Abbott Laboratories (ABT) Q4 2013 Earnings Conference Call January 22, 2014 9:00 AM ET
Brian Yoor - Vice President, Investor Relations
Miles White - Chairman of the Board and Chief Executive Officer
Tom Freyman - Executive Vice President, Finance and Chief Financial Officer
Mike Weinstein - JPMC
David Lewis - Morgan Stanley
David Roman - Goldman Sachs
Lawrence Biegelsen - Wells Fargo Securities
Glenn Novarro - RBC Capital Markets
Kristen Stewart - Deutsche Bank
Jason Bedford - Raymond James
Good morning and thank you for standing by. Welcome to Abbott’s Fourth 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.
Some statements made today maybe forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2014. 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 discussed 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 release and regulatory filings from today, which will be available on our website at abbott.com. Our commentary on sales growth refers to operational sales growth, which exclude the impact of foreign exchange unless otherwise noted.
I will now turn the call over to Miles.
Okay, thanks Brian. Good morning. This morning, I will review our 2013 results as well as our outlook for 2014. For the full year 2013, we achieved ongoing earnings per share of $2.01 representing double-digit growth over 2012. At the same time, we returned nearly $2.5 billion to shareholders in the form of dividends and share repurchases and announced a substantial increase in our dividend beginning this year. Strong performance across many of our businesses and operating margin expansion enabled us to deliver on our 2013 expectations despite a few challenges.
Similar to other multinationals, we were impacted by a slowdown in several emerging economies as well as by foreign currency. Abbott was also impacted by a supplier recall in the International Nutrition. As I have discussed on our previous earnings calls, we were able to offset these impacts in 2013 in part through selective cost management. At the same time, we executed on our key priorities. We achieved high single-digit sales growth in Diagnostics, vision care and Nutrition, excluding the impact of the supplier recall as well as sequential improvements in our vascular business each quarter of last year.
We increased total company emerging market sales by 11%. This was driven by double-digit growth in our Diagnostics, Medical Devices and Nutrition businesses. We completed two acquisitions in medical devices that brought us important best in class technologies to expand our presence in our endovascular and Vision Care businesses. We launched numerous new products including our MitraClip Structural Heart device in the U.S. Muliple innovations in our cataract lens business. They are driving share gains and nearly 70 product launches in nutrition and we expanded our margin significantly in nutrition and diagnostics. As we move into 2014 we will continue to appropriately invest in our businesses to execute on our strategic priorities to drive long term growth. Our ongoing earnings per share of $2.16 to $2.26 calls for double digit growth at the mid-point.
However in the first half of the year we will see some carry over effects from foreign exchange and the nutrition supplier recall where we’re making good progress to recover our share. The long term fundamentals of our business are strong and we remain committed to increasing returns to shareholders. In addition to our dividend increase we’re projecting an increase in share repurchase activity. Overall we expect to return more than $3 billion of cash to shareholders in 2014 which Tom will discuss in a few minutes.
Moving on to our 2013 results and outlook for the business in 2014. In nutrition as expected fourth quarter sales growth increased low single digits affected by the supplier recall that was initiated in August. The additional marketing investments we made in the third and fourth quarters are supporting our recovery and we’re on track with our expectations to recapture our share in the effected geographies. As we look to 2014 we remain optimistic about our growth prospects in nutrition and we’re well positioned to achieve our strategic priorities. We will further expand global capacity with three new manufacturing facilities that will come online in the U.S., China and India this year. Demand is strong for both adult and pedantic nutrition. We will continue to see productivity from our R&D organization and expect to launch several important innovations in 2014 that will help us gain share and in adult nutrition continue to shape and grow that market.
With the combined launch of new products we expect to return to high single digit operational sales growth in nutrition this year as we lap the impact from the supplier recall in the second half of 2014. This will continue to be driven by double-digit growth in emerging markets which we expect to comprise nearly half of nutrition’s total sales by the end of this year.
And finally margin improvement which remains a key priority for this business. We expanded operating margin in our nutrition business by nearly 300 basis points in 2013 ending the year at 18.7% of sales. We expect meaningful margin expansion again this year and the business is well on track to reach it's 2015 operating margin target of more than 20% of sales.
