Johnson & Johnson (JNJ) Q2 2016 Earnings Call

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Alex Gorsky, Chairman & CEO and Dominic J. Caruso, Executive Vice President, Chief Financial Officer  

An overall positive medium term outlook in line with growth expectations in global healthcare

“We expect global healthcare to grow at 3% to 5% over the next five years, and we have an objective to grow our sales organically at a faster rate than the market.We also intend to grow our earnings faster than sales. When we combine these objectives with our plans of continue creating value through strategic acquisitions and partnerships as well as our strong dividend yield, we believe the result to be a basis for compelling, long-term total shareholder returns. And that is our focus. We invest for the long-term success of our business.”

Their capital allocation framework focuses on shareholder returns and value creating acquisitions

“Our capital allocation framework starts with paying dividends to our shareholders, which is why we have increased our dividend every year for the last 54 years. Next, we seek value-creating strategic acquisitions and partnership opportunities. And finally, we consider other prudent ways to return value to shareholders such as repurchase programs.”

Strong underlying sales growth in the first half of 2016

“…we continued to deliver strong underlying operational sales growth of approximately 7.9% for the second quarter and our sales results are above analyst estimates. Our second quarter earnings were also above analyst estimates, driven by strong sales performance and operating margin improvement…our operational sales growth this quarter was 5.3% and excluding the impact of acquisitions and divestitures, hepatitis C sales and also the impact of the devaluation that occurred in Venezuela last year, it was strong at more than 8%.”

Sales growing faster in the US than outside the US

“Worldwide sales to customers were $18.5 billion, up 3.9% versus second quarter 2015. On an operational basis, sales were up 5.3%, and currency had a negative impact of 1.4%. In the U.S., sales were up 7.4%. In regions outside the U.S., our operational growth was 3.1% while the effect of currency exchange rates negatively impacted our reported results by 2.7%. “

The impact of the Brexit is indeterminable presently

“We are watching the euro and other currencies closely, as it is uncertain how they will eventually settle out for the year…we’re closely following the situation with the UK’s vote to exit from the EU. We expect this will take time to fully determine what the impact will be, if any. To put it into perspective, though, the UK represents about 3% of our total sales. “

Hospital admissions and surgical procedures have increased, physician visits have declined

“…we are seeing a pick up in terms of hospital admissions and surgical procedures. I think hospital admissions are up around 3%. We think the procedures are probably up around 3.5%. We continue to see some decrease overall in office physician visits, down a couple of a percent. And we think that that’s just due to a more moderated utilization at the front-end due to increased co-pays and a number of other dynamics. But overall, if we look at the core growth rate in the medical hospital device area, we’re encouraged by some of the recent trends that we’re seeing.”

They´re the lookout for strategic, value creating acquisitions

“And as we said for some time, whenever we’re looking at inorganic growth opportunities, we look at, tuck-ins, we look at mid-size deals. We’ll look at large deals. Of course, the tuck-in strategy, particularly in Pharma, actually in all of our segments -Medical Device and Consumer, are those that, where we feel that we can create the most value. But we do think that there’s other opportunities to create value as well in, again, in mid and larger deals. But we’re going to be very disciplined. We’re going to be very decisive about how we do it, and ultimately try to better serve patients and consumers.”

A continuing expectation of consolidation in the market

“Over the past three years or four years, I think we’ve been pretty consistent in our thinking and in our projections about the likely increase in consolidation among providers and hospitals, particularly here in the United States, and just broader healthcare systems. And as systems feel continuing pricing pressure, we think that will manifest itself by them having consolidation. I think we’ve seen those trends. And I think they’re clearly starting an effort to try and be as effective and as efficient as possible. So we do believe that that will be a longer secular trend that’s going to continue.”

A disciplined approach to acquisitions with consideration to valuations

“..We´re very disciplined in our approach to acquisitions. And although we’re actively involved in considering them, valuations come into play, and willingness of the other party to do an acquisition at certain valuations come into play. So that’s regardless of how much money we have available to spend.”

Some valuations of potential acquisitions are prohibitive

“There are some expectations that are still not, in our opinion, normalized for appropriate valuations in the market, so that’s a factor, and that will take time and we’re patient with that. And then we’ll see how the market evolves over time, or as we learn more about the acquisition candidates and their progress in various areas.”

Extra notes

 

  • The Company increased its sales guidance for the full-year 2016 to $71.5 billion to $72.2 billion.  Additionally, the Company increased its adjusted earnings guidance for full-year 2016 to $6.63 – $6.73 per share.
  • The Board of Directors declared a cash dividend for the 3rd quarter of 2016 of $0.80 per share on common stock with the ex-dividend date being August 19, 2016.