Steve Frank:

Thank you, operator. Good morning, everyone and welcome to the Zoetis Second Quarter 2024 Earnings Call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release, and our SEC filings, including but not limited to, our Annual Report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles or US GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Tuesday, August 6, 2024. We also cite operational results, which exclude the impact of foreign exchange. With that, I’ll turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning everyone. As you heard Kristin mention, our ability to execute on our commercial and strategic plans drove another outstanding quarter. We simultaneously executed across product launches, market expansion and market defense to propel us to a strong first-half. In the second quarter, we posted $2.4 billion in revenue, growing 8% on a reported basis and 11% operationally. Adjusted net income of $711 million grew 9% on a reported basis and 18% operationally. Quarterly growth was driven by our innovative companion animal portfolio. Globally, OA pain mAbs posted $149 million. Our Simparica franchise posted revenue of $384 million, which includes $299 million from Simparica Trio and our key dermatology franchise contributed $414 million. Our lifestyle portfolio also saw strong growth with $694 million in revenue. Looking closely at our success and execution. I'd like to focus first on OA pain. As we continue to execute our US launch strategy, we remain confident in our OA pain trajectory. Based on our experience launching other billion-dollar franchises, we know that first-in-class therapies require significantly more market development than lagging look-alikes. In the US, we have reached over 9,000 vets and veterinary technicians through interactive information sessions with our Chief Medical Officer and industry KOLs. This is on top of the thousands of interactions our sales reps and medical teams have had on individual vet visits. These interactions ensure our customers have the tools and resources to reinforce the safety and efficacy of Librela and Solensia with pet owners. Additionally, we are deploying capital to expand our DTC strategy. Pet owners know their pets better than anyone, and we want to help them detect the signs of OA and the available treatment options. We know these therapies are improving lives based on the positive testimonials from pet owners. The positive impact and reception of Librela are reflected in the market adoption. In the US, we see record penetration with over 80% of clinics now purchasing the product. No product in our history has penetrated this quickly. Reorder rates are approaching 90%, which is a leading indicator of customer satisfaction. In Europe, shipment is expanding to moderate and mild OA cases that were largely untreated, now making up more than 65% of total cases. This is just a glimpse into what we expect in the US over time, as Librela continues to expand the addressable market and gain market share. Despite our early success, we still have significant room for continued expansion. Our focus on execution doesn't stop after we launch a product. After more than a decade of exceptional safety and efficacy, our key dermatology franchise is still a critical performance driver, growing 18% operationally in the quarter. In the US, derm clinic visits are increasing, driving volume growth across both Apoquel and Cytopoint. The franchise including Apoquel, Apoquel chewable and Cytopoint is designed to cover multiple needs across different dermatological indications and their different methods of administration suit any vet or pet owner preference. Our derm products also address a full spectrum of pruritic cases, providing relief from acute and seasonal conditions, as well as treatment for dogs, with lifelong chronic conditions, which make up the majority of total derm revenue. And vets and pet owners are extremely happy with the results. In global studies, veterinarians report approximately 90% of that satisfaction with Apoquel safety and efficacy. Our comprehensive portfolio meets vets’ needs and the needs of their patients, and we are confident in our ability to grow revenue even in the face of competition. That confidence is fueled by the significant opportunities for market expansion that Kristin mentioned earlier. First, we are targeting the 8 million dogs in the US with atopic dermatitis that are either untreated or not treated by a vet through direct-to-consumer advertising, helping to educate pet owners on the signs of an itchy dog and our prescription treatment options. Additionally, in the US, there are 3 million dogs who are prescribed alternative products like steroids. We are confident in our ability to win these new customers through our proven safety and efficacy. We are also drawing more doses from the same patient base due to trends within pet health care, including [preference for] (ph) injectable therapies, chewable formulations and alternative channel growth, increasing compliance. Lastly, there are many markets where our key dermatology franchise is in the early stages of maturity. These markets should provide long-term growth trajectory and our outstanding international growth highlights this momentum. Our excellence in execution on our OA pain launches and key dermatology expansion has contributed to a great first half of the year. Now let us move on to our segment results. US revenue grew 12% in the quarter, with companion animal growing 13% and livestock posting 11% growth. For the first time, sales across our US companion animal portfolio surpassed $1 billion in the quarter. Performance was driven by our OA pain mAbs, Simparica Trio and our key dermatology franchise. Portfolio growth was largely driven by trends in retail and home delivery, reflecting the evolution of pet-owner preference for convenience and increased compliance on dispensing oral medications. In the clinic, usage of injectable therapeutic treatment is going to offset the alternative channel shift. Our pain mAbs, Librela and Solensia posted a combined $71 million in US sales in Q2. Librela generated $53 million, primarily on increased clinic utilization. As I mentioned to-date, market adoption is higher than any product in our history. Thus, we are confident in our trajectory. Solensia posted $18 million in revenue. We continue to be pleased with what we are seeing in the feline OA space. As Kristin mentioned, we see positive trends in feline OA visits which have nearly doubled since our launch almost two years ago. Simparica Trio posted US growth of 19% in the quarter on $254 million in revenue. We are entering our second year with competition in the triple combination parasiticide market, and we continue to execute on not just defending our leadership position with Trio, but growing it. Again we do not take a launch and done mentality. We posted 26% moving average total growth over the past 12 months. The majority of which was in a competitive market, highlighting not only our first mover advantage, but also the stickiness of our customer base. Lastly, in the vet channel, Simparica Trio is winning with Puppies, a leading indicator of future performance. In the absence of meaningful differentiation, vets and pet owners are reluctant to switch from a safe, efficacious product. The dermatology product sales in the US were $283 million for the quarter growing 17%. Apoquel was the largest growth driver with Apoquel chewable benefiting from increased conversion. Cytopoint growth continues to be driven by vet and pet owner preference for injectable solutions, especially for chronic cases. Earlier, Kristin alluded to shifting pet owner demographics in the evolving landscape. Much of our success with Simparica Trio and Apoquel has been bolstered by our ability to win in the growing retail and home delivery space. The convenience of these channels for self-administered products are increasingly popular with pet owners, and we are committed to making our products available where our customers need them. Currently, Simparica Trio is the best-selling prescription products in the retail channel and Apoquel is second. We estimate that over 20% of Trio sales and one-third of Apoquel sales now come via the retail channel. Additionally, the alternative channel growth rate for both Trio and Apoquel exceeded overall growth rate for these products this quarter. Growing pet owner preference for alternative channel convenience, has led to a decline in product-only clinic visits. This is why visits are not the best indicator of our performance, given we have consistently grown volume in an evolving landscape. Our US companion animal diagnostics portfolio grew 5% in the quarter, [returning to growth] (ph) after Q1 distributor inventory work downs following our channel strategies change. US Livestock had a strong quarter, growing 11% driven primarily from the timing of supply on ceftiofur, which had a soft comparable period last year. Moving on to our International segment. Revenue grew 4% on a reported basis and 10% excluding the impact of foreign exchange. Companion animal grew 12% operationally and Livestock grew 8% operationally. Our international companion animal portfolio growth was driven by our Simparica, key dermatology and OA pain franchises, partially offset by impact in China. Our international Simparica franchise grew 35% operationally. Growth was driven by Simparica, growing 38% operationally to $59 million in sales in the quarter. We continue to see increased use in Latin America and Eastern Europe, as well as price benefits in high inflationary markets. Simparica Trio grew 31% operationally on $45 million in sales benefiting from key account growth in Europe, continued focus on DTC and the positive impact of our recent launch in China. Our key dermatology franchise grew 19% operationally in the quarter posting $131 million in sales. We saw double digit growth across most of our major markets, driven by higher compliance and new patients. Growth was partially offset by headwinds in Japan due to pre-price buy-ins in Q1. As we highlighted earlier, we continue to see significant opportunity for growth. Many international markets are in the early stages of market development with significant runway for growth. Internationally, our OA pain mAbs grew 35% operationally, posting $79 million in combined revenue. International Librela sales were $63 million growing 32% operationally. As we highlighted last quarter, we have lapped the launches in our last significant international markets, which occurred in Q2 of 2023. Solensia sales were $16 million, growing 49% operationally. Our international companion animal diagnostics portfolio grew 15% operationally with strong performance across much of Asia and Europe. International companion animal growth was partially offset by expected declines in China, driven by Revolution franchise. International livestock grew 8% operationally in the quarter driven by price increases, primarily in cattle and poultry in high inflationary markets. We saw strong growth in our fish portfolio this quarter with contributions from price and volume driven by strong demand for vaccines in Norway. Growth in price and fish was partially offset by volume declines in most of our other livestock species, due to a challenging comparable quarter as well as the impact of unfavorable rotations. As expected the economic challenges in China persist, putting pressure on certain companion animal products, as well as livestock, especially in swine. Consistent with what we have said for several quarters, the impact on our growth is expected to moderate late in the year, but continued headwinds are expected throughout the year across companion animal and livestock. [Physical] (ph) discipline across the P&L is one of the things that unlocks successful execution. As we move on to some of the highlights, we wanted to reaffirm our continued commitment to reinvesting in our business and our confidence in the returns we see from those investments. Adjusted gross margins of 71.7% declined 70 basis points on a reported basis. Foreign exchange had an unfavorable impact of 130 basis points. Excluding FX, we saw higher margins due to price increases favorable mix and lower freight costs, partially offset by higher manufacturing costs, especially in high inflationary markets. Adjusted operating expenses increased 9% operationally contributing to this growth was SG&A increases of 7% operationally and 17% operational growth in R&D. Improvements in operational gross margin and prudent expense growth contributed to adjusted net income which grew 18% operationally. Adjusted diluted EPS grew 20% operationally for the quarter. Lastly, I want to highlight our share repurchase program. In the quarter, we repurchased a record high $533 million in shares. Additionally, on August 1, we announced that we received board approval for a new $6 billion share repurchase program, our largest program to-date. The shares are expected to be repurchased over a multiyear period of up to four years, and the program can be canceled at any time. The company's previous $3.5 billion share repurchase program, which was approved in December 2021 is expected to be completed this year. This commitment reflects continued confidence in our ability to return value to shareholders. Before moving to guidance, an update on the planned divestiture of our Medicated Feed Additives portfolio. As Kristin mentioned, we are expecting this divestiture to close some time in the second half. Our current guidance is not reflective of the sale and may be adjusted subsequent to the close of the deal. As we stated in our April announcement, this portfolio generated approximately $400 million in revenue in 2023 with roughly linear seasonality. Now moving on to guidance for full year 2024. Our outstanding first half performance particularly in our Simparica and key dermatology franchises, demonstrated our ability to drive growth through execution across our business and gives us confidence going forward. Thus, we are raising our 2024 guidance provided during May's earnings call. Please note that guidance reflects foreign exchange rates of late July. For the year, we expect revenue between $9.1 billion and $9.25 billion, a range of 9% to 11% operational growth. As we stated earlier, our OA pain trajectory remains on track. Our expectations for Librela for the year remain unchanged. We now expect adjusted net income to be in the range of $2.64 billion to $2.69 billion, representing operational growth of 13.5% to 15.5%. We are maintaining our commitment to grow adjusted net income faster than revenue over the long-term, while increasing our investment in demand generating activities such as direct-to-consumer advertising. While we saw exceptional leverage this quarter, subsequent quarters may have -- may not have the same level of operating leverage, due to the optimal timing of investments. Finally, we expect adjusted diluted EPS to be in the range of $5.78 to $5.88 and reported diluted EPS to be in the range of $5.35 to $5.45. In closing before we go to Q&A, the strength and diversity of our portfolio and our relationships, as well as our ability to execute on our strategic vision, continually allows us to outperform our peers. We have the utmost confidence in our best-in-class portfolio and colleagues to continue to set the benchmark moving forward. Now I'll hand things over to the operator to open the line for your questions. Operator?

Jon Block:

Great. Thanks guys. And good morning. Wetteny, maybe the first one for you. Was there a split between price and volume for the quarter? Sorry if I missed that. And then how do we think about pricing contribution from here will call it a 2025 life cycle innovation possibly make price somewhat more durable than maybe some people are anticipating. And then the second question, I'll just ask both upfront. Kristian, you got a lot of innovation to spend on for the DTC. And so where do the best returns reside? I can make the argument Librela is the least penetrated but Apoquel and Trio arguably the annuity is longer. So maybe you can talk to how you're balancing the spend and the associated returns. Thank you.

Kristin Peck:

Thanks. And Jon, I'll take your second question. Look, as you saw in a quarter where we grew derm 18%, the Simparica franchise at 22% and Pain at 142%, clearly, the DTC is having a very positive effect in ROI on each of these. We actually think about it in a much more detailed way than what you were mentioning. We don't just look at it by brand, we look at it by channel. So what is connected TV, TV digital. And there's different ROIs for different. I mean some of these are building markets. As you said, some of these are just more consumer oriented. If you look at parasiticides, consumers really do drive a lot of that spend themselves versus derm and pain, where you have the both the consumer and the veterinary involved. So we look at it both by product. We look at it seasonality. And I'd say, we're investing significantly across all three, where we really believe both there's an opportunity to drive compliance and as well as an opportunity to grow these markets. So we’re aggressively investing across each, but we look at it in a very detailed level to make sure the ROI, any given channel we're investing at any given time of the year makes the most sense.

Erin Wright:

Thanks for taking my questions. On Librela first. So should we continue to see that sequential ramp in US Librela sales throughout the remainder of the year? And how are reorder rates sellout trends kind of throughout the quarter? How did that progress relative to your expectations and thoughts on potential label changes there as well for Librela? And then my second question is on just the competitive positioning now. I guess -- can you speak to how you're thinking about that now particularly in the dermatology category, but also in parasiticides and how much of the guidance update today was attributable to your view of your competitive positioning for the balance of the year? Thanks.

Wetteny Joseph:

Sure. Look, when we look at the performance so far, it is been phenomenal across derm, and Trio for the first half of the year, as well as strong contributions obviously coming from our OA pain franchise. You heard the numbers coming in from Librela and Solensia, both in the US with the launch as well as internationally. When we think about the competitive landscape, look clearly, given what we are seeing and what we anticipate continuing because of momentum in the business, we are raising guidance based on the core business. I would say, Derm, in particular when we look at the competitive landscape, we've raised our expectations on derm to double digits. We are seeing high single digits previously. When we look at Trio, the update isn't really meaningful. We were anticipating to be late in the year, comparative launch. Anyway, it's a third to come to market, et cetera. So not any meaningful impact here in terms of how we think about the guidance.

Michael Ryskin:

Great. Thanks. Both of my questions are going to be on derm market. So first, just a quick one on Apoquel chewable. You launched that recently, and there was a lot of excitement around that. I was just wondering if you could provide any color on how meaningful a contribution that's having to the better results you are seeing? Or if you think it is more traditional Apoquel that's still driving derm. And are there any inventory dynamics there we should be mindful? Was there any stocking with distributors in the quarter or year-to-date? Just an update on Apoquel chewable and then the follow-up on sort of the long-term opportunity. I think you gave a lot of color in the slides on the opportunity in derm in terms of the underpenetrated market, the untreated opportunity and steps you are taking to further penetrate that. My question is that's been the case for a number of years, and you have had derm on product in the market for over a decade now. So it seems like there is a sizable part of the market that's just resistant to treatment or possibly isn't go into the clinic, isn't amenable to this product? I'm just wondering how real do you think that opportunity is and what the barrier there is? Is that an education? Is that a cost price point? Is that a treatment modality issue. Just why is there still such a sizable unaddressed market in derm and what steps you can do to further penetrate that. Thanks.

Wetteny Joseph:

Look, when I look at the derm picture, Mike I'm very excited about how we are thoughtfully targeting these sub-parts of the business beyond continuing to educate pet owners and so on, which is already benefiting us in terms of the growth we continue to see in this product 11 years later. So clearly, we are penetrating those areas, and we think there are some real ways we can smartly and thoughtfully target. Here above the about 7 million that we are already treating with our products. 11 million that we can go after here in the US alone, and Kristin just touched on that. And so we'll go into more detail on that, but we're very excited about how we are doing that there. In terms of true look, this is largely conversion for Apoquel. So I wouldn't say, that it is necessarily contributing to overall growth, but an important part of our strategy as we look ahead. We've seen the conversion rates outside the US, for example, in those markets in Europe, we have been in for, I think, about 2.5 or so years now -- those are now about 50% penetration in the US, as we ended the quarter, we were approaching about 1/4 conversion. I think we've crossed that since. So we are in that ballpark. So clearly, meaningfully converting from Apoquel, which again is an important part of our business, and we think could long-term contribute to overall growth given the ease of use and preference to pet owners, et cetera.

Brandon Vazquez:

Hi, everyone. Thanks for taking the question. Maybe my first question, can you just walk a little bit through the increased guidance, maybe on the top-line and the bottom-line, specifically what is being passed through there. I think not to pick on, it was a great quarter. I think you'd be a little bit more, especially on the organic growth relative to our estimates, and I think less than that beat was passed-through. So just curious if there's puts and takes through the rest of the year that we should be keeping in mind for both sales and EPS on the bottom-line.

Operator:

Thank you. We'll take our next question from Steve Scala with TD Cowen. Please go ahead.

Wetteny Joseph:

Sure. I'll cover both here. Look, really when you look at the conversion strategy we have with Apoquel chewable versus Apoquel, we talk about the key derm franchise here versus breaking them out here. So we have 18% growth in key derm. If you look at both Apoquel the Apoquel franchise, as well as Cytopoint with double-digit growth in the quarter. Again, we continue to emphasize the combination of Apoquel and Apoquel chewable versus breaking them out, which is the reason that you heard the commentary from us as you did. In terms of patent protection, look there are various patents that cover the product, both across the active ingredient, as well as the formulation and dosing regimens. So they do very overall, if you look at the franchise, we are looking at patents that extend out to 2031. More details are available in the 10-K, if you want to pull that up from last year. And of course, this year 10-K we’ll cover that.

Balaji Prasad:

Hi, good morning and congratulations on the quarter. Just a couple for me. Firstly, on -- I wanted to dig a bit into the nuances of pricing. Is there a difference in how pet owners pursue price hikes for pharmaceutical products versus diagnostics? The reason I'm asking is our veterinary survey consistently showing that pet owners are increasingly concerned about spending trends in diagnostics. It seems that this is not applicable on the pharmaceutical side would allow you to take on it, one. Two, could you also just size the fish vaccine business a bit, the growth? And in that context, what would an approval like Alpha Ject Micro translate to in terms of accelerating this revenue growth? Thank you.

Operator:

Thank you. We'll take our next question from David Westenberg with Piper Sandler. Please go ahead.

Kristin Peck:

Sure. I'll take your MFA question, and then I'll let Wetteny take the volumes and things like that across wellness and vaccine. As you think about our medicated feed additive business, as you saw, it was integrated into some of our portfolio contracts, but the majority of those contracts and the majority of the value is Wetteny outlined globally, our MSA sales last year in 2023 were only $400 million. So it's not inconsequential, but it is not a material way of the way we negotiate. Most of our negotiations across portfolio are in more innovative products that are essential to our customers. So no, we are not concerned in livestock, as we sell that business and our ability to continue to leverage our portfolio to provide the best value for our customers. So we're committed to continuing to do that. And I'll let Wetteny take the second question sort of on the wellness.

Operator:

We'll take our next question from Glen Santangelo with Jefferies. Please go ahead.

Kristin Peck:

Thanks. I'll start and see if Wetteny wants to build anything here. I think what you are seeing is the -- you might see an impact in lower spending in pet discretionary -- but we are continuing to see consumer receive pet and medical care as very essential, and they are willing to spend. So if you look in the quarter, we saw about a 4% growth of revenue in the clinics, about 6.2% revenue per visit growth mean obviously, you are referencing the decline in overall clinic visits. But if you look at our US pet care numbers, we outpaced significantly overall in the US with 13% growth in our companion animal business. So we're seeing very strong demand for our products. These pet owners are young, they're affluent. They see the pet as a central member of their family and they are continuing to spend to keep their pets healthy and happy. So we are very optimistic as we look to the rest of this year and confident in the guidance that Wetteny provided and confident honestly, as we look into 2025, the consumer when it comes to essential veterinary care, still is willing to spend. We've done multiple studies as we've referenced before. 86% of pet owners would spend whatever it takes to take care of their pet. And even when faced with a 20% reduction in their income, they would not change what they spend to take care of their pets.

Chris Schott:

Hi, great. Thanks so much. Just two questions for me. On derm, is there an updated view on growth for that business in 2024 relative to the comments you made in 1Q just in light of the very strong first half results you've had. And maybe just a second part to the derm question. With your competitor announcing that their product may have a black box warning -- does that change your approach in terms of thinking about how you're thinking about either growing or defending the derm franchise, promotions, marketing, et cetera, as you go through not just the second half of this year about to 2025? Or -- are the plans largely unchanged in light of that update? Thank you.

Kristin Peck:

And the only thing I'd add there is I think what's really exciting about Apoquel is that you don't have to trade off safety and efficacy there. It can be used across all durations of therapy, both acute seasonal and chronic I think the chewable really provides differentiation, especially at the consumer level. You don't have to worry about vaccine status, and it works very, very quickly. So I think that's what also gives us optimism and our potential to continue to grow this franchise.

Navann Ty:

Hi, good morning. Thanks for taking my question. Just had one on Librela. If you had any updated thoughts on the transition to the moderate population, as well as the antitrust investigation in Europe. And then second, on vet visits, and I know that you are not as sensitive as other players, but if you have any outlook for that visit for the full year and next year? Thank you.

Operator:

Thank you. We'll take our next question from Thomas DeBourcy with Nephron Research. Please go ahead.

Wetteny Joseph:

Yes. So look, great. We saw 9% growth in our livestock portfolio. As you've said continuously, livestock tends to grow the market, somewhere between 2% and 4%. Typically, -- this year, we are seeing increased price, particularly in those hyperinflationary markets like Argentina, for example. And so we would expect livestock as a market to grow towards the higher end of that range. And we believe we will follow that range as well. If you look at what we would expect in our results. I think when you see high single-digit growth rates like this, sometimes it's a comp for example, in the US, ceftiofur had an easier comp versus prior year. So you'll see an uptick in that. But overall, we expect livestock to be in that 2% to 4% range, perhaps a touch above that in this current environment given the pricing environment on those hyperinflation in our markets.

Kristin Peck:

Thank you. Thanks, everybody, for joining the call today and for your questions. Our ability to seamlessly integrate innovation and execution resulted in what I believe is an outstanding second quarter and first half of 2024, it led us to raise our guidance. And we are very excited about the continued momentum for the rest of the year. I think what we've clearly demonstrated is our ability to generate groundbreaking ideas and translate those into tangible results. We are laser-focused on our strategy to ensure we remain at the forefront of the industry. I believe our diverse and durable portfolio of trusted and best-in-class products positions us well to capitalize on the emerging opportunities and to really redefine how animals are cared for, for the long term. And finally, I want to express my heartfelt gratitude to all of our dedicated colleagues across the globe. We recently celebrated Purpose Months across our teams and geographies, highlighting how we bring our purpose to life every day with our customers, our communities and each other and their passion for nurturing the world in human time by advancing care for animals, is truly inspiring. Your hard work and commitment are the driving force behind our success. And I want to thank you for everything that you do. And I want to thank all of you for joining us today. Have a great day.

Wetteny Joseph:

Thank you, and good morning, everyone. As Kristin mentioned, we had an outstanding start to the year driven by the underlying strength of our companion animal portfolio, particularly our innovative products, as well as price growth across all species.

Michael Ryskin:

Great. First, I want to ask just about the guide change. It seems like there's just so many moving pieces right now

Wetteny Joseph:

I'll be happy to take this, Mike. Look, we're very pleased with an outstanding quarter to start the year, clearly delivering 12% operational growth at revenue; 15% at adjusted net income from an operational perspective. Couldn't be more pleased with this.

Operator:

And our next question comes from Jon Block with Stifel.

Wetteny Joseph:

I'll take the Argentina question first and then Kristin will cover Librela. Look, the way I look at it, as we said in the prepared commentary and you quoted here, there's a 200 basis point contribution to the top line from Argentina in the quarter. And so if I were to say, look, we're still early in the year and we'll continue to look to take price in that market. And we'll have to watch how that plays out between price and volume as we go. It's a hyperinflationary market. We're pegging what we're looking at based on the actuals and what we anticipate. But again, it's still early in the year.

Operator:

Our next question will come from Erin Wright with Morgan Stanley.

Wetteny Joseph:

Yes, I'd be happy to. Look, we delivered $100 million of revenue in Q1 on Librela. That's 189% growth over the prior year. Clearly, the U.S. contributing $40 million is a big part of that. But we're very pleased with the performance across our International markets as well for Librela. And we saw a really strong sequential quarter growth across our International markets, and we continue to see the uptake.

Kristin Peck:

Sure. And Erin, I'll take your second question on livestock. As you and I have talked about many times, livestock generally historically in our industry has grown at around 2% to 4%. I know we grew less for a period of time when we were facing the LOE on DRAXXIN and with some [ large ] disease outbreak across the globe.

David Westenberg:

Congrats on the quarter. So you gave a lot of commentary on April and Librela sales, and it sounds like there's week-on-week build. Just to confirm that is in [ fact ] clinic administration or end market that you're looking at versus like stocking or sales out from you.

Wetteny Joseph:

Yes. I'd be happy to. Look, we continue to be very pleased with the performance of Librela, as we said, both the U.S. and International. We did complete a recent survey of vet clinics across European markets. And after 3 years in the market, we are certainly seeing the transition to having a lot more moderate cases. In fact, vets, based on surveys, are saying more than 50% of the cases they're seeing now are moderate and even some mild cases coming into the mix. So that's very encouraging.

Christopher LoBianco:

This is Chris on for Steve Scala. We had two questions. First, on livestock, are you seeing any impacts on ongoing outbreak of H5N1 avian influenza?

Kristin Peck:

Thanks, Steve (sic) [ Chris ]. I'll try to take those, and Wetteny, certainly, if there's anything I missed, you can jump in. Look, we, like all of you, are continuing to watch the outbreak of H5N1. If you look at the portfolio that we have and our capabilities, we stand ready to support both governments and customers across the globe as they look at potential solutions to address H5N1, both on the vaccine side and on the diagnostics side.

Operator:

We'll take our next question from Nathan Rich with Goldman Sachs.

Wetteny Joseph:

I'll take the first one, Nathan, just on Argentina. Look, clearly, the devaluation occurred prior to us issuing guidance and we have plans and continue to see our ability to take price fairly significantly in that market perhaps beyond what we factored in.

Balaji Prasad:

Apologies for missing my spot earlier and also in case my questions are a repeat. So on Librela, curious to understand how has your messaging changed, if at all, with the vets in how they use, how it reacts for dogs that they want to treat and what does this mean for the total addressable market, one.

Kristin Peck:

Sure. I'll take your first question, Balaji, on Librela. And Wetteny, I expect you can take the second one on quarterly cadence.

Wetteny Joseph:

Yes. And Balaji, in terms of quarterly cadence and I'll answer the question specific with respect to Librela. If you mean it for overall, I can certainly recap that conversation.

Glen Santangelo:

Hey, Kristin, obviously, the outlook for Trio in derm continues to be encouraging here. But just given the recent launch of BI and the Elanco launches that presumably may be coming in the second half, if you could look out to 2025 for a second. I'm kind of curious if you anticipate any sort of noticeable shift in the competitive landscape or anything that you think might impact your ability to take price?

Kristin Peck:

Sure. I'll start and then, Wetteny, you can certainly build on this one. We remain very confident and it's really based on our historical performance, and I think you can look at that, we invest in the local innovation across our franchises.

Wetteny Joseph:

Look, the only thing I would say is two things. One, we are not seeing a weakening consumer. You saw us post high double-digit growth across Trio and our key derm franchise. And even if we normalize for some of the tailwinds from last year, we still have high double-digit growth across each of those. And so that certainly demonstrates continued demand products and our innovation.

Operator:

We'll take our next question from Chris Schott with JPMorgan.

Wetteny Joseph:

Yes, absolutely. Look, the short answer is no. There's no channel dynamics that we're seeing here. As I mentioned just a moment ago, we did have dynamics last year in the quarter where you saw destocking coming from promotional -- timing of promotions in the prior year and more prepriced buy-ups. And so that did provide some tailwind here.

Navann Ty Dietschi:

Thanks for the color on Librela. I have some follow-ups. What is the early effect from the vet from your online education sessions? And how many of vets approximately did you reach out to so far? Also interested in your early dialogue with the FDA, if any? Is that just a common surveillance after a product launch so far?

Kristin Peck:

