Abbott Laboratories (NYSE:ABT) Q1 2023 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q1 2023 Earnings Call Transcript April 19, 2023

Abbott Laboratories beats earnings expectations. Reported EPS is $1.03, expectations were $0.99.

Operator Good morning and thank you for standing by. Welcome to Abbott’s First Quarter 2023 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 participants’ 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. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions.Scott Leinenweber Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer.

Robert and Bob will provide opening remarks. Following their comments, we’ll 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 2023. 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 Form 10-K for the year ended December 31st, 2022.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.

On 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 are available on our website at abbott.com.Note that Abbott has not provided the GAAP financial measure for organic sales growth. On a forward-looking basis, because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the quarterly results press release issued earlier today.With that, I will now turn the call over to Robert.Robert Ford Thanks, Scott.

Good morning, everyone, and thank you for joining us. Today, we reported strong results to start the year. First quarter adjusted earnings per share were $1.03, which was above consensus estimates, driven entirely by strong underlying base business performance excluding COVID testing.Organic sales growth excluding COVID testing increased 10%, led by double-digit growth in Medical Devices, Established Pharmaceuticals and Nutrition. As you’ll recall, back in January, I expressed some optimism that the headwinds Abbott and other companies faced over the last few years were starting to peak, and in some cases, ease a bit. As we move through the first part of the year, that’s exactly what we continue to see.Most notably, the impact of COVID has rapidly and significantly lessened.

As part of this transition, certain behavioral shifts have been evident across society. One simple illustrative example has been a significant increase in travel and tourism we’ve all seen, heard about or experienced first-hand.A much more relevant and important behavioral shift that we’re seeing in healthcare globally has been the increased priority people are putting on getting healthy and staying healthy. And for our businesses, the impacts have been increased routine diagnostic testing volumes, improved medical device procedure trends and strong demand for consumer based health products. The net result this past quarter was strong broad-based growth across our portfolio.Importantly, this growing focus on health adds to and enhances other favourable demographic trends such as a global population that’s growing older and living longer and increasing access to healthcare around the world.

The combination of these favourable market dynamics, along with the strength of our growth platforms and new product pipeline provides a strong foundation for sustainable top-tier growth going forward.I’ll now summarize our first quarter results in more detail before turning the call over to Bob. I’ll start with Established Pharmaceuticals or EPD where sales increased 11% in the quarter. This continues EPD’s impressive stretch of consistent strong performance, including double-digit growth each of the last two years. Growth this past quarter was led by strong performance in Brazil, China, and Southeast Asia and across several therapeutic areas, including cardiometabolic, gastroenterology, CNS and pain management.Turning to Nutrition where sales increased more than 10% in the quarter.

In the US, pediatric nutrition growth of more than 35% included the impact of lower sales in the first quarter of last year due to a voluntary recall of certain infant formula products. We continue to make good progress, increasing manufacturing production and recovering market share in this business. Internationally, total nutrition sales grew mid-single digits overall and sales in global adult nutrition also grew mid-single digits driven by strong performance of our market leading Ensure brand.Moving to Diagnostics where, as forecasted, sales growth was negatively impacted by a significant decrease in COVID testing sales compared to the first quarter of last year. Excluding COVID testing, organic sales growth was led by mid to high single-digit growth in Core Lab, Rapid and Point of Care Diagnostics.In Core Lab Diagnostics, growth was led by strong performance in the US and Europe, which was partially offset by soft market conditions in China early in the year where we’re seeing improving market demand over the last several weeks.

Excluding China, Core Laboratory Diagnostics sales grew nearly 8% globally.And I’ll wrap up with Medical Devices, where sales grew 12.5% globally on an organic basis, including mid-teens growth in US and double-digit growth internationally. In Diabetes Care, sales of FreeStyle Libre grew more than 25% on an organic basis in the quarter, including approximately 50% growth in the US and mid-teens internationally.During the quarter, Libre received US FDA clearance for connectivity with automated insulin delivery systems. We’re working with leading insulin pump manufacturers to integrate their systems with both Libre 2 and Libre 3 as soon as possible.In Cardiovascular Devices, sales grew more than 8% overall in the quarter and impressively, organic sales growth rates improved sequentially compared to the prior quarter in every one of our Cardiovascular Device businesses.

