美國雅培 (ABT) 2015 Q2 法說會逐字稿

Good morning and thank you for standing by.

Welcome to Abbott's second-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 express written permission.

I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations.

Good morning and thank you for joining us.

With me today are Miles White, Chairman of the Board and Chief Executive Officer; Tom Freyman, Executive Vice President, Finance and Administration; and Brian Yoor, Senior Vice President, Finance and Chief Financial Officer.

Miles will provide opening remarks, then Brian and I will discuss our performance in more detail.

Following our comments, Miles, Brian and I will take your questions.

Before we get started some statements made today may be forward-looking for the 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 our 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's 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 the second-quarter financial results and guidance provided today on the call for sales, EPS and line items of the P&L will be for continuing operations only.

On today's conference call as in the past non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance.

These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today which will be available on the website our Abbott.com.

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

With I will now turn the call over to Miles.

Okay, thanks, Scott.

Good morning.

Today we reported second-quarter adjusted earnings per share of $0.52, above our guidance range and reflecting another quarter of double-digit underlying growth.

Sales increased double digits operationally for the second consecutive quarter.

Excluding the impact of the 2014 acquisitions and foreign exchange, sales increased 6.5% which as expected reflects an acceleration of our performance from the first quarter.

We also exceeded both our gross and operating margin targets in the quarter.

As you know, macroeconomic events continue to be a major theme in 2015.

Looking back to the beginning of the year most companies, including Abbott, were dealing with the challenge of setting 2015 guidance in the context of the strengthening US dollar against almost every currency that occurred late in 2014.

We set our growth target high with a forecast for double-digit EPS growth excluding exchange and 9% absolute growth.

Halfway through the year foreign exchange is impacting results for Abbott at a somewhat higher level than we projected in January.

At the same time the fundamentals of the end markets in which we compete remain strong and we've remained disciplined in managing our business in this environment.

Strong performance has and will continue to help offset currency headwinds as we're well-positioned to achieve our financial objectives for the year.

With that context in mind, our full-year 2015 adjusted earnings per share guidance of $2.10 to $2.20 remains unchanged which again reflects double-digit underlying growth.

I'll now summarize our second-quarter results before turning the caller to Brian and Scott.

And let me start with Diagnostics where we achieved very strong sales growth of 9% in the quarter driven by continued above-market performance in core lab and point of care diagnostics.

We continue to capture share and win new core laboratory accounts with our customer focused solutions including the immunoassay business of the two largest commercial labs in China during the first half of the year.

In point of care diagnostics we achieved another quarter of double-digit sales growth.

We continue to enhance our product offering and expand our presence in targeted international geographies including Europe where we recently launched our wireless i-STAT handheld device and in the Middle East, Japan and Latin America where we achieved double-digit sales growth in the quarter.

In the US sales performance was driven by continued adoption of our i-STAT system in large hospitals and remote care settings.

In Nutrition sales increased 4%, slightly below our expectations.

In China we achieved double-digit growth and share expansion with the new pediatric products we launched last year.

At the same time recent market softness in Hong Kong and Vietnam impacted our overall international pediatric growth rate in the quarter.

The international Adult Nutrition business delivered another quarter of strong sales growth including double-digit growth in Latin America as we continue to build and shape the Adult Nutrition category globally.

In Medical Devices, our Diabetes Care business delivered 5% growth in the quarter, somewhat ahead of expectations including international growth of 10%.

Consumer response to our new FreeStyle Libre device continues to be very positive in Europe and we're expanding capacity to meet this demand.

We also made progress during the quarter to bring the Libre sensor-based technology to the US with the regulatory submission for approval of Libre Pro, our professional use device.

Our Vascular business performed in line with expectations.

Operational sales growth in the quarter was driven by double-digit growth of our structural heart therapy MitraClip, the first and only device available for the minimally invasive treatment of mitral regurgitation.

In Medical Optics sales were impacted by market dynamics in our cataract and LASIK businesses.

We expect improved sales growth over the remainder of the year driven by market uptake of several recent product launches that enhance our portfolio.

And in Established Pharmaceuticals sales increased double digits excluding the impact from recent acquisitions and foreign exchange.

Improved operational execution and portfolio expansion are driving above market sales growth in several geographies including India, China and Colombia.

We're seeing the benefit from the integration of CFR Pharmaceuticals with a broader product portfolio in key therapeutic areas and expanded salesforce driving double-digit underlying sales growth in Latin America.

So in summary we achieved another quarter of double-digit sales growth including a sequential improvement in our organic growth rate as expected.

We're particularly pleased with our performance in the Branded Generics business and another quarter of above-market growth in Diagnostics.

We continued to make progress on margin expansion and reported second-quarter earnings per share results ahead of our expectations.