Thank you. Look -- sorry, back to me. Thank you. Look, I really want to thank everyone for joining today. I want to reiterate that this was an outstanding performance this quarter. I really want to thank our colleagues for their commitment. And hopefully, you see our focus on creating shareholder value. I think it's a strong start as we look forward to continued momentum in 2024.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis fourth quarter and full-year 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website, and that our remarks today will include forward-looking statements, and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Tuesday, February 13, 2024. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a strong year in 2023, with revenue of $8.5 billion and adjusted net income of $2.5 billion. Our full-year revenue was near the top end of our guidance range, while our adjusted net income was slightly below our guidance range, primarily due to the impact of foreign exchange, as well as an impairment charge related to a prior acquisition. Our revenue growth was broad, with strong growth across both our US and international segments, both our companion animal and livestock portfolios, and due to both price and volume. Full-year revenue grew 6% on a reported basis and 7% operationally, with adjusted net income anchoring 7% on both a reported and operational basis. Of the 7% operational revenue growth, 5% is from price and 2% is from volume. Volume growth was driven primarily by new products, including our monoclonal antibodies for OA pain, Librela, and Solensia, as well as our key dermatology products and Simparica Trio. On a segment basis, our US business posted $4.6 billion in revenue, growing 6% on the year, while our international segment reported revenue of $3.9 billion, with operational growth of 9% on the full year. Additionally, while China represents less than 5% of our global revenues, the ongoing economic weakness there continues to impact our business, and represented a half a percentage point drag on our total company operational revenue growth for the year, entirely in volume. Our full-year growth was driven by continued demand for our innovative companion animal portfolio, which grew 8% operationally. Our livestock portfolio also had a strong year, with operational growth of 6%. Performance in companion animal was led by OA pain mAbs, which posted $321 million in global revenue for the year. Growth came from first wave European markets, as well as from the impact of new launch markets in 2023, including the US. We continue to see penetration of our pain mAbs grow within vet clinics, and a high level of satisfaction amongst both vets and pet owners. Our key dermatology products generated $1.4 billion in sales globally, posting strong growth of 8% for the year on an operational basis. Simparica Trio contributed global revenue of $813 million in 2023, representing growth of 9% operationally, despite distributor inventory headwinds in Q1 and aggressive competitive promotions for much of the year. Our companion animal diagnostics portfolio recorded $356 million in revenue and grew 7% operational, with growth contributions from both the US and international. Our livestock portfolio had a strong year, with 6% operational revenue growth, driven by both price and volume. Moving on to our Q4 financial results, which was another strong quarter. We closed Q4 with revenue of $2.2 billion, representing an increase of 8% on both a reported and operational basis, posting our third consecutive quarter of at least 8% operational revenue growth despite a tough comparative, particularly in US companion animal. Adjusted net income of $569 million is an increase of 6% on both a reported and an operational basis. Of the 8% operational revenue growth, 6% is from price and 2% is on volume. Volume growth consisted of 4% growth from new products and a 2% decline in our inline products. Volume from our key dermatology products was flat in the quarter. On a segment basis, our US business posted $1.2 billion in revenue, growing 9% on the quarter, while our international segment reported revenue of $982 million, with operational growth of 8% on the quarter. Our companion animal portfolio was the main driver of revenue growth in the quarter, growing 10% operationally. Livestock also contributed, with operational growth of 6%. We saw double-digit companion animal growth in both our US and our international segments, driven by our innovative products. Our OA pain mAbs were the primary driver of growth, posting $124 million in combined revenue in the quarter. Global growth came primarily from the impact of new launch markets, bolstered by the Q4 full launch of Librela in the US. Simparica Trio generated $208 million globally in the quarter, representing growth of 21% operationally. Price was the primary driver of growth in the quarter, followed by volume growth, driven by expanded DTC advertising support globally, as well as from increased field force focus. Our key dermatology products generated $375 million in sales globally, posting growth of 7% on an operational basis. Our companion animal diagnostics portfolio recorded revenue of $87 million and grew 8% operationally, with growth contributions from both the US and international. Our livestock products ended the year on a strong note, with growth of 6% operationally, growing in both our US and international segments. Growth was driven equally by price, which grew despite headwinds from drags in price decreases, as well as by volume, with growth in Synovex from our expanded label claims. Now, moving on to revenue growth by segment for the quarter. US revenue was $1.2 billion in the quarter, growing 9%, with companion animal sales growing 10%, and livestock sales growing 4%. Companion animal again posted double-digit growth in the quarter, bolstered by the full launch of Librela at the start of the quarter, all while facing a tough comparative quarter with promotional activity and heavier than normal pre-price buying at the end of last year. In the US, vet clinic visits were flat on the quarter and flat for the year, while we continue to see solid clinical revenue and revenue per visit, growth of 6% for the quarter and 7.5% for the year. Our US companion animal revenue growth continues to outpace veterinary clinic revenue growth due in part to our innovative therapeutics, as well as our strong presence in the retail channel. Moving on to product performance, growth in the US was driven by our pain mAbs, Simparica Trio, and our key dermatology portfolio. Our combined pain mAbs posted $58 million in US sales in Q4. We moved to a full launch of Librela in the US early in the fourth quarter, and we have been pleased with the results our field force has been able to drive thus far. Librela posted $44 million in US sales in the quarter, which is at the higher end of our initial expectations. It's important to note that while we are not leveraging distribution for our pain mAbs, there's a significant clinic stocking impact in the first few months after launch. We have seen higher than expected penetration and reorder rates through the end of the year, as well as rapid patient share growth in the canine pain category. Solensia had sales of $14 million in Q4 in the US. We have seen a marked increase in feline vet visits and feline revenue growth in the clinic. In the US, feline OA patients are up 23% for 2023. Simparica Trio posted US sales of $185 million in the quarter, growing 17%. Growth was driven primarily by price as we were in promotions in Q4 of 2022 following our Q3 2022 supply challenges, and in advance of a then expected competitor launch in early 2023. In our second quarter, with competition in the triple combination space, we continue to see patient share growth in Simparica Trio. We remain confident in our ability to compete and grow in this space through the strength of our label, retail channel presence, strong corporate and specialty relationships, and the significant advantage of being first to market. (Indiscernible) dermatology product sales in the US were $252 million in the quarter, growing 6%. Cytopoint sales continue to drive growth through both price and volume, with vet and pet owners referring its injectable method of administration. (Operational) franchise growth is driven by better net price realization on lower volume due to promotional activity at the end of last year. Our US companion animal diagnostics portfolio posted growth of 9% in the quarter. US livestock grew 4% in the quarter, primarily driven by growth in poultry as a result of favorable rotations back to certain medicated feed additives and the extended use of Zoamix, as well as share gain due to competitor supply constraints. Sales of both swine and cattle products increased in the quarter, primarily as a result of increased supply of vaccines that were limited in the same quarter of the prior year. Moving on to our international segment where revenue in the quarter grew 9% on a reported basis and 8%, excluding the impact of foreign exchange. International companion animal grew 10% operationally, and livestock grew 7% operationally. China represented a 3% drag on our international segment operational revenue growth in the quarter. Higher sales in companion animal products was led by our pain mAbs, our key dermatology products, and our small animal parasiticides portfolio. Growth in our OA pain products was equally driven by sales force focus and DTC awareness campaigns in early launching European markets, as well as continued uptake in markets launched earlier this year. Librela sales were $53 million internationally or 93% operational growth in the quarter. Solensia sales were $13 million internationally in the quarter, growing 77% operationally. Our international key dermatology portfolio contributed $123 million in revenue, posting growth of 10% in the quarter on an operational basis. We continue to see benefit to Apoquel from our DTC awareness campaigns across several international markets and conversion to Apoquel chewable has been positive. Growth in Cytopoint continues to benefit from higher rates of conversion from Apoquel and overall market growth. Our international small animal parasiticides portfolio grew 4% operationally, driven by our Simparica franchise, with Simparica posting $48 million in revenue and growing 32% on an operational basis in the quarter, driven primarily by price, a strong parasiticide season, and demand generation in emerging markets. Simparica Trio contributed $23 million internationally, growing 72% operationally, driven by high peak season sales in Australia and continued uptake in Europe, driven by key account penetration and field force effectiveness. This growth was partially offset by a 33% operational decline in our Revolution franchise, which generates a high proportion of sales in China where we had a tough comparative quarter due to the return of supply in Q4 of 2022, as well as the ongoing impact of the current economic conditions. Continuing on to international livestock, which was 7% operationally, driven primarily by price increases in all species, especially in high inflationary markets. Our poultry portfolio also benefited from favorable MFA rotations in certain markets. China had an unfavorable impact on our international livestock sales in the quarter, particularly in our swine portfolio. Now, moving on to the rest of the P&L, for the quarter adjusted gross margins of 67.1% decreased 100 basis points on a reported basis compared to the prior year. On an operational basis, adjusted gross margins decreased by 20 basis points, resulting primarily from higher manufacturing costs, which were partially offset by price increases and lower freight costs. Adjusted operating expenses increased 11% operationally, driven primarily by higher SG&A expenses, which grew 10% operationally, primarily due to higher competition-related expenses, as well as a charitable contribution related to the funding of the Zoetis Foundation. R&D expenses grew 17% on an operational basis, driven by higher compensation-related expenses, as well as portfolio progression of key pipeline projects. Finally, other income and deductions were higher in the quarter due to an impairment charge related to an acquisition. The adjusted effective tax rate for the quarter was 18.8%, a decrease of 200 basis points, primarily due to higher net discrete tax benefits in the quarter, a higher benefit in the US related to foreign derived intangible income, and a more favorable jurisdictional mix of earnings. Adjusted net income grew 6% operationally, and adjusted diluted EPS grew 7% operationally for the quarter. Capital expenditures in the fourth quarter were $198 million. For the full year, we had capital expenditures of $732 million. Lastly, we continue to return excess capital to shareholders. For the year, we have returned approximately $1.8 billion to shareholders through a combination of share purchases and dividends. In December, we announced a 15% annual dividend increase, continuing our commitment to grow our dividend at or faster than the growth in adjusted net income. Now, moving on to our guidance for the full year of 2024. Please note that guidance reflects foreign exchange rates as of late January. We are expecting foreign exchange to have an unfavorable impact on our growth versus the prior year. At net revenue, we expect foreign exchange to negatively impact our growth by 90 basis points, with the impact being more pronounced early in the year and decreasing later in the year. At adjusted net income, we expect FX to negatively impact our growth by 150 basis points, with significant unfavorable impact in the first half of the year, transitioning to slight favorability in the second half of the year. As a reminder, we do not actively forecast FX, so these estimates assume rates remain where they were as of late January. For 2024, we are projecting revenue between $9.075 billion and $9.225 billion, representing a range of 7% to 9% operational growth, with growth across both price and volume. We expect companion animal to be the primary growth driver in 2024. With the expected impact of the US launch of Librela, we expect to see robust growth from our OA pain mAbs, both in the US and internationally. Our current clinic penetration levels for Librela in the US are exceeding our expectations, and as Kristin mentioned, we have launched our DTC efforts ahead of schedule to drive increased pet owner awareness. Even with the expectation of competitive entrance, we anticipate mid to high single-digit growth in both Simparica Trio and our key dermatology portfolio. For livestock, 2023 exceeded our expectations. Our growth in the year benefited from several tailwinds, including improvements in supply in certain markets, as well as competitive out of stocks. While our outlook for the upcoming year is more optimistic than it was as we entered 2023, we do expect our growth rate to normalize and be in line with livestock industry growth. I'd like to briefly touch upon the key assumptions that underpin our expectations for revenue growth. For companion animal, we are not projecting significant change to the current vet clinic trends. We expect US visits to grow flat to 1%, and expect to see growth in therapeutic visits aided by the impact of our OA pain products. For our companion animal parasiticides, we continue to expect meaningful growth from Simparica Trio. We expect new entrants will help continue to drive the conversion from topicals and collars to triple combination of our parasiticides, a space where we are the market leader. In our key dermatology products, we are prepared for competition and confident in our ability to defend and grow our share through our three differentiated dermatology products, the strength of our customer relationships, and the expertise we have gained from almost 10 years in the space. Lastly, while we are not assuming a change in the current economic situation in China, we do expect a headwind to growth, especially in the first half as the situation worsened over the course of 2023. Now, moving on to the rest of the P&L. Adjusted cost of sales as a percentage of revenue is expected to be approximately 29.5%. We continue to make investments to ensure we can support expected future growth in our portfolio, especially in monoclonal antibodies. These investments are driving short-term margin impacts from lower site utilization. This is offset by price increases and favorable product mix. Adjusted SG&A expenses for the year are expected to be between $2.17 billion and $2.22 billion, with the increase from 2023 focused on supporting primary drivers of revenue growth. Adjusted R&D expenses for 2024 is expected to be between $665 million and $675 million. Spend is driven by the advancement of key pipeline projects, as well as higher compensation-related expenses. Adjusted interest expense and other income and deductions is expected to be approximately $210 million. This is significantly higher than the prior year as our growth here is negatively impacted by the non-recurring royalty settlement income we reflected in Q1 of 2023, as well as the impact of lower interest income. Our adjusted effective tax rate for 2024 is expected to be in the range of 20% to 21%. Adjusted in income is expected to be in the range of $2.65 billion to $2.70 billion, representing operational growth of 9% to 11%. Our guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. We expect adjusted diluted EPS to be in the range of $5.74 to $.584, and reported diluted EPS to be in the range of $5.34 to $5.44. And finally, we are anticipating capital expenditures in 2024 to be in the range of $800 million to $850 million. These levels remain elevated compared to historical spend levels as we continue to make investments to support our future growth. To summarize, 2023 was another strong year. Even with distributor inventory headwinds entering the year and a challenging economic environment, especially in China, we again outperformed the market. We continue to grow share even in spaces where we face new competition, and we remain confident in our ability to expand existing markets and create new ones in the future. As we move into 2024, our guidance highlights our ability to again grow faster than the market, driven by our innovative product portfolio and multiple sources of growth, as well as our ability to grow our bottom line faster than our pipeline, while making meaningful investments for the future and returning significant excess capital to our shareholders. Now, I'll hand things over to the operator to open the line for your questions. Operator?

Erin Wright:

Right. Thanks for taking my questions. So, can you talk a little bit about the reorder rates and feedback and expectations around Librela for 2024 in the US and some of those stocking dynamics that we should think about quarter-to-quarter? And then a bigger picture question just on margins and profitability, and there are some moving factors in 2024, such as FX and the ramp up of Librela that weigh on margins, but can you talk a little bit more about the potential margin leverage that you could see across your business as you expand in some of those faster-growing and higher margin categories in 2025 and beyond? And if you could describe a little bit more about that longer term margin leverage. Thanks.

Wetteny Joseph:

Yes, sure. Look, when looking at margins, yes, indeed there are some moving factors when you think about 2024 and then beyond. We do have Librela in 2023, as we said at Investor Day. If you look at our monoclonal antibodies at peak, particularly as we ramp up production in our capacity, which was built to make sure that we're confident in being able to take advantage of demand, they started out as being dilutive to the overall company average. For example, in 2023. As we go into 2024, Librela becomes accretive to our overall margins, but still below what you would consider our innovative companion animal products. And as we exit 2024 into 2025 and beyond, it becomes more in line with our innovative companion animal products. So, overall, beyond 2024, I won't give you specific guidance here in terms of what to expect, but I think if you look at it, we continue to expect companion animal to outpace the growth of livestock. So, that mix will continue to be favorable for us. And as we get into the higher levels of production for monoclonal antibodies, they're also accretive to overall margins and we're positioned to be able to leverage our SG&A base as well. So, all of those should translate to margin expansion through the P&L over time. But as we've demonstrated, we're not afraid to make the right investments behind our products, behind our key franchises as we see them, investments in R&D, as you saw in 2023. And as the guide implies, R&D will continue to grow faster than revenue as well. So, those investments will slightly offset some of those, but we'll position to continue to expand.

Michael Ryskin:

Great. Thanks for taking the question, guys. First, I want to touch on margins, maybe both for 2023 and 2024. So, it looks like you're guiding - back of the envelope math, you’re guiding to about 100 bps of margin expansion in 2024, but you also did finish 2023 lower than we would've expected. I think 4Q especially came in significantly lower. And you called out some headwinds during the call in terms of FX. You called out some timing, some contribution to the Zoetis Charitable Foundation. Any way you could kind of back that out, give us sort of a cleaner number for what margins should have been in 2023, and then maybe what some of those one-time headwinds would have as an impact to 2024, just to give us a better sense of underlying margins and underlying EPS. And then my second question is just following up on Librela, I don't believe you actually quantified a target. So, I want to - just given what you did in 4Q, a major focus point, is something like $200 million to $250 million for Librela for 2024 reasonable? And especially - that's for US, but then on the O-US side, we've heard some concerns maybe coming out of Europe. And it seems like Librela has sort of been a little bit flat over the last couple of quarters in international markets. So, any color on what's going on internationally. Thanks.

Kristin Peck:

No, it’s great.

Jon Block:

Great. Thanks, guys. Good morning. Wetteny, any revenue cadence in the year to call out? You've got sort of that easier 1Q 2023 comp, but you were also noting more acute China headwinds in the first half. So, just how do we think about it? Do we sort of look at it on a two-year stack basis? And then on the guidance for the full year, maybe GM fell a little bit below what we were thinking, but SG&A expense, despite the investments, Kristin, that you called out, the accelerated DTC, the SG&A was a little bit lower than where our heads were at. So, maybe you can just talk through those items, why we're only seeing, seems like low to mid-single digit SG&A growth year-over-year. I don't know if some of that's blunted by FX. And then just finally, I'm sorry, Librela, due to the stocking, do you still expect Librela to be up in the US 4Q 2023 to 1Q 2024 as it absorbs the stocking? Thanks, guys.

Operator:

Thank you. We'll take our next question from David Westenberg with Piper Sandler. Please go ahead.

Kristin Peck:

Sure. I'll start with that one and Wetteny can certainly build on it. I mean, I want to first underscore, we had a very strong Q4 with Trio, with 21% growth in the quarter with competition. For the year overall, Trio grew 9%. So, we're very pleased with that. As we guided and Wetteny mentioned earlier, we're expecting mid to high single digit growth in Trio for the year. So, this obviously underscores, and we think we'll see that both in price and in volume. So, we do anticipate, obviously a competitor entering. I'm not exactly sure what - how Purdue or Proctor will do it. Our expectation is that is not a differentiated product. They do mention tapeworm, but you get tapeworm from fleas, and we absolutely control fleas. So, therefore, that's really not a differentiated product. So, we are used to having good competitors, obviously with NexGard. I'm sure there'll be some heavy promotional, but I think our strength, honestly, with our corporate accounts, the experience, switching is low for people with this product. It's very unlikely someone on Trio is going to switch. We're doing quite well with retail and auto-ship, which I think also protects us. And we expect a new competitor to expand the market. What we're seeing a lot is a movement into the triple combos out of topicals, collars, et cetera. So, as we look at that, we're confident in our Trio number as we look into the year. And with regards to your question on, what do we learn from Librela in Europe? So, we cannot do branded advertising for Librela in Europe, but we can do overall advertising for disease awareness and encouraging people who have pets, both dogs and cats with osteoarthritis pain, to bring them to the vet. And we are seeing real impact of that disease awareness. I think it's been a long time where pet owners have not had a product that they could turn to, and encouraging them that there is a new product and that they should go to the vet and be seen. We are seeing really positive uplifts from direct-to-consumer advertising, even when it's not branded. So, I don’t know, Wetteny, if you wanted to add into that.

Operator:

Thank you. We'll take our next question from Nathan Rich with Goldman Sachs. Please go ahead.

Kristin Peck:

Yep, sure. I'll take the derm question, and I think Wetteny can follow up on your China question. Look, we saw strong growth both in the quarter and overall in derm at 8%. And I just want to underscore that that growth is obviously understated given the price, if you're looking at the pre-price buying that we saw in late 2022. As we look at our guidance for mid to high single-digit growth for our derm franchise in 2024, that is the expectation that we will see a competitor launch. We expect this market to continue to expand and grow, as we've talked about. There are 85 million dogs in the US who have pruritus. There is still over 6 million untreated dogs and 3.5 million who are treated, but with steroids and sort of over-the-counter products. So, we strongly believe this is a market we can continue to expand. Look, we've had two products been on the market seven and 10 years, respectively. We've had millions of dogs on these products. Our products have been proven over time to be safe and efficacious, and they're trusted by pet owners. They're trusted by vets, and we're seeing more and more a switch to Cytopoint, both a preference for compliance by both the pet owner and the vet. And our competition, we're expecting to come in a film-coated tablet. And if you look at that, we're really focused on investing in applicable chewables and moving them to chewables, which pet owners really prefer. We've been successful in doing this in Europe. We're quite focused on doing this in the US and we're also continuing to look at innovation in the short term, on the long acting. So, we are going to defend this franchise. We're confident in this franchise. Our guidance of mid to high single digits demonstrates that we believe we can continue to grow this market in the US and around the world, not just defend our brand, but continue to bring lifecycle innovation to the space over time to grow our share. Wetteny, do you want to take China?

Operator:

Thank you. We'll take our next question from Balaji Prasad with Barclays. Please go ahead.

Kristin Peck:

So, I'll take your second question first and then let Wetteny take it. I assume you're referencing the letter back in November. Honestly, the letter is uneventful and was well addressed. We immediately resolved the request for clarification. What you're talking about was a request for clarification on our promotional materials. We just made a minor change to the promotional materials and how we represented some statistical data. The concerns are well addressed and the modifications were accepted by the FDA. I mean, this isn't uncommon. So, I don't - that was easily resolved last year. That was a minor issue, but Wetteny, do you want to take the second question?

Operator:

Thank you. We'll take our next question from Brandon Vazquez with William Blair. Please go ahead.

Wetteny Joseph:

Yes, sure. I'll take the first one and then Kristin will cover the second one. Look, there's always some level of pre-price buying in our - as we exit the year, given what our price increases are going to be. I would say compared to the prior year where there was higher than average pre-price buying ending 2022 into 2023, which had the effect on 2024, we more actively managed customer orders in terms of pre-price buying exiting 2023, and that gave us really first the underlying market strength and momentum that we carried into, but also I would say our order position walking into January 2024 was certainly in better position than say the prior year. So, we more actively manage those, but there's always some level in the numbers.

Operator:

Thank you. We'll take our next question from Chris Schott with J.P. Morgan. Please go ahead.

Kristin Peck:

Sure. I mean, starting on the first, we are not very levered, as we've spoken about many times before to vet visits. I mean, obviously, they're not inconsequential. Our view of zero to one is that's where it's historically been. That is historically what you see in vet clinic visits over time. So, I think we're really saying it's back to a normal. What's really happening is there's strong end market demand. There remains some capacity issues in the US, but I think some of that's being addressed by more stuff going to auto-ship and retail and online, which has also been supporting it. But we really sort of view the year, as you look into the year for 2023, although we saw flat vet visits, we saw revenue and revenue per visit up 7.5%. So, we really are seeing really strong growth, obviously overall in revenue, and we're much more correlated over time with that, just given the strength of our portfolio, et cetera. And to your second question with regards to Librela outside the US, I think we're still early innings. And really where I think we see the growth is, right now that product is primarily being used in severe dogs. I think getting it into more moderate dogs, I mean, I think, obviously, at least as someone, in my 50s, I will say my hip hurts right now, but everyone doesn't know that who is around me. And so, the reality is, osteoarthritis exists in animals long before they're limping and can't walk up the stairs. And the more we can control that pain early, I think is critical. So, I think what we're really trying to change the paradigm is getting Librela in first line use for animals with osteoarthritis pain, and getting it into more of those moderate dogs. And we think the more we can do that, the more we can continue to grow the market here and grow our franchise. So, we know, we believe we're in early innings across the globe with regards to osteoarthritis pain with both Librela and certainly with Solensia, where we still have to continue to grow awareness for osteoarthritis pain in cats.

Chris LoBianco:

Hi, this is Chris on for Steve. We have two questions. First on Librela, to what degree are US vet capacity constraints a headwind to longer term treatment compliance? And then is there a regulatory path for the approval of an at-home owner-administered formulation? Thank you.

Wetteny Joseph:

Yes. Look, I think the regulatory path to that isn't really the direction we're going in terms of where we think we can make an impact here. Livestock innovation not only in our OA pain mAbs, but across our portfolio, are really, really important. And as I look ahead, I think longer acting formulations, both Solensia and Librela, will be the direction that will help with this, even though, as Kristin said, we're not seeing any significant impact in terms of our ability to grow the mAbs. I think initial visits where the vet has to see the pet and do the injection beyond that, the techs are able to do it, et cetera. And that varies a bit, but, but we don't see that as being a significant impact for us.

Navann Ty:

Hi, good morning. Thanks for taking my questions. I have two, one on Librela and one on Trio. The first one on Librela, with continued investments in 2024, what are the remaining SG&A needs in addition to the current DTC campaign? And just a clarification, do you currently expect Librela to become potentially gross margin accretive in 2025? And then on Trio, can you help us explaining the switches from the NexGard Plus? Are they mostly from BI’s own NexGard rather than from Simparica Trio, and you see uptake from BI on younger dogs and puppies mostly? Thank you.

Kristin Peck:

The only add, we're doing quite well with puppies. You asked specifically with regards to puppies. I mean, puppies are on the Trio label, so I just want to emphasize that. I know it wasn't on the original Simparica. So, I mean, really you are looking at new starts, we see a lot of puppies and we see a lot of conversion from single and dual-agent customers to a triple combination, and certainly a movement to more people from topicals to oral. So, there's lots of ways for us to continue to gain market share for that product, but we're doing quite well with puppies, to answer that other part of your question.

Kristin Peck:

Great. Thank you all so much for the questions, and honestly, for continued interest in Zoetis. I want to underscore that the enduring strength of the human-animal bond for pet owners’ expectations of human quality healthcare for pets, and the need for safe and secure food supply, all underscore the animal health industry is essential and very durable. We remain confident about our strategy and the ongoing value proposition, because we know that our colleagues will make a difference every day in everything that we're doing. And with their support, I want to reiterate that we expect to grow faster than the market again in 2024, not just in line, and to grow operational revenue by mid to high single digits. We are firmly committed to investing in our innovative pipeline, our portfolio, and the DTC programs we need to support the broadening and building billion-dollar franchises. The animal health industry is resilient even in times of uncertainty, and we are poised to navigate these challenges because our portfolio diversity, our commitment to exceptional customer experience, operational excellence and agility, and we look forward to keeping you updated on our progress on future calls. Thanks much for joining us today, guys. Have a great day.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis third quarter 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website, and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, November 2, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a strong third quarter, with broad-based growth across both our U.S. and international segments across both companion animal and lifestyle portfolios and across both price and volume. For the quarter, we were able to deliver results in line with our expectations, even in light of continued headwinds in China. In the third quarter, we generated revenue of $2.2 billion, growing 7% on a reported basis and 8% on an operational basis. Adjusted net income of $629 million grew 11% on a reported basis and 13% on an operational basis. Of the 8% operational revenue growth, 5% is from price and 3% is from volume. Volume growth consisted of 2% from new products, including our monoclonal antibodies for pain, Librela and Solensia and 1% from our key dermatology portfolio. Our companion animal portfolio was the main driver of revenue growth, growing 11% operationally. Livestock also contributed, with operational growth of 3% in the quarter. Companion animal growth was again driven by our innovative products with double-digit operational growth in our key dermatology portfolio, our monoclonal antibodies for OA pain, Librela and Solensia and Simparica Trio. Our key dermatology products generated $393 million in sales globally, posting growth of 14% on an operational basis with double-digit growth in both the U.S. and international. Globally, our monoclonal antibodies for OA pain posted $77 million in combined revenue in the quarter. Growth came primarily from our European markets as well as from the impact of new launch markets internationally. With the October full launch of Librela in the U.S., our pain products are now available in most major markets. Simparica Trio posted global revenue of $206 million in the quarter, representing growth of 20% operationally versus the comparable 2022 period. Growth was driven by expanded DTC advertising support globally as well as from increased field force and promotional focus. Our companion animal diagnostics portfolio reported revenue of $90 million and grew 14% operationally, with growth contributions from both the U.S. and international. Our life sci portfolio grew 3% operationally, with international growth partially offset by a slight decline in the U.S. Growth in livestock was driven primarily by price, especially in high inflationary markets. We also saw volume growth in our poultry portfolio, driven by increased usage of vaccines as well as our antioxodio product, Zoamix in the U.S. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter, growing 8%, with companion animal products growing 11% and livestock sales declining 2%. On the companion animal side, while vet clinic visits declined 1.5% in the quarter, we continue to see robust play in revenue growth, up 6% versus a year ago. Average revenue per visit is up over 7%. On a year-to-date basis, clinic visits are flat, while clinic revenue is growing 8%. These trends highlight the continued durability of pet owner willingness to spend as well as the continued impact of vet clinic staffing challenges. Our companion animal revenue growth continues to outpace veterinary clinic revenue growth, due in part to our continued upsized growth in retail channel. Turning to product performance. Companion animal growth in the U.S. was driven by our key dermatology portfolio, Simparica Trio and Solensia. Key dermatology product sales in the U.S. were $260 million in the quarter, growing 13%. Simparica point sales continued to drive growth in the quarter, with vets showing a preference for injectables due to higher compliance and pet owners appreciating the longer duration of treatment. Apoquel sales were driven by growth in the retail channel as pet owners continue to rely more heavily on retail for ongoing pharmacy needs as well as retail auto ship programs that drive higher compliance. Our latest dermatology life cycle innovation at Apoquel Chewable was launched in the U.S. in October. Apoquel Chewable has been well received in Europe, as pet owners favor the ease of chewable administration over film-coated tablets. Simparica Trio posted U.S. sales of $184 million in the quarter, growing 17%, driven by increased focus in our parasiticide promotional programs. We continue to see patient share growth in Simparica Trio, even with the recent competitive launch in the triple combination space. We remain confident in our ability to compete through our superior label, strong retail channel presence, and the strength of our corporate and specialty relationships. In the U.S., our pain products posted sales of $15 million in the quarter. We continue to see solid player penetration growth for Solensia, as well as an uptick in Feline clinic visits and expect to continue to drive awareness of Feline OA through our DTC advertising campaigns. Librela has been well received by early experience program participants and their patients during the third quarter. We moved to a full launch in mid-October. We have been very pleased with post launch performance thus far, and are confident that we have ample supply to meet our demand expectations. Our U.S. companion animal diagnostics portfolio posted growth of 18% in the quarter, as we continue to see positive results from the new field force we introduced last year. We saw strong placement growth in the quarter, especially on our images device. U.S. livestock sales declined 2% in the quarter, primarily resulting from the timing of supply on certain cattle products in the prior year, where we had an improved supply position and restocking in the channel, which drove a strong comparable quarter. The Q3 decline was partially offset by growth in our cattle productivity implant, Synovex due to extended label claims. The cattle decline was partially offset by growth in poultry due to vaccines and the extended use of Zoamix, an alternative to antibiotic medicated feed additives. Moving on to our International segment, where revenue grew 8% on both a reported and operational basis in the quarter. International companion animal revenue grew 12% operationally and livestock grew 5% operationally. Increased sales of companion animal products resulted from growth in our monoclonal antibodies for OA pain, our key dermatology products and our small animal parasiticides portfolio. Growth in our OA pain products was bolstered by field force focus and DTC awareness campaigns in early launch European markets, specifically the U.K. and Germany, as well as the continued uptake in markets launched earlier this year. Librela sales were $50 million international or 55% operational growth in the quarter, despite a slightly more difficult comparator in Q3 of 2022 due to the removal of supply constraints in our international markets. We remain confident in our ability to supply our forecasted demand for Librela. Solensia sales were $12 million in the quarter. Our international key dermatology portfolio contributed $133 million of revenue and grew 17% operationally. We saw double-digit growth across most of our major markets and strong uptake of Apoquel Chewable. Apoquel growth was driven primarily by the delayed itch season in Europe and Canada. Cytopoint growth was driven by continued patient expansion and higher compliance in existing patients. Our international small animal are parasiticides portfolio growth of 9% operationally was driven by our Simparica franchise, with Simparica posting $40 million in revenue, growing 29% operationally, driven primarily by demand generation in emerging markets. Simparica Trio posted $23 million, growing 47% on an operational basis, driven by growth in corporate account contracts. The Simparica franchise performance was partially offset by a 16% operational decline in Revolution franchise, driven by a difficult comparable period in China, due to the return of supply in the prior year as well as the ongoing impact of the current economic conditions. As Kristin mentioned, we have seen declines in China due to the ongoing economic challenges, particularly on the companion animal side, which were not fully reflected in our initial guidance. We continue to monitor economic conditions. However, we are not expecting an improvement this year or into the first half of next year. Our international livestock segment grew 5% operationally in the quarter, driven primarily by price increases, especially in high inflationary markets. Growth was driven primarily by our cattle portfolio, which grew 8% operationally. Brazil was the largest contributor, where we have seen price growth, supply recovery on certain products as well as continued improvement in cattle industry dynamics. Additionally, the prior was a weak comparative period due to the impact of supply disruptions and a more uncertain industry dynamic led to a lowering of channel inventories in the quarter. Our poultry business also contributed to growth in the quarter, growing 9% operationally due to increased key account penetration in emerging markets. Now moving on to the rest of the P&L for the quarter. Adjusted gross margin of 70.5% improved 70 basis points on a reported basis compared to the prior year, primarily driven by the impact of price increases and lower freight charges. This was partially offset by higher manufacturing costs, inventory charges and product mix. Adjusted operating expenses increased 7% operationally, driven primarily by higher SG&A expenses, which were 5% operationally due to higher competition related expenses. R&D expenses grew 13% on an operational basis in the quarter, driven by higher compensation-related expenses as well as increased project spend for our pipeline projects. The adjusted effective tax rate for the quarter was 19.6%, a decrease of 130 basis points due to favorable jurisdictional mix of earnings and a higher benefit in the U.S. related to foreign-derived intangible income, partially offset by lower net discrete tax benefits. And finally, adjusted net income was 13% operationally and adjusted diluted EPS grew 15% operationally for the quarter. Capital expenditures in the third quarter were $145 million. We now expect full year capital expenditures to be in the range of $725 million to $750 million. In the quarter, we repurchased $250 million of Zoetis shares. Now moving to guidance for the full year 2023. Please note that guidance reflects foreign exchange rates as of late October, which reflect the continued strengthening of the U.S. dollar. Beginning with revenue for the full year. Due to unfavorable foreign exchange rates, we are revising our reported revenue range while narrowing our guidance on operational revenue growth. We expect revenue between $8.475 billion and $8.55 billion, with a range of 6.5% to 7.5% operational growth. Our previous guidance was 6% to 8%. We have been pleased with our operational performance thus far. While foreign exchange headwinds have been larger than expected, our year-to-date operational revenue growth of 7% is in line with our expectations. We expect to benefit from the approval and launch of Librela in the U.S., which is included in our revised guidance last quarter as well as the performance of our Lifestyle business. However, ongoing uncertainty in China has continued to offset upside potential. We are expecting adjusted net income to be in the range of $2.49 billion to $2.51 billion, also slightly lower, driven by unfavorable foreign exchange. Operationally, we are narrowing our growth expectations to a range of 7.5% to 8.5%, previously 7% to 9%. Expected reported diluted EPS narrows to a range of $5.14 to $5.21. And adjusted diluted EPS narrows to $5.38 to $5.43. Finally, to summarize before we go to Q&A. Our broad-based growth across species and geographies despite the challenging economic environment in China, continue to highlight the resilience of our portfolio and of the animal health industry. We remain committed to growing above the industry, driven by our innovative portfolio, commercial execution and multiple sources of in-line growth. Now I'll hand things over to the operator to open the line for your questions. Operator?

Jon Block:

Great, thanks guys. Good morning. I promise one long question. So in companion animal, the overall revenue was a bit shy of what we had expected, but you really had great performance what we call sort of the big 5 products. So atopic derm, Trio map, the big 5 were all ahead of our estimate. So maybe if you guys can talk a little bit about the ongoing uptake of some of those key big 5 products even with a more difficult consumer, right? Because people view some of those as discretionary. Again, the results were really strong and even despite the more difficult consumer. And then the flip side would just be like anything to site regarding the legacy products, right? So if you back into legacy that might have been modestly down year-over-year. And a quick part B on the follow-up, Kristin, you mentioned faster growth for Zoetis than market and get in '24. I don't think we're really surprised by that. You've done that year in and year out. But can I push you a little bit on how we should think about for Zoetis in '24 versus Zoetis in '23? In other words, if we take into account the OA pain uptake, if you would, could we see accelerated growth for the company in '24 versus '23 when we think about all the moving parts?

Wetteny Joseph:

Yes, absolutely. Look, the 11% growth operationally in companion animal is right in line with our expectations coming into the quarter. And the overall growth of 8% operational, I would even say, is slightly above. If you recall on the last call, we said expect Q3 to come in somewhere between the mid and the high end of our growth rate. So that's roughly between 7% and 8%, so at the high end of that. But in terms of consumer, look, as we've said time and time again, if you look at the therapeutics category in terms of the value in pet health as well as some of the chronic conditions, as Kristin mentioned, consumers have not been treating those as discretionary. Even when you see some relative softness in pet spend, it doesn't carry over into the health care piece in terms of therapeutics, et cetera. And we've seen that play out in many ways even as I'm sure we'll get into a -- clinic visits are slightly down in the quarter. Clinic revenue is up almost 7%, and we're growing faster than that. Again, retail being a part of that, and we'll get into that in a little bit more detail. When I look at the big products, as you described them, John, derm, Triomabs, all up double digits and up across U.S. and international. I mean our growth this quarter was broad-based, across companion animal livestock U.S. international price, 5% volume on 3%. So really broad-based. And I think that really underscores the breadth of our products as well as our innovation and the value that consumer and pet owners place on products. The legacy products, when I look at in line, keep in mind, when we talk price, we tend to see price lift in those legacy products as well. But when it volume, it wasn't down. In-line products were actually flat on the quarter year-on-year with some lift on price. So hopefully, that helps. But I share the optimism Kristin described with respect to 2024. I mean we have multiple sources of growth, not only the Librela launch in the U.S. You've got continued growth across international markets for Librela and Solensia as well. And of course, we'll have price as a lever in addition to in-line products we just talked about. Livestock is now back to growth, and we'll look at what that looks like when we come back with guidance next year. And then we expect growth across our key franchises as well in terms of derm, paris and diagnostics. So I'll cap it there as a long answer to a long question, but we'll take the next one.

Erin Wright:

Thanks. On Librela, can you talk a little bit about the initial feedback for U.S. practices? Will there be any initial clinic level stocking? I think you said your expectations are intact there. But any lumpiness quarter-to-quarter that we should be thinking about? Has anything changed in terms of your expectations there? And then as we think about margin expansion next year, given Librela won't be at critical mass so that we may weigh on the gross margin. But is there still some underlying operating leverage that we should think about across the business?

Wetteny Joseph :

Sure. I will. Look, you're right, Erin. In terms of -- as we said, when you look at ABS at peak, once they ramp up, they will be additive and accretive to our gross margins. We believe they're also accretive to our contribution margin, even when there are what I'll say is subscale in terms of getting towards their peak. So as we launch into the U.S., which is a large market, obviously, as you said, we'll see a little bit of a headwind from a gross margin perspective. But given many of the investments that we need to drive this field force, et cetera, already in the books, if you will. There will be some incremental A&P and DTC. And once we have the right level of penetration of the product in clinics, but that's still going to leave room for contribution margin lift in the product. So that will be, I would say, a factor from a gross margin standpoint. But we'll give more precision in terms of guidance for '24 at the next call. But as you can read from us and what we're saying today, we're very excited about '24. We're optimistic on '24, given the levers I just described. So in line with what we said at Investor Day, we expect to grow in the mid- to high single digits. I think you'll continue to see us look for margin expansion given the mix up in companion animal versus large [indiscernible], but I won't give you any more and more specific than that.

Nathan Rich :

Great. Thank you, so much the question. I wanted to stick with Librela. And Kristin, specifically ask about how vets are diagnosing OA pain and starting dogs on therapy? You obviously talked about the large number of pets that could benefit from this, but relatively few dogs on treatment. I guess, anything you can share in terms of diagnosis rates for practices that were in the early experience program and where those diagnoses are coming from? Are these dogs currently on a pain product and maybe switching to Librela or these new dogs being diagnosed? Anything there would be great. And then a quick follow-up on the international performance of Librela. It looks like it was roughly flat sequentially on a constant currency basis. Any learnings on seasonality or anything like that on the international side, now that that's been on the market for a little bit?

