Q3 2020 Zoetis Inc Earnings Call
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Welcome to <unk> third quarter 2020 financial results conference call and webcast for Zoetis.
Hosting the call today is Steve Frank.
President of Investor Relations for his awareness.
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It is now my pleasure to turn the floor over to Steve Frank Steve You may begin.
Thank you Keith good morning, everyone and welcome to the zoo at its third quarter 2020 earnings call I am joined today by Kristin Peck, Our Chief Executive Officer, and Glenn Davis, 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 and that our remarks. Today will include forward looking statements that actual results could differ materially from those projections.
For a list and description of certain factors that could cause results to differ.
I refer you to the forward looking 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.
Remarks today will also include references to certain financial measures.
Which were not prepared in accordance with generally accepted accounting principles or 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 in the company's 8-K filing dated today November five 2020, we also cite operational results, which exclude the impact of four.
Foreign exchange with that I will turn the call over to Kristen.
Thank you Steve good morning, everyone.
Again, I hope you and your loved ones are safe and healthy at this pandemic continues to be very pervasive and unpredictable. Please call. The cases banking again in several regions of the U.S. and around the world.
All facing the uncertainty entity that is kind of like this pandemic and often.
Also graceland pleased today to share results that reflect the resilience of the animal health industry. The outstanding performance of our colleagues that Atlantic and the essential value, we're providing our customers.
As you're aware, we stayed very responsive to the needs of our colleagues and customers throughout the year, we prioritize their health and safety, while also ensuring that a consistent and reliable supply of product is getting to the clinic farms and pet owners, who need them.
Our global supply chain and manufacturing operations are running well with safety and quality as our top priority and we've maintain operations at normal capacity and with no lot outside.
As we look ahead, we're fortifying our network of suppliers and building inventory levels.
For planning further contingencies for supply and distribution in the months ahead.
R&D program also remain on track despite the pandemic challenges and our feel for it has been very adaptive to the changing protocol lockdown and customer needs in various markets.
Thankfully our purpose.
Sorry for healthier animals, and a healthier world has never been more important apparent and appreciated.
Thanks to the resilience of our customers and the commitment of our colleagues, we were able to generate better than expected results in the third quarter.
Our diverse and innovative portfolio has been driving growth this quarter with companion animal products up 20% operationally and livestock product sales up 9% operationally.
Our newest parasiticide, including supermarket trio Revolution flat and pro Hartwell led the way again, along with vaccines key dermatology product and our diagnostics portfolio, including reference lab. The third quarter also benefited from sales growth in the U.S. capital market and China swine market.
As a result of the sales growth and targeted investments we delivered adjusted net income growth of 20% operationally for the third quarter.
Wrapping up our nine month performance and despite expectations for a more modest fourth quarter, we are increasing our revenue and adjusted net income guidance for the full year, Glenn will provide more details around guidance updates in his remarks.
This year has shown once again that animal health is a steady and reliable sector, even in times of economic hardship.
Fundamental need for nutrition comfort and companionship provided by animal has proven durable and enduring overtime.
In the U.S. veterinary clinic revenue for Pat are increasing at double digit rate.
Owners are focusing again on wellness and chronic illness, not just emergency visits and acute care.
Any more time with our pets pet owners are much more attuned to their dogs and cats out of durbin conditions like edginess dermatitis and pain welcome.
While clinic visits are relatively flat in the U.S., they're actually seeing an increase in average spend per visit.
We expect to continue to see our strength coming from companion animal products, especially our parasiticides and key dermatology portfolios across global markets.
Apparently trio launch and penetration into new clinics in the U.S. and elsewhere is going well. Despite the headwinds of COVID-19, and we're getting a good return to our direct to consumer advertising and digital campaign for some paragraph and Africa.
Meanwhile.
Livestock sector producers are adapting to the changes in our end markets for protein and our third quarter growth was driven by increased sales in cattle swine and fish.
