Abbott Laboratories (ABT) — Q1 2015 Earnings Call Transcript

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 1(a), 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 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 will be brief this morning and leave some time for questions. Our first-quarter performance exceeded expectations on both the top and bottom lines, and 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 will 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 which 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 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. So 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 have launched into China and other fast-growing geographies are continuing to perform well. Products like Similac QINTI and Eleva are seeing 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-digit to 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 earlier 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 have had a very positive early response to the launch of our new FreeStyle Libre device. As I mentioned last quarter, we are 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 fingersticks. 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. In 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 is driving share gains in the U.S. 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 U.S. we have had success with large healthcare networks, standardizing our point-of-care testing with our i-STAT system. Outside the U.S., our expansion efforts continue in both developed and emerging geographies. In established pharmaceuticals, we’re executing better commercially. That is something that I have 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 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 will 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 nutrition, diagnostics, and established pharmaceuticals, which included the impact of 2014 acquisitions. Sales in emerging markets increased strong double digits in the quarter. 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 investments was around 6.5% of sales and adjusted SG&A expenses were around 34.5% of sales. The over delivery 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 activity 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 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 have a 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 from our previous projection in January of around 6%. This should result in reported sales growth in the low single digits for the full year 2015. 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 margin by over 100 basis points in 2015. We 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 in 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 non-operating 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 segment foreign exchange headwind 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 the 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 of $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 will turn it over to Brian to review the business operating highlights and outlook. Brian?

Thanks Tom. This morning I will 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 will start with our nutrition business, where global sales increased more than 6% in the first quarter. In our international pediatric nutrition business, sales increased to 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 continued 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 continued 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 U.S., we announced in March the opening of a new nutrition pilot plant in Singapore. The state-of-the-art facility will serve as a second global R&D hub. In the U.S., 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 the strong flu season. Adults nutrition sales in the U.S. were impacted by competitive and market dynamics, including softness in the institutional segment. We expect a modest improvement in the U.S. 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 nutritional business, driven by a 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 U.S. 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 in an efficient workflow as part of Abbott’s total solutions. 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 are 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 U.S. 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 settings, where small portable solutions such as Abbott 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 U.S. and internationally. Last month, we presented data that reinforces MitraClip’s ability to reduce mitral regurgitation and improve a person’s overall health, which 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. And in our drug-eluting portfolio in the U.S., 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 have 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 U.S. reimbursement changes. Outside of the U.S., 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 continued 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 U.S., we have and will continue to segment our products and our commercial strategies to drive profitable growth. And 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 U.S. we launched TECNIS Multifocal Low Add, which provides more range of vision options to patients and surgeons. And just last week at the American Society of Cataract and Refractive Surgery Meeting, we launched our TECNIS Preloaded in the U.S., which improves the ease of use for the cataract surgeon and enhances the 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?

Hi, congratulations on a good quarter and thanks for taking the question. I was wondering if you could just comment from a big picture perspective. You have 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 shaping Abbott going forward? It doesn’t necessarily seem that you need to be in a rush to deploy any of the cash and you have plenty of flexibility, but how are you thinking about this kind of more from a big picture strategic perspective?

Thanks for the question Kristen. I would say we want to grow, and we want to get bigger. And I think there are obviously two dimensions there. One is organic growth, which can be expansion of products or geographies, and then there is also M&A activity, and nobody would be surprised to hear that from 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 that we have the right core, and it is 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 opportunities for us. But beyond that, I think we can do more, and I think we can do a lot more, particularly if we’re bigger in some of these spaces. My intention is to get bigger. I think strategically that is how I’m thinking about it. And to your comments about resources and timing, as I have said in the past, we don’t feel particularly capital constrained or resource constrained, and yet I don’t feel like we 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 is out there. I would love to say we all go out there with a plan and have the following priorities and 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, and what the circumstances in any given geography or industry may be. Those things always tend to determine the timing of the opportunity, and I think what we have 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 those opportunities line up, then you are not able to take advantage of them. So, we are obviously always tracking, always studying, and we have always got an idea of what our priorities would be. The market will tell us what order we get to address to some degree. But you are right; we are sitting in a very good position right now in terms of our readiness and our ability to have resources, etc., to invest, and the condition of our underlying business. We have given a fair amount of attention to our cost structure, to our supply chain structure, to our back office structure, our G&A, and all those sorts of things over the last couple of years really to ready ourselves for bigger business and greater expansion, particularly geographically, and I would say that has 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, and 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 is 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 are in a really good position right now, and we feel good about it.

