Q1 2020 Earnings Call
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Welcome to the first quarter 2020 financial results conference call and webcast whores awareness.
Hosting the call greatest Steve Frank Vice President of Investor Relations Whores awareness.
The presentation materials and additional financial tables are currently posted on the Investor Relations section I was the widest dot com.
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It is all my pleasure to turn the floor or what are the Steve Frank Steve You may begin.
Thank you good morning, everyone. I Hope you are all doing well welcome to there's a lot as first quarter 2020 earnings call Im joined today by Kristin Peck, Our Chief Executive Officer, and Glenn David Our Chief Financial Officer.
Before we begin I'll remind you that the slides presented on this call are available on the Investor Relations section of our website.
Not a remarks today will include forward looking statements.
Actual results could differ materially from those projections.
Or list and description of certain factors that could cause results to differ I refer you to the forward looking statement 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 are U.S. 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 then the Companys 8-K filing dated today may six.
2020, we also say operational results, which exclude the impact of foreign exchange with that I turn the call over to Kristen.
Thank you Steve Good morning, everyone I Hope you and your families are staying healthy in sake I.
I think it's fair to say the past few months have been unlike any we've ever experiencing business.
Are there any VAT could have imagined for our family friends and communities.
Well look over 19 pandemic has had such an incredible impact on our world and for many of us personally.
It has given me a chance to reflect not just from a financial numbers, we reported today, but on the true value. Our business provides society. The role we play in public health support we deliver for our customers in crisis.
And the safety and security, we provide to our colleagues.
We are doing well.
We're privileged to play an essential role in sustaining and protecting animal and human life during the outbreak.
Our products and services play a critical part in animal health.
Helping support pet care in the food supply.
And we continue to manufacture products and serve customers even in places that have imposed stringent limits on businesses in the wake of the Corona virus.
Our colleagues are more committed than ever to supporting me nutrition and comfort the animals provide the world.
And that purpose has motivated us we continue serving our customers and communities and these extraordinary time.
I'm, especially proud of the efforts of Zoetis colleagues in supporting our local communities healthcare workers and businesses during the outbreak.
We've been contributing surplus personal protective equipment from our operations, we've been increasing production of human health diagnostics and answering requests from local hospitals for a variety of assistance.
As far as a direct impact of coven 19 on our colleagues we've been fortunate to see only a small number of koby 19 cases in our workforce of more than 10000 colleagues. Thanks to increased safety measures hygiene protocol and adjustments to our operations.
How about 70% of our colleagues today are working remotely.
They are being productive as they adjust to new arrangements juggle new home is family responsibilities.
Benefit from the use of technology infrastructure that we've invested in and continue to enhance at this time.
The other 30% of our colleagues are working at our sites supporting essential operations, such as manufacturing distribution and logistics clinical trials in research and technical services and support for customers.
Our teams is a wider sites are hearing too strict health and hygiene protocols recommended by the Whrrl NCTC.
They are practicing social dispensing operating in staggered shifts and participating in health monitoring.
As part of the adjustments, we've made at each plant to limit potential exposure.
Our 30 manufacturing sites remain open around the globe today, and we've been able to maintain supply of critical product inventory.
We've also shown excellent agility to deal with the local market changes in terms of border control regulatory changes and freight operation.
I'm also pleased to say that even under these difficult circumstances, we were able to meet our launch timing first in Paragould trio are highly anticipated triple combination parasiticide.
We launched Simparica trio in the UK, Spain, and Italy in February made initial shipments for distribution in the U.S. in March and initiated a full launch in the U.S. in Canada in April with more markets to follow.
We've seen significant interest in trio and we've been supporting its introduction with consumer AD you asked this spring.
Well, we're excited by the introduction and the Receptiveness of customers in pet owners, we've had to revisit full year projections person Paragould trio, given the expected impact of cobot 19, and the recession.
Glenn will speak more to this in his remarks.
We are grateful we've been able to keep our major R&D program on track, we continue to advance our research in key areas such as monoclonal antibodies for osteoarthritis pain in cats, and dogs and vector vaccines for poultry.
Continuing with regulatory reviews commissions are going in and we're maintaining momentum I don't know what's critical projects for the future all while keeping colleagues safe.
For a piano perspective in the first quarter. The pandemic had limited impact on our results given the February quarter end for international markets and the timing of shelter in place across the U.S.
We generated 7% operational growth in revenue and 10% operational growth in adjusted net income thanks to the strength of our diverse portfolio and global scope of our business.
We expect a more significant revenue impact from coven 19 in Q2 and for the year.
For locked down the recession have a continued impact on our business.
Actually in terms of traffic I companion animal clinics and reduction in demand for protein from their restaurant and dine out sectors.
We will need to watch carefully how the reopening of various markets in the coming weeks impact veterinary services for companion animal as well as laptop.
Glenn will discuss 2020 guidance in more detail in a few minutes, but I'm pleased to share that to what it remains our resilient company at times like these given the essential nature of our business and our diverse portfolio.
In most markets. Our sales teams are working virtually to respect local government guidance and limit potential exposure of Coburn 19 for colleagues and customers.
We've been keeping in regular contact with our customers through phone calls Videoconferences Webinars and surveys and we're responding as best we can to anticipate and address their most important needs.
We're here to help the maintain critical care and supply for their customers at this time and adapt to a new normal for the future of animal care.
For example, we've been advising customers on increasing digital content for their use of pet owners.
Offering telemedicine solutions are new partnerships discussing their liquidity concerns offering continuing education for veterinary staff and providing technical support services to deal with adjustments being made to food production.
We are seeing many of the trends you are in terms of animal health and food supply as well as decrease traffic to veterinary practices.
History tells us that animal health medicines vaccines and other products remain essential even in a challenging economy.
On the last act side of the business the need for food haven't gone away, but with restaurants and hotels closed consumer demand has shifted to supermarkets theres less demand for beef and dairy products, while poultry remains strong as people choose less expensive proteins.
As with every frontline business today, the biggest challenge our lives that customers are having is maintaining their operations with enough healthy workers to handle processing packing and delivering food.
On the pet side of the business veterinary traffic is down in places where containment measures are in place.
Now many bats are leveraging curbside check ins home visits Tele medicine, and online pharmacy distribution to take the place of in clinic visits.
