Q4 2019 Earnings Call

Good day and welcome to the fourth quarter fiscal year 2019 financial results conference call and webcast fours awareness.

Hosting the call. Thank you, Steve Frank Vice President Investor Relations fours awareness.

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Now my pleasure to turn the floor over to Steve right. Steve you may begin.

Thank you Keith Good morning, everyone welcome to the letters fourth quarter full year 2019 earnings call I'm joined today by Kristin Peck, Our Chief Executive Officer, David Our Chief Financial Officer.

Before we begin I'll remind you that the flights presented on this call.

On the Investor Relations section of our website and that our remarks. Today will include forward looking statements that actual results could differ materially from those projections for 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, Iteris, you see 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 principle or U.S. get.

A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures included in the financial tables that accompany our earnings press release, and then the company's 8-K filing dated today February 13 2020.

We will also say operational results, which exclude the impact of foreign exchange was that that will turn the call over to Kristen.

Thank you Steve good morning, everyone.

I know you ran a press release and financial tables in the White House that site. So take just a few minutes to recap so you're talking about outlets for 2020.

Some of the long term investment plans and growth opportunity, we see person or whatever.

Our CFO when David will then cover the fourth quarter.

That's for 2020.

In the lined up for your question.

So let's get started.

The waste delivered another year of strong growth and market leadership in 2019, thanks to our diverse unbearable portfolio and our commitment to continuous innovation.

We grew revenue type person operationally, which includes 2% growth I mean batches acquisition.

Once again.

Okay. Good for animal health, what do you expect it to be 3% to 4% for 2019, assigning the negative impact and Africans My speaker.

We grew our adjusted net income faster than revenue at 14% operationally continuing to achieve our goal of growing profitability faster than revenue.

Long term.

In terms of other elements of our value proposition, we achieved several new approvals in areas that will strengthen our traditional portfolio parasiticide been vaccine I mean basket in critical acquisitions in partnerships.

Salaried our growth in areas, where we are expanding such as diagnostics.

For example, we received approvals for new Parasiticides, such as prior 12 in the U.S. and Sunbury trio any you in Canada.

Enhancing our vaccine portfolio with new products like Diversicare plastic baby or all the first grow vaccine for dogs in Europe and pull back for 30, HBT NB person dr. vaccine for poultry.

We also continued to invest in building, our overall diagnostics capabilities with acquisitions in the reference lab space, which will give us a more holistic offering to veterinarians.

We expanded our equine in pet care portfolio nutritional formulas with the acquisition of platinum for apartments, a premier leader in this market.

Finally in terms of our commitment to returning excess capital to shareholders. We generated 2019 quarterly dividend 16 cents per share increasing to 30% really 2018 dividend rate and we completed approximately $625 million in share repurchases.

We built a strong record deliveries on this value proposition for shareholders over the last seven years.

I'm confident we can continue on its path of long term growth and value creation based on the capabilities colleagues and customer focus we bring to every market opportunity.

Looking ahead now to the rest of 2020.

Animal health remained steady and reliable market based on People's increasing commitment to their pets, how and based on the steady demand for safe and affordable animal proteins.

For 2020, we currently expect the overall industry to return to growth approximately 4% to 5% excluding the impact of foreign currency.

The market, China, I dramatic Kid and Tween 19 from African swine fever in China.

At least at 80% production in herd size according to reports.

Well this to be quite a significant impact on our business in China last year, we see early signs of stabilization and the opportunity for the industry in terms of bars, consolidating investments being made and better infrastructure in biosecurity frozen pork supply being reduced.

Oh part market and trade picture sorts out more than 2020 and with increased export opportunities for many markets. We could see the overall animal health market return to slightly better growth rate.

Turning to species, the swine market should be below the overall market growth for 2020.

Second hand, animal and poultry markets are expected to be somewhat the market grows.

Oh, it's expected to be a little more limited in the market based on a continuing challenges faced by beef and dairy customers.

Yes, we expect to grow faster than the markets for companion animal in poultry and inline with the kind of American.

And the swine market, we would expect to be interide or faster than the market depending on the pace of recovery from Africans why fever, and its impact on additional markets. This year.

In terms of our guidance for 2020, the when its expects to grow revenues significantly faster than the industry in a range of 7% to 9.5% operationally and in terms of adjusted net income we start operational growth in the range of 8% to 11%.

To meet our goals for the 2020, we will continue supporting our latest product launches in lifecycle innovation with direct to consumer advertising and a recently expanded pet care field force in the U.S.

International markets, we're focused on supporting new products, we feel fourth expansions in certain markets and differentiating ourselves with a focus on direct field forces effectiveness and technical expertise.

We will also continue investing in other accelerated growth areas, such as diagnostics genetics precision lifetime farming and digital and data analytics.

This will be an important hearing diagnostics as we complete the integration of our systems and moved to accelerate sales from any more integrated offerings medicines in diagnostics and important way, we can deliver more value to our customers.

And you will continue advancing our pipeline, we think that's missing parasiticides vaccines.

Suddenly antibodies and other therapeutic areas.

The lawn and garden trio, our Triple combination parasiticide is highly anticipated for 2020.

I mean comedy and the U.S. approval in the first quarter with a lot shortly thereafter.

He said recently, we completed the technical section of this entire it's real package for the U.S. and are currently in the administrative review awaiting final approval.

We've already received approvals person Paragould trio you in Canada, and we expect this impairment trio launch in Europe to begin in certain markets. This month.

We take a phased approach to launch there.

Based on these assumptions, we continue to expect to generate incremental global sales since Eritrea when 2020.

Definitely $150 million.

I'm energized by the opportunities kind of less than 2025.

Hybrid and growing companion animal portfolio, driven by internal innovation and more to come within target trio.

We are delivering steady performance across our lifetime products. Despite the market challenges some of our customer space for economic condition emerging infectious diseases and natural disasters.

