Johnson & Johnson (JNJ)

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Johnson & Johnson (JNJ)

Q4 2011 Earnings Call

January 24, 2012 8:30 am ET


William C. Weldon - Chairman, Chief Executive Officer, Chairman of Executive Committee and Chairman of Finance Committee

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

Louise Mehrotra - Vice President of Investor Relations


Charles Anthony Butler - Barclays Capital, Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

David R. Lewis - Morgan Stanley, Research Division

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

Catherine J. Arnold - Crédit Suisse AG, Research Division


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 2011.

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 3 business segments. Following my remarks, Bill Weldon will comment on the 2011 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 fourth quarter financial results and guidance for the full year of 2012. We will then open the meeting to your questions. We will conclude our formal presentation at approximately 9:30 and following Q&A with some final remarks by Bill, will conclude the meeting around 10 a.m.

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 businesses to facilitate updating new 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 meeting 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 review, 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 Johnson & Johnson website at

Now I would like to review our results for the fourth quarter of 2011. If you 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 $16.3 billion for the fourth quarter of 2011, up 3.9% as compared to the fourth quarter of 2010. On an operational basis, sales were up 4% and currency had a negative impact of 0.1%. In the U.S., sales decreased 3.4%. In regions outside the U.S., our operational growth was 10.4% while the effective currency exchange rates negatively impacted our reported results by 0.2 points. The Western Hemisphere excluding the U.S. grew by 17.8% operationally, while Europe grew 9.4% operationally. The Asia-Pacific, Africa region grew 7.9% on an operational basis.

The strong growth in the regions outside the U.S. was due to the success of new product launches, the impact of the amended agreement with Merck regarding REMICADE and SIMPONI, as well as acquisitions such as Crucell. I will discuss these items in more detail in the segment commentary.

If you'll now turn to the consolidated statement of earnings. Net earnings were $218 million compared to $1.9 billion in the same period in 2010. Earnings per share were $0.08 versus $0.70 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, fourth quarter net earnings were adjusted to exclude items such as product liability expenses, the net impact of litigation settlement, costs associated with the DePuy ASR Hip recall program, and an adjustment to the value of the currency option and cost related to the planned acquisition of Synthes, Inc. Net earnings on an adjusted basis were $3.1 billion and earnings per share were $1.13, up 9.3% and 9.7% respectively versus the fourth 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. For the fourth quarter, cost of goods sold at 32.8% of sales was 60 basis points higher than the same period in 2010, primarily due to the impact of the Crucell business, as well as the ongoing remediation work in our OTC business.

Fourth quarter selling, marketing and administrative expenses at 33.6% of sales were up 50 basis points. As we discussed last quarter, expenses including investment spending behind our new products, 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 13.3%, 60 basis points higher than the fourth quarter of 2010, primarily due to the impact of the recent collaboration agreement with Pharmacyclics. Interest expense net of interest income of $148 million was up $34 million versus the fourth quarter of 2010 due to a higher average debt balance. Other expense net of other income was $2.9 billion in the fourth quarter of 2011 compared to $1.1 billion in the same period last year. Excluding special items, other income net of other expense was $501 million compared to $123 million in 2010. Excluding special items, taxes were 14.4% in the fourth quarter of 2011, bringing our annual effective tax rate to 20.1%.

Dominic will provide some additional commentary on both other income and taxes in his remarks.

Now turning to the consolidated statement of earnings for the full year of 2011. Consolidated sales to customers for the year 2011 were $65 billion, an increase of 5.6% as compared to the same period a year ago. On an annual basis, sales grew 2.8 points operationally and currency had a positive impact of 2.8 points. On the consolidated statement of annual earnings, I'd like to draw your attention to the boxed section. Adjusted net earnings of $13.9 billion in 2011 compares to adjusted net earnings of $13.3 billion in 2010. Adjusted earnings per share at $5 grew 5% versus the 2010 results.