As you look ahead, our business continuity plan are working well and we continued to show great agility and responsiveness to this crisis.
We're carefully managing our expenses and doing scenario planning for the medium and long term, including hiring freezes and reductions to discretionary spending such as travel entertainment and consulting.
We have not had to engage in furloughs or salary reductions for our colleagues thanks to the resiliency and diversification of our business and our strong balance sheet.
We continue to regularly assess any long term needs depending on the duration of the pandemic and the resulting recession.
Like all companies, we've begun planning for the days when more of our colleagues will return to the workplace.
Over the last few months, we safely maintained operations and our manufacturing distribution and R&D facilities to ensure a continuous applied to our customers, while maintaining strict quality standards and keeping our colleagues safe.
We plan to leverage these enhanced policies and procedures birthdays return to work that helps ensure the safety of not just our colleagues, but the customer they interact within the field.
I am proud of our teams for their resourcefulness flexibility and commitment to colleagues and customers.
Our efforts are helping us to envision it even better way to work over the long term.
When we began this year my first to CEO.
I laid out five priorities for the wettest.
And those are as relevant today as they were then.
Our priorities remain driving innovative growth enhancing customer experience.
Leading and digital and data analytics, cultivating a high performing organization and Champing, a healthier more sustainable future.
We made it through the crisis to this new normal we will find relevant new ways to adapt our strategies and tactics for the future.
Even in the midst of Coven 19, we continue to act on opportunities to advance these priorities.
Since February we received approval often paragould trio in the U.S. and Australia and have launched it in several markets with the support of direct to consumer advertising and digital marketing where applicable.
We acquired performance livestock analytics, a company, which brings us proven cloud based management systems and data analytics for beef producers and we announced pumpkin I knew pet health startup this offering pet insurance and preventative care in the U.S.
Once again I'm very proud of the results we've been able to deliver this quarter and I look forward to your questions now, let me hand over to Glenn for more detailed the first quarter results at our updated view for the rest of 2020 Glenn.
Thank you Christian and good morning.
That going Christians comments, we find ourselves in a world, we never imagined and grateful for our colleagues as they balance new working arrangements caring for their families and keeping our central business running during this crisis.
Today I'll provide commentary on our Q1 results provide clarity on our liquidity position and review our updated guidance for 2020.
Historically, we notice awareness has remained resilient company given the essential nature of our business and our diverse portfolio.
No one yet knows the full extent duration or applications that this pandemic will have.
Our updated guidance reflects our best estimate based on what we know today.
Beginning with the first quarter results, we generated revenue of $1.5 billion, representing an increase of 5% on a reported basis and 7% operationally.
Adjusted net income of $455 million increased 7% on a reported basis and 10% operationally.
Foreign exchange in the quarter drove an unfavorable 2% impact on revenue driven by the strengthening of the U.S. dollar.
Operational revenue growth of 7% was driven by 3% price and 4% volume.
Volume growth of 4% includes 2% from key dermatology products, 2% from new products, 1% from acquisitions and a decline of 1% in other inline products.
The first quarter was not materially impacted by the outbreak of Colby 19, given the February quarter end from international markets and the timing of quarantine guidelines in the U.S.
However, as indicated in our updated guidance ranges, we anticipate a more significant impact for the full year as the Lockdowns and recession other continued impact on our business.
Depending on what products led the way in terms of species growth growing 10% operationally, while livestock grew 3% operationally.
Companion animal Formans was driven by continued strength of our key dermatology products and I'll Parasiticide portfolio, which includes initial sales of some power could true in both the U.S. and certain European markets.
Revenue from the acquisition of platinum performance, which was acquired in the second half of 2019 and its nutritional products also contributed to strong equine growth.
Let's start growth in the quarter was primarily driven by strong poultry swine and fish performance, partially offset by declines in cattle.
New products contributed 2% to overall growth in the quarter driven by some power to trio and Proheart 12.
Also flux parasiticide for fish in Chile.
We remain very excited and confident in our ability to successfully launched and power Kytril beginning with key markets in Europe and the US. However, we are now anticipating the incremental revenue for the full year to be in the range of 102 $125 million.
The initial response from veterinarians has been extremely encouraging however, due to the current cobot 19 situation clinic penetration and adoption will be more gradual than initially expected.
Global sales of our key dermatology portfolio were $194 million in the quarter growing 25% operationally and contributing to present to overall revenue growth.
The ongoing strength of this portfolio was driven by expanded usage of ethical resulting from promotional investments increased adoption of side a point.
As well as entry into new markets and price.
Recent acquisitions and commercial agreements contributed 1% growth this quarter, which includes platinum performance reference lab acquisitions, and the stable diagnostic tests Frac one.
Other in line products declined this quarter, primarily driven by declines in U.S cattle related to ongoing beef and dairy market challenges.
Now, let's discuss the revenue growth by segment for the quarter.
Yes revenue grew 9% with companion animal products growing 12% and livestock products growing 5%.
Companion animal growth in the quarter were driven by increased sales of our key dermatology products growth of the some power franchise and the impact of recent acquisitions.
This growth was partially offset by declines and point of care diagnostics.
You as key dermatology sales were $136 million for the quarter growing 31%.
Growth this quarter was driven by ongoing promotional investments and expanded usage aside a point in the clinic.
Some power cuts real revenue in the quarter, including initial sales the distribution channels with product becoming available to veterinarians for prescribing in mid April.
We're supporting the launch with strong field force engagement and direct to consumer advertising.
We remain confident in the long term success of this product despite launching within the current environment.
Diagnostic sales in the quarter were primarily impacted by distributor purchasing patterns and slower demand in March related to cope with 19.
You asked livestock returned to growth this quarter supported by positive performance in poultry and swine, partially offset by cattle declines.
Well through continued to benefit from a portfolio of alternatives to antibiotics in Medicaid to feed additives, driven by new customer adoption and efficacy challenges for competitive product.
Swine also had a strong quarter driven by increased sales of any effectives and the onetime replenishment of a classical swine fever vaccine stockpile by the U.S. da.
Cattle product sales continued to be negatively impacted by unfavorable beef market conditions, driven by feedlot placements of heavier and healthier animals with a lower risk profile and dairy continue to face headwinds from negative producer profitability and over supply.