And you have 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 the word I have used a 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, and we wanted a different balance where there was consumer choice, preference, and payment, etc. The mix of our business now is much more like that, not just because of the businesses, but because of geographies and the structures in those markets. So I would say we have targeted those countries with that structure in particular as opportunity. But I would not rule out Europe, the U.S., or traditional markets as opportunities for us for some of our businesses. I just want a different or more balanced structure so we are not over-reliant on heavy concentration in given geographies where there is a lot of decision control at a central point.

Perfect. And just a quick follow-up for Tom. Would you be willing to provide the organic growth for Abbott overall in the quarter?

And the top line is the mid-single digits adjusted for the acquisitions.

Perfect, okay, thank you.

Thank you.

Thanks. Just to clean that up to Tom. Anything more precise than mid-single digits on the organic growth?

Right around 5, Mike.

And then the, it was a bid on the quarter but then 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 bit of it is that certainly in the 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 we’re although, it was a really good high-quality quarter when we look at how the business has progressed both on the top line and particularly in the gross margin area and we’re just pleased with that progress at this early point in the year, and I think it sets us up nicely to continue to build on that as we progress through 2015.

Mike, I would add to that the analysts and investors who cover us have all paid a lot more attention in the last couple of years to currency than have had to in years past. Probably 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 in Asia, Latin America, and other emerging markets, we pay a lot more attention to a lot more currencies, and I think that’s made it harder to forecast and predict particularly the mix and the shifts and so forth. 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 of last year. Although maybe we shouldn’t have been, but we were. And in our case, as I 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 got a bigger basket of currencies to look at and 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; India 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, I look at, and I think okay this should all be pretty stable for the year barring events I can’t predict in the external world. Regarding guidance which you asked about and I’m circling back to, I just think it’s early in the year to do any change in the 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 to make any changes. I would say to echo Tom, the underlying performance of the company is real good, and to the extent that this momentum continues and there is no change to earnings assumptions or to currency assumptions and so forth, you’re going to be pressuring us on this point again in the quarter here. And that’s all good, but I think I just like to see more cards played before we move in that direction. I look back over our last 7 or 8 years to see how many times we had adjusted guidance in the first quarter and I think we just gave it to you a couple of months ago, so to change it two months later does that make sense? I think when we change guidance a couple of times in the first quarter in the last 8 years, I’m not even sure why I did it then because I think in general I had to see half the year played before I had a good feel for how things were 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 the currency or some catastrophic world events. I would just like to see another quarter played, and then if we’re cranking along like we seem to be, then you’re going to be pressuring us and I’m going to be nodding and saying you told me so, you were right.

Okay. So let me switch to strategy. So Miles, depending on what plays out with Mylan, I could see you guys in the year with maybe $12 billion and $13 billion of cash. Probably, for nickel, that would be outside of the U.S. you would have still call it $5 billion of net debt potentially net cash. Does the cash position and the fact that really all of it being outside of the U.S. is that really drive you to an acquisition of U.S. assets or U.S. domiciled assets and do you think you can put, given the opportunities that you think you can put that cash in your balance sheet to work?

Let me go in reverse order. Do I think I can put the cash in the balance sheet to work? Yes. The timing of when I can put it at work is kind of the question which I sort of addressed to Kristen a little bit ago. I can’t predict the timing very well Mike, I can predict in ten and my intent is that I’ll put it at the work. I think we’ve always found the good balance here, we are pretty stable, reliable, predictable in terms of dividend and payout and so forth, and we have been pretty solid about balance of share buyback and capital deployment, but we have also been pretty good about deploying the higher return investments, and we think our deal records speak for themselves. So, I would say yes, the intent there, the timing is a little harder to predict, but I’m not constrained by it at all. Now having addressed that, am I stuck with only opportunities overseas because of the structure of the tax system in the world? No, I don’t think so; I’m not ruling out the U.S. I am not ruling that out at all and I think let’s just say we’ve got great tax guides and great management of our cash flows and access to cash if we want to. I think I’ve got enough flexibility that I don't have to stay in an external world. I think there are a lot of reasons that overseas should be economically more attractive. We all know what those are, but I think those are all sort of financial packs cash-related. At the same time, I think there are strategic opportunities that are attractive to us 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 in my own dock here in the U.S. and look at opportunities in the U.S.

