Q2 2023 Zoetis Inc Earnings Call

Welcome to the second quarter 2023 financial results conference call and webcast for Solaris.

Hosting the call today is Steve Frank Vice President of Investor Relations for Solaris.

The presentation materials and additional financial tables are currently posted on the Investor Relations section of the wettest dotcom.

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

Thank you operator, and good morning, everyone and welcome to the <unk> second quarter 2023 earnings call I'm joined today by Kristin Peck, our Chief Executive Officer, and Whitney Joseph 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 and that actual results could differ materially from those projections for a list and description of certain factors that could cause results to differ I refer you to the four.

We're 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.

Reconciliation of these non-GAAP financial measures to the most directly comparable U S. GAAP measures is included in the financial tables that accompany our earnings press release, and the company's 8-K filing data today.

Today August eight.

2023, we also cite operational results, which exclude the impact of foreign exchange with that I will turn the call over to Kristin.

Thank you, Steve and welcome everyone to our second quarter earnings call for 2023, I Hope you were able to join us or listen to our Investor day. This past may if you missed it please check out a replay of the wettest dot com I think you will find it worth the time and learning more about the weather and where we see future growth in animal health.

We appreciated the opportunity to step beyond the cadence of our quarterly earnings call and speak to you about the long range perspective on our business and our industry during Investor Day. We also appreciated your questions any ongoing dialogue about the issues most important to you.

As you know we shared more detail about our growth strategy innovative pipeline and the key franchises capabilities and investments we are making to build on our competitive advantages as the world leader in animal health. The four tenets of our value proposition, where firmed and expanded on throughout the day and you can expect us to revisit that.

Framework and provide progress updates and future investor interaction.

Our goal is always to ensure that you understand how we are positioned to deliver on our value proposition the revenue growth strategic investments margin expansion and capital returns.

With that covered let's turn now to the second quarter financial results today, We reported strong second quarter results of 9% operational growth in revenue and 12% operational growth in adjusted net income based on our diverse portfolio across markets and speedy as.

As expected we returned to a more balanced segment growth this quarter with 11% operational growth internationally and 7% growth in the U S. R.

Our companion animal portfolio grew 11% operationally driven by our major franchises and dermatology osteoarthritis pain and pet parasiticide.

The second quarter results and drivers were more in line with our performance trends in recent years with innovations and strength in our companion animal portfolio, leading the way mean.

Meanwhile, our livestock portfolio grew 4% operationally in the second quarter, driven by sales of poultry cattle and fish products and continue to demonstrate the benefits of our diversified diversified portfolio across species and geographies with a strong first half overall the first half of 2020.

<unk> has played out much as we expected we have grown revenue, 6% operationally in the first half driven by strong results from our international markets and livestock performance, which were partially offset by the distributor Destocking. We explained in the first quarter as expected the impact of distributor Destocking in our U S. <unk>.

Painting animal portfolio has stabilized and was not a significant factor in the second quarter. We continue to see strong customer demand for our companion animal portfolio for the first half of 2023 companion animal grew 5% operationally, we believe companion animals should be a bigger driver of performance.

The remainder of the year with a stronger second half driven by our key franchises.

While we are monitoring how inflationary pressures may impact pet care spending in markets around the world. The underlying demand has remained steady and resilient to date and this is what we have seen historically.

In the U S. Veterinary clinic visits continue to stabilize staying relatively flat through the first half of the year and clinic revenue and spend per visit were both up about 9% in the U S. In the first half.

Meanwhile, our livestock portfolio grew 8% operationally in the first half of 2023, reflecting strong growth internationally and continued supply recovery and our U S cattle products.

We expect life livestock growth for the full year to be in the low single digits operationally, reflecting tougher comparisons in the second half of the year for our U S portfolio.

With the first half of the year playing out largely as expected we are maintaining our full year guidance for operational growth of 6% to 8% in revenue and 7% to 9% and adjusted net income and our companion animal portfolio, We expect labella excellence yet to continue to ramp up in various markets as we build our franchise for audio.

Arthritis pain.

One way we are supporting growth for both products is increased use of direct to consumer campaigns and launch market.

These campaigns are building disease and product awareness, creating conversations among vets and pet owners and accelerating our efforts in markets, where DTC is available.

We're also pleased to have received U S regulatory approvals in the second quarter for <unk> and for Apple Coachable, both have been performing well in markets outside the U S to date.

<unk> is expected to launch in the U S. In November with an early experienced trial beginning in September .

As you look at the second half we continue to expect strong growth, even as we factor in uncertainty around the macroeconomic conditions and drought that exist in certain countries around the globe, particularly Asia Pacific and tougher comparisons for U S livestock portfolio in the U S.

