Zoetis Inc - Class A (ZTS) — Q1 2019 Earnings Call Transcript

Thank you. Good morning, everyone, and welcome to the Zoetis first quarter 2019 earnings call. I’m joined today by Juan Ramon Alaix, our Chief Executive Officer; and Glenn David, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and that our remarks today will include forward-looking statements, 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 our SEC filings, including, but not limited to our Annual Report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures, which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, May 2, 2019. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon.

Thank you, Steve, and good morning, everyone. I will start today by describing some of the dynamics in the animal health industry that are on investors' minds. First, there is positive strength for spending and innovation in companion animal medicines and treatments. Pet owners' spending in the U.S. continued to rise in terms of our revenue per visit and the number of patient medicines. We also see positive trends for our pet care in the rest of the world. Pet owners are willing to spend their income on medicines, vaccines, and other treatments to ensure a longer and better quality of life for their pets. We believe Zoetis is well-positioned to continue success in the companion animal space as our portfolio of dermatology products, parasiticides, and vaccines continue to drive our growth. Second, we see economic pressure and other challenges continue to impact dairy and cattle producers in the U.S. We still, however, expect to see the U.S. cattle and dairy market growing for the full year, driven by stronger domestic demand for beef and an increasingly optimistic outlook for beef and dairy exports and a modest improvement in milk prices. Finally, African Swine Fever has made headlines due to significant concerns for the pork market. It is impacting producers in China, with some reports saying that as many as 150 million to 200 million pigs or up to 30% of their annual food supply will be lost due to the outbreak. For context, that is more than the U.S. annual pork production. This situation has far-reaching implications for the global pork supply chain. The reduction in supply in China is making the pigs more valuable, creating opportunities for greater export from other countries, and increasing consumption of other products. The situation will evolve through the year, clearly monitoring any effect on the overall market and our business, which showed an impact in the first quarter. This type of outbreaks, unfortunately, are part of doing business in animal health. This year, we are facing issues with African swine fever. A few years ago, we dealt with PEDV and avian flu, and before that, with Brucellosis. These challenges are why Zoetis has built a diverse portfolio of best-in-class products across all relevant species and geographies, allowing us to be more aggressive in managing through economic cycles, outbreaks, and integral weather conditions. We previously indicated in February that we expected the overall industry to grow approximately 5% for the year, excluding the impact of foreign currency. Now, because of African swine fever, we think the animal health industry will have a lower growth rate in 2019 and will continue to assess the broader impact of African swine fever as the year progresses. Despite some of these temporary challenges, we are maintaining our guidance for operational revenue growth, excluding Abaxis, of 4.5% to 6.5% for the full year, which we expect will outpace the growth of the animal health market. Turning now to our first quarter results. We are off to a solid start for the year with 11% operational revenue growth driven by our companion animal business. Revenue from the Abaxis acquisition accounted for 5 percentage points of the overall 11% growth. Our sales in companion animal products are once again leading the way with 27% operational growth based on the addition of sales from Abaxis, as well as our parasiticides and key dermatology portfolio. Our livestock products sales declined 3% operationally due to challenges in certain cattle and swine markets. For the first quarter, we grew our adjusted net income by 18% operationally, and adjusted diluted EPS by 19% as we benefited from strong revenue growth and a significant increase in gross margin, due to pricing, our favorable product mix, and cost improvements. Glenn will provide more details on our first-quarter performance in his remarks. Our results once again confirm the importance and value for growth and innovation in the animal health industry, and we remain confident in our performance and outlook for the full year. Looking ahead, we continue to invest in advancing our pipeline, ensuring careful market launches of new products, and furthering the integration of Abaxis this year. Since our last quarterly earnings announcement, we have seen key companion animal products, including Cytopoint and Simparica for dogs, and Revolution Plus for cats, continue to gain approvals in markets outside the U.S. Our Core EQ Innovator, the first and only combination vaccine to offer protection against five core equine diseases, was also approved in Canada. Last week, Zoetis received approval for Apoquel in China, one of Zoetis’ largest companion animal markets, and we expect to launch the product there within the next three months. On the livestock side, we launched Clarifide Plus for Jersey cattle in the U.S., this is the first genomic test for this breed that provides a direct indication about the genetic risk factors for seven of the most common and costly adult cow diseases. In terms of our R&D pipeline, we still anticipate launching this year a new injectable parasiticide formulation to protect dogs against heartworm for up to 12 months pending FDA approval. Our new three-way combination parasiticides, composed of Simparica and two other active ingredients, are still in regulatory review in the U.S. and with the European Medicines Agency. Reviews are also underway in Canada and Brazil, with further submission expected in Japan, China, and Australia this year. If approved, we anticipate this product will come to market in 2020. We also continue working on new monoclonal antibodies to manage pain in dogs and cats, and dermatology for cats. Those programs are progressing, and we’ll keep investors informed of future findings in this area. We feel very positive about the benefits that these treatments can provide in terms of greater compliance, convenience, and efficacy for different species. In the case of other research in livestock, I would point to our programs in vector vaccine technology for our poultry and research into promising new classes of antibiotics, as well as our growing investment in diagnostics, genetics, devices, digital, and data analytics technology that can be used in applications like precision livestock farming. Additionally, we have vaccine programs to address current and future emerging diseases, which have been growth drivers for our industry in the past. We also maintain a comprehensive portfolio of approximately 300 product lines for Zoetis, and we invest significantly each year on lifecycle innovation that keeps those products competitive and growing. Finally, we are making good progress on the integration of Abaxis. We remain positive on the point-of-care diagnostic market, given this strong global growth prospect, as well as the critical growth these diagnostics play in the vet clinic. We are excited about the strength of the Abaxis portfolio and the way our field force is representing it to customers around the world. Our U.S. team has been working to drive greater growth through new lead generation for diagnostics. In international markets, we have nearly completed staffing and training of our expanding diagnostic team, implemented a new customer service model across these markets, and view this as a greenfield opportunity for future growth. We are pleased with our progress to date, and we continue to view 2019 as an important year for integration and platform setting, enhancing certain products and customer experiences, and developing more progress essentially for customer solutions that leverage our new diagnostic assets. Including our first-quarter results, once again, demonstrate the stability and the diverse strength of our portfolio in a dynamic animal health industry. We are executing on our strategies for growth across the continuum of care with new products and solutions that help our customers predict, prevent, detect, and treat diseases in animals while navigating the evolving trends in animal health. And we are investing and making important progress in key areas such as dermatology, diagnostics, digital, and data analytics, where we see both near and long-term growth opportunities.