To summarize US performance was strong despite ongoing challenges and us beef and dairy cattle markets.
Our international segment had operational revenue growth of 4% in the quarter companion animal operational revenue growth was 8% and livestock operation growth was 2%.
Companion animal product growth resulted from increased sales of our simparica franchise, including the launch of some power could trio and certain EU markets and growth in our key dermatology portfolio.
International livestock growth in the quarter was driven primarily by swine fish and poultry.
It's one return to growth in the quarter due to expanding heard production and key account penetration across emerging markets, including China.
Our short term outlook for China remains neutral to slightly positive as they rebuild due to lower incidence of African swine fever, However, certain smaller markets in Asia continue experiences challenges related to asset.
The first portfolio benefited from the continued uptake of the up plus parasiticide in Chile, well poultry growth was driven primarily by price.
Overall, our international segment continued to be a positive contributor to revenue growth with all species flat to growing including swine returning to growth even in the current challenging environment.
Now moving onto the rest of the piano.
Adjusted gross margin of 70.3% increase slightly on a reported basis compared to the prior year.
Due to price, partially offset by the mildly dilutive impact of recent acquisitions.
Total adjusted operating expenses grew 7% operationally the increase is primarily related to the impact of recent acquisitions investments is for future growth of the business and direct to consumer advertising.
The adjusted effective tax rate for the quarter was 16.8%.
The decrease from the comparable 2019 period is primarily driven by the tax benefits from share based compensation.
Adjusted net income for the quarter grew 10% operationally driven by revenue growth and a lower effective tax rate and adjusted diluted EPS grew 10% operationally.
Next I'd like to cover our liquidity position and our capital allocation priorities.
We ended the first quarter with approximately $2 billion in cash and cash equivalents as well as access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which our undrawn.
Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities of internal investment M&A and returning excess cash to shareholders consistent with what I mentioned last quarter. We are anticipating elevated capital expenditures this year to support investments in manufacturing information technology to support our recent acquisitions.
And capabilities and digital and data analytics.
However, we are delaying expenditures that will not materially impact our medium and long term growth strategy.
Our strong liquidity also allows us to be opportunistic and continue executing on our M&A strategy.
And consistent with what I've said before a focus is on strategic tuck in acquisitions, not large scale transformational M&A.
Our recent acquisitions performance large stuck analytics is a good example.
With regards to returning excess cash to shareholders remain committed to our 2020 dividend, which represents a 22% increase over 2019.
In Q1, we also repurchased $250 million Insulet, a shares and we have approximately $1.4 billion remaining under our multiyear share repurchase program.
However in light of the current situation, we have decided to temporarily suspend our share repurchases and conserve cash.
Now moving onto our updated guidance assumptions for 2020.
As I noted earlier, we cannot know the full extent of the covert 19 pandemic as the situation continues to evolve Delhi.
Our updated guidance reflects our current assumptions and may change materially as the situation progresses.
Our guidance assumes that the economy begins to open up in the second half of the year with pet care visits returning to more normalized levels as the year progresses.
Lifestyle customers being able to maintaining their operations.
It also assumes a continued recession this year.
We have increased the with about ranges as the timing of returning to normal operations and the death of the recession is still uncertain.
Please note that guidance reflects foreign exchange rates as of late April and movement in foreign exchange rate has had a significant impact on our revenue and adjusted net income since prior guidance given our global footprint.
Our current guidance includes unfavorable foreign exchange of revenue of approximately $150 million.
And approximately $50 million at adjusted net income primarily driven by the Brazilian real Mexican peso and the euro.
We're now projecting revenue between 5.95 and $6.25 billion, representing a 2% operational declined to 3% operational growth.
Adjusted cost of sales as a percentage of revenue is now expected to be in range of 30.5% to 31.5% increasing slightly from February guidance due to increased manufacturing and freight costs related to covert 19.
Adjusted SDMA expenses for the year are now expected to be between 1.455, and 1.54 or $5 billion with the decrease from the February guidance, driven by savings and compensation due to hiring freezes and reductions to discretionary spending such as travel and entertainment and professional service spent.
As Kristen indicated our key R&D programs are progressing and so adjusted R&D expenses are now expected to be between 440 and $465 million consistent with our commitment to invest in pipeline opportunities.
We're also continuing to invest in strategic areas of focus such as diagnostics bio devices and precision livestock farming and strategies to maximize the value of the continuum of care through integrated offerings.
While we are taking measures to reduce expenses. This year. We also remain committed to bring medium and long term growth and value to our shareholders.
Adjusted interest and other income deductions is now expected to be approximately $250 million with the increase over February guidance, driven by lower interest income and other factors.
Our adjusted effective tax rate for 2020 is expected to be in the range of 20% to 21% consistent in February guidance.
Adjusted net income is expected to be in the range of $1.52 billion to $1.64 billion, representing an operational decline of 2% to 9%.
Adjusted diluted EPS is expected to be in the range of $3 and 17 to $3.42 and reported diluted EPS is expected to be in the range of $2, an 80 to $3.07.
While our guidance represents for your expectations, we do anticipate revenue and adjusted net income to be most significantly impacted in Q2.
Based upon quarantine and shelter in place guidelines that have been put in place in most major markets around the world and economic impact of recession.
We anticipate the second half of the year will be impacted but to a lesser extent.
Now to summarize before we move to QNX.
Pre cobot 19, 2020 was off to a strong start and inline with our expectations with 7% operational revenue growth and 10% operational growth in adjusted net income.
The central nature of our business the diversity of our portfolio and the durability of our business will allow us to continue executing on our strategy. During this period of uncertainty.
We're confident we'll be able to maintain strong liquidity I managed effectively through this challenging environment, given our strong cash flow and balance sheet.
And despite managing our spend in the short term as we navigate through the impact of the Cobot 19 pandemic, we remain committed to medium and long term profitable growth through responsible investment.
I'll now hand things over to the operator to open the line for your questions operator.
And at this time, if you'd like to ask your question press. The star one on your Touchtone phone you can move yourself when MCU by pressing the county.
We ask that you limit yourself to one question and weak with any follow ups. Your line will be muted after closing your question.
We'll go first to Michael Riskin with Bank of America. Please go ahead. Your line is open.