Spikes in KOVA cases limitations on dining out and shift in production capacities will continue to make livestock a longer term recovery story that may vary by region and Ccs. Another reason, our diverse portfolio and global footprint is such an advantage.
Looking ahead, we have stayed focused on advancing our five key priorities drive innovative growth enhance customer experience lead in digital and data analytics cultivate a high performing organization and champion and healthier and more sustainable future throughout the year. We've stayed on track with our execution and invest.
That was recently approved in China and cited point and Revolution, plus gained approval in additional markets in Asia, and Latin America, respectively, and in livestock received approval in Japan for two of our leading swine vaccine.
Sarah Gold Pcbs, H and frontier gold PCB all great examples of how we build and expand our innovation based franchises.
Dollars was an increase of 15% on a reported basis and 20% operationally.
Foreign exchange negatively impacted revenue in the quarter by 2% driven primarily by the strengthening of the us dollar.
Operational revenue growth was 15% with contributions of 2% from price and 13% from volume.
Volume growth of 13% includes 5% from other inline products, 4% from new products, 3% from key dermatology products and 1% from acquisitions.
Hello, driven by R. U S cattle business seeing a return to historical distributor buying patterns. Following the impact of COVID-19 in the second quarter.
In addition, the fall cattle run occurred earlier in the year, causing a portion of fourth quarter sales to be pulled forward into the third quarter and as a result, we expect a significantly weaker fourth quarter and cattle then we typically deliver.
For the remaining livestock species swine return to growth in the quarter, resulting from expanding heard production and key accounts and increase biosecurity measures in the week of African swine fever in China.
We also remained encouraged by the strength of our agriculture business, which posted the fourth consecutive quarter of double digit growth.
Poultry decline modestly in the quarter, which partially offset the growth and cattle swang and fish.
New products contributed 4%.
In the quarter driven by companion animal Parasiticide, some paraquet trio Revolution, plus and pro or 12.
Recent acquisitions contributed 1% of growth this quarter, including our expansion into reference labs, and the platinum performance Nutritionals business.
Now, let's discuss the revenue growth by segment for the quarter.
U S revenue grew 18% with companion animal products growing 21% and livestock sales increasing by 13%.
We do not expect a sustainable recovery until the middle of 2021.
Revenue in our international segment grew 11% operationally in the quarter with growth across all species with the exception of poultry, which was flat in the quarter.
Companion animal revenue grew 20% operationally and livestock revenue grew 6% operations.
The growth in companion animal swine and Fitch.
We're also encouraged to see cattle returned to growth in what are still difficult market conditions. As a result of the COVID-19 pandemic.
Now moving onto the rest of the PML.
Adjusted gross margin of 69.6% fell 50 basis points on a reported basis compared to the prior year as a result of negative FX of the manufacturing costs and recent acquisitions.
This was partially offset by favorable product mix and price increases.
Adjusted operating expenses increased 9% operationally, resulting from increased advertising and promotion expense for some power cut trio and applicable.
We have strategically reallocated savings mainly from TV costs into these high return promotional programs, which have been successful in increasing sales.
The adjusted effective tax rate for the quarter was 20% a decrease of 50 basis points driven by the impact of net discrete tax benefits.
Adjusted net income for the quarter grew 20% operationally, primarily driven by revenue growth and adjusted diluted EPS grew 21% operationally.
The strength of our balance sheet, along with the significant free cash flow, we generate has enabled us to execute on our investment priorities, including direct to consumer advertising internal R&D and external business development.
While we suspended our share repurchase program for the last two quarters to preserve cash during the pandemic, we remain committed to our 2020 dividend.
In addition share repurchases are a critical component of our shareholder distribution strategy and we'll continue to evaluate the appropriate time to resume the program.
Now moving onto our updated guidance for 2020.
We are raising guidance for a second consecutive quarter as a result of our third quarter performance and the improving companion animal market environment.
While the COVID-19 pandemic presents challenges and risks we remain confident in the resiliency and durability of our diverse portfolio.