As we have seen historically in these type of environments, our global footprint and diverse portfolio provide more stability to our business during uncertain times, and we remain ready to pivot resources and investments to the greatest opportunity areas that it can can share we continue to deliver on our commitments. For example, we continue to.

And in large and growing product areas, such as parasiticide dermatology monoclonal antibodies for pain vaccines, and diagnostics and invest in our franchises and capabilities that support our future growth many of which we discussed at Investor day.

Before I wrap up three quick points around our colleagues first I want to welcome <unk> to ours, the wettest executive team as EVP and President of U S operations. After joined US in July coming most recently from Bristol Myers Squibb, and having spent a major part of her career at Novartis as well she brings diverse.

<unk> global experience in health care, and an impressive track record of driving results to <unk> and I am happy to say she is already off and running with the U S business.

I also wanted to call out the recent publication of our 2022 sustainability report.

This year's report captures has sustainability is integrated across the business and shares the progress we are making toward our driven to care aspirations.

This report honors our Outstandings are what his colleagues who champion our purpose and work every day to make us the world's most trusted and valued animal health company and finally I wanted to mention a recent recognition from fast company, which named <unk> as one of the best workplaces for innovators.

Shaping animal care through innovation is something we've always done across the company and it has been a key element of our success.

This is a well deserved honor for our culture, and our people who continuously strive to solve critical unmet medical needs in animal health from chronic illnesses like osteoarthritis pain and allergic dermatitis for Pat to emerging infectious diseases, threatening the food supply I am truly proud of our colleagues for receiving this.

Mission and.

In conclusion with a solid first half behind us I remain very positive about achieving our full year guidance. Thanks to the purpose driven colleagues innovation driven culture and diverse portfolio that continue to drive our success. Thank you and now let me hand, it off to Whitney Whitney.

Thank you Kristen and good morning.

As Christian mentioned, we had a strong second quarter with balanced growth across both our companion animal and livestock portfolios as well as our U S and international segments.

In the second quarter, we generated revenue of $2 2 billion.

Growing 6% on a reported basis and 9% on an operational basis.

Adjusted net income of $652 million.

15% on a reported basis and 12% on an operational basis.

Of the 9% operational revenue growth, 4% is from price and 5% just from volume.

Volume growth consisted of 2% from other in line products, 2% from new products, including our monoclonal antibodies forthright as pain and 1% from our key dermatology portfolio.

Companion animal products are the primary driver of growth this quarter growing 11% operationally with lifestyle growing 4% on an operational basis in the quarter.

Core companion animal our key dermatology portfolio was the largest contributor to growth in the quarter posting $355 million in revenue, our largest quarter ever and representing 14% growth on an operational basis.

We saw double digit operational growth in both international and the U S driven by strong growth inside a point as well as growth driven by hyper Quill and the conversion to agriculture ruble in certain international markets.

Our mono monoclonal antibody for osteoarthritis pain in dogs, and cats, the Bella and Celesio posted $69 million in revenue globally in the quarter with strong demand for both products as well as the impact of the launch of Labella and several new international markets.

Our companion animal Parasiticide also contributed to growth in the quarter driven by a revolution franchise, which had $103 million in revenue and grew 22% operationally.

<unk> also contributed to the first is our growth with $248 million of revenue and growth of 5% operationally.

Our global companion animal diagnostics portfolio recorded $92 million in revenue in Q2 growing 12% operationally we.

We saw double digit growth in the U S driven by highest room and placements in the quarter and disruptions from the implementation of our new field force model that impacted the prior year.

Sales of our livestock products grew 4% on operational basis in the quarter, we saw growth across both our U S and international segments, driven by poultry cattle and fish.

Now moving on to revenue growth by segment for the quarter U.

U S revenue was $1 $2 billion in the quarter growing 7% with companion animal products growing 7% and livestock sales growing 5%.

As Christian mentioned, our companion animal.

<unk> in the quarter reflects the stabilization of the distributor inventory levels that were a headwind to our growth in Q1.

U S. Ed visits were flat in the quarter revenue growth and average revenue per visit were both up 8%. These trends are in line with expectations and continued to reflect this stabilization post COVID-19.

Turning to U S product performance, our key dermatology product sales were $241 million for the quarter growing 10% and benefited from higher periodic patient visits in the quarter slide.

<unk> sales continued to drive growth with vets and pet owners, showing a preference for injectables.

Our U S small small animal vaccines revenue grew 20% in the quarter driven by higher sales of our canine influenza virus vaccine due in part to a competitor back order as well as higher sales into certain corporate and strategic accounts.

The polka trio posted sales of $232 million in the quarter growing 2% growth was driven by inpatient demand across all channels.

