Just a few months after trimming its sales estimates for this year, animal health giant Zoetis ($ZTS) tempered its expectations once again, announcing Tuesday that the company expects full-year sales to come in between $4.67 billion and $4.78 billion--down from its earlier forecast of $4.8 billion to $4.9 billion. The company reaffirmed its earnings-per-share estimate of $1.61 to $1.68, as it embarks on a major cost-cutting push that includes consolidating management layers and reducing its presence in Venezuela.
Zoetis, which has been facing pressure from activist hedge fund investor Bill Ackman of Pershing Square Capital, announced a wide-ranging plan to cut costs and greatly improve its operating profit margin, from 25% in 2014 to 34% by 2017. The company said it would eliminate 5,000 underperforming, low-margin SKUs, in addition to selling or exiting 10 manufacturing plants. Zoetis is also shifting from a four-region corporate structure to a two-region operation--U.S. and international--and plans to cut up to a quarter of its workforce, or about 2,500 people.
|Zoetis CEO Juan Ramón Alaix|
"We will be a company that will be much more focused in terms of products, markets, and everything that matters to our customers and our company," said Zoetis CEO Juan Ramón Alaix in a telephone interview with FierceAnimalHealth after the earnings release. "I think we are making these changes from a position of strength. We're growing faster than the (animal health) market."
The company expects to realize $300 million in cost savings, which should offset a $280 million drop in revenue and an impact on gross profit of $100 million.
Reducing its presence in Venezuela demonstrates Zoetis' new approach to its international footprint. While the market had been a strong one, the country's volatile currency has hampered profitability, said Paul Herendeen, chief financial officer of Zoetis, during a conference call with analysts. That led to the decision to cut back operations there.
One major element of Zoetis' plan involves changing its approach to research and development. The company is focusing its R&D efforts on a smaller portfolio of products that are most likely to deliver high returns. The products that are being eliminated--roughly 40% of the company's SKUs--should improve efficiency because half of the company's R&D expenses are related to lifecycle management, Alaix estimates.
"The reduction in complexity that we announced today will have an impact, because we'll have fewer people allocated to lifecycle management," Alaix said. That will allow the company to shift more resources to new product development. Among the research areas the company is prioritizing is vaccines, he added.
"We're increasing our focus on (research) that will have a high return for our operations," Alaix said.
The restructuring plans come three months after Zoetis named William Doyle of Pershing Square to its board, in return for a "standstill" agreement from the hedge fund and Sachem Head Capital Management, which should prevent them from expanding their 9% combined stake in Zoetis. In mid-April, Zoetis added a second Pershing Square ally to the board, Actavis ($ACT) Chairman Paul Bisaro. Ackman had long been a critic of Zoetis' cost structure.
Zoetis did stack up well with analysts' estimates for the first quarter, reporting $1.1 billion in sales as expected and adjusted net income of $207 million, or 41 cents per share--up 8% year over year and beating the consensus of 36 cents. Still, vowed Alaix, the changes announced today "will result in a company that will be better positioned for the future."