Zoetis Inc.

Welcome to the Second Quarter 2026 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 zolettis.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 telephone keypad. 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 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. It is now my pleasure to turn the call over to Steve Frank. Steve, you may begin.

Thank you, operator. Good morning, everyone, and welcome to the Zoleta Second Quarter 2026 Earnings Call. I am joined today by Kristin Peck, Chief Executive Officer, and Wetteny Joseph, Chief Financial Officer. This morning, we issued a press release announcing our financial results. Before we begin, I would like to remind you that the release, the corresponding earnings presentation, which we will reference during this call, are available on the investor relations section of our website and that many of our statements today may be considered 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 in our company's Exchange Act reports filed with the FTC. Additionally, today's remarks will include certain non-GAAP financial measures Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures can be found in the earnings press release and our company's 8K filing dated today, August 6, 2026. We will also reference reported and organic operational growth. Organic operational growth excludes the effect of foreign currency, as well as acquisitions and divestitures, which individually impact the lettuce growth by 1% or less. unless otherwise stated, all revenue growth performance metrics will be based on organic operational performance. With that, I will turn the call over to Kristin.

Thank you, Steve. Good morning, everyone, and thank you for joining us today. I will start with the operating environment because it's important context for both our performance and the actions we're taking. As we have discussed in prior quarters, the companion animal market is being shaped by several interconnected forces. Those dynamics continued in the second quarter and in some areas intensified. Veterinary clinic visits declined across markets, extending a multi-year trend that has occurred alongside price increases that have outpaced broader consumer inflation. As a result, pet owners have become more selective in how they spend, which is showing up in visitation patterns and purchasing decisions. In parallel, Thank you for joining us. are categories Zoet has pioneered or helped establish as standards of care. Historically, when more companies invest behind a therapeutic category, that activity helps expand the market by increasing disease awareness, deepening veterinary engagement, and educating pet owners. This is not what we are seeing today. Instead, in a slower growth market, the nature of competition has changed. New entrants are using higher levels of discounting, rebates, crop portfolio bundling, and other incentives to compete for existing patients. And overall, these headwinds have created near-term pressure. At the same time, the level of competitive activity reinforces the enduring attractiveness of the categories Zoetis has helped shape over many years. Our ability to maintain leadership positions, Even amid simultaneous competitive launches gives us confidence in the actions we are taking to strengthen our near-term position and create the right foundation for growth over time. With that, I will turn to our second quarter performance, which reflects these dynamics and fell short of our expectations. On an organic operational basis, revenue and adjusted net income declined 1% and 2% respectively. By segment, revenue grew 6% internationally, supported by broad-based growth in emerging markets, while the U.S. declined 7%. Our diversified portfolio continued to provide resilience, with livestock delivering another quarter of strong 11% revenue growth. However, that strength was more than offset by continued pressure across key parts of our companion animal portfolio. which declined 6% in the quarter. Looking ahead, we have updated the outlook for the year to reflect our first half results and the headwinds we expect to continue in the near term. We are moving with urgency as we navigate the current environment. Throughout today's call, you will hear me discuss the actions we are taking to maintain our leadership and drive growth. We are focused on sharpening commercial execution Strengthening our competitive position, exercising greater cross-discipline, and continuing to invest in the innovation that we believe will define the next chapter of growth for Zoetis. We are also evolving our leadership team to more closely align with our talent and organizational structure with the execution of these initiatives. In June, we promoted Abhay Nayak to EVP and President of our U.S. Commercial Operations. Abhay previously led our global diagnostics division and demonstrated that he's a high-impact leader who can drive strong revenue growth while also advancing innovation and building out key capabilities. Now in his new role, Abhay is laser-focused on driving stronger performance and accountability in our U.S. commercial operations. As we announced today alongside our earnings report, Jay Zakara will also be joining Zoetis as our EVP, Chief Financial Officer, and Chief Operating Officer. This is a newly created role that will give Jay broad oversight of all finance functions as well as global