Q4 2022 Zoetis Inc Earnings Call

Speaker 2: Welcome to the fourth quarter and full year 2022 financial results conference call and webcast for ZOEDIS. Hosting the call today is Steve Frank, Vice President of Investor Relations for ZOEDIS. The presentation materials and additional financial tables are currently posted on the Investor Relations section.

Speaker 2: of Zoetis.com. The presentation slides can be managed by youth viewer and will not be forwarded automatically.

Speaker 2: In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or the investor relations section of zoaddis.com. At this time all participants have been placed in the listen-only mode and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please do so.

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Speaker 3: Thank you, operator. Good morning, everyone, and welcome to the Zoetis fourth quarter and full year 2022 earnings call. I am joined today by Kristin Peck, our chief executive officer, and Wetney Joseph, our chief financial officer.

Speaker 3: Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website, and that our remarks today will include forward-looking statements, and that actual results could differ materially from those projections.

Speaker 3: For a list in description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today's press release and our SEC filing, including but not limited to our annual report, the form 10K and our reports on form 10Q. Our remarks today will also include references to certain financial measures.

Speaker 3: which were not prepared in accordance with generally accepted accounting principles or USGAP, a reconciliation of these non- GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8K filing.

Speaker 3: Dated today, Tuesday, February 14, 2023. We also cite operational results, which include the impact of foreign exchange. With that, I will turn the call over to Kristen.

Speaker 4: Thank you, Steve, and welcome everyone to our fourth quarter and full year 2022 earnings call. Today we reported a strong full year results for 2022, in line with a high end of our guidance from November , and thanks to our diverse portfolio, global scale, and talented colleagues.

Speaker 4: Our 8% operational revenue growth for the year was driven by our innovative companion Antelope Portfolio, which grew 14% operationally, while our livestock portfolio declined 2% operationally, primarily due to generic competition and market challenges, especially in the US.

Speaker 4: Thanks to our broad global scale and diversity, we delivered well-balanced operational growth across our U.S. and international segments, which grew 7% and 9% respectively. For the year, we generated operational growth in all of our top 13 markets.

Speaker 4: despite the economic challenges, continued COVID recovery, and political uncertainty created by the war in Ukraine. Reflecting our long-standing value proposition, we grew our adjusted net income faster than sales for the year, with an operational increase of 11% for the full year. And we use this performance and financial strength.

Speaker 4: to continue investing in the R&D, manufacturing capacity, and sales and marketing resources to support our future growth and pipeline.

Speaker 4: As we begin 2023, we will stay adaptable to the evolving macroeconomic factors and geopolitical tensions around the world and focus on executing our plans.

Speaker 4: We remain very confident in the fundamental and resilient global demand for animal care. And most importantly, we are confident in the wetest visibility to continue delivering solid, sustainable growth as we resolve our prior supply constraints and build share of our market leading franchises.

Speaker 4: Looking ahead, we are committed to our track record of value creation and above market performance, even in the face of today's economic uncertainty. We are well positioned with our strategic priorities and capabilities to expand in large and growing product areas like parasitisides, dermatology products.

Speaker 4: monoclonal antibodies, vaccines, and diagnostics. We are guiding to a range of 6% to 8% operational growth for revenue in 2023, and adjusted net income growth in the range of 7% to 9% operationally, which reflects our increased investment plans for R&D and manufacturing to support growth.

Speaker 4: As the world leader in animal health, a market that is grown on average of 5% to 6% through various economic cycles over the last two decades, we feel very positive about how our portfolio, pipeline, and strategies can drive no term sustainable growth and create value for our customers and shareholders. Thank you.

Speaker 4: What we will discuss more details about the 4Q results in full year 2023 guidance, but let me provide some additional perspectives on our business and set the stage for some of our group drivers for the year.

Speaker 4: First, we have remained the world leader in animal health over the last decade, outperforming the market and bringing groundbreaking innovations to veterinarians, producers, and pet owners who care for animals.

Speaker 4: We marked our tenure anniversary as a public company on February 1, a decade which saw its bringing of more than 2,000 new products and life cycle innovations to market, build a diverse portfolio featuring market leading franchises and 15 current blockbusters. Generate consistent above market revenue growth?

Speaker 4: and deliver a total shareholder return of more than 500 percent, all while increasing our market cap from $16 billion in 2013 to about $75 billion today.

Speaker 4: While we celebrate those accomplishments, I'm even more excited about where we can go in the next decade. And by the talented colleagues, innovative pipelines, investing class capabilities, we have brought together at the WEDA.

Speaker 4: Our colleagues purpose driven mindset and steady performance in the face of adversity, give me confidence in the continued execution, innovation, growth and durability of our business.

Speaker 4: At the turn of 2023, we're focused on five key growth timeless for the years.

Speaker 4: In dermatology, we see excellent growth opportunities, even after nearly a decade of game-changing innovation that began with the introduction of APOCOLLE in 2014 and has continued with the success of our first monoclonal antibody, CITEPLINK, as well as recent life cycle innovations by APOCOLLETUAL. We continue to see even more opportunity to grow and expand in the...

Speaker 4: featuring Simparega Trio, our triple combination product.

