Zoetis Inc - Class A (ZTS) — Q2 2023 Earnings Call Transcript

Thank you, operator. Good morning, everyone, and welcome to the Zoetis second quarter 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, our Chief Financial Officer. Before we begin, I will 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 and 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 the company’s 8-K filing dated today, Tuesday, August 8, 2023. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Thank you, Steve, and welcome everyone to our second quarter earnings call for 2023. I hope you were able to join us or listen to our Investor Day this past May. If you missed it, please check out our replay on zoetis.com. I think you will find it worth the time in learning more about Zoetis and where we see future growth in animal health. We appreciated the opportunity to step beyond the cadence of our quarterly earnings call and speak about the long-range perspective on our business and our industry during Investor Day. We also appreciated your questions and the ongoing dialogue about the issues most important to you. As you know, we shared more detail about our growth strategy, innovative pipelines, and the key franchises, capabilities, and investments we are making to build on our competitive advantages as the world leader in animal health. The four tenets of our value proposition were affirmed and expanded on throughout the day, and you can expect us to revisit that framework and provide progress updates in future investor interactions. Our goal is always to ensure that you understand how we are positioned to deliver on our value proposition: the revenue growth, strategic investments, margin expansion, and capital returns. With that covered, let's turn now to the second quarter financial results. Today, we reported strong second quarter results of 9% operational growth in revenue and 12% operational growth in adjusted net income based on our diverse portfolio across markets and species. As expected, we returned to a more balanced segment growth this quarter with 11% operational growth internationally and 7% growth in the U.S. Our companion animal portfolio grew 11% operationally, driven by our major franchises in dermatology, osteoarthritis pain, and pet parasiticides. The second quarter results and drivers were more in line with our performance trends in recent years, with innovations and strength in our companion animal portfolio leading the way. Meanwhile, our livestock portfolio grew 4% operationally in the second quarter, driven by sales of poultry, cattle, and fish products, and continue to demonstrate the benefits of our diversified portfolio across species and geographies with a strong first half. Overall, the first half of 2023 has played out much as we expected. We have grown revenue 6% operationally in the first half, driven by strong results from our international markets and livestock performance, which were partially offset by the distributor destocking we explained in the first quarter. As expected, the impact of distributor destocking in our U.S companion animal portfolio has stabilized and was not a significant factor in the second quarter. We continue to see strong customer demand for our companion animal portfolio. For the first half of 2023, companion animal grew 5% operationally. We believe companion animal should be a bigger driver of performance for the remainder of the year with a stronger second half driven by our key franchises. While we are monitoring how inflationary pressures may impact pet care spending in markets around the world, the underlying demand has remained steady and resilient to date, and this is what we have seen historically. In the U.S., veterinary clinic visits continue to stabilize, staying relatively flat through the first half of the year, and clinic revenue and spend per visit were both up about 9% in the U.S. in the first half. Meanwhile, our livestock portfolio grew 8% operationally in the first half of 2023, reflecting strong growth internationally and continued supply recovery in our U.S cattle products. We expect livestock growth for the full year to be in the low single digits operationally, reflecting tougher comparisons in the second half of the year for our U.S portfolio. With the first half of the year playing out largely as expected, we are maintaining our full year guidance for operational growth of 6% to 8% in revenue, and 7% to 9% in adjusted net income. In our companion animal portfolio, we expect Librela and Solensia to continue to ramp up in various markets as we build our franchise for osteoarthritis pain. One way we are supporting growth for both products is increased use of direct-to-consumer campaigns in launch markets. These campaigns are building disease and product awareness, creating conversations among vets and pet owners, and accelerating our efforts in markets where DTC is available. We're also pleased to have received U.S regulatory approvals in the second quarter for Librela and for Apoquel Chewable. Both have been performing well in markets outside the U.S. to date. Librela is expected to launch in the U.S. in November, with an early experience trial beginning in September. As we look at the second half, we continue to expect strong growth, even as we factor in uncertainty around the macroeconomic conditions and drought that exists in certain countries around the globe, particularly Asia Pacific, and tougher comparisons for the U.S livestock portfolio. As we have seen historically in these types of environments, our global footprint and diverse portfolio provide more stability to our business during uncertain times. And we remain ready to pivot resources and investments to the greatest opportunity areas that can ensure we continue to deliver on our commitments. For example, we continue to expand in large and growing product areas, such as parasiticides, dermatology, monoclonal antibodies for pain, vaccines, and diagnostics, and invest in the franchises and capabilities that support our future growth, many of which we discussed at Investor Day. Before I wrap up, three quick points around our colleagues. First, I want to welcome Ester Banque to our Zoetis Executive Team as EVP and President of U.S Operations. Ester joined us in July coming most recently from Bristol Myers Squibb and having spent a major part of her career at Novartis as well. She brings diverse global experience in health care and an impressive track record of driving results to Zoetis. And I'm happy to say she is already off and running with the U.S business. I also wanted to call out the recent publication of our 2022 sustainability report. This year's report captures how sustainability is integrated across the business and shares the progress we are making toward our driven to care aspirations. This report honors our outstanding Zoetis colleagues who champion our purpose and work every day to make us the world's most trusted and valued animal health company. Finally, I wanted to mention a recent recognition from Fast Company, which names Zoetis as one of the Best Workplaces for Innovators. Shaping animal care through innovation is something we've always done across the company, and it's been a key element of our success. This is a well-deserved honor for our culture and our people who continuously strive to solve critical unmet medical needs in animal health, from chronic illnesses like osteoarthritis pain and allergic dermatitis for pets to emerging infectious diseases threatening the food supply. I'm truly proud of our colleagues for receiving this recognition. In conclusion, with a solid first half behind us, I remain very positive about achieving our full year guidance, thanks to the purpose-driven colleagues, innovation-driven culture and diverse portfolio that continue to drive our success. Thank you. And now let me hand it off to Wetteny.