Thanks, Thanks for taking the questions I'll ask sort of a big picture one thing at the ball wrong Steve.
Glenn Kristen we roll.
Hi, guys expense on the economic impacts of the recession.
Throughout the press release them in your prepared remarks could you just help us walks through the nuances there and how you think about that affecting both livestock markets and the companion animal I want to come.
And as we think through it all the other impacts.
Okay.
Slaughterhouse closures of the foodservice shifted that visits that's still for the most Paul transient is expected to bounce back later this year, but the recessionary impact on the guys. That's something that could very well persistent point 21 and 2022. So how do you think about that affecting business. If you could offer any.
The point I was really to 2008 2009.
Maybe we will help wasn't walk through it thanks.
Sure. Thanks, Mike I'll talk a little bit about some of the broader trends and then I'll, let Glen talk a little bit about what that means overall in guidance and how that translates.
If we start at the that clinic side and the pet care guide.
Q1, there really wasn't limited impact just given the timing of the quarantine you know decisions across the world and trying to penetrate rebounded a little bit as we moved into early April we did see significant impact I'm about to about a 20% to 30% reduction in the U.S. and in Europe, 30% to 50% the very.
Good news right now is that those are turning around quite quickly.
We're seeing a significant improvement both in the U.S. in Europe, and overall clinic visit and so our expectation is obviously you know overall are weak Q2, but then that will improve in Q3 in Q4 also because we strongly believe that that's our.
You know being very thoughtful about how they increase their business leveraging telemedicine, you know curbside drop off in a lots of different strategies. There as you look at the livestock sector I mean, there too big trends impacting that the first is the shift.
Out of dine out into grocery stores historically that was about 50 50 split.
And now that 80% to 90% of consumption is coming out of grocery stores historically those supply chains were quite different so the channel migration. There has been a little challenging as you've seen and the second trend. There has been at exacerbating. The you asked specifically around the reduction and the fat right at this point about 15% reduction of our processing capacity.
Given some of the outbreaks at some of those sites, which continues to be obviously in the news on everyday again. The good news is that the U.S. trend that trend is not relevant internationally, but what we do see sort of in the medium term as we look into Q2 Q3 Q4 is that this will put pressure on our customers on livestock producers.
Leasing price and therefore their profitability.
It's likely going to decrease their herd size and also put pressure on their input costs and potentially having trade down you know the question is how fast that worked fairly quick to work through that in poultry a little more challenging in swine and you know in cattle as we've seen that really just exacerbating as Glenn mentioned in his remarks I try.
We've been seeing for a while we strongly believe the long term fundamentals remain strong and all these factors though.
Animal protein consumption will continue to grow so I think a lot of this is a more of an impact as we work through some of these dynamics this year and the Humanization of pets has never been more important than it is now even seeing on adoptions of animals than in previous recessions, it's pretty resilient, but I'll, let glen sort of talk through how he thinks about those trends as we as we did our guidance.
Absolutely so yes, I'd like to your question on the economic impacts of the recession as we saw back in 2008 2009, the animal health industry was essentially flat showing strong resiliency and then it had a pretty rapid bounce back in the next year growing around 7%. So in terms of the recessionary impacts as Christian said the companion animal business just.
Due to a recession, we expect to be very resilient, we saw that back in 2008, 2009, and the trends of pets, becoming more part of the family has only continued even stronger there in terms of livestock area. The business. So thats, where the recession may have larger impact as people trade down to lower cost proteins, but also a livestock producers tense.
To go to cheaper products as their profitability is challenged and we do provide premium products. So there will be some pricing challenges and just some overall challenges in livestock industry more so than companion animal from a recession.
Well take our next question from Erinn right with Credit Suisse. Please go ahead.
Great. Thanks.
A couple of question here on the companion animal side, how much to compare Katrina docking contribute in the quarter and how should we be thinking about that quarterly cadence in light of some of the coal that dynamics person pair Katrina with 150 million target for compare country is still intact in inky speak to offset some of the traction you're seeing across the delta.
And it is online channel and in the companion animal segment, just didnt its coal bed and some of the dynamics there how big is that segment for you now thanks.
Thanks, Aaron I'll start off and let Glen don't want it you know we've been very excited at the very strong awareness and anticipating for anticipation for the launch of they really innovative comparison trio.
We did see stocking as I think we mentioned in Q1 of around $15 million that was really just a distribution.
We did the full launch to that tend to customers in April and we follow that shortly thereafter with very strong direct to consumer advertising.
Hi switch has been very well received.
We remain very excited about this product. However, you know we are cognizant that with a pandemic social different thing as well as the recession. The outlook for 2020 will be adjusted I'll, Let Glen talk a little bit about that guidance by you know outside the U.S., we launched in February in the UK, Italy and Spain.
We also recently launched in Canada.
So we remain very excited by the potential for this product.
And we think well I very good Oh 2020, and we're pleased given at the launch so far given what we're facing with a pandemic, but I'll, let Glen talk a little bit about the updated guidance. Yes in terms of your updated guidance was impaired vitriol, we've now broader estimate down from $150 million, an incremental sales to 102 125 million and Thats really based on.
Launching in the face of the colder 19 pandemic in terms of how we see the quarterly progression, we not necessarily going to give quarterly forecast, but we did about $15 million in the quarter and we do expect that to grow gradually over the year and to reflect more underlying demand throughout the year to your question on the alternative channels. Aaron we are definitely seeing a ramp.
Both in alternative channels as a way for our customers to get their prescriptions filled however, it's important to remember that that is off of a relatively lower base still today and also about 50% of our products do need to be administered within the clinic. So while we are seeing a rapid increase it is off of a relatively small base.
We'll take our next question from Louise Chen with Cantor. Please go ahead.
Hi, Thanks for taking my question. So we're seeing a lot of headlines around protein supply chain are these headlines mostly noise or do they concern you in any way and could you give more color on your producers supply chain assumptions and your guidance. Thank you.
Sure. Thanks, Louise I of course, I do not think they are noise. There indeed, very very real for customers.
You know, taking a large part of our field force and technical services supporting our customers through this.
You know setting aside shedding some of these packing plant that having 15% of the capacity of the U.S. packing you know taken offline backed up significantly onto our producers they have nowhere to put animals.
