美國雅培 (ABT) 2015 Q1 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's first-quarter 2015 earnings conference 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.

Okay.

Good morning and thank you for joining us.

With me today are 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 2015.

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 Securities and Exchange Commission Form 10-K for the year ended December 31, 2014.

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.

Please note that first-quarter financial results and guidance provided today on the call for sales, earnings per share, and line items of the P&L will be for continuing operations only.

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.

Our commentary on sales growth refers to operational sales growth, which excludes the impact of foreign exchange unless otherwise noted.

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

Okay, thanks, Brian.

Good morning, everybody.

I'll be brief this morning and leave some time for questions.

Our first-quarter performance exceeded expectations on both the top and bottom lines.

We reported double-digit operational sales growth, exceeded both our gross and operating margin targets in the quarter, closed on the sale of our EPD developed markets business to Mylan, and launched a number of new products across our portfolio.

I'll summarize our first-quarter results before turning the call over to Tom and Brian for some further detail.

Operational sales increased 10% in the quarter with particularly strong performance in our branded generics, international nutrition, and global diagnostics businesses, as well as double-digit growth in emerging markets.

And that did include the additions of CFR and Veropharm.

While currency was a factor, including a 7% negative impact on the top line, we continue to manage through its effect on the bottom line.

Our first-quarter adjusted earnings per share of $0.47 exceeds our previous guidance range and reflects growth of 38%; but again, as I said, that includes the addition of CFR and Veropharm in the comparisons.

Our full-year 2015 adjusted earnings per share guidance of $2.10 to $2.20 remains unchanged and reflects double-digit underlying growth, excluding the impact of currency.

In the quarter, starting with Nutrition, sales increased more than 6% with continued double-digit growth outside of the United States.

The new pediatric products that we've launched into China and other fast-growing geographies are continuing to perform well, products like Similac QINTI and Eleva; and we've had strong performance in the online segment.

These new products drive share expansion and contribute to our growth in the market.

The international adult nutrition business has consistently delivered high-single digits, double-digit sales growth.

Our adult nutritional Ensure is roughly a $2 billion brand globally today, and we launched it into the retail segment in China early this year.

In March, we also opened a nutrition pilot plant in Singapore.

This facility, in addition to the others there, allows us to customize more of our products to meet consumer preferences across Asia.

In medical devices, diabetes care returned to growth this quarter, as we expected.

We've had a very positive early response to the launch of our new FreeStyle Libre device.

As I mentioned last quarter, we're already expanding capacity to meet this demand.

Libre is a highly differentiated technology that helps people self-manage their diabetes without the need for routine finger sticks.

We are also building a portfolio of products based on our sensor technology, and FreeStyle Libre Pro is our first professional-use device that was launched in India earlier this month.

Our Vascular business also performed in line with our expectations.

Operational sales growth in the quarter was driven by high-single-digit performance of our endovascular products as well as double-digit growth of our structural heart product, MitraClip.

The market opportunity for mitral regurgitation is significant but still in its early stages, and MitraClip is the only product on the market to date that can treat this disease in a minimally invasive way.

The medical optics sales were impacted by market dynamics in our cataract and LASIK businesses.

We recently launched two new cataract lenses and saw a pickup in our cataract lens growth as the quarter progressed.

In Diagnostics we delivered 6% growth in the quarter.

The continued success of our commercial strategies with core laboratory customers are driving share gains in the US and emerging markets.

We continue to invest in the development of next-generation system platforms across all three of our Diagnostics businesses.

In point-of-care diagnostics, sales increased double digits.

In the US, we've had success with large healthcare networks, standardizing their point-of-care testing with our i-STAT system.

Outside the US, our expansion efforts continue in both developed and emerging geographies.

In Established Pharmaceuticals we're executing better commercially.

That's something I've given a fair amount of attention to on past calls with you.

We are expanding our product portfolios in our therapeutic areas of focus and driving more awareness of our Abbott brand with consumers, physicians, and pharmacists.

Excluding the benefit from our recent acquisitions of CFR Pharmaceuticals and Veropharm, sales in our key emerging markets increased in the low double digits, with above-market growth in India, Brazil, China, Russia, and Colombia.

With the sale of the developed markets business to Mylan completed in February, EPD is now focused solely on emerging markets.

We received 110 million shares of Mylan stock for the developed markets business and recently sold roughly a third of our position.

The net proceeds from the sale of Mylan shares and our strong balance sheet provide us with additional flexibility to invest in strategic growth opportunities to continue to shape Abbott for long-term growth.

So in summary, we reported first-quarter results ahead of our expectations.

We are building on the momentum we had exiting 2014, and we expect high-single-digit full-year operational sales growth and continued progress on margin expansion, and we are well on track to achieve our financial objectives in 2015.

I'll now turn the call over to Tom and Brian to discuss our first-quarter results in more detail.

Tom?

Thanks, Miles.

As Miles indicated, today we reported first-quarter adjusted earnings per share from continuing operations of $0.47, above our previous guidance range and reflecting growth of 38%.

Sales for the quarter increased 10% on an operational basis, excluding an unfavorable impact of 7% from foreign exchange.

Reported sales increased 3% in the quarter.

Operational sales growth was driven by strong performance in Nutritionals, Diagnostics, and Established Pharmaceuticals, which included the impact of 2014 acquisitions.

Sales in emerging markets increased strong double digits in the quarter.

The first-quarter adjusted gross margin ratio was 58.1% of sales, somewhat above our forecast and up nearly 500 basis points over the first quarter of 2014.

The year-over-year comparison was driven by gross margin improvement initiatives across our businesses, and in part the comparison relative to an unusually low ratio experienced in the first quarter of 2014.

In the quarter, adjusted R&D investment was around 6.5% of sales, and adjusted SG&A expense was around 34.5% of sales.

The overdelivery in the first-quarter EPS compared to our guidance was in part the result of the dynamics of exchange on our results, including the timing effects of hedging activities on the exchange gain/loss line of the P&L.