And Miles, last question, and I’ll jump in. It’s been relatively quiet over the last six months since the treasury action on U.S. corporate and voting to outside the U.S. Is that something Abbott might still consider?

I am not looking at it. Let me put it that way. I may not think that Washington will come to its senses eventually here and make adjustments to the tax code to make U.S.-based multinationals more competitive globally with all the companies that we compete with. I mean there is a lot of script written about this, and my position on it has been clear. This tax code disadvantages U.S. companies and puts the 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 U.S. government on that line because I think in no way enhances job global 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, one of the logs, I think the minute we did something in or around inversion or otherwise, Congress surely would change the tax code and I wonder why bother. So I am not – and I am not even sure I am not 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 in the way the treasury addressed it is affecting the trend for some companies looking at inversion. I think it’s clearly advantageous in the different M&A environment for non-U.S. companies for U.S. 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 am looking at things more strategically and more traditionally, meaning I look at the strategic fits of the business or what we can do with it and how it’s going to operate, and I look at whether those economics are working. I am not trying to subsidize our M&A analysis with tax arbitrage. Now, I think a lot of other companies are definitely subsidizing their analysis with tax arbitrage because they can, but we are not. And that said, I don't – I am not seeing the expectations of tax inversion premium in value. I think values are high. I kind of always think they are high. I think they are high around the world for a lot of reasons; a number of deals are getting done at expensive prices and multiples, not because of inversion or tax, but they are just expensive, and that’s driven expectations in a lot of places up. But I always think it’s expensive out there, and 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 have 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, there is the short answer: I am not focused on inversion for the benefit of tax. Doing those things is temporarily disruptive to a company, and if there is a long-term belief that you need to do that and 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. It’s commercial for me, but that's kind of the deal.

Thank you. Good morning Miles, Tom, and Tim. I wanted to just start with the business actually and specifically around medical devices where actually, 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 if 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 uptick side that we'll see a churn in that franchise through the balance of 2015?

Okay. Let me start with the vascular side. I think what we have seen occur over the last few years in the core strength business in particular because everything kind of revolves around the strength 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, and physicians that use our product they use all of us. So I think what you have seen is the value of incremental innovation has diminished, and the market has kind of stabilized. One might even suggest that’s commoditizing to a degree but it’s kind of stabilizing, so I would say there is kind of a drumbeat to price pressure as governments, payers, or hospitals are trying to manage their own budgets. In some ways, I think it just forces us to be a lot more innovative about where our next frontiers are, etc. And I think that in the medical device business there are a lot of opportunities for innovation, and rather than look at much broader footprints of very matured products we are putting our focus on a lot of innovation at eventual levels and at a smaller level where there are a lot of opportunities for growth expansion and continued improvement to health care. I am not prepared to talk a lot about that today, but I would tell you that's where I am headed with that to grow and expand that device business perhaps a little differently than what people might expect. But I like the core of what we have. I think we are 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 it’s kind of 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 kind of hit a wall; there are several explanations for that. Part of it is us, part of it is our own competitiveness or responsiveness, and part of it is one of our main competitors kind of waking up again and responding to the share that we had taken in the cataract business. I would sort of attribute that to just the ebb and flow of competition, which is good. There are 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 have been seeing that for a number of years now. The cataract business for me is strong. We have got a great drumbeat here of innovation coming steadily. Our R&D groups have done a fabulous job I think over the last several years and they continue to just constant product innovation and launch. So, I think there are some tactical things we got to do a lot better. I like this business. It’s one I want to expand in if you got these. You got to adjust internally, it makes 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 performance and I would say optics is on my radar screen is one to expand because there is a lot of opportunity there.

