美國雅培 (ABT) 2013 Q1 法說會逐字稿

Good morning, and thank you for standing by.

Welcome to Abbott's first-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 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. 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.

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 2013.

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 disclosed 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 news release and regulatory filings from today, which will be available on our website at Abbott.com.

With that, I will now turn the call over to Miles.

Thanks, Brian.

Good morning.

This morning, we reported first-quarter results that were in line with our expectations.

Ongoing earnings per share were $0.42, which is at the high end of our guidance range.

And sales increased 3.5% operationally, led by strong performance in our Nutrition and Diagnostics businesses.

We are confirming our-full year 2013 ongoing earnings per share outlook, which is for double-digit growth, at the midpoint of the range.

We are delivering on our current growth expectations despite a mixed global economy.

Developed markets globally continue to be challenged by 2012 austerity measures and weak economic conditions, and that impacted our results this quarter, as we saw sales decline low single digits before exchange in these markets.

We planned for that, and expect to see some improvement in the second half of the year.

And while most developed market currencies were relatively stable, the yen weakened significantly, representative of the efforts by some governments to stimulate weak economies.

At the same time, emerging markets continue to be a significant opportunity for us, one where the demand for health care and nutrition is growing rapidly, and where Abbott is well-positioned to benefit from the favorable trends that are taking place in these markets.

This quarter, more than 40% of our total sales were in emerging markets.

In the first quarter, we saw particularly strong growth in China, India, Russia and Vietnam, with sales in eight key emerging markets up 18% before exchange.

As we accelerate growth across these countries, we expect to expand our emerging market sales more than 50% of Abbott's total sales over the next several years.

Before Tom and Brian discussed our results in detail, I will briefly comment on our strategic priorities as they relate to first-quarter performance.

As I just discussed, driving above-market growth across emerging markets is a key priority.

Our sales across all of the emerging markets were $2.2 billion in the first quarter, increasing 15%, with strong results across our major businesses, including Nutrition, Core Diagnostics and Vascular Devices.

In Nutrition, emerging market sales represent 45% of total nutrition sales and increased more than 20%.

We have broad global reach today with our pediatric and adult brands, and we've prioritized a group of key markets to deliver on our future growth targets.

This includes multiple countries where we are expanding our current leadership position, such as Vietnam, where we are shaping new markets, such as India, and where we are aggressively expanding our geographic reach, such as China.

By 2015, we expect to more than double our presence in China, which is the largest and fastest-growing nutritional market in the world.

We're executing well against that goal through the first quarter of this year.

We're also making progress with the expansion of global capacity to support the continued strong global demand for pediatric and adult nutrition.

Our three new facilities in China, India and the US are expected to come online later this year or early next year.

In Established Pharmaceuticals, we prioritize 14 emerging markets where the demand for health care is rapidly expanding and where we are building our presence to drive above-market growth.

Sales of these key emerging markets represent approximately 50% of EPD sales, and this quarter increased nearly 9%, led by growth in Russia, India and China.

We anticipate our key emerging markets to deliver double-digit growth for the full year as we continue to build out our local product portfolios and expand in-country in these markets.

In Medical Devices, Vascular Devices delivered 20% emerging market growth, while Medical Optics and Diabetes Care delivered midteens growth.

Medical Devices growth was driven by continued strong performance of our Tecnis brand of cataract intraocular lenses and our market-leading vascular technologies.

In our Diabetes Care business, our emerging market strength was driven by share gains in several key markets, including China.

In Diagnostics, more than 70% of our sales occur outside the United States, with a growing portion in emerging markets.

In Core Laboratory Diagnostics, these markets represent nearly 40% of sales, and we continue to outpace market growth in our priority markets, again, China, Brazil and Russia.

We've seen continued strong demand in the core laboratory for our industry-leading systems, including Architect.

In China, this business, again, grew nearly 40%.

Our second priority is to continue to drive share gains and market expansion through new product launches and brand enhancements.

In Nutrition this quarter, we completed 19 new product launches globally, on track for approximately 70 by year end.

This includes the first international market launches of our new Similac next-generation formula and the continued global rollout of our infant formula tolerance line.

These innovations contributed to our 21% growth rate in international pediatric nutrition.

In the US, we launched a new line of ZonePerfect bars, as well as innovations across our Similac brand, to maintain our leading infant formula share position in the hospital and retail segments.

In Established Pharmaceuticals, we completed more than 45 new product launches across 16 geographies.

This included new formulations of core brands that broadened our key therapeutic portfolios in gastroenterology and neurology.

In Medical Devices, we continued the rollout of Absorb in international markets, and in January, initiated our Absorb US pivotal trial.

Also in January in the US, we launched our new drug-eluting stent system, Xience Xpedition, and are on track for a midyear approval in Japan.

MitraClip, our structural heart device for mitral regurgitation, increased double digits internationally.

In Medical Optics, we launched a new cataract intraocular lens in Japan, which now gives us access to 70% of the market where we were not previously competing.

We also expect to launch our Tecnis toric IOL in the US shortly.

In Diabetes Care, we are on track to initiate our pivotal trial by year-end for our next-generation sensor that we expect to first bring to the European market by the end of 2014.

And in Diagnostics, we continue to broaden our Architect menu with several new tests.

We also launched our next-generation automation solution that improves efficiency and workflow amid increased testing volumes.

Development work continued on six new system platforms across core laboratory, point of care and molecular that are expected to launch over the next several years.

These new systems add new features that are important to our customers, such as speed, scalability and shorter turnaround time.

The third priority I'll highlight is margin expansion.

Our operating margin in the first quarter was in line with our expectations, and we remain on track to deliver approximately 100 basis points of expansion for the full year.

While we are focused on margin improvement across our businesses, Nutrition and Diagnostics are driving much of the improvement this year.

Nutrition operating margin increased significantly over the first quarter 2012, on track to improve at least 300 basis points for the full year.

We are confident in our ability to deliver on our target of 20% of sales by 2015 as we implemented a number of planned actions last year and expect to continue our progress in 2013.

In Diagnostics, operating margin also improved over the prior year as we continue to execute on our efficiency initiatives in manufacturing and supply chain.

