Good morning and thank you for standing by. Welcome to Abbott's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions.

Good morning and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll 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 2020. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on Abbott's operations and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2019, and in 1A Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2020. 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 financial information 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 news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert.

Thanks, Scott. Good morning, everyone, and thank you for joining us. I hope you and your families are staying healthy and safe during these challenging times. Today, we reported ongoing earnings per share of $0.57, which is significantly above analysts' expectations. Based on our performance and momentum for the first 6 months, along with our expectations for the remainder of the year, we now forecast adjusted earnings per share of at least $3.25 for the full year 2020. As I stated on our last earnings call, we anticipated this past quarter would be our most challenging of the year. At the start of the quarter, many areas of the world were under shelter-in-place restrictions, which led to the postponement of elective medical procedures and sharp declines in routine diagnostic testing. Encouragingly, as we progressed through the quarter, we saw steady improvements in both testing and procedure volumes across our hospital-based businesses. At the same time, our more consumer-facing businesses, which include diabetes care, nutrition and established pharmaceuticals, continued to be resilient in this environment, collectively growing more than 9% in the first half of the year. Throughout this time, our supply chain has remained resilient. Our financial health has remained strong, and we've continued to advance our pipeline and strengthen our long-term growth platforms with several recent regulatory approvals, including U.S. approval of Libre 2 as an ICGM, which sets a new standard for accuracy and performance and includes a new pediatric use indication; CE Mark approval of TriClip, the world's first minimally invasive device for repairing a leaky tricuspid heart valve. This is a new market opportunity for our structural heart business that has the potential to be a significant area of growth over the next several years. And U.S. approval of Gallant, our next-generation heart rhythm devices that…

Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our results. Sales for the second quarter declined 5.4%. Our adjusted gross margin ratio was 56% of sales. R&D investment was 7.3% of sales. And adjusted SG&A expense was 30.7% of sales. Exchange had an unfavorable year-over-year impact of 2.8% on second quarter sales. During the quarter, we saw the U.S. dollar weaken versus several major currencies, which resulted in a favorable impact on sales compared to expectations had exchange rates held steady since the time of our earnings call in April. Based on current rates, we would now expect exchange to have a negative impact of approximately 2% on our full year sales. Our second quarter adjusted tax rate of 17.7% reflects the aggregate adjustment to align our tax rate for the first half of 2020 with our revised full year effective tax rate forecast of 15.6%. This is higher than the estimated range we provided in January due to a shift in our geographic and business income mix caused by COVID-19. Before we open the call for questions, I'd like to briefly discuss a couple of items related to our capital allocation strategy. We ended the second quarter with approximately $5 billion of cash and short-term investments, which represents an increase of more than $1 billion compared to the end of the first quarter. The increase includes the impact of a bond offering we executed in June. We intend to use the proceeds from that offering to pay off debt that matures in September. Following that, we have no other debt payments due until mid-2022, which only further enhances our financial flexibility. In June, we also announced our 386th consecutive quarterly dividend payment, an impressive track record that dates back to 1924. This year also marks the 48th straight year that Abbott has increased its dividend payment, making Abbott a long-tenured member of the S&P 500 Dividend Aristocrats Index, which tracks companies that have increased dividends annually for at least 25 consecutive years. Our consistency and commitment to paying a dividend is a hallmark of Abbott's identity, and our strong financial position allows us to continue that track record even during challenging economic times. With that, we'll now open the call for questions.

[Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan.

Congrats on a much better-than-expected quarter. Maybe we could start at the top. With 2Q coming in better but still a decent amount of uncertainty about the balance of the year and the recovery trajectory, what gives you the confidence in providing an EPS floor here of at least $3.25?

Sure, Robbie. Thanks. Well, I'd say it's not one single factor. It's really more of a collection of factors here. And I think it -- that speaks to really the power of our diversified model, the diverse strength of all of our different businesses. So without a doubt, the Q2 EPS beat, which was pretty significant, factors into that. I think some of that really was driven by -- there's some impact there of the challenges of forecasting that I think we all had in April. But a good portion of that beat really comes from strong performance across the businesses. I mean if you look at our 4 businesses, 3 out of -- 3 of them, 3 out of 4 of them are actually posting mid-single-digit growth for the first 6 months of the year. But as you look at the base business and think about base business as ultimately Abbott without COVID testing, I think we saw a nice recovery in the second quarter. Yes, there's probably still some uncertainty, but I think we saw a real nice recovery across our base business. If you look at the diagnostic and the device businesses that were probably more impacted, we -- as I described, we exited June with about 90% pre-COVID -- at pre-COVID levels. So -- and that was on average. I can tell you, there were some markets or some segments of our portfolio that we actually saw growth in the month of June. So -- and that happened I'd say, both in the U.S. and internationally. And that's important because obviously, there's maybe some concerns of resurgence here in the U.S., but a large portion of our sales of these businesses are concentrated internationally, too. And we're not seeing those same concerns in those markets. And…

Great. That's a lot of wonderful color. Maybe if we could turn the second question to testing. And the 2 things I wanted to focus on was the durability of the testing, not just for the second half of this year, but as you think out beyond into 2021-plus, how durable is the serology testing? And then second, if you could just give us an update on where you stand in some of these other tests like the lateral flow test and then anything else time line or product-wise you could comment on.