That's helpful. Now, shifting focus to the nutrition segment, you mentioned in your prepared remarks that you entered the Chinese market with Ensure in retail stores. While this opportunity is still in its early stages, do you believe that the potential for adult nutrition in China could reach a multi-billion dollar market, perhaps between $2 billion and $3 billion? I'm drawing on the example of Vietnam, considering the demographic opportunity in China. Additionally, how long do you think it would take to achieve that potential?

I’m breathless to your expectations. Look, I would tell you I’ve an ambition to put a big business. I’m not sure I’ll put it two or three in front of the billion here, and I would like to get to a few hundred million and kind of get some critical math and momentum. I do have an ambition for it to be a very substantial business, kind of along the line directionally headed. I’m just cautious about getting ahead of myself here on that. I’ve got a couple of businesses here at Abbott, but I’ve had those same ambitions for 10 years, and there is still around half a billion dollar. 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 would say, I believe that opportunity is there; I believe that potential is there. We got to establish the category; we got to establish the use; we got to establish the brand. And I think what we’ve seen in the past is that every country we’ve done that in, it’s been pretty substantial. We create the category; we’re the category; we got to do that in China. There is an adult category in China. It’s a little different than what Ensure does, but there has been some regulatory change there that’s been favorable to us, and allows us to establish this category at a more rapid pace. And I think it’s attractive, and I think there is a big upside here. So, you and I would at least be conceptually online. I’m just afraid to put that specificity around size because I don’t know how long it might take. And you could be right, and wherever we’re when you’re right, I want you to send me a note to let me know you were right because I’ll be very happy if we are. But, I think there is a lot of opportunity to get big like that.

I guess if it makes you feel better, we never specified a timeline, so I was more focused on the peak opportunity.

I think you’re going to be right. As I said, we get to a few hundred millions first, we will start and have a temporary celebration and keep moving on. I mean this is kind of like having a kid and literally you want him to be a cheater. Let’s just take one step at a time here.

I look forward to that celebration. And maybe just lastly on the P&L, looking at your kind of guidance for the year on operating margin, you’ve obviously done a tremendous job of expanding profitability over the past of couple of years. But still as I kind of look at where your margins are versus your peers, it looks like there is still some room to go even after where you end up this year. Are we still sort of in a period where you think Abbott is under-earning versus the peer group insurance segment with room to go on the profitability side?

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 nearly 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. And I think you’re already seeing it in the first quarter here and we’ve objectives in 2015 for that 100 basis points plus and there is no reason to stop 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.

Let me add to that a couple of things. Underlying one is, there is some cost side to get there – there is a lot of low-hanging fruit early on that can get okay that got that. There are other stuff that’s structural, whether it’s supply chain related or plant related where the plant is, cost to labor, cost to inputs, cost to commodities, distribution all those sorts of things. The structural ones take longer, and if I look at the nutrition businesses as an example, we’ve been at it for four or five years; there wasn’t a steady drumbeat every year. But what we’re seeing the benefit of now is the bigger structural investments we had to make that took two or three years to realize, even four years in some cases because of plant location, supply chain, etc. And we’re now starting to see the benefits of that. Sometimes you got to actually change processes, systems, etc., to get at it. Second piece of it that affects the margins is price, and we’re protecting price. This is a little bit two steps forward, one step back. Exchange keeps you erasing some of the advantage of the top line, and you see exchange advantages here on the bottom line to the extent that you can pass it in the right places, and that’s true. But for the last few years, we’ve watched tremendous advantage gained in gross margin management, cost reduction you raised by exchange, and all multinationals are seeing that to some degree. So we look at it and we say okay, we just got to have pretty aggressive targets here to improve these margins steadily. I got to treat exchange almost like a cost at this point each year or price reduction. And so constantly we look at the balance of that exchange and how we manage it and in effect treat it like an erosion of price because that contributes to margin. So you’ve got multiple factors that work here, and we have been very intentional about how we spread our business, spread our cost space, manage exchange, and hedge exchange all of those sorts of things to protect that because honestly it hurts to gain it through cost and give it back through price erosion or exchange over the year. And we have affected the mix, the markets we choose, the products we choose, and so forth; the mix and profitable segments versus less profitable segments, all that affects it. Some of it just takes time now to give you the bottom line answer to your question: are there still opportunities? Yes, there are. And it’s not just little. We keep plugging away at pretty big chunks of opportunity here.