In established pharmaceuticals fully year sales increased modestly. As we have discussed macroeconomic and market pressures in certain emerging markets impacted EPD more significantly than we had anticipated at the start of last year. At the same time new commercial leadership is working to improve how we execute our branded generic strategy in both emerging markets and developed countries. As I’ve said this will take time and we will be looking for improved momentum in this business heading into next year. Over the next several years we expect continued improvement in EPDs growth as sales in emerging markets become a larger component of this business. Growth rates in emerging markets have been and are expected to continue to be higher from the growth rates of the developed countries and the overall global economy and established pharmaceuticals remains well aligned with the fundamentals driving long term growth for health care and emerging markets.
In our Medical Device business which includes our vascular, diabetes care and vision care businesses, sales increased 4% in the fourth quarter. In vascular in 2014 we expect continued improvement over full year 2013 driven by growth in emerging markets and the launch of multiple new products to expand our leading share positions. This includes the U.S. launch of MitraClip our first in class product for the minimally invasive treatment of mitral regurgitation which is the most common heart valve condition in the world.
Combined with continued growth outside the U.S. we expect strong double digit growth of MitraClip sales in 2014. And we have the expected launch of the new peripheral stents in our endovascular portfolio and we will continue to expand share with our leading drug eluting product portfolio. We launched the XIENCE Xpedition in August in Japan and we will launch it in China this month. We will also continue to expand share of our bioresorbable vascular scaffold, ABSORB outside of the U.S. at the same time we move it through the development process in several key geographies including the U.S., Japan and China.
In Vision Care, sales increased 15% in the quarter driven by accelerating growth in our cataract lens business. This business now represents more than 65% of our vision care sales and has been growing well in excess of market growth rates. We expect double-digit sales growth for this business in 2014 with continued positive momentum from new products. And this includes our TECNIS Toric lens in the U.S., our TECNIS OptiBlue lens in Japan and our new Catalys laser cataract system as well as new product launches we expect early this year.
Diagnostics remains one of our most durable growth businesses consistently delivering mid to high single-digit operational sales growth for the past three years. Full year 2013 sales growth of 8% was balanced geographically with double-digit growth in emerging markets and mid-single-digit growth in developed markets. Margin expansion once again exceeded expectations for the full year increasing 300 basis points versus 2012. In 2014, we expect strong performance in Diagnostics as we continue to build momentum in core laboratory diagnostics, increased the penetration of our molecular and point-of-care businesses and expand our presence in emerging markets across all three diagnostics businesses.
In our R&D pipeline, we will continue to invest in the development of several new instrument platforms across the diagnostics portfolio that we expect to launch over the next several years. These new systems add new features that are important to our customers such as speed, scalability, productivity and shorter turnaround time.
So in summary, as we look to 2014, we again expect double-digit ongoing earnings per share growth. We are on track with our recovery efforts in Nutrition. We are projecting an increase in share repurchases in 2014 following a 57% increase in our dividend announced last October. And as we move into the second half of this year, we expect stronger sales in earnings growth highlighted by a reacceleration in our Nutrition business, continued durable performance in Diagnostics, strong vision care growth and another year of double-digit sales growth in emerging markets.
I will now turn the call over to Tom and Brian to discuss 2013 results and the 2014 outlook in more detail. Tom?
Thanks Miles. Today, we reported ongoing diluted earnings per share for the fourth quarter of $0.58 in line with our previous guidance range and up more than 20% over the prior year. Sales for the quarter increased 3.3% on an operational basis that is excluding an unfavorable impact of nearly 3% from foreign exchange. As anticipated, fourth quarter sales growth was affected by the supplier recall in our International Nutrition business, which reduced operational sales growth by an estimated 1.5 percentage points in the fourth quarter.
Operational sales growth was driven by high single-digit growth in Diagnostics and double-digit growth in vision care. Sales in emerging markets were up at 9% in the quarter on an operational basis. Reported sales which include the impact of exchange were up slightly in the quarter. The fourth quarter adjusted gross margin ratio was 55.4% in line with expectations and up 60 basis points versus the prior year despite a negative impact from exchange of 60 basis points. Ongoing SG&A expense was 28.5% of sales lower than expectations reflecting in part G&A expense reductions. Finally, our adjusted gross margin ratio improved by 160 basis points over the prior year in the quarter.
