Johnson & Johnson (JNJ)

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Johnson & Johnson (JNJ)

Q2 2011 Earnings Call

July 19, 2011 8:30 am ET

Executives

Alex Gorsky - Worldwide Chairman of Medical Devices & Diagnostics Group and Vice Chairman of Executive Committee

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

Louise Mehrotra - Vice President of Investor Relations

Analysts

Matthew Dodds - Citigroup Inc

Matthew Miksic - Piper Jaffray Companies

Sara Michelmore - Brean Murray, Carret & Co., LLC

Robert Hopkins

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Glenn Novarro - RBC Capital Markets, LLC

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

Kristen Stewart - Deutsche Bank AG

Larry Biegelsen - Wells Fargo Securities, LLC

David Lewis - Morgan Stanley

Frederick Wise - Leerink Swann LLC

Rajeev Jashnani - UBS Investment Bank

Presentation

Operator

Good morning, and welcome to the Johnson & Johnson Second 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 second quarter of 2011. Joining me on the call today are Dominic Caruso, Vice President, Finance and Chief Financial Officer; and Alex Gorsky, Vice Chairman, Executive Committee, Office of the Chairman. 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 second quarter for the corporation and highlights for our 3 business segments. Following my remarks, Dominic will provide some additional commentary on the second quarter results and guidance for the full year of 2011. Following Dominic, Alex will discuss our medical devices and diagnostics business. We will then open the call to your questions. We expect the call to last approximately 90 minutes. Included with the press release that we sent to the investment community earlier this morning, is the schedule showing sales for major products and/or businesses 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 identify 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. Tables reconciling these measures to the most comparable GAAP measures are available in the press release or on the Investor Relations section of the Johnson & Johnson website at jnj.investor.com.

Now I would like to review our results for the second 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 $16.6 billion for the second quarter of 2011, up 8.3% as compared to the second quarter of 2010. On an operational basis, sales were up 2.6%, and currency had a positive impact of 5.7%. In the U.S., sales increased 0.1%. In the regions outside U.S., our operational growth was 4.9%, while the effective currency exchange rates positively impacted our reported results by 11 points. Europe grew 5.4% operationally. The Western Hemisphere, excluding the U.S., grew by 5.3% operationally, while the Asia-Pacific Africa region grew 4.2% on an operational basis.

If you'll now turn to the consolidated statement of earnings, net earnings were $2.8 billion, compared to $3.4 billion in the same period in 2010. Earnings per share were $1 versus $1.23 a year ago. Please direct your attention to the box section of the schedule where we have provided earnings adjusted to exclude special items. As referenced in the footnotes, second quarter net earnings this year were adjusted to exclude the aftertax impact related to the previously announced restructuring of Cordis, the net aftertax impact of expenses related to the litigation matters, additional DePuy ASR Hip recall costs and an aftertax mark-to-market gain associated with the currency option related to the planned acquisition of Synthes Inc. Similarly, the second quarter net earnings in 2010 were adjusted to exclude the aftertax net impact of litigation matters. Net earnings on an adjusted basis were $3.5 billion, and earnings per share were $1.28, up 4.9% and 5.8%, respectively, versus the second 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 31.2% of sales was 100 basis points higher than the same period in 2010, primarily due to charges related to the restructuring of the cardiovascular care business, the ongoing remediation work in our OTC business and the impact of integrating the Crucell business. Selling, marketing and administrative expenses up 31.4% of sales were up 40 basis points due to investment spending in our 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 11.3%, up 50 basis points versus the second quarter of 2010 due to a higher level of investment spending to advance our pharmaceutical pipeline. Interest expense net of interest income of $111 million was up $53 million, versus the second quarter of 2010 due to a higher average debt balance. Other expense net of other income was $206 million in the second quarter of 2011, compared to $18 million in the same period last year. Excluding special items, net other income was $109 million versus $139 million a year ago. Excluding special items, taxes were 19.6% in the second quarter of 2011, lower than our previous guidance. Dominic will discuss taxes in his remarks.