We are on track to reach our 2015 operating margin target in this business, as well, which is to exceed 20% of sales.

So in summary, our first-quarter results were in line with our expectations, and as we continue to execute on our key business priorities, we expect to deliver on our double-digit ongoing EPS growth target for the full year.

I will now turn the call over to Tom to review our first-quarter results and the 2013 outlook in more detail.

Tom.

Thanks, Miles.

Before we review our financial performance, I'd like to mention that yesterday we furnished an 8-K, detailing the 2012 quarterly income statement for new Abbott on both a GAAP and non-GAAP basis, with appropriate reconciliations.

With that in mind, our review of results for the first quarter of 2013 and our outlook for the second quarter and full-year 2013 will reflect comparisons to the 2012 ongoing baseline in the 8-K.

So for the first quarter of 2013, we reported ongoing diluted earnings per share of $0.42, at the upper end of our previous guidance range.

Sales for the quarter were in line with previous guidance, with operational growth of 3.5% and 1.8% growth on a reported basis, which includes an unfavorable impact of 1.7% from foreign exchange.

Sales growth was driven by strong performance across a number of products and businesses, most notably Nutrition and Diagnostics, along with strong growth across all of our businesses in emerging markets, which grew 15% on an operational basis in the quarter.

The first-quarter adjusted gross margin ratio was 55.8%, somewhat above our forecast, due in part to the timing of exchange effects on this ratio.

In the quarter, ongoing R&D investment was around 6.5% of sales, and ongoing SG&A expense was around 32.5% of sales, both in line with expectations.

Turning to our outlook, for the full year 2013, today, we are confirming our ongoing earnings per share guidance of $1.98 to $2.04, which reflects double-digit growth over 2012 at the midpoint of the range.

Regarding sales for the full year 2013, we continue to forecast operational growth -- that is, excluding the impact of foreign exchange -- in the mid to high single digits, with a somewhat higher forecast for Nutrition, offset by somewhat lower expectations for Vascular.

Based on current exchange rates, we expect exchange to have a negative impact of around 1% on our full-year reported sales.

Brian will review the growth outlooks by business in a few minutes.

We forecast an ongoing adjusted gross margin ratio for the full year of approximately 55%, consistent with guidance previously provided.

We also continue to forecast ongoing R&D as 6% to 7% of sales and ongoing SG&A expense somewhat above 30% of sales for the full year 2013.

Overall, we continue to project expansion of our full-year adjusted operating margin by around 100 basis points in 2013, consistent with previous guidance.

We continue to forecast net interest expense of around $110 million in 2013, nonoperating income of approximately $20 million and around $50 million of expense in the exchange and gain loss line of the P&L.

Finally, we continue to expect an ongoing tax rate of around 21% for the full year 2013, consistent with guidance previously provided.

Turning to the outlook for the second quarter of 2013, we are forecasting ongoing earnings per share of $0.43 to $0.45.

Our operational sales growth in the second quarter is expected to be in the mid-single digits.

At current exchange rates, we would expect roughly 1% negative impact from exchange on sales in the second quarter, so that at these exchange rates, we forecast reported sales growth approaching mid-single digits.

We forecast an ongoing adjusted gross margin ratio at around 54.5% of sales in the second quarter, which includes a negative impact from exchange of nearly 1%.

We also forecast ongoing R&D at around 6.5% of sales and ongoing SG&A expense of somewhat under 32% of sales for the second quarter.

In summary, we are off to a good start in 2013, delivering at the upper end of our ongoing EPS expectations and confirming our 2013 ongoing earnings per share guidance.

This outlook again reflects strong performance as we continue to build Abbott to deliver reliable, top-tier performance in the years ahead.

With that, let's turn to Brian for the operating highlights by business.

Thanks, Tom.

This morning, I'll provide an overview of the first-quarter 2013 performance for each of our businesses and will also review our second-quarter 2013 sales outlook by business.

My comments will focus primarily on operational sales growth, which excludes the impact of foreign exchange.

Let's start with our Nutrition business, where global sales increased 9% in the first quarter on an operational basis, driven by 15% growth internationally.

International pediatric sales grew 21% operationally, driven by uptake of new innovations in Similac formula, continued strong double-digit growth of PediaSure and above market growth in emerging markets as we continue our geographic expansion.

Adult nutrition sales increased 6%, led by continued strong growth of Ensure and Glucerna.

As the global leader in adult nutrition, we continue to shape this market as the world's population ages.

In the US, first-quarter Nutrition sales increased 2.1%, in line with our expectations.

US pediatric sales were driven by continued strong growth of our PediaSure toddler brand, partially offset by a slight decline of infant formula sales.

While we continue to have a leading share position in the US, we experienced some unfavorable year-over-year impact due to lower WIC volume.

First-quarter US adult sales were driven by share and category growth of our market-leading Ensure brand, somewhat offset by lower-than-expected retail category growth.

As we look ahead to the second quarter, we expect our Global Nutrition business to grow high single digits on an operational basis, again led by strong international sales growth as we continue with our portfolio innovations and geographic expansion to drive share gains in emerging markets.

Moving on to Diagnostics, in Core Laboratory Diagnostics, operational sales increased nearly 6% in the first quarter.

About 80% of our Core Laboratory Diagnostics sales are generated outside the US, where we saw nearly 9% operational growth in the quarter.

As Miles mentioned, we also saw strong emerging market sales growth, led by China and Russia, which grew 40% and 35%, respectively.

We delivered on several new product approvals in the quarter, expanding our Architect platform menu by launching six new tests and launching our next-generation automation solution designed to help laboratories improve efficiencies and workflow.

We will continue to broaden our menu throughout this year and continue to invest in the development of our next-generation platforms.

In Molecular Diagnostics, worldwide sales increased nearly 2% on an operational basis in the first quarter, in line with our expectations, led by strong growth in emerging markets, partially offset by market conditions in Europe.

In Point of Care Diagnostics, worldwide sales increased more than 17% on an operational basis as we continue to expand our leadership positions in the United States.

