Zoetis(ZTS) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Revenue for Q2 2023 was $2.2 billion, growing 6$652 million, growing 15% on a reported basis and 12% operationally [15] - Operational revenue growth was driven by 4% from price and 5% from volume, with volume growth consisting of 2% from in-line products, 2% from new products, and 1% from the dermatology portfolio [15] - Adjusted gross margin improved by 260 basis points to 72.4%, driven by favorable foreign exchange, price increases, and product mix [23] - Capital expenditures in Q2 were $166 million, and the company repurchased$324 million of shares [25] Business Line Performance - Companion animal portfolio grew 11% operationally in Q2, driven by dermatology, osteoarthritis pain, and pet parasiticides [6][16] - Livestock portfolio grew 4% operationally in Q2, driven by poultry, cattle, and fish products [6][17] - Companion animal diagnostics portfolio recorded $92 million in revenue, growing 12$241 million, growing 10% [18] - International companion animal revenue grew 17% operationally, driven by parasiticides, monoclonal antibodies for osteoarthritis pain, and dermatology products [20][21] Market Performance - U.S. revenue was $1.2 billion, growing 7$1 billion, growing 6% on a reported basis and 11% operationally, with companion animal revenue growing 17% and livestock revenue growing 4% [20] - Strong growth in Europe, particularly in Northern Europe, with double-digit growth in companion animal products [63][64] Company Strategy and Industry Competition - The company is focused on innovation in chronic diseases, dermatology, parasiticides, and monoclonal antibodies for pain [6][12] - Direct-to-consumer campaigns are being used to support growth for products like Librela and Solensia [10] - The company received U.S. regulatory approvals for Librela and Apoquel Chewable in Q2 2023, with Librela expected to launch in the U.S. in November [11] - The company is expanding in large and growing product areas such as parasiticide, dermatology, monoclonal antibodies for pain, vaccines, and diagnostics [12] Management Commentary on Operating Environment and Future Outlook - The company expects full-year operational revenue growth of 6% to 8% and adjusted net income growth of 7% to 9% [9][25] - The company is monitoring macroeconomic conditions, particularly in Asia Pacific, and drought conditions in certain countries [11] - The company remains confident in its ability to deliver on its full-year guidance due to strong underlying demand for animal health products [81] Other Important Information - The company welcomed Ester Banque as EVP and President of U.S. Operations, bringing global healthcare experience [12] - The company published its 2022 sustainability report, highlighting progress in sustainability initiatives [13] - Zoetis was recognized by Fast Company as one of the Best Workplaces for Innovators [14] Q&A Session Summary Question: Impact of NexGard Plus on Simparica Trio - Simparica Trio has a superior label and first-mover advantage, with strong growth expected in Q3 and the second half of 2023 [32] - The company remains confident in competing against NexGard Plus due to the strength of its label and customer relationships [32] Question: Outlook for Companion Animal Growth - Companion animal growth is expected to improve in the second half of 2023, driven by strong demand and easier comparisons in the U.S. [38] - The company expects Q3 to be stronger than Q4 due to easier comps in companion animal and tougher comps in livestock [39] Question: Gross Margin Drivers and Sustainability - Gross margin improvement was driven by favorable foreign exchange, price increases, and product mix, with sustainability expected in the second half of 2023 [42][43] Question: Dermatology Market and Competition - The company expects double-digit growth in dermatology, driven by strong demand for Cytopoint and Apoquel Chewable [50][51] - The company is focused on life cycle innovation in dermatology, including long-acting monoclonal antibodies and new species applications [61][62] Question: EPS Guidance and Pricing Impact - The increase in EPS guidance is primarily due to favorable foreign exchange, with pricing increases typically occurring early in the year [57][58] Question: Global Parasiticide Market Growth - The company expects to grow faster than the global parasiticide market, driven by innovation and increased compliance [71][72][74] Question: U.S. Pet Health Market and Student Loan Repayments - Flat vet visits in the U.S. are due to workforce challenges rather than demand issues, with no significant impact expected from student loan repayments [77][79] Question: Long-Term Growth Commitment - The company remains committed to mid-to-high single-digit revenue growth over the next 3-5 years, driven by innovation and strong market demand [67][68]