Speaker 4: In the area of pain, we are off to a great start with our two monocle antibodies for off-duose rate of pain, LeBrell of her dog, which became our latest blockbuster in 2022 and Olympia for

Speaker 4: We are once again revolutionizing care in this category and seeing very positive early reaction to both products in their market as they continue to expand geographies and supply. In terms of the US approval from La Barlo, we remain confident in receiving approval in the first half of 23 with a legal plan for late in the year.

Speaker 4: In Diagnostic, we continue to generate solid above market growth in international markets, of all of our go-to-market models in the US, and drive greater global adoption for vetscan images, or AI-based Diagnostic's platform.

Speaker 4: And finally, as population growth and economic mobility drive more demand for animal protein and pests, we see major opportunities in fast growing emerging markets outside the US where a portfolio is well suited to meet those evolving needs.

Speaker 4: Overall, our business continues to be weighted toward higher growth, innovation-driven areas, and companion animals, and these will remain our growth drivers for the foreseeable future.

Speaker 4: Meanwhile, our livestock portfolio will remain a valuable, cash-generating piece of our business as we continue to recover in the U.S. from generic competition and show solid growth in emerging markets. For more information, visit www.fema.gov

Speaker 4: As always, we will stay disciplined yet adaptable and are approached to the new market opportunities, potential challenges, and economic shifts that could occur. And in conclusion, Zeweta's remains well positioned in terms of our market leadership, financial strength, investment strategies, and diverse portfolio to deliver sustainable growth.

Speaker 5: both in line with the high end of our November for your guidance range.

Speaker 5: So you're revenue grew 4% on a reported basis and 8% operation only, with adjusted net income make a 3% on a reported basis and 11% operation only.

Speaker 5: Looking deeper into the operational growth for the year, Christ contributed 3% to full year operational revenue growth, with volume contributing 5%.

Speaker 5: Roddingworth consisted of 4% of new products, including St. Patrick Atrio and our monoclonal antibodies LeBuela and Celentia, and 2% from key dermatology products partially offset by a decline of 1% from other online products.

Speaker 5: Webbinger growth was grow based, the positive operational growth in each of our top 13 markets, which make up approximately 85% of our total revenues, with international growing 9% operational and U.S. growing 7%.

Speaker 5: Our growth was driven by continued demand for our innovative new products in our companion animal portfolio, which we have a 14% operation on.

Speaker 5: Our companion animal portfolio now makes up 64% of our global revenues.

Speaker 5: This growth was partially offset by our lifestyle business, which declined 2% operation only, primarily due to the generic competition, supply constraints, as well as challenging market conditions in certain geographies.

Speaker 5: Performance in comparing an animal is driven by our small animal parasite portfolio, which is 20% on an operational basis.

Speaker 5: In particular, the TREOR generated 744 million dollars in sales, growing 58% on an operational basis.

Speaker 5: Our empirical franchise reached $1 billion in global revenue for the first time in 2022.

Speaker 5: Our key dermatology products generated $1.3 billion in sales, posting strong growth of 17% operation only with double digit growth in both international and the US.

Speaker 5: She, during the world in our international markets, was especially strong at 27% operationally.

Speaker 5: We continue to see solid growth in our monoclonal antibodies for arthritis pain. As expected, cells of LeBuela eclipse the $100 million mark on the year marking Zoya spicy cn15 Mr. Patent 18 blake Ma'sococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococococ

Speaker 5: We look forward to LeBrell's expected launch in the US in late 2023.

Speaker 5: The last year contributed $30 million in sales in 2022, primarily from international markets, with solid playing penetration in the U.S. after a launch late in the year.

Speaker 5: Our comparing nanomodiac diagnostics will slowly decline 2% operational in the year, with declines in the US partially offset by growth internationally.

Speaker 5: Our last part of business declined 2% on an operational basis.

Speaker 5: Our portfolio continues to be challenged by generic.

Speaker 5: and she brought her into the Draxin and Cattle as well as Zoromix in Paltry.

Speaker 5: We do expect this generic impact to begin to moderate in 2023.

Speaker 5: Additional declines were driven by supply challenges on certain life-type products, as well as unfavorable market conditions, especially the U.S. cattle and China flying markets.

Speaker 5: Moving on to our Q4 financial results, which is another strong quarter. We close Q4 with revenue of $2 billion, representing an increase of 4% on a recorded basis, and 9% on an operational basis.

Speaker 5: The net income of $539 million is an increase of 14% on a reported basis and 27% operationally.

Speaker 5: Of the 9% operational revenue growth, 3% insulin price, and 6% from volume.

Speaker 5: Volume growth consisted of 3% from new products, which includes empirical trio as well as the well-inventalinsia, and 2% from key dermatology products, while other inline products grew 1%.

Speaker 5: The pan animal products grew 15% operation only, while a lot of stock portfolio was sliding the quarter.

Speaker 5: In fact, the share was the largest contributor to growth in the quarter, posting global revenue of $171 million, representing an operational growth of 39% for the quarter.

Speaker 5: We expect compared to the continuity of the global addressable market for flea taking hardware and globally and drive the conversion from color and top of the price to all combination

Speaker 5: These dynamics will provide additional runway for future suspension of the broader market and revenue growth for two years, even once competing super-famination products enter the market.

Speaker 5: Our key dermatology products, Apple Quail and Sidepoint, have solid global growth in the quarter, posting $347 million revenue, representing 14% operational growth, against the robust prior year in which key their end grew 23% operation only in the fourth quarter of 2021.