For the second quarter, we are forecasting our Global Diagnostics business segment to generate mid to high single-digit operational sales growth, with continued strong growth from Core Lab and Point of Care diagnostics and accelerated growth in Molecular Diagnostics.

I will now review our Established Pharmaceuticals business, or EPD, where sales in the quarter increased just over 1% on an operational basis, consistent with our previous guidance.

In EPD, we are focused on 14 key emerging markets, which include India, Russia, China, Brazil and 10 additional key markets.

These markets comprise nearly 50% of EPD's sales and grew approximately 9% in the quarter.

As previously discussed, we expect emerging markets to comprise an even larger portion of EPD sales over time.

As expected, growth in other markets, which include developed markets, such as Western Europe and Japan, and other emerging markets, was negatively impacted by European austerity measures and the Japan NHI pricing actions taken in 2012.

We expect to accelerate operational sales growth in EPD over the course of the year as the impact of austerity and pricing actions subsides and as we execute on a number of product and geographic expansion initiatives.

With respect to the second quarter, we expect low-single-digit operational sales growth from our Established Pharmaceuticals business.

And finally, Medical Devices, which includes our Vascular, Diabetes Care and Vision Care businesses.

In our Vascular business, worldwide sales decreased 6% on an operational basis, including the expected non-commercial revenue decline related to the Promus agreement, as well as the negative impact of Japan 2012 NHI pricing actions.

Excluding Promus, sales declined 2.5% on an operational basis.

International sales, which comprise more than 60% of total Vascular sales, increased 4% operationally.

Sales in the emerging markets represent 25% of Vascular sales and grew 20% in the quarter.

Recent international launches of our Xience Xpedition drug-eluting stent and bioresorbable vascular scaffold, Absorb, coupled with contributions from MitraClip and strong growth in emerging markets, are the key drivers of our international performance.

Last month at the American College of Cardiology meetings, we announced positive long-term results from the Absorb trial, indicating that our bioresorbable vascular scaffold provides unique benefits not possible with metallic stents.

These benefits include increases in vessel over time, reduction in plaque and improved vessel function.

US Vascular sales in the quarter declined 19%, driven by the expected decline of certain royalty revenues and soft market conditions, including price.

Looking ahead through the second quarter of 2013, we expect our Global Vascular business to be relatively flat on an operational basis.

We expect to improve our performance over the course of this year with the continued uptake of Xience Xpedition in the US, the expected launch of Xience Xpedition in Japan, continued emerging markets execution and continued penetration of our new products, MitraClip and Absorb.

In Diabetes Care, global sales in the first quarter were relatively flat on an operational basis, in line with our expectations.

Outside the US, growth of 3% was driven by share gains in key emerging markets, which grew double digits in the quarter, as well as the continued uptake of our FreeStyle Insulinx Meter.

In the US, we saw continued share gains in the hospital and retail segments, offset by [market] pricing pressures and lower Medicare mail order purchases.

Moving to the second quarter in our Diabetes Care business, we project sales to be relatively flat on an operational basis.

As we have previously discussed, while we are forecasting strong growth in key emerging markets, the 2013 implementation of CMS, or the competitive bidding for Medicare patients, will impact our US sales this year.

In Vision Care, global operational sales increased approximately 2% in the first quarter.

Cataract sales, which represent about 60% of our Global Vision Care sales, continued to outpace the market in the quarter, led by above-market growth of our Tecnis brand of intraocular lenses.

We expect continued strong growth in our cataract business with several important launches this year.

These include our recent launch of Tecnis OptiBlue in Japan, which provides Abbott access to the largest segment of the Japan market, and the expected upcoming US launch of our Tecnis toric lens.

We also saw continued strong performance of cataract business in emerging markets, with more than a 30% growth in the quarter.

For the second quarter in our Global Vision Care business, we expect low-single-digit operational sales growth.

So in summary, our results were in line with our expectations, and we remain on track to meet our full-year forecasts.

We delivered strong performance in both Nutrition and Diagnostics this quarter, while also executing on a number of new product launches and geographic expansions.

And we expect accelerated growth as the year progresses.

We will now open the call for questions.

(Operator Instructions) Mike Weinstein, JPMorgan.

Good morning.

Can you hear me okay?

Yes, I think it's okay, Mike.

Okay, perfect.

Thanks.

Good morning, Miles.

If I think about the Company -- I thought, by the way, you guys, I thought, did an excellent job in laying it out in the press release, which is -- you had a lot of different details than you've had before.

There is -- you've got 40% of the Company in emerging markets.

It is growing 15% this quarter.

You've got the other 60% in developed markets; that was down like 3% this quarter.

If we think about the acceleration in the total Company over the balance of this year, is it the developed market piece gets better if you think about it in aggregate, or is it the emerging markets piece?

I think I know the answer, but I just want you to flesh that out a little bit.

Well, it's a little bit of both.

I would tell you that a little bit of improvement in developed markets goes a long way.

But the emerging markets for us are showing pretty strong growth.

And I would say even a bad day in an emerging market looks a lot better than a developed market right now.

So when we look at some of these emerging markets, and even at the very strong growth rates we see there, they are a little slower than what we may have historically seen in the last couple years.

So I think it kind of depends.

Unfortunately, they are not all binary and separated; they are linked.

They are somewhat interdependent.

And I would say we are seeing the roll-through right now in the developed markets of the actions -- austerity actions that have been taken obviously in the last year to 15 months, and I think that is going to be with us for a while.

I know the senior management at Johnson & Johnson commented a little bit on that yesterday, and I thought their comments were quite eloquent about that, quite correct, that it's going to take a while for this to roll through and for businesses or companies to lap the actions we've seen in the developed markets.

But a little bit of improvement there, as I said, goes a long way.

At the same time, the emerging markets are still very robust and strong, comparatively speaking, and frankly, even in the absolute.

So I think all of us, we look at our various businesses, it is really, as you point out, a two-part story.

It is developed markets, emerging markets, and they are pretty different.

And so the tactics or the things that we put in place in any of those markets are different.

We are expanding as rapidly as we can where the growth is, and we are finding better ways to be efficient and compete more effectively and, frankly, compete for share in the developed markets.

