Zoetis Inc.

Welcome to the first quarter 2023 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. 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 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 1 on your touch-tone phone. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. In the interest of time, we ask that you limit yourself to one question and then queue up again for any follow-up. 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.

Thank you, operator. Good morning, everyone, and welcome to the Zoetis First Quarter 2023 Earnings Call. I am joined today by Kristen Peck, our Chief Executive Officer, and Wetney 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 US GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable US GAAP measures is included in the financial tables that accompany our earnings press release and the company's 8-K filing, dated today, Thursday, May 4, 2023. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Kristen.

Thank you, Steve, and welcome everyone to our first quarter earnings call for 2023. Today, we reported solid first quarter results of 4% operational growth in revenue, as expected, based on our diverse portfolio and strength in international markets. As we indicated in February, we expected a softer first quarter and a stronger growth for the remainder of the year, And we are reiterating our full year guidance for operational growth of 6% to 8% in revenue and 7% to 9% in adjusted net income, given the underlying strength of the pet care market. In the first quarter, our international segment led the way, growing revenue 10% operationally and was partially offset by a 1% decline in the U.S. Our livestock portfolio drove the results with 12% operational growth in revenue, while companion animal product revenues were flat operationally. The performance in livestock was based on double digit operational growth for cattle, poultry, sheep, and fish. In the case of U.S. cattle, this performance was supported by an improvement in the supply of key products. Meanwhile, our companion animal portfolio in the U.S. declined due to distributors destocking and reducing their inventories in the first quarter, as well as higher purchases in the fourth quarter of 2022, which occurred in anticipation of price increases and based on promotional programs. We see strong end market demand in companion animal channels based on data from veterinary clinics, retailers, and pet owners. And we view distributor inventories as a short-term impact on our companion animal sales. For example, while our sales into distributors declined in the quarter as we expected, our product sales from distributors out to veterinary clinics were up approximately 8% and our product sales out of retail channels to pet owners were up about 35%, affirming a healthy pet care market in the U.S. Pet owner demand for products is expected to grow during the second quarter, pulling through more inventory and allowing purchase patterns by distributors to become more aligned with the underlying demand throughout the year. Other dynamics in the U.S. vet clinics also continue to show momentum and trending in a positive direction. Clinic visits increased 2% in the first quarter, showing an increase for the first time since 2021. Meanwhile, clinic revenue and average spend per visit continue to grow even in the face of inflationary pressures. Revenue and average dollars per visit increased 11% and 9% respectively in the quarter. The combination of evolving pet owner demographics, innovative medicines, and an unbreakable human-animal bond all continue to support a positive and growing companion animal market where we lead. Despite the Q1 distributor issues in the US, our overall growth was driven by strength in international markets, which delivered 10% operational revenue growth in both livestock and companion animal portfolios. This quarter's results are a testament, once again, to how our diverse portfolio and geographic presence help deliver steady and predictable growth. Turning now to adjusted net income, we saw a decline of 3% operationally in the first quarter, which was in line with our expectations. The first quarter reflected significant investments in our U.S. pet care field force and shifts in the go-to-market model for diagnostics, costs which were not incurred fully in the year-ago quarter. We also saw increased investments in R&D, which we have discussed previously. The investments in diagnostics are maturing and gaining traction in the U.S., and we continue to grow and expand outside of the U.S. We expect a return to growth in U.S. diagnostics for the year as we build our VetScan Images AI platform, refine and grow our reference lab business, and bring further innovative offerings to the space. Looking ahead, we see strong demand driving double-digit operational growth for our innovative companion animal portfolio and relatively flat operational growth in our livestock portfolio this year. We will continue to invest in the franchises and capabilities that support our future growth, including large and growing product areas like parasiticides, dermatology, monoclonal antibodies, vaccines, and diagnostics. For example, we continue to build out key product franchises through lifecycle innovations and claim extensions in products like Sempericatrio, Cytopoint, and Draxen. We are also expanding our global reach with approvals in additional markets for new livestock vaccines like Protiviti for beef and dairy calves and Lasatec for swine. And most recently, we purchased a manufacturing site outside Atlanta, Georgia, which will be used as a new monoclonal antibody vaccine and pet care product operation to add capacity for our expected growth. As you know, our monoclonal antibody and vaccine platforms are rapidly growing, and this new site would substantially expand manufacturing capacity for our biologics portfolio and ensure long-term supply across all global markets when it begins operations in 2026. While the overall economic uncertainty remains a headwind globally in 2020-23, we have proven to be up to any challenge. We have learned valuable lessons and built new muscles, especially over the last three years, developing more agility, flexibility, and resilience in our business and our people. Despite the unusual mix of results in our first quarter, I continue to feel very positive about our full-year guidance and how our diverse portfolio and vision for the future of animal health can drive long-term sustainable growth and create value for our customers and shareholders. We will continue to be disciplined yet adaptable in our approach to the opportunities, potential challenges, and economic shifts that could occur throughout the year. We remain committed to delivering strong growth in 2023 based on our market leadership, innovative franchises, and diverse portfolio while continuing to invest for the future. Thank you. Now, let me hand this off to Wetni. Wetni?