Abbott Laboratories (ABT) — Q3 2015 Earnings Call Transcript

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, and Brian and I will discuss our performance in more detail. Following our comments, Miles, Tom, Brian, 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 risk and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual reports 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 the third quarter financial results and guidance provided on the call today 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 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.

Thanks, Scott. Good morning. Today we reported third quarter adjusted earnings per share of $0.54, at the high end of our previous guidance range. We also narrowed our full year 2015 adjusted earnings per share guidance to $2.14 to $2.16. The midpoint of our guidance range remains unchanged and continues to reflect double-digit underlying growth. Sales in the quarter increased double digits operationally for the fourth consecutive quarter. And before I summarize our results, I'd like to take a moment to discuss two topics that have dominated the headlines of late, growth in emerging markets and the continued strengthening of the U.S. dollar. Healthcare growth and demand remains strong despite challenges facing emerging economies. In the third quarter, Abbott again achieved double-digit organic growth in emerging markets, led by Nutrition, branded generics, and Diagnostics. While clearly there has been some softening in emerging markets, growth in these economies continues to outpace growth in the developed world, and healthcare is growing even faster than overall economic growth in these markets. National policies focused on expanding access to care and favorable trends, including increasing birth rates, aging populations, and the adoption of Western standards and technologies are all driving growth. Abbott remains uniquely positioned with our diverse set of healthcare businesses to capitalize on these trends, from birth to older adults and from diagnosis to treatment, in pharmaceuticals and innovative medical devices. At the same time, the strengthening U.S. dollar continues to be a challenge for Abbott and other multinational companies. We're thoughtful about how we manage our business and exchange in this environment, and we remain focused on achieving the right balance of returns to shareholders and investing in the business to drive long-term growth. I'll now summarize our third-quarter results before turning the call over to Brian and Scott, and then we'll be back for questions. I'll start with Diagnostics, where we achieved sales growth of 8% in the quarter, driven by continued above-market performance in core laboratory and Point of Care diagnostics. We continued to capture share and win new core laboratory accounts with our customer-focused solutions. In Point of Care diagnostics, we achieved another quarter of double-digit sales growth. We continued to expand our presence in key developed and emerging markets and capture share in the U.S. through adoption of our market-leading i-STAT System in large hospitals, physician office labs, and remote care settings. In Nutrition, sales increased 6.5% led by growth in our international pediatric business. In China, we again achieved double-digit growth driven by continued market uptake of our Eleva infant formula and online offerings in the premium segment. The international adult nutrition business continues to achieve strong performance, including double-digit growth in Latin America as we continue to build and shape the adult nutrition category globally. In Medical Devices, as expected, our vision care business saw a sequential improvement in growth led by strong performance in our cataract business. The underlying fundamentals of the cataract market remain attractive, and continued market uptake of several recently launched products is driving above-market growth. In vascular, sales growth was led by double-digit growth of MitraClip, the market-leading device for the minimally invasive treatment of mitral regurgitation. And in diabetes care, sales growth was led by international performance. We continue to receive positive responses to FreeStyle Libre, our new sensing technology that helps people self-manage their diabetes without the need for routine finger sticks. Our capacity expansion remains on track to meet the growing demand for the differentiated product. In Established Pharmaceuticals, sales again increased double digits, excluding the impact from recent acquisitions and foreign exchange. Growth continues to be driven by India, Russia, China, and several countries throughout Latin America. This business continues to deliver above-market growth through improved commercial execution, expansion of product portfolios in our therapeutic areas of focus, and driving more awareness of our Abbott brand with consumers, physicians, and pharmacists. So in summary, we achieved another quarter of double-digit operational sales growth. We continue to see strong underlying growth broadly across emerging markets and all of our businesses. And despite a challenging currency environment, we remain on track to achieve our financial objectives in 2015, reflecting the strong outlook we forecasted for EPS growth at the beginning of the year. I'll now turn the call over to Brian and Scott to discuss our third quarter results in more detail. Brian?