And despite a challenging currency environment which you will hear a lot of I'm sure during earning season, we're well on track to achieve our financial objectives in 2015 reflecting the strong outlook we forecasted for EPS growth at the beginning of the year.

So I'll now turn the call over to Brian and Scott to discuss our second-quarter results in more detail and then be back for questioning.

Brian?

Thank you, Miles.

As Miles indicated today we reported second-quarter adjusted earnings per share from continuing operations of $0.52 above our previous guidance range.

Sales for the quarter increased 10.8% on an operational basis; that is, excluding an unfavorable impact of around 8.5% from foreign exchange.

The negative impact from exchange was somewhat higher than previous expectations due to strengthening of the US dollar relative to several currencies in the latter part of the quarter.

Reported sales increased somewhat above 2% in the quarter.

Operational sales growth was driven by strong performance in our Diagnostics and Branded Generics businesses.

Sales in emerging markets increased 21% on an operational basis.

Excluding the impact of 2014 acquisitions and foreign exchange, total companies sales in emerging markets increased 11%.

Given recent investor interest in the Chinese economic situation, I'd note that our sales in China which represents around 8% of our overall sales increased strong double digits in the quarter.

The second-quarter adjusted gross margin ratio was 57.8% of sales, slightly ahead of our previous guidance due to continued underlying improvements in Diagnostics and Nutrition and up 250 basis points over 2014.

In the quarter adjusted R&D investment was around 6.5% of sales and adjusted SG&A expense was around 32% of sales.

Turning to our outlook for the full-year 2015, as Miles indicated, our adjusted earnings per share guidance range of $2.10 to $2.20 from continuing operations remains unchanged and continues to reflect strong double-digit underlying growth.

Regarding our full-year 2015 outlook for the P&L we continued 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 approximately 7.5% on our full-year reported sales, more than our original full-year projection in January of around 6%.

As previously indicated, the increase reflects strengthening of the US dollar versus several currencies late in the second quarter.

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

Scott will provide more detail on the 2015 outlook by businesses in a few minutes.

We now forecast an adjusted gross margin ratio approaching 58% for the full-year, reflecting gross margin improvement initiatives across our businesses.

We continue to forecast adjusted R&D investment of around 6.5% of sales and now forecast adjusted SG&A expense approaching 32% of sales.

We forecast net interest expense of around $80 million, reflecting changes in interest rate assumptions on both our borrowing rates for debt and the income we earn on some of our investments.

Turning to the outlook for the third quarter of 2015, we forecast adjusted earnings per share of $0.52 to $0.54, reflecting double-digit underlying growth largely offset by the impact of foreign exchange headwinds on operating results.

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

At current exchange rates, we'd expect a negative impact from exchange somewhat above 9% in the quarter third quarter resulting in reported sales growth in the low single digits.

We forecast an adjusted gross margin ratio of approximately 57% of sales, adjusted R&D investment of around 6.5% of sales and adjusted SG&A expense of approximately 31% of sales in the third quarter.

Finally, we project specified items of $0.21 in the third quarter reflecting the same items as we identified for the full-year in our readings release with the exception of the gain on the sale of a portion of our Mylan shares which occurred in the second quarter.

In summary, we achieved another quarter of strong performance and are well-positioned to achieve our financial objectives for the year despite a challenging currency environment.

With that I will turn it over to Scott to review the business operating highlights and Outlook.

Scott?

Thanks, Brian.

Today I'll provide an overview of our second-quarter sales performance and outlook by business.

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

I'll start with Diagnostics where sales increased 8.7% in the quarter including above-market growth in both developed and emerging markets.

In Core Laboratory Diagnostics both US and international sales increased 8.5% including another quarter of double-digit growth in emerging markets led by strong performance in China and Russia.

In Molecular Diagnostics sales also increased 8.5% driven by double-digit growth in our core business segment of infectious disease testing.

Growth this quarter was somewhat above our expectations primarily due to slower than planned scale-down of our genetics business and timing of tender orders in emerging markets.

In Point of Care Diagnostics sales increased 11.5% driven by continued adoption of our market leading i-STAT platform.

During the quarter we continued to enhance our product offerings including the US FDA approval of our total beta-hCG test which detects pregnancies in early stages during critical emergency situations.

For the third quarter we expect Global Diagnostics sales to increase mid single digits on an operational basis.

In Nutrition worldwide sales increased 4% for both pediatric and adult nutrition.

In Pediatric Nutrition we continued to expand our product portfolio with the recent launch of the first certified organic infant formula offered by a large multinational companies in China.

In the US we launched Similac Advance non-GMO, the first and only non-GMO labeled formula from a leading infant formula manufacturer.

In Adult Nutrition sales growth was led by international performance.

