Zoetis Inc.

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Erin Wright Great. Thanks for taking the question. So I want to talk a little bit about the targeted price actions that you're taking and what's baked into guidance on that front in terms of overall net price realization in the second half. And is this just your primary stabilization lever at this point? And can you talk about some of the timing of those actions? Can you detail kind of the overall dollar share loss you anticipate in Durham and Simperica that's embedded in the guide at this point and the levels of conservatism you have in the guide on the U.S. companion animal front and kind of how that changed over the course of the quarter in terms of your thoughts there? Just a bigger picture question for Kristin, you know, taking a step back here and there's been a number of leadership appointments and organizational changes, not just more recently, but over the past several years and some of the key functions like head of R&D, COO, companion and others. So I guess, how do you think about the balance of organizational stability and then also your continuing effort to evolve the leadership team. And do you feel like now you're at a point where that's largely in place and you can execute on the strategy? Just wanted to hear your thoughts there. Thanks.

Thanks, Erin. I think that was many questions on very different topics, but we look forward to taking it. I'll start at the top. You asked about the targeted pricing. You know, as we talked about before, you know, I think the demand for pet care and the structural tailwinds remain where they are and remain strong. I think what we're talking about from a pricing perspective, and we've been really actively going after this for the last few months, is looking not at changing overall list price as we've talked about. It's focusing on growth to net. And we're doing this because we think our real focus is protecting our volume and gaining share. And to do that, if you overall change your list price, That is a permanent structural change versus investing in what we're doing, which is growth to net investments, which are really targeted, they're time bound, and they can demonstrate clear value. Because really, when you're thinking about these things, it's maintaining your share at a clinic, it's at point of sale with a pet owner, it may be a new start. So our real focus around growth to net pricing investments. which you saw us do in the quarter, but we're accelerating as we go through the second half is really focused on our goal, which is how do we maintain our volume or gain it? How do we focus on protecting or gaining share? And that's why we're focused on those overall pricing sets As we think about the overall guide, you know, we really focus on looking at the environment that we're operating in, Aaron. It's understanding both the macro, you know, environment that we're operating in, as well as some of the competitive pressures. And I think, you know, Wetteny really talked about that. As we looked at the guide right now, we're assuming the persistence of the trends that we've currently seen. both are in the softer end market demand, as well as really believing that in this environment, the competitive situation will be people persisting in more promotional activity. And we're going to be aggressive as we think about growth to net investments in rebates and pricing and you know pet owner point of sale to make sure that we protect our volume in a market that may not be growing as fast. As we talk about the leadership question which you asked me about you know overall you know I am really excited about the team we have and the team we continue to build. We've had some retirements, obviously, over the last years and some changes. But I'm really focused on ensuring we have the team to focus and be able to deliver in the environment that we have. And that's really been the focus of what we've been doing. So I think that said, I'm sure we'll get into some of these questions, certainly on the guide more as we get to the call.

We'll move next to Brandon Vasquez with William Blair. Your line is open.

Hey, thanks for taking the question. Maybe I'll try to do a two-parter too, because one of them is just a clarification on what you had just mentioned, Kristin. But when you're talking about gross to net pricing, can you just maybe clarify exactly what that means? There's a lot of questions around the pricing dynamics going on right now. Will Zoetis be realizing a net lower ASP based on that language you're using? What does that mean for margins? And then maybe the broader question I have for you guys is, Can you just compare and contrast the updated guidance versus the old guidance? What are maybe the two or three key items that change within those assumptions?

Sure. Thanks, Brandon. I'll take your first and let me take the more detailed question on the guide. To be clear on what we're talking about with regards to pricing is we are not changing the list price of our products. Again, this is a permanent structural change that really changes the market going forward and is very hard to pull back once you do it. What we're talking about is investments in what in the industry it'll call growth to net. A promo to maintain share at a clinic. It might be a cross-portfolio bundling that if you buy a cross, you get a discount. It would be at point of sale to a pet owner to make it more affordable. This is what we mean by growth to net. We feel strongly about protecting both the short-term volume and share that we have, but while doing that, invest in the long-term value of our franchises. And that's why we want to be clear. We are not, and we've said this all year, lowering our overall list price. Well, we are going to be aggressive in defending our volume and protecting our share as we think about promotions and rebates. I'll let Wetteny get into the second question more broadly on guide.