Thank you, Juan Ramon, and good morning. As Juan Ramon noted, 2019 is off to a solid start. Operational revenue growth was 11% and operational adjusted net income growth was 18%. Reported revenue growth for the first quarter was 7%, with a 4% unfavorable impact in foreign exchange, driven primarily by currency depreciation of the Euro and Brazilian Real. Excluding the impact of the Abaxis acquisition, operational growth for the quarter was 6%. Included in the 6% growth is 4% price and 2% volume. Volume growth includes contributions from key dermatology of 2% and new products of 1%, which were partially offset by declines in other in-line products of 1%. Companion animal demonstrated continued strength this quarter with legacy Abaxis products, parasiticides, and key dermatology products leading the growth, with positive contributions from all key markets. Meanwhile, livestock declined in the quarter based upon declines in sales of medicated feed additives and challenges like the African swine fever outbreak in China. Our overall results in the first quarter continued to demonstrate the value of the diversified portfolio, with double-digit operational growth despite the declines in swine and cattle. Legacy Abaxis products contributed 5% to total Zoetis' operational revenue growth in the quarter with sales of $61 million. As a reminder, the acquisition of Abaxis was completed in the third quarter of 2018, so sales from legacy Abaxis products are incremental in the first half of 2019. The revenue this quarter represented a decline over the pro forma revenue from the prior year. This decline is primarily driven by new product launches and initial distributor stocking in the first quarter last year. We continue to expect full-year growth in diagnostics products as we focus on improving customer experience, connectivity to practice management software, and international expansion. Our key dermatology portfolio comprised of APOQUEL and CYTOPOINT also continued to contribute to growth this quarter, with sales of $155 million, a 30% operational increase over the prior year. New products, including Revolution Plus and Stronghold Plus, as it's called internationally, PCV combo vaccines in swine, and Core EQ Innovator in equine were also growth drivers in the quarter. Revolution Plus, a topical parasiticide for cats, builds upon the sarolaner compound that is found in Simparica. The product launched in the U.S. this quarter and in 2017 internationally and is off to a great start, supporting strong growth in the Revolution-Stronghold line in the first quarter. The decline in other in-line product volume was related to the timing of cattle product purchases in the U.S., African swine fever in China, the divestiture of certain agribusiness products in Japan, which occurred in the fourth quarter of 2018, and the implementation of stricter commercial and pricing policies in Brazil. The agribusiness historically has seasonal sales, with disproportionate sales in the first quarter. These declines were partially offset by the continued strength of Simparica, now captured in the in-line product category, which generated $48 million in global sales this quarter, representing operational growth of 61% over last year. Now, let's discuss the revenue growth by segment for Q1. U.S. revenue grew 13% in the first quarter. Companion animal grew 30% and was partially offset by a 7% decline in livestock. Excluding the impact of the Abaxis acquisition, U.S. revenue grew 8%. Companion animal sales in the quarter were driven by sales of legacy Abaxis products, in-line products, including our key dermatology portfolio and Simparica, and new products, including Revolution Plus. Excluding the impact of the Abaxis acquisition, companion animal growth was 20%. U.S. dermatology sales were $104 million for the quarter, growing 26%, driven by market share gains, price, and investments in direct-to-consumer advertising, which continue to expand the market. Simparica sales in the quarter were $25 million, growing 40% over the prior year. U.S. livestock declined 7% driven by cattle and swine. Cattle was impacted by the timing of medicated feed additive purchases, and they are continuing to face headwinds while producer profitability remains low. Swine was impacted by the discontinuation of a promotional program for our premium products and the timing of medicated feed additive purchases. The declines in cattle and swine were partially offset by another strong quarter for poultry, driven by the growth of alternatives to antibiotics in medicated feed additives. Despite the decline this quarter, we continue to anticipate U.S. livestock will grow for the full year. Turning now to our International segment. Revenue grew 7% operationally in the first quarter. Companion animal operational growth was 23%, while livestock declined 1% operationally. Excluding the impact of the Abaxis acquisition, International revenue grew 5%. Companion animal product growth was driven by continued expansion and uptake of key dermatology products, the addition of legacy Abaxis products, strong Simparica sales, and growth in China. Excluding the impact of the Abaxis acquisition, companion animal growth was 18%. Livestock declines were driven by the impact of African swine fever in China and the divestiture of certain agribusiness products in Japan, which were partially offset by growth in poultry, fish, and sheep. The complete quarterly results of our top 11 international markets are provided in the tables included in our earnings release, but I would like to highlight a few items for the quarter. The UK had operational revenue growth of 16% in the quarter, with companion animal growing 21% and livestock growing 11%. Companion animal growth was primarily related to legacy Abaxis products and increased sales of key dermatology products and Simparica. Livestock benefited from increased market share in agricultural vaccines in the quarter. In Australia, sales grew 10% operationally, driven by companion animal growth of 15% and livestock growth of 6%. This market benefited from key dermatology, legacy Abaxis products, and Simparica in companion animal, while livestock growth was related to key brand performance in cattle. In Brazil, sales grew 1% operationally, driven by companion animal growth of 43%, partially offset by livestock declines of 13%. Companion animal revenue growth in Brazil was driven by parasiticides, primarily Simparica, and continued strength of Apoquel. Livestock declines in cattle for Brazil related to the strengthening of our commercial and pricing policies, which impacted short-term results. We anticipate these policy updates will strengthen our