Q3 2007 Johnson & Johnson Earnings Webcast and Analyst
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FINAL TRANSCRIPT JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and Analyst Meeting Event Date/Time: Oct. 16. 2007 / 8:30AM ET www.streetevents.com Contact Us © 2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Oct. 16. 2007 / 8:30AM, JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and Analyst Meeting CORPORATE PARTICIPANTS Louise Mehrotra Johnson & Johnson - VP, IR Dominic Caruso Johnson & Johnson - VP, Finance & CFO Nick Valeriani Johnson & Johnson - Worldwide Chairman, Medical Devices and Diagnostics CONFERENCE CALL PARTICIPANTS Rick Wise Bear Stearns - Analyst Larry Biegelsen Wachovia - Analyst Bob Hopkins Lehman Brothers - Analyst Sara Michelmore Cowen & Co. - Analyst Catherine Arnold Credit Suisse - Analyst Valerie Brown Alliance Bernstein - Analyst Glenn Novarro Banc of America - Analyst PRESENTATION Louise Mehrotra - Johnson & Johnson - VP, IR Good morning and welcome. I am Louise Mehrotra, Vice President of Investor Relations for Johnson & Johnson and it is my pleasure this morning to review our business results for the third quarter of 2007. Joining me on the podium today are Nick Valeriani, Worldwide Chairman, Medical Devices and Diagnostics 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 will begin by briefly reviewing highlights of the third quarter for the Corporation and highlights for our three business segments. Following my remarks, Dominic will provide an additional commentary on the results for the quarter and the guidance for the year. Nick will then provide an update on our Medical Devices and Diagnostics business. 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 Dominic, we will conclude the meeting around 10 a.m. Distributed with the copy of the press release that you just received is a schedule with actual revenues for the 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. www.streetevents.com Contact Us 1 © 2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Oct. 16. 2007 / 8:30AM, JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and Analyst Meeting 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 2006 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. Last item, 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 Johnson & Johnson website. Now I would like to review our results for the third quarter of 2007. If you would refer to your copy of the press release, let©s begin with the schedule titled Supplementary Sales Data. Worldwide sales to customers were $15 billion for the third quarter of 2007, up 12.7% as compared to the third quarter of 2006. Our operational growth was 9.7% and currency had a positive impact of three points. The sales results include the net impact of the acquisition of Pfizer Consumer Healthcare or PCH, which was completed in December 2006. On a pro forma basis, including the net impact of the PCH acquisition in both periods, worldwide sales increased approximately 2.4% operationally. Further, operational growth in the quarter was negatively impacted by approximately five points due to a number of factors. Generics and sales rebate adjustments in our pharmaceutical business and pressures causing decreases in the overall market for both drug-eluting stents and erythropoietin stimulating agents or ESAs. I will cover each of these items in more detail in the segment commentary. If you turn to the schedule showing sales by geographic area, you will see that we achieved growth of 5.8% in the US. In regions outside the US, our operational growth was 14.7% while the effect of currency exchange rates positively impacted our reported results by 6.8 points. The Western Hemisphere, excluding the US, grew 24.9% on an operational basis. Europe grew 13.3% while the Asia-Pacific/Africa region grew by 11.8%. The results in all regions have been positively impacted by the acquisition of Pfizer Consumer Healthcare. If you now turn to the consolidated statement of earnings, net earnings on a reported basis were $2.5 billion while earnings per share were $0.88. This compares to $2.8 billion and $0.94 in the same period in 2006. Please direct your attention to the boxed section of the schedule where we have provided adjusted earnings information. As a reference in the footnote, third-quarter 2007 results were adjusted to exclude the after-tax impact of the costs associated with the previously announced restructuring program of $528 million. The third-quarter 2006 results were adjusted to exclude the after-tax impact of an in-process research and development charge of $115 million associated with the acquisitions of Colbar LifeSciences and Ensure Medical. On an adjusted basis, third-quarter 2007 net earnings and earnings per share were up 7% and 8.2% respectively. I would now like to make some additional comments relative to the components leading to the adjusted earnings before we move on to the segment highlights. For the third quarter of 2007, cost of goods sold at 28.5% was up 100 basis points as compared to the same period in 2006. The third-quarter results included the addition of the PCH business to our mix of businesses, increasing cost of goods sold as a percentage of sales by an estimated 80 basis points. Selling, marketing and administrative expenses at 32.7% of sales were up 40 basis points as compared to 2006. The addition of the PCH business to our mix of businesses increased these expenses by an estimated 100 basis points, substantially offset by continued cost containment efforts across our business. Our investment in research and development as a percent of sales was 12.3%, 60 basis points less than the third quarter of 2006. The addition of PCH to our mix of businesses reduced R&D as a percentage of sales by approximately 60 basis points. www.streetevents.com Contact Us 2 © 2007 Thomson Financial. Republished with permission. No part of this publication may be reproduced or transmitted in any form or by any means without the prior written consent of Thomson Financial. FINAL TRANSCRIPT Oct. 16. 2007 / 8:30AM, JNJ - Q3 2007 Johnson & Johnson Earnings Webcast and Analyst Meeting Interest income net of interest expense of $52 million was down $142 million compared to the third quarter of 2006 due to a lower cash balance and higher debt position. Other expense net of other income was $2 million in the third quarter of 2007 compared to $45 million of net other expense in the same period last year. As previously reported, the 2006 results included an increase to our product liability reserve. With regard to taxes, please direct your attention to the effective tax rate excluding special charges shown in the boxed section of the schedule. In the third quarter of 2007, taxes were 23.3% as compared to the prior year rate of 23.9%. Dominic will provide further comments on taxes during his remarks. Looking at year-to-date results, consolidated sales to customers for the first nine months of 2007 were $45.1 billion, an increase of 13.9% as compared to the same period a year ago. On a year-to-date basis, operational growth was 11.3% and currency had a positive impact of 2.6 points. On the consolidated statement of year-to-date earnings, I would first like to draw your attention to the boxed section. In 2007, the after-tax impact of charges for in-process research and development and the costs associated with the restructuring program have been excluded. In 2006, after-tax amounts for both in-process research and development and the Guidant acquisition termination fees have been excluded. With these adjustments, net earnings for the first nine months of 2007 were $9.5 billion or $3.27 per share, up 9% and 10.8% respectively as compared to the same period in 2006. Now, turning to the business segment highlights. I will begin with the Consumer segment. Worldwide consumer segment sales of $3.6 billion increased 47.5% as compared to the third quarter of 2006. Operational growth was 43.4% while currency contributed 4.1%. US sales were up 39.8% while international sales grew 46.5% on an operational basis. On a pro forma basis, including the net impact of the acquisition of Pfizer Consumer Healthcare in both periods, sales were up an estimated 3.5% on an operational basis. For the third quarter of 2007, sales for the over-the-counter pharmaceuticals and nutritionals increased 79% on an operational basis compared to the same period in 2006.