Wetteny Joseph :

Yes, absolutely. Look, if you look at Librela, we delivered $53 million in revenues in Q3. That's a 65% growth operationally. Now if you look at the preexisting markets, they were up about 33%. So that's an incremental $10 million or $11 million in the quarter year-on-year growth in the pre-existing markets. And then new markets that have been launched this year is about $10 million that includes a little bit from the U.S. from the early experience program. So year-on-year growth and then sequentially, I think was your question, and we're still up a few million sequentially. Just keep in mind, Q3 last year, as we said, we have a bit of a tougher comp for Q3, because that's when we released sort of the allocations that we're on and the supply constraints. So that is factoring a little bit, but we still had 33% in the in the EU sort of locations in markets where we had previously launched. So that's still a very robust growth despite the comp.

David Westenberg:

Hi. Thank you for taking the question. Just on 2024 on derm, do you expect the competitive launch outside of the one we already know from Elanco. How comfortable do you feel about your decision to price Apoquel Chewables at parity with your existing products? And are there any analogs for chewables as a competitive differentiator in front of a competitive launch? And just as a quick follow-up on the R&D. It did step down a little bit, and I think you're guiding for it down. Is there anything are we reading in it too much to say maybe there's not a new product -- a significant new product in 2024, 2025 and maybe reading into that too much.

Wetteny Joseph :

Yes, absolutely. Look, as Kristin just said, we remain on target with our regulatory milestones with respect to R&D spend was up about 13% year-over-year on the quarter. So clearly, well above our revenue growth rate. So what you're seeing in terms of our overall expectations for the year versus where we're landing is just a matter of timing on the span of gross projects, but nothing significant or notable there. Again, we continue to drive innovation, both across new innovation as well as life cycle innovation across our portfolio, and we're very excited about the progress we're making in R&D.

Operator:

Thank you. We'll take our next question from Michael Ryskin with Bank of America. Please go ahead.

Kristin Peck :

Sure. I'll take the first half of the question, see if Wetteny want to build on it and then Wetteny, if you want to handle the CapEx question. We did see strong growth in Trio in the quarter, 20% in Q3 for Trio. It remains the number 1 fleet tick heartworm in the U.S. by revenue. And really importantly, it's continuing to grow share. It's up 3% in the quarter. It's also growing patient share, which was up 2% in the quarter. So we're expecting solid growth this year. Obviously, we -- there's a new competitor. But in the Q4, I would also say to watch, we got a challenging comp as you look at us in Q4. If you remember, we got back into stock and ran a number of promotions in Q4 of last year. But we continue to expect strong growth for the year there. Even with the destocking that we saw in the U.S. in Q1 and the pre-price buying, as we talked about before that you had in Q4 of 2022. So we see this as a franchise that will continue to grow. A lot of our growth is really being driven by our auto ship, by retail, which remains very strong for us, with our corporate accounts. This is also a category where you do see low switching once you get on a product. So we do believe the broadest portfolio, but continue to see strength in Trio. So we're happy with the growth we've seen there. But Wetteny, anything you add that I miss there, and you want to talk about CapEx?

Operator:

Thank you. We'll take our next question from Brandon Vazquez with William Blair. Please go ahead.

Wetteny Joseph :

Yes, I'll be happy to take that. Look, we continue to see, as you saw this quarter, 11% operational growth in companion animal. And though we have some tough comps, as Kristin just referenced with the Trio answer on previous question, we are expecting very, very strong growth across companion animal. And keep in mind, we have some comp challenges with respect to livestock, which will decelerate from what it is on a year-to-date basis, about 6% to a low single-digit growth. So as you look at what's factored into the guidance that we just gave in narrowing the range, but still maintaining our midpoint, if you will, you can factor that into your equation in terms of what the livestock versus companion animal mix is as we exit the year.

Balaji Prasad :

Hi. Good morning. A couple of questions from me. Firstly, to the extent you can without commenting on any '24 guidance. Can you highlight some of the macro factors and how you expect that to change? Speaking -- looking at the diagnostic space of consumer trends, better option volume? And secondly, a bit more specific. Can you speak about your Librela supply plans? You recently opened a facility, a new facility in Lincoln and what impact does that have for supply costs and margins?

Wetteny Joseph :

No, I think you covered the macro dynamics well, Kristin. On the supply question with respect to Librela, we are very confident in our supply plans to meet the demand expectations for Librela that we have certainly for '24 and beyond. Mentioning the Lincoln facility, certainly in addition to both our internal capacity and third party that we are using, we continue to invest internally. And I think if you look at Lincoln that will be a factor, particularly as you go beyond 2024, with respect to supply planning fully well and other maps as well. So again, very confident in our ability to meet those demand expectations, and we've already factored the ramp that we saw in Europe in our thinking around demand there as well.

Chris Schott:

This is Ekaterina on for Chris. Thank you so much for taking a question. So first, very quickly, just on veterinary visits and the pressure we've been seeing there recently, can you just remind us how sensitive Zoetis is to be dynamic and maybe your latest thinking around how visits are going to trend maybe into 4Q and potentially into 2024, if you want to comment on that. And then the second question is just on U.S. cattle. Can you just elaborate a little bit more on the dynamics you saw in the quarter? Because I think one of your competitors mentioned the timing of the cattle kind of was shifted earlier this year. Is this something that you saw as well? And does that potentially create a headwind for you as you think about the fourth quarter?

Wetteny Joseph :

Yes, sure. The only thing I would add on the vet clinic visits is you see our growth continues to outpace that of the clinic growth. And the vet visits were not as they're important, right? But we're not as sensitive to visit because therapeutics and chronic indications tend to power through that. And you can still see volume growth even as visits are down. And then the retail piece, which is continuing to grow. We've seen an additional 24% points as a percentage of our pet care revenues in the U.S. each year. So we've gone from 11% from about 5% just a few years ago. So we continue to see that in the quarter, it was up about 35%, if you look at our retail sales. So those are the factors I would add. With respect to the cattle dynamics and livestock in general, I would say clearly, we've had a very strong start to the year through the first 9 months. Livestock is up about 6%. Clearly, we're signaling that will come down in the fourth quarter. And that's really more of a factor of variability across quarters, given the timing of supply that we've had in the prior year versus the current year. The timing of when we've taken price adjustments for Jackson, for example, which impacted Q2 versus Q3 as well as Q4 this year as we're anticipating a step in that -- at the end of the year. So that will put some more pressure on Q4. We factored all that into our guidance that we've just issued today, which we are still in line with our expectations that we started the year with, which is right around our midpoint, we just narrowed it. So all those are in. With respect to capital dynamics around, we haven't seen anything that would say there's a pronounced shift with respect to the cattle run here. But again, we factored all these items into our thinking and what we've just iterated today from a guidance standpoint.

Unidentified Analyst :

Hi. This is Chris on for Steve. Thanks a taking a question. We had 2. First, on the U.S. on the parasiticide market, can you provide an update on the estimated volume share of topical today? And then looking ahead to 2024, what is the risk of significant pricing pressure on Trio from the month of Credelio Quattro. Assuming a non-inferior product label type seems like the main level they could both to grow their market share. And then a clarifying question on U.S. Librela, can you confirm that U.S. sales were 0 in Q3? And then looking ahead to Q4, do you still expect sales to be immaterial for the full year?

Operator:

It appears disconnected at this time.

Operator:

And there are no further questions at this time. I'll turn it back to Kristin for closing remarks.

Operator:

Thank you. This does conclude today's program. Thank you for your participation. You may disconnect at any time.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis second quarter 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I will remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today’s press release and our SEC filings, including, but not limited to, our Annual Report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company’s 8-K filing dated today, Tuesday, August 8, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning. As Kristin mentioned, we had a strong second quarter with balanced growth across both our companion animal and livestock portfolios, as well as our U.S and international segments. In the second quarter, we generated revenue of $2.2 billion, growing 6% on a reported basis and 9% on an operational basis. Adjusted net income of $652 million were 15% on a reported basis and 12% on an operational basis. Of the 9% operational revenue growth, 4% is from price and 5% is from volume. Volume growth consisted of 2% from other in-line products, 2% from new products, including our monoclonal antibodies for osteoarthritis pain and 1% from our key dermatology portfolio. Companion animal products are the primary driver of growth this quarter, growing 11% operationally with livestock growing 4% on an operational basis in the quarter. For companion animal, our key dermatology portfolio was the largest contributor to growth in the quarter, posting $355 million in revenue, our largest quarter ever and representing 14% growth on an operational basis. We saw double-digit operational growth in both international and the U.S. driven by strong growth in Cytopoint as well as growth driven by Apoquel and the conversion to Apoquel Chewable in certain international markets. Our monoclonal antibodies for osteoarthritis pain in dogs and cats, Librela and Solensia posted $69 million in revenue globally in the quarter with strong demand for both products as well as the impact of the launch of Librela in several new international markets. Our companion animal parasiticides also contributed to growth in the quarter, driven by our Revolution franchise, which had $103 million in revenue and grew 22% operationally. Simparica Trio also contributed to the parasiticide growth with $248 million of revenue and growth of 5% operationally. Our global companion animal diagnostics portfolio recorded $92 million in revenue in Q2, growing 12% operationally. We saw double-digit growth in the U.S. driven by high instrument placements in the quarter and disruptions from the implementation of our new field force model that impacted the prior year. Sales of our livestock products grew 4% on an operational basis in the quarter. We saw growth across both our U.S. and international segments driven by poultry, cattle and fish. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter, growing 7% with companion animal products growing 7% and livestock sales growing 5%. As Kristen mentioned, our companion animal performance in the quarter reflects the stabilization of the distributor inventory levels that were a headwind to our growth in Q1. U.S. vet visits were flat in the quarter. [Indiscernible] revenue growth and average revenue per visit were both up 8%. These trends are in line with expectations and continue to reflect the stabilization post-COVID. Turning to U.S. product performance. Our key dermatology product sales were $241 million for the quarter, growing 10% and benefited from higher periodic patient visits in the quarter. Cytopoint sales continue to drive growth with vets and pet owners showing a preference for injectables. Our U.S. small animal vaccines revenue grew 20% in the quarter, driven by higher sales of our canine influenza virus vaccine due in part to a competitor back order as well as higher sales into certain corporate and strategic accounts. Apoquel Chewable posted sales of $213 million in the quarter, growing 2%. Growth was driven by inpatient demand across all channels, partially offset by a difficult comparison period given the timing of distributor shipments from last year during our supply challenges as well as aggressive competitive promotion in the current quarter. Our growth cadence for Trio across the year will be impacted by the timing of supply recovery in 2022, and we expect growth rate improvement in the second half. As expected, we received FDA approval for Librela in the U.S. in May. We look forward to starting our early experience program in late Q3 with an expected November launch. Now turning to U.S. livestock. We saw 5% growth in our livestock portfolio in the quarter, primarily from our cattle business where we saw significant growth in Jackson, resulting from a favorable comparative quarter last year when an anticipated midyear price reduction limited sales in the quarter. Additional U.S. cattle growth came from Synovex, which benefited from our reimplementation label claim. Our U.S. poultry portfolio also contributed to growth of 11% based on our vaccine portfolio and an increased focus on egg layer market. We also benefited from favorable MFA rotations at certain large producers. Moving on to our International segment, where revenue was $1 billion, growing 6% on a reported basis and 11% operationally in the quarter. International companion animal revenue grew 17% operationally in the quarter, while livestock revenue grew 4% operationally. Increased sales of companion animal products resulted from growth of our small animal parasiticides, our monoclonal antibodies for osteoarthritis pain and our key dermatology products. Our international parasiticide portfolio growth was primarily driven by a revolution franchise with $57 million in revenue, growing 52% operationally driven by the lack of supply last year, which particularly impacted China in the second quarter of 2022. Our Simparica franchise also contributed to growth with continued market share expansion, especially in Latin America, Europe and Asia. We continue to see strong adoption of Librela and Solensia. Librela generated $48 million in revenue with 89% operational growth in the quarter driven by strong growth in Europe, supported by our direct-to-consumer advertising efforts in major markets and recent launches in various international markets, including Canada, Australia, Brazil and Japan. Solensia delivered $11 million of second quarter sales internationally, driven by higher demand and supported by direct-to-consumer marketing efforts. Our international key dermatology portfolio grew 22% operationally. We continue to see double-digit operational growth across most of our major markets, driven by growth from and conversion to Apoquel Chewable as well as from Cytopoint with higher compliance and new patients. Our growth also benefited from a weak comparative quarter in Japan, which was impacted by pre-priced buy ups in Q1 of last year. Moving on to our international livestock portfolio, which grew 4% on an operational basis in the quarter. Our poultry portfolio performed well with growth driven by key account penetration and MFA rotations in core poultry markets, including Europe, the Middle East and Latin America. Our fish portfolio continues to perform well as a result of increased sales of vaccines across salmon markets in Norway and Chile. Lastly, our cattle portfolio saw gains in Turkey, Brazil and Argentina from strong price growth and the recovery of supply issues. Now moving on to the rest of the P&L for the quarter. Adjusted gross margin of 72.4% improved 260 basis points on a reported basis compared to the prior year, resulting from favorable foreign exchange, price increases and favorable product mix. This was partially offset by higher manufacturing costs in the quarter. Adjusted operating expenses increased 8% operationally with both SG&A and R&D growing 8% operationally driven primarily by headcount-related compensation costs due to the timing of new hires in 2022 and the impact of annual salary increases. The lower growth in R&D expenses this quarter is reflective of the timing of spend in project investments and not a reduction in our expected R&D spend for the full year. Year-to-date, adjusted R&D expenses has grown 13% operationally. The adjusted effective tax rate for the quarter was 21.5%, an increase of 80 basis points, driven by higher net discrete tax expenses in the quarter, mainly related to changes to prior year's tax positions and less favorable jurisdictional mix of earnings, partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. And finally, adjusted net income grew 12% operationally and adjusted diluted EPS grew 14% operationally in the quarter. Capital expenditures in the second quarter were $166 million and continue to be on track with our expectations for the year. In the quarter, we repurchased $324 million of Zoetis shares. Now moving on to guidance for the full year 2023. Please note that guidance reflects foreign exchange rates as of late July, beginning with revenue for the full year due to unfavorable foreign exchange we are slightly lowering our revenue range while maintaining our guidance on operational revenue growth. We expect revenue between $8.50 billion and $8.65 billion, representing a range of 6% to 8% operational growth. With the approval of Librela in the U.S., we are now including our projected sales for November and December in our guidance, which are expected to be immaterial to our overall operational growth rate. Their impact on the full year revenue is largely offset by potential uncertainty in China as well as broader macroeconomic conditions in certain markets. Operationally, the first half has played out largely as we expected with 6% operational revenue growth. We expect stronger growth in the second half of the year overall, especially in our U.S. companion animal business. In livestock, which has grown 8% year-to-date on an operational basis. We anticipate unfavorable comparisons in the second half, driven by the timing of price decreases in Jackson in the U.S. last year, and the resumption of supply of several products after outages in the first half of 2022. We expect adjusted net income to be in the range of $2.50 billion to $2.55 billion, slightly above our previous guidance while maintaining our previous guidance of operational growth of 7% to 9%, driven by foreign exchange favorability in cost of sales and expenses, which were partially offset by unfavorability in revenue. Reported diluted EPS increases to a range of $5.15 to $5.27, which is impacted by foreign exchange and a one-time gain from a business development deal. And finally, due to the impact of foreign exchange, we are increasing adjusted diluted EPS to be in the range of $5.37 to $5.47. Just to summarize before we go to Q&A, we saw strong well based growth in the second quarter, growing in both companion animal and livestock as well as in the U.S. and internationally, with contributions from price and volume. We expect stronger growth as we move into the second half. We remain confident in our ability to deliver on our operational full year guidance commitments. We continue to see improving fundamentals in the overall industry and remain committed to delivering on our value proposition to grow revenue faster than the market and to grow adjusted net income faster than revenue. Now I'll hand things over to the operator to open the line for your questions. Operator?

Michael Ryskin:

Great. Thanks for taking the question and congrats on the quarter, Kristen and Wetteny. I want to start with Trio real quickly. We've seen -- we finally see NexGard Plus in the U.S. from Boehringer Ingelheim. I just want to ask, how do you see this market playing out? There's a lot of debate on the label differences Trio versus NexGard Plus, the 6 month versus 1 month warm detail as well as how it's going to be priced with the promotions being put out at the start of the launch. So what are your expectations for Trio now that the competition is finally here both for second half and for 2024. And if I could squeeze in a follow-up. I want to ask on Librela. It continues to be really well OUS. I think it's on track for over 200 million this year from OUS alone. Any learnings or changes to your assumptions now that you can take that into the U.S. launch. Fair to say that it could be incremental 75 million, 100 million to revenue next year? Thanks.

Wetteny Joseph:

Sure. Mike, thanks for the question. Look, we remain really on track with EU performance, and we are very pleased to see $48 million of Librela revenues in the quarter, up 89% versus the prior year. We also launched a product in a number of new markets in our International segment including Japan, Australia, Brazil and Canada. Those contributed about $10 million for the quarter. So we continue to see really strong demand for the product, and we are starting to initiate DTC campaigns, which will continue to drive awareness across both Librela and Solensia in our markets. It is already, as we said last year, the #1 osteoarthritis pain product in the EU. Look, we won't necessarily get into what the expectations are for next year. Obviously, we'll do that as we get into guidance for the year. We are expecting to continue to see strong growth for Librela on the balance of the year. I will note, last year, we did see a bit of an uptick in the third quarter. That was, as we released the allocations that we are on, and we saw clinics order a bit more, that was offset in Q4. So just a little bit of a dynamic in Q3 and Q4. But really with the new markets as well as continued growth in EU, we are expecting very strong growth in the third quarter as well.

Nathan Rich:

Hi. Good morning. Thanks for the questions. First, Wetteny, I wanted to start with the outlook for companion. I think you had talked about it improving in the back half of the year. Was that relative to the 5% growth in the first half? Or is that relative to the second quarter growth, which is obviously higher. Any context you can kind of provide as well on just kind of cadence through Q2 versus 4Q would be helpful. And then just a follow-up on the commentary on Trio. Could you maybe just talk about the 2% operational growth and the different factors that impacted that in the quarter and then the kind of type of growth that you would expect in the back half of the year, just given the competitive launch that you mentioned as well as maybe a normalization of supply.

Operator:

Thank you. We will take our next question from Jon Block with Stifel.

Wetteny Joseph:

Yes. Look, with respect to gross margin, you saw 72.4% gross margin on the quarter in Q2. That's up about 260 basis points versus last year. FX is about 200 basis points of that. And clearly, we've pegged our overall guidance on FX based on where rates were at the end of July. So I'm not going to venture to forecast what that might mean. But in terms of the other components that are driving our gross margin, price and mix, certainly were favorable for us. And as we've just discussed with respect to livestock having a tougher comp in the back half versus companion animal particularly into the third quarter, we expect price mix to continue to contribute favorably here. The other element, of course, is really manufacturing -- higher manufacturing costs. I think typically what you see is this first half is a little bit higher for us than the second half. Part of that is the mix with respect to cattle run in the fall that tends to have a little bit of a mix down on us overall. But I would say the overall mix for the company, given the back half strength in companion animal is going to be -- continue to be favorable. So we see that being something that will consistently sustain. And again, we won't get into next year's element until we get there. With respect to the second half, look, clearly, our expectations with Trio remain that we'll see strong growth contribution for Trio and we are going to see a very strong third quarter. I think some of the -- and by the way, the year has played out, as we said, we gave a range of 6% to 8% operationally, sitting here today after delivering a very strong second quarter, we remain in line with our expectations for the year at 6% to 8%. I think if you look at some of the areas that we're watching from a macro perspective, China is one of them. I think if you look at the data coming out of China, confidence levels for consumers are low, the savings rates are very high. And so we're watching that as well as the impact it has on the Southeast Asia region given the tourism impact that China has on that region. That's one of the areas. Certainly, we are watching here in terms of what goes into our thinking with respect to the balance of the year.

Operator:

Thank you. We will take our next question from Westenberg with Piper Sandler.

Kristin Peck:

Sure. I can start with your second. Yes, Librela U.S. is in, as we did note, obviously, in Wetteny's remarks. But to get to your question on derm and Wetteny can certainly follow-up with you once on the derm question -- on the Librela question. But we have led the way, as you know, in dermatology with both a small molecule and large molecule. We've been driving awareness through DTC. We still think there's significant market potential here in developed and emerging markets. There's still plenty of dogs that are untreated here. We are really focusing on investing in direct-to-consumer branded in the U.S. and in some markets and unbranded outside. With that, if you're seeing this year, we are looking at double-digit growth. In Q2, we had 14% growth with double-digit growth in both products in the quarter, so real strength. And we are continuing to innovate here. I think you saw also approval for Apoquel-2 in the U.S. We will look for long-acting Cytopoint, look at species, we are expecting obviously competition. We've been expecting it for a while. We'll say again, we're expecting it in 2024, and we'll see what happens. But we really are seeing more of a preference from both the vet and the pet owner moving more to Cytopoint for compliance reasons, obviously, for EE [ph]. So I think we'll continue to see that. So we are seeing very strong growth in dermatology. Again, we are expecting double digits for the year. In the quarter, we had great strength against both, but I would like to be clear that as we are seeing do we think will grow faster. We are seeing greater focus from the vet and the pet owner on Cytopoint being a greater driver of our overall dermatology franchise, but really expect to follow that up with strong innovation continuing in what we think is a really important space, Wetteny do you want to add anything on derma's question or Librela?

Operator:

Thank you. We will take our next question from Brandon Vazquez with William Blair.

Wetteny Joseph:

Yes, happy to answer. Look, as we said, we really reflected two things in our guidance today is, as we said, in fact, last quarter, FX was an area that we are watching, given the volatility that we are seeing across certain currencies that we operate in. And so we've updated guidance for FX both at the revenue line, which is negative. About -- it's about 75 basis points of growth essentially on a reported basis, that's impacting FX. So we reflected that here. But it's actually a positive contribution when you come down to EPS to the [indiscernible] $0.03. So what you're seeing there from an adjusted basis is really all FX. From a reported standpoint, we're also reflecting some gains that we saw from a couple of DB [ph] deals that are elevating the reported rate from an EPS perspective. The only other color I would ask -- add here with respect to the second half from the cadence is, again, we are expecting a very strong second half from a companion animal perspective versus livestock with the comps. I think if you look at the third quarter, we probably saw a bit lower OpEx in the prior year versus the fourth quarter. So I would expect OpEx will also be a little bit higher in Q3 versus Q4 as you look at the balance of the year. But other than that, I think price is something we typically do early in the year. There are certain markets where we may do a midyear price increase as well. But overall, price is something that happens fairly early in the year and pretty consistent with what you've seen in our numbers today.

Unidentified Analyst:

Hi. Thank you so much. This is [indiscernible] on for Chris. So first question, on dermatology, can you just remind us where you are in terms of life cycle management? Any additional color that you kind of see with the dermatology portfolio kind of evolving over the next several years in terms of maybe potential new mechanisms or mode of administration. And then the second question is on Europe. You obviously had a very strong quarter for companion ex U.S. this quarter. Can you just elaborate a bit on the trends that you're seeing there and how you see them holding up in the second half of the year? Thank you so much.

Wetteny Joseph:

Yes. Look, I think just stepping back from a companion animal performance perspective, we've continued to see strength there across our international markets. Even in emerging markets, just in Poland recently you're seeing a real uptick in terms of companion animal continuing to take hold. I think some of the innovation that we have may take some time to take hold in other markets outside the U.S. and it takes longer to get to those peak sales. We are continuing to see really strong derm growth across our international markets and so on. So we believe that is sustainable. The first half, we've seen really strong growth there in terms of companion animal. Across international, we saw 17% operational growth in companion animal in the quarter following a 10% growth in Q1. I would continue to expect double-digit growth, maybe not at the level we saw in Q2 in the back half for international, we continue to see double-digit growth there.

Louise Chen:

Hi. Thanks for taking my question. So I wanted to ask you some of the pushes and pulls to your commitment to the mid to high single-digit revenue growth that you've talked about over the next 3 to 5 years? Thank you.

Operator:

Thank you. We will take our next question from Balaji Prasad with Barclays. And Balaji, your line is open. Please go ahead.

Kristin Peck:

Sure. Thanks for the question. I'll start and I'll let obviously Wetteny build there. We are the leader in parasiticides. We are really proud of that. We really see this as an important franchise. We have a broad set of products from Revolution to ProHeart to Simparica to Simparica Trio. We will be continuing to innovate in this important area. It is, by far, as you talked about, the largest therapeutic area in animal health. We really see a few things. Obviously, we are going to lead with innovation. We are going to lead with innovation in products that are easy to use, that really meet the customer demand as well as what our veterinarians are looking for. And we believe there's continued innovation in the space. We are looking at long actables, we are looking at injectables. We are looking at other combinations. Controlling parasites is critical to the overall health of the animal because if you don't, it creates lots of other issues. for animals. So we'll continue to grow in this important space. We think it will continue to be a major contributor to Zoetis' growth over the time period. So I don't know Wetteny, you want to add anything there?

Kristin Peck:

Yes. The only thing I'd also add there is one other growth that we haven't talked about much today is increase in compliance. I think if you look at retail and auto ship [ph] and injectables, I think right now, if you believe that the research will show you the average pet is really on a bet 6 to 7 months, when they should be on 12 months for many of these products. So I think if we can do a better job of driving compliance either through auto ship on e-commerce or home delivery through the vet or dual [ph] as injectables where you can guarantee compliance. So we think there's lots of potential growth drivers for Zoetis to continue to drive this market and take share.

Unidentified Analyst:

Hi. Good morning. This is Chris on for Steve. We had two questions. First, on the U.S. pet health market. You mentioned U.S. vet visits were flat in the quarter. Is this capacity driven? Or is it more related to demand and weakening new patient visits and oneness visits? And then second, do you expect any headwind from the restart of student [ph] loan repayments this fall? Thank you.

Operator:

Thank you. At this time, we have no further questions in queue. I'll turn the floor over to Kristin Peck for any additional or closing remarks.

Operator:

This does conclude the Zoetis second quarter 2023 financial results conference call and webcast. You may disconnect your line at this time, and have a wonderful day.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I will remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today’s press release and our SEC filings, including, but not limited to, our Annual Report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company’s 8-K filing dated today, Thursday, May 4, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. We had a solid start to the year, with growth driven by our livestock business and strong international market performance. Echoing Kristin’s comment, our Q1 results are in-line with our expectations. As we indicated on our Q4 earnings call, we expected the first quarter to be below the low end of our forecasted annual operational growth rate of 6% for 2023. In the first quarter, we generated revenue of $2 billion growing 1% on a reported basis and 4% on an operational basis. Adjusted net income of $607 million declined 3% on both a reported and an operational basis. Of the 4% operational revenue growth, 5%age from price with a 1% decline in volume. The volume decline is driven primarily by U.S. companion animal distributor destocking in the quarter. Our livestock portfolio led the way in terms of species growth growing 12% operationally with companion animal revenues flat on an operational basis in the quarter. Livestock growth was broad based with double-digit operational growth across cattle, poultry, sheep and fish. The growth in cattle was driven by additional supply of key products in the U.S. We saw growth in our poultry portfolio driven by higher sales of vaccines. Our sheep products benefited from favorable market conditions in Australia as well as our acquisition of Jurox in the fourth quarter of 2022. Finally, our fish portfolio continues to perform well with double-digit operational growth driven by strong vaccine performance in Norway. Sales of our companion animal products were flat operationally in the quarter, with growth in our monoclonal antibody products, Cytopoint, Librela and Solensia, offsetting declines in Apoquel, parasiticides and anti-infectives. Our monoclonal antibodies for osteoarthritis pain in dogs and cats, Librela and Solensia posted $51 million in revenue globally in the quarter, with strong demand for both products. Additionally, Solensia benefited from our U.S. launch in the third quarter last year. As for Librela in the U.S. we still anticipate approval in the first half of this year with the launch later in the second half. Simparica Trio posted global revenue of $151 million in the quarter, representing an operational decline of 7% versus the comparable 2022 period. This was primarily the result of U.S. distributor destocking during the quarter, as well as pre-price increased buy-in and promotional activity during the fourth quarter. This decline was partially offset by growth in our international markets from increased clinic penetration and launches in new markets. Our key dermatology portfolio declined 3% percent operation only with $290 million in global revenue. This decline is attributed to the impact of pre-price increased buy-ins in the U.S. in Q4, and in Japan in the comparable period in 2022. Cytopoint partially offset this decline with double-digit growth based on continued veterinary preference for injectables, which keep revenues in the clinic. Cytopoint better reflects underlying market demand due to our direct sales model on our dermatology portfolio and the lack of retail channel impacts. While we do believe conversion from Apoquel to Cytopoint may be accelerating, our overall outlook for our key dermatology portfolio remains unchanged. Our companion animal diagnostics portfolio declined 3% operationally, with declines in the U.S. partially offset by growth internationally. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1 billion in the quarter declining 1% with companion animal products declining 7% and livestock sales growing 15%. Companion animal performance in the quarter is reflective of the expectations we set in the prior quarter and is a result of distributor inventory and promotional impacts. As Kristin mentioned, demand for the veterinary market as demonstrated by distributor sales to clinics is healthy and growing. We continue to see robust sales outgrowth across our companion animal portfolio, including strong growth in parasiticides and our key dermatology products and our outlook for the full year remains unchanged. U.S. vet practice trends are improving, with clinic visits up 2% in the quarter and clinic revenue growth up 11%. Average revenue per visit is up 9%. These trends are slightly better than we expected and largely reflect the normalization of the COVID impact on vet clinic visits. Total visits in the quarter remain above pre-pandemic levels and clinic revenues have grown on average of 10% annually over that period. Spent per visit remains elevated as the standard-of-care continues to increase. Turning to product performance, the companion animal decline in the U.S. was driven largely by a decrease in sales of our parasiticides portfolio as well as key dermatology products. Simparica Trio posted sales of $127 million in the quarter, declining 13% driven by distributor destocking, partially offset by growth in patient share where we continue to outpace the overall flea, tick, and heartworm market. Our outlook for Trio remains unchanged as we continue to see strong customer demand and continued conversion from topicals and collars. Key dermatology products sales were $184 million for the quarter declining 5%. Apoquel sales were negatively impacted by high sales in Q4 ahead of our 2023 price increases and significant retail buy-in in Q1 2022. Cytopoint sales growth partially offset the Apoquel decline due largely to its injectable administration, which is preferred by clinics. The U.S. companion animal decline was partially offset by growth in sales of Solensia, which launched in the third quarter. We continue to see solid clinic penetration growth in Solensia and expect to drive awareness of feline OA through our DTC advertising campaigns. U.S. livestock grew 15% in the quarter, primarily resulting from our cattle business where we have improved several supply outages, which impacted our revenues throughout 2022 and replenished our channel partner inventories. While we will continue to see benefit from improved supply, the replenishment impact is largely isolated to this quarter. We also saw growth in Synovex due to expanded label claims. Our poultry business also contributed to growth driven by expanded sales of vaccines. Moving on to our international segment, where revenue grew 3% on a reported basis and 10% operationally in the quarter with companion animal and livestock revenue both growing 10%. Increased sales of companion animal products resulted from our monoclonal antibodies for alleviation of osteoarthritis pain, small animal parasiticides, as well as the impact of our Jurox acquisition, which was completed in the fourth quarter of last year. We continue to be encouraged by the performance of Librela and Solensia. Librela generated $34 million or 74% operational growth driven by strong underlying demand and the removal of supply allocations that were in-place for the first half of 2022. Solensia delivered $9 million in the first quarter sales internationally, driven by stronger demand. Simparica Trio was the top contributor to growth for our international small animal parasiticides with $24 million in revenue growing 47% operationally due to expanding market share in the flea, tick, and heartworm space. Our international key dermatology portfolio was flat operational in the quarter. We saw double-digit operational growth across most of our major markets, driven by higher compliance and new patients. However, this growth was offset by large pre-priced buy-ups of Apoquel in Japan in Q1 2022. Our international livestock segment also grew 10% operational in the quarter with growth in four of our five core species. Growth was driven by our cattle portfolio, which benefited from price increases in certain emerging markets. Our sheep business had an exceptional quarter with high demand in Australia due to favorable market conditions as well as the impact of our Jurox acquisition. Poultry also contributed to growth in the quarter with higher key account penetration in the Middle East and Eastern Europe as well as the benefit of price. And lastly, our fish portfolio continues to perform well, driven by growth in salmon vaccines in Norway. Swine was flat for the quarter with strong sales in China, partially offset by intermittent supply constraints in some markets. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 70.8% declined 80 basis points on a reported basis compared to the prior year, resulting from higher manufacturing costs and unfavorable product mix. This was partially offset by favorable foreign exchange and price increases. Adjusted operating expenses increased 12% operationally with SG&A growth of 11% operationally driven by headcount related compensation costs as a result of our U.S. small animal field force expansion, which largely began in Q2 of 2022, and higher T&E. R&D grew 19% on an operational basis, driven by higher project spend for our pipeline candidates, advancing projects include disruptive, novel innovation and lifecycle management. R&D remains our first priority in capital allocation. Other income and deductions in the quarter are reflective of a favorable benefit associated with a settlement in the current period for prior period underpaid royalties related to sales of certain products. The adjusted effective tax rate for the quarter was 20.5% an increase of 160 basis points driven by lower net discrete tax benefits in the quarter and less favorable jurisdictional mix of earnings, partially offset by higher benefit in the U.S. related to foreign derived intangible income. And finally, adjusted net income declined 3% operationally and adjusted diluted EPS declined 1% operationally for the quarter. Capital expenditures in the first quarter were $223 million. We are still anticipating a significant increase in capital expenditures for the full year of 2023. We continue to make investments to support our future growth, including manufacturing capacity for monoclonal antibodies as well as oral solid dosage. In the quarter, we repurchased $283 million of Zoetis shares and grew a dividend over 15% versus Q1 2022. Now, moving on to guidance for the full year 2023. As we have mentioned, the first quarter has gone largely as we expected. We are therefore reaffirming our 2023 guidance provided during February's earnings call. Note that guidance reflects foreign exchange rates as of late April. Foreign exchange rates have been volatile over the quarter. We will continue to monitor the impact of this volatility going forward. For the year, we continue to expect revenue between $8.575 billion and $8.725 billion representing a range of 6% to 8% operational growth. We also continue to expect adjusted net income to be in the range of $2.49 billion to $2.54 billion representing operational growth of 7% to 9%. And finally, we expected this adjusted diluted EPS to be in the range of $5.34 to $5.44 and reported diluted EPS to be in the range of $5.03 to $5.14, both consistent with our February guidance. Just to summarize before we go to Q&A, we remain confident in our ability to deliver on our full year guidance commitments and expect more normalized growth in subsequent quarters. We continue to see positive trends and solid fundamentals in the underlying demand and are confident that our innovative portfolio will continue to allow us to go in-line with or faster than the market. Now, I'll hand things over to the operator to open the line for your questions. Operator?

