Abbott Laboratories (ABT) Q2 2013 Earnings Call July 17, 2013 9:00 AM ET
Brian Yoor - Vice President, Investor Relations
Miles White - Chairman of the Board, Chief Executive Officer
Thomas Freyman - Chief Financial Officer, Executive Vice President - Finance
Larry Biegelsen - Wells Fargo
David Lewis - Morgan Stanley
Mike Weinstein - JPMC
Rajeev Jashnani - UBS
Ben Andrew - William Blair
Jeff Holford - Jefferies
Good morning, and thank you for standing by. Welcome to Abbott's second quarter 2013 earnings conference call. All participants will be able to listen-only until the question-and-answer portion of this call. (Operator Instructions).
This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call including the question-and-answer session is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission.
I would now like to introduce Mr. Brian Yoor, Vice President, Investor Relations.
Good morning and thank you for joining us. Joining me today on the call will be Miles White, Chairman of the Board and Chief Executive Officer and Tom Freyman, Executive Vice President, Finance and Chief Financial Officer. Miles will provide opening remarks and Tom and I will discuss our performance in more detail. Following our comments, Miles, Tom, and I will take your questions.
Before we get started, some statements made today maybe forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2013. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.
Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are disclosed in Item 1A Risk Factors to our Annual Report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2012. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law.
In today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which will be available on our website at abbott.com.
With that, I will now turn the call over to Miles.
Thanks, Brian. Good morning. This morning we reported ongoing earnings per share of $0.46, exceeding our previous guidance range and we are confirming our full year 2013 EPS outlook for double digit growth. Sales increased more than 4% operationally, led by continued strong performance in emerging markets as well as Diagnostics and Nutrition. Abbott continues to deliver on its expectations despite the recent depreciation of several foreign currencies and a mixed global economy.
Before I comment on our results, let me address at a high level some of these dynamics. Our earnings performance was strong despite a more negative impact from foreign currency than we had forecasted in April. As you know, the yen depreciated further over the last few months and was the primary driver of unfavorable exchange. Several emerging market currencies also weakened late in the second quarter. This resulted in an unfavorable exchange impact on sales of 1.7%, more than our forecast of 1%. The underlying fundamentals are good however, especially around gross margin improvement and expense management, which all are progressing ahead of schedule.
As we look at total company's sales, our results were strong in our growth markets and in line with our expectations in developed markets. Sales in developed markets declined about 1% in foreign exchange, which was less of a decline than we saw in the first quarter. Our businesses in these markets are generally more subject to reimbursement and austerity pressures. However, in Diagnostics, one of our most durable growth businesses, sales in developed markets increased 3% for exchange.
While these markets continue to be challenging, we do expect better performance in the second half. Emerging market sales were $2.3 billion this quarter, increasing 13% before exchange similar to our first quarter growth rate. We built a broad emerging market base that helps to offset volatility that can occur in any one market.
With more than 40% of our business in emerging markets, we are well positioned to benefit from the long-term demographic and economic trends that are taking place. While we can't perfectly predict the macro environment, we can manage our business to deliver durable and reliable results for shareholders. We've done that consistently for years and we are able to do that, because we have flexibility. We plan for contingencies and we often times drive outperformance in other areas of our business.
This quarter, we exceeded our gross margin forecast of 54.5%, delivering gross margin of 55% as a result of continued progress on our margin improvement initiatives. We now expect our full year gross margin to exceed our original guidance. This was the result of continued momentum from margin improvement in Nutrition and Diagnostics, where we are ahead of our initial targets.
With that as context, I'll provide a high level high-level review of our four business segments before Tom and Brian comment on the details of the quarter.
The Medical Devices second quarter performance was in line with our expectations, driven by mid-single digit international growth across vascular, diabetes care and vision care, and as expected, global vascular results improved sequentially, compared to first quarter. We've seen good momentum for many of our recent medical product launches, including OptiBlue cataract IOL in Japan, as well as ABSORB, MitraClip and XIENCE Xpedition expedition, which received approval in Japan last week.
On Monday, we also announced two acquisitions, IDEV which expands our endovascular product portfolio, and OptiMedica, which gives us an immediate entry point into the laser cataract surgery market. While organic growth remains our top priority, these acquisitions bring Abbott leading technology to capitalize on growth opportunities.
IDEV's superior stents is on the market in Europe and under FDA review to address the challenges of treating the superficial femoral artery or SFA. Treatment of the SFA is the largest and fastest-growing segment of the peripheral market driven by the rising rates of diabetes and obesity. This acquisition rounds out our endovascular portfolio with a best-in-class technology to further penetrate this market segment. Our endovascular business is approaching $500 million in annual sales and increased 4% operationally this quarter.