Partnering with our customer the innovative ways to help them stay ahead of the curve and evolving technology, new commercial opportunities and shifting consumer trends.

We are building out our capabilities in digital and data analytics to be meaningful solution to the challenges facing their firms and clinics.

Executing on a strategy for growth with internal and external investment that is well positioned for long term growth.

I look forward to carry out of the company successful formula of customer focused innovation and execution as we continue to deliver on our long term value proposition to shareholders now I'll hand things over to Glenn.

Thank you Christian and good morning.

Listen indicated we had another exceptional year with revenue of $6.3 billion and adjusted net income of $1.8 billion with both top and bottom line exceeding the high end of our guidance ranges for the year.

Reported revenue growth was 7% for the year.

3% unfavorable impact from foreign exchange, which was driven primarily by strengthening <unk> dollar against the Euro Brazilian real and Argentinian peso.

Operational revenue growth of 10% was driven by 2% price contribution and an 8% volume contribution.

Volume growth, including 2% for any additional <unk> legacy Abaxis products, 2% forgotten dermatology portfolio.

So from new products and 2% from a other in loan portfolio.

Revenue growth for the year was broad based with U.S. growing 11% and international growing 9% operationally.

Yeah animal underway in terms of species growth outpacing livestock see here.

Revenue for Lucky dermatology portfolio, how diverse parasiticide portfolio with several new launches this year and legacy Abaxis products drove a companion animal operational performance up 23%.

Let's talk declined 1% operationally for the are impacted by the outbreak of African swine fever in China, and challenging beef and dairy cattle market conditions in the U.S.

Oh poultry and finished product portfolios continue to grow partially offsetting the cattle and swine headwinds.

Operational growth in adjusted net income a 14% what's your by strong revenue growth and gross margin favorability.

No I'm not sure Q4 financial results, we had solid performance again this quarter with revenue of $1.7 billion, representing an increase of 7% on reported basis and 9% operationally.

Adjusted net income of $440 million increased 18% on reported basis and 13% operationally.

Foreign exchange in the quarter drew an unfavorable 2% impact on revenue, primarily driven by the strengthening of the dollar against the Euro Brazilian real and Argentinian peso.

Operational revenue growth of 9% for the quarter was driven by 1% price and he presented volume.

The volume contribution of 8% includes 3% from new products, 3% from other long products and 2% from key dermatology products.

Contributions from legacy Abaxis products were not material driver girls in the quarter globally. Since this is the first full quarter lessen the impact of the prior year acquisition.

Breaking down our operational revenue growth by species companion animal grew 19% and lifestyle grew 2%.

Companion animal revenue growth was driven by continued sent about key dermatology products and daqo suicide portfolio, including new products never lose some plus and 212 and the continued adoption of some power.

It's going to also contributed to growth in the quarter with a full quarter revenue from the acquisition of platinum performance and his nutritional products as well as continued growth about 42 innovative vaccines.

Well I saw growth in the quarter was primarily driven by strong poultry industry performance, partially offset by declines in cattle and the impact of asking swine fever.

It's one increased 1% operation in the quarter, despite the impact of African swine fever.

[laughter] new products contributed 3% to overall growth in the quarter, driven by Parasiticides Revolution, plus and stronghold pause as is known internationally for 12, and the recently launched Oh, let's suppose to decide in Chile.

Other inline products contributed 3% to growth in the quarter.

This was primarily driven by revenue from recent acquisitions and commercial agreements, including platinum performance.

Since lab acquisitions, the stable and diagnostic test for equine and companion animal parasiticides, including some power.

This growth was partially offset by declines in U.S cattle any ongoing impact of African swine fever.

Some power can contribute and strong growth in the quarter with revenue of $42 million and 34% operational growth.

For the full year supposed to sales were $214 million well, 40% operationally.

Okay dermatology portfolio continued to grow globally this quarter contributing 2% group.

Global sales were $200 million in the quarter, representing 29% operational growth.

Full year revenue for this portfolio was $754 million growing 29% operationally.

Positive performance in this portfolio was driven by increasing market share price and expanded usage aboard uncle inside a point into recently launched market.

Sales of legacy Abaxis products were $68 million in the quarter, representing 5% operational growth over the prior year.

Now, let's discuss the then go by segment for the quarter.

You asked revenue grew 6% was companion animal growing 15% and lifestyle declining 3%.

Companion animal growth in the quarter driven by increased sales of our key dermatology products. The impact of recent acquisitions are parasiticide portfolio and a number of all the inline products, including Cerenia and room it up.

You asked dermatology sales were $133 million for the quarter growing 21%.

This quarter was driven by price and benefits from direct to consumer advertising driving increased market share.

Our parasiticide portfolio, including new products, such as revenues from plus and poor 12, and inline products such as some paragould contributed to strong companion animal growth.

Oh, Okay, I'm performance was partially offset by U.S. livestock declines in the quarter driven by cattle.

Cattle product sales continued to be negatively impacted by unfavorable market conditions, driven by heavier and helping our animals coming in from pasture little low risk profile and pricing pressure driven by competition.

Partially offsetting challenges in cattle was continued poultry growth primarily from a portfolio of alternatives to antibiotics and medicated feed additives.

We also benefited from new customer adoption and competitors, having product efficacy and supply challenges.

I also had a strong quarter returning to growth due to increased sales of medicated feed additives and vaccines.

To summarize U.S. performance innovation and returns on investments drove positive results, despite challenging market conditions impacting growth in cattle.

Our International segment also contributed strong growth this quarter with operational revenue growth of 12% compared.

Companion animal operational revenue growth was 26% and livestock operational goal was 5%.

Comparable growth was driven by key dermatology products growth in our parasiticide portfolio, including some power and a strong whole franchise and legacy Abaxis products.

International Livestock also performed well driven by growth in cattle fish and poultry.

This growth was partially offset by modest declines in swine due to the ongoing impact of African swine fever.