We expect the first-quarter favorability on this line of the P&L to partially reverse in the second quarter, with the remaining net gains for the year to be offset on the operating income line of the P&L over the last three quarters.

As we discussed last quarter, while the weaker euro impacts our top line, movements in the euro having minimal impact on our bottom line due to our euro-denominated cost base, therefore the further weakening of the euro that we saw in the first quarter of the year does not impact our 2015 EPS forecast.

Turning to our outlook for the full-year 2015, our adjusted earnings per share guidance range of $2.10 to $2.20 from continuing operations remains unchanged.

Regarding our full-year 2015 outlook for the P&L, we continue to forecast operational sales growth in the high single digits.

Based on current exchange rates, we now expect exchange to have a negative impact of around 7% on our full-year reported sales, up over our previous projection in January of around 6%.

This will result in reported sales growth in the low single digits for the full-year 2015.

Brian will provide more details on the 2015 outlook by business in a few minutes.

We now forecast an adjusted gross margin ratio of around 57.5% of sales for the full year, driven by gross margin improvement initiatives across our businesses.

We forecast adjusted R&D investment of around 6.5% of sales, and now forecast an adjusted SG&A expense of around 31.5% of sales.

Overall, we continue to expect to expand our full-year adjusted operating margins by over 100 basis points in 2015.

We now forecast net interest expense of around $120 million, reflecting changes in the interest rate assumptions on both our debt and some of our investments.

We forecast an exchange gain of approximately $35 million on the exchange gain/loss line of the P&L for the full year, reflecting some reversal of the favorability we saw on this line in the first quarter, as mentioned previously.

And we forecast around $5 million of nonoperating expense for the full-year 2015.

Turning to the outlook for the second quarter, we forecast ongoing EPS of $0.49 to $0.51, reflecting double-digit underlying growth, largely offset by the impact of significant foreign exchange headwinds on operating results, as discussed on the January call, as well as the partial reversal of favorability in the exchange gain/loss line of the P&L from the first quarter, as previously mentioned.

We forecast operational sales growth in the low double digits in the second quarter.

At current exchange rates, we would expect a negative impact from exchange of somewhat above 8%, resulting in reported sales in the low single digits.

We forecast an adjusted gross margin ratio of around 57.5% of sales; adjusted R&D investment of approximately 6.5% of sales; and adjusted SG&A expense of somewhat above 32% of sales in the second quarter.

We forecast net interest expense of around $35 million, and approximately $15 million in expense on the exchange gain/loss line of the P&L.

Finally, we project specified items at $0.23 in the second quarter, reflecting the same items as we identified for the full year in our earnings release.

So in summary, our full-year ongoing EPS guidance remains unchanged.

As we start the year, we are well positioned to deliver another year of strong EPS growth in 2015 despite a challenging currency environment.

And with that I'll turn it over to Brian to review the business operating highlights and outlook.

Brian?

Thanks, Tom.

This morning I'll review our first-quarter 2015 performance and second-quarter sales outlook by business.

As I mentioned earlier, my comments will focus on operational sales growth.

I'll start with our Nutrition business, where global sales increased more than 6% in the first quarter.

In our international pediatric nutrition business, sales increased 11.7%, driven by double-digit growth in China and Latin America.

We continued to capture market share with new infant formula products we launched into the fast-growing market segments and geographies over the past year.

This includes Similac QINTI and Eleva, which we launched into the premium infant formula market segment in China in 2014.

International adult nutrition sales increased nearly 11% in the quarter, driven by strong double-digit growth in Latin America.

This is the sixth consecutive quarter of double-digit sales growth in our international adult nutrition business.

We continue to expand the adult nutrition category internationally and recently launched our Ensure brand in China into the retail market segment, which represents a significant growth opportunity for Abbott.

We also continue to expand our local presence in key markets.

As Miles mentioned, in addition to the three manufacturing plants we opened last year in China, India, and the US, we announced in March the opening of a new nutrition pilot plant in Singapore.

This state-of-the-art facility will serve as a second global R&D hub.

In the US, pediatric nutrition sales were up 4.5%, driven by market share gains in the non-WIC segment of the infant formula market and double-digit Pedialyte growth as a result of a strong flu season.

Adult nutrition sales in the US were impacted by competitive and market dynamics, including softness in the institutional segment.

We expect a modest improvement in the US adult nutrition sales growth over the course of the year as we launch new products.

For the second quarter we are forecasting mid to high single-digit growth on an operational basis in our global nutrition business, driven by continued double-digit operational sales growth in international nutrition.

In our Diagnostics business, sales increased 6% in the first quarter, with double-digit sales growth in emerging markets.

Core laboratory diagnostic sales increased 4.7% in the quarter.

This above-market growth was driven by strong growth in our core laboratory segment, as this business continues to increase its win rate and gain share with its customer-focused solutions.

The US growth was impacted by a comparison to a strong first quarter of last year, when sales increased double digits, driven by higher blood screening sales.

Last week we announced a partnership agreement with the number-one coagulation company in Japan, to provide coagulation testing solutions to core laboratories worldwide.

This partnership broadens our Diagnostics offering to meet our customers' needs and to deliver high-quality results and efficient workflow as part of Abbott's total solution.

Coagulation testing is approximately a $2 billion market segment of the in vitro diagnostics market that is growing in the mid-single digits.

In molecular diagnostics, sales increased 7.4% in the quarter, driven by growth of our core business segment, infectious disease testing.

Growth was also favorably impacted this quarter by the timing of tenders in emerging markets.

In Europe, we're early into the launch of our IRIDICA infectious disease testing platform, which helps identify serious infections such as sepsis.

For the second quarter we expect relatively flat growth in our molecular diagnostics business, as we project growth of the infectious disease business to be offset by the declines in our non-core oncology and genetics businesses.

In point-of-care diagnostics, worldwide sales increased 15.5% with double-digit growth in both the US and internationally as this business continues to build and expand its presence in targeted developed and emerging markets.

