Johnson & Johnson (JNJ)

JNJ 
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Johnson & Johnson (JNJ)

Q4 2012 Results Earnings Call

January 22, 2013 8:30.m. ET

Executives

Louise Mehrotra – VP, IR

Alex Gorsky - Chairman of the Board and CEO

Dominic Caruso – VP, Finance and CFO

Analysts

Mike Weinstein – JPMorgan

Matt Dodds – Citigroup

Larry Biegelsen – Wells Fargo

Rick Wise - Stifel Nicolaus

Kristen Stewart – Deutsche Bank

Tony Butler - Barclays Capital

David Lewis – Morgan Stanley

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 fourth quarter and full year of 2012.

Joining me on the podium today are Alex Gorsky, Chairman of the Board and Chief Executive Officer and Dominic Caruso, Vice President, Finance and Chief Financial Officer. A few logistics before we get into the details.

This meeting is 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 fourth quarter and full year of 2012 for the corporation and highlights for our three business segments. ]

Following my remarks, Alex will comment on the 2012 results and provide a strategic outlook for the company. At the completion of Alex’s remarks Dominic will provide some additional commentary on the third quarter results and discuss guidance for 2013. We will then open the call to your questions. We will conclude our formal presentations at approximately 9:45 and following Q&A with some final remarks by Alex, we’ll conclude this portion of the meeting around 10:15.

Following a break, we will resume at 11 and begin the medical devices and diagnostics business review that was rescheduled because of Hurricane Sandy. That program will include presentations by Gary Pruden, Worldwide Chairman, Global Surgery Group; Karen Licitra, Worldwide Chairman, Global Medical Solutions Group; and Michel Orsinger, Worldwide Chairman, DePuy Synthes Companies.

We will break for lunch and the technology displays around noon, and resume the presentations at approximately 12:45. We will include a question and answer panel at the end of the presentations, and expect to close the meeting around 2:30.

Included with the press release that was issued earlier this morning is a schedule of sales for key products and/or businesses to facilitate updating your models. These schedules are available on the Johnson & Johnson website, as is the press release. Please note this webcast includes slides, which are also available on the website.

Before I get into the results, let me remind you that some of the statements made during this review may be considered forward-looking statements. The 10-K for the fiscal year 2011 identifies certain factors that could cause the company’s actual results to differ materially from those projected in any forward-looking statements made today. 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.

During the review, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. These non-GAAP financial measures should not be considered replacements for GAAP results. Tables reconciling these measures to the most comparable GAAP measures are available in the press release and on the Investor Relations’ section of the Johnson & Johnson website at investor.jnj.com.

A number of the compounds and products discussed today are being developed in collaboration with strategic partners or licensed from other companies. This slide lists the acknowledgment of those relationships.

Now I would like to review our results from the first quarter of 2012. 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 $17.6 billion from the first quarter of 2012, up 8% as compared to the fourth quarter of 2011. On an operational basis, sales were up 9.3% and currency had a negative impact of 1.3%.

The acquisition of Synthes was completed in the second quarter of 2012. In the fourth quarter, the acquisition, net of the impact of the divestiture of the legacy DePuy trauma business, contributed 5.6% to the worldwide operational sales growth.

In the U.S., sales were up 6.8%. In regions outside the U.S., our operational growth was 11.2%, while the effect of currency exchange rates negatively impacted our reported results by 2.3 points. The western hemisphere, excluding the U.S., grew by 18.7% operationally, while Europe grew 10.4% on an operational basis. The Asia-Pacific/Africa region grew 8.5% operationally. The success of new product launches and Synthes sales made strong contributions to the results in all regions.

If you’ll now turn to the consolidated statement of earnings, net earnings attributable to Johnson & Johnson were $2.6 billion, compared to $218 million in the same period in 2011. Earnings per share were $0.91 versus $0.08 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 accompanying table on non-GAAP measures, 2012 fourth quarter net earnings were adjusted to exclude special items, primarily related to an increase in the litigation accrual and program costs associated with the DePuy ASR hip, in-process research and development, and integration and transaction costs related to the acquisition of Synthes, Inc.