Speaker 5: Our monoclonal antibodies, which raise pain in dogs and cats, continue to grow, posting $39 million revenue in the quarter, primarily in international markets.

Speaker 5: Meanwhile, cells of livestock products were flat on an operational basis in the quarter, with growth and fish and poultry, also by the impact of generics and supply constraints on cattle and swine products.

Speaker 5: Now moving on to Revenue Growth Ice Segment for the quarter.

Speaker 5: US revenue was $1.1 billion in the border, growing 7% with companion animal sales growing 12% and livestock sales declining by 6%. The US revenue was $1.2 billion in the border, growing 7% with companion animal sales declining by 6%.

Speaker 5: Focusing first on companion animal, we returned to double digit growth in the quarter as we resolved the majority of our supply issues from earlier in the year.

Speaker 5: In the US, veterinary practice revenue is growing approximately 6% and spending per visit remains strong again this quarter increasing 10%, despite a 4% decline in clinic visits in the quarter.

Speaker 5: to visit the client-replace comparison to the peak visit numbers in 2021, driven by a pandemic after effects and increased adoption of pets, as well as the impact of veterinary workforce challenges that have limited some plenary capacities.

Speaker 5: absolute can I visit remain above pre-pandemic levels

Speaker 5: We continue to see growth in the retail segment, outpacing other channels.

Speaker 5: Thank you for, self-to-art retail partners, grew by 49%.

Speaker 5: The Barracuda trio continues to drive growth in the quarter, with sales of $158 million in the U.S., growing 39%.

Speaker 5: With the supply constraints from earlier in the year largely resolved, we were able to leverage promotional efforts to drive growth and regain market share in the quarter.

Speaker 5: Key dermatological products sales in the US were $239 million for the quarter, going 11% with Apple Quail and cider coin each growing double digits.

Speaker 5: We expect to continue the expansion of the market for the foreseeable future.

Speaker 5: You have left by the line 6% in the quarter, as expected, with sales of cattle products impacted by supply restocking for certain products in the third quarter of 2022, as well as the impact of generic competition in cattle and poultry.

Speaker 5: Moving on to our international segment, where revenue was flat on a reported basis, in group 12% operational in the quarter, international and comparing animal revenue to 21% operational only, and lifestyle grew 4% operational.

Speaker 5: Increased cells of companion animal products resulted from growth in our pair of suicide portfolio, archaeometallic products, and a monoclonal antibody, all muchas of the unusual We'll draw this thing.

Speaker 5: Our international small animal parasiticide portfolio had a verse from Porter. Wealth was driven by a revolution franchise, which rebounded wealth and supply challenges, especially in China.

Speaker 5: Archive dimensional products contributed 108 million hours to revenue and grew 22% on an operational basis in the quarter with growth in side-point across all key markets and continuedeps?.

Speaker 5: We continue to be pleased with the performance of our OIP portfolio with LeGuela generating $26 million and Celentia delivering $7 million in fourth quarter sales internationally.

Speaker 5: The well-selling of quarter dips slightly below the pi-acorder due to the removal of supply allocation in certain markets, which led to higher inventory levels at the end of Q3.

Speaker 5: We expect to see significant contribution to growth in 2023 coming from LeBella across our international segment.

Speaker 5: Moving on to our international livestock segment, which we have 4% operationally in the quarter.

Speaker 5: Our fish portfolio is 25% operation only due to increased demand for vaccines in key salmon markets, including Norway and Chile.

Speaker 5: Sales of full-tree products grew due to increased demand for full-tree 14.

Speaker 5: The growth was partially offset by slime cells which declined to supply constraints in certain vaccines across international.

Speaker 5: The slide decline was partially upset by growth in China during by a weak imperative quarter in the prior year and improved slide market conditions.

Speaker 5: Now moving on to the rest of the PNL for the quarter.

Speaker 5: Adjust the gross margins of 68.1% decreased 150 basis points on a reported basis compared to the prior year, resulting primarily from unfavorable fluent exchange impacts.

Speaker 5: Operation only, gross margin decline 60 basis points, given by higher inventory charges, as well as higher manufacturing and freight costs, which were partially offset by favorable price and mix.

Speaker 5: Operation only, adjusted operating expenses decreased 6% with SGNA be crying 9% driven by lower compensation related expenses and lower advertising and promotion partially offset by higher faith and logistics related expenses.

Speaker 5: Rd expenses increase 10% operation only due to higher compensation costs and higher project spend.

Speaker 5: The adjusted effective tax rate for the quarter was 20.8%, an increase of 220 basis points, primarily due to lower net discrete tax benefits in the quarter and a lower benefit in the US related to foreign derived and tangible income.

Speaker 5: I'll just send an income of 27% operationally, and I'll just have to download an EPS with 30% operationally for the quarter. I'll just have to download an EPS with 30% operationally for the quarter.

Speaker 5: Capital expenditures in the fourth quarter were $171 million.

Speaker 5: In the quarter, we re-purchased approximately $400 million of the wedded shares and returned over half a billion dollars to shareholders through a combination of share purchases and dividends.

Speaker 5: For the year, we have repurchased almost 1.6 billion dollars of divided shares and returned over 2.2 billion dollars to shareholders.

Speaker 5: In December , we announced a 15% annual dividend increase continuing our commitment to grow a dividend at or faster than the growth in adjusted net income.

Speaker 5: Now moving on to our guidance for the full year 2023.