Sure, Brendan. In terms of comparing the old guide and the new guide, a few things that I would highlight here. First of all, what Kristin just highlighted with respect to the growth to net investments that we're making. In this guidance, not only are we assuming that the level of macro and competitive pressure persists, Those are reflected, I would say, on the high end of the guidance. On the low end of the guidance, we're contemplating that they would actually accelerate. And if they accelerate, that would mean we would also do so in terms of the actions we're taking from a gross to net perspective, which would have additional implications. So that's such a stress test, the low end of the guidance for us. One other thing we have not touched on with respect to the guidance is there has been some more FX headwinds. So I would put it to around 60, $65 million of top line We'll move next to Michael Riskin with Bank of America. Your line is open. Great. Thanks for taking the question. You touched on price a number of times. I want to ask about some of the other actions you're taking.

We've seen through some of our channel checks some pretty aggressive job cut announcements. You've talked about cost controls. Just wondering how much that's already rolled in, how much you're expecting in the second half. And then you could say on that front, I guess just other levers you're taking besides price to maybe try to stem some of the bleeding here. And then if I could squeeze in a quick follow-up, the new 26 guide, you framed the upside and downside scenarios a number of times. But In terms of the competitive landscape, can I ask what your assumptions are sort of like exiting the year? I know you don't have a 27 number yet, but just do you think you can return to growth? Like will we have absorbed all the incremental competition by the end of this year? Or do you think that, you know, there's still something we're going to talk about next year and beyond? I'm just trying to look forward to how you see this playing out.

Sure, I'll take the first one, Mike. You're right. We've been talking about price so far on this call, but there are many other actions that we're taking. Certainly, there's a lot of focus on commercial execution, what we're doing with respect to how we allocate dollars in investments across DTC and how we drive demand with customers, et cetera, et cetera. So in that light, we're also managing costs. We alluded to this on the last couple of calls, in fact, and you see the impact of The second quarter you saw SG&A down 4% year-on-year. and some of those actions are also reflective in our manufacturing costs that are down year on year that are contributing to where gross margins are landing for us. Of course, these will continue to draw benefits as we go through the back half of the year and into next year and to the extent of the actions that we've been taking, some of which we already contemplated in the prior guidance.

Yeah, and to get to your second half of the question, which I think is just looking at, you know, how do we see the competitive environment and how does it evolve as we, you know, get to the end of the year and we look into 2027, As you imagine, we're actually not providing 2027 guidance today. But, I mean, look, as I think Wetteny has mentioned and, you know, certainly in our script we talked about, you know, we think with a new competitor entering in Q2 in the U.S. in Durham, you know, we think, you know, that our volume and our market share will continue to be under pressure. That is assumed. And I think that will take some time to work out. Is that six? Is that 12? Is that 18 months? I can't tell you. and we'll see, you know, how, you know, we're really focused on commercial actions to protect that share. But given we just got a new entrant in Q2 in the U.S. and, you know, still in other markets around the world, you know, I think we're really looking at the end of 26 and 27 about making sure that our differentiated portfolio across Apoquel, Apoquel 2, Cytopoints and importantly expecting, you know, the approval this year of long-acting Cytopoints Thank you for joining us today. but making sure if they're not growing that we are at least protecting our share and so we'll continue to do that and you know I think as you saw in our guide and on both the low and the high end we're assuming the competitive environment that we're operating in and some of the macro challenges that are certainly compounding that you know that we're going to be aggressive in this environment.

We'll move next to Dave Westenberg with Piper Sandler. Your line is open.

Thank you for taking the question. First, I wanted to maybe compliment on the guide here. You missed by in the tens of millions and you are lowering by almost a half a billion, which obviously we're getting really good feedback from investors right now about that. Saying that, we still need to talk about that Q2. So it's a little bit of continuation of Aaron's question around that. Can you clarify How much of the Q2 deterioration now is market contraction versus maybe some competitive pressure? And if there is a way to maybe quantify ASPs, I know you're not talking about pricing, you're talking about more like rebates, but it will have a net impact on ASPs. So if you can quantify that, that would be great. And then just pivot on kind of the same topic. You laid a great plan around like SG&A and the strategic rebates. I know a lot of contracts, particularly with corporate groups and whatnot, tend to have these two-year kind of things. So how do we think about changes in rebates and that kind of thing, knowing that some of your customers have a two-year basis? And again, sorry for the length, but I did want to at least call out the prudence in the guide there. Thank you.

Do you want to take that first one?

