter and what would be kind of contained in your guidance. Should we assume share repurchases basically offsetting options issuance?

Peter Kasper Jakobsen - EVP and COO: On a fully diluted basis, we had 204.3 million shares in the first quarter and while we did buy back some shares during the quarter that's not going to have that big of an impact on the rate if you move forward. So, something around that level I think is a good assumption.

Timothy Ramey - D.A. Davidson & Co.: Then just one other question on the pension discontinuity so just to restate what I think I heard you said, there was a $0.02 negative impact in the 1Q, but in the 2Q will have a slightly favorable year-over-year impact, but the full year will be negative by a $0.01. Did I get all that right?

Peter G. Leemputte - EVP and CFO: Yes, there was no pension settlement expense in the first quarter of last year. We had $0.02 this quarter so it drove that first quarter performance. And I think the $0.01 that we talked about for the full year really reflects that it's going to be higher versus our earlier expectation and these numbers can bounce around a little depending on when people take -- when people actually retire quarter-to-quarter, but it's really last year's number plus an additional $0.01.

Operator: David Driscoll, Citi Research.

David Driscoll - Citi Research: Steve, I'd just like to say thank you for all that you've done. You've been a pleasure to work with. Terrific performance at the Company and really, good luck on your next ventures or just retirement. I'm not sure exactly where you're going, but, well, you've earned it. I wanted to ask a little bit about Hong Kong and maybe the first kind of big picture question is just, given your comments that Hong Kong sales are being impacted and then, Pete, your comments that dairy costs are rising, particularly in the fourth quarter, it's not immediately clear to me why the guidance isn't moving or if you're not giving a signal to the lower end of the range or exactly what the offsets are. So, maybe you guys could just start there and give us some understanding as to what those variables mean to the guidance?

Peter Kasper Jakobsen - EVP and COO: David, I think maybe I'll comment first, and then I'll let Pete try and reconcile for you if I don't get it quite right. I think what we're certainly still operating in the very early phase post implementation, as I mentioned in the prepared remarks, and yes, we are seeing an impact from sales, but we must put this in the context of the fact that we've got a global business, and we're seeing strengths in other part of our business that we believe, unless there's a change in the outlook in Hong Kong, will offset the weakness we've seen over the last four to six weeks there. So, I guess that is implied in the fact that we are not changing guidance. We're sticking to the guidance. Within that, there's always going to be swings and roundabouts, but we feel pretty good about where the guidance is. Pete, do you want to add anything?

Peter G. Leemputte - EVP and CFO: I think that's an excellent summary of it, and the high end of our range assumes that we are able to offset that impact completely, the lower end of our range, in terms of sales growth would assume a bigger impact from Hong Kong, and would also point out, as Kasper mentioned, that the North America/Europe segment, and granted, we had been saying last time that core sales there should be flat year-over-year as higher non-WIC market share offset the impact of lower consumption. We're now seeing it's up 1%. That doesn't have a big impact on the overall growth rate of the Company, but it's still a good trend.

David Driscoll - Citi Research: If I could ask one final question on North America. Our Nielsen data is showing quite dramatic market share gains for Nestle under their Gerber brand, share declines for both Mead and Abbott. You reported I think that numbers in the quarter are up, and I'm just trying to understand I know there was the very weak compares -- or the year ago numbers were very weak because of the fourth quarter issue in '11, but notwithstanding that type of issue, can you just talk about the market share environment in the United States and what's driving the substantial share gains for Nestle and how concerned are you?

Peter G. Leemputte - EVP and CFO: Yeah. I think it's very hard for you guys to read much into the Nielsen numbers because they don't distinguish between what constitutes a sale on the WIC and what constitutes a non-WIC sale. So, in our prepared remarks, we spoke to you specifically to the non-WIC market share, which is a better indication I guess of our share of the profit pool. So, we feel pretty good about that. We feel good about the progress we've made both over a year ago and -- but you correctly pointed out that we had a relatively easy comparable, but we also feel good about the sequential process -- progress that we're making in the U.S. business and for that matter in Canada.