Partially offset by a difficult comparison period, given the timing of distributor shipments from last year doing a supply challenges as well as aggressive competitive competitive promotion in the current quarter.

Our growth cadence for true across the year will be impacted by the timing of supply recovery in 2022, and we expect growth rate improvement in the second half.

As expected we received FDA approval for Libre in the U S. In May we look forward to starting our early experience program in late Q3 with unexpected November launch.

Now turning to U S livestock, we saw 5% growth in our lifestyle portfolio in the quarter, primarily from our cattle business, where we saw significant growth in Jackson, resulting from a favorable comparative quarter last year, when I anticipated midyear price reduction limited sales in the quarter.

Additional U S. Caddo growth came from <unk>, which benefited from our re implementation label claim.

Our U S. Poultry portfolio also contributed to growth of 11% based on our vaccine portfolio and an increased focus on peg labor market.

We also benefited from favorable MFA rotations at certain large producers.

Moving onto our international segment, where revenue was $1 billion.

Growing 6% on a reported basis and 11% operationally in the quarter.

International Companion animal revenue grew 17% operationally in the quarter, while livestock revenue grew 4% operationally.

Increased sales of companion animal products resulted from growth of our small animal parasiticide.

Monoclonal antibodies for Austria, Spain.

And our key dermatology products.

Our international Parasiticide portfolio growth was primarily driven by revolution franchise with $57 million in revenue growing 52% operationally driven by the lack of supply last year, which particularly impacted China in the second quarter of 2022.

Our <unk> franchise also contributed to growth with continued market share expansion, especially in Latin America, Europe and Asia.

We continue to see strong adoption of labella Insulins here labella generated $48 million in revenue with 89% operational growth in the quarter driven by strong growth in Europe supported by our direct to consumer advertising efforts in major markets and recent launches in various international markets, including Canada, Australia, Brazil.

In Japan.

So lets you delivered $11 million of second quarter sales internationally, driven by higher demand and supported by direct to consumer marketing efforts.

Our international key dermatology portfolio grew 22% operationally, we continue to see double digit operational growth across most of our major markets driven by growth from and conversion to <unk> as well as from sorry to point with higher compliance and new patients.

Our growth also benefited from a weak comparable quarter.

Quarter in Japan, which was impacted by pre priced <unk> in Q1 of last year.

Moving onto our international lifestyle portfolio, which grew 4% on an operational basis in the quarter our.

Our poultry portfolio performed well with growth driven by key account penetration and MFA rotations and core poultry markets, including Europe , the Middle East and Latin America.

Our first portfolio continues to perform well as a result of increased sales of vaccines across seven markets in Norway and Chile.

Lastly, our counter portfolio saw gains in Turkey, Brazil, and Argentina from strong price growth and the recovery of supply issues.

Now moving on to the rest of the P&L for the quarter.

Adjusted gross margin of 72, 4% improved 260 basis points on a reported basis compared to the prior year, resulting from favorable foreign exchange price increases and favorable product mix. This was partially offset by higher manufacturing costs in the quarter.

Adjusted operating expenses increased 8% operational with both SG&A and R&D growing 8% operationally.

Driven primarily by head count related compensation cost due to the timing of new hires in 2022 and the impact of annual salary increases.

The lower growth in R&D expenses. This quarter is reflective of the timing of spend and project investments and not a reduction in our expected R&D spend for the full year.

Year to date adjusted R&D expenses has grown 13% operational.

The adjusted effective tax rate for the quarter was 21, 5% an increase of 80 basis points driven by higher net discrete tax expenses in the quarter, mainly related to changes to prior year's tax positions and less favorable jurisdictional mix of earnings partially offset by higher benefit in the U S related to foreign derived intangible income.

And finally, adjusted net income grew 12% operationally and adjusted diluted EPS grew 14% operationally in the quarter.

Capital expenditures in the second quarter were $166 million and continues to be on track with our expectations for the year.

In the quarter, we repurchased $324 million of <unk> shares.

Now moving onto guidance for the full year of 2023.

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

Beginning with revenue for the full year due to unfavorable foreign exchange, we are slightly lowering our revenue range, while maintaining our guidance on operational revenue growth.

We expect revenue between $8 5086, 5 billion, representing a range of 6% to 8% operational growth.

With the approval of <unk> in the U S. We are now, including our projected sales for November and December and our guidance, which are expected to be immaterial to our overall operational growth rate.

Their impact on our full year revenue is largely offset by potential uncertainty in China as well as broader macroeconomic conditions in certain markets.

Operationally the first half has played out largely as we expected with 6% operational revenue growth.

We expect stronger growth in the second half of the year overall, especially in our U S companion animal business.