Yeah, Dave, I'll take the first one. In terms of what we're seeing in Q2, certainly we don't guide by quarter, so it's a matter of what our expectations are for the year and what we're tracking internally. And certainly I would describe Q2 as coming in below our expectations. Now, to the core of your question, trying to bifurcate between what is macro versus what is competitive, and it's not something that we would give precision around. However, I would say both are impactful. and meaningfully impactful. And they start to converge on each other because in a market that is not growing, certainly the competitive actions last longer and they're more impactful. And our response to those also meaning more meaningful with respect to the growth to net. So now that becomes something we do. Just to give you a couple of examples, if you look at the broad macro, certainly visits, therapeutic visits and wellness visits in the U.S., holistic heartworm was down about 7%. Of course, every major category, you see down trends on visits that have an impact. OA Payne are down, so were Durham, north of 2%. So in each of those areas, that's a macro reflection. And by the way, a product like Cytopoint, for example, we saw some headwinds that are largely, if not entirely, related to that macro versus some competitive friction. So I would say it's not a bifurcation that I can give you, but both were certainly impactful, and the response that we're doing is also contributing to it.

Yeah, I mean, I appreciate that, you know, it's very easy for you all to see list price, to see a growth to net is very hard to see. And it's very hard to see because it will be dependent, you know, by promos will run in any given month. It may be dependent to your other points on specific contracts with a customer. So for example, it may be for a customer to put us as their first and to say they'll give us X share, we give Y pricing. So the contracts that we do are generally give or take two to three years. And so some of those are locked in right now, but some of those are up. And so those are, I know for you all, going to be a little bit hard to see. I think we'll try to help you, but to sort of build on that. We're going to make sure that we take the actions we need to protect share and to protect volume. And so that's what you'll see in the growth in that. There's no way to really see that as an overall because that would be, again, customer specific, maybe event specific. So it might be a new start, et cetera. So that's where you're going to see some of those overall.

We'll move next to Chris Schott with J.P. Morgan. Your line is open.

Great. Thanks so much. I just wanted to just touch a little bit more on the duration of some of these promotions. Are these initiatives we should assume continue until macro gets better? Or is this more about the competitive dynamics you're facing with these new launches and as that competitive landscape normalizes? I'm just really turning my hands around what it's going to take or your ability to back off these promotions at the right time, like what the factors we should be watching that would enable that. My second question was maybe also just on livestock. Obviously a very strong quarter. I think you said some of that was transitory. Can you just give us a sense of what type of growth it's realistic to expect for the livestock business as we think about the second half of the year? Thanks so much.

Sure. So I'll take your first question, which is really on what's the duration of some of these promos. I mean, there's always been some promotional activity, as you've seen, in our industry. So that's not new. I would say the intensity of the promotions is both a combination, I'll talk about where it comes in, to both the macro and the competitive situation. and so where you see cross portfolio and things like that, I think that's really focused for us right now on the competitive space that we're in. So I think if you look at some of the dedicated promos on competition, that'll be quite different. So in any given therapeutic area, there is either more of a headwind. So I think what you just mentioned, if you think about Cytopoint, that's pretty much macro. We don't really have a competitor that's got a full supply against that product. I think let's be clear, if you think about Derm, It is mostly a competitive situation that is driving the Durham situation. As you think about paras, I think it's a little more macro. And we say that because, you know, if you look at both wellness visits down 7% overall in the quarter, but importantly, you know, the deceleration of growth across alternative channels, which had been making up for, again, you've seen paras, you know, under attack in a sense from a wellness visit for a while now, but I think what's really changed in the parasiticides category is has been the also alternative channel. So in any given therapeutic area, it might be more competition or it might be more the macro situation. But I think what we're really seeing and what would be the signs, I think that's really the essence of your question, what we see. As we get to more of a stabilization of share, as we look at quarter over quarter, that starts to stabilize. I think you'll see us pull back because again, our aggressive promos and rebating and point of sale right now is focused, as I mentioned, on protecting our share and making sure we protect our volume. So as we see that stabilize, I think those are going to be the signs that would say that we'll step off some of those growth to net investments.

And I'll take, Chris, the question on livestock. Look, we've been very pleased with the performance on livestock, not only in the quarter, but also on a year-to-date basis. I would say there are strong fundamentals here that we believe to be sustainable, likely in the mid to high single-digit range, if you want to look at this year. We look at the second quarter, particularly in the U.S., we grew total globally 11%, right? The U.S. was up 23%. Now, in that context, we're saying some of the drivers were transitory. For example, timing of supply for certain products that we had really affected the quarter, as well as demand that we're seeing for injectable parasiticides driven by the New World Swarm, for example, in the U.S. So when we parse those out, we would put the quarter in the U.S., into the high single-digit range, I would say, on a normalized basis. And again, for the year, we continue to expect strong fundamentals to drive livestock performance.