Thank you, Kristin, and good morning. As Kristin mentioned, we had a strong second quarter with balanced growth across both our companion animal and livestock portfolios, as well as our U.S and international segments. In the second quarter, we generated revenue of $2.2 billion, growing 6% on a reported basis and 9% on an operational basis. Adjusted net income of $652 million was up 15% on a reported basis and 12% on an operational basis. Of the 9% operational revenue growth, 4% is from price and 5% is from volume. Volume growth consisted of 2% from other in-line products, 2% from new products, including our monoclonal antibodies for osteoarthritis pain, and 1% from our key dermatology portfolio. Companion animal products are the primary driver of growth this quarter, growing 11% operationally, with livestock growing 4% on an operational basis in the quarter. For companion animal, our key dermatology portfolio was the largest contributor to growth in the quarter, posting $355 million in revenue, our largest quarter ever, representing 14% growth on an operational basis. We saw double-digit operational growth in both international and the U.S., driven by strong growth in Cytopoint as well as growth driven by Apoquel and the conversion to Apoquel Chewable in certain international markets. Our monoclonal antibodies for osteoarthritis pain in dogs and cats, Librela and Solensia posted $69 million in revenue globally in the quarter, with strong demand for both products as well as the impact of the launch of Librela in several new international markets. Our companion animal parasiticides also contributed to growth in the quarter, driven by our Revolution franchise, which had $103 million in revenue and grew 22% operationally. Simparica Trio also contributed to the parasiticide growth with $248 million of revenue and growth of 5% operationally. Our global companion animal diagnostics portfolio recorded $92 million in revenue in Q2, growing 12% operationally. We saw double-digit growth in the U.S. driven by high instrument placements in the quarter and disruptions from the implementation of our new field force model that impacted the prior year. Sales of our livestock products grew 4% on an operational basis in the quarter. We saw growth across both our U.S. and international segments driven by poultry, cattle, and fish. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter, growing 7% with companion animal products growing 7% and livestock sales growing 5%. As Kristin mentioned, our companion animal performance in the quarter reflects the stabilization of the distributor inventory levels that were a headwind to our growth in Q1. U.S. vet visits were flat in the quarter. Revenue growth and average revenue per visit were both up 8%. These trends are in line with expectations and continue to reflect the stabilization post-COVID. Turning to U.S. product performance. Our key dermatology product sales were $241 million for the quarter, growing 10% and benefited from higher periodic patient visits in the quarter. Cytopoint sales continue to drive growth with vets and pet owners showing a preference for injectables. Our U.S. small animal vaccines revenue grew 20% in the quarter, driven by higher sales of our canine influenza virus vaccine, due in part to a competitor back order, as well as higher sales into certain corporate and strategic accounts. Apoquel Chewable posted sales of $213 million in the quarter, growing 2%. Growth was driven by inpatient demand across all channels, partially offset by a difficult comparison period given the timing of distributor shipments from last year during our supply challenges as well as aggressive competitive promotion in the current quarter. Our growth cadence for Trio across the year will be impacted by the timing of supply recovery in 2022, and we expect growth rate improvement in the second half. As expected, we received FDA approval for Librela in the U.S. in May. We look forward to starting our early experience program in late Q3 with an expected November launch. Now turning to U.S. livestock. We saw 5% growth in our livestock portfolio in the quarter, primarily from our cattle business, where we saw significant growth in Jackson, resulting from a favorable comparative quarter last year when an anticipated midyear price reduction limited sales in the quarter. Additional U.S. cattle growth came from Synovex, which benefited from our reimplementation label claim. Our U.S. poultry portfolio also contributed to growth of 11% based on our vaccine portfolio and an increased focus on the egg layer market. We also benefited from favorable MFA rotations at certain large producers. Moving on to our International segment, where revenue was $1 billion, growing 6% on a reported basis and 11% operationally in the quarter. International companion animal revenue grew 17% operationally in the quarter, while livestock revenue grew 4% operationally. Increased sales of companion animal products resulted from growth of our small animal parasiticides, our monoclonal antibodies for osteoarthritis pain, and our key dermatology products. Our international parasiticide portfolio growth was primarily driven by a Revolution franchise with $57 million in revenue, growing 52% operationally driven by the lack of supply last year, which particularly impacted China in the second quarter of 2022. Our Simparica franchise also contributed to growth with continued market share expansion, especially in Latin