Growth in cattle was due to favorable pricing as well increase the blood placements in Australia.

New customers, another developed and emerging markets and favorable conditions in key markets such as Mexico.

If this portfolio benefiting from the continued uptake of the Alpha flux parasiticide in Chile, while poultry growth was driven by price and increased sales of vaccines.

As expected swimming chose this quarter by the ongoing impact of African swine fever.

Do you see some positive signs however, partially offsetting these declines with new markets launching a combination swine vaccine and growth in key accounts in China.

Our outlook for 2020 remains neutral to slightly positive for swine in China.

In the near term. However, we remain confident that other regions and proteins will increase production to help mitigate the pope shortage and long term industrialization of pork production in China will be a tailwind.

Overall, our international segment continued to be a significant driver of growth supported by innovation and a diverse portfolio across products and geographies. Despite the impact of African swine fever.

Now moving on to the rest of opinion no.

Adjusted gross margin of 16.5% increased approximately 210 basis points in the quarter on a reported basis compared to the prior year.

The increase was driven by foreign exchange manufacturing cost efficiencies product mix and price, partially offset by increased inventory charges.

Total adjusted operating expenses grew 13% operationally.

The increase is primarily related to compensation related expenses the impact of recent acquisitions, George consumer advertising and investments to support future growth of the business.

The adjusted effective tax rate for the quarter was 14.2%.

The decrease from the comparable 2018 period is primarily related to nonrecurring discrete tax benefits recorded in the fourth quarter of 2019.

Mostly offset by the impact of the global intangible low tax income or guilty tax which was effective because of weather in 2018.

Adjusted net income for the quarter grew 13% operationally driven by strong revenue growth favorability in gross margin and a lower effective tax rate.

Adjusted do lead P.S. grew 14% operationally compare compared to the same quarter in the prior year.

Now moving on to guidance for 2020.

Please note that guidance reflects foreign exchange rates as of late January.

In 2020, we're projecting revenue between 6.65, and $6.8 billion, representing 7% Tonight and a half percent operational growth.

Foreign exchange is expected to be a headwind again next year of approximately 100 basis points.

Innovation will be a key driver grow next year, particularly in companion animal.

Many of them overall is expected to again outpaced livestock benefiting from a diverse parasiticide portfolio, he dermatology diagnostics and strong market dynamics, including continued growth in emerging markets.

And as Christian mentioned, our guidance assumes an incremental $150 million in revenue related to some power can trio.

This estimate represents revenue for roughly three quarters of the or.

And in 2020 as Kristen indicated we anticipate all livestock species returning to global growth.

From a geographic perspective, we anticipate balanced growth between our U.S. and international segments.

Adjusted cost of sales as a percentage revenue is expected to be in the range of 30% to 31% neutral to slightly increasing from 2019 due to unfavorable foreign exchange and mildly dilutive acquisitions, partially offset by price and positive mix.

Adjusted operating expenses for the year are expected to be between 1.59 and $1.64 billion with the increase over 2019 focused on critical areas of revenue growth, including recent and future product launches recent acquisitions and expansion into weapons led diagnostics as Rosie and utilization of our U.S.

Field force expansion and direct to consumer advertising.

Adjusted R&D expenses for 2020 are expected to be between 455 and $475 million consistent with our commitment to dust and pipeline opportunities both lifecycle and novel New therapies.

Going into 2020 investment we focused on delivering the next wave of find value innovation, including monoclonal antibody therapy, the osteoarthritis pain in cats, and dogs and new vaccines for poultry.

We're also investing in strategic areas of focus such as diagnostics bio devices and precision livestock farming and strategy is to maximize the value of the continuum of care through integrated offerings.

Adjusted interest in other income deductions is expected to be approximately $215 million with the increase over 2019, driven by reduced royalty income as well as lower interest income.

Our adjusted effective tax rate for 2020 is expected to be in a range of 20% to 21%.

The increase in 2020 is related to the impact of favorable nonrecurring discreet items that occurred in 2019.

Adjusted net income is expected in a range of $1.65 billion to $1.915 billion, representing operational growth of 8% to 11%.

We remain committed to our value proposition of growing revenue inline with what faster than the market and growing adjusted net income.

In revenue.

However, as I highlighted growth in adjusted net income in 2020 will be negatively impacted by the higher effective tax rate limiting gross margin expansion and strategic investments.

Context, the highly effective tax rate in 2020 will negatively impact our adjusted net income growth by approximately 300 basis points.

Consistent with 2019, we're anticipating elevated capital expenditures in 2020 to support investments in manufacturing focused on internal sourcing <unk> capacity increases and facilities to support pipeline opportunities.

We're also investing in information technology to support our recent acquisitions as well as digital capabilities and data analytics.

We're also committed to our capital allocation priority, returning excess cash to shareholders that isn't deployed internally or for business development opportunities.

To that end, we recently announced a 22% increase the no dividend and we have approximately $1.7 billion remaining under our multiyear share repurchase program after repurchasing approximately $625 million as the weather shares in 2018.

Finally, we expect adjusted two bps to be in the range of $3, a Monday to $4 important do VP has to be in the range of $3, a 53 to $3.65.

Well the guidance represents for your expectations, we do anticipate Q1 to be slightly weaker in terms of revenue with limited growth in adjusted net income due to the timing of this entire country launch and the investment required to support the launch and recent acquisitions.

Now to summarize before we moved to today.

2019 was another exceptional year in which we delivered 10% operational revenue growth and 14% operational growth in adjusted net income.

Our guidance for 2020 underscores our ability to grow revenue organically well above the market and grow adjusted net income faster than revenue.

And our focus remains on delivering long term shareholder value through disciplined internal and external investments and returning excess cash to shareholders.

Now I'll hand things over to the operator do you feel like to your questions operator.

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I think our first question from Louise Chen with Cantor Fitzgerald. Please go ahead.