Okay, great. I appreciate all the detail. Thanks guys.

Good morning. Miles just coming back to the Mylan stake here. Your treatment of this stake has been more patient than I think some expected, which so far is working out to your advantage. I wonder what your thoughts from here?

I just love the voraciousness and patience of the investment community. We didn't even finish this deal till February, that was two months ago. And I know you can say why you could have been thinking about it all ahead of 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, 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 is tied up in Mylan, I would just probably borrow to unlock it. So I don't feel like I have got any constraint at all. And I am happy to have been patient. When this deal was done you’ll recall the original value put on the sale of the EPD business was $5.3 billion, and as I am watching the great theater out there that is surrounding Mylan and the team I have respect for, the value of our position has risen because investors have valued Mylan stock. So you say that's lucky, and I think good luck any day. But I am happy that we have been patient because it’s clearly accruing value to us as an owner and investor of Mylan stock. I think this has got to be an aggressive team there; he’s got aggressive plans, obviously other people have aggressive interest in them, and all of that has been in our favorable interest financially, and it’s not inconsequential that was a $5 billion value, and it’s now $7 billion, and that's just more optionality for me. I am happy about that. So I don't feel like I have to be in a real big hurry to do anything to resolve that stake. 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 prudent to hold it. It has 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 that doesn't need to be hurry. If I put it into the cash, I can tell you right now that I can't earn this much on that because I am earning by leaving it in Mylan, so until I need to sell it, I think it’s in a nice place.

Okay, very clear at this whole, it doesn’t work out I guess you can always be fishing.

And Miles, last question. 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 U.S. nutritionals and the other obviously was EPD. Between those two it does appear that there is more sustainable growth efforts sort of coming through fruitful on the EPD side and the U.S. nutritional business, but I wonder if you could update us in terms of that management intensive focus and where you see those two businesses today? Thank you.

The EPD business has been quite visible for everyone to observe. We made a strategic decision to prioritize emerging markets over developed ones, which aligns better with Mylan's larger business strategy. We also acquired CFR Pharmaceuticals in Latin America, strengthening our position in that region. We navigated a significant deal in Russia during the Ukraine crisis, which could have been problematic, but since we conducted the transaction in rubles, it didn’t impact us too negatively when the currency collapsed. This has been a strategic win for our EPD business, which has undergone a comprehensive restructuring to better focus on where we believe the most significant opportunities lie. This repositioning has been intentional and took about 18 months, which was quicker than anticipated, as conditions aligned favorably for us. The growth rates in the countries we are focusing on for EPD are robust, and while our performance could still improve, it is currently seeing double-digit growth, outpacing market rates. On the nutrition side, we have also experienced considerable changes, including management adjustments. The current management team has shown strong capabilities, with many of our leaders being in their positions for around six to nine months. We’ve also altered our investment strategy and marketing approach, leading to significant improvements. I believe our pediatric business is well-positioned for upcoming growth, with new marketing initiatives and product launches on the horizon. However, I feel our adult nutrition business is underperforming compared to expectations. While it's a strong sector, there are challenges we are addressing. We've implemented some substantial marketing and product changes, and it will take some time to see the results. I ask for a bit of patience as we work through this. In the international aspects, we have successfully weathered several challenges, including product recalls. Notably, our team in China has done an excellent job recovering market share after a recall several years ago. The pediatric segment is doing well, holding a market share of around 8.5% to 9% and showing positive trends. Overall, I am encouraged by the fundamentals of our nutrition business and expect to see evidence of good momentum in the coming quarters.

Okay, thank you operator and thank you everyone for all your questions. That concludes Abbott’s conference call. A replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at www.abbotinvestor.com and after 11 a.m. Central Time via telephone at 402-998-1629, the passcode 1674. The audio replay will be available until 4 p.m. Central Time on Wednesday, May 6th. Thank you for joining us today.