As expected US Adult Nutrition sales were impacted by competitive and market dynamics primarily in the institutional segment.

We now expect Global Nutrition sales to increase mid single digits on an operational basis for the third-quarter and full-year 2015.

In Medical Devices sales in our Vascular business increased 3% led by strong double-digit growth in MitraClip, our first-in-class device for the treatment of mitral regurgitation.

During the quarter we completed regulatory submissions for approval of Absorb in both the US and Japan and expect to submit in China in the coming months.

Collectively these markets represent more than 50% of the world's coronary stent market.

We also enhanced our Absorb product offering in Europe with the approval of Absorb GT1, a new advancement of the Absorb stent system that improves ease-of-use.

For the third quarter we expect Global Vascular sales to increase low single digits on an operational basis.

In Diabetes Care sales increased 5%, somewhat ahead of expectations led by strong international performance.

In the US we launched FreeStyle Precision Neo during the second quarter.

This easy to use meter provides consumers with an affordable, well-known brand in the over-the-counter segment of the market.

For the third quarter we forecast low single-digit operational sales growth in our Global Diabetes Care business.

In Medical Optics sales were up 1%, somewhat below our expectations due to market dynamics in our cataract and LASIK businesses.

Earlier this week we announced US FDA approval and launch of our iDesign system which creates a 3D map of the eye that is 25 times more precise than traditional systems and offers the potential for more people to qualified for our LASIK procedure.

We now expect Global Medical Optics business to grow low single digits for both the third-quarter and full-year 2015.

And lastly, Established Pharmaceuticals or EPD, where sales increased double digits in the quarter with and without the impact of recent acquisitions.

EPD continues to make meaningful progress in becoming a more consumer facing business with an increased focus on branding initiatives, marketing to the pharmacy channel and building the Abbott brand in key countries.

For the third quarter we expect similar double-digit growth in EPD.

In summary, we achieved another quarter of strong growth, achieved several new product launches across our businesses and are well-positioned to deliver high single-digit operational sales growth for the full-year 2015.

We will now open the call for questions.

(Operator Instructions) Mike Weinstein, JPMorgan.

Hi, thanks for taking the questions.

I actually have a bunch of questions, I'll try and be brief though.

Do it as one great big run-on question, Mike.

That's usually the way it works.

Miles, I think everybody would love to hear your thoughts on China.

Obviously there was some concern about how your China performance would look coming into the quarter given Mead Johnson's report, comments from other multinationals about China overall, so we'd love to get your comments there.

And then maybe a second item, you guys disclosed that you'd filed Absorb in the US, the initial PMA.

Can you disclose at this point whether Absorb 3 hit its primary endpoint and anything else you can share on it?

Thanks.

Okay.

Well let me comment on China first.

A lot of times you don't know how you're really doing until you see reports of your own competitors to give you context about what others are experiencing in a market.

I'd say overall we're pretty pleased with China.

We're gaining share, the launch of our new products is moving us along quite nicely.

I think several others have experienced this cross-border issue in Hong Kong, some more than others apparently, and that certainly impacted us a little bit as well but we feel pretty good about China.

It's only about 10% of our total Nutrition sales and about 8% of the total Company, so if there is a hiccup in China it doesn't tend to have a big impact on Abbott as a whole.

That said, it's an important market and this is an important business there for us.

I'd say the fundamentals of our business in China are great.

We're growing double-digit, strong double-digit I should say, and new product launch is going fine.

We're gaining share.

I'm probably less pleased with the development pace of the adult business in China which is a new category, but I'm usually dissatisfied with pace no matter what it is.

So I'd say we've pretty good about China.

I was surprised at the preannouncement that we saw from one of our competitors but it actually give me a little better feel that the issues cross-border from Hong Kong to Mainland China were impacting others as well.

So we weren't the only people seeing some of that impact.

So I guess that context helped.

On Absorb I really don't have much to report.

We have a series of improvements or incremental changes to our product over time here.

This is one of the first, so beyond that I don't think I can comment on your question.

Maybe Brian or somebody else can.

At this point we don't have any further information to report on the details of the trial, Mike.

We're filed and ultimately timing will dictate whether this goes to panel or not ultimately as we move through 2016.

I will tell you, Mike, as long as you asked about Absorb, I was pleased to see that the Vascular business sequentially here while it's not booming double digits is still improving quarter to quarter.

And even though these are low single-digit numbers for Vascular that's an improvement over what we've seen say the last year and a half, 18 months or whatever.

So I'm pretty happy about that.

I like the direction we're headed here.

And frankly I like the direction we're headed with the breadth of the business and next-generation products in the business across the board and not just in the stent business, but other aspects of the whole Vascular franchise.

Miles, just one follow-up.