This broad-based strength was led by strong double-digit growth in Heart Failure and Structural Heart.In Heart Failure, sales of CardioMEMS grew more than 30%, which represents a third quarter in a row that CardioMEMS sales have grown more than 25%. In Electrophysiology, performance was led by high teens growth in Europe, including strong broad-based performance across big five European countries, which was driven by cardiac ablation catheters and mapping systems.In Structural Heart, growth was led by double-digit growth of MitraClip along with strong contributions from three recently launched products Amulet, Navitor, and TriClip which combined to grow nearly 50% in the quarter. And lastly, in Neuromodulation, sales grew 11% driven by recent launch of Eterna, our first rechargeable neurostimulation device for pain management, which targets a large segment of the market where we didn’t previously compete.So, in summary, we’re off to a very good start to the year exceeding financial expectations on both top and bottom lines.

The strong performance we’re achieving is broad-based and fueled by strong execution, new products and improving market conditions and our core foundational growth platforms have strong momentum and are achieving exceptional results, positioning us well for top-tier growth going forward.I’ll now turn over the call to Bob. Bob?Bob Funck Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates unless otherwise noted are on an organic basis.Turning to our first quarter results. Sales decreased 14.5% on an organic basis due to, as expected, a year-over-year decline in COVID testing related sales. Excluding COVID testing related sales, underlying base business organic sales growth was 10% in the quarter.Foreign exchange had an unfavourable year-over-year impact of 3.3% on first quarter sales.

During the quarter, we saw the US dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavourable impact on sales compared to exchange rates at the time of our earnings call in January.Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales, which reflects flow-through impacts from the elevated inflation we experienced last year on certain manufacturing and distribution costs as well as an unfavourable impact from foreign exchange. Adjusted R&D was 6.4% of sales and adjusted SG&A was 28.3% of sales in the first quarter. Lastly, our first quarter adjusted tax rate was 14%.Turning to our outlook for the full year, we now forecast total underlying base business organic sales growth excluding COVID testing sales to be at least high single-digits.

We’re now forecasting COVID testing related sales of around $1.5 billion, which is below the full-year forecast of approximately $2 billion we provided in January due to current testing dynamics we’re seeing in the market. For the second quarter, we forecast COVID testing sales of around $200 million.Based on current rates, we expect exchange to have an unfavourable impact of a little more than 1% on full-year reported sales, which includes an expected unfavourable impact of a little more than 2% on second quarter reported sales.Lastly, our full-year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged, but now reflects a lower earnings contribution from COVID testing sales compared to expectations in January, offset by raising our underlying base business earnings forecast by a little more than $0.10 based on our strong performance and outlook.With that we’ll now open the call for questions.Question-and-Answer Session Operator Thank you.

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At this time, we will conduct a question-and-answer session. [Operator Instructions]

And our first question will come from Larry Biegelsen from Wells Fargo. Your line is open.Larry Biegelsen Good morning. Thanks for taking the question and congratulations on a nice start to the year. So, Robert, you raised the base business organic growth and held EPS flat despite lower expected COVID testing sales. Can you please provide more color on the trends you’re seeing across your businesses and geographies that allowed you to maintain EPS? And how does that feed into 2024? It sounds like you’re thinking more about the base business ex-testing going forward. And I have one follow-up.Robert Ford Sure, Larry. I mean, I think you’ve summarized it pretty well there.

We reduced our COVID forecast right now from $2 billion to about $1.5 billion, but maintained the previous guidance and that was a result of a better performance that we’re seeing in our base — in our underlying base business. I think that’s actually a pretty great trade-off to have our base business have a raise of just over $0.10 here, offsetting this decline in COVID testing.As I said in my comments in the beginning, Larry, back in January, we were seeing already some signs of a better environment, right? Specifically in Devices, we’re starting to see already the hospitals and the systems start to get the handle on staffing shortages. From an inflation perspective, we talked about some of the commodity starting to turn a little bit, not all of them, but some of them starting to turn.

