Abbott Laboratories (NYSE:ABT) Q4 2022 Earnings Call Transcript

Abbott Laboratories (NYSE:ABT) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good morning and thank you for standing by. Welcome to Abbott’s Fourth Quarter 2022 Earnings Conference Call. 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 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 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, 2021.

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, excluding COVID testing sales. 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 excludes the impact of foreign exchange. 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, I will discuss our 2022 results as well as our outlook for this year. For the full year 2022, we achieved ongoing earnings per share of $5.34, which is well above the original EPS guidance we set at the beginning of the year. As you know, macro business conditions have been highly dynamic and challenging over the last few years, particularly for U.S. based multinational companies. COVID-19 pandemic played a big role in this of course. We saw the U.S. dollar strengthened significantly and inflation reached new heights last year. Supply chains continue to face challenges and our healthcare customers have been navigating staffing challenges that are negatively impacting certain medical device procedure trends and routine diagnostic testing volumes.

As we start the new year, however, while all these factors remain headwinds, I am cautiously optimistic that we are starting to see them peak and in some cases, ease a bit. Over the past few months, the impact of COVID-19 on society has lessened and economies around the world are increasingly reopening. In the U.S., the U.S. dollar weakened a bit and inflation has eased somewhat and hospital-based procedures and routine testing trends continue to steadily improve in many areas. As you know, COVID testing has been a big part of our story these past couple of years and I am proud of what our team has built, a full suite of tests across several platforms and the intentionality and how we established a leading role in the world’s response to the pandemic.

In total, we have delivered nearly 3 billion COVID tests globally since the start of the pandemic. Going forward, we expect COVID-19 to transition to more of an endemic seasonal type of respiratory virus. And with that, COVID testing, while still important, is expected to decline significantly. We expect variance will continue to emerge, and therefore, our tests will remain an important part of our leading respiratory testing portfolio, along with flu, RSV and Strep, which we offer across multiple testing platforms, including lab-based systems and hospitals, small desktop devices in urgent care centers and physician offices as well as at-home tests. As we reflect back on the impact of COVID testing efforts over the last few years, it’s clear that our success in this area will have a positive, long-lasting impact for the company.

It strengthened our strategic position in diagnostics through the expansion of our installed base of instruments, including ID NOW, our wrap point-of-care molecular testing platform and through the opening of new testing channels, such as physician offices and at-home testing. It enabled us to increase investments in priority growth areas across the company, including R&D and commercial initiatives in support of several recent and upcoming new product launches, while at the same time, increasing returns to our shareholders in the forms of dividend growth and share repurchases. And lastly, it further strengthened our overall financial health and balance sheet, which will provide significant strategic flexibility as we look to build and grow the company even further.

I am proud of the role we played in fighting COVID the last few years. It reinforced our purpose, had a meaningful impact on society and enhanced our long-term strategic position going forward. Turning now to our outlook for 2023, as we announced this morning, we forecast ongoing earnings per share of $4.30 to $4.50. We forecast organic sales growth, excluding COVID testing sales in the high single-digits and we forecast around $2 billion of COVID testing sales for the full year 2023. I will now provide more details on our results by business area before turning the call over to Bob. And I will start with Nutrition, where sales declined around 6% in both the fourth quarter and full year as a result of manufacturing disruptions at one of our U.S. infant formula facilities last year.

Production at the facility is up and running. And as we have mentioned previously, our initial supply priority was to the WIC, Women, Infants and Children federal food assistance program to ensure underserved participants have access to infant formula. As our manufacturing capacity has continued to recover, we have been able to increase production of our non-WIC brands with a focus on serving the broader infant formula market and building back inventory levels on retail shelves. Turning to Diagnostics, where as expected, sales growth in the fourth quarter was negatively impacted by a year-over-year decline in COVID-19 test sales. COVID testing sales were $1.1 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally, and ID NOW globally compromising approximately 95% of these sales.

Excluding COVID testing sales, worldwide diagnostics grew over 11% in the fourth quarter. Growth in the quarter was led by rapid diagnostics, where excluding COVID-19 tests, sales increased 30% compared to the prior year. As I mentioned earlier, during the pandemic, we significantly expanded the installed base of ID NOW and open new testing channels. This expanded footprint drove strong growth and supported testing needs when flu and other respiratory infection surged late last year. During this past year, we continued the rollout of Alinity, our innovative suite of diagnostic instruments and expand test menus across our platforms for immunoassay, clinical chemistry and molecular testing. Moving to Established Pharmaceuticals or EPD where sales increased 8% in the fourth quarter and over 10% for the full year.

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EPD continues to perform at a high level, having carved out an attractive growth space in the global pharmaceutical market, specifically our geographic focus on fast growing emerging markets with a broad portfolio targeting attractive therapeutic areas. Strong performance in the quarter was led by double-digit growth across several geographies, including India, China, Brazil and Mexico. And I will wrap up with medical devices, where sales grew 7.5% in the fourth quarter and 8% for the full year. Growth in both the quarter and full year was led by double-digit growth in electrophysiology, structural heart and diabetes care in the U.S. Internationally, sales growth was negatively impacted by COVID surges in China during the fourth quarter as well as lingering supply challenges in a couple of areas.