In livestock, which has grown 8% year to date on an operational basis, we anticipate unfavorable comparisons in the second half driven by the timing of price decreases in Jackson in the U S last year and the resumption of supply of several products after outages in the first half of 2022.

We expect adjusted net income to be in the range of $2 five zero to five 5 billion.

Slightly above our previous guidance, while maintaining our previous guidance of operational growth of 7% to 9% driven by foreign exchange favorability in cost of sales and expenses, which were partially offset by favorability in revenue.

Reported diluted EPS increases to a range of $5 15 to $5.27, which is impacted by foreign exchange and a one time gain from a business development deal.

And finally due to the impact of foreign exchange, we are increasing adjusted diluted EPS to be in the range of $5 37 to.

To $5 47.

Just to summarize before we go to Q&A, we saw strong broad based growth in the second quarter growing in both companion animal and livestock as well as in the U S and internationally with contributions from price and volume.

We expect stronger growth as we move into the second half we remain confident in our ability to deliver on our operational full year guidance commitments.

We continue to see improving fundamentals and the overall industry and remain committed to delivering on our value proposition to grow revenue faster than the market and to grow adjusted net income faster than revenue.

Now I'll hand things over to the operator to open the line for your questions operator.

At this time, if you would like to ask a question. Please press star one on your telephone keypad. If at any point. Your question has been answered you may remove yourself from the queue by pressing star two.

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

Lastly, please pickup your handset to allow optimal sound quality.

We will take our first question from Michael Riskin with Bank of America. Please go ahead.

Great. Thanks for taking my question and congrats on the quarter Christian Wetherbee.

I want to start with trio real quickly we've seen we've finally seen Mexico plus approved in the U S from Boehringer Ingelheim.

I just want to ask how do you see this market playing out there is a lot of debate on the label differences trio versus Mexico, plus the six months versus one month warm detail as well as how it's going to be priced with the promotions being put out at the start of the launch. So what are your expectations for trio now that the competition is finally here both for <unk>.

Half and for 2024.

And if I could squeeze in a follow up.

Can I ask on <unk>.

You should do really well O U S. I think it's on track for over $200 million. This year from from O U S alone.

Earnings or changes to your assumptions now that you can take that into the U S launch.

Fair to say that it could be incremental 75 to 100 million to revenues next year.

Thanks Robert.

Sure. Thanks, Mike I'll start with the first question I'll, let let me follow up on Libra.

As we saw that this was the label for <unk>.

Net card classes, largely what we expected I think <unk> clearly has a superior label and it was first to market.

Right now can packaging is number one in companion animal parents in the U S.

As you look at where we are we've had three years of demonstrated efficacy and experience with this product and.

And we will clearly leverage our retail auto ship to continue that.

Look at next scarred. It obviously does not as you saw have heartworm upfront first dose.

It has four <unk> versus five.

Doesn't yet have a label to prevent lime.

It has a lower minimum wage so we really do think we have a strength.

And Paragon <unk> label, we will be aggressive obviously in competing against them. We are expecting a much stronger Q3 for the product.

Based on comparable sales, we expect a strong second half for US we are expecting significant promos, we've Washington do this before this is something <unk> often so beyond the promos, we think we can be very competitive.

With our product based on the strength of our label the strength of the experience with the product our relationships clearly with the corporate and really with a very pleased cat owner, who is on this product. So obviously, we are ready for some significant competition, but we remain very confident overall in our strength in Paris, and we see a stronger second half stronger growth obviously in the next quarter in the second half.

For <unk> overall, but what made you want to take the question on Libra sure.

Mike Thanks for the question look we remain.

Really on track with you our performance and we're very pleased to see $48 million of labella revenues in the quarter of 89% versus the prior year. We also launched a product in a number of new markets in our international segment.

Including Japan, Australia, Brazil, and Canada, those contributed about $10 million for the quarter. So continue to see really strong demand for the product and we are starting to initiate DTC campaigns, which we're continuing to drive awareness across both the Wella insulins here.

In our markets. It is already as we said last year the number one in Austria for OSB products.

In the EU.

Look we won't necessarily get into what the expectations are for next year, obviously, we'll do that as we get into.

Guidance for the year, we're expecting to continue to see strong growth with Aquila on the balance of the year I will note last year, we did see a bit of an uptick in the third quarter.

That was as we released the aloe.

Allocations that were on and we saw clinics order a bit more of that that was offset in Q4. So so just a little bit of dynamics in Q3, and Q4, but really with the new markets as well as continued growth in EU, we're expecting very strong growth in the third quarter as well.

Thank you we'll take our next question from Nathan Rich with Goldman Sachs.

Hi, good morning, Thanks for the questions.

First one.

I wanted to start with the outlook for companion.