So that’s really translated, I’d say, in improving top line on the base business, better diagnostic testing, more procedures.I’d say if you look at the procedure trends throughout the quarter, if you look at cardio specifically of around 8%, you look at the way we exited February and specifically March, there were double-digits in March. So the real impact there was, I’d say, the reopening of China in January, in the beginning of the quarter. That created a little bit of friction, but it was pretty broad-based across the systems in Diagnostics and Devices. US, Europe, Asia, we saw a good performance in Japan also.So that gave us a lot of confidence that we’re on the right trajectory here. And I’d say we’re forecasting at least these high single-digit growth for the base business.

And that’s because of what we’ve been talking about over these last couple of years, which is reinvesting some of those COVID revenues and profits into the base business.So we’re able to drive accelerated growth here without having to provide extra funding, let’s call it that way to that growth. So I think this is a real strong start to the year to see double-digits in Devices, EPD, Nutrition, we continue our recovery there. So it’s a real good strong start to the year. I think it’s very sustainable. Of course, we’re going to keep pushing and wanting more, but I think it’s a good starting point.Regarding your 2024 question, I get it. These last couple of years, Larry, usually in our first calls, it’s always about what’s going to happen the next year because of COVID.

So I get that question. I’d say right now, I’m not going to give any specific guidance, but if you look at our underlying base business, we’re a little over, right now we’re forecasting for this year, a little over $4 of EPS.And we always start our planning process here as double-digits. This year, we’re forecasting really strong double-digit growth because like I — like we’ve talked about, making those investments, getting the leverage through the P&L, not having to invest to get that additional earnings growth.And that’s our starting point as we go into next year, targeting that double-digit EPS growth. And I think it starts with driving a strong top line. And if we maintain the strong top line, which I’m sure we’ll get into all the growth drivers here, I feel very good about them and the sustainability of them and the investment and the execution.So we keep that strong top line.

There’s obviously work that we got to continue to do on margin and margin expansion, and that’s a big area of focus for us. But those are really the elements here, strong top line on the base business going into 2024 and targeting that double-digit growth with that top line and margin expansion.Larry Biegelsen That’s super helpful. Just for my follow-up, Robert, cardio-neuro was strong this quarter at about 8.5% organic. Can you talk about the trends there and the sustainability of that? There’s still concerns in the investment community about your EP business with PFA competition coming. Thank you.Robert Ford Sure. Well, like I said, I think the trends in the quarter were very positive. I think like I said, I think it’s a combination of improving conditions.

I think the hospital systems have done a really good job right now at managing through the staffing shortages and we’re starting to see the impact there and then the combination of our product launches and execution of those product launches.Like I said, I think it was pretty broad-based across the geographies. And really the only challenge we had was in January in China, but I think we’re starting to see again a lot of growth in that market too. So I think it’s very sustainable. Regarding your question on PFA, yeah, I mean, I think it’s an interesting technology. We’ve been working on it for several years now, Larry, and haven’t been as public about what we’re doing. That’s probably driven by my direction for the team, but I think we’ll share more about it at HRS this year in terms of everything we’ve done.As a backdrop to that, I guess, I would say one of the benefits of having a very large installed open mapping system base on the markets, we actually get to see these systems being used in real world.

And it’s a great product development tool, to be quite honest with you. So a lot of our focus in the development of our program, Larry, is really looking at some of the gaps and some of the challenges we’re seeing in these first generation catheter systems and really looking at addressing those. So I think what the team has been working on is really unique and differentiated.So I don’t think that PFA will be the one tool to rule all tools. I think that it will be a tool that will be important. We’re obviously working on our system. I think that the companies that are going to be winning in this space are going to be those that can effectively work with PFA, and at the same time work with RF.So I think there are a couple of questions that are going to still need to be answered over the next 12 to 18 months, Larry.

I think safety and efficacy is one that still needs to be, you know, we see certain signals in certain markets. So those, I think, need to kind of work their way through the type of cases, type of patients that are going to be used with this product.I think one big question on the PFA is kind of can it actually improve real world procedure times. I think that’s the big question I have in terms of what I’ve been seeing, what our teams have been seeing. And then given all the pressures that the health systems have is a 3x to 4x premium on RF is that actually sustainable.So bottom line, I think our device, cardio device portfolio is well developed across all the different areas of growth opportunities that we have. And I think that PFA is going to be an important technology that we’ve been working and investing on to bring to market and looking more as a second generation product.Larry Biegelsen Perfect.