Hi, Thanks for taking my questions and congratulations my quarter in 2020 guidance on my question for you as if you could provide more color on the headwinds and tailwinds in the macro outlook for animal health and 2020. Thank you.

Sure Hi, good morning to weaken it's good to hear Camille.

As we talk about the overall market for 2020 in animal health is projected to grow at a 44% to 5% probably faster than that will be companion animal at the scene in previous years.

As we think about where the awareness is coming and we believe will grow faster than that market really driven by our innovation, obviously, we've given guidance around the excitement around its apparently trio our care eyes are carrying portfolio, we see poultry and growing faster than the market as well and so when it's growing faster than the market as well we have time launches there.

Well as the portfolio, we haven't poultry odd to help raise no antibiotic ever.

We think how returning to growth in 2020, albeit slower than the overall market and we see that when it's probably growing in line with the market overall and it's why we see returning to growth and well in 2020 and the wet it's growing in line or faster. So as we see someone had when they'll remain innovation overall.

Well it sort of a return to growth for livestock and general thankfully.

And we'll take our next question Jon Block with Stifel. Please go ahead, great. Thanks, guys. Good morning allows for the fraud.

You mentioned launching the trio in Europe. Later, this month, I guess anything you're willing to share on price of trio or positioning in the market. You know in other words, what did you guys can do to try to get any incremental revenue from the top two oral flea and tick products versus call. It just partially cannibalizing simparica and then going one for you you know what to think about 2020 God It seems like revs.

And you certainly ahead you adjusted interest expense was above expectations. I think you alluded to less royalty income what about just from a cash flow perspective in other words in the guide is there any assume buyback or pay down debt in there. Thanks for your time guys.

Sure. Thanks, John I'll take the first of all that I can take the second question. How we are expecting to be launching commercial launch in Europe in a few market I guess my fleet will do it stays lifestyle, Italy, Spain and UK are launching this nine <unk> in Europe.

We are not first the market as many of you know in Europe. There are other products on the market. So to your point it is a competitive position.

Well the pricing as we've spoken about before I'm at a premium tested America.

Overall, and you know really I think look back and patents that you'd actually varies dramatically in Europe by market with a different competitive products on the market. Overall, we remain excited for approval in Q1 in the U.S. and plan to launch. Shortly thereafter, you know as is customary NFC spoken about another product launches.

Probably six to eight weeks after that and in the U.S. that we've spoken about we should be first to market again, we'll plan to launch at a price premium that too I think there.

But at a discount probably you know overall, if you look at it from the two products. There we're focused very hard in the U.S. and gaining share. So we haven't gotten specific idle girlfriend thing, but it should be at a significant premium disinherit got today, but we haven't probably watch the U.S. our pricing is not public and U.S.. So I'll, let Atlantic second question sure from a rough.

We expect Im very excited about the expectations for revenue growth this year with growth of 7% to 9% and obviously very excited about some car countries as well in terms of the bottom line growth of 8% to 11% a little less of a differential from buttons and typically expect a lot of that being driven by the impact of the tax rate change year over year accounting for that impact.

How about another 300 basis point impact of growth at the bottom line and also foreign exchange was negatively impacting us in terms of adjusted net income absolute number and that was down 200 basis point negative impact from foreign exchange specifically to your questions. I'm. There is no soon pay back we'll pay down of debt and in terms of share repurchase.

The number of shares that we assume that I repeat those are the shows on the guys have you had to December 2019.

Well take our next question from Michael Risking with Bank of America. Please go ahead.

Thanks, guys just sticking on the Triodos to round out those sort of questions.

You've been talking about a for a while obviously on the on a conference calls and early this year Vms, we saw pretty significant presence from you on a feel have you seen any response from your competitors ahead of the launch in terms of you know either stuffing the channel are giving any promotions with the spectral product in Europe, where even with the standalone probably.

In the U.S., you know, taking any price actions or any any combo or bundling options in the U.S. to try to get ahead of the March launches as that stock up in the first quarter and then just on the same one follow up so what's your expectation for trio impact on gross margins question. Following up on your problem with the house price and obviously you have the <unk>.

Component of two different drugs in there so net net what's going to be the impact on gross margins in 2020, and then even in the out years as volume ramps from the from the trio product.

Sure. Thanks. Thanks, so much like yeah. This is the single biggest category in animal health content handle parasiticide, Oh easy highly competitive space take that you're fine at that 4 billion dollar market in the U.S. alone it two and a half a million dollars. So we are expecting a significant competitive response you know this is a category in Atlanta people decide you know.

I would expect normal I topic, obviously, you know, it's right that the channels or sell in and fill up the shelf is that they can work certainly expecting some of them to look at pricing programs, but we think there's significant excitement around the opportunity for I travel in the U.S.. We certainly have heard it we could not as you saw I'd be an x. I'll, we were not we get now.

Because one of the fact that we were not promoting this product idea that there's a definite understanding that I triple it's coming from I. I think customers are you anticipating that and are very excited to have something new and innovative to share their customer. So I think we're expecting whatever you normally see in a competitive response, but this is a major category. So our plans for launch our revenue.

I didn't we provided when anticipating a significant competitive response in this area overall, so I'll turn it over to I'd like to take the gross margin implications, Ontario, Yeah in terms of the impact on gross margin for 2020, we expected to be mildly beneficial to overall gross margin obviously as time goes on and we become more efficient and the production are operating at full capacity we.

You expected to be a high margin product for us and it will benefit our gross margin overtime as we moved beyond 2020.

Thanks, Mike.

Our next question is from Aaron right with Credit Suisse. Please go ahead.

Hi, Thanks can you give us an update on the diagnostic strategy at this point do you expect continued inorganic activity in reference lab lots. So you ask Dan.

Globally and or is it more of an organic sales at this point in case you. Some at the success you're seeing already in the bundling across the portfolio between therapeutic and diagnostic and then separate question on stocking where there any stocking dynamics worth noting in the corner and should we anticipate distributor stocking in the first or the second quarter.

