Corporate (Investors)

Tuesday, May 5, 2015 7:00 am EDT

 

FLORHAM PARK, N.J.--(BUSINESS WIRE)--Zoetis Inc. (NYSE:ZTS) today reported its financial results for the first quarter of 2015 and announced a comprehensive operational efficiency initiative to enhance its long-term competitive position and profitability. The company also updated its guidance for full year 2015 and provided additional details on its outlook for 2016 and 2017 to reflect the impact of the operational efficiency plans and other factors.

The company reported revenue of $1.1 billion for the first quarter of 2015, which was flat compared to the first quarter of 2014; revenue reflected an operational2 increase of 6%, excluding the impact of foreign currency.

Net income for the first quarter of 2015 was $165 million, or $0.33 per diluted share, an increase of 6% compared to the first quarter of 2014. Adjusted net income1 for the first quarter of 2015 was $207 million, or $0.41 per diluted share, an increase of 8%. Adjusted net income for the first quarter of 2015 excludes the net impact of $42 million, or $0.08 per diluted share, for purchase accounting adjustments, acquisition-related costs and certain significant items. On an operational basis, adjusted net income for the first quarter of 2015 increased 14%, with foreign currency having a negative impact of 6 percentage points.

EXECUTIVE COMMENTARY

"For the first quarter, we continued our solid financial performance from last year," said Zoetis Chief Executive Officer Juan Ramón Alaix. "Our first quarter revenue grew 6% operationally, based on strength in the U.S. and Latin American markets, and our adjusted net income grew 14% operationally, in line with our objective to grow adjusted net income faster than sales."

"Our business model – based on direct customer interaction, R&D and manufacturing capabilities – along with excellence in execution and a singular focus on animal health are key elements of our success," said Alaix. "As we look ahead, we intend to build on that formula and perform even better."

"For the past two years, our focus has been on delivering our operating and financial targets, while successfully establishing Zoetis as a standalone company," continued Alaix. "Now having entered the final stage of our stand-up projects and building on the strong momentum in our business, we are announcing plans to further improve our operations and better position Zoetis to drive long-term profitable growth. The implementation of our plans will allow us to become more competitive by being more focused and cost-efficient, while taking full advantage of our scale and business model."

Paul Herendeen, Executive Vice President and Chief Financial Officer of Zoetis, said, "This initiative is a natural next step in the evolution of our company. We took a comprehensive look across our business and identified opportunities to generate higher quality, profitable growth, while preserving and enhancing our competitive advantages – our customer-facing sales approach, research and development of innovative products, and high-quality manufacturing and supply."

"The operational efficiency initiative we announced today will result in a company that will generate more profit from a slightly smaller, more focused revenue base. We expect to generate cost savings of approximately $300 million in 2017 and to improve our adjusted operating margin from 25% in 2014 to approximately 34% in 2017," said Herendeen. "By 2017, we will be a company that can grow our re-based organic revenue in line with or faster than the mid-single digit growth of our markets, while holding growth in our leaned-out operating expenses to the inflation rate, thereby delivering long-term profit growth greater than our revenue growth. We will also be better positioned to create value from potential business development opportunities," concluded Herendeen.

QUARTERLY HIGHLIGHTS

Zoetis organizes and manages its business across four regional operating segments: the United States (U.S.); Europe/Africa/Middle East (EuAfME); Canada/Latin America (CLAR); and Asia/Pacific (APAC). Within each of these regional segments, the company delivers a diverse portfolio of products for livestock and companion animals tailored to local trends and customer needs.

In the first quarter of 2015:

• Revenue in the U.S. was $521 million, an increase of 9% compared to the first quarter of 2014. Sales of livestock products grew 14%, led by growth in cattle products due to the strength of our portfolio and continued favorable market conditions. Increases in the sales of swine products were driven by a higher population of pigs as well as sales of the PEDv vaccine. Sales of poultry products grew primarily due to the re-introduction of ZOAMIX®, a medicated feed additive. Companion animal product sales grew 3% driven by the performance of key brands such as PROHEART® and REVOLUTION®, the addition of products from Abbott Animal Health, promotional programs, improved weather conditions, and new product launches in diagnostics. This growth was partially offset by competitive challenges to RIMADYL® and sedation products, as well as declines in equine products.
• Revenue in EuAfME was $237 million, operationally flat compared to the first quarter of 2014. Sales of anti-infectives declined in both livestock and companion animal products due to the implementation of new legislation in France. Livestock sales declined 2% operationally due to the French legislation and declines in Russia, but were somewhat offset by growth in other emerging markets. Companion animal products grew 4% operationally, led by broad growth in key brands such as CERENIA® and STRONGHOLD®, as well as improved product availability in equine products.
• Revenue in CLAR was $173 million, an increase of 13% operationally compared to the first quarter of 2014, with strong growth in both livestock and companion animal products. Sales of livestock products grew 13% operationally, as favorable cattle and swine market dynamics across the region drove growth of premium brands, particularly in Brazil and Venezuela. Poultry product sales declined due primarily to timing of customer product rotations in several countries. Sales of companion animal products grew 14% operationally, driven by sales in Venezuela and performance of key brands in Brazil.
• Revenue in APAC was $161 million, an increase of 1% compared to the first quarter of 2014. Growth in emerging markets was offset by declines in developed markets. Sales of livestock products grew 1% operationally, primarily based on strong swine product sales in Southeast Asia. Swine sales in China declined as weaker market conditions led to softer demand for premium products. Poultry sales experienced a slight decline due to weaker market conditions in South Korea and the Philippines. Cattle sales declined in the quarter due to prolonged drought conditions in Australia and New Zealand, partially offset by emerging market growth, particularly in China and India. Sales of companion animal products were operationally flat in the quarter, mainly due to declines in Australia and the prior termination of a distributor agreement in Japan.