America, Europe, and Asia. We continue to see strong adoption of Librela and Solensia. Librela generated $48 million in revenue with 89% operational growth in the quarter, driven by strong growth in Europe, supported by our direct-to-consumer advertising efforts in major markets and recent launches in various international markets, including Canada, Australia, Brazil, and Japan. Solensia delivered $11 million of second quarter sales internationally, driven by higher demand and supported by direct-to-consumer marketing efforts. Our international key dermatology portfolio grew 22% operationally. We continue to see double-digit operational growth across most of our major markets, driven by growth from and conversion to Apoquel Chewable as well as from Cytopoint with higher compliance and new patients. Our growth also benefited from a weak comparative quarter in Japan, which was impacted by pre-priced buy ups in Q1 of last year. Moving on to our international livestock portfolio, which grew 4% on an operational basis in the quarter. Our poultry portfolio performed well with growth driven by key account penetration and MFA rotations in core poultry markets, including Europe, the Middle East, and Latin America. Our fish portfolio continues to perform well as a result of increased sales of vaccines across salmon markets in Norway and Chile. Lastly, our cattle portfolio saw gains in Turkey, Brazil, and Argentina from strong price growth and the recovery of supply issues. Now moving on to the rest of the P&L for the quarter. Adjusted gross margin of 72.4% improved 260 basis points on a reported basis compared to the prior year, resulting from favorable foreign exchange, price increases, and favorable product mix. This was partially offset by higher manufacturing costs in the quarter. Adjusted operating expenses increased 8% operationally, with both SG&A and R&D growing 8% operationally, driven primarily by headcount-related compensation costs due to the timing of new hires in 2022 and the impact of annual salary increases. The lower growth in R&D expenses this quarter is reflective of the timing of spend in project investments and not a reduction in our expected R&D spend for the full year. Year-to-date, adjusted R&D expenses have grown 13% operationally. The adjusted effective tax rate for the quarter was 21.5%, an increase of 80 basis points, driven by higher net discrete tax expenses in the quarter, mainly related to changes to prior year's tax positions and less favorable jurisdictional mix of earnings, partially offset by a higher benefit in the U.S. related to foreign-derived intangible income. Finally, adjusted net income grew 12% operationally and adjusted diluted EPS grew 14% operationally in the quarter. Capital expenditures in the second quarter were $166 million and continue to be on track with our expectations for the year. In the quarter, we repurchased $324 million of Zoetis shares. Now moving on to guidance for the full year 2023. Please note that guidance reflects foreign exchange rates as of late July, beginning with revenue for the full year due to unfavorable foreign exchange. We are slightly lowering our revenue range while maintaining our guidance on operational revenue growth. We expect revenue between $8.50 billion and $8.65 billion, representing a range of 6% to 8% operational growth. With the approval of Librela in the U.S., we are now including our projected sales for November and December in our guidance, which are expected to be immaterial to our overall operational growth rate. Their impact on the full year revenue is largely offset by potential uncertainty in China as well as broader macroeconomic conditions in certain markets. Operationally, the first half has played out largely as we expected with 6% operational revenue growth. We expect stronger growth in the second half of the year overall, especially in our U.S. companion animal business. In livestock, which has grown 8% year-to-date on an operational basis. We anticipate unfavorable comparisons in the second half, driven by the timing of price decreases in Jackson in the U.S. last year and the resumption of supply of several products after outages in the first half of 2022. We expect adjusted net income to be in the range of $2.50 billion to $2.55 billion, slightly above our previous guidance while maintaining our previous guidance of operational growth of 7% to 9%, driven by foreign exchange favorability in cost of sales and expenses, which were partially offset by unfavorable revenue. Reported diluted EPS increases to a range of $5.15 to $5.27, which is impacted by foreign exchange and a one-time gain from a business development deal. And finally, due to the impact of foreign exchange, we are increasing adjusted diluted EPS to be in the range of $5.37 to $5.47. Just to summarize before we go to Q&A, we saw strong, well-based growth in the second quarter, growing in both companion animal and livestock as well as in the U.S. and internationally, with contributions from price and volume. We expect stronger growth as we move into the second half. We remain confident in our ability to deliver on our operational full-year guidance commitments. We continue to see improving fundamentals in the overall industry and remain committed to delivering on our value proposition to grow revenue faster than the market and to grow adjusted net income faster than revenue. Now I'll hand things over to the operator to open the line for your questions.