North America trio.

I guess I just wanted to make sure we're thinking about the quarterly progression appropriately that thanks.

Sure I'll think trail first.

In Europe, we obviously did begin shipping in Europe to customers. There. So you will see some stocking in Q1, there in Q2, it will depend on exact timing, but you know there could be some shipments I think you want its tour until we have an approval as he said before we won't be able to get very specific but we're discussing weeks here and if it happens to be you know the timing in Q1, so on a current to give you.

An exact yeah guided space and you look at 950 million guidance. We gave you. It's a feeling we're selling very three quarters of here. So there could be stocking, obviously, but back to the diagnostic strategy overall.

Thank you very excited and diagnostics you know for starter that that market growing at around 10% for years doesn't quite attack and it continues to also drive you said, our therapeutics and for that and so it's exciting. So we look as we look into 2020, we're looking for double digit growth overall, if they let us is diagnostics portfolio both in the U.S. enterprise.

You know, we southern a lot about our point of care strategy, we're really focused there and increasing placements as well as Rodney consumable use and you look at the reference on strategy. We have made a number of BD deals over the last three or four months into you asked specifically either small deals have you seen but we're looking to build a network. This it'll be the U.S.

A lot of organic build from there scaling the sites we have today looking at some spoke sites as well, but I think you will see some BT as we look to grow into international. So this will continue to be a mix of organic and inorganic but again very focused on ROI, we don't see because significant deals right now we're looking at out you know continuing.

To grow that overtime, but great excitement, but do you look at sort of some of our excitement ending 2019 and moving into 2020, we've been leveraging our freedom Flex program, which combines in offers opportunities across our core portfolio in diagnostics and are very excited to adding rapid insight into that opportunities, they're looking to try to try.

And just to answer the comments on the quarterly Seasonalization progression for trio as I mentioned in the in her prepared remarks, we would expect significantly more sales in Q2 for trio and really know that growing throughout the year. So we look at the overall progression of revenue for the company. We would expect Q ones would be slightly lower in terms of overall growth in that because of the investments.

That we're making in Q1 to support the launch of trio as well or some other strategic investments. We expect income it'd be relatively a you know club or too low single digits.

Our next question comes from John Kreger with William Blair. Please go ahead.

Hi, Thanks, very much Christian can you just give us an update on the monoclonal products that you're talking about in cats, and dogs, where does that stand from a regulatory standpoint, and do you think they can be a notable contributors in 21 or is that more about kind of a late year launch of that thank you.

Sure on air huge between 19 guidance, we indicated we have filed in both you and U.S. and we're expecting approval. My 2021 is obviously too early for us to be terribly specific as these regulatory views you know we wish we could predict with that level of precision. So it's probably a little or they could be able to say whether or not we have failed and 21 or 22.

But you know these it'd be the first mass reviewed by the FDA. So you know we want to make sure we give them I. Finally, we have left understanding of exactly I found that will be but we continue to be very excited as he's talking about before I paid in cash is a you know really the arnaud products today that adequately started that market. So there's a lot of excitement as well as for the canine So I want.

We have worked for me should never have to get provider, but we remain excited.

Our next question is from Chris Schott with JP Morgan. Please go ahead.

Great. Thanks, very much for the questions I'm just to hear first on the reference lab in organic build in the U.S. from here just give us some sense of how long you envision that taking to fully built out your network and portfolio in terms of when it becomes a bigger piece of the offering my second question was just on the gross margin dynamics in 2020, it seems like we have.

You know kind of mix during her favor with the growth in companion, yet I think the guidance is suggesting flat to slightly declining gross margins, it's little bit more color of what's happening there and longer term is it fair to still think about gross margin improvements as we see that companion pipeline can seem to ramp over time, thanks very much.

Sure. Thanks, guys I'll take the first question and I can take the second.

If you look at a reference lab building that you asked me we think there's multiple years, yeah, we looked at scale and geographic as we talked about I reference lab, given the importance of logistics I referenced side. It is an end of phase I and I say market and we're very focused on doing that and making sure. We scale. They the sites that we opened so we do believe it's OK.

A number of years before I go habit significant presence in the U.S. I would say the same for international it'll be up by Intel So to your point I don't think they said something you're going to see you know really significant play within the next 12 months, but we're very excited about the long term growth and scaling in the markets, we've entered into adding suppose there, but I'll turn it over to going to take the gross margin in 2020 odd question. So.

Gross margins so stepping back to 2019 right. We benefited significantly from foreign exchange in 2019 to that sort of about 120 basis points as we move into 2020 that impact of FX turns the other direction well probably about a negative 50 basis point impact from foreign exchange on gross margin in 2020, so that offset.

Some of the favorability that we're seeing a from price, but also from mix from a companion animal perspective.

The thing we need to take into account as some of the acquisitions that we've completed reference labs in particular and diagnostics. They do come in at a slower or lower gross margin. So that offset some of the mix never ability that we see from companion animal overtime. We do anticipate that we'll continue to see gross margin improvements through by the completion of our supply network strategy as well as from cuts.

You know improvements in price and to the extent that companion animal continues to grow faster the lifestyle that'll benefit on margin.

That's correct.

Your next question is from Kathy miner with Cowen and company. Please go ahead.

[noise] Ah. Thank you just one question could you comment on your China business I'm, a little more specifically give us color for the fourth quarter and also how do you see the corona virus impacting.

Both business and your outlook for African swine fever. Thank you.

Sure I'll start and Corona and then I'll, let I'm trying to get more to specific says I prefer to between 19 expectations and everyone is watching the client of ours is obviously a emerging very quickly in the fans have you know that's certainly the news overnight I think our business right now, it's probably too early to tell exactly what the impact will be but let me talk a little bit about some of their rates that were.

Okay.

