Zoetis Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 14 speakers on the call.

Operator

Welcome to

Speaker 1

the Q1 2023 Financial Results Conference Call and Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. Presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. Presentation slides can be managed by you, the viewer, and will now be forwarded automatically. Only 2 hours after the conclusion of the call via dial in or on the Investor Relations section of zoetis.com.

Speaker 1

Call. At this time, all participants have been placed in a listen only mode and the floor will be open for your questions following the presentation. You may remove yourself from the queue by pressing star 2. In the interest of time, we ask that you limit yourself to one question and then queue up again for any follow ups. Your line will be muted when you complete your question.

Speaker 1

When posing your question, please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Speaker 2

Thank you, operator. Good morning, everyone, and welcome to Zoetis First Quarter 2023 Earnings Call. I am joined today by Kristin Peck, our Chief Executive Officer and Whitney 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 ks and our reports on Form 10 Q.

Speaker 2

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.

Speaker 2

GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8 ks 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.

Speaker 3

Thank you, Steve, and welcome everyone to our Q1 earnings call for 2023. Today, we reported solid first quarter results of 4% operational growth in revenue as expected based on our diverse portfolio and strength in international markets. As we indicated in February, we expected a softer Q1 and a stronger growth for the remainder of the year and we are reiterating our full year guidance for operational growth of 6% to 8% in revenue and 7% to 9% in adjusted net income, given the underlying strength of the pet care market. In the Q1, our international segment led the way growing revenue 10% operationally and was partially offset by a 1% decline in the U. S.

Speaker 3

Our livestock portfolio drove the results with 12% operational growth in revenue, While companion animal product revenues were flat operationally, the performance in livestock was based on double digit operational growth for cattle, poultry, sheep and fish. In the case of U. S. Cattle, this performance was supported by an improvement in the supply of key products. Meanwhile, our companion animal portfolio in the U.

Speaker 3

S. Declined due to distributors destocking and reducing their inventories in the Q1, as well as higher purchases in the Q4 of 2022, which occurred in anticipation of price increases and based on promotional programs. We see strong end market demand in companion animal channels based on data from veterinary clinics, retailers and pet owners. And we view distributor inventories as a short term impact on our companion animal sales. For example, while our sales into distributors declined in the quarter As we expected, our product sales from distributors out to veterinary clinics were up approximately 8% and our product sales out of retail channels to pet owners were up about 35%, affirming a healthy pet care market in the U.

Speaker 3

S. Pet owner demand for products is expected to grow during the Q2, pulling through more inventory and allowing purchase patterns by distributors to become more aligned with the underlying demand throughout the year. Other dynamics in the U. S. Vet clinics also continue to show momentum and trending in a positive direction.

Speaker 3

Clinic visits increased 2% in the Q1, showing an increase for the first time since 2021. Meanwhile, clinic revenue and average spend per visit continue to grow even in the face of inflationary pressures. Revenue and average dollars per visit increased 11% and 9% respectively in the quarter. The combination of evolving pet owner demographics, innovative medicines and an unbreakable human animal bond All continue to support a positive and growing companion animal market where we lead. Despite the Q1 distributor issues in the U.

Speaker 3

S, Our overall growth was driven by strength in international markets, which delivered 10% operational revenue growth in both livestock and Companion Animal Portfolios. This quarter's results are a testament once again to how our diverse portfolio and geographic presence Health deliver steady and predictable growth. Turning now to adjusted net income. We saw a decline of 3% operationally in the Q1, which was in line with our expectations. The Q1 reflected significant investments in our U.

Speaker 3

S. Pet care field force and shifts in the go to market model for diagnostics, costs which were not incurred fully in the year ago quarter. We also saw increased investments in R and D, which we have discussed previously. The investments in diagnostics are maturing and gaining traction in the U. S.

Speaker 3

And we continue to grow and expand outside the U. S. We expect a return to growth in U. S. Diagnostics for the year as we build our Vetscan images AI platform, Refine and Grow, our reference lab business and brings further innovative offerings to the space.