Zoetis continues to drive demand and strengthen its diverse portfolio of products through product lifecycle developments, strong customer relationships and access to new markets and technologies. The company is focused on improving the performance and delivery of its current product lines; expanding product indications across species; pursuing approvals in new geographies; and developing innovative medicines, treatments and solutions for emerging diseases and unmet customer needs.

Some highlights of the company's product lifecycle development this quarter include expanding the reach of key products into new markets and with new indications. For example, the BOVI-SHIELD GOLD® FP line of vaccines for certain bovine respiratory and reproductive diseases received approval for additional claims in the U.S. to help prevent fetal infections caused by bovine viral diarrhea (BVD) virus Types 1 and 2; this product line was first approved in the U.S. in 2009. FOSTERA™ PCV MH, a vaccine that helps prevent certain diseases in swine, expanded into new markets such as Thailand and Russia in the first quarter; it was first approved in the U.S. in 2013. And, CERENIA®, an antiemetic to treat and prevent acute vomiting in dogs and cats, was approved for cats in Japan; it was first approved in Europe in 2006.

OVERVIEW OF COMPREHENSIVE OPERATIONAL EFFICIENCY INITIATIVE

Zoetis also announced a company-wide operational efficiency initiative designed to reduce complexity in its global operations and optimize its resource allocation and efficiency. All plans are subject to consultations with works councils and unions in certain markets.

The main actions in the program will be:

• Reducing complexity in the company's product portfolio and structure
  • Increasing focus on key products, key markets and strategic manufacturing sites
  • Improving profitability and enhancing the reliability and efficiency of the supply network by eliminating approximately 5,000 lower-revenue, lower-margin product SKUs
  • Continuing to re-shape the company's supply network, including plans to sell or exit 10 manufacturing sites over the long term
  • Changing its selling approach in approximately 30 markets by shifting to indirect sales or reducing its presence in certain countries
  • Consolidating from a four-region structure to a two-region structure -- U.S. and International -- resulting in a more cost-efficient infrastructure and more standardized processes. The U.S Region will be led by Kristin Peck, and the International Region will be led by Clint Lewis; both are current members of the Zoetis executive team
• Optimizing resource allocation and efficiency
  • Streamlining corporate functions and significantly reducing general and administrative (G&A) costs by improving execution and efficiency
  • Focusing resources closer to customers and reducing the allocation of resources to non-customer facing commercial activities
  • Reducing management layers, increasing spans of control and operating more efficiently as a result of less internal complexity and more standardization of processes
  • Enhancing R&D focus to support a smaller portfolio of products and better prioritize R&D projects with the highest returns

The implementation of this initiative increases the company's outlook for 2017 operating profit by $200 million, driven by $300 million in expected cost savings, which is expected to more than offset a reduction of revenue and gross profit of $280 million and $100 million, respectively.

The operational efficiency initiative is incremental to the Supply Network Strategy that was previously announced and that is expected to add an additional 200 basis points to gross margin by 2020.

Separately, the company has decided to reduce its business in Venezuela. The impact of this change will reduce the company-wide outlook for 2017 revenue, gross profit, and operating profit by approximately $90 million, $65 million, and $55 million, respectively.

As a result of the operational efficiency initiative and supply network strategy, Zoetis expects to record restructuring charges and other one-time cash charges of $400-500 million, primarily by the end of 2016. Additional, primarily non-cash charges related to the company's long-term supply network strategy will occur as the specific plans for each manufacturing site are finalized in the coming years.