Thanks, Miles. As Miles previously stated, today we reported third quarter adjusted earnings per share from continuing operations of $0.54, at the upper end of our previous guidance range. Sales for the quarter increased 10.9% on an operational basis. That is excluding an unfavorable impact of 9.5% from foreign exchange. The negative impact from exchange was somewhat higher than previous expectations due to strengthening of the U.S. dollar relative to several currencies in the quarter. Reported sales increased 1.4% in the quarter. Operational sales growth was driven by strong performance in our Diagnostics and branded generics businesses. As Miles mentioned, Abbott sales growth in emerging markets remains strong, increasing double digits on an organic basis in the quarter. Given continued investor interest in the Chinese economy, I'd note that our sales in China, which represents about 8% of our overall sales, increased double digits overall and across each of our reportable business segments. The third-quarter adjusted gross margin ratio was 57.5% of sales, up 200 basis points over 2014 and slightly ahead of our forecast, driven by continued margin expansion in Diagnostics and Nutrition. In the quarter, adjusted R&D investment was 6.2% of sales and adjusted SG&A expense was 31.4% of sales. Turning to our full-year 2015 outlook, today we narrowed our adjusted EPS guidance to $2.14 to $2.16. The midpoint of our guidance range remains unchanged and excluding the impact from foreign exchange, reflects strong double-digit underlying growth over 2014. We continue to forecast operational sales growth in the high single digits for the full year 2015. Based on current exchange rates, we now expect exchange to have a negative impact of approximately 8% on our full-year reported sales, somewhat higher than our prior expectations and reflecting the move that we've seen against the U.S. dollar since July of various currencies. This would result in reported sales growth in the low single digits for the full year 2015. Scott will review the growth outlooks by business in a few minutes. For the full year, we forecast an adjusted gross margin ratio around 58% of sales, reflecting gross margin improvement initiatives across our businesses. We continue to forecast adjusted R&D investment of around 6.5% of sales and adjusted SG&A expense approaching 32% of sales. Overall, we expect to expand our full-year adjusted operating margin by more than 100 basis points in 2015. We now forecast a gain of around $50 million on the exchange gain-loss line of the P&L for the full year which is offset by exchange impacts on the operating lines of P&L over the course of the year. Turning to the outlook for the fourth quarter of 2015, we forecast operational sales growth in the mid-single digits. At current exchange rates, we'd expect a negative impact from exchange of around 6.5% of sales, resulting in a low single-digit decline in reported sales. The sales impact from exchange in the fourth quarter is expected to be less negative than the third quarter as we will be lapping the currency effects that occurred in the fourth quarter of 2014. We forecast a fourth-quarter adjusted gross margin ratio of around 59% of sales. We forecast adjusted R&D investment of somewhat above 7% of sales, which reflects the planned timing of development programs, including investment in several next-generation diagnostics platforms. And we forecast adjusted SG&A expense of around 30% of sales in the fourth quarter. Finally, we project specified items of $0.28 in the fourth quarter, reflecting the same items as we identified for the full year in our earnings 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 strong quarter and a strong underlying performance and are on track to achieve our financial objectives for the year. With that, I will turn the call over to Scott to review the business operating highlights and our outlook. Scott?