OptiMedica's state-of-the-art laser system provides Abbott access the rapidly developing laser cataract surgery market. Most cataract procedures are performed manually today, but a growing portion of the cataract market is moving to a laser-assisted surgery, especially as the market shifts to premium IOL. The acquisition of OptiMedica will allow Abbott to have broader reach the growing cataract segment cataract sales represent more than 60% of our vision care sales and this quarter increased in the high single digits as we grow momentum with several new product that launched in the first half of this year. We expect to complete both of these acquisitions before year end.
In Nutrition, worldwide sales increased 8.5% with equally strong performance in both, pediatric and adult nutrition. International sales increased 18.5%, driven by strong double-digit growth in emerging markets. We have broad reach around the world and prioritized a group of markets, where we are expanding our footprint. This includes localizing R&D and building out local manufacturing. Our three new facilities in China, India and U.S. remain on track to come online later this year or early next year.
Abbott's scientific heritage and new product development is critical to our success and leadership in the Nutrition market. As I mentioned last quarter, we are on track for approximately 70 new product launches this year and have completed more than 40 through the first half.
It's not only new products but the world of clinical data that allow us to grow, shape and further penetrate these markets. For example in our Adult Nutrition business, results from a health economic study announced last month demonstrates that supplementing with Oral Nutrition such as Ensure can decrease hospital length of stay, reduce hospitalization costs and readmission rates. With healthcare systems facing unprecedented budget pressures and challenges these results are encouraging. They represent an opportunity in both developed and emerging markets.
Nutrition operating margin also increased significantly again this quarter and we are on track to exceed 300 basis points of expansion for the full year. Our initial target of 20% is well within our reach and we intent to continue to look at ways to exceed that goal.
In our established pharmaceuticals division, sales were below our expectations. Global economic growth forecasts are lower than when we began the year. Last week the IMF reduced its growth outlook driven by lower growth expectations in Europe and emerging markets and while we are seeing some impact from these market developments, we also need to improve our commercial execution.
To that point, we recently created two new commercial leadership positions that have separate responsibility for emerging and developed markets. This will sharpen our focus on the very different market specific needs in this business and enable us to achieve the growth targets that we set.
We have some work to do to improve how we promote the Abbott brand through various channels, whether its hospitals, pharmacies or the consumer. We are continuing to build our product portfolios through registrations targeted for specific markets and geographically we will see a shift in sales to more high growth emerging markets from 60% today to 75% over the next several years. This will also accelerate growth.
While we continue to expect EPD sales growth to pick up in the second half, we now have more modest expectations for the pace of that acceleration. We are positive about the growth prospects for EPD and its strategy as we move forward. We obviously have some things to do here.
Diagnostics continues to deliver on its expectations with worldwide sales up 7.5%. Sales in emerging markets, which represent 35% of total diagnostic sales, were up more than 15% in the quarter. This was led by Core Laboratory Diagnostics, where we continue to outpace market growth in our priority markets, China, Brazil and Russia.
In Molecular Diagnostics, we returned to double-digit growth in the second quarter with sales up 13%. In June, we also launched the first FDA approved hepatitis C genotype test, which allows physicians to match patients to the best treatment option based on their genotype. This is especially important as patients will benefit for many new pharmaceutical treatments over the next few years.
The Diagnostics operating margin also came in ahead of our expectations as we continue to execute on our gross margin improvement plan. Despite the R&D investment we have been making for six new system platforms across our three diagnostic businesses, we are well ahead of schedule to reach our initial operating margin target of 20%.
In summary, despite currency headwinds, our performance exceeded expectations. We are executing on our strategic priorities and confirmed our double-digit EPS growth target for the full year.
I will now turn the call over to Tom to review our second quarter results and the 2013 outlook in more detail. Tom?
Thanks, Miles. Today, we reported ongoing diluted earnings per share for the second quarter of $0.46, exceeding our previous guidance range. Sales for the quarter increased more than 4% on an operational basis. That is excluding an unfavorable impact of 1.7% from foreign exchange. The impact of foreign exchange on sales was 70 basis points more unfavorable in the quarter than the estimate we provided in April, reflecting further depreciation of the Japanese Yen and the weakening of several emerging market currencies late in the quarter.
Operational sales growth was driven by strong performance across a number of products and businesses, including growth of more than 13% in emerging markets. Reported sales, which include the impact of exchange, increased 2.5% in the quarter. The second quarter adjusted gross margin ratio was 55%, ahead of our previous guidance due to the impact of margin improvement initiatives in our Nutrition and Diagnostics businesses as well as a lower headwind from exchange relative to previous expectations. In the quarter, ongoing R&D investment was 6.5% of sales in line with previous expectations and ongoing SG&A was around 31% of sales somewhat lower than previous expectations.
