Johnson & Johnson (JNJ)

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Johnson & Johnson (JNJ)

Q3 2010 Earnings Call

October 19, 2010 8:30 a.m. ET

Executives

Louise Mehrotra – Vice President, Investor Relations

Sheri McCoy - Worldwide Chairman, Pharmaceuticals Group

Dominic Caruso – Vice President, Finance and Chief Financial Officer

Analysts

Christine [No other identification.]

Michael Weinstein – JP Morgan Chase & Co.

Sara Michelmore - Cowen & Co.

Rick Wise - Leerink Swann

Matt Dodds – Citigroup

Jami Rubin – Goldman Sachs

Derrick Sung – Sanford Bernstein

Bob Hopkins – Bank of America

Bruce Nudell – UBS

Matt Miksic – Piper Jaffray

Larry Biegelsen – Wells Fargo

Glenn Novarro – RBC Capital

Eddie Han-Burgess - Raymond James

Presentation

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 third quarter of 2010. Joining me on the podium today are Sheri McCoy, worldwide chairman of our pharmaceuticals group, and Dominic Caruso, vice president of finance and chief financial officer.

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 financial results and guidance for the full year of 2010. Sheri will then provide an update on our pharmaceuticals business. We will then open the floor to your questions. We will conclude our formal presentation at approximately 9:30 and following Q&A with some final remarks by Dominic, we will conclude the meeting around 10:00 a.m.

Distributed with the 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 me remind you that some of the statements made during this meeting may be considered forward-looking statements. The 10-K for the fiscal year 2009 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 2010. If you 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 billion for the third quarter of 2010, down 0.7% as compared to the third quarter of 2009. On an operational basis, sales were up slightly, and currency had a negative impact of 0.8%.

In the U.S., sales declined 2.5%. In regions outside the U.S., our operational growth was 2.6%, while the effect of currency exchange rates negatively impacted our reported sales by 1.5 points. Our strongest performing region was the Asia-Pacific Africa region, which grew 4.1% on an operational basis. Europe grew 1.8% operationally, while the western hemisphere, excluding the U.S., grew by 1.7% operationally.

If you'll now turn to the consolidated statement of earnings, net earnings were $3.4 billion compared to $3.3 billion in the same period in 2009, an increase of 2.2%. Earnings per share were $1.23 versus $1.20 a year ago.

I would now 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 30.7% of sales, was 130 basis points higher than the same period in 2009, primarily due to the cost associated with the impact of the recalls and related remediation efforts in the consumer business and the impact of price reductions in our pharmaceuticals business and certain MD&D businesses.

Selling, marketing, and administrative expenses, at 31.4% of sales, were down 20 basis points versus last year due to cost-containment initiatives. Our investment in research and development as a percent of sales was 11.1%, 40 basis points higher than the third quarter of 2009 due to timing of spending on projects.

Interest expense net of interest income of $95 million is $19 million less than the third quarter of 2009 with lower interest expense on lower average debt. Other income net of other expense of $292 million was $196 million greater than the same period in 2009.

Taxes were 19% in the third quarter of 2010 versus 21.2% in the third quarter of 2009. Dominic will discuss other income and taxes in his commentary.

Now turning to the consolidated statement of earnings for the first nine months of 2010, consolidated sales to customers for the first nine months of 2010 were $45.9 billion, an increase of 1.3% as compared to the same period a year ago. On a year-to-date basis, sales were flat operationally and currency had a positive impact of 1.3 points.

On the consolidated statement of year-to-date earnings, I'd first like to draw your attention to the boxed section. Adjusted net earnings of $10.4 billion in 2010 compares to net earnings of $10.1 billion in 2009. Adjusted earnings per share, at $3.73, were 3.3% versus the 2009 results.

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 third quarter of 2010 of $3.6 billion decreased 10.6% as compared to the same period last year. On an operational basis, sales declined 10.2%, while the impact of currency was negative 0.4 points.

U.S. sales were down 24.5%, while international sales were up 0.4% on an operational basis. The consumer sales growth in the quarter was impacted by the OTC recalls, currency devaluation in Venezuela, and certain divestitures. The OTC recall impacted operational growth by approximately 6 points, while the devaluation and divestitures impacted operational growth by just over 1 point each.

For the third quarter of 2010, sales for the over-the-counter or OTC pharmaceuticals and nutritionals decreased 19.4% on an operational basis, compared to the same period in 2009, with U.S. sales down 40.2% and sales outside the U.S. up 3.5% on an operational basis.

Sales were impacted by the voluntary recalls announced earlier this year and suspension of production at the McNeil Fort Washington, Pennsylvania facility. As an update on the products included in the January recall that are produced at our McNeil Las Piedras, Puerto Rico facility, we are at normal levels of production. Restocking commenced in the second quarter and continues to ramp up to normal trade inventory levels for key products.

Regarding the Fort Washington facility, operations at this plant were suspended in connection with the recall of infants and children's liquid OTC products manufactured there. The suspension of manufacturing also impacted adult solid OTC products manufactured at the facility.

We remain on track with our plans for ultimate supply of these products from within the Johnson & Johnson manufacturing network. We began shipping a small amount of product and beginning in the first quarter of 2011, shipments will ramp up and continue to expand throughout the year.

McNeil submitted its remediation plan to the FDA on July 15. The plan applies to all manufacturing facilities McNeil operates to supply the U.S. market and addresses governance and management controls, training programs, process assessments, and process improvements. We are committed to regular and detailed communications with the FDA as we implement this plan.

Now moving on to the other businesses, skincare business declined on an operational basis by 4.9%, with the U.S. down 15.9% and sales outside the U.S. up 3.7% on an operational basis. In the third quarter we began implementing enhancements to equipment that will continue into the fourth quarter. This has resulted in a temporary reduction of shipments for certain products.

Baby care products achieved operational growth of 3.3%, with the U.S. growing 2% and sales outside the U.S. growing 3.6% on an operational basis when compared to the third quarter of 2009. Powders and cleansers were the major contributors to the sales growth outside the U.S., while babycenter.com contributed to the growth in the U.S.

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