Zoetis : Full Transcript Third Quarter 2022

Corrected Transcript

03-Nov-2022

Zoetis, Inc. (ZTS)

Q3 2022 Earnings Call

	Total Pages: 21
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Zoetis, Inc. (ZTS)	Corrected Transcript
Q3 2022 Earnings Call	03-Nov-2022

CORPORATE PARTICIPANTS

Steven Frank	Wetteny Joseph
Vice President-Investor Relations, Zoetis, Inc.	Executive Vice President & Chief Financial Officer, Zoetis, Inc.
Kristin C. Peck
Chief Executive Officer & Director, Zoetis, Inc.

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OTHER PARTICIPANTS

Erin Wilson Wright	Brandon Vazquez
Analyst, Morgan Stanley & Co. LLC	Analyst, William Blair & Co. LLC
Michael Ryskin	Chris Schott
Analyst, BofA Securities, Inc.	Analyst, JPMorgan Securities LLC
Nathan Rich	David Westenberg
Analyst, Goldman Sachs & Co. LLC	Analyst, Piper Sandler & Co.
Louise Chen	Steve Scala
Analyst, Cantor Fitzgerald & Co.	Analyst, Cowen and Company
Jonathan D. Block	Michael Parolari
Analyst, Stifel, Nicolaus & Co., Inc.	Analyst, Raymond James & Associates, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Third Quarter 2022 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com.

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. [Operator Instructions] In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-ups. Your line will be muted when you complete your question. [Operator Instructions]

It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

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Steven Frank

Vice President-Investor Relations, Zoetis, Inc.

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.

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Zoetis, Inc. (ZTS)	Corrected Transcript
Q3 2022 Earnings Call	03-Nov-2022

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.

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Kristin C. Peck

Chief Executive Officer & Director, Zoetis, Inc.

Thank you, Steve. And welcome everyone to our third quarter earnings call for 2022. While the world faces a dynamic external environment and uncertainty in the global economy, our business has been tested and continues to perform well, based on our diverse, durable portfolio and global footprint. In the third quarter we delivered solid results with 5% operational revenue growth, reflecting steady performance across our innovation- driven companion animal portfolio, especially in our International markets.

Our International business grew 8% operationally, and the US grew 2% in the quarter. As we've been saying for some time, supply challenges throughout the year remain a headwind to meeting global demand, and those impacts were more pronounced in the third quarter. Supply has been improving in certain product categories, such as parasiticides, and we continue prioritizing supply for key products and markets. However, we do expect constraints in some categories to continue.

Overall, positive pet care trends in terms of increasing spend and pet owner demographics continue to underpin the strength of our business. With 10% operational growth in companion animal products in the third quarter, we continue to see strong demand globally for Simparica Trio and other parasiticides; our key dermatology products, Apoquel and Cytopoint; small animal vaccines; and monoclonal antibodies, Librela and Solensia.

In the US, supply constraints for companion animal products hampered some of our expected growth in the quarter. And we also experienced an impact related to workforce challenges in veterinary clinics. The decline in clinic visits is stabilizing at pre-COVID rates as clinics struggle with capacity issues. That being said, average revenues per visit continued to rise in the US as pet owners place a premium on the care of their pets, a positive long-term trend.

This commitment to pet well-being is also demonstrated in the success of our monoclonal antibodies for osteoarthritis pain, Librela and Solensia. They are performing exceptionally well in the EU, and Solensia is on track after being launched in the US at the end of the third quarter. We are investing in building a feline market for pain treatment, an undertreated condition for cats.

Outside of the US, companion animal products showed strong growth of 17% operationally. In some of our largest markets like China and Australia, we're seeing our innovative pet care products contributing more and more to growth in these traditionally livestock-driven markets. Meanwhile, our global livestock business performed largely as expected in the third quarter, with a decline of 3% operationally.