Peter Kasper Jakobsen - EVP and COO: Just add a point on the WIC contract, Nestle's gain is all we believe coming from WIC. They picked up the (indiscernible) contract from us last year or late last year and that's what's driving their increase when we talk because the WIC contracts aren't profitable as we've mentioned. We're really focused on the non-WIC share for driving the business.

Operator: John Baumgartner, Wells Fargo Securities.

John Baumgartner - Wells Fargo Securities: Kasper, is there a way to quantify the impact of the Hong Kong buy-in in the first quarter numbers?

Peter Kasper Jakobsen - EVP and COO: No, I don't think we want to go into quantifying it. There's just too much uncertainty about what the longer-term trend there would be. It would mean that we would have to try and net off January, February against either a relatively short period in March or we'd have to net it off against what we think is going to happen in the future. So I think we want to probably stick with the comment that there's an increased demand of uncertainty around it, we'll continue to be very candid with you about it as we learn more and as we see things change and develop there. Certainly, our view is that at the moment, it's manageable within our global guidance. And as I said again, we have pluses and minuses throughout our portfolio.

Operator: Robert Moskow, Credit Suisse.

Robert Moskow - Credit Suisse: The way I had interpreted what Nestle and Danone were saying was that consumers in Mainland China were concerned that they weren't going to be able to get their hands on premium-priced product now that the border with Hong Kong closed. Then you saw headlines of the shelves being empty in the U.K. So you haven't seen any kind of unusual activity in other Asian markets of yours or even European markets, in terms of that kind of growth accelerating with mainlanders trying to find your product in other markets since they can't get it from Hong Kong?

Peter Kasper Jakobsen - EVP and COO: The short answer is, no. We don't have a large business in the routine infant formula area in Europe, as you know. In fact, we have no business in that area in Western Europe, and we have smaller emerging businesses in Poland and Russia only. It's our understanding that most of these Internet-based sales are coming from either Australia, New Zealand or Western Europe. We feel very, very good about our China performance in this quarter and we feel that that is very, very sustainable. We're making sort of sequential progress, as we promised, since our hiccup in the middle of last year. We don't think there are any abnormal factors that have impacted performance in Mainland China over this quarter we just completed. So we're not seeing those dynamics that I've heard other competitors describe.

Robert Moskow - Credit Suisse: It is just tough comp in Mainland China?

Peter Kasper Jakobsen - EVP and COO: That's right.

Operator: Amit Sharma, BMO Capital Markets.

Amit Sharma - BMO Capital Markets: Kasper, I just wanted to look at Asia-LatAm margin structure over longer term, clearly, very strong operating margins. But if you look at last three, four years margins peaked in 2009, and went flat to lower since then. And now, as we look forward, you are talking about greater contribution from the rest of your markets in Asia, Southeast, South Asia and Latin America, where margins structure may not be as strong as it is in Hong Kong, China. Structurally should we expect margins to sort of level out at this level that we saw in 2012 or first Q or should we expect some sort of a modest improvement from here?

Peter Kasper Jakobsen - EVP and COO: Amit, I think I'll ask -- even though you directed the question to me, I think I'll ask Pete to answer that.

Amit Sharma - BMO Capital Markets: Sure.

Peter G. Leemputte - EVP and CFO: I think that any margin trend we're seeing in Asia/Latin America this year, let me just talk very near term, is going to be driven by the level of investment spending that we have, not by gross margins or anything else. And I think we would say, looking forward, the pricing that we see in markets like China is relatively high measured in dollar terms. A lot of that's driven by exchange rates. But we wouldn't be extrapolating from that, that you should expect margins -- that margin to go necessarily higher. We intend to be making heavier investments over time in those emerging markets, and that will probably keep a check on it.

Amit Sharma - BMO Capital Markets: And Pete, mix will not have an impact on margins, that's my understanding from your answer.

Peter G. Leemputte - EVP and CFO: For the Company?