Great. Thanks for taking the question and congrats on the quarter, Kristin and Wetteny. I want to start with Trio real quickly. We've seen we finally see NexGard Plus in the U.S. from Boehringer Ingelheim. I just want to ask, how do you see this market playing out? There's a lot of debate on the label differences Trio versus NexGard Plus, the 6-month versus 1-month warm detail as well as how it's going to be priced with the promotions being put out at the start of the launch. So what are your expectations for Trio now that the competition is finally here both for the second half and for 2024? And if I could squeeze in a follow-up. I want to ask on Librela. It continues to be really well OUS. I think it's on track for over $200 million this year from OUS alone. Any learnings or changes to your assumptions now that you can take that into the U.S. launch? Fair to say that it could be incremental $75 million, $100 million to revenue next year? Thanks.

Sure. Thanks, Mike. I'll begin with the first question and then let Wetteny discuss Librela. The label for NexGard Plus was largely what we anticipated. I believe Simparica Trio has a superior label and was the first to enter the market. Currently, Simparica Trio is the top choice in the companion animal segment in the U.S. We have three years of proven effectiveness and experience with this product, and we will continue to leverage our retail auto-ship program. In contrast, NexGard Plus does not include heartworm prevention from the first dose, offers four ticks instead of five, and lacks a label for Lyme prevention. It does have a lower minimum weight requirement. We believe that our Simparica Trio label is a strong asset, and we will actively compete against NexGard Plus. We anticipate a significantly better third quarter for our product compared to the previous year, which bodes well for the second half of the year. We expect notable promotions and have seen competitors engage in similar tactics before. Beyond promotions, we are confident in our product's competitiveness due to the strength of our label and our proven experience with the product. Our strong relationships with corporate partners and satisfied pet owners also bolster our position. We are prepared for substantial competition but remain confident in our strengths and look forward to increased growth in the upcoming quarter and second half of the year. Wetteny, would you like to address the question on Librela?