Sure. We spent some time looking at kind of what that demand curve will look like. And obviously, our understanding now is much better informed than what it was in March. I'd kind of highlight a little bit the different phases that we'll see. And I think we're now moving into, I guess, what I would call this more recovery phase here as some of these shelter-in-place restrictions are being eased not just in the U.S. but globally also. And that's ultimately the part of the demand curve that I actually see where most of the testing is going to occur, where you're really here trying to do broad surveillance beyond just symptomatic or essential workers. And I can see that phase lasting quite a bit actually, at least until there is a proven kind of vaccine and vaccine availability. And I think once that happens, we'll probably be getting into what I would call like a vaccine phase here, where I still think you're going to be needing to do surveillance testing of the virus. And that's probably where I'll also think that we'll see an increase in serology and antibody testing. And I see that, that's going to be an opportunity for us and for other companies here that have the antibody test. I see that as being kind of a real kind of demand driver on the serology side. But I'd say as we look at this recovery phase that we're in probably over the next kind of 12 months here, we're going to see broad testing. And I think that, as I said, the platforms that we've built is important because you're going to need to have different solutions for different environments, different countries, different trajectories that countries are on. So I like our position. The other thing I would say is there's -- it's good to see a lot of science and a lot of approvals of new tests and that's really important. But as we all know, one thing is to ultimately solve the scientific question of detecting the virus and finding the antibody, but you got to be able to have the scale and the manufacturing footprint to be able to kind of scale up and build. And I think that's what we focused a lot on over -- definitely over the last 90 days is looking at the portfolio of tests that we have and adding our manufacturing capacity to them. And it's not just one single site or one single technology. We're really looking at bolstering manufacturing capacity across all of our testing platforms.

Our next question comes from Vijay Kumar from Evercore.

Congrats on a solid execution here. So Robert, I had a 2-part question or 2 questions, if you will, one on the product side, one on the guidance. Maybe I'll start on with the product side. I think you made some bullish comments on Libre. There has been some confusion on the street on the labeling side, on the ICGM label, but lack of an AID compatibility, if you will. Maybe parse this out and explain how you see this Libre franchise in the back half heading into next year. And in your perspective, do you think this labeling is an issue or is this more of a sell-side issue?

Sure. Well, I mean, I think you saw -- let me just start off then with kind of the trajectory here. I mean you looked at our first quarter trajectory in terms of sales growth, new user additions as measured by prescription data here in the U.S. and other data sources outside internationally. And we were on a real strong kind of trend as we were going into Q1. And then obviously, COVID had a little bit of an impact on our new user acquisition growth rate. I mean we were definitely growing new users through Q2, but I think you could see in the data that we all kind of felt a little bit of an impact in May. And that's probably just the impact of shelter in place where patients weren't going to their physicians either to get their prescription or just weren't going to the physician's office. But you see now, I mean, if you look at the data, you see the pickup in the month of June. And you look at the exit of June, we're probably very close to the rate that we were before we came into COVID. And as I said, that was a rate that was growing really nicely in terms of new users. So I'm encouraged by that recovery there. I would say the biggest encouragement I have here for the second part of the year is not only that recovery, but obviously the approval of Libre 2 here in the U.S. I think it's a product that's been long-awaited from physicians, payers, consumers, the diabetes community. We had launched it in Europe about a year or so ago. So I think I look at this, and it's not really a catch-up for me. It's really setting a new standard, as…

No, that's extremely helpful, Robert. And one quick one on the guidance. I think you mentioned the exit rate on procedures was at 90% of pre-COVID levels. If procedures remain at 90% in the back half, one, are you still expecting to hit the $3.25 EPS number? That's -- I'm assuming -- and if that scenario plays out, it's going to be a mix impact on margins just given devices have higher margins. So where is the upside coming from? I think you mentioned something about antigen testing. I'm just curious how you guys are thinking about that opportunity? And are you baking in some upside from Libre as well?