Jon Block:

Thanks guys. Appreciate it. Good morning. I'll ask both upfront I think importantly, is the channel now normalized in the U.S., Kristin? And then some rough crude math, but if you were down 7% U.S. companion animal and sales out were up 8% -- it's over like a 1500 basis point delta. And I sort of landed over $100 million in sales if you quantify that. So can you guys bridge how you get there? I guess there's $25 million to $30 million of parasiticides last quarter, or [does these] (ph) working down inventory by a week, whatever you can do to bridge that would be helpful. And then a quicker one, an easier one, Librela, I think you said approval still expected 1H. So launch 2H, is that the full launch call it before the end of the year. And then again, Kristin, how do you feel on your ability to serve demand we believe there's a lot of Solensia users that are chomping at the bid to get at it. So do you expect U.S. Librela supply to be an issue at all call it, 1H ‘24? Thanks guys.

Wetteny Joseph:

Sure. Jon, the start of your question was, are we at normalized levels, I’ll start there, first? And yes, we're at normalized levels here sitting here in the second quarter. And let me just step back and give you a little bit more details here. As Kristin said, we came into the year and as you may recall on the last call, we described how we saw increased buy-in in the fourth quarter. Driven by promotions that we ran on parasiticides, given we have recovery of supply late in the year, as we got through some of our supply constraints. And there was more pre-priced buy-in given the level of pricing pieces we're coming into 2023 with, in the fourth quarter above what I would call normal levels pre-price buy-in. So, we expected to see destocking in the quarter, which is why we said that the first quarter would be below the low end of the range of growth that we have for the year at 6% to 8%. So we've seen destocking in the first quarter down to I would say the lower end of our normal range that we've experienced historically. And as we step into -- and by the way, given rising interest rates, that is not unexpected. And then as we got into April, we saw slightly more destocking as we started the quarter, but those have normalized and have been reflected in the guidance that we just reiterated today. And so we're not anticipating a return back to normal levels in terms of inventories or assumption in our guidance is that they'll stay about where they are now. Now to be clear, if you look at the end market demand dynamics, they remain very strong. As we said in our earnings release, sales out of distributors into clinics were up 8% on a volume basis in the quarter. And if you look at retail, sales out pet owners were up 35% on the quarter. We've seen for the first time in about a year vet visit increased by 2%, and if you look at derm patients, for example, visit increased in the quarter versus a year ago. And so again, we've seen normalization since then, and by the way, international markets where we didn't see -- we haven't seen and don't expect to see the level of destocking that we've seen in the U.S. you saw 10% operational growth in our international markets across livestock and companion animal. And so again, without an extremely return to those levels and these are factored into our guidance, and we're contemplated when we gave the initial guidance back in February.

Erin Wright:

Great. Thanks. Two questions, one on livestock, one on companion. So, on the livestock side, was there a stocking benefit across livestock in the segment in the quarter? Can you quantify that for us and how much of the strength in U.S. livestock should continue in the coming quarters, given that you expect flat for the year? And you touched on derm a little bit on the companion animal side, but you mentioned Apoquel declined with no competitors in that segment and your direct distribution strategy, what drove the decline, and does that volatility that you're seeing across that retail channel for this product change how you think about leveraging that alternative channel, and are you proactively shifting customers to side of going ahead of competition? Thanks.

Wetteny Joseph:

Yes, I would just add that first quarter is non-indicative of the year here, Aaron, similar to the overall results. And so to your point around retail channels, etcetera, we don't see us changing that. I think the fact that, Cytopoint we expect to continue to lead the growth for key derm franchise, we'll change the mix between those two. But not changing the overall picture and our expectations for derm remain the same for the rest of the year. And we're off to actually a strong start. In the second quarter for derm both in the U.S. and internationally.

Michael Ryskin:

Great. Thanks for taking the question guys. First, I want to ask about sort of the top line progression through the rest of the year. I think you'd point to some softness from what you previously and you talked about just now let me on when you saw distributors to start the second quarter. But any additional color you could give us as sort of we go through the rest of the year given that there is a relatively steep ramp implied in numbers right now just to hit your $8.65 billion and 68% operational growth. So just talk about the step up in 2Q, 1Q to 2Q versus 2Q to 3Q, 4Q. And then as a follow on to that, Kristin, you touched on Librela earlier, but I was wondering if you guys could comment on the other product launch expected this year, the competitor to Simparica Trio. We haven't seen that yet. Obviously can come any day, but just curious what you're hearing on that. And if your thoughts on what's going on parasiticides market have changed regarding that in terms of what some of your competitors are doing with stocking, what some of your competitors are doing with promotions of some of their products and sort of how that's impacting your view on tariff through the rest of the year. Thanks.

Kristin Peck:

Sure. And let me pick up your second question, which was the other product. We are continuing to expect competition in the second half of the year for Simparica Trio. But I want to underscore that as you look at the first quarter, we actually gained share. So as we said, there's very strong underlying demand for Simparica Trio in the U.S and even with competition coming, if you look at our performance, it was in line with our expectations. Again, we said it's not indicative of the year and we continue to expect strong growth for the remainder of the year. Even with competition in the second half. So we have been expecting this competition. The good news is it's later than we did expect. As we think about it, we've talked about this before, we're not expecting them to radically change any pricing if they would really I think given they are the leader right now with HEARTGARD NexGard, they would really cannibalize their own business. And I think it's important to keep in mind even if you look at the quarter. They ran very strong promotions ahead of their launch. And even with those promotions, we gained share in that quarter. So we remain very confident in the strength of Simparica Trio. In the strength of our relationships with that in the pet owner satisfaction of it, we do expect competition. We think they'll bring a product as I said in the second half of the year, but we remain confident of the strong growth for Simparica Trio as we said before for the year.

Nathan Rich:

Great. Thanks for the questions. Sorry to keep honing in on the destocking dynamics, but could you maybe just talk about how the first quarter U.S. companion animal sales kind of played out month by month? It seems like January and February price saw the bulk of the impact from the pre buy-in and pull forward into the fourth quarter. It sounded like the destocking might have occurred a little bit later in the quarter. I think this is people are looking to get better visibility on the improvement in the second quarter. Could you maybe just comment on how March or April played out just as we think about kind of where the business is heading into the second quarter?

Kristin Peck:

Yeah. And I think I want to also reiterate what Wetteny said earlier, which is they are at very low levels, the lower end of their ranges, but our guidance expects that they do not go back up. We believe that given the current interest rate environment, our expectation is that they will stay at this level. So again, our confidence in the guidance we're providing is assuming that they're not going back up, they will stay at the levels that they're at now.

Louise Chen:

Hi, thanks for taking my questions here. So wanted to ask you, on your upcoming investor event, what will you discuss here? What are some of the key things that you're going to be going over. It's been a while since you've had investor event. And will you be disclosing more additional pipeline products, longer term guidance, anything from that front? And then I also wanted to ask you in your diagnostics business, what's the outlook for the remainder of the year on that business? Thank you.

Wetteny Joseph:

Yes, happy to, Kristen. So look on diagnostics, we have seen increased productivity from our diagnostics team, particularly if you look at the U.S. where we made the change about a year ago into the second quarter. In this first quarter, we actually saw very strong placements across our instruments, including images as well. Those will help drive growth from a consumables perspective if you look at the rest of the year consistent with our guidance, we said we would expect to see improvements in terms of that to the productivity given the new field force and the change out that we did last year. And we would expect to see return to growth in the U.S. in the back half of this year. And again, we're lapping those changes that we made, which we believe -- firmly believe are going to drive long term growth for the business in addition to innovation that we continue to work on in terms of diagnostics.

David Westenberg:

Hi. Thank you for taking the question. So just to get on the Simparica Trio franchise and so in the distributor dynamics here, I usually think about the parasiticide portfolio is being heavy in March to August season. As we take a step back or take a zoom outlook, do you think any of the dynamics that have happened with some of the distributor destocking is going to be a net negative for the annual sales of the product? Put it another way, do you think maybe at this impact the timing of missing the flea and tick season in any of this kind of dynamic? And then just to reiterate on the inventory question on the livestock portfolio, it doesn't have the same dynamics, right? So I mean like the price increases in livestock were not the same as the price increases in companion. Therefore, you wouldn't see some of that same distributor dynamic. And then if I could squeeze just one more, just I want to -- I didn't see the inventory or the balance sheet yet, so just wanted to see if inventory levels trended up or down. Thank you. Sorry. That was one.

Wetteny Joseph:

Yes, look, I think there were couple other parts to your question, I'll touch on in terms of livestock. We're not seeing the same dynamics in livestock. Look, I mean if you look at where we ended last year, maybe we're in the middle of the range towards the bottom of the range, might have been slightly increase in the quarter given the recovery of some supply for certain products as we mentioned in our prepared commentary, but overall, not any meaningful movement there to speak of. And then with respect to our balance sheet on inventory, as you know, we are ramping up certain products, anticipating launch and approval of certain other products that will continue to drive inventories. First, if you look at operating cash flows on the quarter, they're actually favourable to last year because as inventories continue to increase, we saw really strong performance on receivables and other NAP. So overall, operating cash flows look favorable versus a year ago.

Balaji Prasad:

Hi, good morning, everyone. Thanks for the questions. Couple from me. Firstly, could you give an update on the supply chain issues which impacted growth in 2022, be it in the vaccine side Trio or [indiscernible] and would you foresee or anticipate any supply chain issue impacting any of your key products this year? Secondly, I wasn't sure I got the derm decline fully. This is not a distributed independent segment. Can you provide some numbers around the derm segment and help us understand what led to the decline? Thanks.

Wetteny Joseph:

Yes, I'd be happy to. So look, the derm story is similar in terms of destocking from pre-price buy-ins that we saw in the U.S. into retail in Q4. As well as a year ago, if you look at Japan and if you look at our reporting last year in Q1, you would have seen a significant growth rate for Japan in the first quarter, driven by those pre-price buy ups in Apoquel. And then you saw that go the other way in the second quarter. So if you were to I would say pro form the results for the first quarter taking into account what I just said, you will see double digit growth for the derm franchise in both the U.S. and international.

Unidentified Analyst:

Hi. This is [Katarina] (ph) on for Chris. Thank you so much for taking our questions. So, first on price increases, any feedback from the price increases in the beginning of the year, are you seeing any pushback from veterinarians or pet owners and any initial thoughts of how you'll be approaching price increases in 2024. And then the second question is on diagnostics, any thoughts on the proposed Mars Heska acquisition and the impact that will have on the diagnostics market? Does it change Zoetis’ plans and diagnostics or the investments you're making in that market? Thank you so much.

Wetteny Joseph:

Yes, sure. Look, we have not seen any pressure in terms of end market demand given our price increases. We took 5% price on the quarter that's up versus 3% last year. If you look at the end market dynamics that we described earlier, you're seeing significant growth out from distributors to clinics, but also importantly, you're seeing significant growth from retail into pet owners. And we continue to see increased patient visits, for example, in derm, etcetera. So we have not seen any resistance there in terms of price increase. And by the way, if you look at international, we grew 10% in companion animal in the quarter given price increases as well and despite some pre-price buy in, which is normal in the fourth quarter. So we haven't seen any signs of that. If you look at livestock, that actually offsets some of the -- marginally offset some of the price increases we would have seen in companion animal. We can just see some impact on Draxxin, but not meaningful not at the level that we've seen previously as we previously said and actually we saw some volume offset to that positively offsetting some of the price on the Draxxin side. So all told in good shape in terms of what we're seeing in terms of market reaction to our prices. And in terms of what it means for 2024, too early to tell. We won't go into that yet.

Brandon Vazquez:

Hi, good morning. Thanks for taking the question. The first one is just on guidance. You started off the year pretty strong despite kind of inventory levels creating a little bit of noise here. But if you kind of read through that, you're looking at, I don't know, like high single digits, maybe even double digits operational growth to start the year reiterated guide for 6% to 8% operational growth. So the question being basically what would get you to that low end of that operational growth range given the strength you're already seeing in the year if you kind of read through the noise?

Operator:

And we'll go next to [Steve Scholar with PD Cohen] (ph). Please go ahead.

Kristin Peck:

Sure. The new manufacturing facility in right outside of Atlanta, Georgia will be both to support current products and the growth in our current products as well as we'll target launching some of our new monoclonal antibodies out of that facility as well. It's a very large facility. It gives us tons of flexibility, which is what we found really exciting about the opportunity to be able to use it for lots of different things and really build a strong centre in the South with a great labor market, really good access to workforce that we think makes a lot of sense. So we actually -- we see it’s the facility's ability to do both and that is currently the intention. As I mentioned in my prepared remarks, we would expect it to be fully operational by 2026 and doing both at that point. With regards to Investor Day, we will be looking at the whole portfolio. We'll give you more details which we've been asked for around the pain opportunity and what we're expecting there. We'll also talk about some of the new disease areas we've mentioned before. It will give you a sense of what we think those markets could look like. A lot of those markets are new markets, so we'll help you size that market. We'll talk a lot about what our pipeline looks like. And what we're doing now. So we'll give you information both on a species basis importantly on sort of key technologies as we talked about in monoclonal areas -- monoclonal antibodies. And then also lastly, talk about some of these emerging big new markets that we think we can attack with some of our new novel technologies.

Kristin Peck:

Thank you. So look, just to summarize, we really see a very positive and sustainable demand for our product based on what we've talked about for long time which is the fundamental drivers of animal health. We are confident that Zoetis has the industry's most diverse and durable global portfolio. And this is really founded on innovative science as we talk about and supported by a high quality supply chain. We'll remain focused this year and going forward on our five key growth catalyst; dermatology, pet parasiticides, pain, diagnostics and emerging markets. And we're going to continue to invest in the talent, the pipeline and the capabilities that support this future growth while ensuring that we can adapt to the dynamic environment that we all operate in. And we really look forward to sharing more about this with you. Our vision, our pipeline, our strategies for growth at our Investor Day on May 25th. And there you'll hear more from me, Wetteny, our Head of R&D, Rob Polzer, about the confidence we have in the animal health industry. And importantly, our ability to go faster than that market and the investments that we're making to create that value for our shareholders. So, we announced the event this week and I hope you can all join us virtually or at the New York Stock Exchange. As always, you can find more details about our Investor Relations information on our website. So thanks so much for joining us today.

Steve Frank:

Thank you, operator. Good morning, everyone and welcome to the Zoetis fourth quarter and full year 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I will remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today’s press release and our SEC filings, including, but not limited to, our annual report, Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company’s 8-K filing dated today, Tuesday, February 14, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin and good morning everyone. As Kristin mentioned, we had a strong year in 2022 with revenue of $8.1 billion and adjusted net income of $2.3 billion both in line with the high end of our November full year guidance range. Full year revenue grew 4% on a reported basis and 8% operationally with adjusted net income increasing 3% on a reported basis and 11% operationally. Looking deeper into the operational growth for the year, price contributed 3% to full year operational revenue growth with volume contributing 5%. Volume growth consisted of 4% from new products, including Simparica Trio and our monoclonal antibodies, Librela and Solensia, and 2% from key dermatology products, partially offset by a decline of 1% from other in-line products. Revenue growth was broad-based with positive operational growth in each of our top 13 markets, which make up approximately 85% of our total revenues with international growing 9% operationally and the U.S. growing 7%. Our growth was driven by continued demand for our innovative new products in our companion animal portfolio, which grew 14% operationally. Our companion animal portfolio now makes up 64% of our global revenues. This growth was partially offset by our livestock business, which declined 2% operationally, primarily due to the generic competition, supply constraints as well as challenging market conditions in certain geographies. Performance in companion animal was driven by our small animal parasiticide portfolio, which grew 20% on an operational basis. Simparica Trio generated $744 million in sales, growing 58% on an operational basis. Our Simparica franchise reached $1 billion in global revenue for the first time in 2022. Our key dermatology products generated $1.3 billion in sales posting strong growth of 17% operationally with double-digit growth in both international and the U.S. Key derm growth in our international markets was especially strong at 27% operationally. We continue to see solid growth in our monoclonal antibodies for osteoarthritis pain. As expected, sales of Librela eclipsed the $100 million mark on the year, marking Zoetis’ 15th blockbuster product. We look forward to Librela’s expected launch in the U.S. in late 2023. Solensia contributed $30 million in sales in 2022, primarily from international markets, with solid penetration in the U.S. after a launch late in the year. Our companion animal diagnostics portfolio declined 2% operationally in the year, with declines in the U.S., partially offset by growth internationally. Our livestock business declined 2% on an operational basis. Our portfolio continues to be challenged by generic and cheaper alternatives to DRAXXIN in cattle as well as Zoamix in poultry. We do expect the generic impact to begin to moderate in 2023. Additional declines were driven by supply challenges on certain livestock products as well as unfavorable market conditions, especially the U.S. cattle and China swine markets. Moving on to our Q4 financial results, which was another strong quarter. We closed Q4 with revenue of $2 billion, representing an increase of 4% on a reported basis and 9% on an operational basis. Adjusted net income of $539 million is an increase of 14% on a reported basis and 27% operationally. Of the 9% operational revenue growth, 3% is from price and 6% from volume. Volume growth consisted of 3% from new products, which includes Simparica Trio as well as Librela and Solensia and 2% from key dermatology products, while other in-line products grew 1%. Companion animal products grew 15% operationally while our livestock portfolio was flat in the quarter. Simparica Trio was the largest contributor to growth in the quarter, posting global revenue of $171 million, representing operational growth of 39% for the quarter. We expect Simparica Trio to continue to grow the addressable market for fleet taking hardware globally and drive the conversion from collar and top parasiticides to oral combination products. These dynamics will provide additional run-rate for future expansion of the broader market and revenue growth for Trio even once competing triple combination products enter the market. Our key dermatology products, Apoquel and Cytopoint, had solid global growth in the quarter, posting $347 million of revenue, representing 14% operational growth against a robust prior year in which key derm grew 23% operationally in the fourth quarter of 2021. Our monoclonal antibodies for osteoarthritis pain in dogs and cats continue to grow posting $39 million of revenue in the quarter, primarily in international markets. Meanwhile, sales of livestock products were flat on an operational basis in the quarter, with growth in fish and poultry offset by the impact of generics and supply constraints on cattle and swine products. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.1 billion in the quarter, growing 7% with companion animal sales growing 12% and livestock sales declining by 6%. Focusing first on companion animal, we returned to double-digit growth in the quarter, as we resolved the majority of our supply issues from earlier in the year. In the U.S. veterinary practice revenue is growing approximately 6% and spending per visit remained strong again this quarter, increasing 10% despite a 4% decline in clinic visits in the quarter. The visit decline reflects comparison to the peak visit numbers in 2021, driven by pandemic after-effects and increased adoption of pets as well as the impact of veterinary workforce challenges that have limited some clinic capacities. Absolute clinic visits remain above pre-pandemic levels. We continue to see growth in the retail segment outpacing other channels. In Q4, sales to our retail partners grew by 49%. Simparica Trio continues to drive growth in the quarter with sales of $158 million in the U.S., growing 39%. With the supply constraints from earlier in the year largely resolved, we were able to leverage promotional efforts to drive growth and regain market share in the quarter. Key dermatology product sales in the U.S. were $239 million for the quarter, growing 11% with Apoquel and Cytopoint, each growing double-digits. We expect to continue the expansion of the market for the foreseeable future. U.S. livestock declined 6% in the quarter as expected, with sales of cattle products impacted by supply restocking for certain products in the third quarter of 2022 as well as the impact of generic competition in cattle and poultry. Moving on to our International segment, where revenue was flat on a reported basis and grew 12% operationally in the quarter. International companion animal revenue grew 21% operationally and livestock grew 4% operationally. Increased sales of companion animal products resulted from growth in our parasiticides portfolio, our key dermatology products and our monoclonal antibodies for alleviation of osteoarthritis pain. Our international small animal parasiticide portfolio had a very strong quarter. Growth was driven by revolution franchise, which rebounded well from supply challenges, especially in China. Our key dermatology products contributed $108 million to revenue and grew 22% on an operational basis in the quarter, with growth in Cytopoint across all key markets and continued double-digit growth of Apoquel. We continue to be pleased with the performance of our oral pain portfolio with Librela generating $26 million and Solensia delivering $7 million in fourth quarter sales internationally. Librela sales in the quarter dipped slightly below the prior quarter due to the removal of supply allocation in certain markets, which led to higher inventory levels at the end of Q3. We expect to see significant contribution to growth in 2023 coming from Librela across our International segment. Moving on to our International Livestock segment, which grew 4% operationally in the quarter. Our fish portfolio grew 25% operationally due to increased demand for vaccines in key salmon markets, including Norway and Chile. Sales of poultry products grew due to increased demand for poultry protein. Growth was partially offset by swine sales, which declined due to supply constraints in certain vaccines across international. The slight decline was partially offset by growth in China, driven by a weak comparative quarter in the prior year and improved swine market conditions. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 68.1% decreased 150 basis points on a reported basis compared to the prior year, resulting primarily from unfavorable foreign exchange impacts. Operationally, gross margin declined 60 basis points, driven by higher inventory charges as well as higher manufacturing and freight costs, which were partially offset by favorable price and mix. Operationally, adjusted operating expenses decreased 6% with SG&A declining 9% driven by lower compensation-related expenses and lower advertising and promotion, partially offset by higher freight and logistics related expenses. R&D expenses increased 10% operationally due to higher compensation costs and higher project spend. The adjusted effective tax rate for the quarter was 20.8%, an increase of 220 basis points, primarily due to lower net discrete tax benefits in the quarter and a lower benefit in the U.S. related to foreign-derived intangible income. Adjusted net income grew 27% operationally and adjusted diluted EPS grew 30% operationally for the quarter. Capital expenditures in the fourth quarter were $171 million. In the quarter, we repurchased approximately $400 million of Zoetis shares and returned over $0.5 billion to shareholders through a combination of share repurchases and dividends. For the year, we have repurchased almost $1.6 billion of Zoetis shares and returned over $2.2 billion to shareholders. In December, we announced a 15% annual dividend increase, continuing our commitment to grow our dividend at or faster than the growth in adjusted net income. Now moving on to our guidance for the full year 2023, please note that guidance reflects foreign exchange rates as of late January. We are expecting foreign exchange to have a minimal impact versus the prior year, with the full year impact neutral at revenue and slightly accretive at adjusted net income. The foreign exchange impact in the first half will be unfavorable versus prior year, particularly in the first quarter. In the second half of the year, foreign exchange is expected to be favorable based on the late January exchange rates. For 2023, we are projecting revenue between $8.575 billion and $8.725 billion, representing a range of 6% to 8% operational growth. Volume will be 1% to 2% at the low end of our guidance range and 3% to 4% at the high end. We again expect companion animal to be the primary growth driver in 2023 with the continued strength of our diverse Simparica Trio portfolio, the adoption of our monoclonal antibodies for OA pain and further expansion of our key dermatology products. Despite the decline in vet planning visits last year, industry fundamentals remain strong. Business remain above pre-COVID levels and clinic revenue is at an all-time high as the standard of care continues to increase. We anticipate modest livestock declines in 2023, driven by the generic impact on DRAXXIN sales, particularly in the first half as well as unfavorable market conditions in U.S. cattle. These declines will be partially offset by growth in poultry, driven by increased demand for poultry protein and new product launches as well as fish. The fundamental trends which make livestock an essential business remain intact. I’d like to touch upon the key assumptions that underpin our expectation for revenue growth. For companion animal, we assume a triple combination product we will launch in the U.S. in the first half of 2023 to compete against Simparica Trio. We expect this entrant will help Trio drive the conversion from topicals and collars to triple combination or parasiticides and still project significant growth for Trio. We do not expect competitive entrants in 2023 for our key dermatology products, Apoquel and Cytopoint. We expect another year of robust growth of our key derm portfolio coming from continued expansion of the dermatology market and price. We are excited about the continued growth in our OA franchise and plan to launch in several new markets next year. For the remainder of the P&L, adjusted cost of sales as a percentage of revenue is expected to be in the range of 29.5% to 30%, where favorable foreign exchange price increases and product mix are partially offset by higher input costs. Adjusted SG&A expenses for the year are expected to be between $2.06 billion and $2.1 billion, with the increase from 2022 focused on supporting primary drivers of revenue growth. Adjusted R&D expenses for 2023, is expected to be between $635 million and $660 million. R&D spend can fluctuate year-over-year. This increased investment is reflective of both new projects as well as those advancing in our pipeline. Zoetis is the leader in animal health because of the disruptive innovation, novel products and life cycle enhancements we bring to the market. This increase in R&D expenses reflects our commitment to ensuring our capital allocation prioritizes innovation. Adjusted interest and other income reductions are expected to be approximately $170 million. Our adjusted effective tax rate for 2023 is expected to be in the range of 20% to 21%. Adjusted net income is expected to be in the range of $2.49 billion to $2.54 billion, representing operational growth of 7% to 9%. Our guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. We expect adjusted diluted EPS to be in the range of $5.34 to $5.44 and reported diluted EPS to be in the range of $5.03 to $5.14. We are anticipating capital expenditures in 2023 to increase to $950 million to $1 billion. We continue to make investments to support our future growth, including manufacturing capacity for monoclonal antibodies as well as oral solid dosage. Finally, Zoetis and the animal health industry remain resilient in the face of economic headwinds. Our 2023 guidance range is reflective of uncertain macroeconomic conditions and the impact of veterinary clinic labor challenges. While guidance represents our expectations for the full year, Q1 revenue is expected to be below the low end of the operational growth rate in our full year guidance due to a variety of reasons. First, Q1 2022 was a strong comparable quarter as we saw robust growth with limited impact from vet clinic labor constraints as well as minimal disruption from our diagnostics field force model change, which began in Q2. Additionally, in the quarter, we expect to see lingering impacts of the latest COVID wave in China. Lastly, the return of supply on certain products, including Simparica Trio, and subsequent channel restocking as well as promotions to regain share in Q4 2022 modestly increased inventory levels in the channel in the short-term. In Q1, we expect a modest decline in adjusted net income versus the prior year as a result of the timing of our 2022 sales force extension in the U.S., which did not start until Q2, as well as the R&D investment noted earlier, which is also off a low base in Q1 2022. Now to summarize. 2022 was another strong year despite some challenges, we significantly outperformed the market and continue to take share, all while growing the bottom line faster than the top line. As we begin 2023, we once again expect to grow faster than the market, driven by the strength of our innovative portfolio, our ability to successfully launch new products and expand existing markets and our confidence in the end market dynamics for the spaces we compete in. Now I’ll hand things over to the operator to open the line for your questions. Operator?

Michael Ryskin:

Great. Thanks for taking the question and congrats on the quarter, guys. I’m going to throw in a couple of just real quick. First, I would have to get your latest thoughts on NexGard plus BI triple combo now that it’s been unveiled at VMX. Just what are your expectations for Simparica Trio growth this year, if you could give us a ballpark for that? And then second, I want to talk about R&D spend in 2023. It seems to have jumped quite a lot year-over-year, and that’s a big part of why operating margins aren’t expanding as much as we’re used to. Any specific programs you want to highlight? And anything you can say in terms of when that R&D spend will translate into future launches? Is this something that’s sort of in the regulatory phase or weight clinical phase? Just give us a sense of where the extra $100 million year-over-year is going? Thanks.

Wetteny Joseph:

No. Look, I’ll just add a couple of points. Going back to Trio, we expect, as Kristin said, for Trio to grow significantly in the year, although as we now are well into our third year with a product, we wouldn’t expect it to continue to grow at 58%, which is what it did in 2022. Now the timing of our supply recovery in 2022 and the fact that as we see competition come in, it may drive some promotional activities that might drive some variability in terms of quarter-to-quarter in terms of where the growth is. But for the total year, we expect significant growth on Trio. And then on the R&D spend, it’s our practice that we don’t actually dictate what the investment in R&D is going to be. We let the pipeline dictated. And so as we see programs either coming into research or coming out of research into development or into late development as those programs require spending, and we do a full ROI spec, etcetera, on them, we go ahead and fund those. And so we’re very pleased to see that the pipeline is demanding this level of investment and we will still be able to deliver faster growth at ANI in revenue based on our guide of 6% to 8% of revenue and 7% to 9% at adjusted net income.

Jon Block:

Great. Thanks, guys and good morning. Wetteny, the 4Q GM of 68.1% was a little bit below us for the quarter, but the 2023 guidance of 70% to 70.5% was certainly solid. So maybe if you can just talk to the drivers for ‘23 gross margin or those the supply chain easing, maybe a little bit about the cadence? And then maybe just sort of as a tack on to that or the second question. In 2022, it was sort of a tale of two halves for atopic derm. One H was operational around 20%, two H operational, I think it was closer to 10%. I think you guys alluded to solid growth in ‘23, but do you want to just frame that for us? Is it a continued deceleration of atopic derm into ‘23 with no competition because I think you clarified that? Or can we expect some level of stabilization, call it, in that high single, low double-digit range for the atopic derm franchise? Thanks, guys.

Operator:

Our next question comes from Erin Wright from Morgan Stanley.

Wetteny Joseph:

Yes. So let me first touch on your questions around supply, and it’s Trio as well as other products. As we said in the third quarter call, while we had some outages in supply during the year, particularly in the third quarter, competitors actually took advantage of that and run promotions. And we certainly intended to run promotions as we recovered on supply, which we did in the fourth quarter. And so I think the timing of our supply recovery, whether it’s for Trio in the U.S. or for Revolution in China will drive some stocking levels, certainly as we enter into 2023, which we discussed. But I think typically, you’ll see some increase in inventory levels from Q3 to Q4 anyway, because distributors are anticipating our price increases and the intent to drive a little bit of that. So I would say when I look at across other products, it’s probably more in the range of typical increase that you would see. But if you look at Trio, we’re probably, if I had to bracket it in terms of the impact on Trio, if you back out, what would typically be an increase from Q3 to Q4 anyway. So the incremental contribution in the fourth quarter, I’d put somewhere in the $25 million to $30 million range. So it’s not a significant number for us. And certainly, as we discussed already, we factored that into our guidance, and we expect significant growth from Trio on the year. With respect to Librela, look, we continue to expect and I’m very confident that we will see an approval in a well in the first half of the year, our plans have not changed. We continue to plan to have an early experience program run on the program once we’ve gotten approval and we have the label set, etcetera, and that will transition into a launch sometime late in the year.

Wetteny Joseph:

Yes. And we will give a better bracket in terms of what we expect the impact depending on the timing of the launch and what we see through the EEP program, etcetera.

Louise Chen:

Hi, thanks for taking my questions, here. So I wanted to see if you could give more color on how you’re investing in supply to meet the growing demand for your products and when you actually expect to complete – or what your objectives here? Thank you.

Kristin Peck:

The only thing I would build on there, Louise, is I mean if you look at the CapEx number that Wetteny was talking about in his prepared remarks, of $950 million to $1 billion. That is clearly the highest CapEx that we have had. But I also think you should look also at what we said were about R&D. And if you look at significant new investments in R&D, those are going to be products that we are going to have to be able to manufacture in a few years. What you are seeing is the commensurate investment in our manufacturing capabilities to be able to launch those products and really critical platforms across the globe. So, we are very confident in where our pipeline is, and we are going to invest in our manufacturing capacity to deliver on those products over the medium to long-term.

Nathan Rich:

Hi. Good morning. Thanks for taking the questions. The first one on Trio, I would be curious just to get a sense of what kind of factors you are watching as you think about the impact that competition could have. And magnitudes that would kind of push you to the higher or lower end of your range for competition. And are you anticipating any changes to pricing or your promotional cadence when competition enters? And then my second question on DRAXXIN. Just how much of a drag will that continue to be in 2023? I think you have previously said that you will start to cycle the second year of competitive entry in the first quarter, but I think there has been some more recent price changes. So, just curious what we should expect in terms of the impact on the livestock business this year?

Wetteny Joseph:

Yes, absolutely. Look, as we said from the very beginning, we were expecting DRAXXIN to have about 20% decline in the first year of generic competition and then another 20% in the second year. The first year was slightly better than our expectations coming in somewhere around 16% decline. But the second year was a little bit worse. So, I think we are sort of in that ballpark. I think the second year is about 25%. So, we are at a level now that once we lap, I would say, the second year, which would be through the first quarter of ‘23, which is why in the previous commentary, we said, particularly in the first quarter, I think we are at a low enough level, won’t be as meaningful as an impact on us, and I think the drag on our overall are stock business won’t be as significant. So, I would still expect some pressure on livestock given where U.S. cattle, for example, as a market is we are watching swine, particularly in China and anti [ph] has across other regions to determine where we end up lending. But we think livestock will be slightly down year-on-year, maybe marginally better than we – than you saw in 2023, where livestock was down 2%.

David Westenberg:

Thank you for taking the question. So, I want to kind of continue with the some on Trio dynamics. Can you talk about maybe if you got any word on in terms of what the label might look like on the competitive launch? And can you give a little bit more color? I think you said in the prepared remarks that you expect it to come from collars and topical. What are you kind of seeing in the marketplace that suggests that as opposed to whether maybe legacy oral parasiticides? And then kind of the second question here is on the increase in R&D spending, are you going to continue to give out some of the – what you have in pipeline about – I think you guys usually give out six months in advance to Wall Street. Is that kind of still the expectation when you talk about pipeline? And thank you very much.

Wetteny Joseph:

Yes. Look, it’s only small addition I will do to Trio is we do get to 100% heartworm after the first dose. So – and with the product being in the market almost 3 years and satisfaction levels being very high and penetration across clinics, etcetera, we are very confident on our position as competition enters into the space. On R&D, look, I think unlike human health in animal health is not as much visibility as given with respect to what’s being specifically worked in the pipeline, we see that as a competitive advantage for us given our track record and how we continue to drive innovation in the spaces that we enter. And so we won’t necessarily be changing that significantly here in terms of what we have in here, but we have talked about various aspects of unmet needs that if you were to ask veterinary practitioners, what are the top 5 or 10 unmet needs that they have, I think you would imagine that we are working on all of those areas.

Chris Schott:

Great. Thanks so much. I just had a question on the overall volume comments you made. I think it was 1% to 2% volume growth at the low end versus 3% to 4% at the high end. Can you just elaborate on the dynamics there? So, how does that look at for companion versus livestock? And maybe as part of that, what’s implied in terms of vet visit growth this year? And is that even a relevant swing factor in any of the overall outlook for the business? Thank you.

Operator:

Our next question comes from Brandon Vazquez from William Blair.