Sure. Mike, thanks for the question. Look, we remain really on track with EU performance, and we are very pleased to see $48 million of Librela revenues in the quarter, up 89% versus the prior year. We also launched the product in a number of new markets in our International segment including Japan, Australia, Brazil, and Canada. Those contributed about $10 million for the quarter. So we continue to see really strong demand for the product, and we are starting to initiate DTC campaigns, which will continue to drive awareness across both Librela and Solensia in our markets. It is already, as we said last year, the #1 osteoarthritis pain product in the EU. Look, we won't necessarily get into what the expectations are for next year. Obviously, we'll do that as we get into guidance for the year. We are expecting to continue to see strong growth for Librela on the balance of the year. I will note, last year, we did see a bit of an uptick in the third quarter. That was, as we released the allocations that we are on, and we saw clinics order a bit more, that was offset in Q4. So just a little bit of a dynamic in Q3 and Q4. But really, with the new markets as well as continued growth in EU, we are expecting very strong growth in the third quarter as well.

Hi. Good morning. Thanks for the questions. First, Wetteny, I wanted to start with the outlook for companion. I think you had talked about it improving in the back half of the year. Was that relative to the 5% growth in the first half? Or is that relative to the second quarter growth, which is obviously higher? Any context you can kind of provide as well on just kind of cadence through Q2 versus 4Q would be helpful. And then just a follow-up on the commentary on Trio. Could you maybe just talk about the 2% operational growth and the different factors that impacted that in the quarter and then the kind of type of growth that you would expect in the back half of the year, just given the competitive launch that you mentioned as well as maybe a normalization of supply.

Yes, I'm happy to address this and see if Kristin has anything to add. Regarding companion animals, we have reaffirmed our operational guidance of 6% to 8%. Although livestock experienced around 8% growth in the first half, we noted a 4% operational growth in livestock during the second quarter. As mentioned in our prepared comments, we expect livestock growth to be in the low single-digit range. It is clear that growth in the latter half of the year will largely come from companion animals. Additionally, considering the supply timing in 2022, we anticipate an easier comparison for the U.S. companion animal business in the third quarter compared to the fourth quarter. These factors will influence how we align with our operational guidance, which is primarily driven by companion animal growth in the second half of the year. Overall, I expect the third quarter to be strong, likely falling within the mid to high end of our annual range. After last quarter, we acknowledged the impact of distributor destocking on normalized growth for the remainder of the year, which translates to around 8% if we use the midpoint of our guidance. We exceeded that, aligning well with our expectations for the quarter. Looking ahead, I anticipate Q3 to slightly outperform Q4 based on the insights shared regarding companion animals versus the tougher livestock comparisons in the third quarter. Regarding Trio, as Kristin mentioned, we are entering a robust third quarter despite a competitive launch that is expected soon. Last year's supply cadence varied, with a stronger Q2 compared to Q3, and that will influence Trio's growth. Given the first mover advantages we have with Trio, which has been on the market for over three years, and our confidence in our product, we expect continued growth for Trio this year.

