Johnson & Johnson (JNJ)

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Johnson & Johnson (JNJ)

Q2 2009 Earnings Call

July 14, 2009 8:30 am ET


Louise Mehrotra - Vice President of Investor Relations

Dominic J. Caruso - Chief Financial Officer, Vice President Finance


Mike Weinstein - J.P. Morgan

Bruce Nudell - UBS

Tao Levy - Deutsche Bank

Larry Biegelsen - Wells Fargo

Rick Wise - Leerink Swann

Matthew Dodds - Citigroup

David Lewis – Morgan Stanley

Matt Miksic - Piper Jaffray

Glenn Novarro - RBC Capital Markets

Sara Michelmore - Cowen

Bob Hopkins - Banc of America

Derek Sung - Sanford C. Bernstein



Good morning and welcome to the Johnson & Johnson second quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference call over to Johnson & Johnson. You may begin.

Louise Mehrotra

Good morning and welcome. I’m Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the second quarter of 2009. Joining me on the call today is Dominic Caruso, Vice President of Finance and Chief Financial Officer.

A few logistics before we get into the details -- this review is being made available through a broader audience via a webcast accessible through the investor relations section of the Johnson & Johnson website.

I will begin by briefly reviewing highlights of the second quarter for the corporation and highlights for our three business segments. Following my remarks, Dominic will provide some additional commentary on the second quarter financial results, an update on the many positive developments in the quarter, and guidance for the full year of 2009. We will then open the call to your questions.

We expect the call to last approximately one hour.

Included with the press release that was sent to the investment community earlier this morning is a schedule showing sales for the major products and/or business franchises to facilitate updating your models. These are also available on the Johnson & Johnson website, as is the press release.

Before I get into the results, let me remind you that some of the statements made during this call may be considered forward-looking statements. The 10-K for the fiscal year 2008 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or future events or developments. The 10-K is available through the company or online.

Last item, during the call non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These measures are reconciled to the GAAP measures and are available in the press release or on the Johnson & Johnson website.

Now I would like to review our results for the second quarter of 2009. If you would refer to your copy of the press release, let’s begin with the schedule titled supplementary sales data by geographic area.

Worldwide sales to customers were $15.2 billion for the second quarter of 2009, down 7.4% as compared to the second quarter of 2008. On an operational basis, sales were down 1.4% and currency had a negative impact of 6%.

In the U.S., sales declined 6.7%. Outside the U.S., our operational growth was 3.9% while the effect of currency exchange rates negatively impacted our reported results by 11.9 points. The Western Hemisphere excluding the U.S. grew 11.7% on an operational basis. The Asia-Pacific Africa region grew by 3.7% operationally while Europe grew 1.8% operationally.

If you’ll now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.2 billion and earnings per share were $1.15. This compares to $3.3 billion and $1.17 in the same period in 2008.

Please direct your attention to the boxed section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, the 2008 results have been adjusted to exclude the after-tax impact of the in-process research and development charge of $40 million.

There were no adjustments to the results for the second quarter of 2009. Net earnings on an adjusted basis were down 4.7% and adjusted earnings per share were down 2.5%.

I would now like to make some additional comments relative to the components leading to adjusted earnings before we move on to the segment highlights.

Cost of goods sold at 29.2% of sales was 30 basis points higher than the same period in 2008 due to unfavorable mix in our pharmaceutical business partially offset by cost containment initiatives across the businesses.

Selling, marketing, and administrative expenses at 31.5% of sales were down 200 basis points versus last year, driven by leverage across the businesses. Our investment in research and development as a percent to sales was 10.7%, 80 basis points less than the second quarter of 2008 due to a change in the mix of the businesses and reductions in spending levels.

Interest expense net of interest income of $85 million compares to $16 million in the second quarter of 2008. The increase in net expense was due primarily to lower interest rates on our cash balances.

Other expense net of other income was $6 million in the second quarter of 2009 compared to $135 million of net other income in the same period last year. Dominic will provide more commentary in his remarks.

Taxes were 24.7% in the second quarter of 2009 versus 23.7% in the second quarter of 2008, reflecting the change in the mix of the businesses.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting major products or business franchises. I’ll begin with the consumer segment.

Worldwide consumer segment sales for the second quarter of 2009 of $3.9 billion decreased 4.5% as compared to the same period last year. On an operational basis, sales increased 3.1% while the impact of currency was negative 7.6 points. U.S. sales were up 0.8% while international sales grew 4.7% on an operational basis.

For the second quarter of 2009, sales for the over-the-counter pharmaceuticals and nutritionals increased 0.3% on an operational basis compared to the same period in 2008 with similar results both in and outside the U.S. Intensified competitive pressures including private label have impacted the growth in this category.

Our skincare business achieved operational sales growth of 5.9% in the second quarter of 2009 with sales in the U.S. growing at 8.4% and sales outside the U.S. up 3.8% on an operational basis.

Growth was driven by AVEENO with the launch of the nourish plus hair care line in the U.S., NEUTROGENA, and by our [Debow] products acquired in the third quarter last year.

Baby care products were down 2.2% on an operational basis when compared to the second quarter of 2008. Sales in the U.S. were down 6.3% primarily due to lower sales for Baby center has exited the online retail business and will focus on online content.

Sales outside the U.S. were down 1.2% operationally with growth in hair care and powder offset by softness in other categories, primarily lotions and creams.

Women’s health achieved operational sales growth of 4.8%. Sales in the U.S. were down 3.8% due to lower sales of napkins and family planning products. Sales outside the U.S. were up on an operational basis by 8.8% due to the acquisition of the Vania products.

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