Abbott Laboratories (NYSE:ABT) Q2 2023 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q2 2023 Earnings Call Transcript July 20, 2023

Abbott Laboratories beats earnings expectations. Reported EPS is $1.08, expectations were $1.05.

Operator: Good morning and thank you for standing by. Welcome to Abbott’s Second Quarter 2023 Earnings Conference 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. Mike Comilla, Vice President, Investor Relations.

Mike Comilla: 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 will take your questions. Before we get started, some statements made today maybe forward-looking for purposes of the 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 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 31, 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 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 Mike. Good morning, everyone and thank you for joining us. Today, we reported second quarter adjusted earnings per share of $1.08, which reflects an acceleration in the contribution from the underlying base business. Organic sales, excluded COVID testing, increased low double-digits for the second quarter in a row and was led by mid-teens growth in medical devices, along with double-digit growth in Established Pharmaceuticals and Nutrition. On our last couple of earnings calls, I have highlighted improving underlying demand trends across our businesses. These strengthening trends continued in both our institutional and consumer-facing businesses this past quarter. Within the Institutional businesses, healthcare systems around the world that continue to improve their ability to expand the supply of healthcare services through ongoing efforts to adjust protocols, manage the labor challenges and increase the overall available capacity to treat patients.

In our more consumer-facing businesses, we are seeing consumers prioritize spending for healthcare products, which is driving increased demand for our products in the U.S. and internationally. I will now summarize our second quarter results in more detail before turning the call over to Bob and I will start with Nutrition, where sales increased 10% in the quarter. In the U.S., growth was led by pediatric nutrition growth of more than 20%. We continue to make good progress in increasing manufacturing production and have now recovered approximately 75% of the market share in the infant formula business that was lost last year as a result of the voluntary recall. Internationally, total Nutrition sales grew 6%, led by growth in both pediatric and adult nutrition businesses.

Turning to Established Pharmaceuticals, sales increased 12.5% in the quarter. This strong performance was led by growth across several markets, including India and China and therapeutic areas, including gastroenterology, women’s health and CNS pain management. This business continues to execute at a high level and capitalize on the favorable demographic and socioeconomic trends in emerging markets. Moving to Diagnostics. Excluding COVID testing, organic sales grew 7%, led by Core Lab Diagnostics, where sales grew 10%, driven by performance in the U.S., Europe and China. This broad-based strong performance reflects the increased demand for routine diagnostic testing globally. And in the U.S., our blood transfusion testing business continues to make good progress, recovering from the impact of lower plasma donations that occurred during the COVID-19 pandemic.

And I will wrap up with Medical Devices, where sales grew more than 14% on an organic basis, including double-digit growth in both U.S. and internationally. In Diabetes Care, Freestyle Libre sales exceeded $1.3 billion in the quarter and grew 25% on an organic basis. During the quarter, Libre became the first and only continuous glucose monitoring system to be nationally reimbursed in France for all people with diabetes who use insulin. This achievement was a direct result of the unique value proposition that Libre offers, a fully featured continuous glucose monitor made available at an accessible price. Abbott has led the way in expanding reimbursement coverage for continuous glucose monitors in order to bring the benefits of this life-changing technology to more people around the world.

In cardiovascular devices, sales grew more than 10% overall in the quarter, led by double-digit growth in electrophysiology and structural heart. In electrophysiology, performance was led by international growth of more than 20%, which included high-teens growth in Europe and strong growth in China. During the quarter, we received U.S. FDA approval for our TactiFlex ablation catheter, the world’s first ablation catheter with a flexible tip and contact for sensing technology, which helps to deliver improved procedure outcomes and faster procedure types. In Structural Heart, performance was driven by MitraClip growth of approximately 10%, along with growth from several recently launched new products. Earlier this year, we submitted for FDA approval for TriClip, our minimally invasive tricuspid valve repair device that helps treat a condition known as tricuspid regurgitation, a leaky heart valve disease.

The clinical trial data supporting our submission showed that TriClip is a highly effective and safe treatment that provides a significant improvement in the quality of life for patients. TriClip is currently being reviewed by the FDA and we look forward to bringing this first of its kind technology to patients here in the U.S. In Ribbon Management, growth of 8% was led by Aveir, our recently launched leadless pacemaker. And during the quarter, we received FDA approval for our dual chamber leadless pacemaker, a first of its kind technology that allows for two pacemaker devices to communicate with one another inside the body to provide minimally invasive treatment for those with abnormal heart rhythms. Aveir was specifically designed to be upgradable and retrievable in order to evolve with patient changes in therapy needs over time.