In diabetes care, fourth quarter sales of FreeStyle Libre, our market leading continuous glucose monitoring system grew over 40% in the U.S. and global Libre sales reached $4.3 billion for the full year 2022. We continue to strengthen our medical device portfolio with numerous pipeline advancements and launches, including recent U.S. regulatory approvals of Aveir, our highly innovative leadless pacemaker used to treating people with slow heart rhythms, Eterna, the smallest implantable rechargeable spinal cord stimulation system currently available in the market for the treatment of chronic pain. FreeStyle Libre 3, which provides continuous glucose readings in the world’s smallest and most accurate wearable sensor. Libre was recently named the best medical technology of the last 50 years by Galen Foundation.

And finally, Navitor our latest generation transcatheter aortic heart valve replacement system. So in summary, 2022 was another highly successful year for Abbott. We are optimistic about the early signs we are seeing of an improving operating environment and excited about the growth opportunities that lie ahead for all of our businesses and we continue to strengthen our overall strategic position with a steady cadence of innovative technologies that are either in the early stages of launching or expected to launch over the course of this year. I will 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, which excludes the impact of foreign exchange. Turning to our results, sales decreased 6.1% on an organic basis in the quarter. COVID testing-related sales were $1.1 billion in the quarter, which while stronger than the forecast we provided back in October, reflect a year-over-year decline versus sales in the fourth quarter of the prior year. Excluding both COVID testing-related sales and U.S. infant formula sales that were impacted by manufacturing disruptions last year in our Nutrition business, total Abbott sales increased 7.1% on an organic basis in the fourth quarter and 7.4% for the full year 2022.

Foreign exchange had an unfavorable year-over-year impact of 5.9% on fourth quarter sales, which resulted in a somewhat favorable impact on sales compared to exchange rates at the time of our earnings call in October as we saw the dollar weaken a bit late last year. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 55.6% of sales, which reflects the impact of the nutrition manufacturing disruptions and inflation we have experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.5% of sales and adjusted SG&A expense was 28% of sales in the fourth quarter. Turning to our outlook for the full year 2023, today, we issued guidance for full year ongoing earnings per share of $4.30 to $4.50.

For the year, we forecast organic sales growth excluding the impact of COVID testing-related sales to be in the high single-digits. We forecast COVID testing-related sales of around $2 billion with around $750 million forecasted in the first quarter. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 1% on our reported full year sales, which includes an expected unfavorable impact of approximately 3% on our first quarter reported sales. We forecast an adjusted gross margin ratio for the full year of approximately 56% of sales. Also for the year, we forecast R&D investment of around $2.5 billion and SG&A investment of around $11 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives.

We forecast net interest expense of around $300 million, non-operating income of around $450 million, and a full year adjusted tax rate of approximately 14% for the year. As Robert mentioned, the strength and resiliency of our business, particularly since the start of the pandemic has allowed us to concurrently invest in our strategic priorities, provides strong return to our shareholders and further strengthen our financial health, which provides a strong base on which to grow the company going forward. With that, we will now open the call for questions.

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Q&A Session

Operator: Thank you. And our first question will come from Robbie Marcus from JPMorgan. Your line is open.

Robbie Marcus: Great. Thanks. Good morning, everyone. Robert, maybe to kick it off, I appreciate the guidance, but there is a lot of moving parts through the different business lines with macro involved with a lot of new product launches involved. Maybe you could just build up how we should be thinking about how you came up with the guidance range on both the top and bottom lines given all the moving parts?

Robert Ford: Sure. I mean, there is obviously a macro environment here that’s been complex and you have mentioned it. And as I said €“ and as I said in my remarks and I think they have gotten significantly better versus where we were in October, on our last earnings call. So I think that we have factored some of that improvement and some of that stabilization in there. I mean, I don’t necessarily think that we have got too many moving parts here. I mean, obviously, we run a €“ the company has got a lot of business and business segments. But I mean, if you look at really the two areas I would say, Robbie, that kind of have had this effect of maybe sometimes distorting the results a little bit is our COVID testing business and the impact of the recall products last year, right.

So from a COVID perspective in 2022, we actually sold more tests than we sold in 2021 and then obviously, the impact of recall products that was a negative. Both of those split next year. So if you take those out of the equation, you kind of go back to what we were growing pre-pandemic, right, which was top tier, high single-digits, 7% to 8% growth. That’s what we grew in 2022, again excluding COVID and the impact of the recall products. And then if you take that comp out on the recall product side this year as we return to market and look at the base business, obviously, without the COVID testings, we are going to be growing high single-digits, probably at a higher end of that pre-pandemic range probably 8% plus. So I think it starts with the top line.