Please note that our guidance reflects foreign exchange rates as of late October.
Thank you at this time you May Crestar then one on your Touchtone phone to register to ask a question you may withdraw your question by using the pound key we I could you. Please limit yourself to one question you may reach you for any follow up questions.
And we will take our first question from Aaron right with Credit Suisse. Your line is open.
Great. Thank God I have come up I can get one on the guidance and secondly, nagi Mcclatchy Jacqueline in the fourth quarter I assume that has to do with the underlying can get to me and you were speaking to him but is there any other dynamics, we should be thinking about in the fourth quarter and how that month to month trend has progressed here and then lastly on Nick.
M as in the gross margin what were some of the key drivers of the gross margin trend in the quarter.
Four of last year that will not repeat this year and will have a negative impact on our overall income growth.
And we'll move to our next question it comes from Jon Block with Stifel.
Great. Thanks, guys good morning.
Glenn maybe just to start with you at all can you just pick up where you left off on Dragon.
You're not going to go down the road of overall 2021 guidance, but obviously, we all sort of want to sharpen our pencils, if you will and so as we think about traction.
Generic next year should we just be Cogs.
In 2021 as well.
We'll probably see approval of those in the U S and the later ended the out next year. So.
So that gives you a sense of just where we see that those revenues ramping both cat and dog in the U S and the year.
Next question comes from micro skin with Bank of America.
The new things.
Okay.
Going on sort of the rebound from Covid in the recovery in the quarter I'm. Just wondering if you could points intuitively common in some new prepared remarks about the country, some pent up demand in Europe.
And I'm, just trying to get a sense broader across the non profit U S. As well how much you think the true underlying growth could've been versus would really feel a little bit of present demand sort of I realized there's a lot of moving parts in terms of.
That's that reopening a new pet adoptions things like that but just curious how to think about that going forward and then Glen going to follow up for you. Another common you made on.
Kris spending.
Reinvest in the business as you look out the four Q clearly there's a big.
She may ramp and the guidance if you sort of bridge your revenue gap to your ETS.
I started thinking how can you think about 2021 wouldn't be appropriate base for that because there's obviously some spend that you pulled back this year. So how much of that comes back how much extra going to invest for things like library entry.
Entry will next year I'm, just trying to get moving to condemn thanks.
After having a cokehead recovery question.
I think what you clearly.
Q3, wise I significant rebound and companion animal to people going back to that.
Really the biggest growth driver there wasn't really an increase in kind of 2019 at maybe there's an increase from God cute cute cute three it was really increased spending for a visit.
Which we think is a trend that will continue as long as people spend more time at home with our pets. They are noticing more.
Petition.
In the us this year or in the first half of next year as we've talked about many times, we don't have phenomenal intelligence the family humans House does but we continue to believe that and to build our glen's comments. As a result, we are investing heavily behind this product in a DTC to gain market share as as quickly as we can and we look at.
Sort of the growth Glen also mentioned in his remarks that.
The penetration of clinics is improving but probably not as great as we would've wanted given the difficulty in D.
Detailing their product in person, however, where we have penetrated the sales have been much higher.
And honestly, we've been cannibalizing some parrots are much less than we expected and we're really seeing is.
Overall, bringing more people and if you look at.
<unk> take heartworm really only 10% of people who are even taking it are 100% compliance. So we think that remains a significant opportunity for us and again, we have a strong franchise here across parasiticide in fleet Heartworm and it's quite also mentioned, we had a 6% share gain in the overall category, which I.
Think is really impressive so what they've asked <unk> compared to a trio or pro heart Fixer Pro-war 12.
I'll start I'm, just looking at the overall market for pain, starting with the relevance it will probably be our first approval there at least in Europe.
Pain right now in dogs is around $400 million market, but there hasn't been significant innovation in that space and although we do not yet have a label on for our product. We believe is a monoclonal antibody we will have a strong efficacy as well as the safety profile and we think that we've demonstrated certainly in Durham, our ability to grow.