Listen, you've just basically rattled off all the different factors that we've been looking at as we've looked at the $3.25 kind of floor scenario for us over here. So all those things were factored in. We've actually had some countries where we're actually seeing procedure growth. I mean in China, for example, which was probably the tip of the spear, we actually saw procedure growth in the month of June and healthy growth. So we factored all of that in there. We factored in the launch of Libre 2 and the expectations that we think that we can drive in terms of new user acquisitions and recovery there and we factor all this in. And if you ask, where is the upside, well, listen, there could be upside on all these factors here. I would say if you look at how we built the forecast, a big portion of that is our manufacturing, our manufacturing expansion. All of those are on time, they're on sequence. We've allowed for a little bit of wiggle room there, I would say. But if they continue to be on target and on time -- again, it's not one single expansion. But if they continue to be on time, we could potentially see a potential for upside to that number. But all these factors that you've laid out here, we've sort of contemplated that in that $3.25 scenario.

Congrats again.

Our next question comes from David Lewis from Morgan Stanley.

Robert, just another follow-up here on guidance. I guess I appreciate the $3.25 and obviously, you have some incremental profitability coming from the mix of diagnostic testing. So is a good way of thinking about this year something around mid-single-digit revenue growth in that range? And I wonder, if you think about '21, and I know it's obviously pretty early, our math has you sort of comfortably above pre-COVID levels. But any kind of qualitative commentary you can give us on '21 would be, I think, helpful. I have a quick follow-up.

Yes, sure. On your question regarding this year, yes, I mean, I think the math would, at this level, would suggest that, but -- that kind of mid-single-digit growth range. But as I said in the previous question, depending on how some of this manufacturing ramp-up occurs and the scaling of it occurs on the COVID side, the rolling out of our new tests, we could be ahead of that. And that would then imply a different kind of -- a different type of growth rate for the full year. But even at the $3.25, we're definitely accelerating our growth rate versus where we were at pre-COVID levels. So I think that the combination of these factors here, I could -- we can see us potentially entering next year with a high top line growth rate because of the combination of a strong base business, a strong base Abbott with an additional layer here of COVID testing.

Okay. And then just related to that, Robert, just in terms of the diagnostic outlook here, we assume you're expanding capacity. We have both the lateral flow tests coming. How should we think about the capacity expansion on sort of m2000 versus ID NOW? I think your business was sort of $600 million here this quarter. How can that scale up here after the coming quarters? We certainly see an outlook here that's probably $2 billion to $2.5 billion for this year. But just give us a sense of where you think the bigger opportunity lies between m2000 and ID NOW and what steps you're taking there to expand capacity.

Yes, I think that's a good range if you want to dollarize it. And -- but I'd say, listen, we're looking at capacity expansions across all the platforms. So you mentioned m2000. We actually did a really good job at doing -- at expanding capacity through the quarter. We're also looking at expanding capacity for our Alinity m system, which I think is going to get a really nice kind of jump-start here in terms of its launch with the COVID test. It's a very attractive system in terms of kind of its features and -- its competitive features, whether it's a throughput or ease of use, not only versus m2000, but also versus other systems there. We're also investing in ID NOW capacity expansion. We talked a little bit about that when we came out with approval. We knew that 50,000 tests a day wouldn't necessarily be enough. It was a good start, but it wouldn't be enough, and we've been working very diligently to be able to do that. And on the lateral flow side, we began rolling the tests outside and in some international markets. We'll start to bring that here in the U.S. And we think there's a use case for both an antibody and an antigen test also. And we're investing capacity there also. So it's really not just, I'd say, one kind of area, but really looking across the entire suite of solutions here.

Our next question comes from Kristen Stewart from Barclays.

Thanks, Robert and the entire organization, for all that you're doing on the COVID side. Just wanted to get a little bit more specific on just timing for the U.S. for an antigen test, and if there's anything that you can provide, just kind of more specifics on just the manufacturing capacity or just kind of how big you think kind of the COVID testing opportunity could be? And just kind of correct me if I'm wrong, it just sounds like -- and kind of my thought is that this COVID testing opportunity could definitely be something that not only kind of sticks around into 2021, but obviously, it could just be something more durable provided that not everybody may be willing to sign up for a COVID vaccine if one is developed and hopefully, obviously, one is developed. And then if I could just have a follow-up too, if you could explain a little bit more of the dynamics of what's going on in China with Nutrition.