Thanks, Brian. Today I will provide an overview of our third-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% in the quarter. In core laboratory diagnostics, both U.S. and international sales increased 8%. Double-digit growth in emerging markets and share gains globally continued to drive above-market performance in this business. In molecular diagnostics, sales were led by 10% international growth, as well as double-digit growth in our infectious disease testing segment. As expected, U.S. sales were impacted by the continued slowdown of our genetics business as we scale down this business. And lastly, Point of Care diagnostics, where sales increased 12% in the quarter. U.S. and international growth were driven by continued market adoption of i-STAT, our hand-held device which provides critical information that helps clinicians make quick and informed decisions. For the fourth quarter, we expect global diagnostic sales to increase mid-single digits on an operational basis. In Nutrition, global sales increased 6.5%, reflecting a sequential improvement in growth over the prior quarter. Pediatric nutrition sales increased approximately 10% and were led by continued market uptake of Eleva in China and Similac Advance non-GMO in the U.S. During the quarter, we continued to expand our non-GMO product portfolio in the U.S. with new launches in the tolerance and up-age categories. In adult nutrition, sales were led by 8% international growth, including double-digit growth in Latin America. As expected, U.S. adult nutrition sales were impacted by competitive and market dynamics. For the fourth quarter, we expect global Nutrition sales to increase mid-single digits on an operational basis. In Medical Devices, modest sales growth in our vascular business was led by 5% growth in endovascular sales and double-digit growth in MitraClip. During the quarter, we further solidified our leadership position in the transcatheter mitral valve device market with the acquisition of Tendyne and an option agreement to acquire Cephea Valve Technologies. Along with MitraClip, these technologies position Abbott well to sustain our leadership position in this market. For the fourth quarter, we expect global vascular sales growth to be relatively flat on an operational basis. In diabetes care, sales growth was led by international performance, including strong growth of FreeStyle Libre in Europe. For the fourth quarter, we forecast low single-digit operational sales growth in our global diabetes care business. In medical optics, as expected, sales increased sequentially over the prior quarter. Growth was led by strong performance in our cataract business, which represents around 70% of our medical optics sales. Continued market adoption of our premium intraocular lens products, including lenses that provide patients with more range of vision options, are driving high single-digit growth in our cataract business. For the fourth quarter, we forecast mid-single-digit operational sales growth in our global medical optics business. And lastly, Established Pharmaceuticals, or EPD, where sales again increased double digits with and without the impact of recent acquisitions. Sales growth in the quarter was led by strong performance in several markets, including Latin America, where a broader product portfolio and expanded sales force from the integration of CFR Pharmaceuticals are driving double-digit underlying sales growth. For the fourth quarter, we expect low double-digit operating sales growth in EPD. So in summary, we achieved another quarter of strong underlying sales growth and are well positioned to deliver our financial targets for the full year 2015. We will now open the call for questions.

Good morning and thank you for taking the questions. Miles, I think people probably first want to hear your thoughts on capital allocation. On the last call, I think people came away from and expecting that Abbott might be more active over the course of the quarter. Obviously, we saw 10.9%, but I think people's expectations were a little bit higher. So can you just give us your current thoughts on business development activity and how you're thinking about the balance sheet? Thanks.

Yeah thanks, Mike. I'd say basically no change from last quarter. I'd describe a little bit of macro environment. I'd call it exuberance of activity in this space, meaning healthcare in particular, pharmaceuticals, etc. It clearly came to a halt, I'd say, mid-summer. And it doesn't reflect that there aren't the same opportunities or the opportunities that we've been interested in, but activity slowed. I'd say we didn't miss anything. We're still absolutely as active as we wanted to be. I might like to have gotten more done too, but I think sometimes these things take time. And we haven't missed an opportunity. There's one opportunity that went by where I'd say the valuation was such that it obviously was a lot more valuable to somebody else than it would have been to us, and I don't regret missing it. But in general, I think there's been a slowing, but not so much a change in valuation expectations in some of the businesses out there. We're still every bit as active and interested. So on the M&A front, I'd say that remains a very high priority. It's hard to say something gets done within a few months, but I'd say we're all going to have to just be patient here while it sorts out. And rest assured, we have not backed off one iota. In terms of capital allocation in general, I like our position. We've got capacity. We've maintained a strong dividend. We'll continue to do so. We think we've got the right balance here in terms of share buyback, investment in the business, etc. So I think in general, all those different constituencies who value some portion of our capital allocation will continue to be satisfied or pleased with what we're doing.

Okay. And the emerging market performance is obviously encouraging. People were clearly concerned during the quarter about the potential slowdown in China, as well as other markets. Anything in the quarter that you viewed as one-time, whether it be tenders or something that might've benefited the Nutritionals business? Was that a pretty clean picture of your emerging market performance, particularly in Nutritionals?