Can you just share with us your updated thoughts on M&A and your use of your balance sheet, any changes since our call a month ago?

Well, you know I tried to be studiously evasive then and I probably will try to be that now.

And so in some respects no change other than increasingly as time is passing here our focus is sharpening on where our interests lie and I'm pretty pleased with the portfolio of opportunity.

But as I explained before it depends on alignment with other companies and so forth and their interest.

So I think that while I've said in the past sometimes there's not much out there that one can justify from a valuation standpoint or a fit, I'd have to say today while valuations are high I think there's a fairly robust set of opportunities that fit several of our businesses quite nicely and our strategies and intentions quite nicely.

And so I'm not sitting here on a pile of cash thinking there's nothing out there of interest that fits us.

Quite the contrary.

I think there is quite a lot out there that fits us well.

So I don't really want to directionally comment more than that because I generally don't like to telegraph where our interests lie for obvious reasons but I'd say I like what I see.

I particularly -- I have to say you're probably dying to ask me, this as a follow-on as well.

I really like that Mylan investment right now, as a place to park our cash while we're looking at the opportunities we're interested in.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question.

I guess with respect to that Mylan investment right now since you talked about it, what are the terms that you have to vote along with management or abstain from the vote just in terms of monetizing that and maximizing the value?

You said it was more of a short-term investment that you didn't have intentions on being a long-term owner in Mylan, so I guess how should we think about still being a holder in Mylan stock or someone else's stock?

Well, I think that nothing's changed.

We don't have an intention long term of being shareholders in Mylan.

On the other hand, I suppose you could say well what's long term, and until we actually have to monetize that investment I'd put it this way.

Cash on most people's balance sheet today earns pretty close to zero.

And that said I think this is a pretty good place to have our cash parked because I think that Mylan as a company is pursuing a strategy that I would endorse.

I have a little bit of insight, and given our continued dealings with our partners in Mylan and I like the strategy that Mylan is pursuing and I support it and endorse it as a shareholder.

So from that perspective I think that this is right now as long as we are a shareholder we're going to vote in our interest and Mylan's interest because as shareholders it certainly directly impacts Abbott and I think what they're pursuing with their Perrigo acquisition is something we clearly endorse.

We said so.

We have the right to vote our shares on that particular issue as we like and that's an independent decision by us.

It's not one that the Mylan board or management controls.

That's our decision and we made that clear several weeks ago that we support what they're doing there.

Obviously Teva has other desires for Mylan but my own assessment of that as a shareholder of Mylan is that's not likely to happen.

And I think as Mylan shareholders or Teva's or others review in more detail the Mylan situation in the Netherlands in particular and the rules around foreign acquisitions whether in the Netherlands or in Ireland or other places I think that their investors are gradually figuring out what the degrees of freedom are that anybody particularly has.

And in our case we know that pretty well, as the largest shareholder of Mylan we know it pretty well.

So I'd say we've put our interest where our best interests lie and that's to support Mylan's current strategy and current pursuit of Perrigo and we get to vote that ourselves independently.

And I think it's important for not only our shareholders but the other Mylan shareholders to know that since we're the largest one and we get to make that decision.

With regard to certain votes, Mylan would control the vote if they were pursued.

So if a company like Teva pursues Mylan, Mylan controls the vote of those shares as long as we have more than 5% of Mylan but frankly we're pretty aligned on that.

We haven't disagreed with Mylan on this at all at any point in time.

So I think we're not just a passive ride-along here.

There's our interest here, there's Mylan's interests here, and we're voting our interest and our own shareholders interest and I think it's a good place for the proceeds from that transaction to be for now.

And as I said we don't intend to be long term but in the interim here while we don't need access to those resources we certainly want those resources invested the best possible way for us and our investors and I like what I see there and I endorse what they're doing.

Okay.

Then just on the strength of the results that we see for the first half, I guess why not tighten the range from a guidance perspective for the second half of the year for the full-year?

You know, we could have.

I suppose we could have tightened the range.

I think there is enough volatility in the currency markets that I'd say it would -- my concern was it would imply a degree of forecastability and precision that I'm not sure anybody really has and there's a pretty strong possibility that we will beat this original guidance.

But I'm a superstitious guy and I think the minute we try to be more precise than where we already are Murphy is going to reach up and strike us.

I think that there's always some unpredictable event that happens.

I can't predict what those events are.

We're having another strong year in spite of a very strong headwind of exchange.

I think the impact on us from currency this quarter is probably as great as anything I've seen.

It's everything that everybody wrung their hands about back in December and January as companies struggled to give guidance.

And we wrung our hands, too.

But the fact is we set a double-digit target every year and a real double-digit target.

And we did again this year.

So we set a high bar at the beginning of the year and we're exceeding that high bar thus far.