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Zoetis, Inc. (ZTS)	Corrected Transcript
Q3 2022 Earnings Call	03-Nov-2022

We continue to face generic competition for livestock products, especially in cattle and poultry; and we face supply constraints in products such as vaccines. However, we are seeing solid pockets of growth, especially in aquaculture and poultry products and certain markets outside the US. As we stabilize from the generic competition and review more consistent supply, we will improve our livestock performance.

Looking ahead, we remain confident in the innovation-driven strength of our business, especially in areas such as parasiticides, key dermatology products, vaccines, and monoclonal antibodies. I am optimistic about the fundamental growth drivers and essential nature of the animal health industry to weather challenging times. However, we are revising our full-year guidance to reflect lower than expected sales in the second half of the year due to supply constraints, veterinary workforce challenges, and recent changes to foreign exchange rates. We believe it is prudent to take a more cautious view, given the increasing uncertainty around supply, inflation, and other macroeconomic conditions that have become less predictable.

As we look ahead to our 10th anniversary as an independent company next year, and I reflect on all that we've achieved in the last decade, I feel very positive about where we are and the capabilities we have to overcome any challenges we face. Historically, we've always been able to adapt our business to meet evolving customer needs, drive growth faster than the market, and achieve our purpose in nurturing the world and humankind by advancing care for animals.

The human-animal bond and people's connection to pets and farm animals is powerful. It's a bond we support with a diverse portfolio that remains the strength of our business. And we see strong global demand for our innovative products, especially in companion animal parasiticides, dermatology, vaccines, diagnostics, and monoclonal antibodies for pain.

Positive pet owner demographics and their willingness to spend on the care of their animals remain long-term sustainable drivers of growth, despite some of the workforce challenges in clinics. And livestock continues to be an important part of our business, an area where we drive significant value for our customers and shareholders. To sustain our growth, innovation remains our lifeblood, and we continue investing in the industry's leading R&D engine at Zoetis.

Our monoclonal antibody portfolio for OA pain is a game-changer. It has been performing exceptionally well as a pet treatment and growth driver in an increasing number of markets, and Librela is expected to be a blockbuster for Zoetis in 2022. In terms of the US approval for Librela, we have confirmed dates for the FDA site inspections outside the US, but their timing makes it unlikely to have an approval this year. Given our ongoing conversations with the FDA, we are confident in receiving approval in the first half of 2023, with a launch planned for late in the year.

In closing, our business continues to perform well in a dynamic market, and we are well-positioned to advance our strategic growth opportunities in parasiticides, dermatology, pain, diagnostics, and emerging markets. Even as we face challenging supply constraints, generic competition, and macroeconomic uncertainty, I remain confident in the resilience of our business and colleagues as we finish 2022 and we go into 2023.

Given the importance of the companionship and nutrition provided by pets and farm animals and the power of the human-animal bond, the animal health industry has consistently grown in the mid-single digits, even in down markets. And, as the leader in animal health, we have the pipeline, market leadership position, global scale, and financial strength to continue outpacing the market.

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Zoetis, Inc. (ZTS)	Corrected Transcript
Q3 2022 Earnings Call	03-Nov-2022

Throughout the last 10 years in various market conditions, we have grown the top line an average of about 8%. And even in the last recession, when our business was more livestock than companion animal, we still grew. As we look toward the end of the year and into 2023, I expect us to continue setting the bar on innovation, cultivating a high-performing culture, and delivering superior customer experiences. All of this will have us growing significantly above the market and building enduring value for shareholders in this dynamic market.

Thank you. Now, let me hand things over to Wetteny.

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Wetteny Joseph

Executive Vice President & Chief Financial Officer, Zoetis, Inc.

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% on new products, which includes Simparica Trio and our monoclonal antibodies for osteoarthritis pain in dogs and cats, Librela and 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 continued 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. Simparica 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 flea, 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, have 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 diagnostics field force to improve gradually into 2023. Diagnostics remains core to our business and a key long-term growth driver for Zoetis.

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