Johnson & Johnson (JNJ)

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Johnson & Johnson (JNJ)

Q1 2011 Earnings Call

April 19, 2011 8:30 am ET


Dominic Caruso - Chief Financial Officer, Corporate Vice President of Finance and Member of Executive Committee

Louise Mehrotra - Vice President of Investor Relations


Matthew Dodds - Citigroup Inc

Matthew Miksic - Piper Jaffray Companies

Robert Hopkins

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Benjamin Yeoh - Atlantic Equities LLP

Kristen Stewart - Deutsche Bank AG

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Rajeev Jashnani - UBS Investment Bank



Good morning, and welcome to Johnson & Johnson's First Quarter 2011 Earnings Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. [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 first quarter of 2011. Joining me on the call today is Dominic Caruso, Vice President, Finance and Chief Financial Officer.

A few logistics before we get into the details. This review is being made available to a broader audience via webcast, accessible through the Investor Relations section of the Johnson & Johnson website. I'll begin by briefly reviewing highlights of the first quarter for the corporation and highlights for the 3 business segments. Following my remarks, Dominic will provide some additional commentary on the first quarter results and guidance for the full year of 2011. 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 the schedule showing sales for 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 2010 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 first quarter of 2011. 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 $16.2 billion for the first quarter of 2011, up 3.5% as compared to the first quarter of 2010. On an operational basis, sales were up 1.8%, and currency had a positive impact of 1.7%.

In the U.S., sales declined 0.6%. In regions outside the U.S., our operational growth was 4.1%, while the effective currency exchange rates positively impacted our reported results by 3.2 points. The Western Hemisphere excluding U.S. grew by 7.3% operationally, while the Asia-Pacific, Africa region grew by 6.3% on an operational basis. Europe grew 1.9% operationally.

If you'll now turn to the Consolidated Statement of Earnings. Net earnings were $3.5 billion compared to $4.5 billion in the same period in 2010. Earnings per share were $1.25 versus $1.62 a year ago. Please direct your attention to the boxed section of the schedule, where we have provided earnings information adjusted to exclude special items.

As referenced in the footnote, first quarter results this year were adjusted to exclude the after-tax impact of litigation expense and additional DePuy ASR Hip recall costs. The first quarter results in 2010 were adjusted to exclude the after-tax impact of the net gain from litigation matters. Net earnings on an adjusted basis were $3.7 billion and earnings per share were $1.35, up 3.6% and 4.7%, respectively, versus the first quarter of 2010.

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 29.5% of sales was 50 basis points higher than the same period in 2010, primarily due to the ongoing remediation work in our OTC business.

Selling, marketing and administrative expenses at 31.3% of sales were up 80 basis points due to investment spending in our MD&D [Medical Devices and Diagnostics] business as well as the fee on our branded pharmaceutical products included as part of the U.S. Health Care Reform legislation. Our investment in research and development as a percent of sales was 10.8%, up 80 basis points versus the first quarter of 2010, due primarily to the timing of milestone payments.

Interest expense net of interest income of $104 million was up $23 million versus the first quarter of 2010, due to a higher average debt balance. Other income net of other expense was $13 million in the first quarter of 2011 compared to $1.6 billion in the same period last year. Excluding special items, net other income was $359 million versus $97 million a year ago. Dominic will discuss this item during his remarks. Excluding special items, taxes were 22.8% in the first quarter of 2011, in line with our guidance.

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 first quarter of 2011 of $3.7 billion decreased 2.2%, as compared to the same period last year. On an operational basis, sales declined 4.1%, while the impact of currency was positive 1.9 points. U.S. sales were down 13.8%, while international sales grew 2.6% on an operational basis. Excluding the impact of lower over-the-counter or OTC revenues, operational sales declined approximately 1%.

For the first quarter of 2011, sales for the OTC Pharmaceuticals and Nutritionals decreased 8.2% on an operational basis compared to the same period in 2010, with U.S. sales down 26.8%.

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