long-term opportunity in this market. Overall, market dynamics remain positive as does our full-year outlook. Moving on to China, we had a challenging quarter with revenue declining 2% operationally. Livestock declined 28%, driven by challenges in swine. African swine fever is having a greater-than-expected impact, as the outbreak has worsened in China, reducing the size of the swine herd. We continue to expect other regions, primarily the EU, Brazil, and the U.S., to increase exports of pork to China to meet domestic consumer demand. We also anticipate growth in other proteins, although to a lesser degree. Companion animal remains strong, partially offsetting the livestock decline with operational growth of 38% driven by continued growth of vaccines, parasiticides and an expansion of the field force in China, allowing us to capitalize on this fast-growing market. As Juan Ramon mentioned, we're also very excited about the launch of Apoquel into this important market. Other emerging and developed markets also continued to perform well this quarter, particularly in companion animal. Summarizing international performance, continued growth of key dermatology products, the addition of legacy Abaxis products, and diversity across our portfolio, all contributed to a solid quarter despite challenges in livestock. Now, moving on to the rest of the P&L. Adjusted gross margin of 70.2% increased approximately 270 basis points in the quarter on a reported basis, compared to the prior year. The improvement this quarter is primarily related to price, favorable product mix, foreign exchange, and unit cost improvements, partially offset by the inclusion of the lower-margin legacy Abaxis portfolio. We do anticipate a more normalized gross margin in the second quarter as both price and mix impact will moderate. Total adjusted operating expenses, including the impact of the Abaxis acquisition, grew 8% operationally. The increase is primarily related to the acquisition of Abaxis and an increase in certain compensation-related expenses. We are anticipating higher expenses in the second quarter, primarily related to the timing of promotional investments for our key products, the timing of R&D project spend, and the Abaxis integration. We are continuing with direct-to-consumer advertising and promotional campaigns in the U.S. that support our key dermatology and parasiticide products, with our highest expenses occurring in Q2 and Q3. The adjusted effective tax rate for the quarter was 18.8%. The increase from the comparable 2018 period is predominantly related to the impact of the global intangible low-taxed income or GILTI tax, which is a provision of the U.S. tax reform that’s effective for Zoetis in 2019. Our expectation for the full-year adjusted effective tax rate is consistent with initial guidance, which is between 20% and 21%. The favorability in the first quarter is primarily driven by the tax benefits from stock-based compensation. Adjusted net income for the quarter grew 18% operationally through a combination of strong revenue growth, favorability in gross margin, and moderated growth in operating expenses. Adjusted diluted EPS grew 19% operationally in the quarter versus the same period of 2018. Now, moving on to guidance for the full year. Beginning with revenue, we are decreasing both the low end and high end of the range by $75 million to reflect the impact of foreign exchange. As I noted on the fourth-quarter call, U.S. dollar strengthening was something we would be monitoring, and additional USD strengthening has occurred since we set guidance. We’re now projecting revenue between $6.1 billion and $6.225 billion while maintaining operational revenue growth of 7.5% to 9.5% over 2018. Our organic operational revenue growth, which excludes the impact of the Abaxis acquisition, is projected to be between 4.5% and 6.5%, consistent with the guidance provided in February. Adjusted cost of sales as a percent of revenue is still expected to be in the range of 31% to 32%. As I noted earlier, there were some favorable drivers in the first quarter that we expect to moderate through the remainder of the year. We are decreasing the low and high ends of the range for adjusted SG&A for the year to be between $1.45 billion and $1.5 billion, due to the impact of foreign exchange. Moving on to R&D. We expect 2019 expenses to be between $445 million and $465 million, consistent with the guidance provided in February. The full-year adjusted interest and other income deductions is now expected to be approximately $200 million compared to the previous estimate of $220 million. The favorability is largely driven by a reduction in interest expense. Our adjusted effective tax rate for 2019 is expected to be within the range of 20% to 21%, consistent with previous guidance, and we are still projecting adjusted net income in the range of $1.65 billion to $1.7 billion, maintaining 8% to 11% operational growth. With a more limited foreign exchange impact on the bottom line, as well as the benefits of the actions we've taken to reduce interest expense, we continue to expect adjusted diluted EPS to be in the range of $3.42 to $3.52, consistent with previous guidance. Our range for reported diluted EPS of $2.79 to $2.93, however, is a reduction of both the low and high ends of the range based upon increased certain significant items, primarily due to a change in estimate related to inventory costing impacting the first quarter. Finally, I'd like to remind you that our quarterly results may fluctuate, and our focus continues to be on the full year. As I've already noted, we anticipate lower gross margin and higher operating expense in the second quarter, which will impact adjusted EPS. The full-year impact of the Abaxis acquisition will also continue to have a disproportionate impact on the P&L until we pass the acquisition date in the middle of the third quarter. Finally, foreign exchange will continue to negatively impact the P&L in the second quarter with an impact of approximately 300 basis points to revenue growth. Now, to summarize before we move to Q&A. Our first-quarter results continue to demonstrate the value of our geographic and product diversity with operational revenue growth of 11% and operational adjusted net income growth of 18%. We continue to see strength in our companion animal portfolio to drive the year's results and expect growth in livestock for the full year. And we remain committed to delivering on our full-year operational growth rate for revenue and adjusted net income, demonstrating the durability and consistency of our business. Now, I'll hand things over to the operator to open the line for your questions.