Sure. Let me just talk about kind of overall demand there. I mean I agree with you, and that's how we see it. We see the -- that COVID testing will stick around. Even when you have a vaccine, I think that I can see patients going to a physician's office with a fever, and they want to know is it influenza, is it the flu, is it COVID? So yes, so we think that the capacity that we're building is not only for, I'd say, a high demand during the next 12, 18, 24 months here, but we do the -- a steady state, as I said, that it will continue to be there. Regarding your question on antigen, I won't give kind of specifics in terms of timing. What I can say, and I talked about it in Q1, is that we've really looked across our entire agnostic platform and not only the instrumented side, but the non-instrumented side as it relates to lateral flow testing. As you know, a lot of this lateral flow test came with the acquisition we did of Alere, and we're intending to maximize that scale that came with the acquisition. So we feel good about the test that we developed for the antibody. We're rolling it out. The antigen side, again, it's going to be -- we've been working very hard on this. And I think it will just fall into the same kind of bucket and value proposition here where we'll have a lot of scale to be able to use this, produce a reliable test that's easy to use, that's affordable. I think that's the critical aspect here. If you want to get some more mass screening, more mass volume, the tests need to be more affordable. And one of…

Our next question comes from Matt Miksic from Crédit Suisse.

Just maybe changing gears a little bit, if you could talk a little about some of the pipeline products that -- recently approved and in the pipeline and time line, like the CE Mark for TriClip and Tendyne for tricuspid and mitral. Maybe how to think about those products adding to the growth in the back half and into early '21. And then for the pivotal for Amulet, the NCD for CardioMEMS, what's different this time on that product, which was kind of ahead of its time last time? Maybe just help us understand how to think about or model those. And then I have one follow-up.

Sure. Well, we've been investing strong and heavily in the structural heart business. And I think your -- you've just kind of mentioned a lot of a lot of the output of those investments as we're building the portfolio and the pipeline of our structural heart business. I would say, MitraClip is still in the early innings. And I think that we've been working hard to kind of expand that market. And think about the NCD coverage here in the U.S., I mean in the U.S., we did close to 12,000 procedures last year, and the NCD is going to give us opportunity to target 250,000 procedures. So I think -- I still think there's a lot of opportunity in the mitral space, in the repair side. Specifically, on TriClip, listen, I think this is a great opportunity for us. We got a lot of feedback from the physician community about wanting to see a repair system for the tricuspid area. They were trying to get there using the MitraClip, but it's a difficult area to get to. So we took a lot of the feedback here and redesigned the delivery catheter for the clip to be able to get to the tricuspid area. And we've got CE Mark. We've launched it. We've gotten great feedback in terms of its -- the biggest challenge was getting there in an easier way. And I think that the TriClip with the redesign has kind of helped that. I think it's about a -- think about the market size here. It's probably about 1/3 of the size that I think of the mitral repair market. That's how we've looked at it. And it's going to take a little bit of time to develop. If you think about how we developed the mitral repair…

Terrific. And then just one follow-up, if I could, on EPD and emerging markets. I know it's a little bit more of a narrow geography to think about, but maybe similar to the way that everyone was trying to sort of gauge the recovery or the way that COVID sort of paces through the developed markets in Q2. Any sense of how to think about the cadence of -- are we at a trough point? Or should we trough the impact in August here or in this quarter in EPD and in emerging markets?

Yes. So we saw a little bit of softness in Q2, as we discussed. I think it's partially due to some of the purchases that I think were pulled forward a little bit in late March as it relates to kind of the quarantine mandates in certain countries. If you look at our Q1 performance, it was over 9%. So I think what we've seen here is once we saw the data, the data comes here a little bit of a lag to us. We were able to kind of see what happened. And you kind of see this contraction, sharp contraction in the market kind of in the March, probably more April, May kind of time frame here. And early indication starts to show a little bit of a bounce back in June, but it's not going to be -- you can't make a definitive conclusion across all markets because they're all at different phases. So I think right now, probably the ones that are being hit the most are probably kind of Russia and Brazil. But we actually saw, similar to devices, we saw a nice recovery in China in our EPD business also and saw the kind of growth rate that we had been seeing. So double-digit growth rate in the quarter in China. So I guess what I'd say is the impact of quarantine and the virus, it kind of moved from China, started moving east. And I would say kind of the emerging markets were probably the most laggard part of that movement. And I'd expect to see them come back in a similar fashion in terms of some of the developed markets that we saw in devices and diagnostics also. So...

Our next question comes Joanne Wuensch from Citibank.

A very solid quarter. A couple of very quick questions. Can you give us an update on Libre 3 and when you're thinking of the timing of that? Can you also comment on how you're thinking about the run rate for MitraClip, particularly with COAPT data behind it and now CMS coverage in front of it? And then lastly, expense management. I got the impression from some of your comments that you're leaning in on some investments. And if there's anything that you can give us regarding big picture and/or the cadence on that, that would be great.