Speaker 5: Please note that guidance reflects foreign exchange rates as of late January .

Speaker 5: We are expecting for an exchange to have a minimal impact versus the prior year, but the failure impact is neutral at revenue and slightly accretive at a just an income.

Speaker 5: The foreign exchange impact in the first half will be unfavorable, versus prior year, particularly in the first quarter.

Speaker 5: In the second half of the year, foreign exchange is expected to be favorable based on the late January exchange rate.

Speaker 5: For 2023, we are projecting revenue between $8.575 and $8.725 billion, representing a range of 6% to 8% operational growth.

Speaker 5: Volume will be 1 to 2% at the low end of our guidance range and 3 to 4% at the high end.

Speaker 5: We again expect companion animal to be the primary growth driver in 2023 with a continued strength of our diverse births, cypotholio, the adoption of our monoclonal antibodies for all a pain and further expansion of our key dermatology products.

Speaker 5: Despite the decline in planning visits last year, industry fundamentals remain strong.

Speaker 5: visits remain above pre-COVID levels, and clinic revenue is at an all-time high as the center of care continues to increase.

Speaker 5: We anticipate modest lifestyles declines in 2023 driven by the generic impact on Jackson sales, particularly in the first half, as well as in favorable market conditions in U.S. cattle. These declines will be partially offset by growth in poultry driven by increased demand for poultry protein and new product launches, as well as fish.

Speaker 5: The fundamental trends which make livestock an essential business remain intact.

Speaker 5: I'd like to touch upon the key assumptions that underpinned our expectations for revenue

Speaker 5: For companion animal, we assume a triple combination product will launch in the US in the first half of 2023 to compete against the Embarigot trio.

Speaker 5: We expect this entrance will help Trio drive the conversion from topicals and collars to triple combination or pair of suicides and still projects significant growth for Trio.

Speaker 5: We do not expect competitive entrance in 2023 for key dermatology products at the point.

Speaker 5: We expect another year of robust growth of our key durable folio come and continue the expansion of the dermatology market in price.

Speaker 5: We are excited about the continued growth in our OA franchise and plan to launch in several new markets next year.

Speaker 5: For the remainder of the PNL, adjusted cost of sales as a percentage of revenue is exerted to be in the range of 29.5% to 30%, where favorable for an exchange.

Speaker 5: price increases and product mix, are partially upset by higher input costs.

Speaker 5: Adjusted SG&A expenses for the year are expected to be between $2.06 and $2.1 billion, with the increase from 2022 focused on supporting primary drivers of revenue growth.

Speaker 5: Adjusted R&D expenses for 2023 is expected to be between $635 and $660 million.

Speaker 5: R&D spend can fluctuate year over year. This increased investment is reflective of both new projects as well as those advancing in our pipeline.

Speaker 5: Zoetis is the leader in animal health because of the disruptive innovation, novel products, and life cycle enhancements we bring to the market.

Speaker 5: This increase in RID expenses reflects our commitment to ensuring our capital allocation prioritizes innovation.

Speaker 5: Adjusted interest in other income reductions are expected to be approximately $170 million.

Speaker 5: Our adjusted effective tax rate for 2023 is expected to be in the range of 20% to 21%.

Speaker 5: The Senate income is expected to be in the range of 2.49 to 2.54 billion dollars for representing operational wealth of 7% to 9%.

Speaker 5: Our guidance once again reflects a value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue.

Speaker 5: We expected justice diluted DPS to be in the range of $5.30 to $5.44.

Speaker 5: and reported diluted EPS to be in the range of $5.03 to $5.14.

Speaker 5: We are anticipating capital expenditures in 2023 to increase to 950 million to $1 billion.

Speaker 5: We continue to make investments to support our future growth, including manufacturing capacity for our monoclonal antibodies, as well as our solid dosage. Finally, mazoedis and the animal health industry remain resilient in the face of economic headwinds. Our 223 guidance range is reflective.

Speaker 5: of uncertain macroeconomic conditions and the impact of veterinary clinic labor challenges. While guidance represents our expectations for the full year, Q1 revenue is expected to be below the low end of the operation of World 3 in our full year guidance due to a variety of reasons.

Speaker 5: First, Q1 2022 was a strong comparable quarter as we saw robust growth with limited impact on vet plan and labor constraints.

as well as minimal disruption for our diagnosis filled force model change, which began in Q2. Additionally, in the quarter, we expect to see lingering impacts of the latest COVID wave in China.

Lastly, the return of supply on certain products, including the empirical trio and subsequent channel restocking, as well as promotions to regain sharing to you 42022, might as well increase inventory levels in the channel in the short term.

on certain products, including Semperica Trio and subsequent channel restocking, as well as promotions to regain share in Q4 2022, modestly increase inventory levels in the channel in the short term.

In Q1, we extract the modest decline in adjusted net income versus the prior year, and the results of the timing of our 2022 Fill Force expansion in the US, which did not start until Q2, as well as the R&D investment noted earlier, which is also of a low base in Q1 2022.

Now for summarize. 2022 was another strong year. Despite some challenges, we significantly upperformed the market and continued to take share all while growing the bottom line faster than the top line.

As we begin 2023, we want to again expect to grow faster than the market. Given by the strength of our innovative portfolio, our ability to successfully launch new products and expand existing markets.

and our confidence in the end market dynamics for the spaces we compete in.

