Johnson & Johnson (JNJ)
Q3 2009 Earnings Call
October 13, 2009 8:30 am ET
Louise Mehrotra - Vice President, Investor Relations
Alex Gorsky - Worldwide Chairman of our Medical Devices & Diagnostics Group
Dominic Caruso - Vice President, Finance and Chief Financial Officer
Rick Wise - Leerink Swann
Matt Dodds - Citigroup
Matt Miksic - Piper Jaffray
Catherine Arnold - Credit Suisse
Bob Hopkins - Banc of America-Merrill Lynch
Mike Weinstein - JP Morgan
David Lewis – Morgan Stanley
Larry Biegelsen – Wells Fargo
Eric Snyder - UBS
Tao Levy - Deutsche Bank
Previous Statements by JNJ
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A few logistics before we get into the details, the audio and visuals from this presentation are being made available to a broader audience via a webcast accessible through the Investor Relations section of the Johnson & Johnson website. I’ll begin by briefly reviewing highlights of the third quarter for the Corporation and highlights for our three business segments. Following my remarks Dominic will provide some additional commentary on the third quarter results and guidance for the full year of 2009. Alex will then provide an update on our Medical Devices and Diagnostics business and we will open up the floor to your questions.
We will conclude our formal presentation at approximately 9:30am and following Q&A with some final remarks by Dominic, we’ll conclude the meeting around 10:00am.
Distributed with a copy of the press release that you just received is a schedule with actual revenues for major products and/or business franchises. For the listening audience these are available on the Johnson & Johnson website as is a copy of the press release.
Before I get into the results let remind you that some of the statements made during this presentation 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 third 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 $15.1 billion for the third quarter 2009 down 5.3% as compared to the third quarter of 2008. On an operational basis sales were down 2.8% and currency had a negative impact of 2.5%. In the US sales declined 8.1%. Outside the US our operational growth was 2.4% while the affect of currency exchange rates negatively impacted our reported results by 4.9 points. The Asia/Pacific/Africa region grew by 3.5% operationally while Europe grew 2.1% operationally. The Western Hemisphere excluding the US grew 1.5% on an operational basis.
If you’ll now turn to the consolidated statement of earnings. Net earnings on a reported basis were $3.3 billion and earnings per share were $1.20. This compares to $3.3 billion and $1.17 in the same period in 2008. I would not like to make some additional comments relative to the components leading to earnings before we move on to the segment highlights.
Cost of goods sold at 29.4% of sales was 60 basis points less then the same period in 2008 with lower costs offsetting the impact of the change in the mix of the business. Selling, marketing and administrative expenses at 31.6% of sales were down 100 basis points versus last year driven by cost management across the businesses. Our investment in research and development as a percent to sales was 10.7%, 100 basis points less then the third quarter of 2008 due to a change in the mix of the businesses and reductions in spending levels due in part to increased efficiencies.
Interest expense net of interest income of $114 million compares to $25 million in the third quarter of 2008. The increase in net expense was due primarily to a lower interest rate on our cash balances. Other income net of other expense was $96 million in the third quarter of 2009 compared to $224 million in the same period last year. As discussed last year in 2008 we received a settlement payment from Amgen for $200 million. In the third quarter this year we received a settlement payment from Medtronic related to spinal screws of which $115 million is reflected in this account.
Our effective tax rate was 21.2% in the third quarter of 2009 versus 22.8% in the third quarter of 2008. Dominic will provide more commentary on taxes in his remarks.
Now turning to the consolidated statement of earnings for the first nine months of 2009. Consolidated sales to customer for the nine months of 2009 were $45.3 billion a decrease of 6.6% as compared to the same period a year ago. On a year to date basis sales declined by 1.8% and currency had a negative impact of 4.8 points. On the consolidated statement of year to date earnings I’d first like to draw you attention to the boxed section. Net earnings of $10.1 billion in 2009 compares to adjusted net earnings of $10.3 billion in 2008. In 2008 a charge for in process research and development has been excluded. With that adjustment for the nine months of 2009 net earnings were down 2.1%. Adjusted earnings per share at $3.61 was equal to the 2008 results.
Turning now to business segment highlights. Please refer to the supplementary sales schedule highlighting major product or business franchises. I’ll begin with the consumer segment. Worldwide consumer segment sales for the third quarter of 2009 of $4 billion decreased 2.7% as compared to the same period last year. On an operational basis sales increased 1.1% while the impact of currency was -3.8 points. US sales were down 4.4% while international sales grew 5.2% on an operational basis.
For the third quarter 2009 sales for the over the counter pharmaceuticals and nutritionals increased 0.5% on an operational basis compared to the same period in 2008 with US sales down 5.9% and sales outside the US up 8% on an operational basis. Inventory builds of product in anticipation of the flu season have been partially offset by lower seasonal trade inventory builds in allergy. Intensified competitive pressures including private label have impacted growth in this category.
Our skin care business achieved operational sales growth of 1.3% in the third quarter of 2009 with sales in the US up 3.4% and sales outside the US down 0.1% on an operational basis. Growth in the US was driven by AVEENO with the launch of the Nourish Plus Hair care line. Outside the US pressure from the economy impacted many of the brands, offset by sales from Dabao products acquired in the third quarter last year and strong growth in the Le Petit Marseillais products.
Baby care products were down 2.6% on an operational basis when compared to the third quarter of 2008. Sales in the US were down 10.5% primarily due to lower sales for babycenter.com compounded by pressure on the overall category growth. At the end of 2008 babycenter exited the online retail business while continuing to focus on online content. Sales out side the US were down 0.7% operationally with growth in hair care and baby oil offset by softness in other categories.
Women’s health achieved operational sales growth of 3.6%. Sales in the US were down 13.4% primarily due to lower sales of KY products. The year on year comparisons were impacted by the 2008 launches of new products. Sales outside the US were up on an operational basis by 11.7% primarily due to the acquisition of the Vania products.
Sales in the oral care franchise were down 1.4% on an operational basis. In the US, sales were down 8.3% due to softness in the category. Sales outside the US increased 4.8% operationally driven by strong growth for Listerine.
Sales in the women’s care other category were up 10.5% on an operational basis due to the recent acquisitions of two businesses in our wellness and prevention platform and the Vania and Polive acquisition.
That completes the review of the consumer segment and I’ll now review highlights for the pharmaceutical segment.
Worldwide net sales for the third quarter of $5.3 billion were down 14.1% versus the same period last year. On an operational basis sales were down 11.9% with a currency impact of -2.2 points. Sales in the US decreased 19.2% while sales outside the US decreased on an operational basis by 1.9%.