We are an economy and livestock space that was just in time and they were trying to make sure there as efficient as possible. So it is quite serious issue for our producers and it does have impact will be important in 2020.
Raising the price that they're willing to pay they don't need the animals. So there you know paying less for them that significantly hurts the profitability of our customers and certainly wouldn't cars them at this point to reduce herd sizes. So it does have an impact as I was trying to expressed before some of that impact. If you look at it can be turned around quite quickly and.
Poultry were 43 days you can make some new decision there I to expand production is a little more time in park they affect a lot longer to work through a in the besides so we do think they will have an impact in 2020 significantly on the livestock side that was baked into the guidance, we provided but I'll let glenn.
Talk little bit more to that Christians point, we did break this into the guidance now when you look at all guidance. We do expect that Q2 will be more severely impacted so the challenges that we're seeing now in livestock with the plant closures are baked in and we do expect that Q2 will be more severely impacted for livestock and also for companion animal as well as this is when we see the call.
I think visits probably at the lowest in Q2.
Look towards the full year guidance range, the higher end of our ranges do assume that our producer customers are able to return to more normal operations throughout the second half of the year.
Well take our next question for John Kreger with William Blair. Please go ahead.
Hi, Good morning. This is Jon Kaufman on for Krieger. Thank you opportunistic question. So.
One on the Pumpkin insurance launch can you can you talk about your pricing strategy here, how do your prices in coverage compared to others in the market.
On the preventive aspect of this the direct to pet owners shipping.
Is there a chance that you risk angering veterinarians, because you're taking parasiticides sales out of the clinic or will there be some sort of reimbursement of that's related to these scripts and then just another quick one here I don't think I heard that dermatology sales break out between you asked in international can you provide those thank you.
Sure I'll start on Pumpkin, and then God Glenn can follow up on the darn question John.
You know, we're very excited about the launch of Pumpkin I think it's actually never been more relevant than it is as we enter a recession the focus of our the pumpkin insurance and preventative plans is really increasing access to care. It's one of the biggest issues at honored having the best struggle with is you know what's the price can they get a pad and can they afford care.
And really the new value proposition that we were trying to offer on Thats and pet owners is a real focus on preventative. So our plan is unique and that really helps coverage. It completely you know two to three core vaccine for dogs in for Cat.
Parasiticides for the year on that wellness visit which is an important part many pet owners didnt want to get pet insurance in the U.S. because they felt like it only paid quote if they're animal got sick and under the new wave that we have a combined the insurance and the preventative care plan, we think pet owners will see the value I day, one and so.
Although there are you to RF and changes to where that goes for of that clinic, ensuring that those animals will be coming in regularly because out of the visit that is paid for for the vaccines in the wireless visit and the Parasiticide. We think really does help the veterinarian on so as we sat down I think you know there with a lot of you know I think for some of our competitors you know noise around that when it first launch ready.
He sat down to explain to that what we're paying for overall in a wellness is that how will be encouraging that hello be covering vaccines I think veterinarians are quite excited at the opportunity as many new people have adopted Pat and the opportunity in that space overall in the U.S. with penetration levels of pet enter at very low, but you know two three per se.
Versus the rest of the world at 2030, 40% is significant and we think especially going into recession. This is an important part of ensuring that has got the care and then they go to that to get back care. So I'll turn it over I'd say Glenn to comment on the Dar yes. So in terms of the total therm sales breakout so for the year total was 109 for the quarter total was 194.
<unk> million dollars from 25% growth you asked was $136 million with 31% growth and international was 58 million with 14% growth.
Thank you we'll go next to Jon Block with Stifel. Please go ahead.
Thanks, guys. Good morning loss, both the fraud, Chris and maybe the first one for you I may have missed it but I don't think I heard a revised.
Market growth figure versus the previous four to five is there one there and then if so is your 0.5% operational midpoint call it still above market expectations in the second one was just.
The floating on the EPS was a little bit more.
Well the big at all we were expecting so any color on the decremental margins as we think on how would impact you now I'm guessing maybe part of that is FX, but any color you can provide would be helpful. Thanks guys.
Sure John I'd, Great question, I know you did not miss the what is the new market projection to be on the groups. The project the market growth, obviously have not been able to do that yet and this is a fast emerging so there is no general sense.
As we look at it we continue to see that pet care will probably had the strongest growth globally.
Overall, followed by you know poultry as we look at the swine growth overall.
You know, although there were seeing significant impacts in the U.S. right now given a FF in China and really strong demand that China is going to continue to have to important flying we think swine will likely be okay. It will probably have some impact but on do better and we see the greatest impact overall in cattle you know as you look at our business were about 50% companion.
Well, thank you for that livestock. So it really you know as we haven't seen updated market our growth numbers. So how we compare to that but we think we will be doing better than the market and I think it might be helpful. Glenn can talk a little bit about you know you used the midpoint as arranged by well talk a little about what the assumptions are for us at that high end of the range and what the assumptions are at the lower end of the range to help you.
Better navigate that so I'll, let our Glenn take that question as well yes.
Yes, John when you look at the the flow down to two yes. There are couple of things that you don't want to point out a cost of goods is up since the last guidance right by about 50 basis points at the midpoint Big part of that is driven by Koby 19 in some incremental fate freight costs those incremental costs, we expect to have to pay our suppliers for some of our key key agreed.
Thanks for the product so thats, one area that impacts the flow down to the bottom line, we did take cuts it as DNA about $100 million that at the midpoint as we've discussed.
But we also do have additional interest expense.
Previous guidance was 215 million current guidance is approximately 250 million and that does take into account. The fact that we will earn less interest income on our cash and it also does contemplate that we may incur some additional debt throughout the year. So it's really the cost of goods and the interest expense that offsets some of the benefits that were seeing.
Any other expense line that are impacting the EPS.
We'll go next to Chris Schott with JP Morgan. Please go ahead.
Great. Thanks, so much for the questions.
Maybe just the first one just a clarification on the topline guidance update I know you've touched on this on a high level, but curious quantify how much of the sales revision are these kind of near term cobot disruptions of people just not able to get to production sites and not able to see the vets versus how much is longer term recession related.
Headwind.