Strong growth in the quarter was driven by continued performance in the large-hospital segment as well as continued adoption in the physician office laboratory and ambulatory setting, where small portable solutions such as Abbott's i-STAT help improve efficiencies.

For the second quarter we expect our global diagnostics business to generate mid-single-digit operational sales growth.

In medical devices, sales in our Vascular business increased 2% in the quarter.

Sales of our MitraClip product for the treatment of mitral regurgitation increased strong double digits in the quarter both in the US and internationally.

Last month we presented data that reinforces MitraClip's ability to reduce mitral regurgitation and improve a person's overall health and that supports further adoption of this device.

Our endovascular business continues to have momentum, with sales growing high-single digits in the quarter, driven by strong growth in our base business, including vessel closure, as well as our peripheral stent, Supera.

In our drug-eluting portfolio in the US, we have gained sequential market share following the XIENCE Alpine launch.

XIENCE Alpine is the only drug-eluting stent with an indication to treat chronic total occlusions.

We've also recently announced the launch of XIENCE Alpine in Japan.

For the second quarter we expect sales in our global Vascular business to increase low-single digits on an operational basis.

In diabetes care, global sales in the first quarter increased nearly 3%, as this business returned to growth after lapping the impact of US reimbursement changes.

Outside of the US, strong consumer and physician adoption of our revolutionary new glucose sensing technology, FreeStyle Libre, has exceeded our initial expectations, driven by a successful direct-to-consumer campaign.

We continue to expand FreeStyle Libre to new geographies.

Earlier this month we announced the launch in India of FreeStyle Libre Pro for professional use.

Libre Pro uses the same sensor-based technology as our consumer-focused FreeStyle Libre product and helps doctors obtain the comprehensive data they need to make treatment decisions.

India is a logical target market for Libre Pro, because there is a large diabetes population but self-monitoring of blood glucose is not a common practice.

In the US, we have and will continue to segment our products and our commercial strategies to drive profitable growth.

Last week we announced the launch of FreeStyle Precision Neo, a new compact, easy-to-use blood glucose meter that allows people with diabetes to easily access a well-known, multinational brand in the over-the-counter market segment.

For the second quarter, we are forecasting low- to mid-single-digit operational sales growth in our diabetes care business.

In medical optics, sales were down 3.4% in the quarter.

While this performance was below our expectations, we expect to improve sales growth in our medical optics business over the rest of the year as we launch new products.

Earlier this year in the US we launched TECNIS Multifocal Low Add, which provide more range of vision options to patient and surgeons.

Just last weekend at the American Society of Cataract and Refractive Surgery meeting, we launched our TECNIS Preloaded in the US, which improves the ease-of-use for the cataract surgeon and enhances predictability of the procedure.

For the second quarter, we expect our global medical optics business to grow mid-single digits on an operational basis.

Lastly, our Established Pharmaceuticals business, or EPD, where sales increased strong double digits in the quarter, including the impact from recent acquisitions of CFR Pharmaceuticals and Veropharm.

In February, we completed the sale of our developed markets branded generics pharmaceutical business to Mylan.

With this business now focused entirely on emerging markets, we saw low-double-digit underlying sales growth in our key emerging markets which include India, Russia, China, Brazil, and Colombia, along with several additional markets.

Performance across the Latin American region was strong during the quarter as we are starting to see the benefits of a more complete product portfolio and sales infrastructure due to the integration of CFR.

Additionally, Influvac sales were strong and benefited from the production capacity expansion we completed last year.

For the second quarter, we expect similar strong double-digit growth in EPD on an operational basis, including the impact of the acquisitions I mentioned.

In summary, our first-quarter earnings per share and operational sales growth exceeded expectations.

We launched several new key products across our portfolio of businesses, and our outlook for the year remains unchanged as we are well positioned to deliver another year of strong growth.

We will now open the call for questions.

Operator?

(Operator Instructions) Kristen Stewart, Deutsche Bank.

Hi, congratulations on a good quarter and thanks for taking the question.

I was wondering if you could just like comment from a big-picture perspective.

You've now really done a great job of re-shifting the portfolio with the disposition of the developed established pharmaceutical business and bringing in CFR and Veropharm.

Just how are you thinking about just shaping Abbott going forward?

It doesn't necessarily seem that you need to be in a rush to certainly deploy any of the cash, and you have plenty of flexibility; but just how are you thinking about just more from a big-picture strategic perspective what's next?

Thanks for the question, Kristen.

I'd say we want to grow and we want to get bigger, and I think there's obviously two dimensions to that.

One is organic, and organic can be expansion of products or expansion of geography.

And then there is -- I think our footprint could benefit from being a lot bigger in a number of our businesses or even as a corporation in the diverse mix of businesses we have.

So that would imply some M&A activity, etc.

And nobody would be surprised to hear that out of me, I don't think.

So I think both dimensions are important to us, and we are putting a fair amount of attention on both.

The notion is I think we've got the right core: it's a very solid core of businesses that are performing well or they are in markets that we know will continue to be healthy and drive good growth and have great opportunity for us.

So I think we've got the core of the Company well positioned today for the attractiveness of both product markets and geographic markets that we think there is a lot of opportunity for investors for.

But beyond that, I think we can do more, and I think we can do a lot more, and particularly if we are bigger in a number of these spaces.

So my intention is to get bigger.

I think strategically that's how I'm thinking about it.

To your comments about resources and timing and so forth, as I've said in the past I don't feel particularly capital-constrained or resource-constrained.

And yet I don't feel like I have to rush out urgently either.

I think we can afford to be thoughtful and prudent; but at the same time that doesn't mean sit on our hands.

So I think the deal market or the M&A market out there -- I would love to say -- we all go out there with a plan: we have the following priorities; we have the following targets, etc.

Those plans are always dead on arrival.