Hi, thank you. Can you discuss a little bit how the Abaxis integration is progressing here relative to your internal expectations? It was a little lighter than what we thought in our Abaxis model and is that just the distributor dynamic, and I noticed that the GAAP acquisition-related cost takes a little bit higher, is that all attributable to Abaxis and where we stand with it as the key implementation? And then the second question is on international livestock, just given some of the dynamics around African swine fever and what you called out in Brazil, can you speak to how we should think about that quarterly progression over the course of the year? Thanks.

Thank you, Erin. Let me answer the question on Abaxis, and let me first say that we are pleased with the progress that we're making with the integration of Abaxis. The team in the U.S. is already working well, maybe not fully integrating the two portfolios because we mentioned that full integration requires us to work with the integration of SAP. And related to the implementation of SAP for Abaxis, we have decided to move the implementation from August-September to February because we want our IT team to focus on working on the connectivity of all equipment of Abaxis. We think that this connectivity that we expect to achieve by the end of the year will help us really to have that much more support for diagnostics and offer full integration or full connectivity of the diagnostic equipment to the practice management system. We’re also pleased with the progress that we are making in international markets. We have now almost completed all the hiring process for reps and also for technical support. We have also set up customer service that would help in really providing support to diagnostic customers. So, in general, we are progressing very well. We continue to be very excited about the quality of the Abaxis portfolio, and we are very confident that Abaxis will represent a significant growth opportunity, especially from 2020. Now we see 2019 as a year where we are integrating, we are fixing some of the things that we have identified from the previous Abaxis model, and we are very confident that the projections we have for this portfolio will be very positive. In terms of the international livestock, let me provide a comment on Brazil, and then I will ask Glenn to go into more details on what we expect for the rest of the year regarding total livestock performance. In Brazil, we see a market that continues to grow very fast. It's a very strong growth for Zoetis. The growth in companion animal is above market growth, so we are growing very fast. In cattle, we decided to change some of our commercial policies, including prices, and we saw, as expected, some negative reactions from distribution. This had an impact in the first quarter for Brazil, especially in cattle, but we are convinced that these changes will help us in generating better future growth and improve the profitability of our cattle operations in Brazil. So, we remain very convinced that Brazil will be a growth driver for Zoetis, and we are investing to support this growth. Glenn, do you mind providing more details on international livestock?