First is just an overall economic slowdown, which is already dry <unk> reduced overall consumption and animal protein have you seen some of the hardest hit markets, our hospitality and travel so without that there's never keep honestly not eating protein. So it shouldn't that consumption a little day, how long this last what really impact whether or not that's a significant.

Driver or not.

There's probably some commercial risks many of our field are not able to get after veterinarians in may tie owners are not currently bringing their pets to veterinarian getting some of the Corning team, but its current teams left or you know as that that emerges we'll watch that we're obviously watching our supply chain.

Do you have I number of annotate I'm, sorry, 80, either active pharmaceutical ingredients that are produced in China for the world. We're very confident with most of those that we had adequate supply multiple mine. So even if the port can get shut down we should be fine unless that wasn't extended the ports are still open and they are still shipping. So we don't see right now at the moment any impact or overall.

I supply chain well continue to monitor this obviously last year the big impact was I guess at which we did see you know heater flattening of returning to growth in China, but obviously that will be subject to the ability to continue to move both feet around China as of animal proteins. So it's a little earlier to tell but hopefully that gives you a sense if somebody issues that were tracking to get a satisfied.

It remains a significant market I like my answer to talk about her comments and expectations for China overall, yes, really trying to overall so full year, and then talk little bit about Q4, but China for full year 2019 was about $200 million and revenue, which was essentially flat for the prior year, which is pretty impressive performance considering the impact of African swine fever, which we estimate to be greater than.

$50 million in 2019 that was really driven by rapid growth in companion animal companion I'll now represents more than 50% of the overall revenue in China is growing very rapidly. So the market performed very well even in the challenges of African swine fever, I think you saw some of that particularly in Q4, where we saw 10% growth in China. Thank you.

For an operational perspective, even with a negative 11 million dollar and thought from African swine fever.

Your next question from David Westwood Bird with Guggenheim Securities. Please go ahead.

Hi, Thanks for taking the questions and congrats on a good quarter.

So your competitor I'm, one of the largest competitors and diagnostics is historically spend three or four times name out on R&D versus Abaxis in order to close a you know the competitive gap in do you think it simply require scaling or do you think that you need to actually close the D.R. and D. gap.

Longer term and then just sticking with diagnostics with the acquisitions in the in reference lab on what kind of safeguards in place on the D.

You had to make sure that your Salesforce remain focused on I'm, you know selling your products with with such a wide product back. Thank you.

Sure I think David so.

What are your first question I'm not sure I know, there's never reports out on R&D versus I expressed as a lot as we have significant investments in R&D and our diagnostics portfolio. So I don't think we're looking at any incremental spending to close any perceived hi, innovation or R&D gap there you remember.

<unk> diagnostics has always had a core part of how we even developed the products. We developed today, making sure that weekend diagnosis diseases that we create I treatments for ourselves.

I mean, very confident and our R&D spend and the percentage of and dedicated to diagnostics and see significant synergies from an R&D perspective between our core portfolio of medicines vaccines et cetera with diagnostic so no. We don't see that I do look at the field force, we actually again, we like to be solution selling as we've spoken about.

So we go into talking about a wellness visit which diagnostics is their role if we need to for looking to place new instruments or no sign of somebody I'm on I know you referenced offerings. We've begun specialist diagnostics specialists to do that and then we have diagnostics I technical specialists, who come in to maintain adequately. So we do not believe it is tracking at all we do believe.

Once you place that equipment that our core I remember that it is a strategic account managers can really helped drive conceivable you because they talk about a wellness visiting how they can combine that looking at vaccines preventative and doing wellness screening and diagnostic. So we think it's actually quite synergistic and you know we had experts to come in to sort of how fine I'm focused sales.

[noise] placement of new equipment has long been reference I know, we don't see that is a big challenge.

Well take our next question from David Risinger with Morgan Stanley. Please go ahead.

Yes.

Great. Thank you very much and congrats crist into a very nice start to your new role as CEO.

I wanted to just get a little bit better understanding of.

Oh, the Finalization of the Sun Pericom trio approvals, so what needs to be done at this point I know that your highly confident that it's imminent, but what steps need to take place and then I believe that you mentioned that.

You'll wait six to eight weeks after the approval to launch.

And could you just explain that I I would've expected the launch to come much more quickly after the approval given that it's highly anticipated. Thank you.

Sure.

Some of these specific detail here, you know sort of in terms of deals to get our country through approval as we said we're in an administrative review period all the technical section complete. So we're just waiting final response from the regulators at this point in time in terms of time frame of six to eight weeks from a approval to launch that's pretty typical within the industry. There are a number of things that need.

To occur and you'll find a label you need to complete packaging or the product you need to make sure you're building up the appropriate large quantity. Obviously, we're doing that everyday we're looking to minimize that time of 60 week period does not is very difficult within the industry from terms of approval to launch based on the activities that needs to occur post approval.

Your next question from Gregg Gilbert with Suntrust. Please go ahead.

Thanks first back the assets Kristin has your thinking changed at all in terms of the overall impact of asaph and when that impact will begin to abate.

And then Glenn can you talk about how much growth you're factoring in for the term portfolio in 2020 and maybe comment.

Bigger picture on what inning, you think we're in in terms of realizing global peak sales for that portfolio. Thanks.

Sure I think Greg I'll I'll start when asked that you know we do think it's the overall impact based on what we know today I'm is leveling out in China.

The real question if they you know how fast will they be built to hurt in China, and how old China overall I needed to animal consumption demand. So as we sort of see it as we talk a little bit we do think in China, specifically, you know you'll see flat to low single digit growth Airport business. There I think is slowly see on some of the more innovative.

Technologically advanced industrial production starts a very strong bio security, you're starting to see some signs of it but if it fits and starts in a little hard right now with Corona to understand how fast that will really at all but anything that you lose a broader impact that Africans why fever. They argue they need to feed their people, even if it sounds a little bit down so I think you're gonna TV.