The market tells you either who is willing to talk to you, who is willing to engage, what valuations may be, what the circumstances in any given geography or industry may be.

Those things always tend to determine the timing of opportunity.

I think what we've been good at is being ready when opportunity aligns and when people's willingness to engage aligns and so forth.

And I can't always predict the timing of that.

But I can tell you, if you are not ready when the things line up, then you are not able to take advantage of it.

So we are obviously, I think, always tracking, always studying; and we've always got an idea of what our priorities would be.

The market will tell us what order we get to address them in, to some degree.

But you're right.

We are sitting in a very, very good position, I think, right now, in terms of our readiness, our ability to have resources, etc., to invest, the condition of our underlying business.

We've given a fair amount of attention to our cost structure, to our supply chain structure, to our back-office structure, our G&A, all those sorts of things over the last couple of years, really to ready ourselves for bigger business and greater expansion, particularly geographically.

I'd say that's all fallen very nicely into place.

You can see it in the results.

You can see it in the gross margin.

You can see it in the G&A line.

You can see it in the efficiency of the business.

You can see it in the growth rates of some of the businesses and so forth.

I think I feel pretty good about the foundation, and that's the kind of foundation you want to add to.

You don't want to add to a weak one, with a lot of problems or a lot of things you are trying to fix.

You want to add to a strong one.

So I think we're in a really good position right now.

I feel good about it.

And you've been really reshaping Abbott to be more of a consumer-focused business.

Is that how we should think about M&A priorities going forward, in terms of things that could really leverage the Abbott brand and stay within that structure?

Well, I wouldn't say to an extreme degree.

I think a word I've used in the lot in the past is balance.

I think historically, particularly in developed markets, a lot of our businesses were reliant on government reimbursement or single-payer systems and so forth.

We wanted a different balance of that, where there was consumer choice, consumer preference, consumer pay, etc.

The very nature of the mix of our businesses now is much more like that, not just because of the businesses but because of geographies and the structures in those markets.

So I'd say we have -- and for example, in our pharmaceutical business, branded generic pharmaceutical business overseas, those are very much consumer-pay markets.

Economic structure of those markets is a little different; they are more attractive to us.

We've targeted those countries with that structure in particular as opportunity.

So I'd say to the degree that that opportunity exists for us, yes, it's very attractive.

But I would not rule out Europe, the US, or traditional markets as opportunities for us for some of our businesses.

I just want a different or a more balanced structure, so we are not over-reliant on heavy concentrations in given geographies where there is an awful lot of decision control at a central point.

And then a lot of European countries are like that.

It's one of the reasons Europe hasn't been as high a priority for us as emerging markets.

But I wouldn't run all the way to one side of the boat either.

Perfect.

Then just a quick follow-up for Tom.

Tom, would you be willing to provide just the organic growth in the quarter for Abbott overall, and then just comment on --

Yes.

On the top line, it's mid-single digits, adjusted for the acquisitions.

Perfect.

Okay; thank you.

Mike Weinstein, JPMorgan.

Thanks.

Just to clean that up, Tom, anything more precise than mid-single digits on the organic growth?

Right around 5%, Mike.

Okay.

Then the beat on the quarter and not raising the EPS guidance, is that just the timing of FX impacting the P&L over the course of the year?

I'd say a little bit of it is that.

Certainly in that exchange gain/loss line I talked about, that should be considered to be a little extra in this quarter, offset by some negatives over the last three quarters in the currency area.

I'd say overall, though, it was a really good, high-quality quarter when we look at how the businesses progressed both on the top line and particularly in the gross margin area.

And we are just pleased with that progress at this early point in the year.

I think it sets us up nicely to continue to build on that as we progress through 2015.

You know, Mike, I would add to that, the analysts and investors who cover us have all paid a lot more attention in the last couple years to currency than they've had to in years past, and partly because multinationals have expanded so much in a lot more countries.

I mean, we all used to be so euro-focused and yen-focused, and a lot of companies still are.

But because so much of the growth for many of us is Asia, Latin America, other emerging markets, we have all had to pay a lot more attention to a lot more currencies.

I think that's made it harder to forecast and predict, particularly the mix and the shifts and so forth.

Although when it all goes in one direction like it did the last couple of quarters, that's pretty easy.

But for us, at least in terms of the currency piece, I think all of us were caught off guard somewhat by the magnitude of the currency shift in the fourth quarter last year -- although maybe we shouldn't have been, but we were.

In our case, as I've pointed out in the past, we're less vulnerable to the euro -- very much less vulnerable to the euro -- than a lot of companies might be, just because of the mix of our business and where we produce and offset the exchange.

But then that means we've got a bigger basket of currencies to look at.

I look at those currencies and I say: okay; well, the ruble improved on us in the first quarter, thank God, and quite substantially; while the Brazilian real did not and went the other way.

China is very stable; EMEA is pretty stable for us right now.

So the big currencies that you would normally think would affect us or could affect us -- and knock on wood, and I look out and I think: okay, this should all be pretty stable for the year, barring events I can't predict in the external world.

With regard to guidance, which you asked about and I am circling back to, I just think it's early in the year to do any changing of guidance.

I'm kind of a Murphy's Law believer, that the minute we make any kind of confident move, something is going to go wrong with currency or something.

I don't know.

I just think it's a little early in the first quarter.

I have to say, to echo Tom, the underlying performance of the Company is real good.

To the extent that this momentum continues and there is no change to earnings -- or to currency assumptions and so forth, you are going to be pressuring us on this point again in a quarter here or so.

And that's all good.

But I think I'd just like to see more cards played before we move in that direction.

I looked back over our last seven or eight years to see how many times we had adjusted guidance in the first quarter.

And I think, God, we just gave it to you a couple months ago; so to change it two months later, does that make sense?

I think I've only changed guidance a couple of times in the first quarter in the last eight years -- and I'm not even sure why I did it then.

Because I think in general I ought to see half the year played before I've got a good feel for how things are going to lay out.