FINANCIAL GUIDANCE

Zoetis is updating its financial guidance for full year 2015 to reflect the impact of the operational efficiency program, a reduction of its presence in Venezuela, and changes in foreign exchange rates:

• Revenue of between $4.675 billion to $4.775 billion
• Reported diluted EPS of between $0.79 to $1.02 per share
• Adjusted diluted EPS1 between $1.61 to $1.68 per share

The company also provided updates to its long-term outlook for 2017:

• Revenue of $4.850 billion to $5.050 billion
• Reported diluted EPS of between $1.98 to $2.16 per share
• Adjusted cost of sales1 as a percentage of revenue of approximately 32% to 33%
• Adjusted EBIT margin1 of approximately 34%
• Adjusted diluted EPS of $2.18 to $2.32

Additional guidance on other items for 2015, 2016 and 2017 such as expenses and tax rate are included in the financial tables and will be discussed on the company's conference call this morning.

WEBCAST & CONFERENCE CALL DETAILS

Zoetis will host a webcast and conference call at 8:30 a.m. (EDT) today, during which company executives will review first quarter financial results, discuss 2015 financial guidance, and respond to questions from financial analysts. Investors and the public may access the live webcast by visiting the Zoetis website at http://www.zoetis.com/events-and-presentations. A replay of the webcast will be archived and made available on May 5, 2015.

About Zoetis

Zoetis (zô-EH-tis) is the leading animal health company, dedicated to supporting its customers and their businesses. Building on more than 60 years of experience in animal health, Zoetis discovers, develops, manufactures and markets veterinary vaccines and medicines, complemented by diagnostic products and genetic tests and supported by a range of services. In 2014, the company generated annual revenue of $4.8 billion. With approximately 10,000 employees worldwide at the beginning of 2015, Zoetis serves veterinarians, livestock producers and people who raise and care for farm and companion animals with sales of its products in 120 countries. For more information, visit www.zoetis.com.

1 Adjusted net income and its components, adjusted diluted earnings per share, and adjusted earnings before interest and taxes (EBIT) (non-GAAP financial measures) are defined as reported net income attributable to Zoetis, reported diluted earnings per share and reported EBIT, excluding purchase accounting adjustments, acquisition-related costs and certain significant items.

2 Operational revenue growth is defined as revenue growth excluding the impact of foreign exchange.

DISCLOSURE NOTICES

Forward-Looking Statements: This press release contains forward-looking statements, which reflect the current views of Zoetis with respect to business plans or prospects, future operating or financial performance, expectations regarding products, future use of cash and dividend payments, and other future events. These statements are not guarantees of future performance or actions. Forward-looking statements are subject to risks and uncertainties. If one or more of these risks or uncertainties materialize, or if management's underlying assumptions prove to be incorrect, actual results may differ materially from those contemplated by a forward-looking statement. Forward-looking statements speak only as of the date on which they are made. Zoetis expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. A further list and description of risks, uncertainties and other matters can be found in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, including in the sections thereof captioned "Forward-Looking Information and Factors That May Affect Future Results" and "Item 1A. Risk Factors," in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K. These filings and subsequent filings are available online at www.sec.gov,www.zoetis.com, or on request from Zoetis.

Use of Non-GAAP Financial Measures: We use non-GAAP financial measures, such as adjusted net income and adjusted diluted earnings per share, to assess and analyze our operational results and trends and to make financial and operational decisions. We believe these non-GAAP financial measures are also useful to investors because they provide greater transparency regarding our operating performance. The non-GAAP financial measures included in this press release should not be considered alternatives to measurements required by GAAP, such as net income, operating income, and earnings per share, and should not be considered measures of liquidity. These non-GAAP financial measures are unlikely to be comparable with non-GAAP information provided by other companies. Reconciliation of non-GAAP financial measures and GAAP financial measures are included in the tables accompanying this press release and are posted on our website atwww.zoetis.com.

Internet Posting of Information: We routinely post information that may be important to investors in the 'Investors' section of our website atwww.zoetis.com, on our Facebook page at http://www.facebook.com/zoetis and on Twitter @zoetis. We encourage investors and potential investors to consult our website regularly and to follow us on Facebook and Twitter for important information about us.

Certain amounts and percentages may reflect rounding adjustments.

See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted Information for notes (1) and (2).

Certain amounts may reflect rounding adjustments.

A reconciliation of 2015 adjusted net income and adjusted diluted EPS guidance to 2015 reported net income attributable to Zoetis and reported diluted EPS attributable to Zoetis common shareholders guidance follows:

A reconciliation of 2016 and 2017 adjusted net income and adjusted diluted EPS guidance to 2016 and 2017 reported net income attributable to Zoetis and reported diluted EPS attributable to Zoetis common shareholders guidance follows:

Certain amounts and percentages may reflect rounding adjustments.

Certain amounts and percentages may reflect rounding adjustments.