This unique technology offers the potential to revolutionize care for millions of people who require a pacemaker. And lastly, in Neuromodulation, sales grew 16% driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management, which targets a large segment of the market where we previously did not compete. During the first half of this year, we introduced several new innovations, including the launch of Eterna and label indication expansions for treating painful diabetic neuropathy and chronic back pain for those who have not had or are not eligible for back surgery. So in summary, we exceeded expectations on both top and the bottom lines. Growth in the underlying base business accelerated, driven by improving market conditions and contributions from both new products and legacy growth platforms.

And our pipeline continues to be highly productive, which will sustain our strong growth profile in the future. I will now turn over the call to Bob. Bob?

Bob Funck: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our second quarter results, sales decreased 9.2% 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 11.5% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 2.5% on second quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in April.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.4% of sales, which reflects continued flow-through impacts from the elevated inflation we experienced last year on certain manufacturing and distribution costs as well as an unfavorable impact from foreign exchange. Adjusted R&D was 6.4% of sales and adjusted SG&A was 27.2% of sales in the second quarter. Lastly, our second 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 in the low double-digits. We are now forecasting COVID testing-related sales of around $1.3 billion, which is below our full year forecast of around $1.5 billion that we provided in April due to current testing dynamics, including lower demand for testing following the end of the public health emergency in May.

For the third quarter, we forecast COVID testing sales of around $100 million. Based on current rates, we expect exchange to have an unfavorable impact of a little more than 1.5% on full year reported sales. Lastly, our full year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged, but reflects a lower earnings contribution from COVID testing sales compared to expectations in April, offset by raising our underlying base business earnings forecast by approximately $0.05 based on our strong performance and outlook. Compared to the initial guidance we provided back in January, we have now raised our underlying base business earnings forecast by more than $0.15 offsetting the lower contribution from COVID testing versus our initial forecast.

Turning to our outlook for the third quarter, we forecast adjusted earnings per share to be approximately $1.10, which reflects strong growth on the underlying base business. We forecast total underlying base business, organic sales growth, excluding COVID testing sales to be in the low double-digits and exchange to have an unfavorable impact of a little more than 1% on our third quarter reported sales. With that, we will now open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question will come from Joshua Jennings from TD Cowen. Your line is open.

Joshua Jennings: Hi, good morning and congratulations on another strong quarter. The core business is generating nice momentum, organic sales growth accelerating, earnings power increasing. Robert, it would be great to hear your views first on the drivers of the back half momentum, assuming an updated low double-digit organic revenue growth forecast for ‘23? And then second, it would be great also to get your thoughts on the sustainability of this building momentum in ‘24 as the business is creating some more challenging comps for next year? Thanks for taking the questions.

Robert Ford: Sure, Josh. Yes, it was a very strong quarter, broad-based growth. And – but listen, I still think that we could do better and I know my team might feel that also. If you go back a little bit in terms of a couple of years when COVID was happening, we always said that there was a great hedge share for us, right. And when COVID would subside, we would have a strong base business and making investments. And then I think that’s what you are seeing right now play out in these last couple of quarters and what we think is going to continue to play out throughout the rest of the year and going into 2024. We saw very strong growth across all four sectors, excluding the COVID testing piece of it. And as I said in my opening remarks, the institutional business, the consumer business, there was an acceleration from Q1 to Q2 growth versus Q2 of last year.

So, all the right indicators here trending positive and with great momentum. Devices and Diagnostics, there was a nice step up. I attribute that really good improving market conditions, whether it’s the hospital systems, addressing some of the bottlenecks that they had in care, but also markets that are reopening and that trend continuing, but also new products. So the market conditions as part of it, but new product launches also contributed quite a bit there. EPD has sustained, I’d say, high single-digit, low double-digit growth for the last 2 years and I think that continues. I think we are probably one of the best positioned large healthcare companies in emerging markets. We have got a unique strategy there, lot of regionalization and a lot of local for local and the team does a really good job at executing that.

The double-digit growth in Nutrition was as expected. We are seeing the recovery in the pediatric business, recovering our market share. My comment there of the three quarters of recovery is more general and broad-based. But once you start looking at different segments of the information from the market, different SKU sets and different types of form, there are certain segments where we have already backed the leadership position. So, that’s moving all in the right trajectory and adults doing very well in several countries. So, COVID declined as we had forecasted. We decided to bring our COVID number down a couple of hundred million dollars, because we are seeing as the public health emergency ended, we saw little bit of a decline in testing there.

So we will see how that’s going to play out in Q4. It’s probably like the first quarter we will see, Josh, of an endemic respiratory season. So we will see how that’s going to play out. But the big business is doing really well. And I’d say from a geographic perspective, it was pretty broad-based also across all geographies, U.S., Europe, Asia, obviously, China reopening was really positive too. But it wasn’t like this over-indexing in our growth rate with China opening. I mean if you look at our growth rate, excluding China, it was – it only added about 1 point of growth that 11.5%. So, it’s pretty broad-based across the market. So pleased with the top line, we believe it’s very sustainable, which is why we increased from at least high single to low double-digit growth rate.