Because generally the second half of the year is different than the first half of the year for all of us, and it's usually around currency or some catastrophic event and world events.

I'd just like to see another quarter played.

And then if we're cranking along like we seem to be, then you are going to be pressuring us, and I am going to be nodding and saying you told me so; you were right.

Okay.

So let me switch to strategy.

Miles, depending on what plays out with Mylan, I could see where you guys end the year with maybe $12 billion to $13 billion of cash.

Probably everything except for a nickel of that will be outside the US.

You would have still, call it $5 billion of net debt potentially -- net cash, excuse me, at that point.

Does the cash position and the fact that really all of it will end up being outside the US, does that really drive you to an acquisition of O-US assets or O-US-domiciled assets?

And given the opportunity set, do you think you can put that cash and your balance sheet to work?

Let me go in reverse order.

Do I think I can put the cash on the balance sheet to work?

Yes.

The timing of when I can put it to work is the question, which I addressed to Kristen here a little bit ago.

I can't predict timing very well, Mike.

I can predict intent.

And my intent is yes, I will put it to work.

I think we've always found a good balance here.

We are pretty stable, reliable, predictable in terms of dividend and payout and so forth; and we've been pretty solid about balance of share buyback and capital deployment.

But we've also been pretty good about deploying to higher-return investments and so forth, and I think our deal record speaks for itself.

So I would say yes, the intent is there; the timing is a little harder to predict.

But I'm not sitting on my hands, as I said earlier.

Now having addressed that, gee, am I stuck with only opportunities overseas because of the structural tax system in the world?

No, I don't think so.

I am not ruling out the US.

I am not ruling it out at all.

I think that -- let's just say we've got great tax guys and great management of our cash flows and access to our cash if we have to.

And I think we've got good borrowing capacity if we want to and so forth.

I think I've got enough flexibility that I don't have to stay in an external world.

I think there's a lot of reasons that overseas is, say, economically more attractive.

We all know what those are.

But I think those are all sort of financial -- tax, cash related.

At the same time, I think there's opportunities that are attractive to us strategically for our business that aren't overseas, and I don't think I can rule those out.

So I don't feel constrained to being overseas.

I don't feel like our ability to finance what we may be interested in is constrained that way.

So while I am always looking in other geographies of the world for opportunities to expand our footprint, I would tell you I have not failed to fish at my own dock here in the US and look at opportunities in the US.

Miles, last question and I'll let some others jump in.

It's been relatively quiet over the last six months since the Treasury action on US corporates inverting to outside the US.

Is that something Abbott might still consider?

I'm not looking at it, let me put it that way.

I may naively think that Washington will come to its senses eventually here and make adjustments to the tax code to make US-based multinationals more competitive globally with all the companies that we compete with.

A lot has been written about this and my position on it has been clear.

This tax code disadvantages US companies and puts a for-sale sign on them for European and other companies to buy us and arbitrage tax rates.

And I strenuously object to the philosophy of the US government on that line, because I think it in no way enhances job growth or creation, or business creation, or economic recovery in the United States when you advantage everybody else to buy our companies.

So I hope at some point that both parties in Washington will address that; and I think so.

Again, I'm a Murphy's Law guy.

I think the minute we did something around inversion or otherwise, Congress surely would change the tax code and I would wonder why I bothered.

So I'm not even sure I'm enough of a tax technician to tell you whether there is a path to do that anymore.

I think right now the way things have been structured and the way the Treasury addressed in affecting the trend toward some companies looking at inversion, I think it's clearly advantaged a different M&A environment for non-US companies to look at US companies.

I think that's absolutely clear, and you would have to be blind not to see it.

So I don't -- it's not on my radar screen, Mike.

I'm looking at things more strategically and more traditionally, meaning I look at the strategic fit to the business, or what we can do with it, what we can expand it and so forth; and I look at whether those economics work.

And I am not trying to subsidize our M&A analysis with tax arbitrage.

Now, I think a lot of other companies ex-US are definitely subsidizing their analysis with tax arbitrage because they can.

But we are not.

That said, I don't -- I'm not seeing the expectation of a tax inversion premium in values.

I think values are high; I always think they are high.

I think they are high around the world for a lot of reasons.

A lot of deals are getting done at expensive prices and expensive multiples.

They are not because of inversion or tax; they are just expensive.

And that's driven expectations in a lot of places up.

But I always think that it's expensive out there.

My job is to make the best deal I can for the Company, but it's pretty hard to get a real deal in some cases unless you've got a plan for what you are going to do with the business and how it's going to operate in your hands.

So I guess to summarize all that, the short answer is: I'm not focused on inversion for the benefit of tax.

Doing those things is temporarily pretty disruptive to a company.

And if there is a long-term belief that you need to do that, as some companies have done, then it must fit them strategically.

In our case, I don't know that we need to do that.

And I would rather hope here that our government will fix the tax code in the next couple of years; and if they do I think it's going to dramatically enhance the competitiveness of companies like us.

Okay, perfect.

Thank you, Miles.

(multiple speakers) as a commercial for me, but that's kind of the deal.

Thank you.

David Roman, Goldman Sachs.

Thank you.

Good morning, Miles, Tom, and team.

I wanted just to start with the business actually, and specifically around medical devices actually where I think the overall growth rate of that business looks to be trending a little bit better than where it has.

So I was hoping you could just go into a little bit more depth on the turn in the Vascular business; and then also what gives you confidence specifically on the medical optics side, that we'll see a turn in that franchise through the balance of 2015.

Okay, let me start with the Vascular side.

I think what we've seen occur here over the last few years -- in the core stent business in particular, because everything kind of revolves around the stent business -- is a certain amount of stability out in the marketplace.

There is always price pressure; there still is.

The major competitors in the market are pretty competitive.

Physicians that use our products, they use all of us, and they kind of balance it.

So I think what you've seen is the value of incremental innovation has diminished and the market has stabilized.

One might even suggest it is commoditizing to a degree; but it's stabilized.

