Yahoo Finance Zoetis Inc. (NYSE:ZTS) Q1 2024 Earnings Call Transcript
Zoetis Inc. (NYSE:ZTS) Q1 2024 Earnings Call Transcript May 2, 2024
Zoetis Inc. beats earnings expectations. Reported EPS is $1.38, expectations were $1.35. Zoetis Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the First Quarter 2024 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of the call via dial-in or on our Investor Relations section of zoetis.com. [Operator Instructions]. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.
Steve Frank: Thank you, operator. Good morning, everyone, and welcome to the Zoetis first quarter 2024 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny 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 forward-looking statements in today's press release and our SEC filings, including, but not limited to, our annual report on Form 10-K and our reports on Form 10-Q.
Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A 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 dated today, Thursday, May 2, 2024. We also cite operational results, which exclude the impact of foreign exchange. And with that, I will turn the call over to Kristin.
Kristin Peck: Thank you, Steve, and good morning, everyone, and welcome to our first quarter earnings call for 2024. Today, we reported outstanding first quarter results underscored by steady demand for our products, a focused strategy and our purpose-driven colleagues. We delivered 12% operational revenue growth and grew adjusted net income 15% operationally in line with the tenets of our value proposition. Driven by the launch of our osteoarthritis pain franchise, the U.S. led the way with 16% growth and 8% operational growth internationally. More specifically, globally, Librela grew 189% operationally, including $40 million sales in the U.S., in line with our expectations. The powerful human animal bond fueled demand for our companion animal portfolio with 20% growth operationally, while livestock declined 1% operationally.
This quarter's results even amidst global uncertainty are a testament once again to the power of our diverse and durable portfolio across markets, species and therapeutic areas. It also highlights the continued rise and resilience of the animal health industry. Our purpose and performance are rooted in science, which has always been the great disruptor. And as animal health is increasingly essential for nutrition and companionship, caregivers demand even more high quality innovation. That means we identified the most prevalent areas of unmet veterinary need and invest in, develop, manufacture and deliver life-changing products that customers have been waiting for. Take for example, Librela and Solensia, our injectable monoclonal antibodies to treat OA pain in dogs and cats, which are helping millions of pets return to play.
With more than 18 million doses distributed worldwide, we are providing long lasting relief to animals, many of whom were previously undiagnosed or untreated due to limitations of NSAIDs. With nearly 40% of all dogs suffering from OA pain globally, we believe just one-third of those are being treated. So we're just scratching the surface of care. And cats are visiting the clinic more often. In fact, we're helping curve clinic fears with Bonqat, the first FDA approved product to alleviate anxiety in cats, which means we're expanding care in a historically under-medicalized area of the market. We understand that social media is a form for convening, a place for pet owners to connect and to share. But we also have a responsibility to empower our customers to make informed decisions grounded in science and data.
We are unwavering in our commitment to rigorous safety and quality standards, which has earned us the trust and confidence of veterinarians worldwide. Backed by that commitment, Librela and Solensia are safe and effective. They are anchored in 10 years of science and have been used in Europe for more than three years. In the U.S., 78% of veterinarians who are at the center of care are very satisfied with Librela. This is driven by real world experience and consistent with the feedback we hear in other markets. And our research indicates that 46% of vets globally will treat OA earlier and 65% will treat more dogs now that Librela is available. To accurately reaffirm the safety and efficacy of these therapies, we are doubling down, working directly with veterinarians who need these products, hosting live sessions with our Chief Medical Officer and expanding online education and training while deploying capital to expand our DTC strategy.
And veterinarians continue to be confident in Librela as evidenced by a recent blind survey of U.S. vets confirming that perception and intent to prescribe remain unchanged. We remain confident that OA pain could be our next $1 billion franchise, because we are meeting the needs of an underserved market. We are growing by nearly every metric, including adoption, penetration, reorder rates, patient share and expanded utilization. And looking at our 4-week rolling average in the U.S., we're excited to report that sales steadily increased through April. Our performance speaks to the power of the human animal bond, discerning pet owners want option and they will work with our vets to find relief for their best friend. Beyond OA pain, Zoetis has been able to lead the market in other key categories because we deeply understand our customers' needs.
This allows us to not only compete in existing markets, but again to create entirely new ones. And Science has created something completely unique to our industry, $2 billion franchises. Our parasiticides portfolio expanded the total market based on deep customer insights. Before Simparica and Simparica Trio, we were number 5 in this category. These innovations changed how we compete. Today, we are number 2 and continue gaining share and growing the market even in the face of competition. Similarly, we were first to recognize the new therapies where needed to treat canine ish safely and effectively. That market foresight changed the treatment paradigm and revolutionized pet care. A decade of dermatology has led to three products, 20 major lifecycle enhancements including Cytopoint, the first ever animal health monoclonal antibody and the first chewable with Apoquel chew.