Well first, let me say, I think the emerging market performance was a lot stronger than people expected. I think there's been a lot of concern about the slowing of various emerging markets, in particular China. And while the overall economies in some of these markets have slowed, it hasn't been the same in healthcare, and it hasn't been the same in the businesses we're in. Those have not slowed in the same way. And so our performance in the emerging markets remains strong in spite of what we might see in construction industries or other consumer areas, or I can pick a whole lot of different areas that clearly have slowed or investment has slowed in emerging markets, but it's not been so in healthcare. That has remained pretty strong, and I think above expectations, and we're gratified by that. We're glad that's the case. The single biggest thing, Mike, as you know, that's affected all of us in emerging markets is exchange and across the board. I mean last quarter was among the toughest I've seen from an exchange standpoint and you say to yourself, we got to go where the growth is and the growth is clearly attractive in emerging markets. It's double digits. It's healthy, strong double digits on the top line, and we'd all give anything for strong double digits on the top line, and that's there. But again, it's mitigated by pretty strong currency headwind and while none of us are great prognosticators of when that may ease, when it does, I think that the strength and robustness of emerging markets will really, really show. But in the meantime, I'm glad to have the growth of the emerging economies as we do and we continue to be very enthusiastic about them. That said, we have to navigate exchange. To this point, to your specific question about whether or not there's any one-timers here, not that I see or I can think of off hand. I mean everybody around the table here is shaking their heads and nope. So yeah, you're right, it's a clean picture and we're pleased with how that picture is developing and there's no oddities in here or whatever. I'd like to put a one-timer in there of an acquisition here and there and as you know, from the first part of your question, and we'll see.

Okay, great. Congratulations. Thanks guys.

Hi. Thanks for taking the question. I just wanted to just focus on the diagnostics business because that has continued to actually perform quite well and just the sustainability of that. You also commented in the release that you continue to see operating margin expansion there. Can you maybe just flesh that out a little bit more?

We are very pleased with the consistent growth of our diagnostics business, which has been strong across all markets. It has excelled in both developed and emerging regions due to exceptional commercial execution. Our commercial organization is likely the strongest in the company, effectively utilizing their enterprise selling model and enhancing service levels. They have a robust and diverse pipeline of new systems in development. The range and significance of new products being developed in diagnostics have likely never been greater, and we anticipate strong growth and market share gains over the next three to five years. However, predicting beyond that is challenging. The future product launches will support growth, and we have entrusted this to a highly capable commercial and service team, ensuring sustainability. Typically, the business experiences top-line growth fluctuations between 6% and 8%, which is considered healthy, especially in our core laboratory operations. We have also seen positive progress in the point of care segment, particularly with international expansion. Although we've faced some challenges in the molecular business, we believe our plans there are now stable and are optimistic about future developments. Overall, this segment has been a strong and reliable performer for us. In terms of margins, the team has successfully improved gross margins, similar to our Nutrition business. While it may sound counterintuitive, we are increasing our investments despite healthy margins, particularly in costly R&D programs for major system and assay developments. Our portfolio of new developments is unprecedented, and it remains a top priority for internal investment. The commercial team operates very efficiently, minimizing waste and maximizing effectiveness, which enhances margins in this business. We believe there is still room for gross margin improvement, and we are committed to pursuing that, and it is gratifying to witness their success.

And then I know you had mentioned, touched a little bit on the Nutritional margins. You'd think, I mean this year it's been pretty impressive to see if you look, excluding currency, just on the overall leverage that you've seen through the business into the bottom line. Do you think that that level, maybe not this level in 2015 is sustainable, but do you still see the opportunities for leverage going forward?