So I would say there is a constant drumbeat of price pressure as governments or payers or hospitals or whatever the case may be are trying to manage their own budgets.

In some ways I think it just forces us all to be a lot more innovative about where our next frontiers are, etc.

I think that in the medical device business there is a lot of opportunities for innovation.

Rather than look at much broader footprint of very mature products, we are putting our focus on a lot of innovation at a venture level and a smaller level, where there is a lot of opportunity for growth, expansion, and continued improvement to healthcare.

I'm not prepared to talk a lot about that today, but I would tell you that's where I'm headed with that, is to grow and expand that device business, but perhaps a little differently than what people might expect.

But I like the core of what we have.

I think we're going to have to manage it a little differently going forward, but I think the expansion for a lot of other related areas is there.

On medical optics, there's two stories here.

Am I pleased with our performance?

Sometimes.

We had three or four very strong quarters in a row, and then the business hit a wall.

There are several explanations for that.

Part of it's us; part of it is our own competitiveness or responsiveness; part of it is one of our main competitors waking up again and responding to the share that we had taken in the cataract business.

I would attribute that to just the ebb and flow of competition, which is good.

There's also some structural things going on there in the optics business.

We are seeing some customer consolidation in the LASIK market; we are seeing lower utilization in the LASIK market.

We've been seeing that for a number of years now.

Cataract business remains strong.

Yes, super.

We've got a great drumbeat here of innovation coming steadily.

Our R&D group has done a fabulous job, I think, over the last several years and they continue to, with just constant product innovation and launch.

So I think there are some tactical things we've got to do a lot better.

I like this business; it's one I want to expand in.

If you've got things you've got to adjust internally, it makes it a little harder to expand.

You like to add to a strong and well-operating core, so we know we've got some improvement to do in our own performance.

I'd say optics remains on my radar screen as one to expand, because I think there is a lot of opportunity there.

Okay, that's helpful.

Maybe switching gears over to the Nutrition side, I think in your prepared remarks you said that you had entered the Chinese market in adult nutrition with Ensure in retail stores there.

I know that that's an opportunity that is in its infancy right now.

But would you agree with an assessment that over time the Chinese adult opportunity can be a low billion dollar, $2 billion, $3 billion opportunity, using the Vietnam template as an example and just looking at the demographic opportunity in China?

And how long would it take you to realize something like that?

I'm breathless at your expectations.

Look, I would tell you I have an ambition for it to be a pretty big business.

I'm not sure I'd put a 2 or 3 in front of the billion yet.

I would like to get to a few hundred million and get some critical mass and momentum.

I do have an ambition for to be a very substantial business, along the lines you are directionally headed.

I'm just cautious about getting ahead of myself here on that.

I've got a couple businesses here at Abbott that I've had those same ambitions here for, for 10 years, and they are still around $0.5 billion.

So I don't want to perpetually be a visionary, because it never comes true.

I would like for it actually to happen.

So in this case I'd say I believe that opportunity is there.

I believe that potential is there.

We've got to establish the category.

We've got to establish the use.

We've got to establish the brand.

And I think what we've seen in the past is that every country we've done that in has been pretty substantial.

We create the category; we are the category.

We've got to do that in China.

There is an adult category in China; it's a little different than what Ensure is or does.

But there has been some regulatory change there that has been favorable to us and that has allowed us to establish this category at a more rapid pace.

I think it's really attractive, and I think there is a big upside here.

So you and I would at least be conceptually aligned.

I am just afraid to put that kind of specificity around size, because I don't know how long it might take.

You could be right.

And wherever we are, when you are right I want you to send me a note and let me know you were right, because I will be very happy if we are.

But I think there is a lot of opportunity to get big like that.

Okay.

Well, I guess if it makes you feel better, we never put a timeline on it.

So it was more of a peak opportunity.

In that case I think you're going to be right.

As I said, can we get to a few hundred million first?

We will stop and have a temporary celebration and keep moving on.

This is like having a kid in Little League and you want him to be Derek Jeter.

He will be Derek Jeter; let's just take it one step at a time here.

All right.

I look forward to that celebration.

Maybe just lastly on the P&L, Tom, as I look at your guidance for the year on operating margin, you've obviously done a tremendous job expanding profitability over the past couple years.

But still as I look at where your margins are versus your peers, it looks like there still is some room to go even after where you end up this year.

Is that -- are we still in a period where you think Abbott is underearning versus the peer group in certain segments, with room to go on the profitability side?

Yes, I don't like that characterization so much.

I mean, when I look at the steady annual progress of really a complex multitude of initiatives, really from top to bottom line across all these businesses, I think it's just exactly the way to go about it.

But to answer your question directly, I definitely see more margin expansion opportunity across a number of these businesses, and that's part of our expectation as we move forward.

I think you are already seeing it in the first quarter here, and we have objectives in 2015 for that 100 basis points-plus, and there is no reason to stop it there.

I think each of these businesses is moving forward, and it's a huge priority for the management team here as we look at the business.

David, let me add to that a couple of things that underlie it.

One is, at least on the cost side, there is a lot of low-hanging fruit early on that one can get.

Okay?

Got that.

There is other stuff that is structural, whether it is supply chain related or plant related, where the plant is, cost of labor, cost of inputs, cost of commodities, distribution, all those sorts of things.

Right?

The structural ones take longer.

If I look at the Nutrition business as an example, where we've been at it for four or five years, there was a steady drumbeat every year.

But what we are seeing the benefit of now is the bigger structural investments we had to make that took two, three years to realize, even four years in some cases, because of plants, plant location, supply chain, etc.; and we are now starting to see the benefits of that.

So sometimes you've got to actually change process system, etc., to get at it.

Second piece of it is, that affects your margins, is price.

And we are protecting price.

This is a little bit of two steps forward, one step back.

Exchange keeps erasing some of the advantage off the top line.

You can say, well, exchange advantages you on the bottom line too, to the extent that you can put your costs in the right places; and that's true.

