Zoetis’ revenue increases $1.1B to 1% in first quarter 2014

Zoetis Inc. (NYSE:ZTS) today reported its financial results for the first quarter of 2014. The company reported revenue of $1.1 billion for the first quarter of 2014, an increase of 1% from the first quarter of 2013. Revenue reflected an operational increase of 4%, with foreign currency having a negative impact of 3 percentage points.

Net income for the first quarter of 2014 was $155 million, or $0.31 per diluted share, an increase of 11%, compared to the first quarter of 2013. Adjusted net income¹ for the first quarter of 2014 was $191 million, or $0.38 per diluted share, an increase of 7% and 6%, respectively, compared to the first quarter of 2013. Adjusted net income¹ for the first quarter of 2014 excludes the net impact of $36 million, or $0.07 per diluted share, for purchase accounting adjustments, acquisition-related costs and certain significant items.

EXECUTIVE COMMENTARY

"We began the year with 4% operational growth in revenue, adjusted net income growing faster than sales, and we remain confident in meeting our financial objectives for the year," said Zoetis Chief Executive Officer Juan Ramón Alaix. "Despite some challenges in the first quarter, we grew sales operationally in three of our regional segments and across all our major species. Our performance in the U.S. and across emerging markets helped offset an operational decline in certain developed markets in Europe and Asia-Pacific," said Alaix.

"The depth and diversity of our product portfolio remain core strengths of our business, helping to minimize any challenges that may occur within a single species, geography, product line or therapeutic area," said Alaix. "With our focus on innovative new medicines and product lifecycle development, we have seen continued adoption of new products and services in a number of new markets."

"In the first quarter, we continued to demonstrate an ability to grow adjusted earnings faster than sales despite a higher tax rate, cold weather in the U.S. impacting sales, and increased interest expense," said Glenn David, Senior Vice President of Finance Operations and Acting Chief Financial Officer of Zoetis. "Given our continued confidence in our business model, we are reaffirming our guidance for the full year."

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.

Effective this quarter, the company realigned its segment reporting with respect to its Client Supply Services organization (CSS), which provides contract manufacturing services to third parties. The revenue and earnings associated with CSS are now reported within other business activities, separate from the four reportable segments. In 2013, CSS results were reported in the EuAfME segment. The current presentation of segments is more reflective of the company's commercial business since CSS operates differently from the company's commercial operations within the geographic segments. First quarter results for 2014 and 2013 reflect the new segment structure.

In the first quarter of 2014:

• Revenue in the U.S. was $479 million, an increase of 6% compared to the first quarter of 2013. Sales of livestock products grew 7%. Cattle products showed a significant increase during the quarter based on improved market conditions. Poultry product sales grew across the therapeutic areas and benefited from new vaccines. And, swine products benefited from continued growth in new products, tempered by the effect of Porcine Epidemic Diarrhea virus (PEDv). Sales of companion animal products grew 3% driven by the introduction of APOQUEL^®; this growth was tempered by a reduced number of pet owners visiting clinics due to extreme winter weather, as well as a favorable impact in the year-ago quarter due to a competitor supply issue.
• Revenue in EuAfME was $270 million, a decrease of 4% operationally compared to the first quarter of 2013. Sales of livestock products decreased 6% operationally. This is primarily driven by a decline in the UK associated with one-time impacts in the quarter; a decline in poultry products related to regulatory issues that have been resolved; and a decline in swine products linked to reductions in the use of anti-infectives. These overall livestock declines were partially offset by growth of cattle products in emerging markets. Sales of companion animal products increased 1% operationally, primarily driven by the launch of APOQUEL^® in Germany and the UK, and the sale of parasiticides in France, Italy and emerging markets.
• Revenue in CLAR was $168 million, an increase of 10% operationally compared to the first quarter of 2013. Sales of livestock products grew 9% operationally, driven largely by poultry products in Brazil, and cattle and swine product sales across other Latin American markets. Sales of companion animal products grew 15% operationally, primarily related to the continued increase in medicalization rates in Brazil, Mexico and Argentina.
• Revenue in APAC was $169 million, an increase of 4% operationally compared to the first quarter of 2013. Sales of livestock products grew 7% operationally, driven primarily by sales of swine products in China and Japan, poultry products in India, and cattle products in China; this growth was slightly offset by a decline in cattle product sales in Japan, New Zealand and Australia. Sales of companion animal products declined 2% operationally largely due to declines in Australia.

Zoetis continues to drive demand and strengthen its diverse portfolio of products through product lifecycle development, 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 recent examples include:

• Expanding the portfolio's reach - Zoetis continues to support the launch of new products in new markets and to expand the geographic reach and lifecycle of its portfolio. APOQUEL^® (oclacitinib tablet) continues its rollout in the U.S., UK, Germany and certain other markets. The product is approved for the control of pruritus associated with allergic dermatitis and the control of atopic dermatitis in dogs at least 12 months of age. Strong customer demand has been outpacing initial supply and the company has implemented plans to manage the situation. Separately, recently launched vaccines like BOVISHIELD GOLD ONESHOT™, which helps prevent certain bovine respiratory diseases, and FOSTERA™ PCV and FOSTERA™ PRRS, which help prevent certain diseases in swine, expanded into new geographies in Canada, Latin America, and Thailand, respectively, in the first quarter.
• Advancing standards of care - As a world leader in animal health, Zoetis continues to partner with organizations that are advancing and harmonizing the standard of care in markets around the world. In April, Zoetis joined with the World Small Animal Veterinary Association to form the African Small Companion Animal Network (AFSCAN). AFSCAN will strive to build a network of companion animal veterinarians, associations and specialist groups working together to improve veterinary care in sub-Saharan Africa. Zoetis became the sole animal health industry member of the AFSCAN Board.

FINANCIAL GUIDANCE AND COMMENTARY

Zoetis's guidance for full-year 2014 reflects the company's confidence in the diversity of its portfolio, the strength of its business model, and its view of the evolving market conditions for animal health products this year.

Zoetis reaffirmed its financial guidance for full year 2014:

• Revenue of between $4.65 billion to $4.75 billion
• Reported diluted EPS for the full year of between $1.15 to $1.21 per share
• Adjusted diluted EPS¹ for the full year between $1.48 to $1.54 per share

Additional guidance on other items such as expenses and effective tax rate is 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 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 6, 2014.