Turning to our outlook for the full year 2013. Today, we are confirming our ongoing earnings per share guidance of $1.98 to $2.04, which reflects double-digit growth over 2012 at the mid-point of the range. We're forecast operational sales growth that is excluding the impact of foreign exchange in the mid-to-high single digits for the second half of the year.
Based on current exchange rates, we expect exchange to have a negative impact of around 2.5% on our full year reported sales, which was 1.5% more negative than previous expectations. At current rates, we would expect a 3% negative impact on sales in the third quarter and 4% in the fourth. Brian will review the growth outlooks by business in a few minutes.
We forecast an ongoing adjusted gross margin ratio for the full year of approximately 55.5%, which is favorable to our previous guidance, primarily due to strong performance in Nutrition and Diagnostics as these businesses continue to execute well on margin improvement initiatives.
We also continue to forecast ongoing R&D of 6% to 7% of sales and ongoing SG&A expense somewhat about 30% of sales for the full year 2013. Overall, we project our full year adjusted operating margin to expand by more than 100 basis points in 2013, somewhat above our previous guidance.
We continue to forecast net interest expense of around $110 million in 2013, non-operating income of approximately $20 million and around $50 million of expense on the exchange gain loss line of the P&L.
Turning to the outlook for the third quarter of 2013, which we are providing for the first time, we are forecasting ongoing earnings per share of $0.51 to $0.53, which would represent strong double-digit growth at the mid-point of the range. We forecast specified items of $0.20 in the third quarter, primarily associated with intangible amortization expense and cost reduction initiative resulting in GAAP EPS guidance of $0.31 to $0.33.
Our operational sales growth in the third quarter is expected to be in the mid-to-high single digits. And, as previously indicated, at current exchange rates, we expect roughly 3% negative impact from exchange on sales in the fourth quarter. This would result in reported sales growth in the low-to-mid single digits.
We forecast an ongoing adjusted gross margin ratio of approximately 55.5% of sales in the third quarter, which includes a negative impact from exchange of somewhat more than 1%. We also forecast ongoing R&D for the third quarter somewhat about 6.5% of sales ongoing SG&A expense of around 30% of sales and non-operating income of around $50 million.
With that, I will turn it over to Brian for the operating highlights by business.
Thanks, Tom. This morning I'll provide an overview of second quarter performance and our outlook for the third quarter. My comments will focus on operational sales growth, which excludes the impact of foreign exchange. I'll first discuss Medical Devices, which includes our vascular, diabetes care vision care businesses.
In our Vascular business, worldwide sales were flat on an operational basis, a step up than first quarter performance and consistent with previous guidance. International sales, which comprised more than 60% of total Vascular sales, increased 4% operationally. Growth was driven by new product, including our XIENCE PRIME, small vessels stent in Japan, XIENCE Xpedition, ABSORB and MitraClip.
Last week, we announced the approval of XIENCE Xpedition in Japan, which we expect to drive further share gains. This approval follow the initiation of our ABSORB randomized clinical trial in Japan, reaffirming Abbott's commitment to developing truly innovative treatment options for coronary artery disease. U.S. vascular sales in the second quarter were down nearly 7%, impacted by market declines, partially offset by year-over-year share gains as a result of the XIENCE Xpedition launch.
For the third quarter of 2013, we expect our global vascular business to increase in the low-single digits on an operational basis. We expect to improve our performance in the second half of the year with the uptake of XIENCE Xpedition in the U.S. and Japan, and continue penetration of our new products MitraClip and ABSORB.
In Diabetes Care, global sales in the second quarter were relatively flat in line with our expectations. International sales growth of 4% was driven by double-digit growth in the emerging markets, as well as the continued uptake of our FreeStyle InsuLinx Meter.
Abbott was recently selected as the exclusive supplier for the National Diabetes Awareness Program in Saudi Arabia, a country where 40% of the population has diabetes today. In the U.S., we saw continued share gains in the hospital and retail segments, where Abbott maintains its leadership position, offset by market pricing and reimbursement pressures. We continue to invest in the next-generation sensing technology which we expect to initially bring to market in Europe in the second half of 2014. We project third quarter diabetes care sales growth to be relatively flat on an operational basis. As we have previously discussed, while we are forecasting strong growth in emerging markets, the 2013 implementation of CMS competitive bidding for Medicare patients will impact our U.S. sales this year.
In Vision Care, global operational sales increased approximately 2% in the second quarter. Cataract sales, which represent about 60% of our global vision care sales, continued to outpace the market in the quarter led by strong double-digit growth in emerging markets and our TECNIS brand of intraocular lenses. We expect to see continued growth in our cataract business driven by several important new product launches this year.
