Johnson & Johnson (NYSE:JNJ)
2017 Barclays Global Consumer Staples Conference Call
September 05, 2017 12:45 PM ET
Jorge Mesquita – EVP, Worldwide Chairman, Consumer
Lauren Lieberman – Barclays Capital
So, first, welcome everyone to the 26th Annual Barclays Global Consumer Staples Conference. It’s great to see so many familiar faces. This is truly a fun and special event to host. And as always, we’d like to thank all the presenting companies and investors for spending time with us here in Boston, particularly the day after Labor Day.
As many of you know, I am Lauren Lieberman and I cover the US Cosmetics Household, Personal Care and Beverage industries, Andrew Lazar, our US Packaged Food analyst is next door introducing ConAgra. Other key members here include Ben Theurer, who leads our Americas Agribusiness coverage and Alex Smith who covers European staples for us out of London.
I am pleased to report that even after a 15% spike in attendance last year, a very tough comp by anyone’s standards, conference turn out is again very strong this year. In fact we’ve consistently grown attendance posting a CAGR of nearly 7% over the past 10 years or a rough doubling of attendees during these times. Pretty impressive organic growth which we are sure that many companies in this conference would love to emulate. But of course, this has more to do with the content that we are able to provide and what the companies have to say when they come up here and spend their time with us.
Since the last year’s conference we’ve seen obviously heightened deal activity across both public and private companies. Also, we’ve seen that consumer staples companies take more aggressive steps in response to a rapidly changing environment, both in terms of consumer preferences and the retail landscape. So, this year we obviously look forward to hearing companies articulate how they plan to deal with this ever-changing environment.
Few quick notes about the conference and exit door difference, so the breakout rooms this year have been moved, so you will go that way and ground the bend, and then there is two breakout rooms over there, they are bigger. It’s a great setup so hopefully you all will agree.
And the other thing is that any of the food and beverages, the packaged food and beverages, not at your lunch today, but what we don’t consume will be donated at the end of the conference. We are working on logistics that hopefully it goes to Houston — but that’s — kept promises but that’s what we are working on currently. So, we always appreciate feedback about what’s working for the conference, what’s not. Our team Barclays will all be at the bar in the lobby obviously tonight and tomorrow night, so please do reach out to us with any feedback.
So, with all of that on to our first presentation which is Johnson & Johnson. This is J&J’s first time at our conference and only the second time that the company has presented to a dedicated consumer audience, but yet J&J is a very well-established pioneer in the consumer product industry. With a strong stable of iconic and mega brands and a focus on expanding its portfolio in key geographies J&J has steadily succeeded in expanding market share in many of the categories while driving significant profitability improvements.
We are thrilled to have Jorge Mesquita with us today who is Executive Vice President, Worldwide Chairman, Consumer; to provide an overview of the consumer business and to discuss how J&J is well positioned for growth despite its volatile external environment. Jorge, thank you very much for being here.
Thank you very much Lauren for the introduction and good afternoon everyone. So as Lauren said, this is indeed our first time at Barclays and we’re thrilled to be here, to have a chance to in some way introduce you to Johnson & Johnson and our consumer business. In the context to this presentation today, I’ll refer to some non-GAAP measures and forward-looking statements if you have any questions about that please refer to our investor website.
I think that as a way of introduction, I should start by telling you about our values and what we stand for as a unit. So, guided by Johnson & Johnson’s cradle, our purpose is to care for consumers all over the world, anticipate their needs and coming up with great solutions and experiences that helps them and those they care for lead healthy and vibrant lives. This is our mission, this is what gets us going every day.
We are a $14 billion business and as Lauren said, we’re really fortunate to have iconic brands in our portfolio that are really household names across the world. We have 12 mega-brands, which combined represent about two-thirds of our sales and these are the largest brands, the ones that we want to drive disproportionate growth to create scale. Three of those brands are billion dollar brands. Johnson’s Baby, Neutrogena and Listerine. And in the next four years, we anticipate that Aveeno, TYLENOL and the recently acquired OGX will graduate to the billion dollar club, so that’s six billion brands.
We compete in six broad categories beauty, OTC Over the Counter Drugs, Baby Care, Oral Care, Wound Care and Women’s Health or Feminine care. Our two largest businesses are OTC and beauty, combined they represent about 60% of our sales, 30% each. And we have a large global footprint, we are in more than 100 markets globally, but we have still a very sizeable business here in United States accounting for over 35% of our sales.