But I have to say, given the volatility of certain geographies of the world and/or currencies I thought I'd just go one more quarter.

And by the time we actually change this guidance you're going to say we told you so and you'll already know that we're likely to exceed for the year.

I probably could have tweaked the lower end which would have said gee, I'm confident, I am confident.

I wouldn't forecast to you anything that I know of today as a downside to this business other than what we all see as ongoing currency translation.

You watch CNBC or other things and people say, gee, only invest in American stocks and don't invest in companies overseas.

All you've got to do is look at our underlying growth rates and you can see that investing where we are in emerging markets and other places is paying off.

And it's very strong growth for us, it's very profitable growth for us.

And I've said before if you want to be where the growth is you've got to be able to navigate the volatility and that's what we're doing.

We're navigating the volatility.

We're delivering steady, reliable, double-digit earnings net of exchange in spite of how strong the exchange is.

And I think that's what we're supposed to do.

And I have to say I wouldn't have expected it to be tested quite so severely by this kind of currency challenge.

But we're meeting and beating that and given that we set a high bar early I guess my judgment was I'm not ready to move that exchange yet or the guidance yet because I think it is pretty unusual that the currency is as volatile as it is.

So that's one great way of wringing my hands in front of you and saying you're probably right.

But you get to be right at the end of the third quarter.

No problem.

Thanks.

Good quarter.

David Roman, Goldman Sachs.

Thank you.

Good morning everybody.

I wanted just to follow up on the capital deployment side and ask one financial question.

Miles, maybe could talk a little bit about your use of cash strategy more broadly.

If I look over the past call it four to eight quarters you've had a big increase in the dividend that occurred in late 2013.

You've been buying back stock fairly consistently and you've announced some M&A but nothing significant.

Can you maybe just sort of help us understand your broader capital allocation strategy and how we should think about the mix of use of cash?

It's been pretty clear, it's a great problem to have, gee we have a lot of cash and a lot of cash flow.

The businesses our strong and they generate great cash flow.

We're able to fund our plant equipment needs.

We've built a number of plants around the world in the last couple of years.

We're expanding capacity.

We're doing all the things you do to support the ongoing growth of the business from an internal standpoint and yet we generate a lot of cash.

In some regards you'd say there's a lot of different things you could do with that cash.

We know that part of the dividend or part of the identity of a company is a dividend and so we're attentive to an appropriate dividend payout in a range of a percentage of EPS somewhere between 40% or 45% of EPS.

And we tend to maintain that steady range because there's a lot of investors out there who rely on us for steady passive income that way if their portfolio.

So that's one use of cash and frankly we don't have any difficulty funding that.

So I think that's an important aspect of the identity that's Abbott.

M&A activity is opportunistic to a degree as you know and it can be funded by your cash flow or it can be funded by debt as well.

We watch our debt ratio carefully.

We watch our debt rating, we watch all those things.

But I have to say right now while we've got what I think is a fairly attractive menu of opportunities for us from an M&A standpoint you just haven't seen as act on it.

Well I would also say over the last 10 years you've seen us act on a lot of things and we don't tend to forecast it until it's already happened.

And so I'd say you probably should not assume that we're just sitting here on our hands accumulating.

I think investors expect us to deploy cash and we do and we will.

That's one of the things I'd have to say leaving our cash in Mylan right now is a good place for it to be if we haven't got something else to do with it.

I'm not big of big fan of borrowing to buy back shares.

I think that's artificial in the short term, although I know there are many activists who might advocate such.

I think we can deploy our capital to earn a healthy return but it doesn't mean you can do a rolling quarterly basis.

It depends on when the M&A activity is available or when the opportunity arises.

So we're all about building and growing the Company and investing the capital in things that earn at an attractive rate for our investors.

And if we have capital beyond that, which we always seem to do, we do buy back shares.

I think we should guess we do have a philosophy of returning cash to our investors at least at some level to keep our stock and share count from being dilutive, etc.

I chuckle a little bit because some investors or analysts out there condemn the practice of buying back shares while other investors want you to return cash to them or capital to them as part of the return.

It's interesting to listen to these two diametrically opposed points of view.

It's almost like everybody wants to be chronically unhappy.

I think it's a great problem to have great cash flow and a lot of cash.

We can fund the dividend, we can fund the share buyback.

The question is how big in any given point in time?

And frankly we're able to fund a fair amount of M&A and M&A that is strategically a good fit with the Company and a good return above and beyond certainly what we can earn with cash but what we can earn in a lot of things.

So we tend to look at it in all those ways.

Right now I'd say it's in our interest to obviously support our dividend, maintain a certain level of share buyback which we do each year on a steady basis and husband our resources for what we believe are some great opportunities in M&A.

We try to keep that balance in the right balance.