manufacturing and supply. We are in an important moment that requires speed and agility, and this change is all about enabling faster decision-making, greater connectivity across the supply chain. and accelerated turnarounds from strategic planning to execution. We are confident that we found the right leader with the right backgrounds to step into this new role. Jay possesses the unique combination of skills we are seeking. He comes to Zoetis with an impressive background in life sciences, having served as CFO of both GE Healthcare and Baxter. He also has a track record of designing and executing strategies that balance investments and innovations with operational rigor. I look forward to partnering closely with Jay, and I know he's eager to get started in a few weeks on August 17th. And I want to take a moment to express my sincere gratitude to Wetteny. Wetteny has been a valued partner to me at every turn over the past five years. I know I speak for the board and everyone at Sowetis when I thank him for his strong leadership and many important contributions, and we wish him all the best in his next chapter. With that, let's dive deeper into each of our key franchises. I will start with our key dermatology franchise, where the broader companion animal pressures are most visible. The dynamics affecting this franchise remain largely consistent with what we described last quarter, but the pace and intensity of pressure increased in the second quarter and continued to weigh on top-line growth. In Q2, the category itself continued to soften. In the U.S., for example, canine puritic clinic visits remained down more than 2% in the second quarter. Historically, growth in alternative channels, particularly for aquifer, helped offset softer clinic traffic. But in the current environment, growth in those channels also moderated, reflecting broader end-market softness across the category. at the same time, competitive activity intensified globally with new entrants using higher levels of launch-related promotional incentives to establish share. This resulted in continued share pressure, especially in a market that is not expanding. Given the market size and intensity, our strategy is clear. Compete with discipline, reinforced the differentiated value of our portfolio and direct incremental sales and marketing dollars where they can have the greatest impact, protecting share, influencing demand, and driving conversion. This is how we manage the portfolio, focusing resources where the need is immediate while continuing to support our broader companion animal priorities with discipline. Targeted pricing and affordability actions are also being deployed where appropriate, helping us stay competitive in the near term while preserving the value of our franchise. And innovation remains central to the strategy. The anticipated U.S. approval of long-acting Cytopoint later this year would strengthen our dermatology portfolio with another differentiated option, helping veterinarians deliver effective care with greater convenience and value for pet owners. In parasiticides, the Semperica franchise would splat in the quarter with double-digit international growth offset by continued pressure in the U.S. The dynamics vary by market, but the common thread is that affordability, channel behavior, and promotional activity are playing a larger role in purchase decisions for pet owners and veterinarians. Internationally, the franchise benefited from increased usage as well as the continued launch of Sempericatrio in Brazil, reinforcing the relevance of triple combination protection in markets where adoption is still building. In the U.S., franchise performance was pressured by continued clinic dynamics, including declines in sweet-ticket heartworm visits, as well as more competitive and promotional environments. Unlike in prior periods, was not enough to offset. We are taking targeted actions to stabilize performance, including more competitive pricing, enhanced pet owner promotions, and competitive capture, where we see the greatest opportunity to protect and grow volume. Elsewhere, in our small animal parent portfolio, we benefited from the breadth and diversity of our offerings, with revolution growing on increased feline visits, Highlighting the value of having multiple ways to drive essential preventative care in dogs and cats. Turning to canine OA pain, revenue declined in the quarter against a strong comparison. While we saw both year-over-year and sequential growth internationally with contributions from Lanivia, U.S. performance remained under pressure with canine pain-related visits declining more than 2% in the quarter. For canine OA pain, medical affairs remains one of the most important levers for category development. This is a market where specialist engagement and scientific education are essential to strengthening veterinary confidence and expanding use. With Cabrella and the early wave of market approvals for long-acting ranivia, including most recently in Great Britain and Switzerland, we are giving vets greater flexibility and convenience. Encouraging early experience is driving the acceleration of Lanivia launches in Canada and Europe, reinforcing our conviction in the long-term opportunity and belief that this expanded portfolio can help bring the category back to growth over time. Separately, D-Line OA pain grew in the quarter, demonstrating continued