We made a lot of progress last year towards our strategic aspirations. In 2016, we grew our top-line 4.2% organic and that exceeded both our peer composite as well as the market. In doing so, we built market share, we gained share last year overall and we gained share in four of the six categories where we play. We gained share in OTC, Oral Care, Feminine care and Wound Care. We held share in Beauty, the fast growing category that we compete in and the one outlier was Baby, where frankly, we have continued to underperform and this remains our biggest challenge and priority focus area. But perhaps our biggest contribution last year was in our improvement in profitability. We expanded income margin by 560 basis points reaching almost 20%. In fact, if you look at our absolute income, operating income has doubled reaching 2014 and 2016 with doubled income over two years.
That said, year-to-date in 2017 frankly, we have not performed as well as we’d like. Our sales, operating sales are up 1.6% and this is consistent frankly with the slowdown that you’ve seen across the entire industry, but I am optimistic that we’re going to see a sequential acceleration from here to the end of the year and get back to steady growth. So we feel good about the progress that we’re making. But the reality is that the pace of change in our industry is truly accelerating as Lauren said, in fact where I want to spend my time with you here today is to talk about that our industry is really being disruptive. If you look at our last few decades in this industry, there were a series of barriers for entry or sources of competitive advantage that were well established but those are becoming less and less unique. It used to be that companies like ours would acquire the best talent through our recruiting human resources mechanism, but it’s never been easier for you to source great talent across the world on demand.
Our ability to build and nurture brands, brand building competencies used to be again a source of competitive advantage but the reality is it’s very easy for you to start building a business, building a brand from scratch and you really don’t need a ton of money to get a community of active users that support you. Large scale manufacturing assets used also to be a source of competitive advantage. But the reality is if you want to compete in this industry, you can access high quality contract manufacturing work any place in the world.
Retailer relationships used to be also a source of advantage and a barrier for entry, but as you all know, new companies can now sell directly to consumers profitably in most markets. Innovation used to also be a big barrier for entry but again you have an ability now through a network of external partnerships to access innovation even crowd sourcing. And then financial firepower for companies like J&J is not as critical as it used to be because new startup entrants can access capital relatively easy through VCs.
So what you see is a result of these barriers coming down, you see new class of competitors emerging and now we have our classic multi-national, well established competitors and you have these new entrants to contend with. So this disruption that is happening is digitally enabled and is changing the face of our industry. You see these new players coming into our category and at the heart of this disruption, there is a new consumer centric paradigm and that’s challenging completely the cost of goods scale and the value scale as we know it and its forcing a change in both the retail and the media landscape.
And what we’re seeing now is there is a new playbook emerging, a new how-to-win playbook that is really characterized by an asset light infrastructure. And the control of the consumer relationship,via the acquisition of the sports party data that allows for you to have a highly personalized iterative on demand consumer experience. And the ownership of this relationship with consumers and associated ecosystem that comes with it is now the new playbook. It is now the greatest new source of competitive advantage.
So now we have to contend with both large multi-national companies and these startups. So we asked ourselves, you know what are these companies doing well? What is it that is allowing them to succeed, because by and large if you look at our categories, these small players are the ones that are gaining shares and majority of large companies are losing market share. So we’ve found five things that we think these players are doing uniquely well.
First, they are really committed to breakthrough innovation by staying really close to consumers and customers and staying on top of consumer trend. They see where the product is going and they are designing to what that emerging consumer need is. They are focused on building digital first brands that have a clear purpose and a reason for being that resonates with millennial consumers.
They capitalize on the rise of emerging channels. They don’t just play in the legacy channels but they figure out what are the new shopping behaviors, new emerging channel trends and they disproportionate drive growth in those channels. They are hyper efficient. Normally have very lean cost structures, flat organizations, no bureaucracy and as a result they move very fast. Speed is a great currency for them.
So,you may ask how do we know all this? Well because we have the good fortune to have acquired a company like this last year, Vogue the makers of OGX. And Vogue shows its characteristics in space across the board. This is an organization that is intensely focused on their consumers and their shoppers and their consumers and they’re focused single mindedly on designing great new products that consumers truly love. So for example in 2014, Vogue launched a new line of Sea Minerals hair care products, which was a trend that they anticipated seeing in other categories unrelated to beauty and they brought it to this category before, any competitor could in fact the first imitations into the space came 18 months later.
Another example was that in partnership with Walmart they learned that Biotin and Collagen were two very hot new trends that were emerging in the hair care space and the salon space and they were able to launch it in the marketplace. So very focused on external trends for shoppers and the voice of the customer. Over 80% of the brand support levels of Vogue are digitally invested. It’s a company that is digital first and it’s really creating a community of active users and monitoring and engaging in dialogue with them and in the process of doing that, they’re getting feedback about what are the new emerging needs, what are the new trends and this conversation is a great input into their innovation stream.