I think you had talked about it improving in the back half of the year was that relative to the 5% growth.

In the first half or was that relative to the.

The second quarter growth, which was obviously.

Higher any context, you can kind of provide as well I'm just kind of cadence <unk> versus <unk> would be helpful. And then just a follow up on the <unk>.

Commentary on.

Trio could you maybe just talk about the 2% operational growth in the different factors that impacted that in the quarter and then the kind of type of growth.

You would expect in the back half of the year just given the competitive launch that you mentioned as well as maybe a normalization of supply. Thank you.

Yes, I'd be happy to take to take this and see what Kristin wants to add with respect to companion animal as we said and I think you'll see you saw us really reiterate our guidance from an operational perspective, our 6% to 8% while livestock has seen about 8% growth in the first half we saw 4% growth in livestock in the second quarter opera.

<unk>, we are expecting as we said in the prepared commentary lifestyle to come in in the low single digit range. So I think you can clearly see that the growth in the back half of the year is going to be significantly driven by companion animal.

And as we said also given the timing of supply and.

In 2022.

We're facing relatively speaking an easier comp in the U S companion animal business.

In the third quarter versus the fourth quarter. So I think those will play out in terms of how you get how you map out to our guidance central and operational perspective being largely driven by.

My companion animal in the back half of the year I think overall not just <unk>.

Depending on our perspective overall I would expect the third quarter to be another strong quarter for us.

I would expect us to come in somewhere between the mid and high end of our annual range. We said after the last quarter given the distributor destocking impact to normalized growth for the rest of the year.

Which would translate to somewhere if you just pick the midpoint of our guidance that'll be around 8%. We came in slightly above that really in light of our expectations on the quarter and so you can map out what that means for the rest of the year, but also Q3 will be slightly above Q4, given what I just shared from a companion animal perspective versus less like that has a tougher comp in the third quarter, particularly in the in the U S.

Trio by Christian said, we are looking very strong quarter in third quarter. Despite the.

The competitive loss, which we believe to be imminent here part of that is the cadence last year I think the rhythm of supply last year, clearly had an impact where you saw a bigger Q2 last year than Q3, So I think you're going to see that play out with respect to the trio of growth.

And given the first mover advantages that we have.

<unk> that's been in the market for over three years and our confidence in terms of our label et cetera, We expect to see continued growth across geos and a strong year for the year for sure.

Thank you we'll take our next question from Jon Block with Stifel.

Great. Thanks, guys good morning.

I'll ask both upfront I guess the first one just any color on the gross margin.

I think the <unk> hundred 23 gross margin I believe might have been the best in the company's history. So maybe you could talk about the.

The drivers there and more importantly, or some of those drivers sustainable.

The second question might build a little bit on the prior question, which is.

It is true of a modest call. It downside driver of the implied companion animal 'twenty three growth because.

I think I've got it right essentially livestock went from flattish to up low single digits. Obviously overall operational stayed unchanged at six to eight so the implied CA came down a bit do we think about trio being responsible for that and maybe just.

<unk> product that some of the promotions that you called out earlier, thanks for your time.

Yes look with respect to gross margin.

You saw 72, 4%.

Gross margin on the quarter and Q2, that's up about 260 basis points versus versus last year.

<unk> is about 200 basis points of that and clearly we pegged our overall guidance on FX based on where rates were at the end of July so I'm not going to venture to forecast what that might mean, but in terms of the other components that are driving our gross margin price and mix.

Certainly were favorable for us and as we've just discussed with respect to livestock, having a tougher comp in the back half versus companion animal, particularly into the third quarter I would expect price and mix to continue to contribute favorably here. The other element of course is.

It's really.

Manufacturing higher manufacturing costs I think typically what you see is this first half is a little bit higher for us than the second half part of that is the mix with respect to capital.

Ron in the fall that tends to have a little bit of a mix down on us overall, but I would say the overall mix for the company given the back half strength in companion animal is going to be continuing to be favorable so we see that.

Being something that will consistent sustained and again, we wont get into next years.

Element until we get there with respect to the second half look clearly our expectations, which will remain that we will see strong growth contribution from <unk> and we're going to see a very strong third quarter I think some of the.

By the way the year has played out as we said we gave a range of 68% operationally sitting here today after delivering a very strong second quarter, we remain in line with our expectations for the year at 6% to 8% I think if you look at some of the areas that we're watching from a macro perspective, China is one of them I think if you look at the data coming out of China.

Our confidence levels for consumers our load the savings rates are very high.

We're watching that as well as the impact it has on the southeast Asia region, given the tourism.