This includes the recent launch of TECNIS OptiBlue in Japan, which provides Abbott access to the largest segment of the Japan market and TECNIS Toric in the U.S. which gives Abbott access to the faster growing premium segment of the IOL market. The anticipated launch TECNIS Preloaded IOL in the U.S. will also contribute to accelerated growth in the second half of the year. For the third quarter, in our global vision care business, we expect mid-single-digit operational sales growth, an improvement versus first half of the year as we continue to drive cataract growth with new launches and execute in emerging markets.
In Nutrition, global sales increased 8.4% in the second quarter on an operational basis. International nutrition sales grew 18.4% in the quarter, including strong double-digit growth in emerging markets, which now comprise more than 45% of total nutrition sales. Global pediatric nutrition sales grew 9% operationally in the quarter. International pediatric sales grew 19% as we continue to execute on a number of geographic expansion initiatives and launch new product innovations including the global rollout of our specialty tolerance formula products. U.S. pediatric sales were down modestly largely due to lower infant formula share in the WIC segment. Abbott remains the market leader in non-WIC segment of the U.S. infant formula market.
Global adult nutrition sales was comprised nearly 45% of total nutrition sales increased 7% operationally in the quarter. International adult sales grew 17%, driven by strong growth of Ensure and execution in market expansion initiatives. U.S. adult nutrition sales were negatively impacted this quarter by the exit from certain non-core business lines as part of our margin improvement initiative. Excluding the impact of these exits, U.S. adult sales grew low single-digit.
As Miles mentioned earlier, a recent health economic study published in The American Journal of Managed Care found that nutritional supplementation in the hospital setting decreased hospital length of stay and total episode cost by more than 20% and reduced the likelihood of being readmitted to hospital within 30 days by nearly 7%. As the clear global leader in adult nutrition, we are working to expand the market by raising awareness of the role that proper nutrition can play in improving patient outcomes and reducing healthcare costs. As we look ahead to the third quarter, we expect our global nutrition business to grow double digits on an operational basis with strong international sales growth led by emerging markets and continued uptake of recently launched products.
In our established pharmaceutical business or EPD, sales in the quarter were flat on an operational basis as growth in emerging markets was offset by decline in the developed markets. We continue to expand our presence and build local portfolios in 14 key emerging markets. Sales in these markets grew approximately 4.5% in the quarter and was somewhat negatively impacted by timing of product deliveries in certain markets, as well as implementation of the drug price control order in India which caused some delays in customer purchase late in the quarter.
We expect growth in our 14 key emerging markets to improve in the second half of the year with strong growth in a number of emerging countries, including Brazil and India. As expected, growth in other markets which includes Western Europe and Japan, was negatively impacted by overall macroeconomic conditions in these countries, including European austerity measures.
In the third quarter, we expect low single-digit operational sales growth from our established pharmaceuticals' business as we see improving growth in emerging markets due to portfolio expansion and execution of recent tender wins. Lastly, in our Diagnostics businesses, Core Lab diagnostics continued its durable growth with operational sales increasing 6% in the quarter. About 80% of our core laboratory diagnostics sales are generated outside the U.S., where we saw more than 8% operational growth in the quarter.
Sales in emerging markets increased double digits, led by China and Russia, both growing more than 30%. In Molecular Diagnostics, worldwide sales increased 13% on an operational basis in the second quarter, in line with our expectations for accelerated growth versus the first quarter. International sales increased nearly 18% on an operational basis, led by strong infectious disease growth, particularly in emerging markets driven by the impact of new tenders, as well as the continued global expansion of our ALK gene test for non-small-cell lung cancer.
In June, we received approval for the first FDA approved hepatitis C virus genotyping test in the U.S., which will enable physicians to create a personalized, targeted diagnosis and treatment path to improve clinical outcomes, further expanding Abbott's diagnostic testing options in infectious disease area.
In Point of Care Diagnostics, worldwide sales increased 15.5% on an operational basis, driven by continued growth in the U.S. Hospital segment, further penetration in the U.S. physician office labs and strong double-digit growth in emerging markets.
For the third quarter, we are forecasting our global diagnostics business segment to generate high single-digit operational sales growth driven by continued strong double-digit growth in molecular and Point of Care Diagnostics, and mid-to-high single-digit growth in core labs.
So, in summary, we are pleased with our financial performance through the first half of the year. We delivered earnings per share in the second quarter that exceeded our previous guidance range. And, despite a challenging global economy and recent fluctuations in currencies, we are confirming our 2013 ongoing EPS guidance.
We will now open the call for questions.
Earnings Call Part 2:
- Q&A with Abbott Laboratories CEO