In terms of capitalizing on growth of emerging challenge, Vogue has an exclusivity arrangement with Ulta here in the U.S., whereby at the beginning of the year, we sell into Ulta the full range of new innovation for that year. And with them, with Ulta’s help, they curate, what are the items that truly have the greatest impact on consumers and then those are the ones they roll out across the whole world. And they have similar arrangements with companies like Boots in the UK.
We are hyper efficient and if you go and visit that company, it’s a $400 million company, it’s a 100 people, they’re all collocated, they’re all — there is no bureaucracy there is no need for emails. You just walk down the hall and you talk to each other. They are very-very lean in the cost structure, again focused on the outside world. This picture you see here is our Chief Executive Officer,Alex Gorsky, visiting our OGX team in Tampa. And this particular room they’re in, they call themselves the zoo. And what you have there is basically you have collocated designers, consumer insight folks, marketers, researchers, engineers and that’s all they do. They iterate, they receive feedback from the marketplace and they respond and they innovate in really fast time. And they move very quickly.
What you see here on the slide is a new collection for the holidays that was conceived in the month of August of last year and will ship to the marketplace in time for Christmas in only four and a half months. That’s how fast they can move because they are unencumbered by bureaucracy, by processes, they can move with great speed.
So, let me show you a video that illustrates what Vogue is all about, what this company is all about to bring it to life.
So, we’re very bullish on this acquisition. This is a great company. And as I said earlier, we are expecting to reach $1 billion dollars by the end of this decade. So, it’s very exciting growth prospect for us.
So, the question that we ask ourselves is how do we…
Unidentified Company Representative
Absolutely, yes, we are learning a lot from them, as I’m from there, we can get more into that if you like in our Q&A. So, the question we ask ourselves is, how do we compete ambidextrously in these two worlds? We have to play with the big legacy competitors and the newcomers. What do we do to achieve that? Which is kind of the question Lauren asked at the beginning. So, we feel we have a very strong robust strategy that is very much in place and balanced with clear work to play and how to win choices.
But we have identified five principles that we need to follow as we execute that strategy in order for us to be able to compete ambidextrously. The first one is, we need to broaden the scope of our innovation model. We need to build our brands ambidextrously. We need to win traditional, legacy channels, but also in the new and emerging channels. We need to keep the pedal to the metal on our productivity and cost agenda. And we need to evolve our work processes and our culture as an organization so that we can compete at global scale, but also in an entrepreneurial way one market at a time.
So, let me start by talking about broadening the innovation scope. We want to do two things here. First of all is, we need to continue driving big global platforms globally. We need to take our best technologies and roll them out across the world, the ones that have the biggest source of competitive advantage, that’s critical first to compete at scale. But we need to also supplement that with SaaS cycle, locally relevant innovation. Another dimension in which we need to evolve our innovation model is, we need to continue to deliver superior product and packages to consumers, that’s always been at the core of our success, but that’s not enough. With it, we need to offer a digital ecosystem that enables an engagement with our consumers and drives habitual consumption and loyalty overtime.
An example of this breakthrough platform and SaaS cycle innovation is Neutrogena Hydro Boost. This is a new global platform that is proprietary to us. Its uses a combination of a Water Gel Matrix and Hyaluronic Acid, which combined absorb over 1,000 times its weight in water. It’s a very powerful hydration formula that consumers love, because they’re using it as a way to prevent wrinkles before set on, they are trying to delay the onset of wrinkles as much as possible and moisturization, which is at the core of Neutrogena success is a huge way to achieve that. This is being rolled out across every single platform we have around the world and I’d like to show you a video, how this platform is being exploited on a global level.
It’s a huge success for us, but as we rolled it out, we saw that there were a couple of channel segment needs that were not covered by our global platforms. We saw for example [indiscernible] serums which were not part of the overall global platform, were particularly relevant in places like Asia and parts of the US. So, what we’ve decided to do is partner with a company in Korea called Cosmex which has allowed us to turbo charge our Neutrogena innovation platform with its SaaS cycle innovation and that’s supplemented our core Hyaluronic acid global platform. So, we called this two-speed innovation. We need both large platform innovation at scale and then supplemented with partner enabled SaaS cycle regional relevance in innovation, because these small players, they innovate this way too. They have an ability to iterative innovate with customers and channels in a much faster cycle way than we normally can do.
Superior products and packaging will always be at the core of our innovation but a digital ecosystem is key to do as well. Recently we launched across the world, a new line of light therapy products from Neutrogena. We think light therapy can disrupt the beauty industry and we intend on leading that transformation.