From what was once believed to be just $100 million market has grown to $1.4 billion, because we know what our customers need. Today, more than 18 million dogs are treated for allergic ish and atopic dermatitis and another 13 million remain untreated globally. We built $1 billion franchise and demonstrated the durability of our portfolio and we will continue growing this franchise underpinned by strong brand equity, first mover advantage, lifecycle innovation and strong customer relationships. We've led in parasiticides, dermatology and now OA pain. And each time our innovations have created new categories in animal health, you've seen the total industry opportunity expand. Now moving to livestock. I'm sure you all saw the news this week on the announcement of our agreement with Phibro Animal Health to sell our global medicated feed additives and certain water soluble product portfolios and related assets for $350 million.
This deal is another great example of Zoetis' disciplined capital allocation strategy to focus investments in areas with the greatest growth potential and innovation that are aligned with our key capabilities. I'm confident that under Phibro's management, the global reach of these products will continue to expand to meet customer needs worldwide. We remain very committed to livestock and to sharpening our focus and our core innovative livestock growth areas including preventatives, antibiotic alternatives and genetics. In summary, for more than 70 years, Zoetis has been leading the industry with our commitment to innovation. We've invested over $5 billion in R&D since our IPO, which has brought more than 300 product lines to the market. Science is and always has been the great disruptor and at the core of our success in delivering the innovations that veterinarians, livestock producers and pet owners expect from us.
Our pursuit of science has led to breakthroughs in dermatology like Cytopoint and Apoquel chew, in parasiticides and Simparica Trio and now the latest in OA pain with the Librela and Solensia that are revolutionizing animal health. Blazing new trails isn't easy. But time and again, our purpose driven colleagues have proven their ability to expand our industry leadership and forge entirely new markets. And we remain committed to delivering strong growth through our innovative franchises and diverse portfolio, while continuing to invest for the future. Looking ahead to the remainder of 2024, our increased operational guidance reflects the resilience of the animal health market and the execution of our strategic growth priorities. We will continue to be disciplined yet adaptable in our approach to the opportunities, potential challenges and economic shift that occurred throughout the year.
And with that, I will turn it over to Wetteny.
Wetteny Joseph: Thank you, and good morning, everyone. As Kristin mentioned, we had an outstanding start to the year, driven by the underlying strength of our companion animal portfolio, particularly our innovative products, as well as price growth across all species. In the first quarter, we generated revenue of $2.2 billion, growing 10% on a reported basis and 12% on an operational basis. Adjusted net income of $634 million grew 4% on a reported basis and 15% on an operational basis. Our 12% operational revenue growth was due to the underlying strength of our companion animal portfolio aided by the impact of a weak comparative quarter in our U.S. companion animal business. However, the majority of this visibility to growth was offset by headwinds related to economic conditions in China, the impact of a tough comparative quarter in livestock due to the timing of supply for certain products last year and inventory destocking related to our U.S. diagnostics sales model change.
Of the 12% operational revenue growth, 7% is from price with 5% growth in volume. While we saw price growth across our portfolio, price was favorably impacted by hyperinflationary markets, especially Argentina, which contributed 2% to our overall price growth. The volume growth was driven primarily by new products, including our monoclonal antibodies for OA pain, Librela and Solensia as well as our key dermatology products and Simparica Trio. On a segment basis, the U.S. posted $1.2 billion in revenue, growing 16% on the quarter, while our international segment reported revenue of $1 billion with operational growth of 8% on the quarter. Our companion animal portfolio was the main driver of revenue growth in Q1, growing 20% operationally. This growth was partially offset by livestock, which declined 1% on an operational basis.
We saw double-digit operational companion animal growth in both our U.S. and our international segments again this quarter, driven by the strong performance of our innovative products with contributions from both volume and price. Simparica Trio was the primary driver of growth in the quarter generating $243 million globally, representing operational growth of 61%. We saw strong demand for Trio as well as continued growth in patient share even with competition. Our OA pain mAbs were also a significant contributor to growth, posting $131 million in the quarter. Global growth came from the impact of new launch markets both in the U.S. and internationally. In our early launch EU markets, recent vet surveys showed an increase in muscle on therapy and expansion into more moderate OA cases.
Our key dermatology products grew 25% operationally in the quarter with $360 million in global revenue. Wealth within dermatology was driven primarily by our Apoquel franchise where we are seeing solid conversion to Apoquel chewable including a modest impact from the initial distributor stocking in the U.S. Cytopoint growth continues to be driven by vet and pet owner preference for injectable methods of treatment. Our global companion animal diagnostics portfolio declined 12% operationally with declines in the U.S. driven by a distribution model change. These declines were anticipated as our distribution partners sold off their remaining inventory due to our transition to a direct only model for our U.S. diagnostics portfolio. U.S. declines were partially offset by growth internationally.