Kristin Peck:

Sure, Brandon. I will start and let Wetteny build on both of them. So, in diagnostics, first of all, just ready and are joining you from our national sales meeting actually out in Denver. And I would say the energy in our diagnostics team is just amazing. So, we will – as Wetteny mentioned in his prepared remarks, Q1, a little, but we didn’t have them on board until Q2 of 2022. So, what we are expecting as we look into 2022 as we get into the sort of middle of the year and the end of the year is really a return to at least market growth in the U.S., if not faster. We have continued to see very strong growth in international, as you saw from last year, and we expect that to continue into the year. So, we are really excited about the new field force, having them on the ground, having them fully up to speed. Wetteny and I spent a lot of time with them yesterday. So, I would say super optimistic overall in diagnostics, returning to growth across the board, certainly, the images platform and investments there. And then I will start on China and let’s see what Wetteny has to build on it. We did see overall strong growth in the year of 11% and we are optimistic so far year-to-date in sort of the return in China. We have seen both on the companion and animal side, a really strong rebound there as we look into – certainly, for us, our year is both December and January. December, obviously, with the number of people home stick there was a little weaker, but we are seeing really strong rebound in January. And we are looking, I think at a strong year for us in China. Also, as you look at livestock with opening up China, more return to eating out to travel, to tourism will not just be good for China, to be honest with you, it could be good for livestock across the globe. So, it’s one to watch, obviously, there is huge uncertainty around China not to mention geopolitical tensions and potential UFO these days. But we stayed really confident in where we think China will be for the year. But it remains a big risk both for China as well as for livestock across the board because I think a lot of if China returns, they will see China buying a lot of poultry, beef, etcetera, from Brazil, Europe, the U.S. there. But I don’t know if you want to build anything either on the diagnostics question or China, Wetteny?

Operator:

Our next question comes from Elliot Wilbur from Raymond James.

Kristin Peck:

Sure. I would say a few things on derm, both domestically as well as globally. We will be looking to expand and I think as Wetteny said in his prepared remarks, reaching peak sales in some of these markets takes a little bit longer outside of the U.S. So, we are continuing to see very strong growth in dermatology, both in Apoquel and Cytopoint as well as life cycle innovation remains really important for us here. The movement to Apoquel Chewable – it’s been growing much faster than we expected and the conversion there remains very, very strong. So, I think it’s both, you are going to see growth in volume, certainly potentially a little more globally. But beyond Apoquel, I mean I think Cytopoint, that’s really love it and so do customers. It’s 100% compliance. So, I think if you look at the overall franchise, Apoquel, Cytopoint, Apoquel Chewable, we will probably see greater growth outside the U.S. So, we are both looking at volume. We have taken price consistently here. And certainly, 2023 will be no different here. So, I think you will see growth from both price and from volume, you will see chewable really building on it. I think you will see a real uptick in Cytopoint. Again, we are back to absolute full supply. We, as you know, last year, did need to make some trade-off decisions there, because that the same impacts as our other mAbs and in some of our vaccines with regard to some of the COVID vaccine supply challenges we had. But we are back full speed. So, we are also really investing in other big growth drivers here will be direct-to-consumer advertising in international. So, we are going to do unbranded DTC as we have started last year. And we are really – even in the U.S., you still have 6 million itchy dogs that are currently undiagnosed and not treated. So, we really continue to see growth here, as we said, double digit, as Wetteny mentioned earlier, but I will let Wetteny take the second question, obviously, on inflation in 2023 and etcetera.

Operator:

And our last question comes from Balaji Prasad from Barclays.

Wetteny Joseph:

Yes. So, look, when you look at our capital allocation priorities, certainly investing in the business is the first place we go. And clearly, we are poised to significantly invest in the areas of R&D as well as across our supply chain and manufacturing – you saw the significant increase in R&D spend anticipated for 2023 versus 2022. And our CapEx numbers are going to be in the range of $950 million to $1 billion on the year. Certainly, as you look at our strategic priorities, they are aligned with where we look at from a BD perspective in terms of where there might be opportunities to accelerate some of those execution on our strategies. And they span across our current slate of businesses, including some of the R&D areas in terms of external innovation and so on. BD is one of those areas, as you know, is hard to predict in terms of exact timing and so on, but it is an important lever that I would say, second after investing in the business. And then thirdly, as you saw in 2022, we are returning capital to shareholders to the tune of $2.2 billion in total between share buybacks and dividends. Alright. I think you had a question – sorry, I think you had a question in terms of new pets. Look, if you look at the growth in the industry over the last two decades, it’s been about 5% to 6%. The way I look at it, vet visits, in essence, as you see pet population growth and so on, it would be reflected in that. They have accounted for about 1% of that growth historically. So, the bigger element of growth here is really pet owners’ willingness to spend for innovation, and you see that reflected in the spend per visit figures that are far more in terms of the impact on growth historically, and we anticipate that continuing. So, as you sit here today, I wouldn’t say new pet increases is a major factor into what we are looking at. It’s our innovation and pet owners willing to pay. And the demographics of pet ownership with Gen Z and millennials willing to spend more on pet health and prioritizing those as well as higher income households that are bringing pets and more pets into their homes. Those are the factors that we watch that contribute to growth.

Kristin Peck:

Thank you so much, and thanks everybody for your questions and certainly for your continued interest in Zoetis. And just to summarize, we see really positive and sustainable demand for our products based on the fundamental drivers of animal health, we see continued strength across our diverse global portfolio, especially in our products for pet care. And we are continuing to invest in the talent, the pipeline and the manufacturing capabilities that can support our future growth, while adapting our business to the increasingly dynamic environment where we operate. So, we look forward to keeping you updated on future calls, and thanks so much for joining us today.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis third quarter 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements. And that, actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or US GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, November 3, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a solid quarter with growth across a number of our core franchises, driven by our companion animal performance, especially in international. Today, I will focus my comments on our third quarter financial results, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the third quarter, we generated revenue of $2 billion, growing 1% on a reported basis and 5% on an operational basis. Adjusted net income of $566 million declined 5% on a reported basis and grew 2% on an operational basis. Of the 5% operational revenue growth, 4% is from volume and 1% from price. Volume growth consisted of 4% from new products, which includes Simparica Trio and our monoclonal antibodies for osteoarthritis pain in dogs and cats, Librela an Solensia and 1% from key dermatology products, while other in-line products declined 1%. The decline was largely the result of supply challenges. Companion animal products continue to be the primary driver of growth, growing 10% operationally, with livestock declining 3% on an operational basis in the quarter. Simparica Trio was the largest contributor to growth in the quarter. Trio posted global revenue of $172 million, representing operational growth of 43% versus the comparable period in 2021. We expect to continue to grow the addressable market for flee, tick and heartworm globally and see significant room for growth with brands like Simparica Trio, Simparica, ProHeart and Revolution Plus. Meanwhile, our key dermatology products, Apoquel and Cytopoint, had solid global growth, especially internationally, with $343 million of revenue, representing 11% operational growth against a robust prior year in which these products grew 26% operationally. Year-to-date revenue is $966 million, representing 18% operational growth. Sales of our monoclonal antibodies for osteoarthritis pain in dogs and cats in International continue to exceed expectations, posting $37 million of sales in the quarter. Switching to Diagnostics. Our global Companion Animal diagnostics portfolio recorded $78 million in revenue in Q3, declining 9% operationally. Despite declining revenues, we saw solid new instrument placements in the quarter. The decline in our US diagnostics portfolio was partially offset by growth internationally in the quarter. In the US, our diagnostics results were also impacted by the vet clinic workforce challenges, and we continue to experience a slowdown in sales as we transition to our new go-to-market model and build out a sizable and new dedicated field force for diagnostics. While disruptive in the short term, this investment is putting the necessary elements in place to position and grow our diagnostics portfolio over the long run. We expect the effectiveness of our new diagnosis field force to improve gradually into 2023. Diagnostics remains core to our business and a key long-term growth driver for Zoetis. Meanwhile, sales of lifestyle products declined by 3% operationally in the quarter. Our portfolio continues to be challenged by generics and cheaper alternatives to Draxxin in cattle as well as Zoamix in poultry and supply challenges for certain products. Our fish portfolio grew 19% operationally in the quarter and along with the strength of our sheep products in Australia, partially offset the broader decline. Now moving on to revenue growth by segment for the quarter. US revenue was $1.1 billion in the quarter, growing 2%, with companion animal sales growing 6% and livestock sales declining by 7%. Focusing first on companion animal. The effects of our ongoing supply challenges were more pronounced in the third quarter, tempering growth in our parasiticides. In US companion animal, we are also seeing vet clinic workforce challenges limiting appointment availability as visits declined 4% in the quarter. Despite lower visits, practice revenue is growing approximately 5% and as spending per visit remained strong again this quarter, increasing more than 9%. The decline in clinic visits is stabilizing at pre-COVID levels, as the impact of higher pet ownership growth rates due to COVID normalize and vet practices deal with workforce challenges. However, underlying demand for veterinary care remains robust throughout the country, even as people return to work. While vet clinic workforce challenges do exist, we believe vet clinic revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better pet ownership demographics, higher compliance and more pets. Even with the robust comparative year, we continue to see volume growth in our companion animal products, driven by our innovative products, such as Trio and our key dermatology products, Apoquel and Cytopoint. Growth of Simparica Trio was again strong in the quarter with sales of $157 million in the US, growing 43%. Despite the impact of supply constraints and the vet clinic workforce challenges, we continue to take share within individual clinics. These dynamics will provide additional runway for future expansion of both the broader market and revenue growth for Trio. Key dermatology products sales in the US were $231 million for the quarter, growing 6% with Apoquel and Cytopoint each contributing to growth. Year-to-date, our US derm portfolio has grown 12%. Growth is tempered by prior year cover related spice in derm visits that drive visit growth of 25% in Q3, 2021, and help accelerate market expansion. This growth was also impacted by the ongoing pet clinic workforce challenges. We expect continued expansion of the market for the foreseeable future. US livestock declined 7% in the quarter as expected, with sales of cattle products impacted by generic competition for Jackson. Meanwhile, our US poultry portfolio continues to be negatively impacted by the expanded use of lower cost alternatives and generic competition for Zoamix. US swine product sales declined 3% in the quarter, driven primarily by increased competition for vaccines. Moving on to our International segment, where revenue declined 2% on a reported basis and grew 8% operationally in the quarter. International Companion animal revenue grew 17% operationally and livestock revenue was flat operationally. Increased sales of comparing animal products resulted from growth of monoclonal antibodies for alleviation of osteoarthritis pain, our key dermatology products, and Simparica Trio. We remain excited with the long-term prospects of these innovative brands and expect future direct-to-consumer advertising to help drive additional growth. Sales of companion animal vaccines also contributed to growth in the quarter. We continue to be pleased with the performance of our monoclonal antibodies for OA pain with Librela generating $31 million and Solensia delivering $6 million in third quarter sales. Librela remains on track to exceed $100 million in revenue this year, a new blockbuster for Zoetis. As we have mentioned in prior quarters, Librela is the number one pain product in the EU with the underlying performance metrics being very favorable for future growth. Reordering rates remain high. Compliance continues to exceed our initial expectations and we continue to see significant opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. We saw volume growth in our international companion animal portfolio in the third quarter and we also saw growth across our injectable products, including monoclonal antibodies and vaccines. Meanwhile, international livestock was flat operationally in the quarter. Our fish portfolio grew 19% operationally and experienced increased demand for vaccines in key salmon markets, including Norway and Chile. Sales of sheep products grew as a result of favorable market conditions and new product launches in Australia. Growth was offset by swine sales, which declined due to supply constraints across international and lower sales across Europe due to reduced exports to China and higher input costs for producers. Sales in Brazil also declined as we are seeing supply challenges on cattle products. Additionally, inflationary impacts on consumer spending are driving consumption away from beef to lower-cost animal proteins such as pork and chicken and reducing reducer profitability. Lastly, the Jurox acquisition, which is based in Australia, was completed on September 30 and is not reflected in our Q3 results. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 69.8% decreased 90 basis points on a comparable basis to the prior year, resulting primarily from unfavorable foreign exchange impacts. Operationally, gross margin slightly declined, driven by higher manufacturing, freight and other costs, which were largely offset by favorable mix and price. Adjusted operating expenses increased 3% operationally, with SG&A growth of 3% operationally, driven by T&E costs beginning to return to pre-COVID levels as well as freight and logistics. R&D expenses increased 4% operationally due to higher compensation costs and higher operating costs. The adjusted effective tax rate for the quarter was 20.9%, an increase of 420 basis points due to unfavorable changes to the jurisdictional mix of earnings, including decreased favorability related to foreign-derived intangible income in the prior year period. And finally, adjusted net income grew 2% operationally and adjusted diluted EPS grew 4% operationally for the quarter. Capital expenditures in the third quarter were $154 million. In the quarter, we repurchased approximately $375 million of Zoetis shares and returned over $0.5 billion to shareholders through a combination of share repurchases and dividends. Year-to-date, we have repurchased almost $1.2 billion of Zoetis shares. Now moving on to our updated guidance for the full year 2022. For operational revenue growth, we are lowering our growth to 7% to 8%, previously 9.5% to 10.5%. We are also lowering our operational growth expectations for adjusted net income to a range of 9% to 11%, previously 11% to 13%. This change in guidance is reflective of our Q3 results, continued impact from supply challenges and the ongoing veterinary workforce challenges. Foreign exchange rates on our updated guidance are as of late October and reflect the continued strengthening of the US dollar. Beginning with revenue for the full year 2022 due to lowering of our guidance and the impact of foreign exchange, we are now projecting revenue of between $8.0 billion and $8.075 billion. We lowered our operating expense guidance for the full year, reflecting lower expenses in both Q3 and Q4, which reflects our ability to manage costs. Additionally, it is worth noting that our expected Q4 expense decline is also impacted by an easier comp due to heavy spending in the fourth quarter last year. Additionally, our guidance for adjusted interest expense and OID was changed to reflect favorable changes to interest income. We now expect adjusted net income to be in the range of $2.27 billion to $2.31 billion. And finally, we expect adjusted diluted EPS to be in the range of $4.83 to $4.90 and reported diluted EPS to be in the range of $4.51 to $4.59. While lower, our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue over the long term. Our success will continue to come from our diversified portfolio of enduring brands driven by multiple sources of in-line growth, productive innovation and our infrastructure to develop and expand market globally. We expect to continue to execute across multiple dimensions of our business and capitalize on key growth opportunities for the foreseeable future. Now I'll hand things over to the operator to open the line for your questions. Operator?

Erin Wright:

Great. Thank you for taking my question. So when we think about some of these headwinds and tailwinds related to 2022, what is now proving to be more challenging than anticipated? Is it mostly the supply chain issues, or is it other factors here? And can you quantify the supply chain constraints, what sales would have been excluding these dynamics? And then, how should we think about those broader headwinds and tailwinds from an operational perspective into 2023, as we think about both livestock and companion animal, should low single-digit livestock growth in 2023 be the right way to think about it? And then, if that's the case, how do we think about companion animal operational growth in 2023? And I'll stop there. Thanks.

Wetteny Joseph:

Yeah, sure. Erin, as we've been saying throughout this year, supply certainly remains a headwind to meeting global demand. And as Kristin mentioned, the timing of recovery on some of these is very important. So as we went throughout the year and face supply constraints, particularly in Trio, despite the fact that Trio has performed really well for us, growing 65% on a year-to-date basis. The reality is, we had outages throughout the peak parasiticide season for Trio to Q2 and Q3, though we recovered late in Q3, the impact was such that we allowed competitors to be more aggressive about placing products on shelves, which we saw that impact as we exited Q3. But going forward, we do anticipate continuing to see some impact for Revolution, Revolution Plus, where we are selectively looking at key markets to deliver those products against others. So that is something that we're carrying into the fourth quarter, and we have reflected in the guidance that we have issued today. So while our business faces other impacts outside of supply, whether it's workforce or macro in certain markets. By far, the supply constraints are the biggest impact here, looking at how we've seen the year sort of transition versus what we saw earlier. And so, if you look at the guidance change here of about $200 million reduction in guidance, I would say, FX and supply account for more than 75% of that, with supply being by far the largest majority of that.

Michael Ryskin:

Great. Thanks. And I have a quick follow-up on that last point and then touch on something else. So on the supply issues, I think a lot of what you just commented on, Kristin and Wetteny was that, as you guys have these challenges in the quarter, your competitors took advantage of stock shelves. How should we think about that longer term? Is that a temporary switch over? Meaning, can you gain that back once you resolve especially some of the older products of Revolution, but also Trio, whether that happens this quarter or next quarter, are you going to be able to push those competitors out of those positions easily, or is that something that’s going to be a little bit more of a challenge to regain your footing there? And then, I also want to touch on Librela approval. It seems like that time line has slipped a little bit with the OUS inspection date. I'm just wondering, how does that change your launch expectations and ramp expectations in the United States. I mean, you talked about second half 2023 or later in 2023 launch. So just walk us through the dynamics there. Thanks.

Wetteny Joseph:

I'll just add a couple of points on Trio. Look, if you look at combination, flee, tick, heartworm, it's still a relatively new standard of care. And what you continue to see is in this very important part of the market, which is north of $5 billion globally. This expansion going from topicals and orals -- topicals and collars into orals and then now with triple combinations, we'll continue to expand that into the market and grow the market as well. So even with competition, we expect to continue to grow. So this dynamic that we described that occurred as we exited Q3 -- between Q2 and Q3, we see that as a temporary effect, and we'll continue to drive our share here. And particularly, since we are not anticipating a delay in terms of competition, though it's hard to say exactly when it will come. It could come in 2023, but we don't expect it early in the year. With respect to Librela, what I would say is, we continue to be extremely pleased and the product continues to perform better than our expectations across Europe. And though we've had capacity constraints that didn't allow us to be able to take full advantage of demand this year and we've had to actually make trade-offs in terms of delaying launches in other markets. As we exit the year, we anticipate next year being able to launch the product in additional markets outside the US and outside of Europe. And the product, again, continues to perform really well for us. So we're very pleased with that. And so this sort of delay in terms of when the actual approval will happen in the US, given the dynamics we're seeing in terms of the expansion of 40% of the dogs that have been put on the product and new to the market. The less of time duration of use of the product, et cetera, all bode well for sort of continued growth in this area and expansion of the pain market beyond the timing of the launch, et cetera.

Nathan Rich:

Great. Thanks for the questions. I had a follow-up on the supply constraints as well. Wetteny, it seems like based on your commentary on the second half revenue revision, the supply constraints would be something like a 200 to 300 basis point impact on second half volumes. I just wondered to see if that number is in the right ballpark. And as we think about the go forward, will there be a headwind in 4Q? It sounded like those -- a large majority of the constraints that may have been resolved by the end of the third quarter. Just wanted to see what we should expect for the third -- for the fourth quarter, excuse me. And then into 2023, would you anticipate there to be any lingering supply constraints or should everything be resolved at that point? Thank you.

Operator:

And we'll take our next question from Louise Chen with Cantor. Please go ahead. Your line is open.

Kristin Peck:

Sure. Louise, in your first question with regards to competition, I think the good news is we're not expecting competition early in the year anymore on Trio. But regardless of when competition arises, I do think we'll continue to grow through this. If you look at this category, even when [indiscernible] were introduced and you saw one then two then three, this category grew, we launched a triple combination, and we grew incredibly well. I think there was plenty of space here. Wetteny mentioned earlier, there's still movement from topicals and collars and this is a really innovative category. So I do believe you'll continue to see growth. As you look at dermatology, I would say the same thing. I think a competitor can help us continue to grow this market. There are still 6 million untreated dogs. The usage of this product in international is still significantly below that of the US when you have the same number of dogs with the conditions. So we continue to believe there is growth across these. Obviously, growth may decelerate in derm with a competitor, but I still think these are going to be growing markets. I think the innovation. And don't forget, we continue to look at life cycle enhancements for all of these products. We are not stopping with what we have. So I think there's a lot of visibility into a competitor might come, but not necessarily some of the innovations in these key product categories that we'll continue to do. With regards to innovation and livestock, Wetteny, do you want to take that one with regards to growth rates?

Operator:

And we'll take our next question from Jon Block with Stifel. Please, go ahead. Your line is open.

Wetteny Joseph:

Yes. So I'll take the first part of the question in terms of how we see margins and investments, et cetera. We've made a number of investments across the business, whether you look at what we're doing in R&D, what we've done with respect to our field force, and we'll continue to do across the diagnostics in our pet care field force, for example, in the US, we're making investments across our supply chain and manufacturing, obviously, given the demand we're seeing across our products and anticipated launches of other products out into the future. So we'll continue to make those investments, but we do have the ability to manage discretionary spend and you see that play out in the third quarter, where OpEx was below top line growth. And in fact, other than the tax rate difference to last year, if you look at our earnings before taxes, those grew at 8% on a 5% top line growth. So you see that leverage playing out in the P&L. And we have the ability to continue to do that. And I think we'll continue to use price to drive margins. The mix is favorable to us, given companion animal continues to grow faster than livestock. So companion animal grew 10% in the quarter where livestock declined 3%. So that mix is favorable to us, although, we see some offset with respect to inflation and so on, but you continue to see those drivers, and we can anticipate those going into next year. So we'll continue to make investments in select areas, again, prioritizing R&D prioritizing manufacturing and supply chain, for example, but we'll manage discretionary spend elsewhere to still deliver a leveraged P&L, which is what we've said. Now there may be quarters, where that doesn't play out exactly. But I think if you look at a year, you will see us continue to do that. And that margin between top line growth and bottom line growth may be less than what the business naturally can do, but that's because we're making investments where we see the need, but we will still manage to deliver annually a leveraged P&L is our target.

Wetteny Joseph:

Look, I just think one of the things that I've really learned in the last 18 months be in this space is, it's not if you recover from a supply constraint, it’s when you recover really matters. So we talk about that already in parasiticides from a season perspective. But that's true across livestock. If you look at gaining supply in time for fall cattle run in the US is important. And so, if you missed that window, you have a greater impact than you thought. So if you were planning to and executing towards the timing of that, and you cover a little bit later, that's where you start to see the impact. And I think that's what's played out here as we exit Q3 and why some of this might appear as a little bit of a surprise to you.

Brandon Vazquez:

Hi, everyone. Thanks for taking my question. I wanted to focus on -- we have talked about 75% of the lowered guide was FX and some of the supply constraints. Maybe that smaller portion, the 25% and less, I think, was vet staffing issues. So maybe, can you talk a little bit about what kind of changed what incrementally maybe got worse in the vet staffing issues, how that's trending into the fourth quarter, so we can kind of frame up how that might be a headwind as we go into 2023? And really how -- what kind of confidence you have that, it's not maybe a demand issue as macro conditions worse and it's really just a vet staffing issue? Thanks.

Wetteny Joseph:

I would just say, look, as I said earlier, there are other factors that impact our business. I mean you do see some macro in some select markets. So if I look at Brazil, for example, you see a trade down from beef to poultry and swine. If you look at China, we continue to see lockdowns impact consumption, particularly on the livestock side. But if you look at companion animal performance, even in those markets, despite the significant letdowns in China, you see strong double-digit growth in companion animal. We saw double-digit growth in companion animal even in Brazil, despite the macro. So I do think this speaks to the resiliency of particularly on the companion animal side of the space, even in challenging macro areas. And then, the other thing I'll say with respect to a very strong comp is, if you look at derm, our third quarter last year, derm grew 26% globally. It was north of 20% in the US. And so when you have labor capacity constraints at the vet clinic, being able to perform above that level of growth from a prior year perspective becomes a challenge. So, again, supply is by far the biggest challenge we faced all year and certainly in the third quarter. But the macro continues to be largely from a demand perspective, remaining strong.

Chris Schott:

Great. Thanks so much. Just a couple of quick ones here for me. I just want to come back to Trio. With this competitor delay that you're talking about for early next year. I just want to make sure I'm clear. Is there going to be any supply issues as a rate limiter for growth of Trio in 2023 or was this more of a onetime issue in 2022. So, I guess, can you fully take advantage of that delay in competition as we think about the spring season next year? And my second question was on the ongoing supply issues. I know this is -- in the near term, you can't do much about this. Is there an ability to either hold higher inventories or just think about supply differently kind of going forward to ensure that, I guess, these issues don't happen again in the future. Again, I know you can't deal with that in the 3Q, but just as we think about kind of 2023 and beyond, or do you view this, as discussed, a moment in time where there's not much of an ability to manage this? Thanks, so much.

Chris Schott:

The ability to manage inventory and so on to --

Wetteny Joseph:

The only thing I would say is, look, the actions we've taken this year will continue to execute against give us confidence in our ability to capitalize on the opportunity here with a delay from a competition standpoint. But what we've learned over the last two-plus years is, things happen in this world, whether it's US or Europe and so on. So barring any sort of major events, we do feel confident with our ability to capitalize on this and execute to meet the demand for the product. And we anticipate we'll continue to see demand beyond when a competitor comes into place as well, for the reasons we've already stated.

David Westenberg:

Hi. Thank you for taking my questions. Most on supply chain have already been answered. So I'll start with Librela, I think you mentioned it's a blockbuster. It's only outside of the US. I think we typically think of animal health as being or companion animal as being kind of half in the US, half outside the US. Is there something specific about outside the US that's made it resonate so well, or should we still think of this as maybe a $200 million product if it was available in the US? And then a question for Wetteny, you mentioned a lot more, I think, on competition in livestock and I've heard commentary in the past. I mean, I think you said poultry vaccines and Draxxin. Draxxin, of course, has been the ongoing issue. Can you talk about -- is there a way to quantify how much more this quarter or what we're seeing now is competition versus just dynamics across livestock because, of course, dynamics across livestock have been a little bit on the weaker side. And I just want to see how much is transitory and how much of this might be permanent. Thank you for the questions.

Wetteny Joseph:

Yes, sure. Look, the first thing I would say is, there is no structural change with respect to the competitive nature of livestock. It's always been competitive and it remains so. So our commentary here today and what we've been talking about over the last couple of years isn't necessarily different. What is, is that generic competition has had an impact on us over the last couple of years as we anticipated, as we said. So Jackson, if you look at Jackson prior to LOE, we are roughly in the mid-$300 million, let's call it, $350 million in revenue. That by far, the largest sort of individual product within livestock. And so, certainly, as we anticipated, about a 20% impact in the first year, another 20% in the second year. The first year was a little bit better than that. It was south of 20%, but the second year is above that. And so, still in the neighborhood, maybe a little bit worse than what we thought initially, with respect to Jackson, but there's no other large product like that. I would say, in the portfolio, though Zoamix also has seen some competition, but it was nowhere near the size of a Jackson. So short story is, no change in terms of what we're seeing in terms of the competitiveness of livestock, is just a little bit more intensification in terms of products that have become generic if they are sizable.

Steve Scala:

Many thanks. First, just to clarify, in the prepared remarks, it was stated that supply challenges were more pronounced in Q3 and that there is increased uncertainty. Can you clarify why supply challenges peaked in Q3 and why there is now more uncertainty as opposed to what was seen in Q2 or apparently what is anticipated in Q4? And then secondly, China lockdowns were mentioned. Can you quantify the impact? And then lastly, what is the capacity of Lincoln to manufacture the pain monoclonal antibodies? I thought at one point, some small-scale manufacturing was done there. Is that a possibility to be expanded? Thank you.

Kristin Peck:

A few follow-ups there. I mean, for starters, the comment on uncertainty had to do with the macroeconomic environment. The question is, we're still seeing very strong consumer demand, but there's still a belief that we'll have potentially a recession in Q1, Q2, Q3. It was not about increased uncertainty, to be clear, in supply. It was uncertainty as to the macroeconomic environment and what we'll be looking at into 2023 or even in Q4. So let me be clear, the uncertainty comment that was not related to supply. The only -- the comment I'll make is with regards to the China question. I mean, look, in Q3, China grew 35% even with these lockdowns, again, underlying what we've been saying, the demand for our products remains very strong. What's important there is, if you look like four or five years ago, it was a majority livestock business. It became about 50-50 last year between livestock and companion animal. And if you look at it right now, the lockdowns are clearly impacting livestock, but companion animal, and given its close to 50-50, grew almost double what you see as China's growth that. So even with the lockdowns, we really see China remaining a strong market for us and growing quite well. So I think we can weather those lockdowns. I mean, look, if we -- the lockdown staff, which does not appear based on the news in the last 24 hours, to be something that's going to be happening in the near term, you might see livestock recover a little faster than what it is. But again, even in this environment, even with lockdowns, you saw 35% growth in Q3 in China. So I would just underscore that.

Michael Parolari:

Hi, guys. This is actually Michael Parolari on for Elliot. Thanks for taking my questions. So first one from me, you guys might have touched on this earlier, so apologies if I missed that commentary, but any early commentary on how we should be thinking about currency impacts on top line and margin trends into 2023? And then second question is, growth contribution from price this quarter, I believe, you said, was 1% compared to 3% over the past two quarters. Most of the industry seems to be moving in the other direction, given the current macro environment. So just wondering, if you guys could touch on perhaps what negatively impacted that growth contribution in the period and how to be thinking about that moving forward? Thank you.

Operator:

And we'll go next to Balaji Prasad with Barclays. Please go ahead.

Wetteny Joseph:

Yes. So we've been very pleased with the penetration across large corporate accounts. We're about 90%, but we still see more room, even within those large corporate accounts to increase utilization of Trio. And we continue to work on those, and that's part of where our expanded field force in the US is focused in addition to, obviously, with the launches of other products, et cetera, and across derm to continue to penetrate and so on. So we've been very pleased with the overall penetration across large corporates. We continue to work on smaller and mid-sized accounts as well. And we see more room within those penetrated clinics to get better utilization on Trio. I don't know if you would add anything to that, Kristin.

Operator:

And there are no further questions at this time. I'll turn the call back over to Kristin Peck for any closing remarks.

Operator:

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.

Steve Frank:

Thank you. Good morning, everyone, and welcome to the Zoetis second quarter 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements. And that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, August 4, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a very strong quarter with growth across a number of our core franchises and the continued resilience of our end markets. Today, I will focus my comments on our second quarter financial performance, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the second quarter, we generated revenue of $2.1 billion, growing 5% on a reported basis and 8% on an operational basis. Adjusted net income of $567 million was flat on a reported basis and grew 9% on an operational basis. Of the 8% operational revenue growth, 3% is from price and 5% from volume. Volume growth consisted of 6% from new products, which includes the Simparica Trio and Librela, 2% from key dermatology products, while other in-line products declined 3%. The decline in other inline products was expected and largely the result of the impact of intermittent supply challenges and generic competition for Jackson. Companion animal products continue to be the primary driver of growth, growing 14% operationally with livestock declining 1% on an operational basis in the quarter. Simparica Trio was the largest contributor to growth in the quarter. Trio posted global revenue of $237 million, representing operational growth of 72% versus the comparable 2021 period. We also continue to experience better-than-expected results from our Trio franchise outside the U.S. where we had sales of almost $30 million. We expect to continue to grow the addressable market for flea, tick and heartworm globally and see significant headroom for growth with brands like Simparica and Trio. Meanwhile, our key dermatology products, Apoquel and Cytopoint, had significant global growth again with $315 million of revenue, representing 16% operational growth against a robust prior year in which these products were 22% operationally in the second quarter of 2021. In Europe, our monoclonal antibodies, fostered pain in dogs and cats also meaningfully contributed to growth posting $31 million in sales. Our global companion animal diagnostics portfolio recorded $83 million in revenue in Q2, declining 9% operationally. Growth in our international diagnostics portfolio was more than offset by a decline in our U.S. business in the quarter. In the U.S., we experienced a decrease in sales resulting from our new grocery market model and the build-out of a sizable and new dedicated field force for diagnostics. While disruptive in the short term, this investment is putting the necessary fundamental elements in place to position and grow our diagnostics portfolio over the long run. We expect the effectiveness of our new diagnostic sales force to improve gradually for the remainder of the year. Diagnostics remains core to our business and a key long-term growth driver for Zoetis. Sales of livestock products declined 1% operationally in the quarter, negatively impacting growth across the portfolio were global generic competition for Jackson and the War in Ukraine. China swine products again declined due to lower pork prices and COVID-related lock downs. Our U.S. poultry portfolio also continues to be challenged by generics and cheaper alternatives to Zoetis. Meanwhile, our fish portfolio again grew double digits in the quarter. And along with the strength of our sheep products in Australia, partially offset the broader decline. Overall, livestock performance in the quarter continues to be in line with our expectations. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.1 billion in the quarter, growing 9% with companion animal products growing 13% and livestock sales declining 7%. Focusing first on companion animal. U.S. set practice revenue trends continue to be positive with practice revenue growing approximately 5%. Spending per visit remained strong again this quarter, increasing over 7%. Visit declined more than 2%, primarily due to challenging prior year comparisons. In terms of best visit traffic, it is worth noting that business in the second quarter were above the number of visits pre-COVID in the second quarter of 2019 and the trend line for growth in visits over the last several years continues to slow favorably. I would also like to point out that our companion animal portfolio in the U.S. had volume growth of 8% in the quarter. Our injectable portfolio of products that must be administered in the vet clinic also saw volume growth in the quarter. These products include Cytopoint, vaccines and Poulvac. Underlying demand for veterinary care remains robust throughout the country even as people return to work. While labor challenges do exist as they do across most industries, we believe vet clinic revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance and more pets. Companion animal growth of 13% in the U.S. was driven largely by sales from Simparica Trio as well as key dermatology products. Growth of Simparica Trio was again strong in the quarter with sales of $208 million in the U.S., growing 74%. We are pleased to see that a significant number of Trio customers are new to the flea, tick and heartworm category altogether. In addition, we continue to meet our clinic penetration targets and take share within individual clinics. These dynamics will provide additional runway for future expansion of both the broader market and revenue growth for Trio. Key dermatology product sales were $219 million for the quarter, growing 11% with Apoquel and Cytopoint is significantly contributing to growth. Year-to-date, our derm portfolio grew 16%. Our investments to support our derm portfolio have been instrumental in driving more patients into the clinics and we will continue to invest meaningfully in this space as a large portion of dogs with dermatitis remain undertreated, representing an opportunity to further expand the market. U.S. livestock declined 7% in the quarter, driven primarily by sales of cattle products as a result of generic competition for Jackson. Meanwhile, our poultry portfolio continues to be negatively impacted by the expanded use of lower cost alternatives and generic competition for Zoamix. Swine products sales grew in the quarter as a result of increased disease prevalence and favorable market conditions for producers. Moving on to our International segment, where revenue grew 2% on a reported basis and 8% operationally in the quarter. Companion animal revenue grew 16% operationally and loss lag revenue grew 2% operationally. Increased sales of companion animal products resulted from growth of monoclonal antibodies for alleviation of osteoarthritis pain, our key dermatology products and the Simparica franchise. These core brands continue to benefit from our international direct-to-consumer promotional campaigns and we remain excited with the long-term prospects of these programs. We continue to be pleased with the performance of our monoclonal antibodies for OA pain with Librela generating $26 million in Solensia delivering $5 million in second quarter sales. Librela remains on track to exceed $100 million in revenue this year. As we have mentioned in prior quarters, Librela is the number one pain product in the EU with the underlying performance metrics being very favorable for future growth. Reordering rates remain high. Compliance continues to exceed our initial expectations, and we continue to see significant opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. It is also worth noting that we are observing similar pet owner and vet clinic trends in many of our key international markets that we are seeing in the U.S. The higher standard of care and better demographics as well as a more rapid adoption of innovation continues to expand markets for our products and we expect these trends to continue. Volume growth in our international and companion animal portfolio was 10% in the second quarter, and we also saw growth across our injectable products, including monoclonal antibodies, vaccines and Cytopoint. Meanwhile, international livestock grew 2% operationally in the quarter with solid growth across fish, cattle and sheep. Our fish portfolio experienced increased demand for vaccines in key standard markets, including Chile and Norway. Cattle grew through favorable market conditions and price in key emerging markets, including Australia, Turkey, China and the U.K. Sales of sheep products grew as a result of favorable market conditions and new product launches in Australia. Growth was partially offset by continued weakness with the price of pork and COVID-related supply challenges in China as well as unfavorable producer rotational programs with MFAs in Europe and reduced stock sizes in Latin America impacting poultry. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 69.8% decreased 120 basis points on a comparable basis to the prior year, resulting primarily from unfavorable foreign exchange impacts as well as higher manufacturing, freight and other costs partially offset by favorable price and mix. Adjusted operating expense increased 10% operationally with SG&A growth of 8% operationally, driven by promotional and marketing expenses related to key brands and new product launches as well as T&E cost beginning to return to pre-COVID levels. R&D expenses increased 16% operationally due to higher compensation costs, increased spending on projects and higher operating costs. The adjusted tax rate for the quarter was 20.7%, an increase of 70 basis points, driven by changes in jurisdictional mix of earnings and lower discrete tax benefits related to share-based payments. And finally, adjusted net income grew 9% operationally and adjusted diluted EPS grew 10% operationally for the quarter. Capital expenditures in the second quarter were $146 million. We are still anticipating a significant increase in capital expenditures for the back half of 2022, primarily related to investments in Ireland, the U.S. and China to support manufacturing capacity needed to meet our long-term growth demands. In the quarter, we returned over $600 million to shareholders through a combination of share repurchases and dividends. We repurchased only $450 million of Zoetis shares, representing our largest share repurchase ever. Now moving on to our updated guidance for the full year 2022. For operational revenue growth, we are maintaining the midpoint and narrowing the range of growth to 9.5% to 10.5%, previously 9% to 11%. We are increasing our operational growth expectations for adjusted net income to a range of 11% to 13%, previously 10% to 13%. This change in guidance signals increased confidence in the back half of the year due to the continuing outperformance of companion animal, easing of certain supply constraints and an improvement in our business in China. Please note that our guidance for adjusted interest expense and/or ID was changed to reflect favorable changes to interest income. Foreign exchange rates on our updated guidance as of late July and reflect the continued strengthening of the U.S. dollar. Beginning with revenue for the full year 2022 due to the narrowing of our range and the impact of foreign exchange, we are now projecting revenue of between $8.225 billion and $8.325 billion. We now expect adjusted net income to be in the range of $2.35 billion to $2.39 billion. And finally, we expect adjusted diluted EPS to be in the range of $4.97 to $5.05 and reported diluted EPS to be in the range of $4.65 to $4.75. While guidance possess our outlook for the full year due to the unique factors impacting our business in 2022, I would like to note that our guidance for growth, especially for revenue and adjusted net income will be rated towards the end of the year. While we expect operating expenses to be incurred at a similar rate across that half of the year, we are noting an easier OpEx pop in Q4 than Q3 due to heavy spending in the fourth quarter of last year. Also, in Q3 of last year, we experienced an unusually low adjusted effective tax rate of 16.7% due to favorability related to foreign-derived intangible income and certain discrete items. We do not expect similar favorability this year. Our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster in the market. and growing adjusted net income faster than revenue over the long term. Our success will continue to come from our diversified portfolio of enduring brands driven by multiple sources of in-line growth, productive innovation, and an infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business and capitalize on favorable end market dynamics for the foreseeable future. Now I'll hand things over to the operator to open the line for your questions. Operator?

