Zoetis Inc.

Welcome to the third quarter 2019 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 this call via dial-in or on the investor relations section of zoetis.com. At this time, all participants have been placed in a 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 press star and 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. 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. When posing your question, please pick up your handset to allow optimal sound quality. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Good morning, everyone, and welcome to Zoleta's third quarter 2019 earnings call. I am joined today by Juan Ramon Alikes, our chief executive officer, Glenn David, our chief financial officer, and also by Kristen Peck, our CEO-elect. 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 in the company's 8K filing dated today, November 7, 2019. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon. Thank you, Steve.

Good morning, everyone. Today, you will hear a commentary on the market dynamics and quarterly results from me and Glenn. I am also pleased to have Christine Peck, our next CEO, joining us to share some remarks on her appointment and the future of Zeratis. At the end of the year, let me provide some context around recent market dynamics. The animal health industry in 2019 has been facing a challenging year for swine and cattle, while seeing very good performance in companion animal and poultry. We have seen a growing appetite in the companion animal market for spending on innovation in pet care. And we, once again, expect to grow much faster in the market in companion animals for 2018. Veterinarians are excited by the new products and life cycle innovations, giving them more advanced ways to assist pet owners with the skin conditions and parasites. Dermatology treatment continues to be a critical need. And Zoetis has been rewarded for the innovation we have developed in this space with a continued market penetration and a global expansion of our key dermatology products, Apoquel and CytoPoint. They are on track to achieve more than $700 million in sales for 2019. In recent years, Zoetis has also been strengthening its position in parasitic sites. This year, we added two new products to our parasite design portfolio. Revolution Plus to protect cats against ticks, fleas, and internal parasites, and ProHard 12, a one-year injection to prevent heartworm disease in dogs. Additionally, we are planning to launch Sympathica Trio in European countries and Canada in the first quarter. In the U.S., we expect the FDA to complete the review of Sympatica Trio at the end of the first quarter. If approved, we will launch shortly after. Based on these assumptions, we project to generate incremental global sales of Sympatica Trio in 2020 at around $150 million. In other areas like pain, alternative to existing treatments for dogs and cats represent a significant opportunity. And in the case of our cats, it is largely unmet need today. We are excited by the potential for our research programs with monoclonal antibodies in this area. As I mentioned in the last quarter, we initiated the filing process in the EU and U.S. for a new feline monoclonal antibody candidate to treat osteoarthritis pain in cats. And we recently also initiated the filing process in the EU and US for a canine monoclonal antibody candidate to treat osteoarthritis pain in dogs. If approved, we would anticipate these products coming to market in 2021. African swine fever, trade incentives, and weather conditions affecting mainly U.S. cattle are having a significant negative impact on the livestock market. As a result of this negative impact, we expect the overall animal health market to grow operationally between 3 to 4 percent in 2019, compared to 5.6 percent in 2018. As noted in our guidance, we expect to outpace the market with operational growth in revenue of 6% to 7%, and this excludes the positive impact of ABAXIS. Turning now to our third quarter results. We continue our strong performance with 9% operational revenue growth in the third quarter, driven by sales of our companion animal and poultry products. Our companion animal portfolio continues leading the way with a 23% operational growth based on strong sales of our parasiticides, our key dermatology products, and diagnostic portfolio. Diagnostic revenue from the Avaxis acquisition accounted for 2% of the overall growth. In terms of livestock, we saw an operational decline of 4%. Growth in poultry was 5%, but it was offset by declines in cattle, mainly due to lower feedlot placements in the U.S. and the impact of African swine fever in China. Our third quarter results demonstrate how our diverse portfolio and focus on meaningful innovations are driving our success. These trades remain the foundation of our consistent long-term performance. In the third quarter, we grew our adjusted net income by 10% operationally, and we continue to benefit from increasing revenue, improve growth margins, and moderate growth in operating expenses. We remain confident in our latest innovation, future pipeline, and core business to support future growth and deliver our 2019 guidance, which Glenn will discuss later. As we look ahead, we are making good progress with innovations and investment that will generate our future growth. As I said, we are preparing for the launch of Simparica Trio in European markets and Canada at the beginning of next year, with the product currently in production. Other regulatory reviews remain underway in Australia, Brazil, and Japan, with further submissions expected in China and Mexico. In the U.S., we have been expanding our field force to better support our growing companion animal portfolio, including diagnostic products, and in preparation for the launch of a sympatic atrio next year, once approved. We also continue to enhance our vaccine portfolios for livestock. In October, Zoetis received USDA approval for Pulvac Procepta HVTMD, the company's first vector vaccine for poultry. It will help to protect against both malaria disease and Newcastle disease. highly contagious infection for poultry. The product complements our market leading innovative vaccine delivery system for poultry producers. And it is the first in what is expected to become an important new global vaccine franchise for phloetis over the next several years, especially in international markets. We are also taking important first steps to address African swine fever, having reached a non-exclusive license agreement with the U.S. Department of Agriculture in late September. This agreement gives us access to three patents and materials related to African swine fever vaccine strains that will be incorporated into our research. While it could take several years to complete the development and licensing of a vaccine, a work with the USDA and other partners provides a comprehensive approach to addressing this infectious disease. In addition to new products approval and lifecycle innovations, Zoetis continues to support the future growth through business development activities. we announced the acquisition of Phoenix Lab, a Seattle-based reference laboratory that is highly valued by veterinarians for quality assurance and customer care. This is Zoetis' first entry to the veterinary reference laboratory space, and it is expected to further strengthen our overall diagnostic portfolio, building upon our 2018 approaches of ABAXIS, a leading provider of point-of-care diagnostic instruments. We view reference labs as another important part of our comprehensive diagnostic offering, and we plan to build our presence in reference labs over time through organic expansion and other small acquisitions in this space. Now, I would like to say a few words regarding our leadership transition. As we announced in October, I am retiring at the end of the year. It has been an amazing opportunity to build a company like Zoetis over the last seven years, and I feel very positive about Zoetis' future based on our proven strategy, hard-earned track record of execution, the diverse and innovative portfolio that underlies our success with customers, and the growth investment we are making for the long term. I am confident that our talented colleagues and management team led by our next CEO, Christine Peck, will continue to capitalize on the many growth opportunities ahead of Zoetis and create significant value for our company, customers, and shareholders. has been with the company since the beginning of Zoetis, and currently serves as Zoetis Executive Vice President and Group President of U.S. Operations, Business Development, and Strategy. Having worked with Christine for many years, I know that she's the right leader for Zoetis' next phase of growth and industry leadership. She is a strong advocate for our customer needs, a champion of her Zoetis culture and values, and an inspirational and collaborative leader for our people and industry. Her track record of strong performance through her tenure at Zoetis, as well as her operational experience, innovative strategies, and deep customer knowledge, positioned her well to drive Zoetis' continued growth. She will build on our long-term strategy, which she helped to develop, alongside with the rest of the Zoetis management team, and bring her own vision to leading the next stage of Zoetis' journey. I will remain an advisor to Zoetis during the course of 2020. And Christine and I are already working closely to ensure a smooth transition and maintain the momentum of our business growth. Before Glenn discuss our third quarter results, I have asked Christine to say a few words. Christine?