Fourth quarter 2011 net earnings included after-tax special items of $2.9 billion as detailed in the reconciliation on non-GAAP financial measures. Excluding these special items for both periods, net earnings for the current quarter were $3.4 billion and diluted earnings per share were $1.19, representing increases of 7.9% and 5.3% respectively as compared to the same period last year.

I would now like to make some comments relative to the components leading to earnings before we move on to the segment highlights. For the fourth quarter of 2012, cost of goods sold, at 34.2%, was up 140 basis points from the same period last year, primarily due to an inventory step up charge related to the Synthes acquisition.

Excluding the inventory step up charge, which has been treated as a special item, cost of goods sold increased 10 basis points versus the same period last year. Incremental amortization expense related to Synthes was almost completely offset by positive mix, complemented by cost reduction efforts.

Fourth quarter selling, marketing, and administrative expenses, at 32.2% of sales, were down 140 basis points due to cost containment initiatives across many of our businesses. Our investment in research and development as a percentage of sales was 13.3%, consistent with our 2011 results.

Interest expense, net of interest income of $89 million, was down $59 million versus the fourth quarter of 2011, due to a lower debt level. Other expense, net of other income, was $319 million in the fourth quarter of 2012, compared to $2.9 billion in the same period last year.

Excluding special items, other income net of other expense, up $420 million, was $81 million less than 2011 due to lower gains on divestitures. Excluding special items, the effective tax rate of 18% in the fourth quarter of 2012 compared to 14.4% in the same period last year. Dominic will provide commentary on taxes in his remarks.

Now, turning to the consolidated statement of earnings for the full year of 2012, consolidated sales to customers for the year 2012 were $67.2 billion, an increase of 3.4% as compared to the same period last year. On an annual basis, sales grew 6.1 points operationally and currency had a negative impact of 2.7 points. Synthes, net of the impact of the divestiture of the legacy DePuy trauma business, contributed 3.1% to the worldwide operational sales growth.

On the consolidated statement of earnings, I’d like to draw your attention to the box section. For the year 2012, adjusted net earnings were $14.3 billion, and adjusted earnings per share were $5.10, up 3.4% and 2% respectively versus the 2011 results.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting key products or businesses for the fourth quarter of 2012. I’ll begin with the consumer segment.

Worldwide consumer segment sales from the first quarter of 2012 of $3.7 billion decreased 0.4% as compared to the same period last year. On an operational basis, sales increased 0.9% while the impact of currency was negative 1.3%. U.S. sales were down 3.6%, while international sales grew 3.2% on an operational basis.

Baby care products increased on an operational basis by 2.8% when compared to the fourth quarter of 2011, primarily due to international sales of powders, wipes, and haircare products. Sales in the oral care business increased 2% operationally due to strong sales outside the U.S. with the continued success of new product launches for Listerine.

From the first quarter of 2012, sales for OTC pharmaceuticals and nutritionals increased 2.6% on an operational basis compared to the same period in 2011, with U.S. sales down 3.8% and sales outside the U.S. up 5.7% on an operational basis.

Sales in the U.S. decreased primarily due to lower sales of analgesics due to supply constraints and competitive pressures in nutritional products. This were partially offset by very strong sales of upper respiratory products with the relaunch of many of them. Increased market penetration and product launches drove strong growth of analgesics, digestive health, and upper respiratory products outside the U.S..

Our skincare business declined 3.9% on an operational basis in the fourth quarter of 2012, with the U.S. down 4.5% due to divestitures and discontinued programs, while sales outside the U.S. were down 3.4% due to competitive and marketplace pressures.

Women’s health grew 5.5% on an operational basis due to international sales growth of 9.4%, with strong growth across the sanitary protection category. Wound care, other sales decreased 2.9% on an operational basis with the sales decline outside the U.S. of 8% due to competitive pressures, partially offset by growth in the U.S. of 1.8%.

That completes our review of the consumer segment, and I’ll now review highlights for the pharmaceutical segment. Worldwide net sales for the fourth quarter of $6.5 billion increased 7.1% versus the same period last year. On an operational basis, sales increased 8.5%, with a negative currency impact of 1.4 points. Sales in the U.S. increased 4.4%, while sales outside the U.S. increased on an operational basis by 12.1%.

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