So I think at the end of the day, while we've given guidance that we expect to be mid to high single digits, depending on how long sort of the economic conditions persist, we will be toward the mid, and if it begins to improve, we will start to move the other way.

Okay.

Well, let's take EPD, because I think that is probably the business where there is probably the biggest range of views on the growth profile of that business.

And if you look at it this quarter and then what you are expecting over the balance of the year, you've got your emerging markets piece, which is posting good growth, not double digits, but pretty close.

And then you've got your rest of Europe, which has been declining and it has been a drag.

So if EPD gets better over the balance of the year, is that because you start to lap some of those cuts that occurred in Europe last year, or is it because emerging markets accelerates?

Again, it is a little bit of both.

We definitely did better as we lapped some of last year.

The developed market, part of EPD in some ways has been more strongly hit than any other businesses -- or that business in developed markets has been more strongly impacted because of just the direct impact of price cuts in Japan or Europe.

And then, of course, you've got the yen on top of it.

And we've got a pretty significant business in Japan there.

So we've got a disproportionate index on the developed markets in EPD.

So I think as we lap that, it gets better.

But at the same time, as you pointed out, the growth rate of EPD in the emerging markets is about 9%, and, frankly, I expect that to improve in the latter half of the year.

Okay.

One last follow-up for Tom.

The gross margin commentary for the second quarter, you are expecting a step-down from 1Q to Q2 despite having probably $200 million in incremental revenues.

Is that just because the first quarter was just higher than it normally would be because of FX hedges?

Yes, we just had -- the timing of the flow-through of the exchange really just kind of helped the first quarter a little bit, and it will be a little bit of an offset in the last three quarters of the year.

I think the key message on gross margin is as we look at the full year, we are right on track with what we thought we would have as we talked about back in January.

So it is really just a timing thing, Mike.

Perfect.

Thanks, Tom.

Rajeev Jashnani, UBS.

Hi, thanks for taking the question.

I was wondering if you would comment a little bit about maybe what is going on beneath the surface in SG&A.

There is a lot of probably activity in emerging markets, and maybe talk about some of the investments you're making there, versus what you're doing in the developed markets to just facilitate the longer-term growth first.

Thanks.

This is Miles.

I think that's a pretty good summary right there.

We are definitely expanding in the growth markets around the world, both in headcount and promotional spending and so forth, to support that growth.

And we are doing that at a prudent rate.

We are also tightly managing the sales and marketing expenses in markets where we are not going to get the return or aren't getting the return.

I would also say a little bit of what is going on there, and you will probably see this play out over the remaining quarters of the year, we are putting an awful lot of emphasis on our G&A.

It is not that we want to spend less or invest less in our sales and marketing support of our businesses or investment in businesses, but I do want to run the Company at a very efficient level from a G&A standpoint.

So we've put a lot of emphasis on how we are performing in all of -- call it overhead or support functions around the world.

It doesn't matter what country you are in for that one, or what business.

And we're looking at any kind of duplication between our businesses and corporate and so on.

Now that we've got a little different configuration of the Company without the proprietary pharma business, it gives us an opportunity to look pretty closely at a lot of our support spending in G&A.

That is not something we can do in just a quarter, but over the coming quarters, we will definitely be putting some emphasis on that.

So -- and is it enough that you could see that play out in the SG&A?

Yes.

The question is driven more toward gee, are you too tight on SG&A?

I'd say no, we don't feel like we are starving SG&A.

I think -- not at all, actually.

If we have the opportunity to invest more where we know we can get the return and grow, we are definitely doing that.

There is a certain pace at which you can do that and a certain quality at which you can do that, and we are mindful of that.

But we want to make sure we put that investment into the growth of the businesses.

And I would say the same with R&D.

You look at a profile of R&D this quarter, and it looks like it might be slightly down.

That it's really a timing issue.

We don't like to shift or reduce any kind of R&D spending at all, provided it is productive.

So we like the notion of investing more in R&D, and we like investing it well.

And we don't want to make our bottom line based on what we do with discretionary spending in SG&A or R&D; that bottom line needs to be driven by core performance at the gross margin level.

And that is why we are putting so much emphasis on the gross margin improvement in the businesses, which is going quite well.

That not only is good for the investor at the bottom line, but affords us more investment capability in R&D and SG&A.

I know it's a long-winded answer, but there you go.

That was very helpful.

Thank you.

And I guess one quick follow-up on the product side.

I was wondering if you could talk about the Absorb product in Europe and what you're -- maybe a little bit more granular on what you are seeing there in terms of uptake and how you expect that to broaden out over the coming quarters.

Thanks.

I would say the uptake is taking a little longer to ramp than we might like, but it is coming along pretty nicely.

We are confident that this is going to be a workhorse stent for us over time.

And I think the initial trial and positioning of the stent has people trying it.

And you might even say in its initial launch, it looks like it is going to a very high niche.

On the other hand, that is the starting point, to get some experience with physicians and doctors.

It is our intent to drive it into what I will call very common workhorse use.

And the pace of that is steady.

I think we are always going to be impatient and wanting to drive it faster.

For a little while, it was about having the range of sizes.

We solved that in a number of our markets, so I expect that to continue to perform pretty well.

Thanks, guys.

David Lewis, Morgan Stanley.

Good morning.

Miles, I thought I would come back to one of the bigger growth drivers in Nutrition, and two specific points to maybe a follow-up.

There has been a lot of talk intraquarter about the Hong Kong ban; it has pressured some of the peers in the space.

Maybe what is Abbott's positioning on the impact the Hong Kong ban would have, if any, on the business?

I guess the second follow-up would be Ensure, I think a business that people are not focusing as much on, obviously a launch last year.

How are you thinking about Ensure and the opportunity in China?

You know what?

I'm going to let Brian or Tom answer your Hong Kong question because I think, frankly, the answer is we are not having an impact.

But we will give you more granularity on the impact we are not having.

This is Brian.

We had a great quarter, as you can see, in Nutrition, and that is driven by strong growth in China.

That dynamic is not our dynamic.

And I know you and I have discussed this a little bit.

We are not as overindexed in Hong Kong as our competition.