Yeah, I see some opportunities. It's been a focus there now for four or five years, and we've seen steady incremental improvement. Of course, early on, there's low-hanging fruit that you pick, and then other things take some investment and some shift in your manufacturing and other things. And I think that we have begun to see the benefits of a lot of the things that took longer to get at. So I do, I think there's more, I do. Do I think there's another 500 basis points or something? Geez, I wouldn't forecast that even if I thought so. So I think there's still room for steady improvement there. We have not been dependent on price to get it. In fact, we've been very careful not to rely on that. I think when you rely on price, you don't get at the underlying fundamentals of how you operate your business. At some point, I think we're going to feel the pressure of commodity prices. We've been fortunate in the last couple of years that we've gotten some great benefit from lower cost, lower priced commodities. At some point that will turn, and we've tried to put plans in place to be able to mitigate that when the time comes, so I think that will be some pressure on us sometime in the future and we should probably anticipate that at some point. So we keep our focus on continuing to manage cost, input costs, etc., because I think that will be coming someday and we should expect that.

Thank you, and good morning, everybody. I wanted to just start with the total top line picture, and by just by our own math, it looks like the organic growth rate, I guess excluding acquisitions, accelerated once again to north of 7% this quarter, representing the fastest level of growth I think you've had since the spin. So maybe, Miles, a) is that correct? And b) maybe you could sort of talk about some of the factors that have come together over the past couple quarters to give you that level of growth and your view on the sustainability thereof.

You're correct. The organic growth rate, excluding exchange impact and acquisitions, is about 7.5%. This growth has resulted from several initiatives we implemented in our pharmaceutical and generic pharma businesses. We are experiencing improved commercial execution and expanding our product lines in key therapeutic areas. The focus on various global markets has also helped sustain our business growth. If conditions remain stable, which is unlikely, I believe the underlying organic growth in pharma can be sustained at mid to high single-digit levels. We aim to enhance that further. Our other businesses have also managed margins effectively. While we often face surprises and issues like access, licensing, or pricing fluctuations, the overall story has remained steady. Several years ago, our performance was less favorable, but we concentrated on improving commercial execution, expanding our product range, and strengthening distributor relationships, which has yielded positive results. In Nutrition, we have mixed results; we are pleased with our performance in some areas but not in others, and we believe we can improve further. In Diagnostics, I have mentioned my focus on specific segments of our medical device business, which are solid but no longer growing as robustly as before. We aim for continued product improvements and expansions around our core offerings. This sector remains highly profitable, and I believe it can sustain itself long-term. I expect to see more clearly the underlying growth I referenced earlier, particularly in the second half of next year, assuming exchange rates remain stable. This growth is evident now through calculations. We have established ourselves in markets where growth is occurring, including emerging markets and specific segments. I anticipate our diabetes care sector, especially FreeStyle Libre, will surprise with its growth. We are making progress on capacity expansion, allowing us to increase product availability that has previously been limited. There are several factors supporting our growth, and while external factors like currency fluctuations are concerning, they affect everyone similarly.

And then maybe more specifically on medical devices. If I look at that business, it's still the one that remains a drag on growth despite the overall uptick in performance. Can you get that back to a mid-single digit growth business organically? Or is that the area that requires the most focus from an external investment standpoint?

Well, I think from my standpoint, it requires a fair amount of focus. If I went back a couple of years ago, we were having this kind of a conversation about the generic pharma business. And there were not a lot of people giving us much prospect of doing better with that business. And I'd say, okay, look where it is now. So I'd say, look, it's clearly got a lot of our attention. And I can't forecast for you. I don't think I should forecast for you what the growth rates are likely to be or what they will be or what it's going to look like when. But I will say this, we are in no way accepting its current standing or status. It's a strong, good business with best-in-class products in the market. The market's clearly changed some. I'm speaking primarily on vascular here because the optics business, it's doing well. I think it's getting our attention. When we put a lot of focus on something, we've generally fixed it and redirected its strategy. So I'd say we are in that process right now, and it's premature to forecast timing or outcome.