Turning now to business segment highlights, please refer to the supplementary sales schedule highlighting major products or businesses for the fourth quarter of 2011. I'll begin with the Consumer segment. Worldwide Consumer segment sales for the fourth quarter of 2011 of $3.7 billion increased 1.6% as compared to the same period last year. On an operational basis, sales increased 2.7%, while the impact of currency was negative 1.1%. U.S. sales were up 2.4%, while international sales grew 2.8% on an operational basis. For the fourth quarter of 2011, sales for the OTC Pharmaceuticals and Nutritionals increased 4.6% on an operational basis compared to the same period in 2010. Sales in the U.S. were down 2.9% due to supply constraints on certain products, partially offset by the return to the market of other key products and the impact of the acquisition of the full ownership rights to certain digestive health products. McNeil-PPC is operating under a Consent Decree covering the manufacturing facilities in Las Piedras, Puerto Rico and Fort Washington and Lancaster, Pennsylvania. McNeil continues to operate the manufacturing facilities in Las Piedras and Lancaster, however, production volumes in some of these facilities have been impacted due to the additional review and approval processes required. Regarding the products previously produced at Fort Washington facility, McNeil continues to work on the resiting of these products to other facilities. McNeil is making progress on the validations at these sites and a modest amount of products returned to the market in fourth quarter of 2011. Product will continue to be reintroduced throughout 2012.

Sales outside the U.S. were up 8.7% on an operational basis due to the recent acquisition of the DOKTOR MOM and RINZA brands from J B Chemicals & Pharmaceuticals and the successful launch of new smoking-cessation products. Our Skin Care business grew 6.6% on an operational basis in the fourth quarter of 2011, with sales in the U.S. up 14.5% and sales outside the U.S. up 1.3% on operational business, primarily due to the success of NEUTROGENA new product launches. Baby care products achieved operational growth of 0.6% when compared to the fourth quarter of 2010 due to increased sales of hair care and cleansers, partially offset by lower sales of lotions and creams. Women's Health declined 9.5% on an operational basis. Sales in the U.S. were down 24.6%, while sales outside the U.S. were down 4% on an operational basis. The sales decline this quarter was primarily due to the impact of divestitures of certain brands. Sales in the Oral Care business increased 7% on an operational basis, with the U.S. up 16.1% due to the success of recently launched LISTERINE products. Wound Care/Other was down 0.5% on an operational basis compared to the same period last year, impacted by the divestiture of PURELL. That completes the review of the Consumer segment, and I'll now review highlights for the Pharmaceuticals segment.

Worldwide net sales for the fourth quarter of $6.1 billion increased 6.7% versus the same period last year. On an operational basis, sales increased 6.6% with a positive currency impact of 0.1 points. Sales in the U.S. decreased 8.3%, while sales outside the U.S. increased on an operational basis by 25%. The loss of marketing exclusivity for LEVAQUIN in June negatively impacted worldwide pharmaceutical operational sales growth by approximately 8 points, and U.S. growth by approximately 13 points. Positively impacting the sales growth in the quarter were sales related to the recent acquisition of Crucell and the impact of the amended agreement with Merck, partially offset by divestitures. Excluding the items mentioned as well as the impact of inventory changes, the underlying worldwide operational growth was approximately 9%.

Now reviewing the major products. Sales in the U.S. of our key immunology products which include REMICADE, STELARA and SIMPONI were up nearly 20% versus 2010 with growth for REMICADE at 14.3%, STELARA at over 70% and SIMPONI at 10.7%. With this strong growth, we continue to be the market leader in immunology in the U.S. On a combined basis, export and international sales of REMICADE increased nearly 70% due to the impact of the amended agreement with Merck, complemented by international market growth. As a reminder, we began recording sales of products from the territories relinquished by Merck in the third quarter and the amended distribution agreement division of contribution income split of 50% also went into effect July 1, 2011.

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