If you look across Hong Kong and China, our shares are relatively the same.

So we don't see this dynamic impacting us.

But clearly, it is an impact on the industry if they make restrictions of product that can cross the border there.

I would say our growth rate in China is pretty robust.

We are not seeing that impact.

Frankly, our growth rate in Hong Kong is pretty good, too.

And your second question was?

On Ensure, Miles, is it too early to start thinking about how big the Ensure opportunity could be in China?

Well, we are thinking about how big it might be.

I'm not sure I can quantify it for you, but we think it is a fairly significant opportunity, and we're investing to, frankly, drive and create that market.

And I think there is -- how would I put it?

I think it should be a terrific opportunity for us.

It is a market that I think demographically and from a culture and a use standpoint is perfect for Ensure.

We are currently, as you know, investing in capacity for our liquids in the United States.

We will probably -- we will enter that market first with our powder versions of Ensure and then we'll transition to liquid, when we will add on to our plant -- or one of our plants in Asia to give us the capacity to manufacture in or near market for Ensure.

That is one where we are very confident of the opportunity.

I think almost any projection we put together will be wrong, but I know it will all be good.

So that is when we look forward to running at as fast as we can, I would tell you; I think it is a big opportunity.

Okay, that's very clear.

Maybe a quick follow-up for Tom.

Tom, if you think about the road map you laid out on the road show for Nutrition margin expansion, now that we are sort of 3, 4 months post that, where do we sit now in terms of where we stand?

Are we on plan, slightly ahead of plan, potentially behind?

And then what are kind of the key guideposts in terms of either manufacturing capacity or cost reduction initiatives over the next several quarters we should be focused on?

Well, we are ahead of plan.

When you look at the first quarter, when you see the Q come out, you're going to see a really good operating margin for this business.

I think you have to be a little careful with that, and we really need to look at this on a full-year basis, because in the last three quarters we are planning some investments in the business and we are starting up the plants that Miles talked about.

And so I wouldn't straight-line the margin you see in the first quarter out to the full year.

But as Miles indicated in his remarks, year-over-year for the full year, we expect 300 basis points of improvement in the operating margin this year alone, which gets us very well on the track towards the target he talked about.

So we are ahead of plan and that business is really clicking on all cylinders when it comes to the margin expansion.

Okay.

Thank you very much.

Kristen Stewart, Deutsche Bank.

Thanks for taking my question.

Just a follow-up, I guess, on MitraClip, given that you guys have had the panel.

What are your expectations just in terms of whether you are optimistic that the FDA will ultimately approve the product or whether we should just expect to see perhaps some of the other studies before granting full approval?

And then if you could also update just on the performance and sales level in Europe, too, that would be great.

I guess, Kristin, the first thing I would tell you is we are pleased that we got a favorable indication from the panel that was recently held with the FDA.

But I have found over time it is never good to speculate about what the FDA may or may not do or may or may not think.

We are hopeful, and we are working as constructively as we can with the Agency regarding the US.

But I don't find it useful at all for us to speculate or put the FDA in a spot or whatever.

We want them to work constructively with us, and I think the best I can say is we can't predict it, and we are not in a position to really comment much further than that.

And I guess with regard to Europe and the 30 countries that it is available in today, we are pretty pleased with the performance.

It has been implanted in 8000 patients, and we've had a good performance with it.

It is growing quite nicely in the markets where we are marketing it, and growing at a very nice, healthy, double-digit rate.

We would certainly like to bring it to the US for patients who are at high risk and have no other option.

And we'll just see how that plays out.

Okay.

Any kind of high-level thoughts just on capital allocation, M&A strategy here, now that kind of the spinoff is complete?

Tom loves it when you talk about capital allocation, so I'll let him take that.

Thanks.

Kristen, as we entered the year, it's similar really to the way we viewed this even prior to separation.

It is a balanced approach.

We pay a healthy dividend.

We believe in a growing dividend.

We execute on share repurchase each year, and we did some of that in the first quarter and plan to do that this year.

There is some degree of cash buildup, and some potential of moderating on the debt level.

So it is a balanced approach, and the cash flow of the Company is good.

We've projected $4 billion this year.

That gives us a lot of options.

And it is more of the same as we progress through 2013.

Okay, perfect.

Thanks.

Larry Biegelsen, Wells Fargo.

Good morning, and thanks for taking the question.

Let me start with the US.

The international performance was very strong, but some of the US businesses came in a little weaker than we expected.

Maybe if you could talk about whether there were fewer selling days in the quarter that might have an impact.

And the three businesses that would be helpful to get some color from you on are Vascular, Adult Nutritionals and Core Labs.

And then I just had one follow-up.

Thanks.

This is Brian.

There was some impact on the selling days.

That is something we've not stressed in the past calls, but it definitely impacted our Nutritional business to where those sales would have been a little bit higher, as well as the Vascular side even, to a little bit -- to an extent.

You saw -- clearly in the US, I would probably start with where the pressures are on the Vascular side that you are seeing.

And with there, we have seen some market pressures.

We've seen nearly a 10% decline in this market, primarily pricing related.

And we are down a little bit on a share year-over-year basis.

However, we are gaining share sequentially as if you look through the fourth quarter to the first quarter, where our share has picked up about a couple points.

And again, Xpedition, I would say is early in its launch in the US, and so as we discussed before, we expect some continued share gain in the US and for that business to pick up as we move throughout the year on Vascular.

I would add to that for you, I think if you compare just on share in that business versus a year ago, I think we are down about two points, best as we can tell.

On the other hand, we are on an uptick, because we launched Xpedition just after the first of the year.

So I would expect that to pick up.

The pressure in Vascular, very heavily a market pressure, and part of it is competitive and pricing in the market, and part of it is just utilization.

I would tell you one of the benefits we have here looking across all these businesses, because we have the diverse portfolio we do and we are in so many countries, we get the benefit of comparing the performances of different businesses across those different geographies.

And I would tell you that as we look at the US, Japan, the European Union, Canada, et cetera, the developed markets, and look across the various businesses, whether it's Vascular or Diagnostics or any of these businesses, it is pretty uniform, the growth rates and the market growth rates and, frankly, the business growth rates and pressures that we see.