Overall as we look at 2013, we delivered strong ongoing earnings per share growth in line with our initial guidance and up double-digits despite some challenges. We also achieved a number of financial objectives we set out a year ago. Our Diagnostics business expanded its operating margin by 300 basis points and continued to deliver strong top line growth. Our Nutrition business expanded its operating margin by nearly 300 basis points. And overall, we expanded adjusted gross operating – adjusted operating margin by more than 100 basis points.
Turning to our outlook for the full year 2014, today, we issued full year ongoing earnings per share guidance of $2.16 to $2.26 reflecting double-digit growth at the midpoint of the range. Before I review our forecasts for sales and P&L line items, I would like to discuss certain factors that are impacting our forecast for 2014 and comparisons for 2013. We achieved our ongoing EPS expectation in 2013 in the face of a negative foreign exchange impacts on sales of approximately 2%. Additionally, the supplier recall in our International Nutrition business impacted EPS by an estimated $0.10 per share in the second half of the year. The effects of these two items on growth would carry into the first half of 2014. In terms of exchange, the yen began a steady decline in the first quarter of 2014 and a number of emerging market currencies similarly weakened beginning late in the second quarter. Both of these events are expected to affect reported results in the first half of 2014 but if current rates were to hold exchange impacts would normalize by the second of 2014.
Over the past 12 months we have been assessing how to better align our resources and infrastructure to meet the needs of our business owing to the separation from AbbVie. As I mentioned previously we took some selected G&A expenses out in 2013 and reduced our ongoing SG&A expense ratio from 31.3% of sales in 2012 to 30.6% in 2013.
In 2014 as part of our efforts to get our support structure to appropriately levels we will take further actions to reduce our expenses. We expect SG&A expense as a percentage of sales to decline by around 70 basis points in 2014. We continue to update you on these initiatives as appropriate.
We project share repurchases in 2014 to exceed $2 billion above the 2013 level. Combined with the 57% increase from the dividend announced last October we plan to again return substantial cash to shareholders in 2014. In 2014 we intend on a onetime basis to repatriate about $2 billion in 2014 earnings generated outside the United States.
We expect that the cash taxes due in the U.S. on this one time repatriation will be low as we plan to accelerate utilization of various long term deferred tax assets. This repatriation would result in specified charges to tax and be around $0.40 per share in 2014 of which $0.30 will be non-cash with $0.10 in cash taxes.
Turning to our 2014 outlook we’re forecasting operational sales growth in the mid-single digits to the full year 2014. Based on current exchange rates we would expect exchange to have a negative impact of somewhat more than 1% on our full year reported sales that the most significant impact in the first half of the year. This would result in reported sales growth in the low to mid-single digits to the full year 2014.
Operational sales growth is expected to be driven by continued strong growth in diagnostics, nutrition and vision care along with an improvement in the growth rate in vascular.
We’re also forecasting continued strong growth across our businesses in emerging markets. We expect a high single digit operational sales decline in our diabetes care business driven by reimbursement, reductions and competitive dynamics in the U.S. Brian will go into more detail on the 2014 outlook by business in a few minutes.
We forecast on adjusted gross margin ratio of approximately 55% for the full year 2014 which reflect a negative impact of around 90 basis points and the combination of foreign exchange and the effect of the U.S. market conditions and our U.S. Diabetes Care business partially offset by underlying improvements in nutrition, diagnostics and Vision Care. We forecast ongoing R&D somewhat about 6% of sales and ongoing SG&A of approximately 30% of sales for the full year 2014.
Overall we expect to expand our full year adjusted operating margin by approximately 60 basis points in 2014. Forecast net interest expense of around $90 million, non-operating income around $10 million. Approximately $50 million of expense on the exchange gain/loss line of the P&L and ongoing tax rate of 19% for the full year of 2014.
Finally I would like to review the quarterly outlook for 2014. For the first quarter we’re forecasting ongoing earnings per share of $0.34 to $0.36. As I discussed earlier certain amount of lease will effect sales and earnings comparisons in the first and second quarters of 2014 including the carry over effects of 2013 foreign exchange movements and the 2013 supplier recall on nutrition.