Michael Ryskin:

I'm going to try to squeeze in two real quick. First, on the -- your comments on the Trio competition, Kristin, certainly something that's been talked about and anticipated for a while. But I'm curious if you have any updated thoughts on how you'll respond? Is there going to be a change to how you price Simparica Trio or any additional promotional or do you see plants you can try to implement in the next 6 months. And I'm wondering if it's too early to give us maybe a ballpark dollar target for next year. Is it great to think that you could hit $1 billion in Trio sales in 2023. And then a quick follow-up, if I can. On margins for the year, when I'm hoping you could -- can you walk us impact to margins, both on gross margin and OpEx. Just wondering how that factors into the updated outlook.

Wetteny Joseph:

And Mike, your question on margins and OpEx. If you look at our gross margins on a year-to-date basis, if you take out the impact of FX, we're running about 20 basis points above last year. So in the quarter, you saw gross margins down about 120 basis points, but it's all FX driven. We've effectively maintained OpEx growth range in our guidance, and we're able to raise the bottom line guidance to 11% to 13% versus 10% to 13% that we started the year with. So again, FX is having an impact here but we are executing into our plan, and we'll see an improvement even on the bottom line growth rate.

Erin Wright:

Could we get an update on Librela, both the U.S. approval and the supply chain constraints for that product in international markets. At this point, do you think you have visibility if supply chain constraints will have any sort of impact on the U.S. launch in terms of timing? And after you do get approval in the U.S., will you be ready to broadly launch that product immediately. And then just in terms of the guidance, how should we be thinking about what's embedded in the guidance for companion animal and livestock growth for the balance of the year? Are there any sort of dynamics from a quarter-to-quarter basis that we should be thinking about?

Wetteny Joseph:

Yes, Erin, with respect to our guidance and how you should be thinking about companion animal versus livestock. And so far year-to-date, we've delivered 9% operational growth at the top line, losses driven by companion animal. I think you can expect that to continue in the back half of the year when you consider, as Kristin just mentioned, Solensia will be fully launched in the second half in the U.S. here, we'll continue to see growth in Trio and with Librela, which we expect to be a blockbuster in the EU this year, we delivered $21 million in the first quarter, $26 million in the second quarter. So that will continue to ramp. So I think those will contribute towards comparing that will continue to drive. When I think about livestock, we do see easier comps in the back half than we would have had in the first half to recall swine in China, for example, prices start to really decline in the second half of last year. So that becomes a comp when you think about Q3 and Q4. And then for cattle, we did have some price adjustments in the fourth quarter last year on Jackson leading into the start of the year. So those make for a slightly easier comp from a cattle perspective in the fourth quarter. So those are sort of the considerations, but I would expect the second half to look more like the first half in terms of the contribution from companion animal compared to livestock.

Jon Block:

I'll try to ask two logos upfront. Key derm, I think it was up 22% operationally in 1H, but I think it slowed from 27% in 1Q to 16% in 2Q, and I got a sort of a similar year ago comp. So can you talk to, Kristin, your thoughts on the topic derm growth call it, just the trajectory going forward? Does the chewable version offer a price premium for you guys? And I think, Kristin, you also talked about just no competition for maybe in the next 10 months, just how you have that line of sight. And then shifting to your second question to livestock. That market just always seems to be evolving. Would love to get your thoughts on normalized growth returning to the industry in 2023, Kris, I think you called it out last quarter. Does that stay intact? And would your growth be representative of market since I think you're going to get soon on the back end of some of the generic headwinds that you've been facing.

Wetteny Joseph:

Yes. When you look at livestock, historically, we've seen livestock grow around the 4% range. Certainly, you're very familiar with what's happened in the last few years in terms of ASF and for us, with generic competition with Jackson and Zoamix, the year is essentially executing as we expected on livestock. We continue to believe that we can see livestock returning to normalized growth in the 2023-2024 time frame. And long term, when you look at livestock, we continue to see growth in this business long term, given population growth. We see urbanization as well as growing middle class, particularly as you look across emerging markets. And even this year, if you look at this quarter, for example, livestock grew 2% internationally, despite the headwinds in swine as I said, those comps get easier in the back half. And if you Russia-Ukraine, for example, another point there. So we're seeing growth in emerging markets on livestock. We expect those to continue in long term with innovation as well as we continue our swine vaccines that we are launching vector vaccines on the poultry side, immunotherapies [Indiscernible], et cetera, we would expect to continue to drive growth in livestock long term.

Christine Rains:

Just piggybacking off of that last point, can you further review those pipeline highlights in the work for our livestock portfolio. And just related on the comparatively well international growth in livestock this quarter. Can you discuss the factors there that drive the different performance between international and domestic here?

Kristin Peck:

Yes, I'll take a little bit more on your question on the pipeline and livestock. To build on what Wetteny saying, we do continue to believe that we're -- that there's significant growth opportunities in vaccines and livestock, that's what our customers are looking for. As Wetteny referenced, we've been launching some vaccines in swine. Certainly, vector vaccines, we just announced approval of the second vector vaccine. In poultry, we'll be launching more vector vaccines, not poultry franchise as well. Really excited, as I mentioned earlier, about fish with 23% growth in the quarter. Apoquel really focusing on [Indiscernible] and other potential vaccines there. And then if you look at that more broadly as we look out a little farther investment immunotherapies as well as in precision livestock farming, continuing to add to our block yard product there to our genetics business there. So we do see a number of key platforms in livestock to drive innovation in the space. As Wetteny said, I think you can get back to the historical growth rates of around 4% as we hopefully lap some of these generic issues around Jackson and Zoamix and poultry and the ASF issue in China. But I think to get above that, which we certainly aspire to do, it's going to take bringing innovation, and we are certainly investing to be the leader in innovation in livestock.

Nathan Rich:

Kristin, you talked about the capacity and labor constraints that clinics are facing. But I think you noted vaccines and injectable products continue to grow. I guess could you maybe talk to your ability to continue to grow those products the current market backdrop. And I guess, ultimately, the bigger picture question is, if we see these market dynamics, both from a macro standpoint as well as some of the pressures that vet clinics are facing continue into next year. I guess -- how should we think about growth? I guess, should we expect a similar level of companion animal growth as to what you're guiding to in the back half?

Operator:

Our next question comes from Louise Chen of Cantor Fitzgerald.

Wetteny Joseph:

Well, I think certainly, when we look at price and demand, we've continued to see opportunistic price at or above inflation, and we've demonstrated that over the years, particularly in certain markets. We've also looked at data in terms of pet ownership and demographically, we see the structural improvement, I would say, even compared to a very strong basis to begin with. So if you look at pet ownership with respect to Gen Z and millennials, and they're prioritizing pet health that certainly bodes well. But also, we're seeing more adoption at higher income households if you look at what adoption numbers look like over the last number of years, which again is structurally very positive for the industry. So as we've taken price over the years and we took about 5% price on -- in companion animal this year. Overall for the company, we've been running about 3% net given some of the last slight dynamics of the Jackson generic competition. But we haven't been able to take price. And yet we still continue to see strong volume growth across the business. And to Kristin's point, that's largely driven as well by innovation in the space. So we continue to see elasticity in terms of ability to take price see from an inflationary perspective.

Elliot Wilbur:

Just a follow-up question for Kristin around parasiticide trends in the quarter. Can you maybe just talk about category growth overall? It seemed like some of the metrics out there suggested that overall category growth had actually been down. And obviously, Trio continues to perform extraordinarily well, particularly in the U.S. But I'm just thinking about the second half of the year and then early next year with a potential entrant, what you're seeing in terms of category growth? And if you could just give us the number in terms of where Simparica is with respect to overall share in the category. And if I could just get a quick follow-up in here on Librela. Obviously, the initial EU experience has been quite positive here. I think you mentioned that 40% of pets were new to therapy. Just wanted to get maybe an update in terms of what you're seeing with respect to persistence some of the pets that started therapy initially and sort of where we what kind of persistence rates you're seeing sort of 6 to 7 months after beginning therapy? And is that 40%, is that sort of a normal number in terms of new pets coming into the market or should the takeaway there be that Librela sort of test really kind of elevated the overall category growth?

Wetteny Joseph:

Yes. When we look at the category, we speaking, clearly, Trio grew 72% in the quarter. If you look at our overall Simparica franchise, grew 47%, right? So if you get Simparica, not Trio, but Simparica internationally, it grew 23% in the quarter. So we have the broadest offering into the parasiticides in the industry. And clearly, the only triple combination in the U.S. What we are seeing is, categorically, we're seeing a shift from topicals and collars to all medications. And if you look at triple combination in the U.S. One of the interesting statistics that we've seen is that on Trio, about 30% of the dogs that are coming on Trio are new to the category and not having been prescribed a prescription of parasiticide in the prior 18 months or so. So we do see significant room to continue to expand in this space. And as competitors come into the space, there'll be more DTC that will drive even more patients for the clinic, which is beneficial for us as well given our relationships across corporate accounts and so on will benefit from having more voices out driving more patients into the clinic. So we're not seeing a slowdown in the category. There is a bit of a shift from the topicals and collars into rolls and that benefits us given our premium products.

Balaji Prasad:

Firstly, as we start to lap the impact of generics on Draxxin and Zoamix, would you still count a threat of generalization as a top two or top three challenge over the next two years? And if you could also add some broader comments around the percentage of your portfolio exposed to general completion of this period. Also on diagnostics, operational decline of 9%, it seems to be the first quarter of decline after Q2 2020 and in contrast to your per visits results. So wondering what kind of increased spend per visit did you notice that you've been calling out over the past few months? And any metrics that you can direct to between point of sale or reference labs that helps us understand this performance?

Wetteny Joseph:

Yes, sure. If you look at Draxxin, right, the largest product that we have across our livestock portfolio. Beyond that, there isn't any other product that's even nearly that size and magnitude if you look across our portfolio as well in companion animals, there or products that are anywhere near any sort of LOE. So we would not anticipate after the first two years, that the generic competition element will be the key driver here in the business. As we said, we expect lifestyle to be returning back to sort of normalized growth in the '23-'24 time frame is what we would expect in that regard to a generic standpoint.

Ekaterina Knyazkova:

This is Ekaterina on from Chris from JPMorgan. And my question is on the macroeconomic environment here, are you seeing any notable differences when it comes to panel demand across geographies -- so Europe appears to be getting hit harder by some of the challenges related to fuel costs to food prices and stuff like that. And I was wondering if you're starting to see any changes in behavior in that market.

Operator:

And this does conclude our question-and-answer session for today. I'd be happy to return the call to our host for any concluding remarks.

Operator:

This does conclude the Zoetis Q2 2022 earnings conference. You may now disconnect your lines, and everyone, have a great day.

Steve Frank:

Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2022 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements. and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings including but not limited to our annual reports on Form 10-K and our reports on form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing dated today, Thursday, May 5, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a very strong start to the year with continued growth across a number of our core product franchises. Today, I will focus my comments on our first quarter financial performance, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the first quarter, we generated revenue of $2 billion, growing 6% on a reported basis and 9% on an operational basis. Adjusted net income of $625 million grew 4% on a reported basis and 8% on an operational basis. Of the 9% operational revenue growth, 3% is on price and 6% from volume. Volume growth of 6% consisted of 5% from new products, which includes Simparica Trio and Librela, 3% from key dermatology products, while other in-line products declined 2%. The decline in other in-line products was expected and largely the result of a difficult comparison to the prior year and the impact of our swine business in China. Companion animal products led the way in terms of species growth, growing 20% operationally with livestock declining 6% on an operational basis in the quarter. Our small animal parasiticide portfolio was the largest contributor to growth in the quarter, where our innovative and diverse fleas, tick and heartworm portfolio drove growth of 25% operationally. Simparica Trio posted global revenue of $164 million, representing operational growth of 83% versus the comparable 2021 period. In Q1, Simparica Trio was the number one canine parasiticide sold in the U.S. in terms of revenue, and we recently launched Trio in Japan, a sizable international heartworm market. Meanwhile, our key dermatology products, Apoquel and Cytopoint, had significant global growth again with $307 million of revenue, representing 28% operational growth against a robust prior year in which key derm grew 24% in the first quarter. In Europe, our recently launched monoclonal antibody Librela, which is for osteoarthritis pain in dogs, also meaningfully contributed to growth in the quarter, posting $21 million in sales. Our Global Diagnostics portfolio recorded $98 million in revenue and had operational sales growth of 12% in Q1, growing across both our U.S. and international segments. Growth was largely driven globally by consumable usage and new products. We also continue to see growth in the placement of new devices in international markets. Diagnostics remains a key growth driver for Zoetis, and we continue to make significant investments in our field force, new technologies and reference grew 24% in the first quarter. In Europe, our recently launched monoclonal antibody, umbrella, which is for osteoarthritis pain in dogs, also meaningfully contributed to growth in the quarter, posting $21 million in sales. Our Global Diagnostics portfolio recorded $98 million in revenue and had operational sales growth of 12% in Q1, growing across both our U.S. and international segments. Growth was largely driven globally by consumable usage and new products. We also continue to see growth in the placement of new devices in international markets. Diagnostics remains a key growth driver for Zoetis, and we continue to make significant investments in our field force, new technologies and reference lab. I think revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance and more pets. Companion animal growth in the U.S. was driven largely by sales from our parasiticide portfolio as well as key dermatology products. Growth of Simparica Trio was again strong in the quarter with sales of $147 million in the U.S., growing 77%. We continue to meet our clinic penetration targets and take share within individual clinics with additional runway for future revenue growth. Federal on and satisfaction material is approximately 90% key dermatology products sales were $194 million for the quarter, growing 23% with APOQUEL and Capon each significantly contributing to growth. Our investment to support the portfolio have been instrumental in driving more patients into the clinic, and we will continue to invest meaningfully in this space as a large portion of dolls with dermatitis remain undertreated, representing an opportunity to further expand the market. In an effort to support all of our long-term sustainable sources of growth in our companion animal portfolio. In April, we launched our new pet care go-to-market strategy, expanding our U.S. companion animal field force by approximately 40% and creating dedicated and separate diagnostic and pharma coverage for our portfolio of products. U.S. livestock declined 11% in the quarter, primarily resulting from our cattle business. This was expected as we experienced challenges from generic competition for Jackson, which didn't exist in the same quarter last year as well as elevated input costs continuing to weigh on producer profitability. Meanwhile, upholstery business continues to be negatively impacted by the expanded use of lower cost alternatives resulting from reduced disease pressure from smaller foxises as well as generic competition for Zoamix. Swine products sales grew in the quarter as a result of favorable market conditions for producers and higher disease equivalence. Moving on to our International segment, where revenue grew 3% on a reported basis and 8% operationally in the quarter. Companion animal revenue grew 23% operationally, and livestock revenue declined 3% operationally. Increased sales of companion animal products resulted from the growth of our key dermatology products, monoclonal antibodies for alleviation of ore pain and our parasite portfolio. Semak brands continue to benefit from our international direct-to-consumer campaigns in Latin America and parts of Europe, and we remain excited with the long-term prospects of these programs. We are encouraged by the performance of our monoclonal antibody for OA pain with Librela generating $21 million and Cerencia delivering $3 million in first quarter sales. Librela remains on track to exceed $100 million in revenue this year. As we mentioned last quarter, Librela became the number one pain product in the EU in the first year of launch, with the underlying performance metrics being very favorable for future growth. Reordering rates remain at around 90%. Compliance exceeded our initial expectations, and we'll continue a significant opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. Meanwhile, international livestock declined 3% operationally in the quarter. opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. Meanwhile, international livestock declined 3% operationally in the quarter. This decline was driven predominantly by our swine portfolio in China. As we indicated over the past several months, increased port supply in the market like to a significant decline in pork prices, which impacts producer profitability. In addition, our first quarter of 2021 presented a difficult comparative period as pricing and producer profitability in that quarter had been at an all-time high. While we expect China to return to growth in the back half of the year, we anticipate a challenging second quarter for our swine portfolio. Partially offsetting our decline in swine was growth in our fish, poultry and cattle portfolios. Our fish portfolio grew double digits again this quarter, driven by growth of the AlphafluxCLIce treatment product and AlphaGeLivVac vaccine for SRS in Chile. Sales of cattle products grew in key markets due to favorable market conditions and pricing in Brazil and Australia as well as demand generation efforts in emerging markets such as Turkey and China. Now moving on to the rest of the P&L for the quarter. Adjusted gross margin of 71.6% improved Advertising and promotion as well as direct-to-pet owner campaigns for key brands. R&D expenses increased 4% operationally due to higher compensation costs. The adjusted effective tax rate for the quarter was 18.9%, a decrease of 20 basis points, driven by the impact of favorable discrete tax items and settlements with certain tax authorities, slightly offset by changes in the jurisdictional mix of earnings. And finally, adjusted net income grew 8% operationally and adjusted diluted EPS grew 9% operationally for the quarter. Capital expenditures in the first quarter were $115 million. We are still anticipating a significant increase in capital expenditures for the full year 2022, primarily related to investments in Ireland, the U.S. and China to support manufacturing capacity needed to meet our long-term growth demands. In the quarter, we returned over $0.5 billion to shareholders through a combination of share repurchases and dividends. We purchased approximately $361 million of Zoetis shares, representing our largest dollar-based quarterly share repurchase ever. Now moving on to guidance for the full year 2022. Foreign exchange rates on our updated guidance are as of late April and reflect the recent strengthening of the U.S. dollar. Please note that any update to our full year guidance are related directly and only to foreign exchange and that the ranges of our operational growth rates for revenue of 9% to 11% and adjusted income of 10% to 13% remained the same as our previous February guidance. We are holding these top and bottom line operational growth rates the same despite the conflict in Russia and Ukraine, negatively impacting our expected full year operational growth by 1%. We feel we can offset this impact with the strength of our companion animal portfolio. Beginning with revenue for the full year 2022, we are decreasing both the low and high end of the range by $100 million to reflect the impact of foreign exchange. We are now projecting revenue of between $8.225 billion and $8.375 billion while maintaining our expected operational growth of 9% to 11%. and bottom line operational growth rates the same despite the conflict in Russia and Ukraine, negatively impacting our expected full year operational growth by 1%. We feel we can offset this impact with the strength of our companion animal portfolio. Beginning with revenue for the full year 2022, we are decreasing both the low and high end of the range by $100 million to reflect the impact of foreign exchange. We are now projecting revenue of between $8.25 billion and $8.375 billion while maintaining our expected operational growth of 9% to 11%. For adjusted net income for the year -- adjusted net income is now expected to be in the range of $2.365 billion to $2.4 billion, while maintaining our expected operational growth of 10% to 13%. And finally, we expect adjusted diluted EPS to be in the range of $4.99 to $5.09 and reported diluted EPS to be in the range of $4.65 to $4.77. Sales of companion animal products will be the primary growth driver in 2022 with the continued strength of our diverse prior silicide portfolio, further expansion of our key dermatology products, the adoption of our monoclonal antibodies for OA pain and growth in point-of-care diagnostics. We also continue to see a very favorable global companion animal backdrop for 2022. For livestock, the fundamental macro trends, which make animal protein on essential business remain intact, and we believe more normalized growth will occur in 2023. While our guidance represents our expectations for the full year, I would like to provide some color on the expected phasing of growth for the remainder of 2022. We expect top line operational growth for Q2 to be slightly below Q1 as today business and certain supply chain activities. We also expect a similar foreign exchange impact in Q2 that we experienced in Q1, where reported revenue was negatively impacted by about 3%. In addition, the significant investments we are making early in the year to support future revenue growth, including field force expansion in the U.S. and incremental DTC advertising will drive OpEx growth in Q2 at a faster rate than revenue, impacting Q2 bottom line profitability more materially than in the back half of the year. We expect that foreign exchange in Q2 will have a negative impact to the bottom line of about 5%. Our full year 2022 guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. Our success is derived from our diversified portfolio of enduring brands driven by multiple sources of in-line growth, and agile and disciplined innovation engine and our infrastructure to develop and expand markets globally. We extract to continue to execute across multiple dimensions of our business and capitalize on favorable end market dynamics for the foreseeable future. Now I'll hand things over to the operator to open the line for your questions.

Erin Wright:

Great. I have one on companion animal trends that I have to ask here. What are you seeing at the clinic level if you could parse out a little bit more of what you're seeing across the U.S. and international in terms of demand trends, what you're seeing in terms of capacity constraints at the vet clinic level? And what is implied in your guidance at this point in terms of operational growth across the companion animal segment? And then a follow-up on Trio, I guess, where do you stand now in terms of market share in canine parasiticide at this point? And how much do you think Simparica Trio is taking share versus expanding the market with greater compliance?

Wetteny Joseph:

Yes. Sure, Erin. Look, very, very pleased with the performance of Simparica Trio posting $164 million of revenue in the quarter, up 83%, became the number one canine parasiticide in the U.S. And as we've shared before, we have 90% penetration across large corporate accounts, et cetera. And within those penetrated clinics, we continue to take share as well. Satisfaction level with our product is about 90% among pet owners, and we also just launched Simparica Trio in Japan, which is a key heartworm market as well, just in the middle of this quarter. So I'm very pleased with the performance with Trio.

Christine Rains:

I was just wondering if I could have any update on diagnostics contribution to the quarter and overall performance? Is growth tracking with your expectations? And can you comment on system placements versus testing volume growth. And if you would have made any additional reference lab purchases?

Operator:

Our next question comes from Louise Chen of Cantor.

Kristin Peck:

Thanks, Louise. I'll start and then I'll move it to Wetteny. We've seen historically that pet owner spending has been incredibly durable right now, we've got about 63% of our revenue in companion animal. But if you look at the February research, 86% of pet owners would spend whatever it takes. So we do see inflation, and Wetteny can certainly get into how we've taken price, et cetera. But I think we've obviously seen increase in labor cost and freight and fuel. But Wetteny can really talk about the fact that we've been able to leverage price especially in our companion animal business. So Wetteny, do you want to go over some of those numbers?

Kristin Peck:

And the only thing I'd add there is, despite inflation, I would just note that in 2021, we increased our margins and our guidance for 2022 does the same. So I think it really shows the durability and resilience of our industry.

Nathan Rich:

Kristin, I'd be curious to get your view following up on the commentary you have on just vet visit trends and vet spending trends. Do you see more variability in sales for your products that are administered need to be administered by the vet? And can you just remind us how big of a percentage of your companion animal business that is? And then a quick follow-up for Wetteny. It looks like the revenue guidance came down by $100 million. It looks like operating profit may be down by $50 million. So it seems like a high decremental margin on the revenue reduction. I guess does that just reflect kind of the composition of the expense base? Just to be curious kind of any color you can shed on that dynamic. Thank you.

Wetteny Joseph:

Yes, sure. As we've said, we've revised our guidance solely to reflect FX. We continue to maintain our operational guidance range, both top and bottom for the company that we came into in February that we gave. So from an FX perspective, top line impact is about 3%. It's about $260 million of an impact. And as you referenced, the change you're reflecting the change in FX has a wider impact on the bottom, and that's really largely driven by FX in losses given our exposure across certain currencies, particularly the euro. If you look at the first quarter, for example, you see a wider impact at the bottom that you see at the top, driven by the impact of that as well.

Michael Ryskin:

Congrats on a strong result. I want to start with livestock markets. I mean we've known livestock was going to be weak for a while, and so it's not a huge surprise. But so I just want to get an update on how you're seeing a couple of factors that are going, both DRAXXIN, are you still sort of projecting lapping the tough comps around the summer and sort of what are your expectations for DRAXXIN exiting this year and next year, and then broader conditions such as drought in the Midwest and the United States, rising input costs. Sort of how do you see that playing out for U.S. livestock and internationally? And then a follow-up question for Wetteny, if I might. You guys touched a number of times in the prepared remarks on field force expansions or investing in growth, investing in the opportunities in companion animal. Just wondering if you could go into a little more detail on how that's going to play out? When do you see that shown up in the numbers when you think you'll start seeing the payoff for that? And just sort of talk about labor pressures, wage pressures, how that affects your thought process there?

Wetteny Joseph:

Yes. So as we said from the very beginning with the cycle DRAXXIN, we expect it to have about a 20% impact to the top line in the first year and another 20% in the second. So what we're seeing across livestock right now is playing out exactly as we thought. In fact, in 2021, we did a little bit slightly better than that with respect to DRAXXIN. And we continue to have the effects -- positive effects of life cycle innovation like Draxxin KP, and we're maintaining most of our volume. And the margin for DRAXXIN remains very attractive for us as well. So as we expected, we've seen competitors come in, but the performance has been at or slightly better than we expected. Broadly speaking, I think if you look at swine, for example, in China, there was a pretty significant impact on the quarter with respect to large stock. Again, we expected that coming in. And it's really looking at where swine prices are in China versus a year ago, where they were at all-time highs and have been at all-time lows essentially here and the lockdowns having an impact on sort of demand consumption as well in this case. So with respect to the field force, if I can transition to that part of your question, very pleased to be able to expand our field force here. We have the broadest portfolio across the market. And if you look at innovation that we have coming as well with respect to the pain franchises for Solensia that we are probably launching across the second half of this year. And as we get approval for Librela and launched that as well in the U.S., we continue to have opportunities to really capitalize on the market dynamics and the strong demand and have additional field force, which we see a strong return on those as well. We're also launching a dedicated sale force for diagnostics, separate and apart from our Rx teams, which we believe will have, again, a very positive return for us as well. Now you can see that with those plans, we still have an operational levered P&L where we're growing the bottom line above the top line. So top line in 9% to 11% and the bottom at 10% to 13% with approximately a 40% increase in our field force.

Jon Block:

Great. Maybe just a couple of quick ones. For U.S. Librela approval, was that a slight push, Kristin, to year-end '22 for mid-'22? If it was, maybe just if you could elaborate on what still needs to get done there for approval? And if it is here in '22, how are you from a supply standpoint? Do you think that product will be ready for early 2023 U.S. launch? And then maybe just as a quick follow-up. Wetteny, can you talk about the supply chain and cost and how you feel there? Companion animals expected to be a big year-over-year in '22. So you've got this positive mix shift, you've got price running ahead of what it normally does. I think you called out 3% versus 1% last year. And GM still expected to be flattish. So you just would love some color on how you're feeling in the supply chain.

Wetteny Joseph:

Yes. And I'll take the supply chain part of the question, Jon. Look, our supply chain has proven to be very resilient despite challenging elements over the last couple of years. We delivered 15% operational growth last year with 14 of that in volume. So we put an ability to continue to navigate through those. Currently, we are looking at China, for example, where the lockdowns have had an effect certainly in our first quarter, and we see that in our second quarter as well, which is why we included those in our prepared commentary around Q2 expectations. But in terms of price, we are pulling that leverage 3% total for the company. On the companion animal side, which now that's about 53% of our company if you look at the first quarter, companion animal has grown almost 60% over the last two years, if you look back to 2019 level. So again, very strong market dynamics and demand. We do see the mix shift being very positive for us with more companion animal and with our innovative products that are launching as well. But we do have some offsets when you look at livestock, particularly DRAXXIN, as we just talked about in line with our expectations, but certainly are giving price and maintaining the volume and, as I said, still at attractive margins for us. But that's really the main offset if you look at it across the year.

Balaji Prasad:

One each on combined and livestock, firstly on atopic dermatitis. I estimate that you currently probably have around 35% of the market share in the U.S. between Cytopoint and Apoquel. With the -- what percent of the incremental market is allergic dermatitis and is this market open for you as you get the label extension. On the same subject, do you also have an update on your oral JAK inhibitors and which is expected to come later this year, how that would influence the market share at all? On the livestock side, could you quantify if there are any opportunities that are coming to you through the Chinese consumption shifting towards beef and poultry will be swine, are you there's not much of a trend there?

Wetteny Joseph:

Yes, sure. Just one thing to add on the first one. For us, really, when we look at Derm, it's less about market share, it's a lot more about market expansion. There's certainly an opportunity when we look at the number of dogs that suffer from each [indiscernible] are not being treated. About 6 million, and of the 7.6 million that are being created, so a good portion of them are undertreated with either antihistamines or steroids. So we do think there's an opportunity with respect to the under treatment there. Now I'll shift over to your question around livestock, particularly around China. We have seen an increase in beef consumption here, which certainly benefits us when you look at our business in Brazil, for example, that exports into China from a beef perspective as well as in China set of activities. And so it's still -- in terms of in China, it's still relatively small compared to swine, for example, but we are seeing good trends there that are favorable to us.

Chris Schott:

First, can you just remind us about your sensitivity to economic growth? I know you're seeing very healthy demand in the companion side right now and you've been able to take price. But if we enter a mild recession in some parts of the world, particularly Europe, what type of pressures would you anticipate, if any, to your business from that? And my second one was on protein demand. I know you've touched on this in a couple of other questions, but it does seem like we're entering kind of a challenging macro environment with food prices growing very rapidly, especially in the emerging markets. Do you see that as a risk at all in terms of global protein demand consumers trading down on protein that could kind of dampen kind of your livestock recovery as we look out to kind of 2023 and beyond.

Wetteny Joseph:

Yes, I think you've covered it well, just a companion animal. It's a bigger percentage of our business now is proving to be very resilient. And structurally with respect to demographics we have more Gen Z and millennials, owning pets, more pets. And if you look across our portfolio, a number of chronic conditions that we're treating that are very resilient even as we've seen in the past and structurally even stronger now. With respect to livestock, you do see the potential for people to trade down in proteins going from beef down to chicken or pork and then et cetera. So we do think that can happen in terms of looking across the globe. We do have a growth portfolio across different species, obviously. But that is one of the areas that we think is a little bit less than what we see in companion animal, where extremely resilient. Now we do, overall, though, when you look at protein consumption, we do see that growing over time, particularly as you could look across emerging markets, growing populations increase in sort of sole income, et cetera, and growing middle class across different markets. We see those continuing to maintain growth to protein consumption, we do have the pandemic, which actually has been negative from a lifestyle perspective. I think folks look at the pandemic and think about the positive effects on the companion animal side. but that has actually been largely negative. And so we do believe that they'll -- in addition to our DRAXXIN, which we've talked about, we do anticipate a return to growth in livestock as we get out into 2023, 2024 timeframe.

Steve Scala:

You mentioned enhanced spending per pet. Our understanding is that this is due to two things, enhanced compliance and catch-up in routine wellness checks. Is that what you've seen? If so, how much does each contribute? So how much does enhanced compliance contribute versus catch-up in routine visits. The concern is that the catch-up in routine visits would seem like a onetime boost. And if that's the case, then what are the long-term implications of not -- no longer getting that boost and just enjoying the trends of the enhanced compliance?