We do pay attention to the returns we're earning for our shareholders.

And frankly we track what our shoulders think about that capital deployment or redeployment so that frankly we're reflecting what they're looking for as an investment.

So I don't know if that specifically answered your question but I'd say right now the level of share buyback that we typically have done is not threatened in any way.

I would not rule out and do some big leverage share buyback and frankly if I was going to go seek leverage it would be to acquire additions to the Company which I think would make a lot of sense.

Okay, yes.

That is very helpful actually.

Then on the financial side if I look at your guidance for the full-year it looks like you're targeting about a 19.5% operating margin but as I kind of look at the comp set of the individual businesses in which you compete that would suggest that there are several hundred basis points still of margin expansion left in the business.

I guess, A, would you agree with that assessment and B, if so is there a reasonable case to be made for a consistent call it 100 basis points or so a year of operating margin expansion?

I think for the foreseeable future I'd say that's the case.

It's an interesting thing.

We've done very well in the margin expansion, particularly in Nutrition and Diagnostics, and in fact in Diagnostics I think there's more opportunity but I wouldn't drop all of it through to the bottom line.

I'd like to be investing even more in R&D, in Diagnostics and some in SG&A.

I think all of our businesses would take more sales and marketing investment in a heartbeat.

Every business always thinks it's a titan, it always thinks it has more things to spend money on.

But the reason they call it discretionary spending is because it's discretionary.

And I think that to the extent that we keep improving the margins part of that is good for the shareholder and part of it is good for discretionary spending depending on the worth of the investment whether it's R&D or sales and marketing expansion.

So I agree with you, I think there's more opportunity.

I think the Nutrition business has shown a tremendous capability to improve its gross margins.

Now to be fair we've had the benefit of low commodity prices and at some point that is going to end and we'll see a change.

But we had the benefit of low commodity prices, that's clearly reflected in our margins in the Nutrition business.

I think the Diagnostics business has just made great strides in what it's done from a gross margin standpoint.

There are days when I look at the margins in these businesses and say but for exchange or but for price pressure in given markets.

There is not a lot of robust price upside out there in a lot of these businesses and yet even in the face of exchange and/or pricing depending on where you are in the world the margins keep improving which I think is a great credit to the management team in these businesses.

So long way around I agree with you.

I think there's still consistent opportunity to keep improving margins.

And like every other CEO of a multinational I'm waiting for the day that the US dollar weakens.

Okay, got it.

Thank you very much.

David Lewis, Morgan Stanley.

Good morning.

Miles, just one question and one quick follow-up on some prior questions.

Just coming back to China, you have less exposure to many of the factors that your competitor obviously described for their China weakness and you're actually seeing strength in China.

But nutritional growth did come down modestly for the remainder of the year, so where specifically is that pressure coming from if it's not a lot of China?

Well we've got some challenges in Vietnam and some other places as well.

The market in Vietnam has slowed I'd say kind of suddenly and a lot.

And I don't think we're losing any share in Vietnam but we've certainly seen it slow and from time to time we see the impact of government price pressures and so forth, but do I expect that to be a sustained situation in Vietnam?

No, I don't.

I can't always explain why any given market will suddenly take a breather but they seem to.

And in this particular case Vietnam and Hong Kong both are impacting these numbers to a degree.

Last year Saudi Arabia impacted our numbers to a degree.

And in a lot of cases I think we get so used to watching China that we discount the impact that other countries may have on our performance and the truth is we're pretty large in Vietnam.

We're the biggest nutrition Company in Vietnam by far and it's a big market for us.

Same with Saudi Arabia.

There are some of these markets that because China gets so much attention we tend to think are rounding error.

And they are not rounding error, they are important and they are big markets for us.

So when we see some impact in the marketplaces in some of these other countries it does affect the collective numbers overall.

Because as I mentioned earlier China is only about 8% of the whole Company and that's all businesses including Pharma and Devices, Diagnostics, etc.

and our second-biggest business in China is Diagnostics.

And so China is important to the Company across the board but it's only 8% of all our sales and in the Nutrition business it's only 10%.

Our competitors sometimes are much more highly indexed in China relative to other countries.

And I say that and the Danones, and the Meads and the Nestles, they're in all the same countries we are but the degree to which they are dependent on China versus other countries varies.

And in our case while China is a very big business in Nutrition relative to the total of all the business in Nutrition and in Abbott it's not as big.

So some of these, the long story short some of these lesser, smaller markets or countries also impact the local sales.

So what you're seeing here I think is more Vietnam and Hong Kong than fundamental Mainland China.

Okay, very helpful.

And then Miles you've talked extensively today about the Mylan/Perrigo situation.