Sure. I guess I would take your first question on Libre 3. We've gone through a long journey here, so I think I want to prioritize a little bit on Libre 2. But what I will say is the following. We've always said that Libre was a platform product. We've always said that we would have different iterations. Libre 3 has been in development for some time. But I'm not going to provide any details on product capabilities or time lines as it relates to this point. My focus here is going to be really to maximize kind of Libre 2 launch. But we do have a team that's been working on it, and we're excited about it. And when we have more details to kind of share, we will share. Regarding MitraClip, yes, it was an interesting quarter for sure. We saw a pretty sharp decline in clip procedures in the month of April and probably about half of May. Then we started to see a nice kind of ramp up. And so we exited Q2 in June with about 85% of where we were in pre-COVID levels, and that continues to kind of trend up. So I think you've -- you talked about kind of a key growth driver for us. The NCD is an important part. I'm glad to see the process moving forward. I think it represents a significant growth opportunity for us. I think it more than doubles the U.S. market opportunity, as I said. And it's nice to see that we could have an expected time line here that could potentially result in an NCD approval at the end of the quarter. So I'm -- as I said in the previous question about the structural portfolio, we've got a lot there, but MitraClip is…

And our last question comes from Matt Taylor from UBS.

So I really had just 2 follow-ups on 2 of the bigger themes here. So one is on the floor of $3.25. It seems like you've been very thoughtful about how you've layered together all these different moving parts for the second half of the year to get to that floor assumption. I guess my question is kind of taking the inverse of that. So what would have to happen, what would have to go wrong for you to not achieve that floor? Would things have to get significantly worse? Maybe you could just speak to that.

Yes. I mean, listen, we've looked at every -- a lot of different scenarios here, Matt. We've got a lot of great data that we -- that's pretty proprietary to us. I mean I think I mentioned this in the last quarter where a lot of the laboratory testing that happens on our systems in the hospitals, we get to see that data every day, every night and we've been aggregating it. And we look at not only the volume of tests that are being done, but we also look at the type of different tests that are being done. And so I think we've got a pretty good insight in terms of what's actually happening in the hospitals beyond just the headlines. Those are important, but we haven't relied on headlines or models to do this. We've really looked at it at a very granular level using the assets that we have to be able to kind of put our own forecast together. On the device side, the way our compensation is struck with our sales reps, they've got to log their procedures. So we have a fairly accurate representation of the kind of procedures that are occurring at the hospital. So we've factored all this in and factored in the different components of our manufacturing of COVID. And that's why I feel confident, again, in reinstating and reinstating at $3.25. So what you're trying to figure out is what needs to go wrong here. I think even if there is a shutdown, another shutdown, which I personally don't believe will be there, I think we know a lot more now. The hospitals know a lot more versus what happened in the first shutdown. And I think we're going to have a lot of manufacturing capacity to be able to deal with that from a testing perspective. And then you also have to have that same granularity not just in the U.S., so looking at different states. But you also have to look at it around the globe. And around the globe, there are different countries on different situations, too. So...

And then maybe one other follow-up. So you talked about Libre 2 and all the exciting aspects of it. I was wondering if you could at least qualitatively talk about the kind of acceleration or pickup or additional opportunity that you see for that in the second half of the year. And are you going to immediately be able to blast that out? Or is there some kind of conversion time for you to get up to full speed on the manufacturing of the new product?

Well, on the manufacturing side, I'll just answer that quickly. I mean you know that we've been investing in manufacturing, manufacturing capacity and scale. We knew that was going to be an important aspect for our strategy when we look at it as a mass market. So from a manufacturing standpoint, we don't have that issue. We've got teams that are already kind of building product, putting them in boxes, ready to start shipping them to wholesalers and retailers here in the U.S. Regarding kind of qualitative assessment of the opportunity, I mean, I guess, I'll just go back to there's -- you can look at the penetration of CGM in the U.S. here. And again, it depends on the kind of lens you want to look at. If you want to look at it through the lens of AID systems and connected pumps, you're going to have a market. If you're going to look at it through the lens of at least how we're looking at it, which is mass market, Type 1s, Type 2s, whether you're on insulin or whether you're not on insulin, you're looking at a large -- you're looking at 15 million, 20 million people here in the U.S. And you can look at the amount of users we have. You can look at the amount of users that the other systems in the market have. And you can add that up and you can say, "Okay, there's a lot of opportunity here for that kind of growth." The question is what is the product that best suits that kind of penetration, that more mass market penetration. And I'll make the case not because I've been with this product for a while. But I'll make the case based on what I've heard from payers, what…

Okay. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day.