Now, I'll hand things over to the operator to open the line for your questions. This time we will open the floor for questions. If you'd like to ask a question, please press the star key followed by the one key on your touchtone phone. If at any time you'd like to remove yourself from the questioning queue, press star 2.

Please limit your questions to one at a time. Again, to ask a question, please press star one. We'll take our first question from Michael Rice-Riskin from Bank of America.

Great, thanks for taking a question and congrats on the quarter, guys. I'm going to throw on a couple just real quick. First, we'd have to get you a way to start on NextGuard Plus, the BI Center triple combo now that it's been on the LWVMX. Just what are your expectations for? Some part could trail growth this year if you could give us a ballpark for that.

And then second, I want to talk about R&D spend in 2023. It seems to have jumped quite a lot your year, and that's a big part of, you know, why operating margins aren't expanding as much as we're used to. Any specific program as you want to highlight, and any means in saying in terms of when that R&D spend will translate into future launches, is something that's sort of in the regulatory phase.

you know, obviously we got back in clinics after some of the supply problems and we're fully back there. We've got 90% penetration with an 80% reorder rate. And are now the number two flea tick heartworm there. We are expecting competition from next start plus sometime in the first half. We actually, as I'm sure you know, don't know exactly when that will be.

But we continue to expect the market to expand and we continue to expect compared to trio to be growing on the year. I mean, I'll be at probably not at 58%. But we have a very strong year. I think what you're gonna see is really moving more customers from collars and topical into what is a best in class fleet to cartworm combined oral products. So we expect to keep that in mind.

think about R&D spending, I'll start and I'll see what me wants to build there. We've gotten questions often from you and from a lot of our investors. Why don't you spend more in R&D or if you had a program with you investment? And I think what we're demonstrating is we see a very strong pipeline here. These incremental investments to your question are certainly the bigger ones are in late-stage development going into development.

toward and the long term across there. We see obviously really big platforms there in parasiticides continuing to invest there in dermatology and across our monoclonal antibody franchise. Certainly looking at long acting as we've talked about, but also new disease areas. So I don't know if I missed anything, what name do you want anything? No, look, I'll just add a couple of points going back to Trio.

As we see competition come in, it may drive some promotional accessories that might drive some very early in terms of quarter to quarter, in terms of where the growth is, but for the total, you'll expect significant growth on trio. And then on the R&D spend, it's our practice that we don't actually dictate what the investment R&D is going to be. We let the...

pipeline dictated. And so as we see programs either coming into research or coming out of research into development, into late development, as those programs require spending and we do a full RIs, spec, etc. on them, we go ahead and fund those. And so very pleased to see that the pipeline is demanding that this level of investment.

and we'll still be able to deliver faster growth at A and I in revenue based on our guide of 68 at revenue in 79 under just an income. Our next question comes from John Bloch from Steve Ful. Great thanks guys and good morning. What do you think? One of the four key GM of 68 one was a little bit below us for the quarter but...

The 2023 guidance at 70 to 70.5 was certainly solid so maybe if you can just talk to the drivers for 23 gross margin of those You know the supply chain easing maybe a little bit about the cadence And then you know maybe just sort of as a tack on to that or the second question in 2022 sort of a tell it to have for a topic Durham

One H was you know operational around 20% to H operation. I think was closer to 10% I think you guys alluded to solid growth in 23 But do you want to just frame that for us is it a continued deceleration of atopic dorm into 23 with no competition because I think you clarified that or can we expect some level of Stabilization call it in that you know high single low double

come in to the tune of about 80 basis one ahead when against where smart and fourth quarter. And certainly we've seen input costs, as well as some manufacturing costs impact the gross margin picture that you saw in the fourth quarter. But given where op-x came in, you saw substantial growth at A&I versus revenue wherever you came in.

We were quite thank wishes that started to change that as we go into 23, which is why we do guidance where we see about 40 basis point margin growth margin expansion on the year. And obviously a point, if you look at the midpoint of our guidance growth higher at A and I versus versus the top line is what I would say on the margin. Certainly as you look at continues growth of.

If I am an animal, I'll pacing the growth of livestock in the business. That mix will be favorable to us in addition to what I was already covered from our place perspective. I think if you look at the topic Durham, we deliver 1.3 billion dollars of revenue in 2022. That's a 17% increase and we're almost at 10 years since...

since Applequell was launched and just amazing to see that we continue to expand the market and we believe there's more room to expand not only in the US where we grew 12% in 2022, but particularly in international markets, we take longer to get to peak sales levels and we deliver 27% growth in international. I think we'll continue to see really solid growth across the business.

We actually had double digit growth in 2023, so it may not be at the level that you've seen in 2021 where we grew I think about 23% and then 17% in 2022, but we continue to see room to continue to expand the derm market here. Our next question comes from Erin Wright from Morgan Stanley .

Great, thanks. So two questions here. One, how much did the lingering supply chain issues impact some pericotrio sales in the quarter, if at all, and how much did the stocking benefit offset that in the fourth quarter? And did you benefit across other product lines in terms of distributor stocking that we should be aware of in terms of that first quarter cadence as well?

in terms of US contribution from my Braille as that material in 2023. Thank you.