But for the last few years we've watched tremendous advantage gained in gross margin management and cost reduction erased by exchange.

And all multinationals are seeing that to some degree.

So we look at it and we say: okay, we've just got to have pretty aggressive targets here to improve these margins steadily.

You've got to treat exchange almost like a cost at this point each year or a price reduction.

So constantly we look at the balance of that exchange, how we manage it, in effect treating it like an erosion of price, because that contributes to margin, too.

So you got multiple factors at work here, and we've been very intentional about how we've spread our business, spread our cost base, managed exchange, hedged exchange, all those sorts of things, to protect to that.

Because, honestly, it hurts to gain it through cost and give it back through price erosion or exchange every year.

And we've affected mix: the markets we choose, the products we choose, and so forth.

The mix in profitable segments versus unprofitable segments or less profitable segments, all that affects it.

Some of it just takes time.

Now to give you the bottom-line answer to your question, is there still opportunity?

Yes, there is.

And it's not just a little.

We keep plugging away at pretty big chunks of opportunity here.

Okay, great.

I appreciate all the detail.

Thanks, guys.

David Lewis, Morgan Stanley.

Good morning.

Miles, just coming back to the Mylan stake here, your treatment here of this stake has been more patient than I think some expected, which at least so far is working out to your advantage.

I wonder, what are your thoughts from here in --

It's working out for us just fine.

(laughter)

That's right.

Patience is perfect.

But I wonder what your thoughts are here at how you are balancing access to capital and the potential optionality of Mylan.

There seems to be this view about the investment community that you are spending a lot of time thinking about this stake and what you do with it.

How much time are you spending on it?

Is this important to you?

And how are you balancing these different factors?

You know, I just love the voracious impatience of the investment community.

We didn't even finish this deal till February; that was two months ago.

I know you could say: well, you could have been thinking about it all ahead of that time.

Yes, I know.

But until it's done, it's not done.

And now it's done, right?

I would also say I don't feel constrained at all by the form of our capital, whether it's in Mylan stock or cash or anything else.

The fact is, it has no bearing on what we can or can't do from a strategic standpoint because if, for whatever reason, our capital was tied up in Mylan I would just probably borrow till I unlocked it.

So I don't feel like I've got any constraint at all.

And I'm happy to have been patient.

When this deal was done, you will recall the original value put on the sale of the EPD business was $5.3 billion.

As I am watching the great theater out there that is surrounding Mylan and a team I have respect for, the value of our position has risen because investors have valued Mylan's stock.

So you can say that is lucky -- and I will take good luck any day.

But I'm happy that we've been patient, because it's clearly accruing value to us as an owner and investor of Mylan stock.

I think Rob Coury has got an aggressive team there; he's got aggressive plans.

Obviously other people have aggressive interest in them.

And all of that is in our favorable interest financially, and it's not inconsequential.

What was a $5 billion value is well north of $7 billion now; and that's just more optionality for me, and I'm happy about that.

So I don't feel like I have to be in a real big hurry to do anything to resolve that standing.

I mean, one of the reasons that we only sold a third of the stock is because that's all we wanted to sell.

We didn't want to sell any more than that, nor would we have.

I like where we are with it.

I think it's been proven to hold it.

It's proven to be a great value gainer for us, and it's not a constraint.

So there is no hurry on Mylan other than we don't intend to be long-term holders, but there doesn't need to be a hurry.

If I put it into cash, I can tell you right now I can't earn as much on that as I am earning leaving it in Mylan.

So until I need to sell it, I think it's in a nice place.

Okay, very clear.

If this whole CEO thing doesn't work out, I guess you can always be a [PM], Miles.

The other question I wanted to go in, Tom, is gross margins.

I think there's been a lot of commentary on margins on the call here.

But specifically, this is the strongest gross margin quarter I think we've seen since the spin -- actually even going back before the spin, at least the four quarters before the spin.

So can you just talk specifically in this particular quarter any specific drivers of gross margins?

It does seem largely sustainable into the second quarter.

But what's really driving the strongest number we've seen in three years?

Yes.

It's just business mix, continuing focus on cost reduction, everyone focused on expanding, and really it's across the board in the businesses.

There is probably a slight amount of this euro benefit coming through there as well, but it really is really operating focus, David.

Okay.

Miles, just one last quick question and I'll jump back in queue.

There were two businesses you called out about a year ago as areas you were going to see more intensive management focus.

I think one was US nutritionals and the other obviously was EPD.

Between those two, it does appear that there is more sustainable growth efforts coming through or fruitful on the EPD side than the US nutritionals business.

But I wonder if you could just update us in terms of that management intensive focus and where you see those two businesses today.

Thank you.

Well, the EPD business has been pretty transparent to all of you.

You've watched what we've done there over time.

I mean, there was several things going on.

One, we came to the conclusion that we wanted to focus on emerging markets, not developed markets.

And the developed market part clearly was strategically a better fit within Mylan, in a much larger business focused in those developed markets.

And so we did that.

Now you'll note we also acquired a wonderful company, CFR Pharmaceuticals, in Latin America, which gave us a very strong position in Latin America and enhanced the one we already had.

And we made a fairly significant move in Russia that got done during the core of the whole Ukraine issue, which was a -- again, Murphy's Law: if you believe that if it can go wrong, it will.

Boy, everything aligned badly and we still got that deal done.

Fortunately we did it in rubles, so it didn't hurt us when the ruble collapsed.

So, that was really good strategically.

I think that what we've got now in our EPD business, which was done fairly transactionally, is a complete redirection of that business, refocus, re-emphasis where I think the biggest opportunities from our standpoint are, for what we are focused on and interested in.

So that's been good.

That repositioning has been good.

It's been very intentional.

It took us about 18 months to get it done.

Frankly, I think that was faster than we might have expected.

Things aligned very well for us.

So I look at the underlying growth rates of the countries that we are focused in, in EPD.