The market.
To really raise awareness, bringing innovation and brings new customers in new options. So we do really believe we can continue to do that if you look at it today, there's about 165 million dogs across the EU in the U S and about 40% of them will get OA and right now depending on where they are in the USA.
Terms of the benefit that we've seen in the usage of both the reference labs and the point of care together. We are very early in our reference lab strategy, we're looking to build out a global network across the us but that will take some time. So we're still early on in that build up.
We will take our next question from Chris Schott with JP Morgan.
Our conditions with their dogs, they're also spending more time at home seeing our AD.
And realizing that there if they have a dog is actually there is a product for that so I don't think that trend maybe it was more accelerated this year, but I think those dogs and cats are here to stay I think people will change their behaviors and some of them I think around spending more time with the comfort both emotional otherwise of pet will continue and as you look at Europe. Your question was.
Regards to cobot in Europe, the deed in Europe as you know is not as reliable and we use there's not as many comprehensive data sources, but what we're hearing anecdotally is our customers figured out in Q2, how to continue to see past due curbside check ins and that really hasnt changed they figured out how to operate gives.
It's typically one of your faster growing areas in livestock. So just trying to get a sense of what changed this quarter is it part of a typical rotation of product usage or is it some sort of competitive dynamics that thank you sure.
Sure I'll start on the diagnostic imaging we are.
Very pleased with how that's going on as you know the first indication for the immediate switches and AI driven diagnostic.
In FICO back to about a $500 million market growing about 7%.
People are excited at the opportunity for this technology and certainly for additional indications that we are on track there and I think we're very pleased with its progress and given the positive receptivity to it we are accelerating our investments to bring new indications.
Overall, there and as you look at culturally poultry certainly in the U.S. There is definitely a rotation, which we always talked about that was definitely a driver in the quarter and I think you'll see again moving into Q4, so potentially bringing one of the reasons, we guided where we did our livestock overall in Q4.
Jeff Great growth across the portfolio and strong performance there certainly on revolution.
King revenue will just just now getting the approval on Simparica.
It's more timing of regulatory on trio, there, but I'll, let glenn get into some specifics on the numbers and the growth.
So to answer the details of numbers and as you mentioned overall in China for the quarter grew 63%, we saw 52% growth in companion animal and we saw 81% growth in much talked about 81% growth in livestock was driven by swine. So as mentioned in the prepared remarks swine grew 159% in China for the quarter as we've continued to see that.
The recovery in some of our key accounts in the larger producers we've.
We've seen very strong performance of our products within those accounts.
Would you be able to ramp faster to peek fails when we're launching new technologies in the U S than we are able to do in Europe, just given we can't do direct to consumer advertising brand specifics, though I do think we look at how fast can you ramp up that market in.
Europe, it will be slower than the U S. Once we have a U S. Just given the history ultimately I think we'll be well there, but I think it is a little floor I would say overall there.
And your second question was around.
What was it around Durham politics, so in terms of the opportunities for germs. So we continuously really strong performance in the in the dorm portfolio. We grew 16% this quarter with 21% growth year to date in terms of the continued opportunity for growth, we see opportunities for growth in both the us and international so looking at the U S.
Currently there are about 75 million dogs, and the us in about $14 million of the genus of.
Those 14 million dogs today about 60% are treated so there's still 40% of the dogs with the itchiness that are not treated. So we do think there is an opportunity to continue to raise awareness of the disease state and get those as your dogs continuing to take out the quote or side of point. When you look outside of the U S. We also see a big opportunity for.
Both in terms of the breakout ourselves today about two thirds of ourselves of the U S and one third is international however, the number of itchy dogs is similar between those segments. So to the extent that we're able to continue to drive that adoption or an awareness. We do believe that there is continued growth expected and the international markets as well and.
I think I'd say, we're still looking at.
