Johnson & Johnson (JNJ)

JNJ 
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Johnson & Johnson (JNJ)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

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

William Weldon - Chairman of the Board, Chief Executive Officer, Chairman of Executive Committee and Chairman of Finance Committee

Louise Mehrotra - Vice President of Investor Relations

Analysts

Matthew Dodds - Citigroup Inc

Matthew Miksic - Piper Jaffray Companies

Catherine Arnold - Crédit Suisse AG

Jami Rubin - Goldman Sachs Group Inc.

Michael Weinstein - JP Morgan Chase & Co

Robert Hopkins

Kristen Stewart - Deutsche Bank AG

Derrick Sung - Bernstein Research

Larry Biegelsen - Wells Fargo Securities, LLC

Frederick Wise - Leerink Swann LLC

Bruce Nudell - UBS Investment Bank

Presentation

Louise Mehrotra

Good morning, and welcome. I'm Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson, and it's my pleasure this morning to review our business results for the fourth quarter of 2010.

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 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 2010 results and provide a strategic outlook for the company. At the completion of Bill's remarks, Dominic Caruso will provide some commentary on the fourth quarter financial results and guidance for the full year of 2011.

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 a.m.

Distributed with a copy of the press release that you just received is a schedule with actual revenues from major products and/or business franchises. For the listening audience, these are available on the Johnson & Johnson website, as is the 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.

During the meeting, 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 on the press release or on the Johnson & Johnson website.

Also, in the course of today's presentation, we will discuss a number of products and compounds developed in collaboration with partners or license from other companies. Acknowledgment of those relationships shown in today's presentation can be found on the Johnson & Johnson website. Now I would like to review our results for the fourth quarter and full year of 2010.

If you'd refer to your copy of the press release, let's begin with the schedule entitled Supplementary Sales Data by Geographic Area. Worldwide sales to customers were $15.6 billion for the fourth quarter of 2010, down 5.5% as compared to the fourth quarter of 2009. On an operational basis, sales were down 5.1%, and currency had a negative impact of 0.4%.

As we pointed out last year, our 2009 results benefited from the inclusion of a 53rd week. To remind you, the Johnson & Johnson fiscal calendar is based on four 13-week quarters, resulting in an extra week every five or six years. We estimate the 2009 quarter growth rate was enhanced by just over 2% and the year by approximately 0.5%.

Also impacting the quarterly comparisons were U.S. healthcare reform implemented in March and the OTC recall announced earlier this year. Adjusting for these items, the 2010 fourth quarter operational sales would have been down approximately 1%.

In the U.S., sales declined 8.1%. In regions outside the U.S., sales declined 2.3% operationally, while the effective currency exchange rates negatively impacted our reported sales by 0.8 points. Our strongest performing region was Asia Pacific and Africa region, which grew 4.2% on an operational basis. The Western Hemisphere, excluding the U.S., declined 7.6% operationally, while Europe declined 4.5% operationally.

If you'll now turn to the consolidated statement of earnings, net earnings were $1.9 billion compared to $2.2 billion in the same period in 2009, a decrease of 12%. Earnings per share were $0.70 versus $0.79 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, 2010 fourth quarter adjusted results exclude the after-tax net impact of litigation settlement, increases to the product liability reserve and costs associated with the DePuy ASR Hip recall program.

The fourth quarter 2009 results have been adjusted to exclude the after-tax impact of the restructuring charge and net litigation settlements. Net earnings on an adjusted basis were $2.9 billion, and earnings per share were $1.03, up 0.6% and 1%, respectively, versus the fourth quarter of 2009.

I would now like to make some additional comments relative to the components leading to adjusted earnings before we move on to the segment highlights. Cost of goods sold at 32.2% of sales was 10 basis points higher than the same period in 2009, primarily due to the costs associated with the impact of the recalls and related remediation efforts in the Consumer business, and the impact of price reductions in our Pharmaceutical business and certain MD&D businesses. These were largely offset by cost reduction initiatives across the businesses, and certain charges reflected in the 2009 results related to the restructuring program.

Selling, marketing and administrative expenses at 33.1% of sales were down 90 basis points versus last year due to cost containment initiatives. Our investment in research and development as a percent of sales was 12.7%, 70 basis points lower than the fourth quarter of 2009 due to lower project costs and timing of spending on projects. Interest expense net of interest income of $114 million is $33 million higher than the fourth quarter of 2009, with lower interest income due to lower average interest rate on our investment.

Other expense net of other income of $1.1 billion compares to other income net of other expense in 2009 of $361 million. Excluding special items, net other income in the quarter was $123 million compared to $25 million of net other expense in 2009. 2010 reflects less charges in write-offs as offsets to gains as compared to 2009. Taxes were 17% in the fourth quarter of 2010 versus 16.4% in the fourth quarter of 2009. Dominic will discuss taxes and special items in his commentary.

Now turning to the consolidated statement of earnings for the full year of 2010. Consolidated sales to customers for 2010 were $61.6 billion, a decrease of 0.5% as compared to the same period a year ago. On an annual basis, sales were down 1.3 points operationally, and currency had a positive impact of 0.8 points. Net earnings for the 12-month period were $13.3 billion, and earnings per share were $4.78.

I'd now like to draw your attention to the boxed section. Adjusted net earnings of $13.3 billion in 2010 compares to adjusted net earnings of $12.9 billion in 2009. Adjusted earnings per share at $4.76 were up 2.8% versus the 2009 results.

Turning now to the 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 fourth quarter of 2010 of $3.6 billion decreased 15% as compared to the same period last year. On an operational basis, sales declined 14.5%, while the impact of currency was negative 0.5 points.

U.S. sales were down 28.8%, while international sales were down 4.9% on an operational basis.

In addition to the 2009 53rd week impact of just over two points, 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 6.5 points, while the devaluation and divestitures impacted operational growth by approximately one point each. Net of these items, operational sales declined approximately 4%.

For the fourth quarter of 2010, sales for the over-the-counter, or OTC pharmaceuticals and nutritionals, decreased 29.6% on an operational basis compared to the same period in 2009, with U.S. sales down 52.8% and sales outside the U.S. down 5.2% on an operational basis.

Sales were impacted by the voluntary recalls announced earlier this year and suspension of production of the McNeil Fort Washington, Pennsylvania facility. The McNeil recalls, including both Las Piedras and Fort Washington products, impacted the fourth quarter sales by approximately $300 million and total year sales by approximately $900 million.

As an update on the products produced at our McNeil Consumer Healthcare Las Piedras, Puerto Rico facility, we are at normal levels of production for key products, restocking commenced in the second quarter and continues to ramp up to normal trade inventory levels for key products. In an effort to simplify and streamline the operations at Las Piedras, we are in the process of temporarily transferring certain product to other sites or eliminating some other products and promotional items that would have been produced there.

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 that facility.

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