In fact, the China has on that region. That's one of the areas. Certainly we are watching here in terms of what goes into our thinking with respect to the balance of the year, Yes, I just want to reiterate it is not I would not call trio what is driving any change in the second half I really want to emphasize what you said and what we said in our remarks.

He is as Youre looking at it uncertainties with China Southeast Asia, Australia with the drought.

As always when you run a large global company I think the advantage of the what is the diversity of our portfolio.

And the durability.

And that's by market that by species and that by therapeutic area. So we are obviously seeing strength in a lot of areas, but obviously uncertainties remain in China Southeast Asia and certainly in <unk>.

Other markets around the world certain.

Certain ones such as if you look at say <unk>.

<unk> et cetera, which has got high inflation and.

Weather issues as well so I would say, it's going to be very clear I don't think your characterization of trio specifically your parents are concerned in the second half. It is much more around some of these macroeconomic and geopolitical and weather uncertainties that we're seeing in certain markets.

Thank you we'll take our next question from Weston Berg with Piper Sandler.

Hi, Thank you for taking the question. So can you talk about the dairy market in 2024, and not talking necessarily about your specifically, but how you expect growth in monoclonal versus growth in small molecule with the incoming competitor and if I could just squeeze in one really short one just want to confirm library U S is.

Not in the 2023 guidance. Thank you.

Sure I can start with your second yes, Labella U S is in as we did note obviously in <unk> remarks.

But to get to your question on Derm and what you can certainly follow up if he wants on the term corresponding liberal question, but.

We have led the way as you know in dermatology with both small molecule and large molecule we've been driving.

<unk> awareness DTC, we still think there is significant market potential here in developed and emerging markets Theres still plenty of dogs that are untreated here.

We're really focusing on investing in direct to consumer branded in the U S and in some markets and unbranded outside.

If you are seeing this year, we're looking at the double digit growth in Q2, we had 14% growth with double digit growth in both products in the quarters that real strength and we're continuing to innovate here I think you saw also approval for <unk> in the U S. We'll look for long acting cider point look at species.

Our expecting obviously competition, we've been expecting it for a while we'll say again, we're expecting it in 2024 will be if it happens.

But we really are seeing more of a preference from both that and the pet owner moving more to <unk>.

For compliance reasons.

Obviously for <unk>. So I think we will continue to see that that we are seeing very strong growth in <unk>.

Dermatology again, we're expecting double digit for the year in the quarter, we had great strength against both but I would like to be clear that we're seeing which do we think will grow faster, we're seeing greater focus from the VAT and the pet owner on say the point being a greater driver of our overall dermatology franchise, but really expect to follow that up with strong innovation, continuing and what we think is a really important states.

Did you want to add anything on <unk> question on Labella, Yes look I think clearly a really strong quarter for us are in derm.

In the second quarter, and we are expecting.

Another strong quarter and strong back half for derm across fluke cytokines, driving that as well and just with respect to labella I just wanted to add a little bit of color in terms of our thinking Theyre certainly very pleased to have received approval in may.

But really consistent with our expectations, we've been sharing for the last I think two or three quarters.

We've been expecting an approval to be to come in the first half of this year followed by an early experience program.

Then the launch late in the year is what we've been saying we remain on track with that.

We are planning to begin the early transfer again next month.

With the launch to follow somewhere in the November timeframe.

Given the holidays in what's typically a little bit slower timeframe with respect to clinics et cetera, we're not expecting the contribution here to be significant to the growth for the year.

And look we continue to see great performance outside the U S and we're launching in other markets as well.

<unk> of this year, a little bit earlier, with an 89% growth rate on the gorilla on the quarter.

So we have factored that into into the guidance here, but again not a significant contribution.

Thank you we'll take our next question from Brandon <unk> with William Blair.

Good morning, Thanks for taking my question, just first on EPS and guidance I just wanted to clarify.

It was pretty strong in the quarter I think about nine relative to the street EPS at the midpoint for guidance came up three points and just clarify is that entirely the delta between those two is that entirely FX or is there anything else. There we should be keeping in mind and then as we think of the rest of the year kind of following up on that guidance.

Thank you said, 4% pricing in the quarter can you just remind us when some of these pricing increases came in.

As the benefit of pricing kind of slowdown in the back half and does that imply any improvement in volume in guidance. Thanks.

Yes happy to two vessel as we've said we've really reflects two things.

In our guidance today.

You said in fact last quarter FX was an area that we're watching given the volatility we're seeing across certain currencies that we operate in and so we've updated guidance for FX. Both at the revenue line, which is <unk>.

Negative.

It's about 75 basis points of growth essentially on a reported basis thats impacting FX that we reflected that here, but it is actually a positive contribution when you come down to EPS to the tune of about <unk> <unk>. So what you're seeing there from a adjusted basis is really all FX from a reported standpoint, we're also reflecting.