And maybe in the same vein how much of the reduction is livestock versus companion is it 50 50 to 60 40 any color there.
My second kind of bigger picture question was on the company inside the business and how sensitive that part of the portfolio is term recession is that true thing about that business being more insulated than livestock or is there also some potential sensitivity we have to think about on on on that portion of the portfolio. Thanks. So much.
Sure I'll take that Karen and Glenn can take overall guidance.
With regards to pet care in previous recessions on it had been a very resilient industry and we think it will continue to be I think if you look at you know the hit in Q2, it really obviously recession impacted but less than most other sectors.
But you know Q2 with people not going to the VAT, which is not necessarily right right now in Q2 recession. It was more related to the pandemic and the quarantine in.
Situation. If you look at it we still have a very strong portfolio that doesn't even require you to go to the that believing that visit isn't always agree proxy for our business.
Thanks, a lot of our product can be bought online, but there are a percentage of our business. That's more in clinic, we're seeing much greater impact for example in diagnostics, but for us diagnostics and only 5% of our business. So we do think pet care will be quite resilient in the medium to long term and will bounce back and it has historically as Glenn mentioned in quite resilient historically by.
I think Glenn can do a good job of putting in context, our assumptions as that we try to do the year at the high end of the guidance versus the low end of the guidance for both pet care and lifestyle.
Yes, so Chris I'll just address your first question then we'll go into a little more the details on the on the guidance. So in terms of Colgate versus the recession. Obviously, we think Q2 will be the most severely impacted and code will be a big driver that in both livestock and companion animal in terms of them then going forward, we do expect an impasse.
From the recession, and we do expect that the recessionary impacts will be more impactful in livestock and companion animal based on the reasons that Kristen just shared.
However, I think when you look at the overall guidance right. We did do a bottoms up analysis to inform the guidance range because we do believe that the people in the markets. Our closest to this and have the best information and what we got back was pretty clear that Q2 will be the hardest hit due to the impact of so-so distancing on the recession and the fact that the companion animal business will be lowest in Q.
You too and livestock plant closures will also impact the livestock side of the business. When you look at the second half of the year. The high end of the guidance range assumes that the recessionary impacts continue but that companion animal visits returned to more normalized levels amount of livestock producers returned to full operations.
If you look at the lower end of the revenue range that really assumes a very deep recession and also contemplates a potential second wave of the virus with social distancing measures negatively impacting both companion animal and livestock further in the second half of the year. So really just trying to be very transparent with investors as we always do which is why we chose to provide the guidance with.
On a range however, as we look to the long term future of both the industry in our business. We do expect that we will return to more normalized growth rates that we see in terms of revenue.
Our next question comes from David Westenberg with Guggenheim Securities. Please go ahead.
Hi, Thanks for taking the question. So I know you mentioned that the online alternative channels is a little bit more of a low base, but we haven't seen a speed up in the adoption curve of online.
Pharmacies now as we look to compliance and maybe the back half a year I mean do you think could we see maybe some some upside from reorders that we not would normally not see and then my second question is a little bit more continued granularity on on the guidance on so when we're looking at.
In the last week, I think I've seen on some data and talking to clinics about normalization almost in the last week. So when we're looking at Q2 I mean should we assume the last couple of weeks. This is something that could happen in Q2, and I know that you know your crystal ball might not necessarily D. The perfect here, but just as well.
Modeling that on its moving so fast and it does seem like there's some positive bounced back in the last week I just want to be fairly accurate in in the way we're more modeling that so I. Thank you.
Thanks, David I'll start with the online channels I'll, let Glen pick up your question on the more detailed guidance and what you're seeing as a trends out right now and that's on the online channels have in a significant trend.
I'd say from a a few different places and you know if they continue I do think there is an upside with regard to compliance.
We've seen a significant uptick in that signing up for a cold mattresses, that's first choice and that fourth.
To make sure that their pet owners I get their products if they even if they feel uncomfortable coming into the that we have seen you know as they published as well studies that once you get a customer onto your online home delivery that they are compliant goes out because it shifts one combined vendors left of the Frac. So we do think that the potential upside and again.
It really just accelerated a trend that we thought would happen, but we have seen significant growth in that channel for us.
And I think Thats why you know as I've said before our portfolio has been more resilient. Some other companies because many of our product you can get off from home delivery. The other big channel has been quite on growing quite quickly for us our remain E. Commerce. So you know to me as also increased its sales dramatically with that I got I want to go back and Glens earlier point. This is.
Off a very low based on this was historically a very small percentage is growing very quickly and we do think you know, especially now our consumers would like to get more shipped directly going again. So I think this is a trend that we're going to continue to see on and we do thing. It does have the upside over the medium term to improve compliance overall with pet owner, so that its potential upside.
Let glen take their up to your questions with regards to guidance, yes. So in terms of guidance and for Q2 in particular in some of the trends that we're seeing in the more current weeks I think it's important Ada break it out between us and international So again reminding because of our international close Q2 for us will be the months of March April and May So recovery in terms of visits will have a smaller benefit.
In international because it only applies to the end of April and early May when you look at U.S. However in early April we were seeing visits down 20% to 30%, but to your point, we have seen those numbers begin to rise pretty significantly and to the extent that that continues that could limit the impact that we would expect to see if.
You too, particularly on the companion animal side of the business. So those are positive trends and we hope that those trends do continue.
Our next question from biologic for side with Barclays. Please go ahead.
Hi, good morning, Thanks, Dan's questions. So crossing could I Oh, we have discussed much more than you had an impact in with what we like you'd seen cure during Q3, guys take a step back here on asking about the longer dumb gain vacations, all slow going 19 on both livestock and companion side, how do you think loved the changing industry dynamics generally.
User behavior, let me practices meet go to users and and what it means more importantly for the long term industry goes from as I discussed in both the Brian will then lifestyle side. Thanks.
Thanks, Absolutely you know, we very much still believe the longer term.
Trend for this industry are very strong as you look at the trend into Humanization of pets I actually think it's been accelerated so as you look at the next few years of people likely spending more time at home less travel maybe potentially working from home more there around their pets longer they tend to therefore want to take better care of and they also tend to.