Our livestock portfolio declined 1% operationally as expected, driven by a tough comparative quarter in the prior year, especially in the U.S. as well as impacts from the ongoing economic conditions in China. This decline was partially offset by price growth in our other international markets. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter growing 16% with companion animal growth of 25% and livestock posting a 7% decline. The companion animal performance in the quarter was driven by Simparica Trio, our key dermatology portfolio and the impact of the launch of Librela in the U.S. as well as the impact of a weak comparative quarter. Our outstanding U.S. companion animal growth came in the quarter where we saw vet clinic visits decreased 1.5%.
We continue to see growth in the therapeutic visits, while wellness visits drove the decline. Sales outgrowth in the retail and home delivery continued to uptake vet clinic fulfillment, which is based on growing pet owner preference for these alternative channels. This dynamic is expected to put continued pressure on total vet clinic visits without impacting our expectations for revenue. Despite the visit decline, revenue and spend per visit in the clinic grew 4.5% and 6%, respectively, which reflects continued pet owner willingness to pay. Turning to product performance, Simparica Trio posted sales of $205 million in the quarter growing 61%. We continue to be the market leader in the triple combination parasiticide space. Our leading footprint across channels has allowed us to continue to drive dosage growth through increased compliance even with declines in wellness visits at the clinic.
In addition to a weak comparable period in the prior year, we are seeing favorable price realization due to more targeted discount programs to vets as well as channel dynamics. Key dermatology product sales in the U.S. were $233 million for the quarter growing 27%. We saw growth in both price and volume and across both Apoquel and Cytopoint. Growth also benefited from a weak comparable period in the prior year. Market demand for our dermatology products remains high. In the quarter, we saw growth in both our patient share as well as higher periodic visits in the clinic. Additionally, growth of retail auto-ship programs continue to bolster compliance. At the beginning of April, we made Apoquel chewable available through our distribution partners.
Our pay mAbs, Librela and Solensia posted a combined $57 million in U.S. sales in Q1. Librela generated $40 million in the quarter with underlying vet demand continuing to build on the momentum from our full launch in Q4 of last year. Excluding the impact of the initial clinic stocking, which we were provided last quarter, we are seeing robust sequential quarter growth in Librela in line with expectations. We continue to see good growth in penetration as well as strong reorder rates, which are approaching 80%, all of which points to positive real world satisfaction in the clinic and among pet owners. We remain confident not just in the safety and efficacy of Librela, but also in our expected performance. As Kristin alluded to, we have seen steady increasing trends in our trailing 4-week sales average in the U.S. even into April after the increased media attention.
We continue to see steady progress in Solensia, which had U.S. sales of $17 million in the quarter, more than doubling our prior year Q1 sales. We have indicated the feline market needs significant development, but we are pleased with our progress thus far. Solensia is now the market-leading product for feline OA pain in the U.S. and we have seen a significant increase in the medicalized patient pool since launch. Our U.S. companion animal diagnostics portfolio declined 21% in the quarter, driven primarily by distributor inventory work downs following our channel strategy change. This destocking is in line with our expectations and has negligible impact on our underlying clinic demand. U.S. livestock declined 7% in the quarter, while our underlying business performance in the quarter was as expected.
Our results are reflective of a strong comparative period in Q1 of 2023 in which we grew 15% due to the return of supply on several products, primarily in cattle. Sales of swine products declined due to decreased sales of vaccines as well as JAKs. In poultry, we saw declines as a result of increased generic competition in our medicated feed additive products. Moving on to our International segment, where revenue grew 3% on a reported basis and 8% excluding the impact of foreign exchange. Companion animal grew 14% operationally and livestock grew 2% operationally. Increased sales of our international companion animal products were driven by OA pain mAbs, key dermatology products, vaccines and small animal parasiticides. This growth was partially offset by impacts in China.
Our international OA pain mAbs grew 67% operationally to $74 million in combined revenue in the quarter. International Librela sales were $59 million, growing 71% operationally. Growth is balanced across new launch markets and our first wave EU markets. We continue to see evolution in the European markets where we have seen expansion in Librela’s use in moderate OA cases, which according to the latest vet surveys now represents the majority of Librela patients in Europe. We remain pleased with the success of our DTC advertising campaigns in increasing pet owner awareness of OA. Solensia sales were $15 million internationally in the quarter, growing 54% on an operational basis. Our international key dermatology portfolio grew 23% operationally in the quarter, posting $127 million in sales.