Yeah, so let me first touch on your questions around supply and it's true as well as other products. And as we said in the third quarter call, while we have some outages in supply during the year, particularly in the third quarter, competitors actually took advantage of that in rent promotions. And we certainly intended to run promotions as we recovered on supply, which we did.

in the fourth quarter. And so I think the timing of our supply recovery, whether it's for Trio in the US or for revolution in China, will drive some stocking levels, certainly because we enter into 2023, which we discussed. But I think typically you'll see some increase in inventory levels from Q3 to Q4 anyway.

because distributors are anticipating our price increases and they tend to drive a little bit of that. So I would say when I look at across other products, it's probably more on the range of typical increase that you would see. But if you look at Trio, probably if I had a bracket in terms of the amp, I don't Trio. If you're back out, it would typically be an increase from Q3, Q3, Q4 anyway. So the incremental.

contribution in the fourth quarter, I put somewhere in the 25 to 30 million dollar range. So it's not a significant number for us, and certainly as we discuss already, we factor that into our guidance, and we expect significant growth from trio on the year. With this right to LaGrella, look, we continue to expect in a very confident that we will see on approval in the well in the first half of the year.

Our plans have not changed. We continue to plan to have an early science program run on the program once we've gotten approval and we have the label set, etc. And that will transition into a launch sometime late in the year. And our practice, just to build on that. Our practice on that is that we do not include in our guidance or our budgets.

if we're expecting a late launch in the year. We've always done that as those have covered us for a while. So, Labrela is not in our current guidance that we provided. We will update the guidance once we have a better sense. Obviously, this is a big product and when it launches, it could have a big impact. So, whether or not you have one month, three months, you know, etc., four months, it makes a big difference. So, we'll update guidance once we have a better sense of that approval. So, to clarify your second question, Labrela is not in the guidance that we provided.

Hi, thanks for taking my question here. So I wanted to see if you could give more color on how you're investing in supply to meet the growing demand for your products. And when you expect it complete, or read your objectives here, thank you.

Yeah, I'll take that and see if Christian would add on anything. We are investing in a number of areas when it comes to our supply network. I'll put a couple of categories I'll take in the short or near term. We have investments clearly in inventory to help absorb any shocks that come through the supply chain. We're making investments in our demand planning processes and tools.

to give us better visibility, et cetera, as well as we don't see what we're building in certain aspects of our inputs coming into our manufacturing process. Longer term, as you may have listened on the prepared commentary, we're making significant capital investments across our network, across the network in the US to support our monocoantibodies, both for products that have already been approved and are launching.

and what we have in our pipeline is all from a map perspective. It is a platform that we continue to innovate on. And then our whole solid dose as well, whether it's para-suitaids, durame accession, and various aspects we are making investments throughout the network for those who make investments to support our vector-vac scene manufacturing, for example, as well as for livestock and so on. So we are making investments across.

the highest cap ex that we've had. But I also think you should look also at what we said about R&D. And if you look at significant new investments in R&D, those are going to be products that we're going to have to be able to manufacture in a few years. So what you're seeing is the commensurate investment in our manufacturing capabilities to be able to launch those products.

in really critical platforms across the globe. So, you know, we are very confident in where our pipeline is, and we're going to invest in our manufacturing capacity to deliver on those products over the medium to long-term.

Our next question comes from Nathan Rich from Goldman Sachs. Hi, good morning. Thanks for the questions. The first one on Trio, I'd be curious just to get a sense of what kind of factors you're watching as you think about the impact that competition could have.

you know, magnitudes that would kind of push you to the higher or lower end of your range for competition. And are you anticipating any changes to pricing or your promotional cadence when competition enters? And then my second question on Dracks, and how much of a drag will that continue to be in 2023? I think you've previously said that you'll start to cycle the second year of competitive competition for energy?

prepared for what that is. We've been investing heavily, obviously, behind DTC, really investing with our customers and with pet owners directly to make sure that when competition enters that we have very, you know, please customers. And a few things go point to there. Obviously it's our direct and consumer advertising. I would say our broad portfolio and our

You know, if you look at our relationship with corporate accounts, we're very strong with corporate accounts. We are their preferred product. So, you know, I think that we'll find some resiliency. But I also say auto ship remains a real strength. You know, this is not a sector where people often switch unless there's a really good reason. So a new dog, you know, they'll make a choice. But they're not, I think customers are already on our product. Are not going to be that inspired to change. And if you look at the dynamics certainly in the US around retail, it grew 43% on the year. It's now about 11% of our US business.

And I highlight that because the more that insulates us from potential new entrance coming and we obviously expect next-card plus, but I'm sure there will be others over the next one to two years that enter as well. So we're really investing in insulating ourselves from that impact by investing in pedo-honor loyalty programs, DTC, a broad portfolio with innovation with our customers wanting to do corporate account site also underscore, and then lastly, auto-ship and strong relationships with the retail sector. So...

I do want to take the second question on Jackson. Yeah, absolutely. Look, as we said from the very beginning, we were expecting Jackson to have about a 20% decline in the first year of generic competition and then another 20% in the second year. The first year was slightly better than our expectations, coming in somewhere around 16% decline. But the second year was a little bit worse. So I think we're sort of in that ballpark. I think second year was about 25%. Doesn't it make a difference between Jackson and Jackson?

