Johnson & Johnson (JNJ)

JNJ 
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Johnson & Johnson (JNJ)

Q4 2009 Earnings Call

January 26, 2010 8:30 am ET

Executives

Louise Mehrotra – VP, IR

Bill Weldon – Chairman and CEO

Dominic Caruso – VP, Finance and CFO

Analysts

Rick Wise – Leerink Swann

David Lewis – Morgan Stanley

Jami Rubin – Goldman Sachs

Michael Weinstein – J.P. Morgan

Matt Dodds – Citigroup

Tao Levy – Deutsche Bank

Bob Hopkins – Bank of America, Merrill Lynch

Glenn Novarro – RBC

Bruce Nudell – UBS

Matt Miksic – Piper Jaffray

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 of 2009. Joining me on the podium today are Bill Weldon, Chairman of the Board of Directors and Chief Executive Officer of Johnson & Johnson; and Dominic Caruso, Vice President, 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 fourth quarter for the Corporation and highlights for our three business segments. Following my remarks, Bill Weldon will comment on the 2009 results and provide a strategic outlook for the company. At the completion of Bill’s remarks, Dominic Caruso will provide some additional commentary on the 2009 financial results and guidance for the full year of 2010. 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 Bill, we’ll conclude the meeting around 10 o’clock.

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 me 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 any projections 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 fourth 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 $16.6 billion for the fourth quarter of 2009, up 9% as compared to the fourth quarter of 2008. On an operational basis, sales were 4.5% and currency had a positive impact of 4.5%. I would like to point out that our 2009 results included a 53rd week. The J&J fiscal calendar is based on four 13-week quarters, so every five or six years, we have an additional week. Since this 53rd week occurs during a holiday period, we do not achieve a full week of revenue. The estimate of approximately half the operational growth in the quarter was due to the extra shipping days. While the 53rd week adds some additional days to sales, I should point out that it brings with it a full week’s worth of operating costs. Therefore bottom line impact is negligible.

In the US, sales increased 2.6%. Outside the US, our operational growth was 6.4%, while the effect of currency exchange rates positively impacted our reported results by 9.2 points. The Western Hemisphere excluding the US grew 19% on an operational basis. Europe grew by 5.1% operationally, while the Asia-Pacific, Africa region grew 2.3% operationally.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $2.2 billion and earnings per share were $0.79. That compares to $2.7 billion and $0.97 per share in the same period in 2008. 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, fourth quarter results in both years exclude the after-tax net gains from several litigation matter. In addition, the fourth quarter 2009 results have been adjusted to exclude the after-tax impact of the restructuring charge and fourth quarter 2008 results were adjusted to exclude the in-process research and development charge. Net earnings on an adjusted basis were $2.8 billion and earnings per share were $1.02, up 8.4% and 8.5% respectively versus the fourth quarter of 2008.

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 32.1% of sales was 330 basis points higher than the same period in 2008. As we discussed last year, the 2008 results were favorably impacted by one-items. In addition, the change in the mix of the business and certain charges related to the restructuring program that are not treated as special items contributed to the higher costs.

Selling, marketing, and administrative expenses at 34% of sales were down 330 basis points versus last year. As noted, the fourth quarter of 2008 included investments spending. Also contributing to the favorability is cost management across the businesses. Our investment in research and development as a percent of sales was 13.4%, 50 basis points less than the fourth quarter of 2008, due to a change in the mix of the businesses and reductions in spending levels due in part to increased efficiency.

Interest expense, net of interest income of $81 million compares to $17 million in the fourth 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 $361 million in the fourth quarter of 2009 compared to $638 million in the same period last year. In both 2008 and 2009, this account includes the impact of net litigation matters. In addition, in 2008, the resulting gain from the divestiture of the professional wound care business was included in this account.

Our effective tax rate excluding special items was 16.4% in the fourth quarter of 2009 versus 19.9% in the fourth quarter of 2008. Dominic will provide more commentary on taxes in his remarks. Now, turning to the consolidated statement of earnings for the year of 2009. Consolidated sales to customers for the full year of 2009 were $61.9 billion, a decrease of 2.9% as compared to the same period a year ago. On a year-to-date basis, sales declined operationally by 0.3% and currency having negative impact of 2.6 points. On the consolidated statement of annual earnings, I would first like to draw your attention to the boxed section where we have provided net income and earnings per share information excluding special items.

In both years, the after-tax net litigation gains have been excluded. Additionally in 2009, the after-tax cost associated with the restructuring program has been excluded. In 2008, the charge for in-process research and development has also been excluded. With these adjustments, net earnings for the 12 months of 2009 of $12.9 billion were in line with 2008. Adjusted earnings per share of $4.63 were up 1.8% as compared to 2008.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting major products and/or business franchises. I will now review fourth quarter highlights for our three business segments, beginning with the Consumer segment.

Worldwide Consumer segment sales for the fourth quarter of 2009 of $4.2 billion increased 10.2% as compared to the same period last year. On an operational basis, sales increased 5.2%, while currency positively impacted sales by 5 points. US sales were up 3.4%, while international sales grew 6.5% on an operational basis.

For the fourth quarter of 2009, sales for the over-the-counter pharmaceuticals and nutritionals increased 4.2% on an operational basis, compared to the same period in 2008, with US sales up 5.9% and sales outside the US up 2.2% on an operational basis. Growth was driven by analgesics and other respiratory products, due to a strong flu season, as well as nutritional products, partially offset by lower sales of smoking cessation products.

Our Skin Care business achieved operational sales growth of 8.1% in the fourth quarter of 2009, with sales in the US up 10.2% and sales outside the US up 6.7% on an operational basis. New launches drove growth at NEUTROGENA, AVEENO, and Dabao products.

Baby Care products were up 3.4% on an operational basis when compared to the fourth quarter of 2008. Sales in the US were down 2.8% due to lower sales for babycenter.com. At the end of 2008, babycenter exited the online retail business, while continuing to focus on online content. Sales outside the US were up 5% operationally, due to growth in hair care and baby wipes.

Women’s Health achieved operational sales growth of 5.2%. Sales in the US were down 8.8% primarily due to lower sales of external sanitary protection products. Sales outside the US were up on an operational basis by 12.5%, primarily due to the acquisition of the Vania products.

Sales in the Oral Care franchise were down 1.7% on an operational basis. In the US, sales were down 13% due to softness in the category, lower sales of toothbrushes and the fourth-quarter divestiture of certain products. Sales outside the US increased 9.1% operationally, driven by strong growth of Listerine.

Sales in the Women’s Care Other category were up 20% on an operational basis, primarily due to the acquisitions of two businesses in our wellness and prevention platform and the Vania Polive acquisition. Strong sales of Curel also contributed to growth.

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 billion were up 5.4% versus the same period last year. On an operational basis, sales were up 1.6%, with a positive currency impact of 3.8 points. Sales in the US decreased 2.7%, while sales outside the US increased on an operational basis by 8%.

Our results continue to be impacted by generic competition on some of our products, namely Risperdal Oral, Topamax and Razadyne. The marketing exclusivity for Risperdal expired in the US at the end of June 2008 and there are generic competitors for Risperdal in most markets. The marketing exclusivity in the US for Topamax expired this past March and multiple generics have entered the market, while generic competitors for Razadyne entered the US market in the latter half of 2008.

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