Now turning to the consolidated statement of earnings for the first half of 2011. Consolidated sales to customers for the first 6 months of 2011 were $32.8 billion, an increase of 5.8% as compared to the same period a year ago. On a year-to-date basis, sales were up 2.2 points operationally, and currency had a positive impact of 3.6 points. On the consolidated statement of year-to-date earnings, I'd first like to draw your attention to the box section, adjusted net earnings of $7.3 billion in 2011 compared to adjusted earnings of $7 billion in 2010. Adjusted earnings per share at $2.63 were up 5.2% versus the 2010 results.

Turning now to business segment highlights. Please refer to the supplementary sales schedule highlighting major products or businesses. I'll begin with the consumer segment. Worldwide consumer segment sales for the second quarter of 2011, up $3.8 billion increased 4% as compared to the same period last year. On an operational basis, sales declined 1.8%, while the impact of currency was positive 5.8 points. U.S. sales were down 8.5%, while international sales grew 2.8% on an operational basis. Excluding the impact of lower U.S. over-the-counter or OTC revenues, as well as the impact of divestitures, operational sales grew approximately 2.5%.

For the second quarter of 2011, sales for the over-the-counter pharmaceuticals and nutritionals decreased 11.5% on an operational basis, compared to the same period in 2010 with U.S. sales down 32.9%, primarily due to supply constraints.

On March 10 this year, McNeil-PPC announced the signing of a Consent Decree covering the manufacturing facilities in Las Piedras, Puerto Rico and Fort Washington and Lancaster, Pennsylvania. McNeil has made progress against its commitments under the terms of the Consent Decree and has managed requirements to date with the FDA. McNeil continues to operate the manufacturing facilities in Las Piedras and Lancaster. McNeil is proceeding with its site specific work plan. As we previously discussed, production volumes from these facilities have been impacted due to the additional review and approval processes. However, shipments of key selective products remain on track to ramp up during the latter part of 2011.

Regarding the products previously produced at the Fort Washington facility, McNeil continues to re-site the production to other facilities. McNeil is making progress on the validation and expects a modest amount of certain products to ship in late 2011. We anticipate the balance of the portfolio of key products will continue to be reintroduced throughout 2012.

Sales of OTC and nutritional products outside the U.S. were up 4.8% on an operational basis, primarily due to a higher instance of respiratory illness and flu in Europe. Our skin care business grew 5.3% on an operational basis in the second quarter of 2011, with sales in the U.S., up 6.4% and sales outside the U.S., up 4.3% on an operational basis. Neutrogena, Le Petit Marseillais and AVEENO achieved strong sales growth due to the success of new product launches.

Baby care products achieved operational growth of 5.2% when compared to the second quarter of 2010, due primarily to double-digit growth in cleansers, wipes and oils. Women's health declined 4% on an operational basis. Sales in the U.S. were down 11.7%, while sales outside the U.S. were down 0.9% on an operational basis. Lower sales of K-Y products and the divestiture of the e.p.t. pregnancy test brand earlier this year impacted growth in the quarter. Sales in the oral care business increased 1.5% on an operational basis. In the U.S., sales increased 6.8% due to LISTERINE new product launches and strong sales of toothbrushes.

Sales outside the U.S. decreased 2.1% operationally, primarily in Europe and Venezuela, which was partially offset by strong growth in Asia. Wound care/other was up 2.8% on an operational basis compared to the same period last year. Solid growth was achieved across most of the product lines, partially offset by the divestiture of PURELL in the fourth quarter of 2010.

That completes our review of the consumer segment, and I'll now review highlights for the pharmaceuticals segment. Worldwide net sales for the second quarter of $6.2 billion increased 12.2% versus the same period last year. On an operational basis, sales increased 7% with a positive currency impact of 5.2 points. Sales in the U.S. increased 4.1%, while sales outside the U.S. increased on an operational basis by 10.7%. The marketing exclusivity for LEVAQUIN expired in June, negatively impacting worldwide sales growth by approximately 3 points and U.S. growth by approximately 5 points.

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