Okay. And then maybe lastly on the M&A side, understandably you're not going to give us too much visibility into what you're thinking. But conceptually, as we kind of evaluate the types of deals you might be looking at, could you just sort of talk about how you think about the financial engineering cash EPS accretion that's seemed to be quite popular, call it six to 12 months ago versus top-line growth and ROIC from your vantage point?

Well I'd say I start with the strategic fit with the business. We're looking at growth opportunities, and growth comes in a lot of different ways. If you just start with emerging markets, if you put your company in growth markets and you put it in the current of the stream or the flow of business, you should be able to do as well as the growth in the marketplace. So obviously we look for growth segments, whether it be geographic or business segments. And we're in those now. So I'd say we are looking to add to or expand our footprint in places where we have that kind of growth. And then you want to be among the leaders in those markets because your ability to drive share gain is greater, and so we're targeting areas where there is clearly growth, and that means it needs to strategically fit with the businesses we're in. Now that said, there's a lot of ways that fit is accomplished. If you were to look at the pharma segment, there gets to be a blurring sometimes between OTC, OTX and Rx, and depending on the nature of a given geography or market or distribution channels in that market, there's opportunity for expansion there for us. So I look at strategic fit first. We're not financial engineering our growth. We're not looking to be a rollup that's got to go find a few more opportunities every year to overcome last year. We're looking for fundamentals that drive growth and expansion in markets and there's a lot of healthcare expansion around the world that fits us beautifully and a lot of opportunity for us access. So our primary focus is on businesses that relate to what we're already in or doing. Does that mean we would not look at businesses that we're not in? No, it doesn't mean that. We'd look at businesses we're not in if they fundamentally have the characteristics that we as a diverse healthcare products company have or look for. We know what we can leverage. We know what we can do. We know what doesn't make sense in our mix. But we are generally very interested in things that strategically fit what we're trying to do as a company and we're not particularly interested in those that are, as you characterized it, financial engineering for short-term accretion. I think we're always mindful of accretion. We're clearly very sensitive about dilution, as our investors are. It's one reflection of price. It's one reflection of value. It depends on how long something will take to pay off. And I think we've been pretty disciplined dealmakers, hence probably one of the reasons that we haven't seen as much activity out of us as we wanted to. You can make a lot of deals out there if you have no limit on what you want to pay. And I think in this environment, you got to put the right value on businesses and that means that your forecast about what a business is going to do in the near to long-term really matters, and there's a lot of ways to do deal models to convince yourself that what you're doing is a fundamentally good return. But let's face it, at the end of the day, we're investing our shareholders' money for growth and for long-term sustainability and that's what we're focused on.

Okay. Thank you. I appreciate all the perspective.

Hi. Thanks for taking the question. I wanted to ask one I guess related to exchange. It's sort of a two-parter, but the question is really on number one, can you just walk us through your hedging program? Remind us how your hedges were set this year and how further drops in exchange could impact the middle of the income statement and the bottom line. And then as related to that, I was just curious how you think about exchange in terms of being opportunistic with M&A. You've structured some prior deals where you've done deals in local currency, and that's actually benefited you when exchange has dropped. So just curious if that's something that's on your mind or is more of a minor theme.

Okay. I'm going to ask for some assistance with the exchange explanation, but let me answer generally. Depending on your hedging strategy, currency hedges are effective for about a year and may not be as beneficial in the following year as they expire. While we can be opportunistic, we are not currency traders looking to profit from currency exchanges; instead, our goal is to mitigate the impact of currency fluctuations so they do not disrupt our investor expectations or business planning. We do hedge our currencies thoughtfully, categorizing them into three groups: those that are easy and cost-effective to hedge, a middle group where hedging costs and benefits need careful evaluation, and those that are simply impractical to hedge. We assess these categories to determine where it’s advantageous to manage currency impact, employing a continuous, strategic rolling laddered hedging approach. This minimizes shocks to our operations from currency fluctuations. Like everyone else, we face the same exchange market conditions. Our long-term strategies influence our operational choices, such as plant locations and R&D investments. The best natural hedge against currency exchange is to have costs aligned with profit sources, which we strive for through investment decisions, though this takes time. Overall, the euro has a lesser impact on us compared to other currencies due to significant investments in Europe that help counterbalance exchange impacts. We’ve also invested in India, Russia, China, and Latin America with plans for capacity adjustments over time. The negative impact of exchange on our dollar-based operations has been evident over the past few years, acting as a headwind, but growth opportunities exist in emerging markets where expansion is more pronounced than in developed markets. To pursue growth, managing exchange impact must be a core aspect of our strategy, and we have incorporated that into our approach. Tom, do you have anything to add?