They are strong.

I look at our own performance.

It's improving.

Could it be better?

Sure it could; but right now it's double-digit and above its market rates in its countries, and I think that's all good.

So I like the positioning of that, and that's a core that I can add to.

On the Nutrition side, we've gone through quite a bit of change, too.

There has been some management change in the businesses.

I like the management team we have in place right now, a lot, in terms of its capability.

It is just getting its feet under it.

Most of our leaders there have been in place for the better part of six to nine months, if there has been a change.

That's good.

Some of that is organic; some of it is from outside.

We've made some changes in how we are investing in the business and, frankly, how we are marketing.

All of that has been a strong improvement.

I think the pediatric business is well positioned.

We will see a fair amount of improvements in our marketing coming forward here, new product launches and other things that I am pretty excited about, that I think will be good for that business.

So I've actually got a pretty strong comfortable feeling about the US.

I think our adult nutrition business is weak -- or weak relative to what I would expect of it.

It's a strong business; we are large in the category, as you know.

I think there are some things that we are working through there.

We've got a good team there, and it takes a while to see the results of the changes in marketing that we've put in place and the changes in product, and etc.

So I think we've just got to be -- I hate to say the word for you guys -- a little patient to wait for the results to show.

But the actions that we've taken, which were pretty deliberate, are in place.

I can remember years ago in Chicago, Dave Wannstedt, coach of the Bears, saying all the pieces are in place, we're going to win the Super Bowl; and I don't think we were even 500 that year.

I think the pieces are in place, the right management is in place, and I am pretty pleased with where we are with that business.

You don't see it as much from your perspective because it wasn't so transactional, like divesting or acquiring companies was in EPD.

But I think the Nutrition business is now well positioned.

When I look at the international part of it we've weathered a number of events, whether it's recalls or other things in that business.

If I call out one example, I would say the team in China has done a wonderful job regaining lost market, lost share, lost position from that recall a couple years ago.

That business is going well -- the pediatric business I am speaking of now -- and the share is somewhere between 8.5%, 9%, whatever, the way we measure it, and trending well.

Growth rates are trending well.

Our position in a number of other countries improving well, so I like the underlying fundamentals of what I am seeing out of our Nutrition business.

I'd like to just see a couple of quarters of evidence of good momentum here, and I think you will see it.

Okay, great.

Thank you very much.

Okay, we'll take one last question from the queue, please.

Bob Hopkins, Bank of America.

Hi.

Thanks for taking the question.

Just two quick strategy questions, one on devices and one on EPD.

First, Miles, it sounds like from your comments that the strategy in traditional devices is going to be a little more focused on smaller, innovation-based deals.

I was wondering, is that the right way to look at it?

Because I assume your comments on wanting to be a lot bigger don't really apply to traditional non-consumer-facing medtech.

Let me clarify.

I wouldn't say exclusively -- so I wouldn't want you to think you are only going to see little out of me, because that's probably not accurate.

But I think that you can't just assemble large and mature either.

Okay?

You've got to have a foundation and a presence and a core.

But the future of any core or foundational business in devices almost always depends on innovation, replacement, cannibalizing yourself with future innovation, etc.

So there's got to be a balance there, and I think we're at a point where we've got this very strong core but probably not enough of the innovation that comes from the smaller kinds of companies, etc.

And you can't do everything in your own R&D in that particular business.

You can in diagnostics, but you can't in devices.

So I would say you might see both.

You might see that -- I can tell you intentionally you are going to see -- we are going to be investing in smaller opportunities that could get a lot bigger, because we want to build the breadth of that business.

But you are right; we may well have to pay attention to the foundational base as well.

So I wouldn't rule it out.

But I don't want to give you the impression that I am just looking at a couple of big add-ons or something there, because I am not.

Okay.

Does that make sense?

It does.

It does, yes, and we'll follow up a little bit more off-line, because I wanted to ask one other one just about EPD.

Because you've done a couple deals lately and I am just curious.

Are there others out there in EPD from an M&A perspective?

Or is this an area where you've found what's available, acquired them?

I just curious how hard it is to find assets in EPD since it looks like that is an attractive business long-term.

It is not hard at all to find assets.

That part's easy.

And it's not hard to find really good assets.

That part's easy.

And it's not hard to find assets with good management, good fit, good products, good geographic locations.

That part's actually easy.

And I think our people and our team and some of our contacts and stuff, I think we have a unique advantage there geographically and internationally, on that particular dimension.

I can think of one or two other companies that historically I've thought we're thinking about it the same way, because we keep bumping into them everywhere we go.

And when we are out hunting, fishing, whatever you want to call it, looking at opportunities, we keep running into the same one or two companies out there doing the same thing.

So I know that they think a little bit like we do.

But I would tell you that part is easy.

The hard part is getting beyond the recognition of it and getting to something where either somebody is interested in a transaction or it's at a value that doesn't make your nosebleed.

And that is sometimes a challenge.

A lot of the things that we would be interested in, in some of the international markets, are family sponsored, family-owned, or privately owned, etc., and sometimes it's just more complicated.

It's not easily transacted.

It takes -- well, what I would call a lot of relational time, getting to know each other and getting to become familiar and comfortable, to get somewhere with a deal.

I would say that the CFR transaction -- this is a fabulous company.

It was a family company, even though it was public.

It had a 90-year history; it was an emotional thing for them to sell the company.

And the company is super high quality; the management is high quality.

I couldn't be more pleased, and it's a great home if you're at Abbott for it; it's a great performer.

That deal took a while to develop comfort and relations and so forth, and that's how a lot of them are.

That's how a lot of them are.

Piramal in India was the same way, and I think it just takes time.

So if you ask me, do I think there is opportunity out there?

There is a lot of opportunity, but they are not fast.

Terrific.

I appreciate the comments.

Thanks so much.

Okay.

Thank you, operator.

And thank you, everyone, for all your questions.

That concludes Abbott's conference call.

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