Absolutely. Erin, just also to your question on Abaxis and the Q1 performance you referenced, distributor stocking. So far, we talked about the performance in Q1 2019 versus Q1 2018. In Q1 2018, there was stocking with the introduction of the new products in terms of your settlement analyzer and Apoquel rapid test, which did pose a challenging comparison between Q1 2019 and Q1 2018. In terms of the international livestock performance, as Juan Ramon said, our livestock internationally declined about 1% this quarter, driven by the factors that we discussed in terms of African swine fever, as well as the impact in Brazil. We would expect to return to growth in Q2, and that growth to accelerate in Q3 and Q4.

Thank you, Glenn. Next question, please.

Hi. Thanks for taking my question here. So, I wanted to ask you about your temporary weakness in livestock and when do you expect that to subside this year and then return to growth, and how much of that is macro versus company-specific? And then maybe just if you could talk a little bit more about this MSA buyer pattern? Thank you.

Well, as we said, in the first quarter, we faced two impacts in terms of the temporary weakness in livestock. One was that the cattle business in the U.S. was affected by different factors. The market declined. We saw that the movement of animals was below expectations, in many cases driven by weather conditions, but we are optimistic about the cattle business in the U.S. moving forward; the demand for beef is positive, and also the exports are increasing. Additionally, we expect that in the second half of the year there will be a small increase in the price of milk, which will also help the total cattle business in the U.S. As many times we have mentioned, I think it is difficult to analyze our business on a quarterly basis. There are fluctuations based on buying patterns and promotional activities, as well as weather conditions that may be important to understand the business on a yearly basis. We remain confident that the livestock market will be growing by the end of the year. What we are expecting is that the poultry will be growing in line or slightly ahead of the market. In terms of swine, we expect it to grow lower than the market, primarily due to the African swine fever. But we expect to have a temporary impact, perhaps from the third or fourth quarter, and definitely, in 2020, we expect a significant recovery because many markets outside of China will expand production, generating significant growth.

And in terms of the timing of the MSA purchases in the U.S., that’s really related to the timing of our annual price increases. So, in 2019, we aligned the timing of our MSA price increases to be in sync with the rest of our portfolio, which is in January, leading to some additional sales in Q4 of 2018, and then destocking in Q1 of 2019. So that is not an impact that we would expect to see as we move forward through the rest of the year.

Next question, please.

Good morning. Hi, Juan Ramon. Just have a couple of questions here. Companion animal continues to be really strong. You're seeing good growth out of obviously the dermatology portfolio, but also Revolution Plus for cats compared to the dogs. Could you talk about what areas you're focused on with the product development, maybe more on the feline side in the areas that are being medicalized? Also, timing for the monoclonal antibody products? And then Glenn, on the SG&A and operating expenses, clearly there were some favorability this quarter. And you talked about increased spending, DTC campaign in Q2. Could you give us a little bit more color on that? Thank you.

Kevin, we see that the current portfolio still shows opportunities for growth. We see opportunities for growing the parasiticides now with Revolution Plus. We still see that Simparica continues gaining momentum in the U.S. and also in international markets. Apoquel and CYTOPOINT are growing, and we expect to continue growing in the U.S. and also expect to continue growing in international markets. And now, we have the addition of Apoquel in China, which will also support this growth. We are also very confident that this growth is steady for the long-term, because as we said, the current portfolio continues growing, but we expect also to introduce Simparica or a combination of products – three-way products in 2020, and we expect that will continue generating growth. In the future, we are not at this point providing any details of when we expect that monoclonal antibodies to be in the market, but definitely we see opportunities in pain management for dogs and cats and dermatology for cats, again with monoclonal antibodies. We are very confident that the R&D machine will continue bringing innovation to the market, in companion animals, but also in livestock. We have products for both companion animal and livestock that will support growth in 2020, 2021, and also 2022. So, we are very confident that we have a pipeline that will maintain growth that will be in line or faster than the market. And Glenn will respond to the question on G&A.