What we’ve learned is that with the right combination of light color and wavelength, you can demonstrate powerful clinical evidence of huge skin benefits in acne, in anti-ageing, in tone, in just in general skin care benefits in many different dimensions. So, let me show you the ad that we used to support the launch of Neutrogena light therapy mask offering a promise of fairness for ageing consumers which is a very relevant one and as you see it’s not just about the advertising itself but its digital ecosystem that drives an engagement with consumers around this product.
This light therapy platform has been a huge success for us and in Asia we’re very really producing as much as we can sell. It’s just a tremendous success for us and we’re very bullish. And you can see here this digital ecosystem is creating a community of active users that are engaging with us and we use these very well-known bloggers to attract these new consumers to our group.
Another dimension that I want to talk about, another principal is about how do we build our brands ambidextrously, and here I want to talk about two things. One is we need to continue driving global campaigns to support our business but we’ve got to make them intensively locally relevant, one market at a time. At the end, we need to make sure that our advertising, our communication continues to convey how our products are superior to competition in specific ways, how our science drives better performance and better efficacy, but at the same time we got to tell consumers what it is that we spend for, what are we about.
A great example of the global campaign that is locally relevant is Listerine. This brand has been supported by a campaign we call Bring out the bull. And what we learned is that consumers that use Listerine, as they switch with it, they feel like the brand ignites something within them, makes them just a little bit more bolder, makes them have a pep in their step. And this has been a huge success for us in terms of driving category relevancy and category penetration across the world. But how do we execute this in a way that is regionally relevant. Well, for example in Asia, we are launching a new version of Listerine with lemon and salt. And these are two kitchen logic ingredients that consumers in Asia associate with whitening benefits. And so, this is the way that we’re launching our new Listerine white in Asia, so let’s take a look.
As an example of this local relevancy for Listerine is from the Middle East where we recently launched Listerine Miswak. Miswak is the derived from the root of the arak tree, and it’s been used in the Middle East for millennia to provide oral health benefits, in fact that root is used over the time for consumers to actually clean their teeth with it. So, we launched the Miswak version of Listerine, let’s see the launch ad.
So, we believe very strongly in this balance. We need to have our best global ideas that have universal appeal and drive them everywhere for scale, for maximum business impact, but you need to execute them in a way that is intensely local. This is what we start ups do very well. Those brands feel very personal, very intimate to consumers like they belong in that country that market and nowhere else. That intimacy is something we need to preserve even as we drive global campaigns.
And then there is also this point around you have to talk about the efficacy of your products and why they’re better than competition which you’re all set to talk about the purpose of your brand. Millennial consumers demand that and these small start-up brands get that and they make that part of their mission, they make their part of their marketing program. We’re doing the same, an example of that is Nicorette, the global leader in smoking cessation. This is a great business for us, we’re gaining market share and growing the business everywhere, the people that work in this brand, they don’t see this just as a brand or a business, they truly see their personal mission to help people quit smoking for good. They know how devastating smoking can be to someone’s health. So, everyone in the organization has that as a clear mission and they convey their consumers at every touch point. An example of that is the visual activation that we launched recently in the UK that won a Cannes Silver Lion award just this last year. Please take a look.
So, this is something that we will embrace in every one of our brands and communicate our superiority but stand for something that is beyond just a category we convey something important for consumers.
Another principle I talked about is winning in traditional legacy channels but emerging channels too. If you look at the United States for example, we have a very large driving business in our core FDM category. So, you have Walmart, Target, Kroger, CVS, Walgreens. And that’s a business we’re committing to continue to grow. But in the last few years, we see at both ends of the spectrum very fast-growing channels. e-commerce of course led by Amazon at one end but perhaps another channel that is growing equally fast in a more perhaps less heralded way is the discounted channel with companies like Lidl and Aldi. And you have to have to have the capabilities to compete across all of these channels, before that actually gets a scale. So, we are investing heavily in making sure that we are not only winning in the FDM channel but at the bookends of the overall retail landscape.
Another example is in China. We have a very strong hyper market, super market business and a business that we sell to down the trade stores through distributors and wholesalers. But we have too many distributors supporting our business there. We have to restructure that business. We’ve reduced the number of distributors by fourfold from 400 to a 100. And this is enabling us to have much more depth of coverage and dedicated focus to support our business. But even as we are winning in our core channel, we’re committed to growing in these emerging channels that you see here.