Second African swine fever in countries like Brazil, Brazil, you ask that you and they look to meet that demand there's been a little volatility obviously, given corona import prices no recently, but overall they've been trending up this will encourage our producers to raise more pegs rate heavier things.

We are seeing significant increases in export at least in the U.S. already in Brazil, I into China. So I think you'll see that which is why didn't we believe the drivers and why we said we think livestock overall across species will return to growth in 2020, because China will either have to be there on population you know some will come from internal but they will need picking up again imports into.

Hi, China and that will continue to come from Brazil, the U.S. and that you both in part, but we're also seeing potential opportunities in both poultry NB I'll, let Atlantic. The second question I talked about yeah in terms of term grocery just looking back in 2019, a really strong year foods our portfolio in 2019, we grew 29% operationally.

The U.S. growing 25% and international growing 30%, we'd expect to consider <unk> continued growth in 2020 not to that level as we're working off of a higher base with the areas that we expect to exceed growth International we expect international continue outpace the U.S. in terms of growth just because currently the mix of the revenue between.

The U.S. and international is about two thirds U.S., one third international although the number of Medicalized AWS is pretty much equivalent between the juice or we would expect to gain market share in international as it does get more and more comfortable the products internationally and U.S. as has the advantage of direct to consumer advertising, which is not available in all international markets from U.S.

Perspective, we continue to see opportunity in terms of continuing to expand the market continuing to expand the usage into a few patients and we still expect continued good price in the U.S. as well. So we see 2020 as being another your growth for the drug portfolio, but as the portfolio continues to mature the pace of growth will slow.

Your next question from David Shake up with Yes. Please go ahead.

Hi, This is broken up in <unk> on behalf of know me.

So that's putting our questions. My first question is on a long term opportunity for Simparica trio.

In the past it affects space to switch from tropical storms, most quite significant at a greater than 70%. So do you think this which is a good on them up.

Or how much it could be switched over from Doe.

Dublin to the Tropic class or are we missing any dynamic and secondly on your Officemax vaccine do you have a bounce notion is vaccine in Norway as well on could you frame the market opportunity for this vaccine. Thank you.

I'm sure I'll start with the first one I know like when take the second one so do you live in the long term opportunity for trio I thought I'd be significant as we talked about it the single largest category and companion animal and I'm certainly overall, it's a highly competitive category as well. So we're very excited we think that we will gain shares we think about 300.

50 million incremental for 2020, he assumption in that overall isn't me, we do not competition in the U.S. not here. It is already obviously competitive space in many markets outside the U.S., We think we'll get a movement obviously from some from PC. We think we'll certainly see some cannibalization we spoken about benefit Erica, but we also think.

It will take some some of the other orals in the market overall, so I'm not going to the switched from on top of the oral is necessarily the best overall property and part of the long term opportunity for trio also depend on our label versus the label potential other competitors to come to the market as well as the distance between our lives and their lives I know that.

My question is you know what are we expecting a competitor and you know NRC, there's very little information available is one of those in the private companies either one that's not disclose though at the moment, we believe will be the only product on in the U.S. in 2020 and not as part of the assumption under 150 by the longer we are great or the opportunity to gain share overall, we continue to see this.

As a significant innovation for both the pet owner and the VAT and a lot of excitement around that so we'll be investing significantly in that I'll turn it over I think let a little bit on a out next yeah. So in terms of a this portfolio for Q4, we saw very strong growth at 17% and often flux is a key contributor to that growth in the quarter, particularly in Chile The reserve.

It is similar product on the market in a in Norway. So that would not be an incremental opportunity in terms of launching new products in Norway. As we look into 2020, you know we continue to suit there's portfolio growing there maybe some limitation in terms of the numbers on it available to treat a based on certain regulations, but we still see fish as a rapidly growing a species for us.

In 2020.

Your next question from Elliot Wilbur with Raymond James. Please go ahead.

Thanks, Good morning Ah first question for Kristen just wanted to ask you about longer term R&D investment.

Good point of the guide for 2021.

What percentage basis guidance would have you coming in below 7% and that number has trended down on a relative basis last couple of years, obviously, if you've enjoyed strong growth, but as you think about driving where they need to invest to really drive you know more innovation is a sub 7%.

R&D investment ratio sustainable or should we expect that to do increase perhaps we started to see the topline decelerate a little bit next couple of years, just quick follow up for Glenn you mentioned, the lower gross margin profile the diagnostic businesses, but as we think about modeling segment margins I would also presume that.

Operating income basis, those businesses also have lower margins, but I wanted to confirm that thanks.

Sure. Thanks, Kelly I'm not allowed for R&D investment and we look every year at the portfolio of opportunity. The innovation that we had a nice and investing side, where we see those opportunities. It does fluctuate a little bit year here, it's been growing at a faster than our overall ATSI and am I not necessarily always had revenue growth.

We are we I think made very strong investment then if we see opportunities where more than happy to increase that R&D investment.

So I certainly quarter to quarter and year to year, but you know we're confident that spend around are we are again, you should expect fluctuations year to year based on opportunities. Some of these studies and especially livestock. When you move them. They can drive significant costs year to year, but we're very confident that we have the right level of spend to drive our value proposition.

You bet against top line growth at or faster than the market long term and what we've provided over I'll see if they must add anything to that and if you can take the second question, yes or in terms of the the question on operating margins for diagnostics. So gross margins will be lower over the long period of time for a for diagnostics. However, when you look at operating margin obviously right now we're in the Bill.

The so it's a little lower than a rural business, but as we progressed and over the next number of years with the ability to leverage our commercial infrastructure, we due to the operating margins for diagnostics coming very close to our core portfolio as well.

Your next question from but allows you for side with Barclays. Please go ahead.