No, I think you captured it pretty well, Miles. I mean obviously the hedging helps, it smooths, but it doesn't eliminate currency. If you look at our EPS forecast for the year this year, it's very strong, upper single digits, and our underlying growth is much stronger than that. So we did experience some currency this year despite some pretty timely hedging. It'll help going forward, but every year you are still going to have some challenges from the currencies, because that's where our businesses are.

And I think there was a second part to question I've already forgotten. Could you repeat it?

Sure. Yeah, no, that's a great first part answer. The second one was just as currencies shift, if there were bigger drops in currency, does that change how you think about valuations given those particular countries where then you might have an advantage if you structured it in local currency? So just curious how you would plan for that.

Well, I recall you asked if we have a philosophy on how we do any M&A in those countries. Look, I think I'd always want to do it in local currencies if possible. It's not always possible. So I think there's always an assessment of, if you're engaged in any kind of M&A activity in some of these countries with volatile currencies, can you do it in local currency or not, and if not, there is a risk assessment there of how you manage that. If it doesn't go your way, I can tell you there's a few circumstances where I've backed off from opportunities because they were going to have to be done in dollars, and I didn't view the risk on the currency as worth taking. And fortunately, it turned out to be right, and I was glad I didn't. But you can't always forecast or predict that, and so I think there is an assessment of the value of an investment you make for the long term to add to the company versus what your view may be the currency environment short term. But generally speaking, I'd prefer to do it in local currencies, but you're not always able to do that.

Great. Thanks a lot for the answers.

Hey, guys. Thanks for taking my question, and maybe one on gross margins here. Really strong incrementals, right, and despite the FX headwinds that you guys are seeing, looks like the increments are really strong. Points out some structural changes in the business, right. So I'm just thinking sort of what innings are we in on the gross margin side?

Well, there's two parts to that. We've obviously improved our gross margins with a lot of internal activity in terms of costs and cost management, expense management, etc., and some of that has been in investments in our own production and efficiencies and so forth. The gross margin has also been impacted interestingly enough by negative exchange. I mean, because it's a mitigating factor when our costs are in local currencies, we, as we just explained, have a bit of a self-hedge there, and that too contributes to the gross margins. So you have to break it down into two pieces, that which is sort of organic to us and that which is driven in this case by negative exchange, and I'm going to guesstimate that's about a 50/50 proposition right now. I'm looking around the table here for opinion on that, but...

Yeah, there's not much impact from exchange this year on our gross margins. You're seeing the true underlying performance here, in what you see in the year-to-date results and what we're projecting for the full year.

Great. And then maybe one follow-up on, again I think one of the questions I'm getting from investors here is, look, I mean 3Q was fantastic, but as we look at sort of the near term, how do we put in context? You have certain elements of your business which are more consumer-like versus parts of your business which are much more resilient to cycles out there. Could you sort of compare and contrast how those two pieces play out? Thank you.