Wetteny Joseph:

Yes. I would say it's a combination of just an increased standard of care for animals, particularly for pets that's aided by the innovation that's come out of Zoetis across derm and parasiticides and now with pain and the demographics of the owners that actually put a premium on the health of their pets that's driving this. And I think people are doing more in those visits as well, which is driving sort of the revenue per visit figures that you see, which is, again, part of the reason that we don't think the visits themselves are as meaningful as the spend per visit.

Elliot Wilbur:

One question around the EU launch experience and dynamics to date with respect to Librela and Solensia. Just how some of the early experience is shaping expectations for the U.S. launch areas of over underperformance where you've been positively surprised. And just thinking about dynamics such as persistence, do you have any sense of the number of patients started on therapy that are returning for follow-up injections, Librela share of new patient starts. And I know it's still relatively early, but is -- or are you seeing or are you expecting to see an increase in overall patient volumes from the launch of these products? And then just as a quick follow-up here, how important was -- or is the mAb opportunity in the U.S. in terms of driving your decision behind the sales force expansion?

Wetteny Joseph:

No, just a part of the question on the field force, I wanted to just make a comment on, which is, look, we have the broadest portfolio, as I mentioned before. And we continue to add innovative products to that. And so we carefully analyze sort of the coverage across clinics and across products for our field force and are very confident that this is an investment that's going to have that's going to yield positive returns for us across our products, existing products, opportunities to expand in the existing products as well as new products that are coming on.

Kristin Peck:

Great. Thank you all for your questions and for the continued interest in Zoetis. I just want to summarize, I think Zoetis is off to a strong start of the year. We've got continued strength in products for pet care, and I think as you've seen, a diverse and durable global portfolio, we're really happy to be maintaining our operational growth expectations for the full year despite the negative impact of foreign exchange and other headwinds. And we're continuing to make ongoing investments in talent and technology, manufacturing expansions and innovation that have us well positioned to support our future growth plans as well. So I look forward to keeping you updated on future calls and hope you have a great day. Thanks so much, everybody.

Steve Frank:

Thank you, Catherine. Good morning, everyone and welcome to the Zoetis fourth quarter and full year 2021 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I’ll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today’s press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and the company’s filings dated today, Tuesday, February 15, 2022. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin and good morning everyone. 2021 was an exceptional year for us with revenue of $7.8 billion and adjusted net income of $2.2 billion both exceeding the high end of our November full year guidance range. Full year revenue grew 16% on a reported basis and 15% operationally with adjusted net income increasing 21% on a reported basis and 19% operationally. Looking deeper into the 2021 numbers, price contributed 1% to full year operational revenue growth, with volume contributing 14%. Volume growth consisted of 6% from other inline products, 5% from new products, including Simparica Trio and 3% from key dermatology products. Revenue growth was again broad-based with the U.S. growing 14% and international growing 17% operationally. Our strong performance was driven by our innovative, diverse and durable companion animal portfolio, which grew 27% operationally. Our livestock business, which faced generic competition on key franchises as well as challenging macro conditions in certain markets, grew 1% operationally on a year-over-year basis. Performance in companion animal was led by our small animal parasiticide portfolio bolstered by full year sales of Simparica Trio, which generated revenue of $425 million, an increase of $305 million compared to 2020 sales. Sales of Simparica also grew double-digits for the year, with operational revenue growth of 13%. For the year, the Simparica franchise grew 82% operationally, with revenue of approximately $0.75 billion. Our key dermatology products performed incredibly well, growing 24% operationally with approximately $1.2 billion in revenue for the year, performing above our expectations. Our diagnostics portfolio grew 21% operationally in the year, with strong contributions from our U.S. and international segments and we will continue to make meaningful investments in the coming years to drive global growth. We do believe the adoption of diagnostics products and services outside the U.S. represents larger growth opportunities geographically and feel we are favorably positioned to capture future growth in those markets. Our livestock performance in 2021 depicts the importance of geographical diversification. Generic competition and challenging market conditions weighed on our U.S. performance, but were offset by solid growth internationally, primarily in emerging markets. The modest livestock growth on a global basis was in line with our expectations for the year. Moving on to our Q4 financial results, we posted another strong quarter, with revenue of $2 billion, representing an increase of 9% on both a reported and operational basis. Adjusted net income of $474 million is an increase of 8% on a reported basis and 5% operationally, of the 9% operational revenue growth, 1% from price and 8% from volume. Volume growth of 8% consisted of 5% from new products, which includes Simparica Trio, 2% from key dermatology products and 1% from other inline products. Companion animal products led the way in terms of [indiscernible] growth, growing 21% operationally, with livestock 6% on an operational basis in the quarter. Small animal parasiticides were the largest contributor to growth in the quarter, where our innovative and diverse fleet, tick and heartworm portfolio grew 32% operationally. Simparica Trio posted revenue of $124 million, representing operational growth of 106% versus the comparable 2020 period and the third consecutive quarter with sales exceeding $100 million. Meanwhile, our key dermatology products, Apoquel and Cytopoint, again, had significant global growth in the quarter, with $360 million of revenue, representing 23% operational growth against a robust prior year in which key derm grew 27% in the fourth quarter of 2020. Our livestock business declined 6% in the quarter as a result of generic competition for DRAXXIN on favorable market conditions in the U.S., primarily resulting from elevated input costs as well as softer conditions in China, losses driven by reduced pork prices. Our fish business grew double-digits in the quarter and along with the strength of our emerging markets, partially offset the broader decline. Overall, livestock performance in the fourth quarter was in line with our expectations. Now, moving on to revenue growth by segment for the quarter, U.S. revenue grew 9%, with companion animal products growing 20% and livestock sales declining by 13%. U.S. pet care vet practice trends remained robust in Q4, with practice revenue growing approximately 8% with visits growing 3% despite challenging prior year comps. Companion animal growth in the quarter was driven by sales from our Simparica franchise as well as key dermatology products. We are driving growth in both therapeutic areas by making meaningful investments, primarily through direct-to-consumer advertising and field force and we continue to be pleased by the return on investment the programs are yielding. Growth of Simparica Trio was again strong in the quarter, with sales of $114 million growing more than 100%. We also met our clean penetration target and continued to take share within the clinics. Key dermatology sales were $216 million for the quarter, growing 22% with Apoquel and Cytopoint each growing significantly. Our investments to support the franchise have been instrumental in driving more patients into the clinic and we will continue to invest meaningfully in this space as the large portion of dogs with dermatitis remain untreated, representing an opportunity to further expand the market. U.S. livestock fell 13% in the quarter, primarily resulting from our cattle business, which as expected, was challenged by generic competition for DRAXXIN as well as elevated input costs continuing to weigh on producer profitability. Our poultry business was negatively affected by reduced disease pressure from smaller flock sizes as well as generic competition, while swine faced competitive pricing pressure on anti-infectives and vaccine products. Moving on to our international segment, where revenue grew 8% on a reported and operational basis in the quarter. Companion animal revenue grew 23% operationally and livestock revenue declined 2% operationally. Increased sales of companion animal products resulted from growth of our key dermatology products, our monoclonal antibodies for alleviation of OA pain and our parasiticide portfolio. Several key brands are benefiting from our international DTC campaigns in Latin America and parts of Europe and we remain excited with the long-term prospects of these programs. Overall, companion animal grew double-digits operationally in every major market in the quarter. We are encouraged by the performance of our monoclonal antibodies for OA pain, with Librela generating $15 million and Solensia delivering $3 million in fourth quarter sales. In the fourth quarter, Librela became the number one pain product in the EU in its first year, with the underlying performance metrics being very favorable for future growth. Reordering rates were in excess of 90% and compliance rates exceeded our initial expectations. In the past, we have highlighted the significant opportunity to expand the pain market. Therefore, we were extremely pleased to see approximately 40% of Librela and Solensia sales or from patients receiving medication for the first time. International livestock declined 2% operationally in the quarter as declines in cattle and swine were partially offset by growth in fish and poultry. Cattle declines were largely in the EU and Canada as generic competition for DRAXXIN weighed on sales. The decline in swine sales was primarily the result of lower pork prices in China negatively impacting producer profitability. Our fish portfolio grew double-digits again this quarter driven primarily by growth of Alpha Flux in Chile and the growth in poultry was largely attributed to further key account penetration. Now, moving on to the rest of the P&L for the quarter, adjusted gross margin of 69.6% increased 190 basis points on a reported basis compared to the prior year resulted from favorable product mix, lower inventory charges, favorable FX and price. This was partially offset by higher freight, manufacturing and other costs. Adjusted operating expenses increased 12% operationally with compensation-related costs being the primary driver of the 15% operational increase in SG&A as well as 3% operational increase in R&D expenses. Increased international advertising and promotion expense for key brands also contributed to higher SG&A, while R&D had increased project spend in the quarter. The adjusted effective tax rate for the quarter was 18.6%, an increase of 510 basis points, driven by the impact of prior year discrete tax benefits and changes to the jurisdictional mix of earnings. And finally, adjusted net income grew 5% operationally and adjusted diluted EPS grew 6% operationally for the quarter. In December, we announced a 30% annual dividend increase continuing our commitment to grow our dividend at or faster than the growth in adjusted net income. In the quarter, we repurchased approximately $200 million of Zoetis shares and announced the authorization of a $3.5 billion multiyear share repurchase program. Because we generate significant free cash flow, we have the ability to grow our business through organic investments and business development and return excess cash to shareholders without consuming our cash balance or being dependent on elevated leverage. Now moving on to guidance for 2022, please note that guidance reflects foreign exchange rates as of late January. We are expecting an unfavorable foreign exchange impact versus prior year by approximately $160 million on revenue, which is roughly 200 basis points and approximately $0.12 on EPS, which is about 250 basis points. For 2022, we are projecting revenue between $8.325 billion and $8.475 billion, representing 9% to 11% operational growth. We again expect companion animal to be the primary growth driver in 2022 with the continued strength of our diverse parasiticide portfolio, further expansion of our key dermatology products, the adoption of our monoclonal antibodies for OA pain and the growth in point-of-care diagnostics and reference labs. We see a very favorable companion animal backdrop for 2022 while expecting certain vet clinics trends to moderate over time we believe they will remain above pre-pandemic levels. The catalyst for growth in 2022 and beyond stem from a younger pet owner demographic and the standard of care increases, which took shape over the prior 2 years. Our innovative portfolio, geographic representation and significant investments in key brands have us positioned extremely well to capture a meaningful portion of that growth. We anticipate modest livestock growth again in 2022 led by the contributions of our emerging markets. The macro trends which makes livestock and essential business remain intact, and we believe more normalized growth will occur in 2023. I’d like to touch upon the key assumptions that underpin our expectations for revenue growth. Beginning with companion animal, we do not assume a triple combination product will launch in the U.S. in 2022 to compete against Simparica Trio or competitive entrants for our key dermatology products, Apoquel and Cytopoint. As Kristin mentioned, in 2022, we expect Librela to become a blockbuster product in the first full year of sales with revenue exceeding $100 million largely from the EU markets. We remain very optimistic about the potential of Solensia as well. While the revenue curve will have a different shape due to the lack of an established feline pain market, we review Solensia as a long-term blockbuster product, which suggested a significant unmet need in animal health. In livestock, we expect generic competition to negatively impact DRAXXIN revenue by approximately 20% in 2022 comparable to the impact we saw this year. For the remainder of the P&L, adjusted cost of sales as a percentage of revenue is expected to be approximately 29%, where favorable product mix and price are expected to generate margin expansion. Adjusted SG&A expenses for the year are expected to be between $2.07 billion and $2.12 billion with the increase from 2021 focused on supporting primary drivers of revenue growth, including investments to support new and existing products as well as diagnostics. Adjusted R&D expense for 2022 is expected to be between $540 million and $560 million. Zoetis is the leader in animal health because of the novel products, disruptive innovation and life cycle enhancements we bring to the market. Our internal R&D engine remains the primary source of innovation, and we are committed to ensuring it will continue to be significantly funded as a priority in capital allocation. Adjusted interest and other income inductions are expected to be approximately $240 million, representing a minimal year-over-year change. Our adjusted effective tax rate for 2022 is expected to be approximately 20%. The increase in 2022 is primarily related to the favorable impact of foreign derived intangible income and nonrecurring net discrete tax benefits that occurred in 2021. Adjusted net income is expected to be in the range of $2.415 billion to $2.470 billion, representing operational growth of 10% to 13%. Our guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. We are anticipating a significant increase in capital expenditures in 2022 primarily related to investments in manufacturing expansions in Ireland, the U.S. and China. Finally, we expect adjusted diluted EPS to be in the range of $5.09 to $5.19 and reported diluted EPS to be in the range of $4.75 to $4.87. While guidance represents our expectations for full year financials, I would like to provide some color on the expected phasing of growth in 2022. We expect top line growth to be fairly consistent between the first half and second half of the year. However, due to the impact of generic competition for DRAXXIN, isolated supply constraints and the continued weakness of our swine business in China, we expect growth in the first quarter of 2022 to be lower than the remaining three quarters. In addition, the significant investments we are making early in the year to support revenue growth, primarily in companion animal, including diagnostics, along with very challenging comparative periods for T&E and other expenses, will impact Q1 materially more than the subsequent quarters. Now to summarize, 2021 was another exceptional year, our best performing year with 15% operational revenue growth and 19% operational growth in adjusted net income. Our guidance for 2022 reflects the strength of our innovative portfolio, our ability to successfully launch new products and establish new markets and our confidence in the end market dynamics for the spaces we compete in. Now I’ll hand things over to the operator to open the line for your questions. Operator?

Louise Chen:

Hi. Congratulations on the quarter and thanks for taking my question. So you’ve been very successful over the years in your R&D efforts. And where do you our next wave of innovation coming from? And is it going to be companion or livestock focused drugs or diagnostics? Thank you.

Operator:

We will take the next question from Mike Ryskin with Bank of America. Your line is open.

Wetteny Joseph:

Yes. So let me take that first. With respect to Trio, we continue to be very pleased with the performance of Trio and really the entire Simparica franchise. When you look at Trio, we delivered $124 million of revenue in the quarter. When you look across the franchise, we continue to see really strong growth. For the year, the franchise grew 82% across the board, so very pleased with that. And we’re putting significant investments behind the product and across Simparica as well in markets where you don’t see heartworm being prevalent. And so we’ve seen Simparica grow 13% on the year. And so we continue to make those investments in our field force as well as advertising and DTC campaigns across – our confidence is that we will continue to see growth even when this competitor is in this space. We have seen that in other cases where other products have come into the market. When you look at the fleet tick heartworm market, it’s the biggest market within animal health with $5 billion, and there are other products in the space that have better sizes of $800 million-plus. So as we look here, we continue to see more headroom to continue to grow this brand and this franchise even when there is competition. When I look at price, we delivered 1% of growth in price net in 2021. And we’re probably looking at about the same sort of range when we think about 2022. You have to keep in mind while we see opportunities to take price across the board, particularly in companion animal and behind our innovative brands and seeing really strong demand in the end markets. We will continue to pull that lever. In terms of what’s going the other way, as you’re aware, DRAXXIN is one with competitive – generic competition there with respect to that as well as Zoamix in BMD, we’ve seen that sort of partially offset, I would say, but we still delivered a net price increase in 2021 and we believe even as we look to offset inflation as we have done in 2021, we will have the opportunity to do that. We do look at price on a market-by-market and SKU-by-SKU basis. And so we deliberated about where we can be more aggressive, and we will take those opportunities as we go through.

Nathan Rich:

Hi, good morning. Thanks for the questions. I had two on Librela. Kristin, I think you said you expect Librela to be a blockbuster in ‘22. What have you seen with respect prescribing patterns for vets that have started to use the product? I mean has this displaced other products? Or are vets just diagnosing OA more? And can – and does the guidance for it being a blockbuster in ‘22 assume a U.S. launch? And then just as a quick follow-up to that, could you just go into more detail on the supply disruption that you mentioned for Librela? Is it an API issue or a factory issue? Just any more details that you could share there, that would be great. Thank you.

Wetteny Joseph:

Yes. And I would just add with Librela in the fourth quarter, we were deliberate about holding back even new patients coming on. We just want to make sure that we can secure the inputs so that when it all comes on, they can stay on given that it’s chronic OA pain conditions. So – and we’ve been able to secure materials and be able to run, and we’re confident in in our forecasted demand here to be able to manufacture and deliver those.

Erin Wright:

Great, thanks. A question on the monoclonal antibody, can you speak to the pipeline outside of Solensia? And you have significant capacity there and you’ve entered multiple partnerships, including [indiscernible] products. How would you think about the targets there and the time line? And what’s next on that front? Do you see several monoclonal antibody launches for you over the next 3 to 5 years? And then on diagnostics, you mentioned increased focus internationally. And can you speak to how that strategy is progressing, I guess, both in the U.S. and internationally for reference lab as well as on point of care. And is international reference lab also on your radar screen? Thanks.

Wetteny Joseph:

Yes, we continue to be very excited about the diagnostics space with growth above the animal health space in general. If you look at 2021, we delivered 21% growth in diagnostics across the year and particularly when you look at – although we grew both across U.S. and international. And we’ve always said that international was the more level playing field where we look to be aggressive and we continue to make investments across field force, reference labs, etcetera, here. You’ve seen us innovate in this space with Imagyst, the first AI platform with – indication. We look at additional indications coming on there as well. And so we will continue to make those investments, and diagnostics is one of our key growth drivers as we look ahead.

Jon Block:

Thanks, guys. Good morning. It seems like you’re implying 2022 companion animal growth, roughly mid to high teens, a very solid growth rate. Maybe I can just put you guys a little bit on some of the key products, any specifics for Trio when we think about 2022 or call the Simparica franchise and/or the atopic derm franchise just maybe in terms of contribution to growth? And then a little bit of a follow-up. Those Librela – certainly the Librela numbers are really solid international numbers, add the gate where the medicalization rates are usually a lot lower. So Kristin, can you just comment, does this still hold where, longer term, this is still like a 70-30 U.S. international split in terms of revenue from those novel therapeutics when we look out a number of years? Thanks, guys.

Operator:

We will go now to Chris Schott with JPMorgan.

Wetteny Joseph:

Yes, sure. Let me take both. So, going to your first question with respect to Librela, as we said in the prepared commentary, we continue to anticipate approval sometime late in 2022, that is hedging on an inspection that the FDA has to do at a facility outside the U.S. By the time this product gets approved and as we continue to leverage our global manufacturing footprint and our plans, we anticipate having the manufacturing capacity that we need to meet demand across the market. Now, we will certainly leverage our learnings from our launches outside the U.S. in terms of how we go about executing that with respect to early experience programs, etcetera. But at this point, we are confident in our ability to manufacture to meet customer commitments across that product when it gets approved. Now, going on to operating margins, as we have said, we see opportunity to really invest behind a number of areas to drive long-term sustainable growth. And we are doing so, whether you look at R&D, investments in our field force, for example, investments in advertising campaigns, DTC campaigns behind our brands that we can really drive growth in – particularly in areas where we have an advantage like being the only triple combination in the U.S. as we speak as well as in the derm area. As we do that, we will be aggressive, but we are mindful to grow the bottom line faster than the top line. And that may narrow the range that you see from time-to-time. But certainly, the business has the ability to continue to expand margins, and we have demonstrated that. But we are going to be aggressive about those opportunities when we see them, which may narrow that range. In terms of how long do we continue to see that, as long as we see the opportunity to continue to drive growth and grab more share, we will execute on those, but be mindful of that value proposition.

Balaji Prasad:

Hi, good morning and congratulations on the quarter. Firstly, on the R&D pipeline, the innovations that you called out and the focus that you called out six, seven areas for innovation, I am not sure if I am reading too much into it, but I thought oncology pipeline was the same. I remember this being flagged as an important carrier in the past. Have you had a change of thought around oncology as a key area of innovation? And just on Librela, does your success in the first year drive you to revisit your thoughts around the longer term opportunity in the clinic pain market? You have called it out as a market which can potentially double over the next few years. Is there an upside risk to those numbers? Thank you.

Operator:

Our next question comes from Christine Rains with William Blair. Your line is open.

Kristin Peck:

Sure. The one thing we have done with Solensia was the learning from Cytopoint. Certainly, as you bring new technologies and create new markets, it starts with really with your KOLs. So our plan, as you probably saw in 2021, which was first start with early experience with some of the key opinion leaders in each of the markets to get them experience, to get them talking for general practitioners to be able to call them and sort of hear their experiences seeing videos. As you think about, you made a really good point you have seen with regards to pet owners. We are also trying to provide tools for pet owners to be able to know when their cat is in pain. Cats do a great job of hiding it. So, that’s really been a focus on videos to show them what it looks like, so they can sort of notice it, giving a big awareness campaign there and then helping vets understand how to make it easier for people to either bring their cats in or there is some now cat-only clinics or the ability to have vets go out and do injections or have technicians go out and do injections. We are not focused right now on having monoclonal antibodies being able to be done by consumers at their house. This is a pretty advanced technology. Our focus is really on helping to raise awareness, increase the medicalization and make treating these cats easier either at the clinic or at home. There is really no reason, for example, technician, once the vet that has seen it can’t do the monthly injection at home. So, we are just seeing really positive, but it takes a thoughtful creation of the market. And as I talked about before, that would be our plan in the U.S. as well. We will start with early experience, get that – get the KOLs talking, get things of able to be seeing multiple cats. And that really helps us, once you get in the GPs, ensure that they are using it and they know how to do it successfully. So, that is our plan as we think about it.

Elliot Wilbur:

Thanks. Good morning. I guess just two questions for Kristin, specifically with respect to your outlook for the livestock segment in aggregate, anything you could say about growth expectations for the specific species and what – which of those may have more risk based on your current assumption than others? And then just switching gears to the international markets and specifically thinking about regions where you showed 20% plus or stronger growth, Chile, Italy, China, etcetera, can you just talk maybe a little bit more about the key drivers there? How much of the growth is coming from companion versus livestock? Which markets is the company over-performing? And what are the key drivers of that over-performance? Thanks.

Wetteny Joseph:

Yes, absolutely. Look, one of the most remarkable things, at least in my first year here, that I have come to realize is what we are seeing in terms of trends on companion animal not just in the U.S., but we are seeing them across the emerging markets. Now if you step back, international is still about just over 50% of our international revenues, our livestock and companion animal is about just over 40%. However, the pace of growth that we are seeing across markets, I am comparing absolutely phenomenal. Markets like China that used to be mostly livestock is now about 50% companion animal. And elsewhere, even when we talk about Brazil, we are seeing a really great year across cattle, etcetera. Brazil is growing double digits in companion animal. So, we believe those trends – those same reasons that are driving growth for companion animal, where pet owners prioritize the health of their pets and are willing to spend more on them, we are seeing those across international markets and we see those outpacing growth versus livestock, although we have seen livestock growth in international markets, as Kristin mentioned. It was 8% growth in livestock in 2021 across our international markets. And if you look at species, fish, for example, is 100% of our fish business is outside the U.S. So, that’s one area of growth that we anticipate as well. So hopefully, that gives you some color looking across international.

Navann Ty:

Hi, good morning. Could you discuss your expectation on vet staffing in the near-term and the potential impact on Zoetis Companion Animal segment, if any? And then I have a second question on Simparica Trio. Can you give us more details on the label expansion, how significant could be the new indications? Thank you.

Operator:

The next question comes from Kathy Miner with Cowen. Your line is open.

Kristin Peck:

Sure. So, with regards to Solensia, yes, we are focused when we think about the long-term to ensure that we start with early experience. We build that market, and we will obviously launch shortly thereafter. But we are not concerned there on a supply issue. The plans that we have assume supply for exactly what we are planning on doing. So, that is not what’s driving that one. And derm in 2022, we continue to expect robust growth obviously with – right now, as we talked about, we are not expecting competition next year, of course, we could be wrong, but we are not. And therefore, we will invest aggressively, not just in the U.S., but outside the U.S. That does not, to your question, assume that we have Apoquel chewable in the U.S. and nor does that number that we are talking about in derm assume that we are having it for cat. So, we really believe with Apoquel, Cytopoint, Apoquel chewable outside the U.S., we can continue to drive robust growth in 2022 across the category.

Kristin Peck:

Great. Look, thank you, everyone, for your questions and your continued interest in Zoetis. Just to summarize, I am really proud of what Zoetis delivered in 2021, having our best year ever. And we see that positive momentum really continuing into 2022, as I think you heard today from both Wetteny and myself, we will continue to build on our diverse global portfolio and really our strength in pet care, diagnostics and emerging markets to grow faster than the market in 2022 and beyond. And we are committed to the investments in talent, technology, manufacturing and innovation that will spur our future growth. So, thanks so much, everybody, and talk to you soon.

Steve Frank:

Thank you, Operator. Good morning, everyone. And welcome to the Zoetis Third Quarter 2021 Earnings call. I am joined today by Kristin Peck, our Chief Executive Officer and Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projection. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings including, but not limited to our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles or US GAAP. Reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release, and in the Company's 8-K filing dated today, Thursday, November 4th, 2021. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin and good morning, everyone. The focus of my comments today will be on our third quarter financial results, the contributing factors that drove our performance and an update of our improved full-year 2021 guidance. In the third quarter, we generated revenue of $2 billion, growing 11% on a reported basis, and 10% operationally. Adjusted net income of $597 million was an increase of 14% on a reported basis and 10% operationally. Operationally revenue grew 10% with 2% from price and 8% from volume. Run growth is comprised of 5% from new products, including Simparica Trio, and 3% from our online portfolio, primarily our key dermatology franchise. Now let's dive further into the details of the quarter. Companion Animal products again led the way in terms of species growth, growing 19% operationally, with livestock declining 2% operationally in the quarter. Our parasiticide portfolio made the largest contribution to Companion Animal growth driven by sales of Simparica Trio and continues strength across our broader portfolio including the Proheart franchise, Simparica, and Revolution Stronghold Plus. We also saw robust growth in our key dermatology products, Apoquel and Cytopoint. Simparica Trio had another exceptional quarter posting revenue of $122 million, representing operational growth of 140% versus the comparable 2020 period, with year-to-date sales of $350 million. We believe the global fleet second hardware market will continue to expand and that our broad and innovative portfolio, which were 32% operationally in the quarter has us well-positioned to capture share and outpace our competitors. Global sales of our key dermatology products were $321 million in the quarter, growing 26% operationally. Total sales exceeded $300 million for the first time in Company history. And we remain ahead of schedule to surpass $1 billion in dermatology sales for the year. Our diagnostics portfolio had operational sales growth of 7% in Q3 against a very challenging comparative period as the third quarter of 2020 had a sharp increase in wellness visits following wide fill clinic closures in the second quarter. Our International Diagnostics portfolio performed very well, which as Kristin mentioned, was a key component for the strategic rationale of the Abaxis acquisition. Diagnostics remains the key growth driver for Zoetis, and we will continue to make significant investments in new technology, expand our reference [Indiscernible] footprint, as well as provide flexible solutions to our customers. Our equine products delivered strong results with operational sales growth of 20% in the quarter as horse shows and racing return to pre-pandemic levels and field growth in vaccines, as well as nutritional and pain products. The expected decline in livestock in the quarter was primarily driven by our US cattle and US poultry businesses as our international segment delivered operational growth across all species. Globally, our cattle business declined 5% operationally in the quarter driven by the impact of generic competition for DRAXXIN and a difficult comparative quarter resulting from COVID-19 dynamics and earlier fall cattle run in the US in the third quarter of 2020. Poultry also declined in the quarter as producers in the US rotated to lower-cost alternatives to our premium products as a result of current market dynamics. Sales were also negatively impacted by generic competition of Zoamix and BMD, our alternatives to antibiotics in medicated feed additives. The decline in cattle and poultry offset the growth in fish. Swine was essentially flat in the quarter as decline in the US, primarily from pricing pressure on our anti-infective and vaccine portfolio as a result of generic competition, offset the growth internationally from further key account expansion. Overall, we delivered another strong quarter, bench marked against a very difficult prior-year comparative period on both the Companion Animal and livestock sides of our business. Now, let's discuss the revenue growth by segment for the quarter. US quarterly revenue exceeded $1 billion for the second consecutive quarter, with revenue growth of 7%. Sales of Companion Animal products grew 17%, and lifestyle product sales declined by 13%. For Companion Animal, Petcare trends continued to be robust. Vet clinic revenue and patient visits grew again this quarter against growth rates from the third quarter of last year, which were well above historical levels. Our view remains unchanged that certain trends will moderate, but we remain above pre-pandemic levels. Growth in US Companion Animal was led by our parasiticides portfolio and our key dermatology products. Simparica Trio continues to perform well, with US sales of $110 million and year-to-date sales north of $300 million. This quarter is also an excellent representation of our commitment to invest in the broader parasiticide portfolio as we launched the targeted DTC campaign for Proheart and prevalent heartworm geographies. Key dermatology sales were $270 million in the US for the quarter, growing 20% with significant growth for Apoquel and Cytopoint. US diagnostic sales grew 2% in the quarter, which as I mentioned earlier had a very difficult comparative period. However, year-to-date performance has been strong at 23% growth. US livestock sales declined 13% in the quarter. Our US cattle business faced the comparative period that's a robust growth at third quarter performance of 2020 benefited from an early for cattle run and pent-up demand work its way through the system. In addition, generic competition had not entered the market in the third quarter of 2020. Our generic defense strategy has been successful as we have been able to maintain a greater volume share of the [Indiscernible] market than originally expected. Although additional generics will likely enter the market in the coming quarters. From an end market perspective, producer profitability remains challenged by input costs, primarily feed and labor. US poultry sales declined in the quarter as smaller flocks resulted in lower disease pressure, allowing producers to expand usage of lower-cost alternatives through our highly efficacious premium products. In addition, generic competition is creating pricing pressure on our Zoamix NBNT franchises. To summarize, our US operations delivered another strong quarter driven by our innovative and robust Companion Animal products along with petcare and markets, displaying very strong fundamentals. The near-term weakness in our US livestock business has been expected and has been more than offset by the strengthened Companion Animal, which demonstrate the importance of diversification across species. Now, turning to our international segment. Revenue of our International segment grew 14% operational in the quarter with Companion Animal revenue growing 24%, and livestock revenue growing 7% operationally. In the second half of 2020, we saw a material uptick in medicalization rates and standard of care by pet owners, a trend which has continued through the third quarter of this year. We entered and made significant investments in advertising promotion to capitalize on favorable market conditions and drive growth. Companion Animal achieved broad-based growth internationally in the quarter, led by strong performance of our key dermatology products. Through 3 quarters of 2021, year-to-date sales are in excess of total sales on the entire prior year. In addition, we are in the early stages of a DTC campaign for key dermatology, which we expect will create additional demand for our products. Paracitisides had a strong quarter internationally, led by significant growth in the Simparica franchise, which benefited from DTC campaigns and drove growth in Brazil, Eastern Europe, and Latin America. Librela our monoclonal antibody for alleviation of [Indiscernible] pain in dogs, has done extremely well, generating $15 million in quarterly sales in a select number of markets. Feedback from veterinarians and pet owners on the quality-of-life improvement for the patients has been extremely encouraging. Our feline monoclonal antibody for alleviation of [Indiscernible] pain Solensia, had positive feedback from the early experience programs in Q2 and launched in the EU this quarter. [Indiscernible] in cats is a significant unmet need in animal health and our view is that Solensia will become a blockbuster product, with the pain market for cats becoming approximately a $200 million global category overtime. Our international diagnostics portfolio grew 20% operationally in the quarter, with significant growth in consumable and instrument revenue. And strong growth across a number of geographies such as the UK, Australia, China, and various other markets. Moving onto livestock, our international business again delivered growth across all species, led by strong operational growth in cattle and fish. Cattle growth in the quarter was driven by further key account penetration and favorable export market conditions in Brazil, in several other emerging markets. Our fish portfolio continues to perform very well, growing 21% operationally. Growth in our fish portfolio was primarily the result of increased sales of our Alpha Flux Sea lice treatment product, as well as strong growth in vaccines. Performance in swine and poultry were also fueled by growth in key accounts, as well as overall market growth, primarily emerging markets. At a market level view for international segment, all major markets grew operational in the third quarter with the exception of France, which was essentially flat in Q3. Emerging markets was again a key contributor to our international performance, led by Brazil, which was 22% on an operational basis. As we expected, growth in China slowed in the third quarter as lower pork prices challenged with this or profitability. However, the Companion Animal business in China, which grew double-digits once again, offset the weakness in swine. Overall, total emerging markets has grown significantly in both the quarter and on a year-to-date basis. Our international segment again delivered strong results of robust growth in Companion Animal and growth across all species in livestock. On a year-to-date basis, our international segment has grown 20% operationally with our Companion Animal and livestock businesses, each growing double-digits. While following pork prices in China are creating a headwind that is moderating growth in swine, it is more than offset by the growth across other species and markets for the demonstrating the importance of our diversity across species and geography. Now moving on to the rest of the P&L. Adjusted gross margin of 70.7% increased 110 basis points on a reported basis compared to the prior year as favorable product mix for an exchange, low inventory charges and price were partially offset by higher manufacturing costs, freight and distribution costs. Adjusted operating expenses increased 19% operationally, with SG&A expenses growing 20% operationally resulting from increased compensation-related costs, as well as increased advertising and promotion expense, freight, and T&E. Our [Indiscernible] expenses were 17% operationally driven by higher project spend. The adjusted effective tax rate for the quarter was 16.7%, a decrease of 330 basis points due to favorable changes to the jurisdictional mix of earnings including increased favorability related to foreign derived and tangible income, and an increase in favorable discrete items compared to the prior year's comparable third quarter. Adjusted net income and adjusted diluted EPS grew 10% operationally for the quarter, primarily driven by revenue growth, gross margin expansion, and a lower effective tax rate. Our liquidity position remains very healthy. And in the third quarter were $3.3 billion in cash and cash equivalents following a $600 million repayment of long-term debt in August. Our financial flexibilities in a very strong position, which allows us to make meaningful investments in our business while returning excess cash to shareholders, as demonstrated by our repurchase of Zoetis shares of approximately $200 million in the quarter. Now, moving on to our updated guidance for 2021 through a raising and narrowing as a result of our performance in the third quarter and confidence in our ability to deliver sustainable future growth. Please note that our guidance reflects foreign exchange rates as of mid-October. For revenue, we are raising and narrowing our guidance range with projected revenue now between $7.7 billion and.$7.75 billion and operational revenue growth between 14% and 14.5% for the full-year versus the 12.5% to 13.5% in our August guidance. Adjusted SG&A expense for the year are expected to be between $1.91 billion and $1.94 billion versus $1.87 billion and $1.91 billion in our prior guidance. The guidance rate largely represents additional compensation-related costs, as well as increased advertising and promotion spend to support growth of new products and key franchises. Adjusted net income is now expected to be in the range of $2.2 billion and $2.225 billion, representing operational growth of 16.5% to 18% compared to our prior guidance of 13% to 15%. Adjusted diluted EPS is now expected to be in the range of $4.62 to $4.67, and reported diluted EPS to be in the range of $4.23 to $4.29. Now, to summarize, before we move to Q&A. Three quarters, we've delivered strong operational top and bottom-line growth with revenue growing 17% operationally. And again, raised and narrowed our full-year 2021 guidance. We have achieved significant growth across our key franchises and are extremely excited about our new product launches, and product pipeline. Now, I hand things over to our operator to open the line for your questions. Operator.