So we're at a level now that once we lap, I would say the second year, which would be through the first quarter of 23, which is why in the Pre-Vary commentary we said, particularly in the first quarter. I think we're at a lower level where we won't be as meaningful as an impact on us. And I think the drag on our last stock business won't be a significant. So I would still expect some pressure on lifestyle, given where US cattle, for example, as a market is, we're watching swine, particularly in China and the impact it has.

across other regions to determine where we end up lending. But we think livestock will be, you know, slightly down year on year, maybe marginally better than you saw in 2023 where livestock was down 2%. Our next question comes from David Westenberg from Piper Sandler. Hi. Thank you for taking the question. So I want to kind of continue with some of the trio dynamics.

Can you talk about maybe if you got any word on in terms of what the label might look like on the competitive launch and can you give a little bit more color? I think you said in the prepared remarks that you expected to come from callers and topical. What are you kind of seeing in the marketplace that suggests that that as opposed to other maybe legacy oral parasiticides?

And then kind of the second question here is on the increase in R&D spending. Are you going to continue to give out some of the what you have in pipeline about I think you guys usually give out six months in advance to Wall Street? Is that kind of still the expectation when you talk about pipeline? And thank you very much.

Hi, Dave. I'll start on trio and then maybe Whitney can clarify because I'm finishing a missing and then I'll let Whitney take the R&D question as well. We don't have any clear signs of what the label of competition will be. We're very confident in our current label. We don't think it has any holes. I've got to tell you we're at 100% heartworm per-

they can, but we don't really think there's any holes in our label right now that we're concerned about. We're in puppies, you know, if you look back to Semperica and the second part of your question, you know, look, yes, they will move from single agents. I think they will. Single agents, you know, from just, you know, FleaTic or just heartworm products, I think we'll move into the combination labels for sure, but we're not expecting pricing to be a big factor initially, and really that has to do with who's entering.

Because if they don't enter the market, you know, similarly priced or higher than their current two products, they're going to cannibalize themselves. So, you know, I think really the power of who's entering does not lead us to believe that price is going to be a major factor in who enters. I mean, obviously we'll adapt to whatever comes, whatever label they have. But we remain very confident in our label, in our relationships and in our data today. But you'll...

position as competition enters into the space. On R&D, look, I think, unlike human health, an animal health is not as much visibility as given with respect to what's being specifically worked in the pipeline. We see that as a competitive advantage for us given our track record and how we continue to drive.

innovation in the spaces that we enter. So we won't necessarily be changing that significantly here, it doesn't what we have in here, but we have to talk about various aspects of unmet needs that if you were to ask veterinary practitioners, what are the top five or 10 unmet needs that they have, I think you would imagine that we're working on all of those areas.

Our next question comes from Chris Schatz from JP Morgan. Great. Thanks so much. I did a question on the overall volume comments you made. I think it was 1 to 2 percent volume growth at the low end versus 3 to 4 percent at the high end.

Q is just to elaborate on the dynamics there. So if I have that look at for companion versus livestock and maybe as part of that, what's implied in terms of that visit growth this year is that even a relevant swing factor as you're going to get the overall outlook for the business? Yeah, so look, I think if you look at our 2022 results, the net price contribution is about 3%.

Now if you take Drachten out, that number is about 4%, and comparing animal would be at the higher number here, with certain products essentially above that. I would very pleased to be able to take price, which typically is about 2 to 3%, and here in 2022 is about double what we would normally do, and we still saw about 5% volume growth.

in 2022. So as we look at 2023, I think you would see price with drags and impact being less than it was in 2022 in particular, plus, you know, how we're going into price in certain products. I think you can expect a higher price contribution. On the year, the timing of that in terms of, you know, where customers may have bought ahead of the price increases and so on. So you might see a little bit of a lag in terms of when you see

2021 in the fourth quarter visits were down about 4% but revenue per visit was up 10% and total revenue was up 6% on the quarter again continuing the trend that we see as being sustainable which is pet owners willing to pay for innovation and seeing sustainably higher revenue for pet clients.

Now, we're still very early in 2023, but as we look at data in January , we are seeing some increases in vet visits. Again, as we expected, we've been running above pre-pandemic levels. So even in Q4, where visits were down 4%, they were actually still 2% above Q4 2019. And so we've been saying that that's the element to continue to watch. I think one...

But my first is just on the diagnostic side. You guys have, I believe talked about this before, but maybe can you refresh us on where you are on some of the commercial changes? I think it was in the US, where those are, and what that might mean for growth, and potentially accelerating that business into 23 plus. And the other is just on China. Do you guys have a nice rebound there? I think you mentioned a little bit of supply coming back on the market, but maybe tempered that a little bit with COVID-19.

repaired remarks, Q1, the little that we didn't have them on board until Q2 of 2022. So what we are expecting is we look into 2022 as we get into the, you know, sort of middles of the year and the end of the year is really it returned to at least market growth in the US if not, you know, faster. We continue to see very strong growth in international as you saw from last year.

And we expect that to continue into the year. So, you know, we're really excited about the new field force, having them on the ground, having them fully up to speed. You know, what? And I spent a lot of time with them yesterday. So I would say super optimistic overall in diagnostics returning to growth across the board. Certainly the images platform and investments there.

And then I'll start on China and let's see what one he has to build on it. You know, we did see overall strong growth in the year of 11 percent. And you know, we're optimistic so far year to date in sort of the return in China. We've seen both on the companion animal side, you know, a really strong rebound there as we look into, you know, certainly for us, our year is both December and January . December , obviously, obviously with, you know, the number of people homesick there was a little weaker, but we're seeing really strong rebound and January . We're looking. I think.

where we think China will be for the year, but it remains a big risk both for China as well as for livestock across the board because I think a lot of if China returns they'll see China buying a lot of port poultry beef etc from you know Brazil, Europe , the US there, but you know if you want to build anything either on the diagnostic question or China, Wendy.

