Johnson & Johnson (JNJ)
Q3 2008 Earnings Call Transcript
October 14, 2008 8:30 am ET

Executives

Louise Mehrotra - Vice President, Investor Relations
Dominic Caruso - Vice President, Finance and Chief Financial Officer
Christine Poon - Vice Chairman, Board of Directors and Worldwide Chairman Pharmaceuticals Group
Paul Stoffels - Company Group Chairman, Global Research and Development Pharmaceuticals Group

Analysts

Rick Wise - Leerink Swann
Matt Dodds - Citigroup
Seth Damergy – Deutsche Bank
David Roman – Morgan Stanley
Catherine Arnold - Credit Suisse

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 third quarter of 2008. Joining me on the podium today are Chris Poon, Vice Chairman, Board of Directors and Worldwide Chairman, Pharmaceuticals Group, Paul Stoffels, Company Group Chairman, Global Research and Development Pharmaceuticals Group and Dominic Caruso, Vice President, Finance and Chief Financial Officer.

Also joining us today in the audience is Sheri McCoy, Worldwide Chairman, Surgical Care Group. As we announced last week, effective January 1, 2009, Sheri will assume the role of Worldwide Chairman, Pharmaceuticals Group.

A few logistics before we get into the details, the audio and visuals from these presentations 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 third quarter for the corporation and highlights for our three business segments. Following my remarks, Dominic will provide additional commentary on the results for the quarter and guidance for the year. Chris and Paul will then provide an update on our Pharmaceuticals Business. We will then open the floor to your questions. We will conclude our formal presentation at approximately 9:30 am and following Q&A with some final remarks by Dominic we’ll conclude the meeting around 10:00 am.

Distributed with the copy of the press release that you’ve 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 2007 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.

The Pharmaceutical Group presentation contains statements about new molecular entities or NMEs and other medicines or line extensions in various stages of development. These presentations are based on the Company’s current knowledge of the status of development of the NMEs, medicines and line extensions and are subject to the challenges and difficulties inherent in product development. Not every compound highlighted today will make it to the market.

In Biopharmaceuticals there are higher possibilities of encountering infringement claims by competitors with respect to patents or other intellectual property rights. The company does not undertake to update any forward looking statements as the result of new information or future development.

Last item, during the call, non-GAAP financial measures may be used to provide information pertinent to the 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 2008. If you would refer to your copy of the press release, let’s begin with the schedule titled supplementary sales data by segment of business.

Worldwide sales to customers were $15.9 billion for the third quarter of 2008, up 6.4% as compared to the third quarter of 2007. Our operational growth was 3.3% and currency added 3.1 points. If you turn to the schedule showing sales by geographic area, you will see that we achieved growth of 0.4% in the US. In regions outside the US our operational growth was 6.5%, while the effect of currency exchange rates positively impacted our reported results by 6.6 points. Our strongest performing region was the Western Hemisphere excluding the US which grew 15.3% on an operational basis. The Asia/Pacific/Africa region grew by 11.3% operationally while Europe grew 1% operationally.

If you will now turn to the consolidated statement of earnings, net earnings on a reported basis were $3.3 billion and earnings per share were $1.17. This compares to $2.5 billion and $0.88 in the same period in 2007. Please direct your attention to the box section of the schedule where we have provided adjusted earnings information. As referenced in the footnote, third quarter 2007 results were adjusted to exclude the after-tax impact of the cost associated with the restructuring program of $528 million. There were no adjustments to the 2008 results in the quarter.

Net earnings on an adjusted basis and earnings per share were up 7.6% and 10.4% respectively versus the third quarter of 2007.

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. Cost of goods sold at 30% was up 150 basis points versus the same period in 2007. Approximately half of the increase is due to changing mix within our businesses while the remaining half is due to additional costs incurred in our manufacturing operation.