Johnson & Johnson Management Discusses Q1 2012 Results - Earnings Call Transcript

Johnson & Johnson (JNJ)

Q1 2012 Earnings Call

April 17, 2012 8:30 am ET

Executives

Louise Mehrotra - Vice President of Investor Relations

Dominic J. Caruso - Chief Financial Officer and Corporate Vice President of Finance

Analysts

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

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

Jami Rubin - Goldman Sachs Group Inc., Research Division

Matthew J. Dodds - Citigroup Inc, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Ian Sanderson - Cowen and Company, LLC, Research Division

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

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Frederick A. Wise - Leerink Swann LLC, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Alison Yang - Barclays Capital, Research Division

Glenn J. Novarro - RBC Capital Markets, LLC, Research Division

David R. Lewis - Morgan Stanley, Research Division

Presentation

Operator

Good morning, and welcome to the Johnson & Johnson First Quarter 2012 Earnings Conference Call. [Operator Instructions] This call is being recorded. If anyone has any objections, you may disconnect at this time. [Operator Instructions] I will now turn the call over to Johnson & Johnson. You may begin.

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 first quarter of 2012. Joining me on the call today is Dominic Caruso, Vice President of Finance and Chief Financial Officer. A few logistics before we get into the details. This call is being made available through 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 first quarter for the corporation and highlights for our 3 business segments. Following my remarks, Dominic will provide some additional commentary on the first quarter financial results and discuss guidance for the full year of 2012. We will then open the call to your questions. We expect the call to last approximately one hour. Included with the press release that was sent to the investment community earlier this morning is a schedule showing sales for major products and/or businesses to facilitate updating your 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 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 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 and on the Investor Relations section of the Johnson & Johnson website at investor.jnj.com.

Now I would like to review our results for 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 $16.1 billion dollars for the first quarter of 2012, down 0.2% as compared to the first quarter of 2011. On an operational basis, sales were up 1% and currency had a negative impact of 1.2%. In the U.S., sales decreased 5.1%, impacted by generic competition for LEVAQUIN and CONCERTA. In regions outside the U.S., our operational growth was 6.4%, while the effective currency exchange rates negatively impacted our reported results by 2.3 points. The strong growth in the regions outside the U.S. was primarily due to the success of new product launches and the impact of the amended agreement with Merck regarding REMICADE and SIMPONI. I will discuss these items in more detail in the segment commentary. The Western Hemisphere, excluding the U.S., grew by 23.3% operationally, while Europe grew 4.5% operationally. The Asia-Pacific Africa region grew 1.2% on an operational basis.

If you'll now turn to the consolidated statement of earnings, net earnings were $3.9 billion compared to $3.5 billion in the same period in 2011. Earnings per share were $1.41 versus $1.25 a year ago. Please direct your attention to the boxed section of the schedule, where we have provided earnings adjusted to exclude special items. As referenced in the accompanying tables on the non-GAAP measures, 2012 first quarter net earnings were adjusted to exclude the after-tax net impact of a currency adjustment related to the planned acquisition of Synthes, partially offset by costs associated with the acquisition. First quarter results for 2011 were adjusted to exclude the after-tax impact of litigation expense and a few ASR Hip recall costs. Net earnings on an adjusted basis were $3.8 billion and earnings per share were $1.37, up 1.5% versus the first quarter of 2011.

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 first quarter, cost of goods sold at 30.4% of sales was 90 basis points higher than the same period in 2011 primarily due to the ongoing remediation work in our OTC business and unfavorable mix, including the impact of the Crucell business. First quarter selling, marketing and administrative expenses at 31.1% of sales were down 20 basis points due to cost-containment initiatives across many of our businesses. Our investment in research and development as a percent of sales was 10.2%, 60 basis points lower than the first quarter of 2011 primarily due to the timing of milestone payments. Interest expense, net of interest income of $130 million, was up $26 million versus the first quarter of 2011 due to a higher average debt balance.

Other income net of other expense was $611 million in the first quarter of 2012 compared to $13 million in the same period last year. Excluding special items, other income net of other expense was $494 million in 2012 compared to $359 million in 2011. 2012 results include the gain related to the divestiture of Bystolic while 2011 results included the gain related to the equity investment in Crucell. Excluding special items, the effective tax rate was 22.8% in the first quarter of 2012, in line with the 2011 rate.

Turning now to business segment highlights. Please refer to the supplementary sales schedules highlighting major products or businesses for the first quarter of 2012. I'll begin with the Consumer segment. Worldwide Consumer segment sales for the first quarter of 2012 of $3.6 billion decreased 2.4% as compared to the same period last year. On an operational basis, sales decreased 0.6%, while the impact of currency was negative 1.8%. U.S. sales were down 2.2%, while international sales grew 0.4% on an operational basis. Baby care products declined on an operational basis by 1.4% when compared to the first quarter of 2011 due to lower sales of lotions and powders, partially offset by stronger sales of wipes.

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