My comments around supply was just the timing of recovery, particularly on revolution, revolution plus in that market that might create some dynamics on quarter quarter. But we are expecting really solid growth out of China this year. I think the first quarter though, given the timing of the COVID waves, just as a reminder, I am done with cash and oil.

segment closes at the end of November , which means the quarter really started in December for them. And so a lot of that occurred in the first quarter, and we're seeing that having an impact, but we do see a rebound. And as Kristin said, it has implications for other markets in terms of exports into China, but we are expecting a really solid rebound there.

Our next question comes from Elliot Wilberg from Raymond James. Thanks. Good morning. I wanted to go back to some of your early commentary around growth expectations for the key derm franchise and just

specifically thinking about the key levers in 2023. Kristen, what if you can maybe just talk about, especially given the high level of penetration of, of, of, in the US, you know, what the key levers there are going forward, whether it be price, new market entry.

geographic expansion or just outperformance by side-of-point relative to APIC well, and then for Whitney just I don't know if you said this in your parent commentary or not. I didn't catch it if you did, but within Gross Margin guidance, could you just talk maybe about the inflationary headwinds that are sort of embedded?

in your guidance for this year. Thanks. Sure, I pay a few things on Derm both domestically as well as globally. We will be looking to expand, and I think is what he said in his prepared remarks, reaching peak sales in some of these markets takes a little bit longer outside of the US, so we're continuing to see very strong growth in Dermatized.

in volume, certainly potentially a little more globally. But beyond Apple Quail, I mean, I think Side-A-Point, that's really love it, and so do customers. It's 100% compliance. So I think if you look at the overall franchise, Apple Quail Side-A-Point, Apple Quail chewable, we'll probably see greater growth outside the US. So we're both looking at volume. We've taken price consistently here, and certainly 2023 will be no different. Here, so I think you'll see growth from both price.

And from volume, you'll see chewable, really building on it. I think you'll see a real uptick in sight of point. Again, we're back to absolute full supply. We, as you know, last year, did need to make some trade-off decisions there because that the same impuss as our other mad and in some of our vaccines with regard to some of the COVID vaccine supply challenges we had. But we're back full speed. So we're also really investing. Another big growth driver here will be direct to consumer advertising.

international. So we are going to do unbranded DTC as we started last year and we really even in the US you still have six million you know itchy dogs that are currently undiagnosed and not treated. So we really continue to see you know growth here you know as we said double-digit as Wetne mentioned earlier but I'll let Wetne take the second question obviously on inflation in 2023 and etc.

Yeah, so look, I think across the macro elements, we've been appropriately prudent in how we laid out this guidance in the range that we've given today. But specifically on growth margins, if you look at inflation, as we're preparing to come into the year, we are certainly counting for significant inflationary pressure on some of our input calls, energy, Europe , etc. But as we've entered the year, I think they're a little bit better than what we anticipated coming into the year, but still significant inflation that's baked into.

What we have here, which obviously are more than offset by our mix and our price, which is why you see some modest gross margin improvement year on year as we go through the year. But we have factored in fairly significant inflationary pressure in the gross margin figures that we gave. And our last question comes from Balaji Prasad from Barclays. Hi, this is Michaela on for Balaji. Thanks for taking our time.

to significantly invest in the areas of R&D as well as across our supply chain and manufacturing. You saw the significant increase in R&D spend anticipated for 2023 versus 2022, and our CAPEX numbers are going to be in the range of 950 million to a billion dollars on the year. Certainly, as you look at our strategic priorities.

They align with where we look at, on a BD perspective, in terms of where there might be opportunities to accelerate some of those execution on our strategies and they span across our current Slate of businesses including some of the R&D areas in terms of extra innovation and so on BD is one of those areas as you know is is hard to predict in terms of exact timing I saw them, but it is an important lever that I would say second after investing in the business and then thirdly

As you saw in 2022, we are returning capital to shareholders to the tune of $2.2 billion in total between Shabidex and dividends. I think you had a question. Sorry, I think you had a question in terms of new pets. Look, if you look at the growth in the industry over the last two decades, it's been about five to six percent.

The way I look at it, that visits, in essence, as you see, tech population growth and so on, it would be reflective in that. They were counted for about 1% of that growth historically. So the bigger element of growth here is really, better on as willingness to spend for innovation. And you see that reflected in the spin per visit figures that are far more in terms of the impact on growth historically. And we anticipate that continuing.

Those are the factors that we watch that contribute to growth.

It appears we have no further questions at this time. I will now turn the program back over to CEO , Kristen Pack.

Thank you so much and thanks everybody for your questions and certainly for your continued interest in Zoetis. And just to summarize, we see really positive and sustainable demand for our products based on the fundamental drivers of animal health. We see continued strength across our diverse global portfolio, especially in our products for pet care.

And we're continuing to invest in the talent, the pipeline, and the manufacturing capabilities that can support our future growth while adapting our business to the increasingly dynamic environment where we operate. So, we look forward to keeping you updated on future calls. And thanks so much for joining us today.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.