We forecast modest operational sales growth in the first quarter and a current exchange rate we would expect a negative impact from exchange of approximately 3% resulting in reported sales down low single digits. We forecast an adjusted gross margin ratio approaching 54% which reflect impact in foreign exchange. The 2013 supplier recall in nutrition and competitive dynamics and diabetes care. We also forecast ongoing SG&A expense around 33.5% of sales and R&D expense approaching 7% of sales in the first quarter. For the second quarter, we are forecasting ongoing earnings per share of $0.49 to $0.51. We forecast operational sales growth in the low to mid-single-digits in the second quarter. And at current exchange rates, we would expect a negative impact on foreign exchange of approximately 1.5 percentage points. For the first and second quarter, we project specified items at $0.27 and $0.22 especially reflecting the same items as we identified for the full year in our earnings release. As previously indicated, we expect the pace of both sales and ongoing EPS growth to accelerate in the second half as comparisons become more favorable with operational sales growth in the mid to upper single-digits and steady operating margin expansion.
So in summary, we delivered double-digit EPS growth in 2013 and our 2014 outlook reflects double-digit earnings growth at the midpoint of our guidance range driven by improving sales growth in a number of our businesses and expanding operating margin.
And with that, I will turn it over to Brian to review the business operating highlights.
Thanks Tom. This morning, I will provide a more detailed review of our fourth quarter performance and our 2014 sales outlook. As mentioned earlier, my comments will focus on operational sales growth.
I will first discuss our Nutrition business, where global sales increased 1% in the fourth quarter and were impacted as expected by the supplier recall in International Nutrition. The sales disruption is estimated to have reduced global nutritional operational sales growth by approximately $90 million or somewhat more than 5% in the quarter. Global Pediatric Nutrition sales were down 2% in the quarter, including a 3% decline in International Pediatric Nutrition. Excluding the impact of the sales disruption, International Pediatric Nutrition sales would have increased strong double-digits driven by market uptake of new product innovations.
While the U.S. Pediatric sales were relatively flat in the quarter, Abbott remains the market leader in the non-WIC segment of the U.S. infant formula market and continues to drive uptake of recent innovation launches. Global Adult Nutrition sales increased 5% in the quarter with international adult sales increasing 14% driven by strong growth of our Ensure and Glucerna brands along with execution of several market development initiatives. U.S. Adult Nutrition sales were down 5% impacted by the exit from certain non-core business lines as part of our margin improvement initiative as well as higher sales in 2012 from the timing of a new product launch.
We continue to focus on innovation in our global nutrition business. In 2014, we anticipate several important programs to drive share gains in Pediatric Nutrition and category expansion in Adult Nutrition, where Abbott holds the global leadership position. This includes the recent launch of Similac’s Triple [ph] Pack in the online market segment in China, which brings Abbott’s best-in-class packaging solution to this large and rapidly growing segment of the infant formula market. At the same time, we continued to expand our manufacturing and R&D presence to be closer to our customers. As Miles mentioned, three new manufacturing facilities will come online this year, including plants in China and India. In addition, we are investing in local R&D and recently opened a R&D center in China and broke ground on a new pilot plant in Singapore. As a result of these efforts, we expect our R&D resources based in emerging markets to grow more than 30% over the next few years.
For the full year 2014, we are forecasting high single-digit sales growth on an operational basis for our Global Nutrition business. We are on track with our recovery efforts in the geographies affected by the supplier recall and forecast low double-digit operational sales growth in the International Nutrition. As Tom mentioned, we will see a first half carryover effect of the supplier recall. And for the first quarter, we are forecasting a low single-digit sales decline on an operational basis for our Global Nutrition business.
In our Diagnostics business, we achieved nearly 9% sales growth in the fourth quarter, including mid-teens growth in emerging markets. Core laboratory diagnostic sales increased more than 9% in the fourth quarter driven by continued above market performance in both developed and emerging markets. This business continues to execute on its commercial strategy to deliver total solutions that are efficient, flexible and cost effective to large healthcare customers.
In Molecular Diagnostics, worldwide sales increased 1% in the fourth quarter with international sales up 10% led by strong growth in infectious disease platforms and geographic expansion in emerging markets. In point of care diagnostics worldwide sales increased 14% driven by continued growth in the U.S. hospital and physician office lab segments as well as a double digit growth in emerging markets.
In 2014 we expect to again deliver above market performance in global diagnostics. In core laboratory diagnostics will continue to broaden our ARCHITECT assay menu and execute on our commercial strategies in both developed and emerging markets such as China, Brazil and Russia. We also expect continued double digit growth in our infectious disease business in molecular diagnostics and continue market penetration with our point of care platform with double digit growth in emerging markets across all three businesses.