You can see the pressure or the economic conditions in the retail markets for our Nutrition business.

You can see it in the hospital markets.

You can see it in, frankly, any segment of the markets, the pharma markets and so forth; they are all pretty similar.

And what we take from that -- obviously, we know how we are doing and we know how some of our competitors are doing and so forth -- but we take from that there is an underlying call it economic malaise or weakness that is pretty consistent across the developed markets.

And it's not unique to the US, it is not unique to Europe.

It manifests itself in some different ways, depending on how the products are paid for or by whom, whether it's patient pay or government pay or third party insurer pay or so forth.

But overall, they are pretty similar.

And the conditions are such that you've got that headwind in literally all of the developed markets.

And one way or another, we are seeing it in each of these businesses.

Conversely, in the emerging markets, it is just the opposite, and they are almost uniformly all pretty robust.

They are a little more volatile, a little less predictable, you've got some currency swings here and there and so forth, which is why it is great to be in a pretty broad portfolio of emerging markets and not over-indexed in any one.

But the fact is consistently across the board, they are pretty healthy growth rates in those markets.

And I would say the unique distinctions among them pretty much blend out across them, whereas there is a lot more consistency across the weakness of the developed markets.

Tom.

To answer your question on Core Lab, Larry, we outlined this in the earnings release, but there was kind of a comp issue in the blood banking business, and we had a really strong, unusual order last year that was really nonrecurring.

So I would not trend out that first quarter, and you should see better performance in the US on Core Lab.

That's very helpful.

Thanks, Tom.

Did we catch everything you asked there, Larry?

You did.

Thank you.

Let me just ask one follow-up of Tom.

Thanks for providing the 2012 quarterly numbers.

It is the first time to get to hear your perspective on those numbers.

And just two things stood out to me.

One is the gross margin came in at about 55.

That is what you are guiding to this year, and the tax rate was about 25% last year and you are guiding to 21% this year.

So just curious on the gross margin why no improvement in 2013?

And second, just wanting to understand the tax rate obviously a great improvement from 25% to 21% but just a little bit of color on how you can achieve a 400 basis point improvement and maybe where it can go from here?

Thanks.

Thanks, Larry.

The gross margin is actually on an underlying basis improving across this business.

We have about a 1% exchange headwind because of lag effects and hedges and the like comparing 2012 versus 2013.

And we said -- we talked about this on the fourth-quarter call, that we would be flattish in gross margin but underlying is improving and it is just kind of a tough year from an exchange comp perspective.

So I think that is pretty consistent with what we have said before.

Regarding the tax rate, there are a couple things.

When you look at the tax rate in this baseline, clearly it is a carve out or a residual of a carve out of -- we ran the whole Company the way we ran it, and we repatriated for the whole Company and this is what shook out relative to the Abbott that we are now running.

So it is just -- that is one thing to keep in mind.

And really the two things that are causing the improvement over that carve out, if you will, is the tax law changes that were enacted and as you know at the beginning of the year for the whole of 2012 we were unable to recognize any of the benefits associated with that, and there were certain provisions of that that went beyond the R&D tax credit that were helpful to the Company.

And we are seeing a shift of income to better, lower tax jurisdiction shall we say, which is kind of a mix effect in income which is helping us to run at the 21% late this year.

So those are the reasons, and I guess the other thing I would just note is when you compare our year-over-year progress and our growth, tax is helping it for sure.

But if you just call that aside and look at operating growth, we are still growing at that double-digit level, which is, again, the way we've built and what we hope to sustain the growth profile of this business.

So that's the explanation on the tax rate.

Thanks very much, guys.

David Roman, Goldman Sachs.

Good morning, everyone.

Thank you for taking the question.

I was hoping you could spend a little more time on the US Medical Devices.

Certainly we can appreciate some of the challenges in the coronary stent market as it relates to pricing and overall utilization.

I was hoping you could just expand upon is where you think we are with respect to volumes.

And PCI volumes have been down now for several years.

I think there was some perception that was sort of cyclical.

It is turning out to seem a little bit more secular.

But how should we think about your US Vascular business going forward?

This is Brian.

I'll start off here and then perhaps turn it over to Miles or Tom for more perspective.

But we have seen on a year-over-year basis the PCIs, to your point, on volume being down approximately 5%.

And we are still continuing to see pricing pressures on a year-over-year basis, almost as much as 7%.

You know, you kind of wait these things out with the other dynamics of the market.

That was the 10% that I was talking about being down year over year.

I would say sequentially, we still are seeing some modest decline, even sequentially, in these price and PCI as well.

If you look at some of the news that was out there -- and Miles mentioned this -- it is all out there in terms of the health care space, what some of the Health Management Association's been reporting, that there are certain utilizations that have just kind of flattened off, and we are still continuing to see that pressure.

So for us in the US, it really is going to be about the share momentum and gaining back, as Miles mentioned, with respect to the Expedition launch.

But obviously, it is very similar to what we've been talking about throughout this call.

It is really a tale of two markets.

Developed world is a little more challenge, but the emerging markets grew 20% in the quarter in this.

And we are seeing double-digit PCI growth in some of the Asian -- in a number of the Asian markets.

So between this, MitraClip, Absorb progress, Xpedition launch and the like, there is a portfolio of growth drivers that we believe are going to help level out this business and start it back on the growth path globally.

David, I think the other thing I would point out -- and I think Brian sort of covered it -- is, first of all, there are two dynamics going on here.

One is the PCI volume and one is the price.

The quarter compares to quarter a year ago.

We also look at the most immediate past quarter, the fourth quarter in this case of 2012.

So if you look at the current trend or the current sequential trend, the difference you see versus a year ago has slowed considerably.

So as PCI growth, down 5% -- on a sequential basis quarter to quarter, it is barely a percent down.

So the rate at which it has declined would appear to be slowing, moderating, whatever.

But it isn't recovering.

That part is true; it's not recovering.

And the same I can say for price.

Price hasn't taken a lot of pressure over the last 3, 4, 5 months, but it certainly did versus a year ago.