Some gains that we saw from a couple of BD deals that are elevating the reported rate from an EPS perspective.

The only other color I would ask add here with respect to the.

The second half and the cadence is again, we're expecting very strong second half from companion animal perspective versus livestock are the comps I think if you look at the third quarter, we probably saw a bit.

Lower opex in the prior year versus the fourth quarter. So I'd expect opex will still be a little bit higher in Q3 versus versus Q4 as you look at the balance of the year, but other than that I think price is something we typically do early in the year there are certain markets.

Where we may do a midyear price increase as well, but overall prices something that happens fairly early in the year end.

And pretty consistent with what you're seeing in our numbers today.

Thank you we'll take our next question from Chris Schott with J P. Morgan.

Hi, Thank you so much into the cat arena on for Chris.

First question on Dermatology can you just remind us where you are in terms of lifecycle management and any additional color.

Did you kind of see.

With the dermatology portfolio evolving over the next several years in terms of maybe potential new mechanisms or motive administration.

And then the second question is on Europe , you, obviously had a very strong quarter for companion ex U S. This quarter can you just elaborate a bit on the trends that youre seeing there and how you see them holding up in the second half of the year. Thank you so much.

Sure. Thanks, Irina I'll take your questions and see what he wants to build on it.

Lifecycle innovation, obviously is critical in dermatology.

We're quite focused on and a number of areas. I think you saw approval in may of <unk> in the quarter of agricultural which we had approved outside the U S. Right now that are approved in the US This is really important for a lot of pet owners, who have trouble getting their dogs to take pills achievable has real value. There. We're also looking at.

Monoclonal antibody is looking at more long acting in that space. We're also looking at lifecycle innovation around other species clearly dermatology is a significant issue amongst many companion animals. So we'll continue to look for opportunities. There. It is a big market and we will continue to lead in innovation and in lifecycle innovation across a number of different areas I said from small.

Molecules to monocle antibody two additional <unk>. So we are really focused there as you look at Europe , I mean, I think for most companies that we'd say the growth in Europe was ahead of what many of US expected for the year, mostly because I think they were expecting energy to be a much bigger issue certainly through the winter et cetera, but we've seen a great strength, particularly in New York.

Within Europe , but I would say that if you look at southern Europe , I don't think its performing as well as northern Europe , they've got greater inflationary markets there.

As well as a number of weather issues.

Severe heat waves and droughts across markets like Spain, but we really see the underlying demand in Europe , and northern Europe remaining strong and we're seeing strong growth there. So I'm not sure what any way if you want to build on any of those color. Yeah look I think just stepping back from a companion animal performance perspective, we continue to see strength there across our international markets.

Emerging markets I was just in Portland recently you.

Youre seeing a real uptick in sales of companion animal continues to take hold I think some of the innovation that we have may take some time to take hold in other markets outside the U S and it takes longer to get to those peak sales will continue to see really strong durham growth across our international markets and so on so we believe that that is sustainable the first half we've seen really strong growth there in terms of <unk>.

Companion animal.

International we saw 17% operational growth in companion animal in the quarter. Following a 10% growth in Q1 I would continue to expect double digit growth maybe not at the level. We saw in Q2 in the back half of international but continue to see double digit growth there.

Thank you we'll take our next question from Louise Chen with Cantor.

Okay.

And Luis your line is on beauty. Please go ahead with your question.

Hi, Thanks for taking my question. So wanted to ask you some of the pushes and pulls to your commitment to the mid to high single digit revenue growth that you've talked about over the next three to five years. Thank you.

Yes.

Sure. Thanks Luis.

We remain committed to that.

The guidance, we provided at Investor day back in May.

We really I would start with just the resiliency of the animal health industry. The industry itself. Historically as you know growth at 4% to 6%, we see really strong tailwind is driving the industry over the next medium to long term, increasing medicalization, especially in emerging market and increases in population really the strength of the human animal bond.

Increasing willingness to pay with 86% of pet owners say they'll pay whatever it takes to take care of their pets, but really where I think it differentiates the way. This is innovation our innovation across chronic diseases, we look at.

What we can do as we talked about some of our new franchises that we think will build over that time period as well, we look at an increasing global population, which is obviously driving the need for more sustainable ways of producing agriculture and meets in proteins that we really think that wireless will continue to outperform our market growing 4% to 6% historically, we've outperformed at close to 3%.

The way it is well diversified and we're the innovation leader, we've got strong franchises today that are continuing to grow dermatology as we say it again this year growing double digit parasiticide OA pain, we've got strong diagnostics emerging market. So we really believe the industry is very attractive and very resilient, but most importantly, I think the what is the.