Kevin, in terms of the operating expenses. So, just for the quarter, our operating expenses grew about 8%. If you back out Abaxis, operating expenses grew around 3%, compared to our revenue growth of 6%. So, pretty much in line with our overall expectations over an extended period of time. That being said, we did have some favorability in R&D expenses in terms of the timing as well. So, as we move through into Q2 and Q3, we'd expect elevated expenses in Q2 and Q3 as that is the timeframe in which our DTC promotions, particularly in the U.S., around our dermatology portfolio and Simparica, kick in at a higher level. And we'd also expect some elevated expenses in terms of our R&D as well.

Next question, please.

Hi, guys. Thanks for taking the question. A couple – I want to dig deeper on some of the moving pieces in the quarter, both on the livestock markets in the U.S. and internationally. If I sort of go through some of the items you called out, African swine fever, the spend, divestment, looking at your revenues by geography, I think I can estimate that ASF may have had a $5 million to $10 million hit in the quarter. The Japan divestment is somewhere in the same ballpark as well. So, I want to get a sense of if that's the right way to think about it? And then is that similar run rate you would expect for ASF going forward? And then the other one would be on the U.S. livestock business. You talked a little bit about the distributor relationship in the stocking in Q4, but just trying to get a sense of the magnitude of that impact in the first quarter versus the rest of the feedlot pressures as well, so we could plan the phase through the course of the year? Thanks.

Thank you, Mike. I will make a general comment on African swine fever. Then Glenn will go to the details of your questions. So, first, the African swine fever definitely is having a significant impact in China, and we also have an impact on our results. We mentioned that probably up to 30% of pigs will be lost due to African swine fever in China. So, if we translate this 30% to our revenues in – we can also estimate that it will be about 30% of our revenues. Although we expect a little bit lower impact because maybe sophisticated farms are less affected by the African swine fever than the production of small farms. We expect that it will be an immediate impact in terms of the value of the pigs. As a reference, in the last quarter, in the fourth quarter of 2018, producers in the U.S., they were losing $20 per pig, and now they are making a $30 profit per pig. So, the value of the pigs has increased significantly, and their willingness to spend and to keep these pigs healthy and productive also will increase. We expect that will have a positive impact, an immediate positive impact. Then, we also expect that farmers or producers in the U.S., Brazil, and European Union will increase production. The cycle of production is six months. But probably we will need to wait six months to see some impact because it will increase the production. Even that if it takes six months from birth to slaughter, I think we can start using products at earlier stages of the animal. So, we expect in the third and fourth quarters of this year to see a positive impact on the swine business in Brazil, U.S., and international markets. And moving into the details of the impact of African swine fever in the quarter and also the Japan agro business and also the U.S. impact on the value, Glenn.

So, Mike, specific to your questions, for ASF and Japan, you mentioned the range of $5 million to $10 million. What I'd say: ASF is probably at the high end of that range for the quarter, and Japan is probably at the low end of that range for the quarter. In terms of U.S. livestock, obviously, we did have the impact in Q1. It's a little above that $5 million to $10 million range that you referenced with the bigger portion of that being cattle.

Thank you, Glenn. Next question, please.

Pardon me. Thanks, guys. Good morning. I've got two long ones. Maybe I'll try to break it up if it's okay with you. The first one is on Simparica Trio; any updates on how the filing or interaction with the agency is proceeding? I'm just curious about your ability to fulfill demand in the early days. Obviously, with Apoquel there were challenges post-launch, although I know some of that was sort of the reliance on a third-party manufacturer. So, any color would be helpful. And then I'll ask a quicker follow-up. Thanks.

Thank you, Jon. We have provision with the discussions with the FDA. We have completed all the sections of the filing and it's just now the normal process of questions and answers. We are confident that this year it's strong and it will be approved by the FDA, but always something that is not depending on us, but on the regulators. One of the challenges that we discussed in the past is that we needed to demonstrate 100% efficacy on how we have to provide these data. We are confident that – probably that will be approved and ready to be launched in 2020. We are trying to learn from previous challenges or issues or mistakes, and definitely in the case of the three-way products, we secured enough active ingredients to be ready to launch the product as soon as the product is approved. So, we are not expecting any challenge in terms of supplying the market or the demand. Next question.