Speaker 3

Looking ahead, we see strong demand driving double digit operational growth for our innovative companion animal portfolio and relatively flat operational growth in our livestock portfolio this year. We will continue to invest in the franchises and capabilities that support our future growth, including large and growing product areas like parasiticides, dermatology, monoclonal antibodies, vaccines and diagnostics. For example, we continue to build out key product franchises through life cycle innovations and claim extensions in products like Simparica Trio, Cytopoint and Draxin. We are also expanding our global reach with approvals in additional markets for new livestock vaccines like Protiviti for beef and dairy calves and Lassitech for swine. And most recently, we purchased a manufacturing site outside Atlanta, Georgia, which will be used as a new monoclonal antibody and Pet Care product operation to add capacity for our expected growth.

Speaker 3

As you know, our monoclonal antibody and vaccine platforms are rapidly growing and this new site would substantially expand manufacturing capacity for our biologics portfolio and ensure long term supply across all global markets when it begins operations in 2026. While the overall economic uncertainty remains a headwind globally In 202023, we have proven to be up to any challenge. We have learned valuable lessons and built new muscles, especially over the last 3 years, Developing more agility, flexibility and resilience in our business and our people. Despite the unusual mix of results in our Q1, I continue to feel very positive about our full year guidance and how our diverse portfolio and vision for the future of animal health can drive long term sustainable growth and create value for our customers and shareholders. We will continue to be disciplined yet adaptable in our approach to the opportunities, potential challenges and economic shifts that could occur throughout the year.

Speaker 3

We remain committed to delivering strong growth in 2023 based on our market leadership, innovative franchises and diverse portfolio, while continuing to invest for the future. Thank you. Now let me hand this off to Whitney. Whitney?

Speaker 4

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 Kristen's comment, our Q1 results are in line with our expectations. As we indicated on our Q4 earnings call, we expected the Q1 to be below the low end of our forecasted annual operational growth rate of 6% for 2023. In the Q1, we generated revenue of $2,000,000,000 growing 1% on a reported basis and 4% on an operational basis.

Speaker 4

Adjusted net income of $607,000,000 declined 3% On both a reported and an operational basis. Of the 4% operational revenue growth, 5% is from price with a 1% decline in volume. The volume decline is driven primarily by U. S. Companion animal distributor destocking in the quarter.

Speaker 4

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.

Speaker 4

Our sheep products benefited from favorable market conditions in Australia as well as our acquisition of Gerox in the Q4 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, Librella and Silencia offsetting declines in Apoquel, parasiticides and anti infectives. Our monoclonal antibodies for ulcerative arthritis pain in dogs and cats, Lubuela and Silencia posted $51,000,000 in revenue globally in the quarter with strong demand for both products. Additionally, Valencia benefited from our U.

Speaker 4

S. Launch in the Q3 last year. As for Luebwela 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 100 $1,000,000 in the quarter, representing an operational decline of 7% versus the comparable 2022 period.

Speaker 4

This was primarily the result of U. S. Distributor destocking during the quarter as well as pre price increased buying and promotional activity during the Q4. 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% operationally with $290,000,000 in global revenue.

Speaker 4

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 offsets 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.

Speaker 4

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.

Speaker 4

U. S. Revenue was $1,000,000,000 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 Kristen mentioned, demand for the veterinary market as demonstrated by distributors sales to clinics is healthy and growing.

Speaker 4

We continue to see robust sales outgrowth across our companion animal portfolio, including strong growth in baricitisides 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%.

Speaker 4

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. Spend per visit remains elevated as the standard of care continues to increase. Turning to product performance, the companion animal decline in the U. S.

Speaker 4

Was driven largely by a decrease in sales of our parasiticides portfolio as well as key dermatology products. Simparica Trio posted sales of $127,000,000 in the quarter, declining 13%, driven by distributor destocking, partially offset by growth in patient share where we continue to outpace the over the oil fleet tick and hardware 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 $184,000,000 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.

Speaker 4

CYTOPOINT sales growth partially offset the Abrokal 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 CELENCIA, which launched in the 3rd quarter. We continue to see solid claim financial growth in CELencia and expect to drive awareness of feline OA through our DTC advertising campaigns.

Speaker 4

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.

Speaker 4

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% operational 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 Xerox acquisition, which was completed in the Q4 of last year. We continue to be encouraged by the performance of Luella and Solencia. Luella generated $34,000,000 or 74 percent operational growth driven by strong underlying demand and the removal of supply allocations that were in place for the first half of twenty twenty two.

Speaker 4

Valencia delivered $9,000,000 in the 1st quarter sales internationally driven by stronger demand. The Paracatu Trio was the top contributor to growth for our international small animal parasiticides with $24,000,000 in revenue We're in 47 percent operation only due to expanding market share in the flea, tick and heartworm space. Our international key dermatology portfolio was flat operationally 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 price buy ups of Apoquel in Japan in Q1 2022.

Speaker 4

Our International Livestock segment also grew 10% operationally in the quarter with growth in 4 of our 5 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 Xerox 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.

Speaker 4

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 and 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 and A growth of 11% operationally driven by headcount related compensation costs as a result of our U.

Speaker 4

S. Small animal field force expansion, which largely began in Q2 of 2022 and Higher T and E. R and 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 and D remains our first Priority and Capital Allocation.

Speaker 4

Other income and deductions in the quarter are reflective of a favorable benefit associated with the 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 percent, an increase of 160 basis points driven by lower net discrete tax benefits in the quarter and Less Savorable 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.

Speaker 4

Capital expenditures in the Q1 were $223,000,000 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 $283,000,000 of Zoetis shares and grew our dividend over 15% versus Q1 2022. Now moving on to guidance for the full year 2023. As we have mentioned, the Q1 has gone largely as we expected.

Speaker 4

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. Call.

Speaker 4

For the year, we continue to expect revenue between $8,575,000,000 $8,725,000,000 representing a range of 6% to 8% operational growth. We also continue to expect adjusted net income to be in the range of $2,490,000,000 to $2,540,000,000 representing operational growth of 7% to 9%. And finally, we expect that 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 and A. We remain confident in our ability to deliver on our full year guidance commitments and expect more normalized growth in subsequent quarters.

Speaker 4

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 grow 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?

Speaker 1

We'll take our first question from Jon Block with Stifel. Please go ahead.

Speaker 5

Thanks guys. Appreciate it. Good morning. I'll ask both upfront. I think importantly, Is the channel now normalized in the U.

Speaker 5

S. Kristen? 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.

Speaker 5

And I sort of landed over $100,000,000 in sales If you quantify that. So can you guys bridge how you get there? I guess there's the $25,000,000 to $30,000,000 of ParaSett last quarter. Or the distis working down inventory by a week, whatever you can do to bridge that would be helpful. And then a quicker one, an easier one.

Speaker 5

Librell, 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, Kristen, how do you feel in your ability to serve demand? Line to be an issue at all, call it 1H24. Thanks guys.

Speaker 3

Sure, John. I'll start with your second question. It's pretty straightforward. Yes, we continue to expect approval of Libriella in the first half with the launch in the second half. The timing of exactly that a full launch, we would obviously, we've always said Do early experience first and then go to full launch.

Speaker 3

The full launch could be very late in the year. But as we continue to and I'll reiterate again, the Librella is not in our numbers for the year. We do not include in our numbers for the year a product that's expected to launch very late in the year, for obvious reasons. So we would do experience as we've always done with a full launch. If we did a full launch, it'd be very late in the year based on what we're saying.

Speaker 3

And no, we do not anticipate any supply challenges On a full launch in 2024, whether it's late this year or early 2024, we don't see any challenges there. On On your second question, the distributor, I think we'll spend a bunch of time on that today. Obviously, there's a lot of complexity in that one. But again, it is in line with what we expected. And We really don't think the trend you see in the quarter is going to continue.

Speaker 3

Let me let Whitney get into all the details because I know this is probably the biggest question we've been hearing early this morning. So, Wendy, do you

Operator

want to go through some of the details?

Speaker 4

Sure. John, 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 Q2. And let me just step back and give you a little bit more details here.

Speaker 4

As Kristen said, we came into the year and as you may recall on the last call, we described how we saw increased buying in the 4th quarter, Driven by promotions that we ran on parasiticide given we had recovery of supply late in the year as we got through some of our supply constraints. And there was more pre price buy in given the level of price increases we're coming into 2023 with In the Q4, above what I would call normal levels of people who are buying. So we expected to see destocking in the quarter, which is why We said that the Q1 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.

Speaker 4

And then as we got into April, we saw slightly more destocking as we started 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. So our 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.

Speaker 4

And if you look at retail, sales out to pet owners were up 35% on the quarter. We've seen for the first time in about a year vet visits increased by 2%. And if you look at derm patients, for example, visits increased in the quarter versus a year ago. And so, again, we've seen normalization since then. And by the way, in 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.

Speaker 4

S, you saw 10% operational growth in our international markets across livestock and companion animal. And so again, we're not assuming a return to those levels and these are factored into our guidance And we're contemplated when we gave the initial guidance back in February.

Speaker 1

And we will take our next question from Erin Wright with Morgan Stanley. Please go ahead.

Speaker 6

Great. Thanks. Two questions, 1 on livestock, 1 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.

Speaker 6

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 cytokine ahead of competition?

Speaker 6

Thanks.

Speaker 3

Sure. Thanks, Erin. Again, livestock Did grow 12% as you mentioned, which was in line with what we expected. But the growth really was driven by resupply or increased supply of a lot of key products. As we reiterated in our prepared remarks, we continue to expect a flattish growth for livestock for the year.

Speaker 3

If you look at it, we saw if you look at the U. S. Business, we think you'll see it's really more of a one time sort of getting back into supply in some of this. Is it slightly up or slightly down? I think a lot of that is genuinely going to depend on China.

Speaker 3

With This return to travel and dining out in China will drive growth in a number of our markets around the world, in our export markets such as Brazil or Australia or even the U. S. So We continue to expect and built into our guidance for the year is to have a flat, flattish Livestock number, which obviously gets back to wet knees point, which is we're expecting very strong double digit growth in companion animal. As you look at derm, for the quarter, It did decline, but this is largely due to the destocking of the pre price buy ins and promotions in the U. S.

Speaker 3

And as Whitney mentioned in his remarks, the one time issue in Japan back to Q1 of 2022. In fact, if you pulled that out, International had double digit growth if you take out Japan. So again, this performance was in line with our expectations. But really importantly, It is not indicative of our view of our expectations for the year. We continue to expect double digit growth for the rest of the year and for the overall year for dermatology.

Speaker 3

Our sales out remain really strong. We're seeing a lot of uptake right now in Cytopoint. More and more pet owners are really seeing the compliance benefits of it, the efficacy of it, and vets love it because it obviously stays in the clinic. As we continue to see the shift here, it was compliance, I think again will underscore our growth there. And the other thing I'd mention that, Whitney mentioned is derm visits continue to grow in Q1 and we're not really seeing any pushback from customers on the price increases that we did do.

Speaker 3

So we continue to expect strong growth for derm for the year. Per our last guidance, double digit growth for derm.

Speaker 4

Yes. I would just add, the Q1 is not 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 Farfetch Derm franchise will 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 Q2 for derm both in the U.

Speaker 4

S. And internationally.

Speaker 1

And we will take our next question from Michael Ryskin with Bank of America. Please go ahead.

Speaker 7

Great. Thanks for taking the question guys. First, I want to ask about sort of the top line progression I think you had pointed softness in 1Q previously and you talked about just now widening on what you saw distributors to start the 2nd 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 $8,650,000,000 68 percent operational growth. So just talk about the step up in 2Q, 1Q to 2Q versus 2Q to 3Q, 4Q.

Speaker 7

And then as a follow on to that, Kristen, you touched on Libriella 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, it didn't come any day, but Just curious what you're hearing on that and if your thoughts on what's going on in the parasiticide 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 Para through the rest of the year? Thanks.

Speaker 4

Hey, Mike. I'll start with progression for top line for the year and then I'll turn it over to Kristen and she'll cover Libriella launch and Sure competition. So with respect to progression for the balance of the year, we expect normalized growth across the year starting with the Q2, which obviously we're already About halfway into the Q2 and as I mentioned just a little bit ago, we got a strong start particularly in Durham but across the board What I'll call more normalized mix and normalized cadence for the balance of the year. One thing I would say is with respect to Q2 And that's normalized operational growth rate I'm referring to. If you take a look at FX, for example, that was about 3 points of headwind in the Q1.

Speaker 4

Based on where rates are right now, I would expect about 2 points of headwind on the 2nd quarter. So when you map out operational growth To reported growth, you should take that into consideration. That turns around in the second half, again, based on where rates are now. And it ends up being slightly unfavorable on the year year on year on FX on the top line and slightly favorable at the bottom line. So that's how I would sort of think through The progression, but again starting with the Q2, you should expect normalized growth to get to the guidance that we just reiterated at 6% to 8%.

Speaker 3

Sure. And let me pick up your second question, which was you showed the other products. 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 Q1, we actually gained share. So as we said, there's very strong underlying demand for Simparica Trio, in the U.

Speaker 3

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.

Speaker 3

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 and 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.

Speaker 3

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 vets and 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.

Speaker 1

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

Speaker 8

Great. Thanks for the questions. Sorry to keep honing in on the destocking dynamics. But Could you maybe just talk about how the Q1 U. S.

Speaker 8

Companion animal sales kind of played out month by month? It seems like January February, you probably saw the bulk of the impact from the pre buying and pull forward into the 4th quarter. Sounded like the destocking might have occurred a little bit later in the quarter. I think just as people are looking to get better visibility on the improvement in the Q2. Could you maybe comment on how March or April played out, just as we think about kind of where the business is heading into the 2nd quarter?

Speaker 8

Yes.

Speaker 4

So look, I'll be happy to answer the question in terms of destocking. Look, we saw destocking from the start of the quarter just as we anticipated and as we discussed on the prior call given the dynamics coming out of Q4. As we mentioned too in the last call, the Timing of our supply recovery in terms of last year would have had an impact on the cadence on the year, which is playing out exactly As we thought, I'll give you a little bit more color perhaps that might be helpful if you think about what the end market demand looks like. When we look at our sales out of distribution to clinics. We said it's 8% volume growth on the quarter.

Speaker 4

If you look at how those played out for March, the end of the quarter, they're actually above that number So we haven't seen anything in terms of what the end markets are that would indicate a slowdown. And as I said, we've had Strong start to the Q2 and we're sitting here in the middle of the Q2 and I'm saying that we would see normalized growth starting in this current quarter

Speaker 7

for the balance of the year. Yes.

Speaker 3

And I think I want to also reiterate what Whitney 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.

Speaker 1

And we will go next to Louise Chen with Cantor. Please go ahead.

Speaker 9

Hi. Thanks for taking my questions here. So I 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?

Speaker 9

It's been a while since you've had an 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.

Speaker 3

Sure. We are excited for our Investor Day. We spent a time talking to a lot of our investors over the last 6 months as to what they're looking about. Our focus there will be really on Building confidence in our medium to long term growth expectations. We've gotten a lot of questions obviously on our pipeline and R and D.

Speaker 3

So you'll see us, As we mentioned in our press release, Rob Poelzer, our Head of R and D will be coming to give more detail on our R and D portfolio. And we also look forward introducing you to other members of our leadership team. So you get to meet them as well. We're excited to sort of share what we view as the short, medium and long term growth aspirations and give you some confidence in more around all of those. So, Whitney, do you want to take her second question on diagnostics?

Speaker 4

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 2nd quarter. In this Q1, we actually saw very strong placements across our instruments, including images As well, those will help drive growth from a consumer perspective as we look at the rest of the year.

Speaker 4

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.

Speaker 1

And we will take our next question from David Westenberg with Piper Sandler. Please go ahead.

Speaker 10

Hi. Thank you for taking the question. So just on the Simparica Trio franchise and so on the distributor dynamics here. I usually think about the parasiticide portfolios being heavy in a March to August season. As we take a step back or take A Zoom outlook.

Speaker 10

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 another way, do you think maybe if 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, we're not the same as the price increases in companion.

Speaker 10

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.

Speaker 10

Sorry, that was a lot.

Speaker 3

Sure. Let me start with Trio and then I'll let Whitney take the other I want to underscore what we said earlier. We have very strong demand in sales out. And so what you saw in Trio in the Q1 was a stocking issue. But as we look at the demand for the product and where it's going, it has no effect on the flea and ticks as we meet it.

Speaker 3

We had full supply in. I think what makes it a little complicated and as unusual was The supply issues we had in Q3, Q2 and Q3 of 2022 put us putting a lot more inventory into the channel at the end of Q4, Trying to restock shelves against what we thought, if you remember, was going to be a launch in Q1, of a competitor. So I think there's obviously some quarter to quarter Docking dynamics, but I want to underscore demand for this product remains strong. We gained share in the quarter. We are now at normal inventory level.

Speaker 3

So no, we do not see anything as you look at Q2 to Q3 of the product and which we would agree that is normally Q2 to Q3 is the strongest sales normally in parasiticides. So We continue to see very strong demand for the product. Obviously, there is some quarter to quarter stocking stuff that is relatively unique as you looked at the end of 2020 2 and the beginning of 2023, but we don't think that actually signals through anything in the demand for the product or importantly the strong growth we see for the product for the year, even as we said assuming competition in the second half.

Speaker 4

Yes. Look, I think there were a couple of other parts to your question I'll touch on in terms of livestock. We're not seeing the same dynamics In livestock, look, I think 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 up for us. If you look at operating cash flows on the quarter, they're actually favorable to last year, Because as inventories continue to increase, we saw really strong performance on receivables and other NAPs.

Speaker 4

So overall, operating cash flows Look favorable versus a year ago.

Speaker 1

And we will take our next question from Balaji Prasad with Barclays. Please go ahead.

Speaker 11

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 2020 Growth in 2020 to be it in the vaccine side or triore, monoclonal cells. And would you foresee and anticipate any supply chain impacting any of your key products this year.

Speaker 11

Secondly, I wasn't sure I got the done decline fully as this is not a Bureau dependent segment. Can you provide some numbers around the Dump segment and help us understand what led to the decline? Thanks.

Speaker 3

Sure. I'll start with your first question on supply chain and maybe Whitney can build on my derm answer from before. With regards to the supply chain, As we expected, we have completely normalized the supply chain. We always have some small level of challenges as we mentioned before in the biologics. But the challenges we saw in 2022 have been resolved as we indicated they would be.

Speaker 3

We're back into normal supply on these products as you look at whether that's Parasiticides or importantly our monoclonal antibodies. As expected, those are at normalized levels. We'll have some small number in bios as we always have And all of our competitors generally have, but supply chain has been normalized, and we don't foresee any specific supply chain challenges In 2023, going forward. But maybe, Wettin, you can build up my previous comments on Derm and see if you can clarify some of his questions.

Speaker 4

Yes, I'd be happy to. So look, the Derm story is similar in terms of destocking from pre priced 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 finance in the Q1 driven by those pre price buy ups in Apoquel. And then you saw that go the other way in the Q2.

Speaker 4

So if you were to I would say pro form a, the results for the Q1, taking into account what I just said, you would see double digit growth, for the derm franchise In both the U. S. And international.

Speaker 1

And we'll take our next question from Chris Schott with JPMorgan. Please go ahead.

Operator

Hi. This is Ekaterina 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?

Operator

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 Lettuce's plans in diagnostics or the investments you're making in that market? Thank you so much.

Speaker 3

Sure. Thanks, Catarina. I'll take your second question first and then let Whitney take your first question on the pricing. I really think the margin acquisition of Heska confirms that the veterinary diagnostics market continues to be incredibly attractive investment area. Most importantly, it reinforces our strategy.

Speaker 3

We think the sound around committees executed around in the U. S. Specifically, building our reference lab network and continuing to invest in innovation Importantly, in our point of care, we had a robust start to 2023. As we look at our images, our virtual lab, our reference lab offering, We really believe it's resonating with customers. And really our focus is on leading with cutting edge medicine, really rolling out our virtual lab, We really think is a differentiator and we think that's what differentiates Zoetis overall, is innovation in the space, innovation around point of care, innovation in customer experience, Innovation in the reference lab.

Speaker 3

So no, we really see that acquisition as reconfirming our strategy, and really we're going to accelerate our growth focused on innovative diagnostics. So, Whitney, Do I take our second group of questions around pricing?

Speaker 4

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.

Speaker 4

And by the way, if you look at international, we grew 10% in companion animal in the quarter, given our price increases as well, despite some pre price buy in, which is normal in the Q4. So we haven't seen any signs of that. If you look at livestock, that actually offsets some of the marginally offsets some of the price increases We would have seen in companion animal, we tend to see some impact on Jackson, but not meaningful at the level that we've seen previously as we And actually we saw some volume offset to that positively offsetting some of the price on the Jackson 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.

Speaker 4

We won't go into that yet.

Speaker 1

And we'll take our next question from Brandon Vazquez with William Blair. Please go ahead.

Speaker 12

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.

Speaker 12

So the question being basically what would get you to that low end operational growth range given the strength you're already seeing in the year if you kind of read through the noise.

Speaker 4

So look, if you look at the end market dynamics that we see, we see strength there. So I think that supports certainly the mid to high end of our guidance, I would say, if you look at the what it means for the rest of the year and I'll reiterate this point, which is we're already halfway through the 2nd quarter. And again, we're seeing strong start to the quarter and we'll see that normalized growth rate, including mix, by the way, for the balance of the year. And keep in mind, Right. Our guidance didn't change, including what we expect from livestock for the balance of the year, right?

Speaker 4

We went from saying livestock could be minus 1 to plus 1, we're saying it's flattish. Basically the same thing. So how Q1 has played out is exactly as we thought essentially and therefore the rest of the year is the same. And so no point in our guidance range is any, I would say, more probably than the other. We feel great about where we are on the year And how it's starting out for us in the Q2 in particular despite what you described as the noise in terms of the inventory levels.

Speaker 1

And we'll go next to Steve Scala with TD Cohen. Please go ahead.

Speaker 13

Thank you. A couple of questions. First, the new manufacturing facility in Georgia. Is the investment based predominantly on increased forecast for current products or positive late stage R and D progress for which we at least on the outside currently don't have visibility or is it some combination? And in the prepared remarks, you referred to disruptive novel innovation in the pipeline.

Speaker 13

Should we expect to get a window on that during the May meeting. And can you tell us if this is likely mainly directed at currently untreated diseases, More species, wider claims within existing species, improved dosing or something else. Thank you.

Speaker 3

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 center 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.

Speaker 3

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 talked we've mentioned before. We'll 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.

Speaker 3

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 on 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.

Speaker 1

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

Speaker 3

Thank you. So look, just to summarize, we really see a very positive and sustainable demand for our products based on what we talked about for a long 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 sciences we talk about and supported by a high quality supply chain. We'll remain focused this year and going forward on our 5 key growth catalysts, dermatology, pet parasiticide, pain diagnostics and emerging markets.

Speaker 3

And we're going to continue 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, Whitney, our Head of R and D, Rob Holzer, 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.

Speaker 3

So thanks so much for joining us today.

Speaker 1

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

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Earnings Conference Call
Zoetis Q1 2023
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