I'll take our next question from John Block with Stifel. Your line is open.

Thanks, guys. Good morning. Also a two-parter, Wetteny, what's the update for 2026 price realization has that change versus I think prior it was 1% to 2% guidance for price this year. And I just want to verify, you know, that the gross to net would show in that updated number if there is one and, you know, where that update's coming from as a key franchise, as an other when you fight back against the generics. And then, Kristin, regarding the promos, is it Durham? Is it Paris? Is it both? I thought you mentioned it's U.S. specific. I just want to verify that and just attack on to that last one. Maybe a difficult question. Kristin, do you have the better products? Like, do you have the better 80 jack product? Apple Quo was revolutionary, but it's 10 years old. Trio was revolutionary, but, you know, you do have others that are resonating with a marketing approach. So it's one thing to ramp up the promos, but I think the other key question here is the products in the field and are they up to snuff to compete effectively? Thanks.

So I'll take the first part of your question, John. Certainly you saw in the quarter price was flat. You're seeing the impact of the Wilson Net responses that we've already covered on this call at length, so I won't repeat those. And so what that would translate into, if you look at the guidance we just issued, on the range, you could be in the zero to minus 1%, potentially minus 2% as you get towards the low end of the guidance, given our response will also be Thank you for joining us.

You know, we continue and we said on every call that we continue to have differentiated products in each of these categories. But when pet owner affordability becomes a big issue, there, you know, becomes a question of good enough. We absolutely have differentiation in both Trio, in Apple, in Apple, we have a chewable. We have more safety, more efficacy than, you know, anybody else who we're competing against in these markets. you know whether we talk about site a point even site a point long acting we will continue to defend that differentiation but we're also you know we don't want to be naive and believe that you know in this competitive environment with people offering significant promotional or rebate discounts to someone now they will all try the other one and see how it is we are starting to see in Europe you know people switch back after experiencing it but our focus has to be on overall value and our value is in the differentiation in the safety and efficacy of our products But right now, we also have to admit that in a macro environment where affordability is a much bigger issue, we want to make sure that we're meeting our customers where they are and understanding that we need to be defending the share. And if a low enough price makes someone try another product, we want to discourage that behavior. So we're really focused, again, on the differentiation on the overall value, but understanding the macro environment we operate in is a little bit different than it used to be.

We'll take our next question from Daniel Grosslight with Citi. Your line is open.

Hi, thanks for taking the question. One of your competitors noted that there's been a very high correlation between direct to consumer channel investment and market share gains. I know you mentioned the alt channel has decelerated a bit this quarter into the back half of the year, but I'm curious How, if at all, are you changing your marketing channel strategy, your investments in DTC, and if you are also seeing a correlation between or a high ROI between direct-to-consumer investment and market share retention?

Sure. Obviously, we are heavily invested in direct-to-consumer. But importantly to this question, part of direct-to-consumer is actually advertising at a retail center or on an online site. And we do see very strong ROI. And you see the strongest ROI, and this would be obvious, because you're really focusing when you're on those sites on conversion. So you already have someone who you know is looking for the product, and you're converting it. So by far, we would absolutely agree. The highest ROI in direct-to-consumer advertising is at the retailer where someone's actually searching for a product and you're helping convert them and you already have an interested party. We've also been really focused on continuing to grow markets as well. That ROI is important, but that's a longer term ROI versus the ROI we're seeing as you invest at point of sale, either in the clinic or in retail, et cetera. So we are very focused as we think about these growth to net investments and this direct to consumer advertising at point of sale, whether that be in a clinic, whether that be on a website or whether that be in a store.

Thank you. At this time we've reached our allotted time for questions. I'll now turn the call back over to the CEO Kristin Peck for any additional or closing remarks.

Great. Thanks everybody for joining us today and as always really appreciate your questions and your interest in Zoetis. We know this is a moment that demands even greater focus and execution and we look forward to keeping you updated on our progress. I also want to reiterate that we remain confident in the long-term fundamentals of animal health in the strength and differentiation of our portfolio and our pipeline and our ability to create value. Thanks for joining us.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.