We saw double-digit operational growth across most of our major markets driven by higher compliance and new patients. Wealth was also favorably impacted by pre price increased buy-ups in Japan and certain European markets. Our international small animal parasiticide portfolio grew 6% operationally, driven by our Solensia franchise with Simparica Trio growing 58% operationally to $38 million in sales. Trio growth benefited from continued uptake in Europe, driven by key account penetration and field force effectiveness as well as contributions from Trio's launch in China. Simparica posted $56 million in revenue, growing 22% on an operational basis in the quarter. This growth was partially offset by 29% operational decline in our Revolution franchise, which generates a high proportion of sales in China.
International livestock grew 2% operationally in the quarter, driven by price increases especially in high inflationary markets. Price growth was partially offset by volume declines across all of our species, partially driven by a tough comparative period in the prior year due to the return of supply of certain livestock products. The volume declines in livestock were driven by cattle due to a tough comparable period related to supply and worsening market conditions in Australia. Our international swine portfolio saw volume declines driven by China, where we saw lower hog prices as well as a reduction in herd sizes. In sheep, we saw declines from herd reductions due to expected weather conditions in Australia and New Zealand as well as supply constraints on eight key products.
As we mentioned last quarter, we continue to see economic challenges in China, where low consumer spending and high urban unemployment have reduced spending. We are also seeing a slowdown in livestock with lower pork prices and smaller herd sizes. The impact on our growth is expected to moderate late in the year, but we expect to continue to see headwinds throughout the year across both companion animal and livestock. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 70.7% declined 10 basis points on a reported basis compared to the prior year. Foreign exchange had an unfavorable impact of 180 basis points on our reported adjusted gross margins. Excluding FX, we saw higher margins due to price increases, favorable mix and lower freight costs, partially offset by higher manufacturing costs, especially in hyperinflationary markets.
Adjusted operating expenses increased 11% operationally, driven primarily by SG&A growth of 10% operationally, mainly due to higher compensation related expenses as well as increased advertising and promotion spend on our OA pain mAbs. R&D grew 13% on an operational basis, driven by higher project spend related to both recent acquisitions as well as advancements of our pipeline candidates. The adjusted effective tax rate for the quarter was 19.7%, a decrease of 80 basis points, primarily due to a higher benefit in the U.S. related to foreign derived intangible income and a more favorable jurisdictional mix of earnings. And finally, adjusted net income grew 15% operationally despite a $31 million headwind to growth from the non-recurring benefit of our prior year royalty settlement.
Adjusted diluted EPS grew 17% operationally for the quarter. Capital expenditures in the first quarter were $140 million. In the quarter, we repurchased $339 million of Zoetis shares. Before moving to guidance, I wanted to comment on our recent announcement to divest our medicated feed additive portfolio and certain water soluble products to Phibro Animal Health. This is a transaction that demonstrates Zoetis' disciplined capital allocation strategy to focus our investments on innovative solutions that advance animal health, productivity and sustainability. This divestiture will allow us to remain focused on other livestock solutions, including vaccine, biologic and genetic programs that are more aligned with our strategic priorities. Now moving on to guidance for full-year 2024.
As we have mentioned, we had an outstanding first quarter that highlighted our ability to deliver through multiple sources of growth. Our performance in companion animal, especially in parasiticides and our key dermatology franchises exceeded our expectations. Additionally, we continue to be pleased with the progress of the U.S. launch of Librela and are confident in our ability to meet expectations. We are therefore raising our 2024 operational guidance provided during February's earnings call. Note that guidance reflects foreign exchange rates as of late April. The updated foreign exchange rates negatively impacted our reported revenue guidance by approximately 2% and our reported adjusted net income guidance by approximately 4% when compared to our initial guidance issued in February.
For the year, we expect revenue between $9.05 billion and $9.20 billion, representing a range of 8.5 to 10.5 operational growth. Our increase in operational growth is reflective of Argentina's pricing impact as well as due to performance in our companion animal parasiticides and key dermatology products. We now expect our full year operational growth for Simparica Trio to be double-digits, while we expect growth in our key dermatology products to be in the high single-digit range. As we stated earlier, we remain pleased with our U.S. launch of Librela. Our expectations for Librela for the year remain unchanged. Moving down the P&L, we now expect adjusted net income to be in the range of $2.62 billion to $2.67 billion, representing operational growth of 13% to 15%.
And finally, we expect adjusted diluted EPS to be in the range of $5.71 to $5.81 and reported diluted EPS to be in the range of $5.34 to $5.44. Just to summarize before we go to Q&A, we are very pleased with our start to the year. While our reported results are reflective of various foreign exchange related headwinds, operationally, we continue to deliver growth across our key therapeutic areas and across most of our major markets. This growth highlights the diversity and dependability that allows us to continually outpace the animal health market. Additionally, we continue to lead the way creating new markets and launching new innovation that increases the standard of medical care for animals. Now, I'll hand things over to the operator to open the line for your questions.
Operator?
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