I noticed issues before they might have noticed than historically. So we think you know really the long term trend here is very positive and will continue to humanization of pets in the only thing that will temper that is obviously recession, but again as we said in previous recession tight there has been quite resilient space I think as you look at the longer term trend.
In livestock you know I think you know for the next phase as we talk about this year. There is some significant impact and many of our producers, but over the medium to long term feeding the world is an important secular trend that is not going to change on so supply chains will.
Realigned themselves.
So that it you know more those the grocery store will be better aligned to do that they'll change it inoffensive dining dine out the also evolve a proxy. So it may be that you will see poultry and pork do better over the you know that short to medium term, but in the end of a day and as we've seen over and over again, another crises and professions feeding.
In the World is a strong secular trend. So we remain quite optimistic for the industry and specifically for our portfolio. You know as you look at our portfolio, it's very diversified and that has been very good for us over the years with about half in the U.S. half outside the U.S. a with a 50 50 split between livestock and companion animal and watch.
During that evolves. So we're very optimistic to continue to believe that the industry and more importantly, zoetis will be resilient.
Next question is from David Risinger with Morgan Stanley. Please go ahead.
Okay.
Thanks, very much sorry about that so congrats on the pumpkin.
Innovative and compelling offering right certainly differentiated.
Could you help us understand.
The insurance element of the promotional offering including.
Acute illness coverage and exactly what.
So what else is.
His pitching to had owners with respect to the insurance aspect and then just aside comment with respect to the second wave.
Thats. Your modeling you are assuming that second wave and in the fourth quarter not this summer correct.
Oh, Okay I'll start the insurance out let Glen I'll take the question on the second wave, we're very excited about punk and what we think truly differentiate that is that preventative wellness plan.
The insurance again, we're not taking underwriting risk and that's that have taken by crime in foster I can't get into comparing individual plans, obviously would depend on your pet its age as always all insurance that I'd say the insurance is a very strong insurance plan, but there's many comparable ones on the insurance unique part of the offering is they're real focused on the additional.
Preventative wellness plans, where I think we haven't their unique offering there and is quite differentiated by from an insurance perspective, you know, it's quite competitive with other things out there I wouldn't say reinsurance alone is has differentiated I would say, how we work with our customers. The customer experience is quite differentiated if you've checked it out and go onto the website, we're trying to make it easier for pedal.
On our similar to understand similar to file claim. So we're really looking innovate and user experience with regard to the insurance part of it but the plant itself you know, it's comparable what's really different as the additional preventative wellness.
Plan, which I think is quite different but I'll, let glen take the question on the second away, yes in terms of the second wave again, that's one of the assumptions within the lower end of our guidance range. We would anticipate that that would occur later in the year not necessarily in the coming months.
We'll go next to Nathan Rich with Goldman Sachs. Please go ahead.
Good morning, just two quick questions from me.
First person just going back to.
Her comment bonds and Paragould trio could you maybe some of the initial feedback that you've gotten from that and how receptive you think they might be to kind of using this product is the around 3 million potentially kind of switching.
At mid year, and then you have you seen any change in response from from competitors that factored into your outlook.
The first question. This is the second question for Glenn I think the companion animal growth rate internationally, I think slowed a little bit from what the recent trend has been can you maybe just go into more detailed.
On what you saw there in the quarter.
Sure. Thanks, Nathan if you look I I'd trio, we think our customers have been quite receptive.
There have been very excited this has been a highly anticipated product.
And the reception for many of our vast having something exciting new to discuss with their pet owners.
To make sure that they can take care of a deadly disease like heartworm.
And combine that with one of the bat flea and tick from product. We it's been quite positive we've been seeing it pick up even more in the last few weeks as that they've had more time to engage so honestly from the market. You know that's been very excited we've seen great receptivity to our direct to consumer advertising you know as we saw from some of our competitors.
Are they did exactly what we expect they definitely still the channel with as much product as they cut in Q1 before our launch as we talked about at our Q4 call that was anticipated and obviously there will come after US you know as they said this is the single largest sector as you know and animal health and in the U.S. alone at the 2.5 below.
In dollar market. So you know we're really excited we continue to see if you saw our guidance on to this will drive significant growth for us overall as a company in certainly in the U.S. and you know we have been very pleased with the receptivity of both that's and pet owners I to this new innovation. So Glen do you want to take as our companion animal question, Yes. So in terms of a companion animal and the entered.
National markets. So we did see good growth of 8% in companion animal in the international markets. There were a couple of things that did factor into living that growth to some degree say, China grew 8%, which was actually a little below our expectations because of the impact of covert 19 of the time you cover 19 within that market. We also did see.
Declines in markets, such as Italy in Canada, Italy was chain was impacted by some changes in prescribing laws that we think again, we'll recover through the rest of the year, whereas Canada was impacted somewhat by the timing of the launch of Simparica trio. There was a hold on some of the sales for some erica from our customers in anticipation of synthetic atrial being provided shortly thereafter.
The next question is from Kathy Miner with Cowen. Please go ahead.
Thank you for taking the question I'm, just going to follow up a little bit more on dermatology business I'm, specifically was there any stocking of applicable in the first quarter and second of all can you comment on site a point you've indicated that there was growth in the quarter and since this is of that kind of product just talk about those dynamics and how you see that as we get into.
Q2, and later in here and if there's any difference in this U.S. versus the U.S. awesome. Thank you.
Sure so from a quote perspective, and just from a broader companion animal perspective, we do not see stocking.
During the quarter. This is something that we monitor and manage very closely and we prefer ourselves from your underlying demand. So we do not see significant stocking in the quarter of of any extent.
Look at the breakout between Apoquel inside a point they both performed very well in the quarter, but side appointed actually grow more rapidly as we think the convenience and the compliance and the fact that is administered in the clinic certainly does help.
Outside of point, we also saw very rapid growth inside a point in international growing them approximately 71% as it was introduced in new markets as well so very strong performance across the entire portfolio both side a point and apical.
Our next question from Elliot Wilbur with Raymond James. Please go ahead.
Thanks. Good morning question on a return to baseline or normalcy trends in terms of Uh huh.
Ed visits on the companion animal side I'm, assuming that in fact does happen near year end or sometime in the second half of 2020 at least how are you thinking about how should we think about revenue.
Per visit is there the possibility of a trade down effect is that something that you've incorporated into expectations and maybe any color from.