So we look at it both ways -- what is the case versus year-ago and how is it trending right now.

And I would say both of those factors at least as impact have kind of flattened modestly, slightly down, maybe, but pretty much flattened.

But it is in recovery.

So it is a pretty -- as you said, it wasn't temporary.

It seems to be hanging in there.

That's helpful.

I think that's true for a lot of the hospital segments, frankly.

And I think hospitals today are even more aware of fixed budgets, if not declining budgets.

And they are putting a lot of pressure on utilization and/or price, procedures, et cetera, as they try to deal with, hey, we've only got so much to spend and we are trying to allocate it as best we can.

That's helpful.

And then maybe on the emerging markets piece, obviously, another very strong quarter and you called out some of the highlights in key segments.

What I was hoping you could just spend a couple seconds on is how you sort of view the competitive dynamics stacking up across your biggest businesses.

Where -- is most of your growth coming from building new categories that didn't really previously exist in markets?

Are you taking share?

How do locals stack up?

I know in China, for example, there are sort of a decent cadre of local stent manufacturers, but your numbers continue to show quite a bit of strength.

Maybe just help us frame out the competitive impact versus the new market development impact in those regions.

I think, first of all, it is very heavily new market, new growth.

And that is why those markets are growing.

As the health care systems expand, as the medical practices expand, as incomes expand and so forth, you actually see the evolution of two or three sometimes four kind of pricing tiers in segments.

You would -- there is often -- call it a high-end niche; there is a midmarket; there is a lower tier; and sometimes a very low tier.

All of them are growing, and you see a migration of that midtier to the upper tiers in some cases.

In a lot of cases, the multinationals and/or exporters that are not local manufacturers in those markets are in those upper tiers and trying to move down, and the local manufacturers are in the lower to mid tiers, trying to move up.

We see that it almost every business we are in.

But I would tell you in spite of the fact there is multiple competitors, whether local or multinational, and pretty healthy competition amongst us all, we are all being driven by a heavy tailwind of growth and expansion and utilization in those markets as their health care system expands.

So you can track -- in a lot of cases -- and we are careful to look at this internally -- not to get too excited about our growth if we are not taking share.

We want to be paying attention to whether or not we are winning in these markets and in the competition.

It's wonderful to have the growth, but at the same time, we are mindful that your competitiveness is measured in your share as well.

So I would tell you that the emerging markets are very, very much a tailwind of growth, but at the same time, we are all mindful of the competition.

Okay, maybe lastly on EPD, I think one of the things you had communicated on the fourth-quarter conference call was some expectation for a moderation of pressure in Europe throughout the course of the year, given some of the austerity measures that were in place last year perhaps sort of stabilizing.

Is there any visibility on that at this point, or is that something that we sort of have to wait and see how that plays out over the course of the year?

I'm afraid it falls into the wait-and-see category.

No, I'm not seeing it yet.

It is something we expect in the second half of the year, but no, we're not seeing it yet.

I think what we are seeing right now is the flow-through of the measures taken in the past, as I said, 12 months or 2012.

There were a lot of pricing actions taken by governments, and we are seeing that flow through the business now in the comps.

And I would expect to see us lap some of that and see it moderate in the second half of the year, but we haven't seen it yet.

Okay, got it.

Thank you.

Rick Wise, Stifel.

Good morning, Miles.

Good morning, Tom.

Maybe I'll start off on the Diabetes side.

You're clearly doing well in emerging markets; US, softer outlook, I assume in part due to the new US reimbursement -- lower reimbursement -- CMS reimbursement for diabetes test strip.

Just could you give us your perspective on some of the next drivers in Diabetes?

Is this sharp reduction in test strip reimbursement reflected in the numbers?

And maybe remind us of the Medicare and non-Medicare mix in the business -- in the US business.

In the US, first of all, I would say it's one of those rare circumstances where you're glad your share is not real high in a particular segment.

I realize that sounds like some rationalization, but we are not -- we don't have a real high Medicare share.

And we have one of the lowest shares in mail-order.

So the CMS competitive bidding that has been put in place in the United States is going to have an impact on all manufacturers.

But it is, frankly, relatively speaking, less on us, because we are not highly indexed there.

The business itself has segmented and focused on the high-testing or frequent-testing, insulin-dependent user for quite some time, and that is a more robust segment, where we've been steadily, incrementally gaining some share.

We've targeted our R&D efforts on next-generation sensors and testing on those users that are looking for more than just a test strip and a test.

They are looking for a lot more information management, a lot more ease of testing and so forth.

So I would tell you the product lines that we have in development in that business today, which I think are very innovative and will have tremendous value for those patients, are steadily moving along.

I was just recently out in California, meeting with the group for a day, and I'm very pleased with what I see there.

I think we've targeted a segment of the market that is a lot less, say, cost-sensitive and much more performance-sensitive around what their testing and information gives them.

And I am thinking the business is certainly positioned in the right place going forward here over the coming years.

Today, it is a very tough competitive commodity-like market for the Type Twos and the less frequent testers and in the US.

Tom?

Rick, I would just say when we went through our planning process last fall, it was very clear what was coming and competitive bidding in the business.

And our plan totally factored in pretty much what has played out in the bidding process.

So we are well covered in our guidance for the evolution of the US market here.

Good.

On the EPD side, you've talked about launching new and different formulations of existing drugs and registering current drugs in the portfolio in new additional geographies.

Can you update us there and your progress there and what we should be looking for on those fronts?

As I mentioned in my remarks, there were 45 of them that came through in the first quarter.

There have been hundreds of submissions made to the various regulatory bodies around the world, and one of the things we are finding is that those regulatory bodies are capacity-constrained in their ability to process registrations in a number of countries.

So it is slower going than we might hope, but we're making progress.

And it is something that each of our local regulatory people is working through with the various regulatory bodies in each country.

But we're making progress with it, and as we do, it is gradually expanding the product lines.

One of the things we are trying to do is prioritize into those registrations that are higher volume, higher likely usage and so forth, ahead of those that are less so, to fill out our product lines, trying to get the priorities straight.

That is not always easy to do with the regulatory body, because their interests aren't necessarily the same as our interests.