Hi, good morning, and thankful over the course shutdowns. So couple of cushion the poultry side. A one question you spoke about Oh your competition does that if it can see on supply challenges in the quarter. What can you throw some light and one for these challenges are no prolong do you think this could be and a 420 20, what do you see lab and being able to grow fast.

So then marketed bees dislocations did not exist.

Secondly, could you also throw some light on though the market opportunity for make two x. scenes on how should we think about the portfolio and revenue down from the segment.

Sure I'll take my take these yes, no terms or via the culture I would say this year was very strong performance in poultry, we grew 10% for the year globally in poultry and we see 2020 is being about another very positive year for poultry go growing growing much faster than the overall market and with our portfolio continuing to outpace the.

Market.

In terms of the I've talked about it seems you know 2019, we launched a perspective vaccine that really set the stage for us from an R&D perspective to continue develop more and more vaccines over the next number used for those to become a bigger section of our portfolio and we do see poultry continued to be a rapidly growing market that will continue to invest in our R&D for that market.

Hi, good questions from Nathan Rich with Goldman Sachs. Please go ahead.

Thanks for the questions I'm, just two quick ones on diagnostics, you talked about a double digit revenue growth in 2020 can you just maybe help us think about how much of the contribution you expect from the through reference club deals are you done and what your kind of expecting for organic growth kind of ex those.

Ill.

And then Glenn I think you mentioned, a reference lab being a drag on margins gross margins in 2020 could you maybe just give us some sense of magnitude.

It was kind of get a better picture of what you're expecting for margins for the underlying business. Thank you.

Sure I'll take the first on the obviously if you look at diagnostic overall to be clear, we're expecting double digit growth in our core point of care that let us diagnostics, that's not being driven by reference I referenced that wouldn't be incremental to that it's again I want to emphasize still a pretty thing it's a small part or overall portfolio in the U.S., but we are expecting double digit growth in both the E.

Yes, and international in the point of care space, <unk> Kinda talk little bit more about gross margin over aren't yet from a gross margin perspective again overall in diagnostics and as we are expecting rapid growth in that area. It will be negative driver of our overall gross margin as those products tend to be able to low gross margin profile, where you look at the overall EPS impact, particularly to your question.

And on reference Labs reference labs in 2020 is about a negative three to four said impact on our overall GPS based on the investments were making to grow that business for the future.

Your next question is from Kevin that was with Ace Research. Please go ahead.

Hi, Good morning, Hey, guys. So lot lot of my questions have been asked a but just wanted to see if you could provide a little bit more in detail on what you're doing in the digital and data analytics and when we could see some material impacts in those initiatives.

Sure sure. Thanks, Kevin you know digital and data analytics, obviously, you can afford to strategy that company. It's one of our five priorities as we move into 2025, I always say, there's two components of that one is leveraging digital and data to drive greater sales of our core business. So that's really focused around better targeting our customers providing more personal.

Hi, and customized solutions set and leveraging the data we have to better understand how they operate their business what products are the most attractive what offers are the most attracted to them. So I think that well that's already in place and I think we're doing a very strong job both in the U.S. and international of leveraging some of those capabilities to drive our core business. We also see.

That opportunity.

Both pet care and livestock to create new revenue generating solutions seven out of the pet care side will be around I'm overall diagnostic opportunities and linking those opportunities to our core portfolio and providing incremental insights to our customers in livestock that remains as well around both our genetics portfolio as well as our precision lifestyle.

Farming, which we see that significant growth driver for us in the medium to long term I think if you look at both the consumer preferences and where the industry moving it's moving more to individualized animal care. So solutions such as what we have a smart, though which is airtime for dairy cattle and better understanding.

Health and the productivity aspect of animals individual animals, and helping producers and veterinarians make better decisions.

A short term is an opportunity as we link that to both our genetics business, which isn't you know you can also pretty quick animals will be borne healthier and I will have a better productivity and everything in the medium certainly opportunities like that as well to our diagnostics and really you know provide both veterinarians producers and consumers I wouldn't better under.

Standing and better health for animals. So we think this will help drive her business you know we see some of those if you are more short term opportunities. Some are more medium term and I think about the connection between all three genetics conversation livestock, you know data in our portfolio diagnostics, that's probably more in the medium to long term.

Next question to follow up for Michael risk and with Bank of America. Please go ahead.

Oh, Thanks, guys just a quick one that keeps coming up so I. Appreciate you squeezing me in had a lot of questions on a on products coming off IP or potential generic competition or others, you talked a little bit about no expectation for competitors Simparica trio for example, but I was wondering if you have anything any expectation of any thoughts about a competing products in the door imports.

Oh, you open the U.S. and also for all products like tracks and have that questions on I P. Rolling off there for a while I'm just curious if you're seeing anything there or sort of what your expectations for that for 2020.

Sure I'm as we look I'll just start with derm.

We obviously have created a significant market for dermatology, we have been expecting a competition I will enter at some point based again in our industry. There is not great data. So I can't tell you exactly when I compare lives. We are obviously planning for a competitor launch in the next one to three years exactly when that will be will be difficult perhaps to fully.

With that but we do expect potential small or large molecule entry. Yeah. We don't know exactly when that will be but we have put plans in place to prepare for that overall on if they if they keep focused threat and for Jackson, we still have patent protection through 2021. This is a significant markets that we again here exactly they'll see comps.

Kitchen, when that does hit.

When it had an exclusivity runs out yeah, that's a significant market, but as we said what's different about animal health and human health is even though we'll see I. Just competition. You know we still think you know you can in our business that normally has an impact between 20 and 40% both in sort of market share in price over a number of here. So we do expect obviously.

Challenge I enjoy in 2021 or 2020 200.

Yeah. It appears we have no further questions I'll return the Florida, you Kristen for closing remarks.

Well, thanks very much for I. I appreciate all the great questions today, and if you got any further questions assay that down thanks, so much.

Yeah. This will conclude today's program. Thank for your participation you may now disconnect kind of great day.

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