Experienced during the great recession with respect to that aspect of that digits would be helpful. Then just real quickly. If you could you remind us of the relative margins.
Within the.
Livestock business between cattle versus swine and poultry. Thanks.
Sure. So in terms of the the relative margins across the the livestock business actually you are starting to converge mccrosson, but in general cattle is a higher margin then come swine then comes poultry, but they're all relatively relatively close.
And then in terms of.
The the revenue per per visit say in the first quarter. We did see very positive trends in terms of revenue per visit and companion animal we got most of that they'd honestly within the U.S. So we haven't seen anything telling us that revenue per visit is declining significantly but that is something that we will track throughout the year, but we have no data that indicates that that is a trend that should reverse.
As it anytime soon.
Thank you were an extra Gregg Gilbert with Suntrust. Please go ahead.
Thank you I know that you and others are offering tele health to that customers can you talk about how that's being embraced and how that could affect the business longer term and then secondly.
What are you seeing in Asia I realize it's early days, but what are you seeing in terms of or a return to normal or an attempt to return to normal both from your own employee base as well as the customer base in the U.S., we see a lot of companies guiding to some returned to normal for their business by year end, but.
Those companies that are guiding have employees, who are terrified to go back to work anytime soon so just trying to maybe that's a very U.S. sort of a new York centric way of thinking, but I'm, hoping you can offer some color from a more global perspective. Thanks.
Sure.
Thanks, So much Greg I'll start with a you know it's looking at China.
Try it really has I'll come back we they have about 80% to 90% of that clinics are now open and they are seeing pet owners return, but they do the pet owners do remain cautious so I wouldn't say, it's not exactly the same levels, but do you look at and we have significant operations in China, we're continuing to operate or manufacturing sites and other sites, there and our experience there.
You know the measures that the government has put in place to control the virus and to do staggered shifts et cetera, and track and trace are not measures that so far at most of Europe, and the U.S. are willing or able to implement anyway. The ability to look at that as a proxy. We don't think that is a good proxy for what I returned to the work.
Place looks like.
In the U.S. and in Europe, there just what they've done there is quite different you know we did see a strong growth in China. As you look at Q1, they grew 13% with 19% in livestock and 9% in companion animal, but we cautioned that looking at China and extrapolating for the rest of world is probably not but that strategy.
We do see on and we've put a lot of focus and what a return to work looks like we are leveraging our experience in our manufacturing sites distribution and R&D sites that have that operational as an essential business throughout and our plan is to leverage those learnings.
Where we looked at implementing you know health and hygiene measures such as social different thing increased Sanitization 10 checks and staggered chefs and that is certainly the way we're looking to do that in the U.S. You know I think you know we talk a lot about office based colleagues, but feel they colleges another big category for us and so we think it's going to take a little longer.
And we'll obviously be leveraging other opportunities such as you know tele health.
And then Webinars and you know things like that with our afterwards, we can make sure that as our colleagues return to customers are comfortable to its got to be two sided and as regard to your question specifically on how we did see a quick uptick initially it is a process change for clinics. So you know whether or not yeah and at what level that really control.
Menus I'd to take off you know, it's still early days I've actually been doing a telehealth visit I'd say it does help the that you know do really simple checkups on a procedure to just make sure that pets. Okay remotely it is actually more efficient and to get them pay for something that somebody they call a customer and they were never paid for so I do think it will take off by it.
The big process flow change for the that and even integration into the system. So I think we'll take a little time to see on how fast that picks up but I you know we've heard a positive reception from most of our our customers who started to adopt it but it does take a little Todd.
Well take the next question from Labor Jacob with UBI, Yes. Please go ahead.
Hey, when check the mute button on your phone your line is open.
Whereas theres been Echography becomes back yes, we'll go to the next one we'll go next to Michael.
Risk and what the follow up please go ahead.
On channel on your opportunity move move over there could you just sort of give us an over you over the companimal product portfolio you have now between vaccines and other Injectables excited point.
There's a large part of the other products it simply cannot be done on and then on other hand, you have parasiticides growing presence there.
The call other products than what the prescription you can get it from chewing from other.
From other sites.
Could you just discuss how the what does this position here and then online channel and sort of Big picture do you anticipate Colin could drive longer terms shift to more online pharmacy purchase isn't supposed to be will go into bad if people are trying to continue to practice and social business thing.
Longer term.
Sure.
Look at our portfolio. The first thing I'd start with is almost all of our portfolio does require prescription. So that will remain at the center you know anything that happens, but to your question of sort of where they get product over you know whether it's in the clinic through home delivery via the clinic web site or through Chile is really a focus as you.
Look about our portfolio about 50% of our portfolio generally will be given in clinic that would be a vaccine and injectable a surgical on something for you know urgent care et cetera, and about 50%.
Our portfolio could eventually go to home delivery or online and I think you're seeing the acceleration of that as we look at you know the certain that pandemic input impact overall in Q1, and I think that we'll continue to accelerate but you know you will get a lot of it it's still requires a wellness as if it's still requires a prescription so that will stay central valley.
Do you think you're seeing in our real acceleration in home delivery and places like you. We have the upside of driving compliance as we've talked about before a and we do believe it well and we'll see how fast the continues to go but I think once you get a customer in the habit of a monthly home delivery on it certainly makes their lives easier so on it will drive.
Clients overall.
Yes. It appears we have no further questions I'll return the floor to your question for closing remarks.
Thanks. So much you know these are certainly unprecedented times, but you know the one thing that they started out with you know the way it doesn't essential built business has also been quite resilient company and I'm quite proud of what our colleagues across the world have done to ensure that they've taken care of each other and supported our customers.
Medicine vaccines diagnostics and many of our solution will remain essential I'm in the month in years to come we things the way. It has a diverse portfolio that addresses a broad spectrum of needs and given the diversification of our portfolio and our very strong balance sheet. We believe that the why does the strongly positioned I to manage on certainly over this.
Sure and in the years to calm were driven by two very important.
Secular trends, both the humanization of pets, and ensuring we see the world, though we remain quite optimistic as we look to the end of 2020 and 2021 that is that why that's at our industry will continue to be essential and resilient. Thanks, so much for joining us today.
Hi, This will conclude todays.
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