But we are making progress there.

And just last, Miles, I hate to always ask you about acquisition plans.

It's hard to resist, since I'm asked -- it's almost the first question I guessed every time I speak about Abbott.

And just I guess your latest thoughts on strategy and focus.

I get asked about your priorities, US or OUS, one business or another.

And maybe talk about the pressure you feel or don't feel to move forward on that front.

Thanks.

I guess I would answer it a couple different ways.

I don't feel any particular pressure, because I think there is a balance between the things you might like to do strategically or look at versus the pricing or the values in the market or whatever the case may be.

And we like to think -- I'm sure every business and competitor out there likes to think -- that we are prudent stewards of shareholder dollars and that we make prudent deals and so forth when we do.

Our track record has been pretty good that way.

But we are mindful of that.

And I think it kind of depends.

There have been some areas of the business that we wanted to expand.

Obviously -- and I think I've commented on it in the past -- we are looking at quite a wide variety of potential things in the device businesses to expand our device footprint and platforms and so on.

But it kind of depends where and when they are ready and/or we like what we see, the value we see, et cetera.

So I would say we are always active there.

We were not so active last year because, first of all, I think a lot of things weren't ready, and secondly, we were pretty focused on all of the activity with regard to the separation.

But having the separation activity behind us, we are able to turn our attention now to what some of those things may be.

But it doesn't mean we are sort of out on a buying spree either.

I think we tend to be pretty selective.

We always balance it versus the value of the business and what we can do with the business and the capacity of our businesses to absorb additional new things to do.

Because whether it is big or small, it takes a lot of effort to put it in your portfolio and drive it appropriately.

So I would say we are actively looking there.

We are not trying to -- I would say on the Device businesses and so forth, we are not sort of US versus not US or overseas or whatever.

I think, as everyone in this market can tell, it is often faster to be in the markets in Europe than it is in the US these days, and I think that is fairly apparent.

But that doesn't mean you only buy ex-US businesses or look at licensing products ex-US.

The US is still a very important market to us and is one in which we have ambitions to keep growing and in our Device businesses.

So there is no distinction geographically there at all.

In our EPD business, that business is not in the US, and it has no intention to be.

So any interest we have in properties there that might expand our geographic footprints would all be ex-US.

And again, we follow that pretty regularly.

But I have to say, the valuations and things that we've seen, in a lot of cases, haven't made sense to us.

So we are careful about that.

And then in Nutrition, I would say our Nutrition business has some interest in some things.

I would characterize them as relatively small, and given the growth rate of the business, I don't think there is any need there.

It would have to be a particular opportunity we thought had robust potential, because with the way the business is performing, you don't want to over-distract it with an acquisition or integration when it is hitting on all cylinders like it is.

So I'm sure that kind of describes the waterfront there.

I'm intentionally not going to be specific with you about what we may be looking at.

When we were doing our road shows last fall, I did get a lot of questions on it from investors and analysts.

And I always get specific questions about specific businesses or specific segments that I realize our investors have other investments in and are trying to triangulate on interest in.

But there is nothing I've been asked about that we haven't been following or looking at closely, or studying or looking at in some fashion.

I think one of the things that makes any company successful in the M&A or licensing areas is that you've done your homework and you've been doing it over time, so that when you finally decide to make a move with something, you've had a lot of diligence and you know why you want to do it and so forth and you're ready.

And I would tell you that has always been our practice, to kind of be on top of whatever portfolio of opportunities there might be for us.

Appreciate that, Miles.

Okay.

We have time for one more question.

Glenn Novarro, RBC.

Thanks for taking my question.

I just had a follow-up on the use of cash.

Tom, you highlighted the dividend as well as some debt paydown.

But what about share buyback?

Is that something focus -- a focus?

And how should we think about shares outstanding?

And then I had one more follow-up on the use of cash.

I did mention when I gave my recap there, share buyback has always been part of our mix of use of cash.

We were -- we bought a fair amount of shares in the first quarter, and it's something we continue to look at as we progress through the year.

So absolutely, it's an important part of the mix for us.

It's a good way to return cash to shareholders.

And obviously, with the view we have about the long-term of this Company, it is a good investment for our shareholders.

So absolutely, it is part of the mix, and we did execute on a fair amount of that in the first quarter.

Is there a target for shares outstanding by the end of the year?

I wouldn't say that.

Sometimes that fluctuates with the stock price fluctuations and the impact on diluted shares.

But what we have is a target for deploying cash into share buyback, and we executed on a fair amount of that in the first part of the year here.

Okay.

As a follow-up, I would assume that most of your cash is now sitting outside the US.

So if that is correct, how does that impact -- and this is specifically for Miles -- how does this impact your M&A thoughts?

I would think more targets would therefore be outside the US.

Well, I don't necessarily target the businesses or the interests strategically by where the cash is.

We first look at the strategic fit of any given business of interest to us with the businesses we are in or what we can do with it.

And obviously, we look at returns and all the obvious and important financial metrics that we ought to look at.

And then depending on our access to cash or where that business may be, we have that as a consideration.

But I would tell you we don't start with it as a constraint.

We don't start with it as necessarily the determining factor of where we ought to be hunting or looking.

Our interest outside the US is because, frankly, that is where the growth is.

And it's an awful lot of growth.

And we want to feed that growth.

So to the extent we can invest in that growth, we do.

And therefore, in some ways, it is very convenient to have significant portion of cash outside the US to support that growth.

Now having said that, there are things that we also are interested in that are in the US.

And device businesses in particular tend to be US-centric, at least as a point of residence.

And we don't feel like we are particularly constrained or unable to react to the ones we're interested in to acquire.

We have found it possible to manage our cash and our returns appropriately.

So while I would say it would be nice if the US government, in its efforts with tax reform at some point, would find a path to allow companies economic repatriation, that would certainly be in everybody's interests.

But right now, it is not determining where we focus our M&A activity.

Okay, great.

Thanks for the color, Miles.

Thanks, Glenn.

Thank you, and thanks to everyone for your questions.

And that concludes Abbott's conference call.

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Thank you, and this concludes today's conference.

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