At the same time we will continue development of several next generation platforms that are designed to positively impact point of [ph] care, improve service to customers, enhance laboratory productivity and reduce cost.
For the full year 2014 we expect our global diagnostics business to generate mid to high single digit operational sales growth. With mid-to-high single digit growth in Core Laboratory and molecular diagnostics and double digit growth in point of care diagnostics. For the first quarter we are forecasting low to mid-single digit operational sales growth in our global diagnostics business. In our status pharmaceuticals business or EPD, sales increased in the quarter modestly.
Sales growth in our key emerging market segment increased 10% in the quarter led by strong growth in Russia, China and Brazil. We continue to focus on broadening our core therapeutic area product portfolios, strengthening our commercial capabilities and implementing tailored strategies to accelerate growth in emerging markets.
Sales growth in our developed and other market segment decreased 7% in the quarter and continues to be impacted by market conditions particularly in Western Europe.
As we look ahead to full year 2014 for EPD we expect low single digit operational sales growth as we build momentum over the course of the year. Given that 100% of EPD sales are outside of the U.S. this business is relatively more impacted by exchange movements. But we would expect sales to be relatively flat on a reported basis.
In the first quarter of 2014 we’re forecasting sales to be relatively flat on an operational basis which includes the timing impact from a plant shutdown to expand capacity in order to meet increasing demand for one of our key products in the emerging markets. Including the impact of foreign exchange we expect first quarter reported sales to be down mid-single digits. And lastly Medical Devices, which includes our vascular diabetes care and Vision Care businesses.
Sales growth in Medical Devices increased 4% in the fourth quarter. Our vascular business achieved another quarter of sequential improvement in it's growth rates, the worldwide sales up nearly 4%. International sales increased more than 5% driven by continued momentum across key geographies of XIENCE Xpedition and ABSORB. Double digit sales growth of MitraClip and strong performance of our endovascular portfolio.
The U.S. sales increased 1% in the fourth quarter. In 2014 we expect continued sales growth improvement in endovascular business driven by a number of new product launches including MitraClip. The approval and launch of a new peripheral stent in our endovascular portfolio and a continued growth of ABSORB.
We continue to move ABSORB through the development process in several key geographies. Most recently we completed an enrollment in our ABSORB trial in Japan and we’re on track to complete enrollment in China and the U.S. in the first half of this year. For the full year 2014 we expect sales in our global vascular business to increase in the low to mid-single digits on an operational basis with low to mid-single digit growth in the first quarter.
In Diabetes Care, global sales in the fourth quarter decreased 3.5% impacted by implementation of the competitive bidding program for Medicare patients. International sales which represent 60% of total diabetes care sales increased 4% in the quarter driven by strong performance in the emerging markets. For the full year 2014 we forecast a high single digit decline in global diabetes care on an operational basis. In our international diabetes care business we expect similar performance to 2013 driven by continued double digit growth in emerging markets. This will be offset by an expected decline in the U.S. impacted by reimbursement reductions and competitive dynamics resulting in a low double-digit operational sales decline for our global diabetes care business in the first half of 2014.
In vision care, we achieved nearly 15% sales growth in the fourth quarter with balanced double-digit growth in both emerging and developed markets. Sales of cataract products increased strong double-digits outpacing the global cataract markets driven by the continued uptake of recently launched products. These new intraocular lenses or IOLs provide Abbott with access to large and growing segments of the cataract market where we weren’t previously competing. We expect continued strong growth in our vision care business this year as we continued to introduce new products. This includes the launch of new preloaded IOLs, which improved the ease-of-use for the cataract surgeons as well as the further penetration of our new Catalys laser cataract system, which is receiving very positive feedback.
For the full year 2014, we forecast double-digit operational sales growth in our global vision care business with mid to high single-digit growth in the first quarter. In summary, we achieved our expectations for 2013 including double-digit ongoing earnings per share growth, a more than 100 basis point improvement in adjusted operating margin and numerous new product launches. In 2014, we are well positioned to deliver another year of double-digit ongoing earnings per share growth with accelerated growth in the second half of the year.
We will now open the call for questions.
Earnings Call Part 2: