Wetteny Joseph
Executive Vice President and Chief Financial Officer at Zoetis
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 U.S. 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 increasing 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 U.S. 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 0.5 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 U.S. 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 10% operationally, with growth contributions from both the U.S. 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 the reported and operational basis, posting our third consecutive quarter of at least 8% operational revenue growth, despite a tough comparative, particularly in U.S. companion animal. Adjusted net income of $569 million is an increase of 6% on both the reported and an operational basis. Of the 8% operational revenue growth, 6% is from price and 2% is from volume. Volume growth consisted of 4% growth from new products and a 2% decline in our in-line products. Volume from our key dermatology products was flat in the quarter.
On a segment basis, our U.S. business posted $1.2 billion in revenue, growing 9% on the quarter, while 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 U.S. and our International segment, 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 U.S.
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 some 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 reported revenue of $87 million and grew 8% operationally, with growth contributions from both the U.S. and International. Our livestock products ended the year on a strong note with growth of 6% operationally, growing in both our U.S. and International segments. Growth was driven equally by price, which grew despite headwinds from Draxxin 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. U.S. 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 prepriced buy-in at the end of last year. In the U.S., vet clinic visits were flat on the quarter and flat for the year. While we continue to see solid clinic revenue and revenue per visit growth of 6% for the quarter and 7.5% for the year. Our U.S. companion animal revenue growth continues to outpace its 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 U.S. was driven by our pain mAbs, Simparica Trio and our key dermatology portfolio. Our combined pain mAbs posted $58 million in U.S. sales in Q4. We moved to a full launch of Librela in the U.S. 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 U.S. 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 U.S. We have seen a marked increase in feline vet visits and feline revenue growth in the clinic. In the U.S., feline OA patients are up 23% for 2023. Simparica Trio posted U.S. sales of $185 million in the quarter, growing 17%. Growth was driven primarily by price as we ran promotions in Q4 of 2022 following our Q3 2022 supply challenges, and in advance of [Indecipherable] 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 a significant advantage of being first to market. Key dermatology products sales in the U.S. were $252 million in the quarter, growing 6%. Cytopoint sales continue to drive growth through both price and volume, with vets and pet owners preferring this injectable method of administration. Apoquel franchise growth is driven by better net price realization on lower volume due to promotional activity at the end of last year.
Our U.S. companion animal diagnostics portfolio posted growth of 9% in the quarter. U.S. 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 gains 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 field force focus and DTC awareness campaign in early launch European markets as well as continued uptake in markets launched earlier this year. Librela sales were $53 million internationally with 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 of revenue, posting growth of 10% in the quarter on an operational basis. We continue to see benefits 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 price 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 onto international livestock, which grew 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 U.S. 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 repurchases 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 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. On 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 U.S. launch of Librela, we expect to see robust growth from our pain mAbs both in the U.S. and internationally. Our current clinic penetration levels for Librela in the U.S. 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 entrants, 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 U.S. visits to grow flat to 1% and expect to see growth in therapeutic visits aided by the impact of our OA pain products. For an 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 oral 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 in 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 competition-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 net 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 $5.84 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?
