Abbott Laboratories (NYSE:ABT) Q3 2023 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q3 2023 Earnings Call Transcript October 18, 2023

Abbott Laboratories beats earnings expectations. Reported EPS is $1.14, expectations were $1.1.

Operator: Good morning, and thank you for standing by. Welcome to Abbott’s Third 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 reproduced broadcast 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; Bob Funck, Executive Vice President, Finance; and Phil Boudreau, Senior Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we’ll take your questions. Before we get started, some statements made today may be 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 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 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, Mike. Good morning, everyone, and thank you for joining us. Today we reported third quarter adjusted earnings per share of $1.14. Based on our performance through the first nine months of the year, we raised the midpoint of our full year adjusted earnings per share guidance and narrowed the range to $4.42 to $4.46. Organic sales growth on the base business, which excludes COVID testing, increased double digits for the third consecutive quarter and was led by double-digit growth in all four of our major businesses. This acceleration in sales growth is a result of our strong position in attractive growth markets, in conjunction with the additional investments we made across the company during the pandemic.

In addition to the strong top line performance, we continue to deliver accelerating earnings power on our base business and remain on track to deliver on the financial commitments we set at the beginning of the year. With a positive growth outlook for the businesses and the momentum we’re building across the portfolio, we are well positioned for a strong finish to the year and heading into 2024. I will now review our performance in more detail before turning the call over to Phil. I’ll start with nutrition, where sales increased 18% in the quarter. In pediatric nutrition, growth of 25% was led by continued market share capture in the U.S. infant formula business, where we have now reclaimed the leadership position. Internationally, we continue to deliver well-balanced growth coming from both infant formula products and our PediaSure toddler brand.

In adult nutrition, growth of 12% was driven by strong demand for Abbott’s market-leading Ensure and Glucerna brands across the U.S. and international markets. Turning to established pharmaceuticals, sales increased 11% in the quarter. This strong performance was broad-based and led by double-digit growth in several markets and therapeutic areas, including cardiometabolic, women’s health, and CNS pain management. In September, we announced an agreement with global biotech leader mAbxience to commercialize several biosimilars in emerging markets. This collaboration will help introduce cutting-edge medicines in the areas of oncology, women’s health and respiratory diseases to people in countries that have historically lacked access to these treatment options.

Moving to diagnostics, excluding COVID testing, organic sales grew 10%, led by core lab diagnostics where sales grew double digits, driven by above market performance in the US and internationally. Growth was driven by a continued increase in global demand for routine diagnostic testing and a strong recovery of our blood transfusion testing business following a period of lower plasma donations that occurred during the COVID-19 pandemic. In rapid diagnostics, double-digit organic sales growth on the base business benefited from increased demand for respiratory tests in anticipation of an earlier than normal start to the flu season in the Northern Hemisphere. And I’ll wrap up with medical devices, where sales grew nearly 15%, including double digit growth in both the U.S. and internationally.

In diabetes care, FreeStyle Libre sales were $1.4 billion in the quarter and grew 28%. The global Libre user base now exceeds 5 million people with nearly 2 million of those in the U.S. where the Libre user base has nearly doubled in the last two years. A recent analysis of our U.S. user base showed that a growing number of Libre users are using Libre in combination with GLP-1 medications as part of a companion therapy approach for managing their diabetes. On average, those using both Libre and a GLP-1 exhibited a higher rate of use for both products, wearing Libre sensors more often and taking GLP-1 medication more frequently compared to other users. This increase in use or better compliance is a positive sign that these users are taking an even more active role in managing their diabetes.

While we traditionally think of therapy choices as having to compete against one another, this is a good example of a complementary relationship between two products that both help optimize the treatment of diabetes. In cardiovascular devices, sales grew 10% overall in the quarter, led by double-digit growth in electrophysiology and structural heart. In electrophysiology, sales growth of 17% was driven by double-digit growth across all major international geographic regions and high teens growth of ablation catheters in the U.S. In structural heart, performance was driven by double digit growth of MitraClip and strong growth from several recently launched new products, most notably Navitor, our latest generation TAVR valve. In Rhythm Management, growth was led by double-digit growth in pacemaker sales, led by Aveir, our recently launched leadless pacemaker that can be used for both single chamber and dual chamber pacing.

And lastly, in neuromodulation, sales grew 19%, driven by the recent launch of Eterna, our first rechargeable neural stimulation device for pain management, which targets a large segment of the market where we previously did not compete. So in summary, this was a very strong quarter with all four major businesses delivering double-digit organic sales growth, excluding COVID testing-related sales. Growth rates in the base business have improved every quarter this year on both the top and bottom lines. And the momentum we are building positions us well for a strong finish to the year and heading into 2024. I’ll now turn over the call to Phil. Phil?

Philip Boudreau: 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 third quarter results, sales decreased 1.5% on an organic basis due to, as expected, a year-over-year decline in COVID testing-related sales. Excluding COVID-testing sales, underlying base business organic sales growths was 13.8% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 1.4% on third 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 July.

Regarding other aspects of the P&L, the adjusted gross margin ratio was 55% of sales. On a year-to-day basis, our adjusted gross margin ratio is 55.4% of sales, which is below our original full year guidance of approximately 56% that we provided back in January. The difference is primarily due to lower gross margins on COVID tests due to lower volumes and price compared to our original forecast assumptions and the impact of higher inventory obsolescence as a result of maintaining higher inventory levels throughout the pandemic to help ensure product supply during a time when global supply chains were less predictable. As the global supply chain environment continues to improve, we’re adjusting our inventory levels to align with that trend. Adjusted R&D was 6.2% of sales and adjusted SG&A was 26.4% of sales in the third quarter.

Lastly, our third quarter adjusted tax rate was 14%. Turning to our 2023 outlook. For the full year we now forecast ongoing earning per share of $4.42 to $4.46, which is comprised of our year-to-date results plus ongoing earning per share guidance of $1.17 to $1.21 for the fourth quarter. For the fourth quarter, 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 unfavourable impact of a little more than 1% on fourth quarter reported sales. With that, we’ll now open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question will come from Josh Jennings from TD Cowen. Your line is open.

Joshua Jennings: Hi, good morning. Thanks for taking the questions and congratulations on another strong quarter. Robert, [indiscernible] growth nearly touched the mid-teens range for the core business in 3Q. And I realize we recently talked about the sustainability of the momentum generated this year, but I think investors would like to hear about your confidence level in the core business delivering high-signature organic revenue growth and solid margin expansion in 2024 off the 2023 comp that’s only moved higher over the course of this year. Thanks for taking the question.

Robert Ford: Sure, Josh. I mean, the confidence level is very high, especially with this kind of momentum that we’re seeing. Clearly, there’s going to be some macro environment challenges as companies head into 2024. But I’d say our portfolio has really been built to withstand this type of environment and we tend to do pretty well in this type of environment. And as I said in my comments also, we’ve further strengthened the portfolio and the position that we had with the investments that we made during the pandemic, and that’s helped lead to step up here in our growth rate this year. The base businesses has grown double digits three quarters in a row, and I expect to be doing that again in Q4. And if you look at the EPS contribution, as I said in the comments, it’s really having a positive impact and a lot of power coming through on the base business as we continue to grow that.

And it’s sequentially gotten better every quarter. So we’re forecasting another step up in the fourth quarter. So if you look at that EPS for the fourth quarter and put it all together, the base business here is going to contribute about $4.10 of EPS, and we’ve raised that twice this year. So there’s clearly momentum that’s building here, both in the top and the bottom lines, and I believe that momentum is going to sustain and continue as we go into 2024. I think it starts, Josh, always with a top line. And if you can drive higher top line growth, I think that’s really the building block. And if you look at our, let’s say our pre-pandemic kind of growth formula here, we were growing around 7%. So I expect that to accelerate in next year, without a doubt.

And that’s off a much larger sales base than we were pre-pandemic. And like I said, that’s based off the momentum that we’re seeing and increased contributions that we’ll be seeing from a lot of our growth drivers that I’m sure we’ll be talking about throughout the call. The street model’s double digit EPS on the base business right now, and I feel real good about our ability to deliver that. Obviously, a lot of focus is going to come from gross margin and gross margin expansion. And I think we’ve got momentum until when here as we’re going to go into 2024. So when we go to our call in January, I’ll be able to kind of quantify that and give you better ranges on all of that. But I’d say, it’s really about reiterating and reinforcing our growth model, our growth framework, which is high single-digit revenue growth, double-digit bottom-line growth, margin expansion, strong free cash flow generation, and a balanced capital allocation strategy.

So, again, I feel very good sustaining this momentum going into next year.

Joshua Jennings: Understood. Thanks a lot.

Operator: Thank you. And our next question will come from Larry Biegelsen from JPMorgan. Your line is open.

Larry Biegelsen: Thanks for taking the question. Just to be clear, it’s Wells Fargo. But good morning, Robert.

Robert Ford: We know who you are, Larry.

Larry Biegelsen: Okay, good. So, Robert, China has been in the news a lot. Love to hear your thoughts on how you’re thinking about China, big picture. How is Q3 and what are you expecting from the VBP impact in the EP business and from the anti-corruption initiatives we’ve been hearing about there. Thanks for taking the question.