Vijay, this is Brian. So I would say looking forward, I'd say all of our businesses look healthy going forward, and I don't really necessarily separate it in terms of consumer versus I'll say the non-consumer, I mean because we're participating in markets where growth in healthcare has high demand. If you go back to my comments for example, all of our major segments, not just Nutrition, grew double digits in China. So we're seeing a lot of resilience I would say on the upstream, be that in our diagnostics, be in our vascular, and our other medical devices, in addition to the consumer side. So you're right, the consumer side tends to get a lot of attention, and the consumer has been quite resilient around the world. And you see that reflected in the demand for our Nutrition business as well as our Established Pharma businesses. But at the same time, there's a lot of investment going on in these countries because healthcare is part of their five-year plans, or part of their priorities to where they're also making investments in for example private hospitals. And that's playing very well into the underlying demand that's occurring across our other businesses, not just the consumer, but across the whole spectrum of health that we're trying to cover here.

Operator, we'll take one more.

Good morning, and thanks for the question. Miles, a couple of things. First on the EPD front, you did CFR in May of 2014. Just maybe help us understand, is it fully integrated now? Are you fully cross-registered with the products, with all the parts of your global business? I'm just trying to gauge where are you in that process. Clearly, you're seeing excellent growth. And have you achieved all the sales and cost synergies you hoped to? Is there more to come? Just where are you in that whole process?

Well, I think generally, Rick, we are pretty fully integrated. There wasn't a lot of integrating to do, to be honest. The management that was running CFR is still in place. It's excellent management. We've had a fair amount of sharing across the board between the regulatory and R&D teams of CFR and the other parts of our business around the world. We tend to run them in fully integrated fashion in the various geographies of the world, rather than functionally from the top. So CFR has remained fully functionally integrated, which is a good thing. Now we did back integrate our Mexican and Brazilian operations into CFR. Or actually, make that our Latin American organization. CFR became the core of our Latin American organization, and we back integrated Abbott into it. We did that in every country, but in particular Mexico and Brazil, because CFR didn't have a lot of business in Brazil or Mexico, so we have fully integrated and combined all of that. I think that's largely done. I think there's always opportunities for further improvement. I can't comment on some of the back office stuff because I don't know, but generally we tend to integrate our IT and finance systems and so forth over time, and my guess is that's probably pretty close to complete, but it may not be. But in general, commercially it's fully integrated. Management's fully integrated. Abbott, we're very happy with the management team. It's an excellent management team, and I'd say it's clearly contributing to our growth, and the more we can expand in Latin America, the better. We picked up some other assets in other countries, non-Latin American, with CFR. Actually very happy to have those assets too and looking for ways to expand and grow those in those given countries. So yeah, I think that's actually been a real positive. It was everything we thought it would be, and we've been very pleased with it.

Yeah, and just a second question on China. Clearly you've answered some of the concerns, 8% of sales, up double digits in each segment. Maybe a couple of questions there. Is this, whatever the specifics were of the double digits, I don't know if it was low or high teens or whatever, how sustainable is it? And what's next in China? You've opened up the sales and distribution centers. You've launched new products in new categories. How do we think about growth? And if you want to extend it more broadly in emerging markets, but China specifically, how sustainable? What's next? Thanks so much, Miles.

Okay. Well, I'd say a couple things. I think the growth opportunity in China remains as attractive as ever. China reaches up and surprises everybody once in a while in a lot of businesses. And we've had some experience that way ourselves. I think there's still a lot of opportunity for us to grow there in the pediatric business. I think there's opportunity in the adult business. We have not been pleased with our progress in that business. And obviously, that gets a fair amount of attention. But I think there's an awful lot of opportunity in China. I think as a very, very large market, and because it's China, there's always a certain amount of caution about how far one can go with growth in China and so forth. I think for us, there's a lot of opportunity. Our share position, or frankly the size of market in some of these businesses is such we think there's a lot of opportunity. So for the foreseeable future, barring any sudden changes or changes in policy or whatever the case may be, I think China is a pretty attractive opportunity for us, and it remains so.

Thank you, operator. And thank you for all of your questions. And that concludes Abbott's conference call. A replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at www.abbottinvestor.com, and after 11:00 a.m. Central Time via telephone at 402-220-9782, passcode 1784. The audio replay will be available until 4:00 p.m. Central Time on Wednesday, November 4. Thank you for joining us today.