traction in a category that remains early in its development. The context here is important. While overall clinic visits remain pressured, feline visits were a positive outlier in the quarter, and recent industry research points to a more durable feline opportunity, with kitten hope cohorts remaining above pre-pandemic baselines. At the same time, cats remain historically under-medicalized, with a meaningful gap between the number of cats in households and the number receiving regular veterinary care. That gap is especially relevant in OA pain. where the condition remains underdiagnosed and undertreated. Since the launch of Silencia, we have seen how innovation can help begin to close that gap, expanding feline clinic visits and giving vets a new reason to engage cat owners. Fortella builds on that progress. With three-month long-acting profiles, its launch in Canada and the EU provides veterinarians a broader set of options and greater convenience in treating feline OA pain. Early feedback has been encouraging, reinforcing our confidence this expanded portfolio can help build the category over time and support continued medicalization. Turning to companion animal diagnostics, revenue grew 12% in the quarter, reflecting sustained demand for diagnostic tools and services, particularly in urgent and emergency care. During the quarter, we expanded the capabilities of VetScan OptiCell, Further strengthening our point-of-care diagnostic offerings. We also completed the acquisition of VitalRest, a veterinary teleradiology services platform, which will extend our capabilities beyond in vitro testing and into veterinary imaging interpretation, supporting our vision of a more complete end-to-end virtual reference lab. Together, these developments reinforce why diagnostics is an important catalyst for Zoletus and a clear example of how we are deepening our customer relationships. Our platforms strengthen veterinary workflows, increase our daily relevance in the clinic, and help veterinarians move from diagnostic insight to treatment decisions faster. And, as earlier detection becomes increasingly important, our diagnostic capabilities can support adoptions We are also continuing to advance our diagnostics pipeline with VetScan Omnimax, our new multimodal chemistry platform, and one of our potential blockbuster opportunities, with commercial validation still expected by year end. In livestock, we delivered strong 11% growth in the quarter, with an especially strong contribution from the U.S. Performances led by cattle and poultry, reflecting continued demand for our broad portfolio of medicines and vaccines that help producers protect animal health, improve productivity, and manage evolving disease threats. In cattle, increased demand for Decovax related to New World Screw Room incursions underscores the role the lettuce plays as a trusted partner when veterinarians and producers need effective tools quickly. Poultry also contributed meaningfully with growth driven primarily by vaccines in key markets supported by our hatchery programs, new contracts, and tender winds. I also want to highlight the broad-based strength we saw in emerging markets with contributions across livestock, companion animal, and diagnostics. That performance reflects the value of our global footprint and ability to capture demand across a diverse set of markets. Stepping back, these results reinforce two important points. First, the near-term pressures affecting parts of our companion animal and our full-year outlook. And second, the value of our diversified portfolio to provide balance. That combination is why we are staying disciplined on costs, targeted in commercial investment, and focused on advancing the innovation that it can expand markets over time. With that context, we are revising our foliar outlook to reflect the marking conditions we expect to persist in the near term and the actions we are taking in response. Since our last call, pressure in parts of our companion animal portfolio has been more pronounced than our prior outlook assumed, as reflected in our Q2 results, which fell below our expectations. The change is driven by primarily continued clinic visit declines, More value-conscious pet owner behavior and elevated promotional activity in key categories, particularly dermatology and U.S. parasiticides. We now expect organic operational revenue growth to decline 3% to 1% and organic operational growth to decline 9% to 5% in adjusted net income. Even as we navigate near-term pressures, We are confident in the long-term fundamentals and in our ability to lead through this cycle by defending leadership positions, investing behind the highest return opportunities, and continuing to build the next wave of innovation. Before I close, I want to recognize our colleagues around the world whose focus and commitment to customers are critical to delivering against our priorities and close with how we are thinking about the path forward. We are operating in a more competitive and value conscious environment than we have seen in recent years, and we are not assuming the market gets easier. We are adapting to the market in front of us. We are responding with focus and discipline, sharpening execution and companion animals, allocating capital with discipline, exercising greater cost discipline, and continuing to advance the innovation that has always differentiated Zoetis.