And that’s probably the number one part of our guidance is obviously making sure that we feel that our top line is taking advantage of all the good parts, all the good product launches, etcetera that we have. And from that perspective, I think a lot of what we are doing kind of supports that ongoing high single-digit growth rate. If you look at our device portfolio, we will be looking at high single-digit growth rate, low double-digit growth rate, combination of both kind of recovery, the steady recovery procedures that we are seeing combined with all these product launches that we have got lined up that will ultimately have a full year impact, whether it’s Libre 3, Amulet, Aveir, Navitor, CardioMEMS, Eterna on the neuromodulation side, our mapping system in EP, we are going to launch a new ablation catheter.

So, the device portfolio is well set up to be able to drive those high single €“ sorry, high single-digit, low double-digit growth rate. I mean, I think we are going to continue to see strong performance in EPD. I think as the world continues to reopen, those emerging markets continue to be a great opportunity for us. We have strengthened our position in diagnostics throughout these years and we will see continued successful rollout of Alinity in our core molecular diagnostics and recovery in infant formula too. So I think you put all that in place, our core business, Abbott that we knew pre-pandemic is actually stronger than we were pre-pandemic with the investments that we made. And I think that’s the other part of, I guess, in the P&L, if you look at what we have been able to do this year is because of COVID and the investments that we made during COVID in these growth areas, we are able to drive this high single-digit growth across the company with a fairly flat investment line, whether it’s R&D and SG&A, so really getting the leverage across the businesses.

So I mean, I think it really starts with our top line and the confidence we have and the products we’re launching, the pipeline that we have. And then COVID, we forecast about $2 billion next year, and I think that’s the right number right now. Obviously, we see kind of society transitioning here. We’ve got a strong installed base. We’ve got manufacturing capacity. We haven’t factored in any kind of real surge but if that happens, we do have the capacity to be able to do that. So I’d say those are some of the moving pieces there. But fundamentally, we’re in a real strong position in terms of our long-term growth opportunities. Leading positions in these attractive growth areas, strong pipeline, which I’m sure we will get into some of them and a strong balance sheet.

So that’s how this has been constructed, and I think that we’re in a good position here.

Robbie Marcus: Great. Thanks, Robert. Really helpful. Maybe one for Bob, you gave us the full year guide and you gave some commentary down the P&L, which is really helpful. But how should we be thinking about some of the quarterly cadence here? How FX flows, what is FX on the bottom line? And how did that compare to €˜22? And any just things we should be thinking about first half versus second half on the P&L? Thanks a lot.

Bob Funck: Yes. So if you think about the kind of the cadence of our business for 2023, it really starts with the top line and some of the things that Robert kind of talked about. First, we have a lot of the new product launch activity, especially in our medical device businesses. You got products that either launched last year, we will be launching this year. I’m sure we will talk about some of those on the call today. So you’ll see the impact of those launches kind of grow over the course of the year, kind of feather into that top line. Secondly, we are seeing a steady improvement in procedure trends in the U.S. and Europe. We’ve been seeing that and we expect to continue to see kind of a steady improvement there on procedure trends over the of the year.

In our Nutrition business, we will see improvement as we continue to supply the market, in particular, the non-WIC segment of the infant formula market in the U.S. And so will recover share there. And so we will have the impact of that over the course of the year. For China, Robbie, I’d say we’ve assumed a softer start in Q1 given some of the dynamics there at the start of this year, but we anticipate that will improve over the course of the year. And so all those changes €“ all those impacts on the top line as that builds over the course of the year will flow through to earnings as Rob about we’re going to get leverage in the middle here. And so for the first quarter, we’re €“ we think earnings will be approximately $1, and then we will build from there.

On your question on foreign exchange, rates have improved a bit recently, but exchange is still a headwind, particularly on earnings. At current rates, as I said in my opening exchange is approximately a 1% headwind on sales. EPS, it’s a little bit more than $0.30 headwind for us in 2023. The fall-through impact when currencies move like we have seen over the last year is always complex. Translation is just a piece of the impact. And while that has improved from where we were a few months ago, it still remains a headwind. One of the biggest drivers that we’re seeing is the impact from our hedging program. We realized pretty significant hedging gains last year that won’t repeat this year. And you can really see the impact of those hedging gains on our 2022 results.

Last year, there was a pretty significant exchange headwind on sales, a little over 5% or $2.1 billion, but a fairly modest impact on earnings as it was less than dime. And that was really the benefit we realized last year on those hedging gains that won’t repeat in 2023. That’s not a unique dynamic that we’re seeing. We’re seeing that from some other multinationals as well.

Robbie Marcus: Thanks a lot.

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

Larry Biegelsen: Good morning. Thanks for taking the question. Robert, I feel compelled to ask about Libre again, just given how important it is. So maybe I’d like to hear from you the outlook for 2023. How should we think about worldwide growth? Can it exceed 20% this year? And can you talk about international, where you’ve been negatively impacted by the supply issues and the transition to Libre 3 in Germany, when do you expect those issues to be resolved? And just the growth drivers like Basel and the vitamin C, resolution, what are some of the growth drivers to look forward to this year for Libre? And I had one follow-up. Thank you.