Thank you very much. So, I have three questions, please. First, with respect to U.S. companion growth this quarter, could you just give us the figure, the percentage ex-Abaxis? Second, how should we model livestock sequentially in the second quarter? I just don't have a good feel for how we should think – thinking about the livestock business sequentially in Q2 in the U.S. and ex-U.S. And then, one little tidbit, with respect to the revenue guidance reduction of 1%, was that solely related to FX or was there also some modest impact elsewhere? Thank you.

Sure. So, just in those questions. In terms of our revenue growth excluding Abaxis focused on companion animal, so globally our companion animal business grew 27%. Without Abaxis, we still grew extremely strong at 19% globally. In the U.S., the number was – with Abaxis we grew 30%; excluding Abaxis, we grew 20%, and internationally, companion animal grew 23%. Without Abaxis, we grew 18%. So, really strong organic growth within our U.S. companion business. As we mentioned earlier, in terms of the livestock growth sequentially, when you look at it globally, we did decline 3% this quarter in terms of livestock business on an operational basis. We do expect to return to growth in Q2, and we expect that growth to accelerate throughout the year. In terms of the guidance, we reduced the guidance for both the low and high end of the range by $75 million, that was purely due to FX. There were significant movements at the time from when we set guidance. When we set guidance back in February, we were using rates as of late January, and when we set guidance now, we're using rates as of the end of April, and that had a significant movement, so the movement was purely due to FX.

Thank you. Next question, please.

Hi, this is [indiscernible] on for John Kreger. So, just a quick question surrounding the dermatology portfolio. When you just think about like the penetration rates specifically in the U.S. right now, where do you guys kind of think that is? And then when you think about the international growth in the dermatology portfolio for the rest of 2019 and beyond, where do you guys foresee that going? And then just when you think about them individually, so Apoquel and CYTOPOINT, have they trended well, compared to your expectations? Are you seeing there's a strong preference for one or the other products? Thanks.

In terms of penetration for the dermatology portfolio, I think it's about – in terms of patients, about 63%, which is based on and we still see opportunities first to continue expanding the market. We will be starting now in the second quarter with a detectable tumor campaign. We set two objectives: one is to expand the market, and also the second is to continue building brand equity for Apoquel. We see also that these investments are also having a positive impact on CYTOPOINT. We expect the dermatology portfolio to continue growing. We expect also to grow faster in international markets than in the U.S., but in the U.S., we still see a positive momentum. How much is the preference between CYTOPOINT or Apoquel? In that respect, I think we leave veterinarians to decide what is the best for their patients, the pets. We are not trying to promote Apoquel in favor of CYTOPOINT or CYTOPOINT in favor of Apoquel. We are covering all the spectrum of needs in terms of treating dermatology issues, itching in dogs, and we see that there is some natural cannibalization, but also CYTOPOINT has been growing the market and helping us increase this franchise.

Thank you. Good morning. I've two questions. First, could you just provide a little more clarification on your comments about the impacts of African swine fever on Zoetis? I appreciate that over time, there is going to be a greater demand for the proteins, or will see other regions pick up some of the supply? Can you just help us understand why that's medium to long-term, and why shouldn't we see some of those dynamics sooner, particularly as supply needs to pick up in some other countries? And my second question is on Apoquel. First, could you give us the breakdown between CYTOPOINT and Apoquel sales of $155 million you gave us before? And also, in Apoquel in China, could you give us a sense of the market size, is it similar to the EU5 or U.S., and is CYTOPOINT also under review in China? Thank you.

Thank you for all the questions, Kathy. So, let's go back to the African swine fever and the potential impact. We mentioned that we expect that up to 30% of pigs can be lost because of African swine fever in China. So, if we translate this 30% to our revenues – we can also estimate that it will be about 30% of our revenues. Although we expect a little bit lower impact because maybe sophisticated farms are less affected by the African swine fever than the production of small farms. We expect that it will be an immediate impact in terms of the value of the pigs. As a reference, in the last quarter, in the fourth quarter of 2018, producers in the U.S. were losing $20 per pig, now they are making $30 profit per pig. So, the value of the pigs has increased significantly, and their willingness to spend and to keep these pigs healthy and productive will also increase. We expect that to have a positive impact, an immediate positive impact. Then, we expect also that farmers or producers in the U.S., Brazil, and European Union will increase production. The cycle of production is six months, but probably we will need to wait six months to see some impact because it will increase the production. Even if it takes six months from birth to slaughter, I think we can start using products at earlier stages of the animal. We expect in the third and fourth quarters of this year having a positive impact in the swine business in Brazil, U.S., and international markets. And moving into the details of Apoquel breakout, Glenn, do you mind answering that? And also, probably, those projections in China and providing some context.