As a leader in innovation will continue to drive this important space.

Yeah.

Thank you we'll take our next question from <unk> Prasad with Barclays.

Okay.

<unk>. Your line is open. Please go ahead.

Good morning. This is <unk> on for <unk>. Thanks for taking our questions. A quick one on the global Parasiticide market on the Investor Day, you would expect the global parasiticide market to expand from six points to rebuilding in Colombia today, two to around 10 to 12 buildings owned by 2030.

Two which implies a CAGR of around 6%. You also mentioned that you expect to grow faster than the market segments. So would you give us a ballpark range of the market share of its always has.

Parasites parasiticide business in the next three to five years.

How much you all future growth in this segment will be supported by new product launch and how much will be supported by revenue goes off trio and Revolution plus thank you.

Sure. Thanks for the question I'll start and I'll, let obviously Whitney build there we are the leader in Parasiticide, we're really proud of that we really see this as an important franchise, we have a broad set of products.

Resolution to pro hard to compare <unk> trio, we will be continuing to innovate in this important area. It is by far as you talked about the largest therapeutic area in animal health.

We see a few things obviously, we're going to lead with innovation, we're going to lead with innovation and products that are easy to use that really meet the customer demand as well as what our veterinarians are looking for and we believe there's continued innovation in this space. We're looking at long acting polls were looking at injectable, we're looking at other combination.

Controlling Paris eight is critical to the overall health of the animal because if you don't it creates lots of other issues for animals, though will continue to grow in this important space. We think it will continue to be a major contributor to <unk> growth over the time period. So I don't know if you want to add anything there yeah look what I would say is <unk>.

The biggest.

Sort of market segment within animal health. It's also a very competitive space now if you look at Triple combination all.

Medications. These are relatively new standard of care and we're going to continue to see those.

Spanned the market with respect to the number of doses as well as from a price perspective, and this is the area that we play in the oil space largely.

I would expect us to grow faster than the market, but again, it's a competitive space and we'll continue to innovate as others do as well, yes. The only thing I'd also add there is one other growth that we haven't talked about much today is increasing compliance I think if you look at retail and auto ship and.

In Injectables I think right now if you believe that the Atwood that research will show you. The average pad, it's really on at that 6% to seven months when they should be on 12 months from any of these products. So I think if we can do a better job of driving compliance either through auto ship on E Commerce, our home deliveries to that Oh, as well as Injectables, where you can guarantee compliance so we.

There's lots of potential growth drivers for us is to continue to drive this market and take share.

Thank you we'll take our next question from Steve Scala with TD Cowen.

Hi, Good morning. This is Chris on for Steve two questions first on the U S. Helping okay, you mentioned U S.

Okay.

In the quarter is this capacity.

Related to demand and weakening.

Patient visits wellness visits and then second do you expect any headwind from the restart of student loan repayments. This fall.

Thank you.

Sure. Thanks, as you look at the the vet visits they we really haven't seen them on average be flattish for the first half of the year, but to be clear. They are still ahead of where they were pre pandemic, we do not see that as a demand issue as we've talked about on previous calls, it's really more of a supply issue in the sense of.

The veterinary workforce challenges, we're working hard to partner with that to help address this.

Certainly with finding new efficiencies in their clinic, helping to support it.

We began adding more of that tax et cetera financial support you name it to support it but we're not seeing any concerns around demand for veterinary health care, we're really focused on making sure that the supply is there. So no. We're not saying we don't look at them flat vet visits and have a cause for concern.

Historically, just so you know that visits have been give or take flat to one ish. Historically. So this is not a really concerning and if you look at the first half of the year, we saw a 9% increase in both average revenue per visit and revenue overall in the clinic. So we're continuing to see really strong demand for veterinary care and for our product and we don't really see that changing.

And now on your second question on headwinds from student loan, we're not expecting that to be a significant driver for us in the back half of this year or in 2024.

Thank you at this time, we have no further questions in queue I'll turn the floor over to Kristin Peck for any additional or closing remarks.

Great. Thank you all for your questions today, and importantly for your continued interest in <unk>. Looking ahead, we really want to underscore that we remain confident in our full year guidance really because of the sustainable underlying demand for animal health as we just talked about especially in uncertain times, we believe that the enduring strength of the human animal bond their willingness to.

Spend on pet health and the essential need for a safe and affordable food supply are all fundamental drivers of our growth and I believe no. One in the industry has a stronger set of capabilities and colleagues when it comes to meeting customer needs to advancing animal care into creating shareholder value. So we look forward to keeping you updated on our progress and thank you for your time today have a great day.

This does conclude the <unk> second quarter 2023 financial results conference call and webcast you.

You may disconnect. Your line at this time and have a wonderful day.

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