Not having competition until at the earliest that that could happen next year. So we're going to continue to try to grow as fast as we can and gain market share.
And our next question comes from Navin Jacob with UBS.
Kind of ruined the streaker 90 per month or intervenes income apologies for.
Getting cut.
Cut off.
Before.
But I just have a couple of questions.
So.
In anticipation for the dressed and generic coming next year.
What level of Destocking can we expect to see.
And then.
Maybe.
Maybe just on the Medicalization right in osteoarthritis, what's a good analog for how high you think you can he can get.
In dogs and cats in the U S.
Thanks very much.
Sure Scarring I'm Jacqueline.
Little bit hard to tell.
Tell you exactly what we think maybe attacking will be I think given the expectation from any of our customers that they will see significant new generic entrants.
I am sure. They will think differently about building inventories ahead of normally when is our price increases in Q1 and that with Glen with alluding to earlier.
Obviously, we have a robust.
Plan for Jackson, it's an important product, we still hadn't given it high margin significant pricing leverage here, but obviously.
We anticipate that some of our customers who would normally stock up at the end of the year ahead of the price increase will not be doing so.
Hi, Ken Medicalization rates to get for OA, I mean, you would love to believe that all those dogs it'd be diagnosed I don't think you're going to really ever get to that exact number but we tried to look at our ability for example in Durham to try to do that so we do think there's a significant opportunity both because they are bringing innovation and we also believe that.
Anticipated potential safety profile of a map will bring more people out on that are struggling certainly on the dark side, but definitely on the cat pain as well. So I think it's a little too early to say exactly where you can go by there is a significant opportunity and we've demonstrated before that we've been able to grow markets and we've entered them with new innovative technologies.
For next question comes from Elliott Wilbur with Raymond James.
This is actually Michael Portillo Aryans were Wilbur.
The question.
Most of my questions have actually been answered already so I just have one for you on the topic share repurchases I know that you said that you're continuing evaluate the assumption of the program.
But given the strong mcgovernism business I was just wondering if you guys have any timelines specifically on when you look into visiting the program and if you were looking for anything specifically decide whether or not tourism program. Thank you.
Thanks, Michael So in terms of share repurchase we don't have any specific timeline, obviously, it's something that will continue to evaluate there's still a lot of uncertainty in the marketplace, particularly around COVID-19, and timing that we expect to see a full recoveries about some one of the factors that will continue to evaluate one thing I will say there was a capital allocation priorities.
Have not changed drive in terms of investing in the business is our first priority and I think you'll see us doing a lot of the this year, even in light of Covid, particularly with the investments that we're making DTC the investments that we're making an orange you to continue to support the medium short and long term growth of this company also significant investments that were men.
Making a manufacturing to ensure continuity of supply and also investments that we're making from an inventory perspective again to ensure continuity of supply. So we are really focusing on some of those internal investments. We've also been able to execute on some business development deals throughout this year as well even with the limitations that may be provided by Covid.
But really good use of our capital across all areas.
And as a reminder, it is star then one on your Touchtone phone to ask a question today.
The next question is a follow up from belongs she for some with Barclays.
Hi, Thanks stand the question again, so I'm just trying to check on your comment on the market share in the flea and taken heartburn segment six puzzle game I just wanted to clarify that was based on.
And market size of.
$252.6 million.
And classify that thanks I'm thinking you also what is actual number for Cleo disclosure.
So just to clarify that was based on the U S market size of around $355 billion.
And the second question was around alcohol for the for the quarter.
For three I'm, sorry, so a trio for the quarter, we did $50 million in sales for trio for the for the quarter.
And at this time there are no additional questions I would like to turn the program back over to Christian pet for any closing remarks.
Okay well. Thank you all for your questions and continued interest in that.
We look forward to keeping you updated on our business and continuing to deliver the results and innovation that new at our customers expect correct.
Thanks, so much.
Thank you for your participation.
Conclude today's program you may disconnect at any time.
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