Amit Sharma - BMO Capital Markets: For this division.

Peter G. Leemputte - EVP and CFO: It can quarter-to-quarter but over the course of this year, I think we're going to have some good comparisons coming in, in the second half. The China mix for this year is going to be pretty healthy.

Operator: Diane Geissler, CLSA.

Diane Geissler - CLSA: I wanted to ask on your demand generating expenses and what is all entailed in that, are you seeing anything in terms of pricing, promotional activity in that area around Hong Kong that's causing you concern or most of the demand generation that you see right now really in the form of advertising or some other kind of promotional activity. Then, just on that area that's contiguous to Hong Kong what are your market shares like in that area. It's obviously a well-developed area from the formula perspective; I'm just trying to get a feeling for how you compete against the other big multinationals and some of the larger Chinese producers there in that region.

Peter G. Leemputte - EVP and CFO: First, with regard to demand-generation investments, when we talk about that we're talking about advertising and promotion. Promotion does not mean discounting. It's really the investment side of it. Anything along those lines of promotional programs to help move volume would be treated as a reduction in sales and the environment that we're seeing is quite stable at this point with no downside. So when we talk about heavier demand-generation spending, it's advertising, probably for the most part in Asia/LatAm. In terms of the south of China, we haven't given a specific number for our market share there, but it's noticeably higher than what we see for the country overall, which is in the mid-teens.

Operator: Jason English, Goldman Sachs.

Jason English - Goldman Sachs: I'll echo this sentiment of other and say congratulations to you and same for you Kasper. A couple of quick questions, it sounds like a lot of the growth is coming from online what prevents you from getting European package product into the channel?

Peter G. Leemputte - EVP and CFO: I don't think technically there is anything preventing us from doing that, should we decide to do so. I mentioned in my prepared remarks that we did not want to get into discussing future plans and I'm sure you can understand that. So, I just want to say that we've recognized that there is a demand in China for trusted products. We think that that will necessitate a multi-pronged approach and we are pursuing several initiatives to make sure that we can meet that consumer demand.

Jason English - Goldman Sachs: One quick housekeeping question. Last year, there were some shipment dislocation in your broader China-Hong Kong business. Do you have a sense or can you give us a sense of how much of a drag on growth that was in China-Hong Kong this quarter and what you expect it to be next quarter?

Peter G. Leemputte - EVP and CFO: In terms of inventory dislocations, there was some bad weather at the end of '11, that led to a little bit higher, goods in transit at the end of '11 that affected the first quarter, but it was very, very, very minor. So, we wouldn't – and we don't see any inventory – any significant distributor inventory impact in the first quarter. There was some, but it is small, most of it is coming in the second quarter.

Operator: Bryan Spillane, Bank of America.

Bryan Spillane - Bank of America Merrill Lynch: Just a question about the competitive landscape in China. Just simply, last year, there was a little bit more I don't know what the right word is promotional activity or promotional intensity from some of your competitors in China. Has that continued in the first quarter or your market share has increased, has that also come at a – as you've been able to kind of pull back a little bit on the promotional intensity?

Peter Kasper Jakobsen - EVP and COO: No, I don't think that the promotional intensity has changed at all. I think Pete just alluded to it when we talked – when Diane asked the questions about the A&P spend. The promotional environment in China has now been pretty stable, I would say, over the last nine months or so really. So, we are not seeing an acceleration of price discounting, for instance, or other things like that. It's a pretty stable environment.

Bryan Spillane - Bank of America Merrill Lynch: Steve, I just want to say congratulations. Wish you all the best. It's been great working with you.

Stephen W. Golsby - President and CEO: Likewise, Bryan. Thank you very much. Operator, with that, we've taken up the allotted amount of time. Thanks once again, everybody, and best wishes for the future.

Operator: I'd now like to turn the call back over to Ms. Kathy MacDonald.

Kathy MacDonald - VP - IR: Again, thank you for your participation in today's conference. Operator, this concludes the call.

Operator: Thank you. Ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a good day.