In the last five years, in China, we saw the rise of cosmetic stores where most of the beauty care consumption takes place. On one hand and Baby and Mom stores, these are baby dedicated stores that pop-up around anytime a maternity gets built in China. And the reality is if you look at the last five years, most multinational companies have lost market share in China at the expense of local Chinese start-up players. And the primary reason why they did that, is because, they saw the rise of these channels before most companies did. The established players were complacent, the start-up players were proactive and saw where the folk was going.
And we’re committed to growing our ecommerce business by eightfold in the next three years. We’re investing heavily and supply chain in IT, in leadership to ensure that we’ve accomplished this. And we’re experimenting with connected commerce or direct-to-consumer as well.
We got to keep the momentum our productivity and cost agenda. Most of our big multinational competitors have announced big restructuring progress and big cost reduction campaign. And as I said earlier the small players have lean cost structures. We have no choice, but to continue down this march. We feel great about the progress we’ve made. Over the last two years, we’ve taken well over $1 billion out of our cost structure through strategic pricing or revenue growth management, we created value by consolidating our video purchases and driving productivity in our brand support investments.
We continue to efficient tie our supply chain and drive aggressive cost reductions in SG&A. But costs take out through value, non-value-added cost elimination is one important thing we do, but complexity is one and that we are realizing is a big source of potential value for us as well. As we speak right now, we are redesigning one of our megabrands globally for a restage and that will go to the markets starting next year. It’s a complete transformation and we’re taking advantage of this to radically simplify the line-up of our brand. And yet meet the needs of every region and every channel across the world. But entropy leads to complexity accumulation overtime, and left to its own devices lead you to have line ups that are too fragmented and lacking in skill. So, we’re going to have 40% less products, 25% less SKUs, 70% less colors than we used to have before.
In terms of packaging, we’re going to reduce bottles, next moves by somewhere between 60% and 75%. And in doing so, we can reduce the number of packaging suppliers by 90% and you can imagine, the economic advantages that come with that. So, complexity is something we need to attack, if we are to compete ambidextrously with large and small players. So, what we envision is not just a large supply chain scale of big manufacturing plants that are owned by ourselves but rather what we envision is a dynamic end-to-end agile network of internal and external assets. Those capabilities balance our global and local needs thereby enabling us to maximize our returns. And this balance between skill and nimbleness and responsiveness is what we need to do to compete in the new world.
We also need to evolve our work processes and our culture. Our vision and we are piloting several experiments like this, is that the way we should be organized as a big multinational company to compete with the small players and the large ones. Used to have dedicated, collocated, and powered multi-disciplinary end-to-end work teams. We call them working pots. Focused single mindedly on winning one market at a time, pictures of voting in each one of our key regions, geography and category combination and yet they all need to be organized globally so we can drive global sale across the board.
So that balance of empowerment through pushing decision making down, allowing them to move fast, to compete and focus externally eliminating non-value-added processes, but at the same time making sure that each one of these groups are working in a synchronized way so that everyone is rolling together against our strategic priorities is the balance I think that we can do. And in doing so create a culture where our team and sales are the ones who go after these speed and energy traps that slows them down and keeps them from succeeding.
So, in summary, we believe that we have the right strategy here but we have to follow these five principles as we execute it so we compete in this ambidextrous world against this new evolving competitive landscape.
Last year, we were $13.3 billion in turnover with a 19.9% margin. Our goal is to build one to two points ahead of the market every year and to build our profit ahead of our sales year in and year out. And we think that our strategy and the execution of these principles will get us there. And in doing so, will help us to continue to contribute to Johnson & Johnson’s success, a company that as you know one of very few AAA rated companies in the world, a company that has had 55 consecutive years of dividend increases, a company that has 75% of its sales in positions of either strong number two or number one in each one of these categories.
And as a result, the company that has posted great results versus the overall enterprise peer set, the consumer peer set or the marketing indexes, whether you look at one, two, five years, 10 years. And so, we think we can be a significant contributor to J&J, we’re well positioned to do so.
Thank you very much for your time and I would love to entertain any questions you may have.
Q – Unidentified Analyst
You mentioned the rise of the extreme discount retailers, are there margin ramifications for your business in terms of selling to those kinds of companies versus selling to the much, much large players like Walmart and Amazon?
I don’t believe so but one thing needs to be true, we need to design in a way that is customized to the needs of the shopper in their channel. I think we cannot have a one size fits all approach to meeting the needs of shoppers across that spectrum I talked about. So as long as we are prepared to understand the shoppers needs and partner with the discounters in really designing so that we have maximum value and convenience for those shoppers then I think we can be as profitable in that channel as we are in any other.
Unidentified Company Representative
I apologize, but we’ll have to continue the question again in the breakout session since we’ve run over a little bit with time. Thank you, Jorge.
Pleasure. Thank you.
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