Sure. So, in terms of the total derm revenue, we had $155 million in total sales for the quarter with growth of 30%. To the earlier question, in terms of penetration, U.S. has $104 million in sales, and international had around $52 million. The similar amount of medicalized dogs in the U.S. is international, we would expect more rapid growth from international greater penetration over time internationally. The breakout of $155 million between Apoquel and CYTOPOINT; we had $119 million of sales of Apoquel with 22% operational growth, and we had $36 million of sales in CYTOPOINT with 65% operational growth. In terms of Apoquel in China, we’re very excited about the launch of Apoquel in China, which is one of our largest and fastest-growing companion animal markets. Just to put in context, in 2018, Apoquel globally in all of our international markets, including the U.S., had less than $160 million in sales, with our top market internationally generating sales of just below $30 million. So that should give some overall context in terms of the potential of Apoquel in any given international large companion animal market.

Thank you. Next question please.

Great. Thanks very much. Just two questions, maybe first on Simparica Trio. Just a little bit more color about how we think about the launch of these new triples, how quickly they'll be adopted. Should we be thinking about these as products that could have significant year one uptake or is this a more gradual kind of three to five-year process as these roll out? The second question, I know it's been touched on a little bit, but your companion business, particularly in the U.S. companion business, was particularly strong in the quarter and above recent trend, just elaborate a little bit more on what you're seeing here, and if there's anything with either one-time related or year-over-year timing related in terms of the strength we saw this quarter. Just trying to get a sense of how much of this is really healthy organic kind of underlying growth versus timing issues? Thanks so much.

First, starting with the combination of product for parasiticides. Well, their options – I think we expect their options would be fast and also will depend. If we are number three, number two, or number one in the market, but definitely we see a need for the market to combine internal and parasiticides, mainly in dogs. We are confident that we have significant opportunity to generate growth in 2020, 2021, and also 2022 because we think this probably will have a long run, and definitely the opportunity is really to generate our growth in companion animal. Glenn will talk about the U.S. companion animal growth in the quarter and the trends for the future.

Yes. So, what I would say, Chris, is the overall global companion animal growth was very strong. When you take out the impact of Abaxis, we grew 19%, 20% in the U.S., and 18% internationally. So, both segments grew very rapidly in companion animal, and those are driven just by strong underlying dynamics and trends, particularly around the derm portfolio around Simparica and also really strong performance of Revolution Plus. Q1 of 2019 was the launch of Revolution Plus in the U.S.; it's off to a very successful start. There is some stocking in Q1 of 2019, particularly in the U.S., but still the start that we're seeing in Revolution Plus is very, very encouraging.

Thank you, Glenn. Next question please.

Great. Thanks for taking the questions. This is Greg Fraser on for Gregg Gilbert. As [indiscernible] that the livestock business was impacted by destocking related to consolidation in the distributor space, that's something that you've observed, I wasn't sure of your comment on distributor purchasing patterns, which related to what they described, and just a quick follow-up on the livestock commentary, are you anticipating growth for international for the full year? Thank you.

Probably we still have some challenges with distribution in Brazil, but not in the U.S. In Brazil, I mentioned that we have these changes in the commercial policies that impacted sales to distribution during the quarter. But, as I mentioned, we expect that this will support more quality growth in the future, but no changes in distribution in the U.S. So, Glenn, do you want to add comments here?

No, just to your question on livestock growth for the full year. We still are expecting livestock to grow globally in the U.S. and internationally.

Thank you. Next question please.

Hi, this is Prakhar Agrawal on behalf of Navin Jacob. Two questions, please. First, on poultry, your growth in poultry products was quite strong. So, could you give more color on what is driving that in terms of the near-term trends and anything specific from your product portfolio? And secondly, one of your competitors recently made an acquisition that included some oncology products, so is Zoetis making an R&D investment in oncology, and do you think this market is commercially attractive? Thank you.

I will ask Glenn to answer the question on poultry, and then I will cover the oncology part of the question.

So, from a poultry perspective, we continue to perform very well in poultry. Overall, very solid growth, higher than the rest of our portfolio livestock, and really that's driven by our portfolio of alternatives to antibiotics in poultry that we continue to perform very well within the MSA sector. So that's something that's been consistent for us over the last number of quarters and a trend that we expect to continue.

And on oncology, we have already a product in oncology, which is working well. We launched this product some years ago. We continue assessing the oncology market, and we have some internal programs related to monoclonal antibody and some of the products such that the oncology market is very limited; however, it may become a potential attractive market in the future. But today, it is quietly with that opportunity. I think that concludes the questions, and thank you very much for joining us today. As we said, we remain very confident about the outlook for 2019, and we are maintaining our operational growth, and we are also maintaining our target in terms of adjusted net income. Thank you very much for your attendance.