Michael Ryskin:

Great. Thanks for taking the question, guys and congrats on a strong quarter and raised the guide. I want to start on DRAXXIN real quick. You touched on generic impact in US livestock a number of times in your remarks, we assume that's predominantly from DRAXXIN. Can you give us an update if you're seeing any stabilization there or are you expecting for the headwinds in 4Q '22 or 4Q or 2022 or given those trends improve and stabilize from here?

Kristin Peck:

And the only thing I would add there, as we said, this is completely in line with our expectations, not just that we gave this year, but that we've been talking about when the generic enters. We generally said it takes somewhere between 20% to 40% over a number of years. We said in the beginning of this year that that would likely be a little faster and we're on track to be doing that. We expect probably somewhere around a 20% head-on price for us on this product in the year. So, in line with the expectations, Mike.

Louise Chen:

Hi. Thanks for taking my question here. So, as we start to think about 2022, what are some of the pushes and pulls hereperce for example, will recovery from food services and restaurants be a tailwind in 2022 for livestock? And what else should we be thinking about? Thank you.

Operator:

We will take our next question from Nathan Rich with Goldman Sachs. Please go ahead.

Wetteny Joseph:

Yes. Sure. Look, we continue to see really strong underlying market dynamics overall. And our portfolio is really well-positioned and continues to perform very well against those dynamics. As we discussed on the prior earnings call, what we're seeing in terms of growth rates in the second half of this year is more reflection of how the phasing occurred last year versus this year, given our position in the market. Again, the strong market dynamics that we continue to face here. If you look at last year, the second half had almost 17% more revenue in the back half in the first half of last year. And so that's really what's driving the comp here. Those are the phasing of last year where this year is a little bit more normalized. As Kristin just referenced, we see a number of growth drivers for us, not only from the overall market, but also our portfolio across [Indiscernible], as we look at pain, diagnostics as well, with the one area -- the area that we're watching, including DRAXXIN. To your point around inflation, is you know given our portfolio and innovative products that we have and demand we see for those products, they position us well to take price. And you saw a 2% price in the quarter included in 10% operational growth. And we'll continue to look at opportunities to continue to do that as we go into next year, you saw in the quarter our gross margins actually expanded by 110 basis points versus last year Q3, and so that despite some headwinds in the areas of freight, etc. So, we'll continue to monitor those and take price where we can give the innovative products that we bring to the market [Indiscernible]

Jon Block:

Great. Thanks, guys. Good morning. See if I can [Indiscernible] a couple. The first on livestock and quite honestly was pleasantly surprised by the international livestock up 7% operationally. There's just a lot of noise out there with other companies and swine chatter. So, I guess the first question is, was that a clean number? No pull forwards and maybe just talk to this market overall, do you still view it as a low single-digit grower for you this year with eventual improvement to mid-single-digit in call it '22/'23? And then just a pivot, Kristin or Wetteny. I know we're not going to get a 2022 guide, but maybe conceptually at a high level, how do we think of '22 in terms of a year where the delta -- how do we think about the delta between revenue and EPS growth? And I guess where I'm going with this is a lot of innovation for you where you're still dominating the market. So conceptually, do we just think about it as another year of spending, supporting the portfolio of DTC where the delta between those 2 revenues -- revs and EPS might be a little bit tighter than prior years? And sorry for the long-winded questions. Thanks.

Wetteny Joseph:

Yes. As we've discussed just before here, we're well-positioned, going out of this year into next year, to continue to sustain growth beyond this year. In terms of how you might see things flow through the P&L, our long-term value proposition is to grow adjusted net income faster than revenue. We don't see any reason to depart from that. However, given the opposition across a number of really key brands and demand that we see, we'll take the opportunity to invest behind those brands to drive DTC by other awareness campaigns, etc. We're also are investing in R&D, as well as Diagnostics and other areas that we believe will help us accelerate and enhance growth going forward. So that may, at times, cause that difference to be a little bit tighter as you said, from time to time, but it's to drive that growth -- that enhanced level of growth that we see, given the opportunity that we see in the market.

Erin Wright:

Okay. Thanks. Can you provide us any metrics on the contributions from Librela and Solensia in the quarter or any metrics around reorder rates of the products in certain markets and how the launch is progressing relative to your expectations at this point in the expected timeline again for the US launch. And then second, just more broadly on Companion Animal trends. Any monthly metrics you can give us over the course of the quarter and kind of what's expected for the fourth quarter and beyond in terms of the underlying demand trends across that market? Thanks.

Kristin Peck:

Solensia.

Kristin Peck:

No worries.

Kristin Peck:

And I'll take the second half of your question, Erin, with regards to US Companion Animal trends. We don't have the monthly data, but just putting some of this in context, we believe that we look at the data overall right now. We're seeing overall vet clinic revenue growing 7%, which is higher than the historical rate. It's been a little bumpy over the year. I mean, weather, lots of different dynamics have been driving it. You saw 8% in Q1, 14% in Q2., we are seeing 7%. The way we sort of see this is, we think it overall will be higher than historical norms. Is it -- is the double-digit that you saw consistently in 2020? No, but I don't think -- we saw very weak as you saw in Q1 and there's a huge bounce back in the second half as we saw last year, we do think that revenue at that clinic will continue to grow above historical rates. We're not really sure, as I said last quarter that we think that's going to be double-digit, but historically it grew 5 to 6. Is it going to be 7 to 8? I think our view is it will still be stronger than normal, but maybe not in the double-digits overall. But I mean, its still seeing strength, if you -- anyone of you who have been trying to get an appointment for your dog or your cat at the vet, it's pretty challenging to get one. So mostly because the demand really does remain high there.

Chris Schott:

Great. Thanks so much for the questions. I just -- my question on the derm portfolio, you've built a billion-dollar franchise here, but it's really about competition coming in 2022 or beyond. What are you anticipating in terms of the impact that a competitor launch could have? I think historically you've talked about a second entry, more building the market than maybe directly cannibalizing your existing business. But I guess as you've had a longer window of time to develop this, do we reach a point where that competitive launch, I guess, more impacts your growth versus -- I guess the heart of the question is, how much more room is there for market expansion as a new player comes in? Thanks so much.

Operator:

And our next question comes from Balaji Prasad with Barclays. Please go ahead.

Wetteny Joseph:

Yeah, I'll start and see what Kristin what's to add here with respect to China. As expected, we saw growth decelerate in China this quarter with about 1% growth in the quarter but keep in mind, China has actually grown 35% on a year-to-date basis. We're up against a very solid comparative on last year where we saw 63% growth in the quarter. And swine was actually up 159% in the same quarter last year. Again, the pricing dynamics [Indiscernible] which we discussed on the last call started about mid-June. And so, we expected to see sort of decline in the pork area. Now, the other part of your question is long-term. What do we expect in the market? We do see continued opportunity to grow substantially in China over time as we bring more and more robotics to the market. But also, if you look at what's happened since African swine fever, you see a concentration more on larger producers versus backyard forms, and we think that [Indiscernible] well in terms of whole medicalization over time, as well for our premium products with respect to swine. And then on the Companion Animal side, we continue to see really robust growth in China. In Companion Animal, we saw double-digit growth this quarter. And Companion Animal which obviously was partly offset by the swine. So long term, we continue to expect really solid growth in China, which is our second largest market, driven by the market dynamics that we discussed. Although there may be cycles that we'll see in swine as we're going through right now from a pricing standpoint.

Operator:

Our next question comes from Steve Scala with Cowen. Please go ahead.

Kristin Peck:

Sure. Again, I can start there. We are really pleased with Librela and yes, we are seeing animals return. I don't have the specific number of days that they're coming back. We can certainly look into that and see if we can get that data for you. It is priced at a premium to both Rimadyl, as well as to Gala plans on the market, so given it has a phenomenal, both safety and efficacy profile, it has been priced at a premium. The price obviously varies from market-to-market, so I don't think we have that overall information. With regards to the second part of your answer on Solensia, half is it quite different markets. So, although today the market in dogs is 400 and we believe we can double it. The market is actually pretty higher to size in cats. There are very few approved products out there today to treat cats, so I hardly even say what it is. It's not zero, maybe tens of millions, it's certainly not hundreds of millions of dollars. And cats are less medicalized than dogs. So, you really have to first medicalize those cats. You have to be able to -- cats like to hide their pain. So, you also have to find a way that pet owners can notice pain in cats better and identify it and bring them to the vet. So, the reason we've said it's a smaller market is, the number of cats that are medicalized are just smaller, and then the number that are actually treated is really small. So, the first thing is you need to be able to identify [Indiscernible] with pet owners, convince them to take their cats to the vet and build a market from scratch. Cat owners, when they used to call the vet when their cat was severing from pain, from osteoarthritis. We're told it really wasn't anything. There's no product in the US, for example, whatsoever. So, it's really about retraining pet owners that there is a product that can meet their cat sneeze, and helping vets really bring the cat into the vet. A lot of pet owners don't like putting their cats in crates to bring them to the vet as you probably know. But we're very confident that we have a strong pipeline for cats that will increasingly medicalized cats’ overtime and helped build this market. But as we said, just given the number of medicalized cats will be a smaller market than the dog space. And it will likely take a little longer to build it.

Christine Rains:

Hi. Congrats on a great quarter and good morning. My question is that we noticed that Trio declined sequentially for the first time, so I was just hoping to have some color on this and how it's performing versus your expectations. Thanks.

Operator:

Your next question comes from Navaan Ty with Citi. Please go ahead.

Kristin Peck:

Sure. I'll start with your question with regards to the investigation and then Wetteny can take the second half of your question on Companion Animal. On the [Indiscernible] inspection pertains to the [Indiscernible] decision to discontinue the clinical development of a single experimental drug candidate. We're working with the EC to ensure it has all the necessary information that it needs. And we are confident that we can align the concerns which are prompted the investigation. So, I think your second part of the question was on Companion Animal trends. The 7% which was broken up between 3% on traffic and 4% on spend per visit, but I don't know Wetteny if you've got any comments on that?

Operator:

And our next question comes from Dave Westenberg with Jefferies. Please go ahead.

Kristin Peck:

Sure. I wish we knew exactly. I mean, we had the same theories that you do that there could be certain technical reasons for some competitors. And let me be clear. Everyone's working in this space. This is the parasiticides. It's the largest single market in Animal Health at $5 billion. So, I think if you're pretty much any of the large companies we compete with, they're all trying to come up with their own triple combination. So, I don't know that it's the same thing that's holding each of the companies back. I mean, we're not really clear. It definitely could be regulatory, it could be technical, it could be manufacturing CMC. We're not exactly clear. And to your point, there's really very few public companies who actually disclose much about their pipeline. So, our ability to know where people are is quite limited. We just -- and we always -- I know it's a little [Indiscernible] keep pushing it out. Sort of like 6 to 12 months from whenever you ask the question because we haven't seen it and we haven't heard it in corporate accounts and they're negotiating with us, we think it's definitely another 3 -- every quarterly with another 3 plus months out. And that's really where some of our back comes from. And yes, we are confident that even if you'll see, we are planning on competition in these key products, but I think that it's the strength and diversity of our pipeline globally that makes us confident we can continue to grow above market. We've got diagnostics, we've got pain mAb. We still think you're going to be growing in [Indiscernible] to be honest with you, it's still a lot of unmet medical needs, so yes, we remain confident that we can grow above the market even if we do start to face competition in some of these key franchises.

Balaji Prasad:

Hi, thank you for the follow-up. And just a question on DRAXXIN, I mean, [Indiscernible] in detail, but I know that you've got approval for DRAXXIN KP in July, probably launches some time in Q3. So, a lot of expectations from the KPs [Indiscernible] ensure that the market stays flat or is this go for this to [Indiscernible] growth? And secondly, on the same, it seemed that 'til now [Indiscernible] launched January versions. You call out a couple of more generates. Any more are you expecting next year? Thank you.

Operator:

It appears we have no further questions. I'll return the floor to Kristin Peck for closing remarks.

Operator:

This will conclude today's program. Thanks for your participation. You may now disconnect.

Steve Frank:

Thank you. Good morning, everyone, and welcome to the Zoetis second quarter 2021 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and by Wetteny Joseph, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements and that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filings, including but not limited to, our annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, Thursday, August 5, 2021. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Wetteny Joseph:

Thank you, Kristin, and good morning, everyone. Before I discuss our second quarter performance, I would like to take a moment to express how excited I to join Zoetis, a company with an exceptional opportunity for meaningful for long-term growth, driven by the durability and resiliency of the existing portfolio, a robust product pipeline and a key focus on future innovation. I look forward to leading an outstanding finance organization and maintaining the financial principles and investment strategies, which position Zoetis as the world leader in animal health. I would also like to express my appreciation to the Zoetis colleagues and the investment community for such a warm and gracious welcome. I had the pleasure of speaking with several of our investors since becoming CFO and I look forward to connecting with many more in the coming weeks. Now shifting the focus to earnings. This morning, I will provide commentary on our second quarter financial results, the key contributing factors to our performance and an update on our improved full year 2021 guidance. In the second quarter, we generated revenue of $1.9 billion, growing 26% on a reported basis and 22% operational. Adjusted net income of $566 million was an increase of 33% on a reported basis and 28% operationally. Operational revenue grew 22% with 2% from price and 20% from volume. Volume growth includes 12% from other in line products, 6% from new products and 2% from key dermatology products. We delivered another strong quarter and remain encouraged by the performance of our business, health of the overall industry and our outlook for the future. It is worth noting that Q2 2020 is a favorable comparative period due to the impact of COVID-19. The pandemic caused widespread uncertainty last year, which led to clinic closures, supply chain disruptions, and shifts in consumer demand from restaurant and foodservice to grocery stores. This materially impacted several aspects of our companion animal and livestock businesses. Now let's dive further into the details of the quarter. Companion animal products led the way in terms of species growth, growing 36% operationally with livestock growing 3% operationally in the quarter. Performance in companion animal was again driven by our parasiticides portfolio, led by sales of Simparica Trio and with significant contributions from the broader portfolio. We also continue to see growth in our key dermatology products, Apoquel and Cytopoint, as well as in vaccines and diagnostics. Simparica Trio had continued to perform exceptionally well, posting revenue of $139 million, representing growth of more than 200% versus the comparable 2020 period. In addition to sales, we are exceeding our other performance measures as well, such as clinic penetration, share within penetrated clinics and reordering rates. The strength of our entire companion animal parasiticides portfolio was evident again this quarter growing 50% operationally with meaningful growth in the ProHeart and Revolution strong growth franchises in addition to the Simparica franchise. Having the broadest and most innovative portfolio within a larger and expanding therapeutic area is as bullish on future growth in parasiticides. Global sales of our key dermatology portfolio was $280 million in the quarter, growing 22% operationally. Cytopoint had an particularly strong quarter, growing 42% operationally and generating quarterly revenue of $100 million for the first time since launch. Year-to-date sales for key dermatology products of $524 million in our view remains unchanged that sales will exceed $1 billion this year. Our diagnostics portfolio had operational growth of 38% in Q2, led by increases in consumable and estimate revenue as the business continues to recover from the impact of the pandemic. With our sustained investments in diagnostics, the newest technology we are bringing to the market and the ability to leverage the breadth of our medicines and vaccines portfolio, we are well-positioned to grow faster than the diagnostics market, which is expected to grow double-digits and outpace the overall animal health markets. Livestock growth in the quarter was primarily driven by our cattle and swine businesses. Cattle grew 3% and swine grew 6% operationally, despite price reductions as part of our generic defense strategy and higher input costs, weighing on producer profitability in the U. S. Data suggests the foodservice service and restaurant industries continued to recover in the second quarter, which is a crucial dynamic for demand of our premium products. Poultry was the only species to decline in the quarter, which fell 4% as producers in the U. S. expanded their use of lower cost alternatives to our products. The decline in poultry partially offset the growth in cattle, swine and fish products. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 22% with sales of companion animal products growing 34% and livestock product sales declining 8%. U.S. quarterly revenue exceeded $1 billion for the first time in company history. For companion animal, pet ownership and pet spending trends remain robust. Placement revenue increased double-digits in the quarter and patient visits and spend per visit were up as well. While we expect some of the trends to moderate, our view is we will remain above pre-COVID-19 levels. In addition, a meaningful portion of pet acquisitions, which occurred during the pandemic were by millennial and GenZ. This infuses a solid foundation of younger pet ownership, who are willing to spend disproportionately more on all aspects of pet than prior generations and will be a key growth driver for companion animal medicines, vaccines and diagnostics moving forward. Our companion animal parasiticides portfolio was the largest contributor to companion animal growth in the U.S. growing 59% in the quarter. Key hematology products, vaccines and diagnostics also contributed to growth. Simparica Trio had an incredibly strong quarter in the U.S. with sales of $120 million generating the highest revenue by a single product in the U.S. for Q2. The Simparica franchise generated sales of $153 million, growing 96% and remained the number two brand in the U.S. flea tick and heartworm markets. Key dermatology sales were $197 million for the quarter, growing 23% with significant growth for Apoquel and Cytopoint. Diagnostics sales increased 22% in the quarter with growth in instruments, rapid, test, point-of-care consumables and reference lab revenue. U.S. livestock sales fell 8% in the quarter, driven by declines in cattle and poultry with swine essentially flat for the quarter. Q2 cattle sales were negatively impacted by a promotional program in the first quarter of this year, which pulled forward a portion of second quarter sales. In addition, price reductions as part of our generic defense strategy and higher input costs weighing on beef and dairy end-markets, presented challenges to our cattle business this quarter. Poultry declined in the quarter, as produces expanded use of lower cost alternatives to our premium products as a result of higher feed cost and labor wages and smaller flux sizes reducing disease pressure. We also face generic competition for Zoamix, our alternative to antibiotics in medicated feed additives. To summarize, our U.S. operations delivered another strong quarter, led by our innovative and robust companion animal portfolio. The end-market dynamics for companion animal remain extremely healthy with pet ownership and pet spending trends driving an environment conducive to sustainable future growth, which is expected to more than offset the near-term weaknesses in our U.S. livestock business. Now turning to our international segment. Revenue in our international segment also grew 22% operationally in the quarter with companion animal revenue growing 41% and livestock revenue growing 10% operationally. The trends fueling strength in our international companion animal business are very similar to those in the U.S. The increasing medicalization rates and standard of care by pet owners, coupled with significant investments in advertising and promotion to support new product launches and key brands drove growth across our parasiticides, vaccines, diagnostics, and key dermatology portfolios. Diagnostics were one 106% operationally in the quarter, with consumables and instrument revenue, each exceeding 100% operational growth. Librela, our monoclonal antibody for of alleviation of OA pain in dogs launched in the EU in the second quarter. Feedback from the early experience trials in Q1 was encouraging and second quarter sales exceeded our expectations further supporting our optimism on the long-term blockbuster potential of the product, as well as monoclonal antibodies as a platform for future growth. Our feline line monoclonal antibody for alleviation of OA pain Solensia began early experience programs in the second quarter with an EU launch following in Q3. As previously mentioned, OA pain in cats is a significant unmet need in animal health and we're excited to provide pet owners with a novel product in a space that has previously lacked innovation. Meanwhile, our international livestock business had its second consecutive quarter with growth across all species led by strong operational growth in cattle and swine. Cattle growth in the quarter was driven by marketing campaigns, key account penetration and favorable export market conditions in Brazil and several other emerging markets. Revenue growth in swine is largely attributed to China, which grew 38% operationally. The theme for growth in swine remain consistent with previous quarters has large key accounts increased their use of our vaccines and other products as they continued to expand production as the market shifts from smaller farms to larger scale modern operations. Our fish portfolio continues to perform very well, growing 25% operationally. Growth was driven by strong performance of Alpha Flux in Chile, vaccine volume in Norway and the 2020 acquisition of Fish Vet Group. From a market perspective lens, all major markets grew double-digits in the second quarter with the exception of Japan, which declined slightly in Q2. China and Brazil had strong quarters, growing 30% and 40% respectively on an operational basis. Growth in companion animal across emerging markets remains a key driver of our international business and in addition to the growth in China and Brazil, our other emerging markets companion animal business grew 68% operationally. Overall, our international segment delivered strong results, demonstrating the importance of our diversity across species and geography. The livestock business continues to perform well and increasing pet acquisitions and pet care spending are extremely encouraging trends for long-term growth in companion animal. Now moving onto to the rest of the P&L. Adjusted gross margins of 71% is essentially flat on a reported basis, compared to the prior year, as favorable product mix and price were offset by higher manufacturing cost and freight. Adjusted operating expenses increased 23% operationally, resulting from increased compensation-related costs, advertising and promotion expense and freight. The adjusted effective tax rate for the quarter was 20%, a decrease of 230 basis points, driven by the favorable impact of a jurisdictional mix of earnings, lower GILTI tax and an increase in favorable discrete items, compared to the prior year's comparable quarter. Adjusted net income and adjusted diluted EPS grew 28% operationally for the quarter, primarily driven by revenue growth. We remain in a very strong liquidity position and continued our share buyback program, repurchasing approximately $165 million worth of shares in the quarter. The strength of our balance sheet and substantial free cash flow generation allows us to make significant investments for future growth, while still returning excess cash to shareholders. Before I review our updated guidance, I would like to reiterate a point that has been discussed on prior earnings calls, which is that, we expect growth to moderate in the second half of the year as a result of varying comparative periods, where pent-up demand created by COVID-19 in the first half of 2020 worked its way through the system in the second half of the year in addition to the expected increased generic competition for DRAXXIN. Adjusting for the variability in the comparative period due to the pandemic, our phasing of top-line growth would be more normalized and consistent quarter-to-quarter throughout this year. Now moving on to our updated guidance for 2021, which we are raising and narrowing as a result of our second quarter performance, strength of our product portfolio, and favorable market dynamics, which we expect to continue in the second half. Please note that our guidance reflects foreign exchange rates as of mid-July. For revenue, we are raising and narrowing in our guidance range. We’ve projected revenue now between $7.625 billion and $7.7 billion and operational revenue growth between 12.5% and 13.5% for the full year versus the 10.5% to 12% in our May guidance. Adjusted SG&A expense for the year are expected to be between $1.87 billion and $1.91 billion, versus $1.82 billion and $1.87 billion in our prior guidance. The increased spend represents additional advertising and promotion investments, a significant portion of which will occur in the third quarter, as well as compensation-related cost due to the company performance. Adjusted net income is now expected be in the range of $2.135 billion and $2.175 billion, representing operational growth of 13% to 15%, compared to our prior guidance of 12% to 14%. Adjusted diluted EPS is now expected to be in the range of $4.47 to $4.55 and reported diluted EPS to be in the range of $4.09 to $4.19. Now to summarize before we move on to Q&A. Our strong performance in the first half of 2021 continues to underscore the value of our diversity, innovation and durable business model. We again raised and narrowed our full year 2021 guidance and expect to grow faster than the markets. We continue to focus on long-term sustainable growth by investing in our pipeline, including infrastructure to support current and future product launches and remain very positive in our outlook for sustainable growth beyond this year. Now I’ll hand things over to the operator to open the line for your questions. Operator?

Michael Ryskin :

Thanks for taking the question, as always I will congrats on another strong quarter. I want to start with Simparica Trio, just a really break out quarter with $139 million. I mean, by our projections, something in the $450,000 to $500,000 range, has been out of the picture for the rest of the year. So I just want to get better a sense of where you're seeing an incremental growth coming from? I mean, we did note a little bit of a tick down in regular Simparica in the U.S. year-over-year. So just wondering if you could kind of little again on cannibalization just revenue expectations as you move forward? And then, my second question will be on the operating leverage. I was wondering we’ve talked about in the past, but definitely saw a notable step up sequentially in SG&A coming in somewhat above my estimates. You mentioned a lot of the advertising spend, a lot of compensation-related expenses. Could just give us a sense of how much this is expected to persist going forward? Obviously, it’s going to play a big role in the operating leverage in the second half of the year and given some of the comps, I want to get a better sense of what goes into that $490 million and sort of how to think about that?

Joseph Wetteny:

Yes, in terms of SG&A, indeed, the step up that you see in terms of our trend there is really largely driven by R&D investments, as well as advertising and promotion behind our strong brands, given momentum that we have in the market and the strong market conditions that we are in. We are really putting advertising behind our key brands You mentioned Simparica as a franchise, both Trio, particularly in the U.S. and other markets, but also Simparica continues to grow internationally for us and we want to take advantage of the momentum that we have in this very large market, $5 billion plus. And so, we'll continue to do that as we enter into the back half of the year, particularly, in Q3, as we said in the prepared commentary. But that's really largely what’s driving in. In terms of compensation-related costs, this is really more of a variable low compensation areas that are really in line with the performance of the company there, as well.

Jon Block :

Great. Thanks, guys. Good morning. Chris, maybe I'll start on the monoclonal and I know it's early, but how are you seeing Librela being used in these international practices? In other words, is it market expansion? Is it taking share from other solutions or cannibalization or remedial? Any color you have there would be helpful. And then just to shift gears on livestock, it's always choppy and can move around. But is there anything more structural going on in the U.S. market in regard to generic competition? And maybe on that last point, how is traction playing out? You mentioned that it seems like maybe less impact to-date, but is the overall year assumption still unchanged? Thanks guys.

Joseph Wetteny:

Yes, sure. Look, in terms of livestock, we don't see a structural change here in terms of your question and the performance that we're seeing is right in line with our expectations. Livestock grew 3% on the quarter. And as we've said, livestock has tend to grow somewhere around the 4% range in the past but we expect it to be in low-single-digits. This year, and really the global growth in that area is driven by international markets, particularly when you think about emerging markets like China and Brazil, et cetera, in the U.S. with the generic competition for DRAXXIN, we expected to see some headwind there. And it's really playing out in line with our expectations. One more point I’ll make is, if you recall, in Q1, we did have some promotions again in line with our generic defense strategy that really accelerated some of our revenue into Q1 from Q2. So that's playing out a little bit in terms of what you're seeing in the livestock figures for the U.S. But we expect to see further declines in terms of livestock for the remainder of the year and all that’s factored into the guidance that we raised today as well.

Louise Chen :

Hi. Thanks for taking my question here. Just curious how durable you think this increase in the vet visit, plus spend per pet will be over the longer term? Thank you.

Operator:

And we will take our next question from John Kreger with William Blair.

Joseph Wetteny:

Yes. Look, we certainly - given the safety and efficacy profile of these products, we expect to be priced at a significant premium to existing therapies including on remedial. So, I would say, it would be above sort of our average gross margin that you see across our portfolio.

Joseph Wetteny:

Thanks, John.

Katie Tryhane :

Hi. Thanks for my question. You highlighted the strength in diagnostics. Can you just speak about some of the advantages and success that you've had with bundling strategies with therapeutics? And can you speak to what you're seeing in terms of competitive placements for instruments? You also called out the new VetScan Imagyst platform. I mean, how has that been performing today? And how do you expect that to contribute to growth in the business going forward? Thanks.

Joseph Wetteny:

Not it’s probably 1%.

David Westenberg :

Hi. Thank you for taking the question. I am going actually continue on that concept. And can you - that was just asked with Katie. Can you help us conceptualize the size of the non-therapeutic revenue for Zoetis on a go-forward basis? And whether or not we should see it as a revenue contributor or as maybe a means of driving therapeutic revenue? And I am going across the categories with like diagnostics, insurance, Embrex, genomics, et cetera. And then, just a quick clarification question to the answer to Jon Block’s question on the doubling of the pain market. Was that just in dogs? And then, cats is just a plus beyond that or was that $800 million or the doubling of $400 million just the dog and cat? Thank you.

Kristin Peck:

Sure. And I can take your second question with regards to the cat market. Yes, we think that would be incremental. It is a little hard to size the cat market today. There is really not much of an OA pain market in the U.S. There is some international products that are approved. But, as we talk about doubling the dogs from $400 million to $800 million, if you recall and it's again it's a little hard to size the cat market, maybe it's a $100 million. We think you can double that as well. So I think that could be a $200 million market, which would make the OA category for us across dogs and cats, potentially a $1 billion market that we can play. And so, we think this is a very exciting space for us.

Balaji Prasad - Barclays:

Hi. Good morning, and thanks for questions. Just a couple for me. Firstly, on the parasiticides market, do you have a sense of relative size of where mix gotten better in the quarter and if Trio growth came in at the cost of competitors or some market expansion? On the same point, you recently got a label expansion for Simparica. Could you also just describe take us through the implications for it commercially? And on the guidance side, could you also just take us through what led to a 1% revenue guide change and the 2% increase in SG&A? And where those increased expenditure is going into? Thanks.

Joseph Wetteny:

Yes. Look, one thing I would add in terms of parasiticides, I think it's a $5 billion market, that's growing around 5% and we're gaining share in this marketplace. We do think that with a triple combo, it's improving compliance with respect to heartworm, et cetera and so that we'll have the opportunity to continue to expand the market, as well. So we're very pleased with the performance across our parasiticides portfolio and the share that we're gaining. We will continue to invest behind this product and this portfolio, as well.

Joseph Wetteny:

Yes, look, certainly, and when you look at our guidance, compared to where we started in the year and given the overall market - positive market dynamics that we see, our portfolio is performing very well. Kristin covered some of the trends around vet visits and so on. All those are contributing towards optimism and you've seen the year-to-date performance that we've delivered. And in fact, we've taken our guidance in terms of top-line operational growth up from where we started in the year at 9% to 11%, now at 12.5% to 13.5%. So full three points above where we started the year. So, we're very pleased with how we started the year. I think if you look at from a overall perspective, certainly, the first half and the second half of the year, if you look at purely top-line, it's really roughly in line, pretty consistent sort of phasing across the year. The growth rates will moderate based on last year, largely not really a matter of how this year is executing for us. We're in a very positive market dynamic with very strong performance across our portfolio. Last year, given the pandemic, there was a bit of variability across the year. There was disruption in the first half of the year, given COVID-19, which created more demand that got pent-up and caught up in the back half of the year. So that's going to create a dynamic in terms of what the Vs look like in terms of growth rates first half versus second half. But we are very pleased with where we are and we are going to continue to invest behind our key portfolios and brands.

Chris Schott :

Great. Thanks so much for the questions. I just want to focus a little bit more on U.S. livestock. Can you talk a little bit again about the 2Q dynamics? Because it seems like you were going up against a fairly easy comp, but this was still down about 8% So, I was trying to get a sense of like, as we think about the rates of decline you're expecting in the business in the second half of the year, just help us conceptualize what type of erosion you're thinking about as we go up against, what seems like some tougher comps for those quarters? And then, maybe from a longer term perspective, just walk a little bit through about how you're thinking about recovery for U.S. livestock as we think about both poultry and cattle as we get past some of these kind of more challenging near-term dynamics and just think about the longer term business? Thanks so much.

Joseph Wetteny:

Yes. Look, I mean, look, if you look at livestock across the world with protein consumption population growth, income levels rising, et cetera, we expect those to continue to drive growth in livestock for the long-term. We delivered 3% on the year, as we said it’s as expected and as was covered in the prior earnings call, we expected declines in the U.S., particularly given the generic entry for DRAXXIN. Now, the first quarter did benefit a bit from two things. One, there was a little bit of a delay in terms of the entry of generic for DRAXXIN, but also we ran a promotion in the first quarter that accelerates some revenue into Q1 taking it out of Q2. So, if you take those in consideration, which are exactly in line with our defense strategy, livestock really is performing exactly as we expected. Now, given that the intensification of generic competition as we expected, just began really into the late first quarter into the second quarter, we expect the decline to continue. And again, they are right in line with our expectations here.

Steve Scala :

Thank you. A local paper in Nebraska reported last week that Librela is being manufactured at the Lincoln plant. If that is correct, then is that product ultimately destined for the U.S.? And as the U.S. regulatory process evolves, can you confirm that it is still the case that no new clinical data is required? Thank you.

Joseph Wetteny:

Look, given our global footprint and presence, you should not beat anything into the location of manufacturing in terms of where products are destined to. In particular, we'll continue to leverage both our footprint as well as third-parties that are manufacturing. And so I wouldn't draw any conclusion from that.

Michael Parolari:

Hi guys. This is actually Michael Parolari filling in for Elliot. Thanks for taking my question. So, I believe you said in the past that Trio has had about a 90% uptake on top corporate accounts. Just wondering if you provide an update though on penetration across all targeted accounts. And then, in relation to the DTC campaign, I know you said in your prepared remarks that it remains beneficial. But just wondering if you could give a updated timeline line on how long you could see it continuing? And then also how you see incremental spend really driving ROI here? Thank you.

Operator:

And we will take our next question from Navaan Ty with Citi.

Joseph Wetteny:

Yes, sure. So, in terms of capital allocation, you should expect consistency in terms of how we've managed capital allocation with the focus first and foremost on internal investments. We have opportunities in terms of R&D, investing behind our brands, on advertising and promotion perspective, CapEx to support our growing pipeline including monoclonal antibodies, et cetera. That's really our first priority. Of course, we'll take advantage of any opportunities from a business development perspective for M&A that helps to accelerate our growth in various markets in areas, as well. So that really follows in terms of investments. And then, as we have free cash flow generation very strong free cash generation, we'll look to return cash to our shareholders. We’ve increased our dividends as you've seen typically faster than our revenue and we reinitiated our share buyback program, which we were continuing. So, that remains consistent, I would say with the best.

Joseph Wetteny:

Yes. So, look, certainly in Jurox, we are excited to be bringing them once we get through the process here over the next six months and close the transaction. We try to bring Jurox into the Zoetis family. Australia is our fifth largest market globally. And this is really at our core. It does increase our presence in a therapeutic area with the leading product, as well. So we're very excited about that opportunity and what it does for us. And we will continue to look for bolt-on opportunities to bring on both the core, as well as other areas of the business whether it's diagnostics or what have you, as well.

Kristin Peck:

Great. Thank you everybody for your questions today and for your continued interest in Zoetis. We look forward to keeping updated on our business throughout the remainder of the year and continuing to deliver on our results and innovations that you and our customers expect. So, thanks so much for joining us today. Stay safe.