Just a small nuance, was there a benefit to Abbott shareholders in expressing earlier support for Mylan/Perrigo than perhaps you needed to or are people just making too much of that particular point?

Well I think a lot of people are making a little too much of it.

But I think first of all the rules in the Netherlands are a lot more complex than what a lot of investors understood and certainly about Mylan's domicile there.

And therefore there's been a fair amount of press, more lately around the so-called structure of ownership in the Netherlands, the stichting and all these other things.

And I think if one assesses the clear path to completion of Mylan's interest in Perrigo versus Teva's interest in Mylan there is a pretty clear difference.

I don't think investors completely appreciate that because I don't think they know the underlying hurdles or rules, etc.

So I think that I think a lot of investors could have misunderstood or misperceived a choice that doesn't actually exist.

My view.

One investor.

So I wanted to make it clear where the largest investor in Mylan stood because I think that will influence other investors to take a closer look at the facts of what is a clear path to completion here in terms of what are thought to be alternatives that I don't think are.

To the extent that that influence other investors to take a closer look I think that's in Abbott's best interest as Mylan's largest shareholder rather than continuing to debate back and forth an alternative that I don't think truly is.

End of comment.

Thanks.

Very clear.

Very important commentary.

Thank you.

Glenn Navarro, RBC Capital Markets.

Hi, good morning guys.

Miles I'm a little surprised just here in the middle of the year we haven't seen any M&A from you.

And I'm not sure if you're paying attention to Congress but there's a chance that attached to the Highway Bill there may be a tax holiday toward the back end of this year.

So given the fact that a lot of your cash sits outside the United States, I'm just wondering is that what's holding back any M&A?

Are you potentially waiting for this potential tax holiday and if there is one would that accelerate the pace of M&A?

Thank you.

No.

The image that comes to mind is Charlie Brown holding the football for Lucy.

Do I think Congress is actually going to do anything with tax policy before the end of the year?

I give you a resounding no.

So I would tell you not for one minute would I hold back our M&A interest based on thinking that Congress is actually going to do something in some comprehensive and constructive fashion here about tax policy in the United States.

I hate to be that definitive about it, you can probably tell what I think but no, that has no impact whatsoever.

I'd say the things that have impacted us up to now has mostly been us completing other things that we needed to complete which we've done.

We think we're in good shape on all our transitional things and it's more just our own pursuit and decision-making that is driving our M&A portfolio.

We've got a lot of opportunities I think to support our Branded Generic Pharma business and we've got a lot of opportunities in the Device space and that's where a lot of our interest is right now.

We'll make a lot of progress there.

It will become more apparent by the end of the third quarter I feel confident.

Apparent doesn't mean there's some great blockbuster coming here.

Those things tend to take time and I don't know that I can predict time right now.

But I'd say look, I already said normally I've been on this call and said there's not that much out there.

Frankly there's a lot, but it's all very highly valued and nothing is easy in the deal world and I think you know that even though there's a lot of activity these days.

In fact, a lot more activity than we've seen in a long time over the last 18 months.

So I'm not sitting here holding back for anything.

I think we're moving along as best we can.

I think the one thing that holds anybody back is the fear of overpaying or paying too much or making a poor deal.

And I think we've always tried to be disciplined about our deals.

I always find that we're criticized for paying too much until a couple of years later when everybody says hey, great bye.

We try to make intelligent deals.

I don't think you can ever expect not to pay full value for something but we're always careful about what we think we can do with a given business and whether we can add value to it and so forth.

And trying to find that sweet spot where everybody's happy is sometimes a little slower than we might like.

Okay, and just one quick follow-up.

I'm not going to ask you about your view on the medtech tax, so I'll just as quickly in the past you've said that the fact that your cash sits outside the US or most of it is outside the US it would not hold you back from doing M&A in the United States.

Does that still hold true?

That still holds true.

Okay, great.

Thank you.

Jayson Bedford, Raymond James.

Hi, good morning.

Thanks for taking the questions.

I guess my first is there has certainly been a lot of conversation of you getting bigger and I understand that but are you also contemplating further pruning of the business?

Meaning product lines that may not fit as well or visibility into the returns may not be there, is that part of the strategy going forward?

It is not.

Okay.

And then just a specific question and following up on an earlier what the Nutrition softness outside of China, I think you mentioned price in Vietnam and I'm guessing Hong Kong as well.

Is this a dynamic that you'll be facing for the next three quarters until it laps or are there other factors there that would allow you to turn this geography around a little earlier?

No, I don't actually expect a long sustained downturn we've got to lap here, etc.

Brian is dying to say something, let me let him comment.

No, I just wanted to add --

Brian was just there by the way.

So he really wants to tell you about it.

So in Vietnam we are gaining share.

Remember we are recovering so all things are pointing the right way there.

This is purely a market issue, so I think this is within our destiny to control.

The good news I think with Nutrition is when you look even beyond that area we're growing double digits in key Latin American markets as well.

So a little bit different dynamics and circumstances than maybe what we heard from others last week.

So we feel good about where we're at.

Yes, it's hard to generalize because we just had my staff meeting earlier this week and we look at every geography, we look at our share position, we look at our competitors.

And I have to tell you every one of these countries has got a different mix of competitors.

And different companies are strong in different countries.

So it's hard to just generalize with one brush across them all.

Vietnam as I said before, it's been an important market for us, it is an important market for us, it will be.

I don't anticipate some long-term difficulty here.

But it clearly impacted this quarter.

Operator, we will take one more question.

Larry Biegelsen, Wells Fargo.

Hey guys, thanks for taking the question.

Can you hear me okay?

Yes.

Great.

Let me start with one product question, one strategic question.

So international diabetes growth accelerated nicely this quarter, I think you had 10% operational growth outside the US.

Libre, you know the feedback is all frankly phenomenal that we've heard but you're capacity constrained I believe.

And you filed Libre Pro in the US.

So Miles, can you just give us an update on Libre, how big do you think that product can be for you in 2015, 2016?

When do you think you won't be supply constrained?

And when are we going to see the key European and US studies that you have ongoing?

And I had one follow-up after that.

Thanks.

I'll tell you we think we've got a real winner of a product here but we are capacity constrained and that's our own problem.

We obviously didn't build enough capacity for what we anticipated.

We expect that to start easing in the mid to late fall.

We'll have considerably more capacity online at that point and we continue to invest in capacity because we believe in the impact of this product.

And the response from diabetics and consumers is frankly terrific.

We've intentionally slowed down our marketing because there's no point in creating greater difficulty in terms of demand for a while until we can fix that capacity issue.

And we're getting close to that point now where we can go back to a more aggressive marketing of the product.

But in the meantime we're just waiting for that capacity to come online.

Brian, did you catch the rest of those questions?

Yes, with respect to Libre Pro, with respect to the launch that we had in the US or the pending launch, the approval submission.

So Larry recall we just got this approved in India.

This is a great opportunity for us to go after the doctors and the patients in a different way.

We did file and submit in the US.

And typical timeline I'd say here is approximately a year but again this is probably a modest segment, we're still forming one for the professional segment that we're targeting.

But I'd say overall between this strategy as well as what we have internationally with Libre and even our approach to the market here in the US with some of our offerings is really balanced and really helping us as you see here return to growth for the Diabetes Care business.

To be performing in the mid single digits is where we expect it to be and so I think everything is on track.

I don't think I can forecast for you how big is going to be.

I don't know, I just don't know.

What I do know is anything I would tell you would be wrong.

So I think it will be a significant product.

I think after say 6 to 12 months of unfettered availability we'll know pretty well.

But I'd like to hit that capacity or the capacity release point where we've got plenty of manufacturing capacity and we're unconstrained and then we will get a better sense of that.

Thanks, and then on a strategic note, when one looks at the Abbott's Vascular business it doesn't have the breadth right now of two main competitors.

And cardiovascular device is one of the therapeutic areas where we have seen contracting across product categories, so what are the strategic implications of those factors for Abbott's Vascular business?

At some point does that business model need more breadth within the cardiovascular device space?

Thanks for taking the question.

Yes, I do think it needs more breadth but I also think it needs pretty solid performance in the pieces it has.

I think we can do better on the stent front than we're doing and I think we can do better in the endovascular space than we're doing.

Structural heart for us really right now is a product but we think there's a lot more breadth there that we should be participating in.

And then I think beyond that in the device space whether it's vascular or not there is a lot more breadth.

We created a different structure in our organization where we'll incubate ventures.

Ventures can take on a lot of different sizes and there's a lot of activity there right now.

We have a clear focus on expanding and broadening the whole device business.

It's actually going really well.

We're just not in a position to tell you much about it yet.

And it ranges from equity investments to outright ownership or assembly of businesses there.

And we announced early in this quarter, the second quarter that we were making a change there to not just be a venture funder but actually build our business.

And it's surprising to me how much opportunity exploded in that space for us.

So we're going to broaden it, well underway, lot of opportunities, agree with your point and we're on it.

Thanks for taking the questions, guys.

Thank you, operator.

And thank you for all of the questions.

And that concludes Abbott's conference call.

A replay of this call will be available after 11 AM central time today on Abbott's investor relations website at www.abbottinvestor.com and after 11 AM central time via telephone at 203-369-2013, passcode 4277.

The audio replay will be available until 4 PM central time on Wednesday, August 5. Thank you for joining us today.

Thank you.

This does conclude today's conference.

You may disconnect at this time.