Great. Thanks, everyone. Good morning. I'll start with the first question regarding gross margin. Wetteny, I believe the second quarter of 2023 had the highest gross margin in the company's history. Could you discuss the factors contributing to that and, more importantly, whether these factors are sustainable? The second question builds on a previous inquiry: Is Trio a modest downside driver for the implied growth of the companion animal segment in 2023? I think I am correct in noting that livestock growth turned from flat to low single digits, while overall operational growth remained unchanged at 6% to 8%, leading to a slight reduction in implied companion animal growth. Are we thinking of Trio as a contributing factor to this, possibly due to some of the promotions you mentioned earlier? Thank you for your time.

In the second quarter, we achieved a gross margin of 72.4%, an increase of approximately 260 basis points compared to last year. Currency fluctuations contributed about 200 basis points to that increase. We based our overall guidance on currency rates as of the end of July, so I won't speculate on future implications. Other factors positively influencing our gross margin include favorable pricing and mix. As we noted, livestock will have a tougher comparison in the latter half of the year compared to companion animals, especially in the third quarter, but we expect price mix to continue benefiting us. Manufacturing costs are rising, with the first half typically being more expensive than the second half due to the seasonal nature of cattle runs in the fall, which usually leads to a slight decrease in our overall mix. However, considering the strong demand for companion animals in the second half, we believe the overall mix will remain positive. Regarding the latter part of the year, we anticipate that Trio will make a significant growth contribution, and we expect a robust third quarter. Overall, we are still projecting operational growth of 6% to 8%, consistent with our earlier guidance after a strong second quarter. From a broader economic perspective, we are monitoring China, where consumer confidence is low and savings rates are high, as this could affect tourism and economic conditions in Southeast Asia. We are keeping these factors in mind as we plan for the rest of the year.

Yes, I want to emphasize that Trio is not the factor driving any changes in the second half. It's important to highlight what Wetteny mentioned and our previous comments. We're currently facing uncertainties in China, Southeast Asia, and Australia due to drought conditions. The strength of Zoetis lies in the diversity and durability of our portfolio across different markets, species, and therapeutic areas. While we see strength in many areas, uncertainties persist in China, Southeast Asia, and certain other markets like Spain, which is dealing with high inflation and weather challenges. I want to clarify that the concerns for the second half are primarily related to macroeconomic, geopolitical, and weather uncertainties, rather than Trio specifically.

Hi, thank you for the question. Could you discuss the dermatology market in 2024? I'm interested in your expectations for the growth of monoclonals compared to small molecules in light of an emerging competitor. Additionally, could you confirm that Librela U.S. is not included in the 2023 guidance? Thank you.

Sure. I can start with your second question. Yes, Librela U.S. is in, as we noted in Wetteny's remarks. Regarding your question on dermatology, Wetteny can certainly follow up with you on that. We have been leading the way in dermatology with both small and large molecules. We are driving awareness through direct-to-consumer marketing. We believe there is significant market potential in both developed and emerging markets, with many untreated cases still present. We are focusing on investing in direct-to-consumer branded marketing in the U.S. and unbranded efforts outside. This year, we are looking at double-digit growth. In Q2, we experienced 14% growth with strong performance in both product categories, showing real strength. We are continuing to innovate; for example, we received approval for Apoquel-2 in the U.S. We are also looking at long-acting Cytopoint and different species, and we do anticipate competition. We've been expecting it for a while and anticipate it to come in 2024. However, we observe a growing preference among both veterinarians and pet owners for Cytopoint due to compliance reasons, particularly for atopic dermatitis. Therefore, we expect to see continued strong growth in dermatology and are anticipating double-digit growth for the year. In the quarter, we saw great strength from both products, but it's important to note that we believe Cytopoint will grow faster. Both veterinarians and pet owners are focusing more on Cytopoint as a key driver of our dermatology franchise, and we plan to back this up with ongoing strong innovation in what we see as an important area. Wetteny, do you want to add anything regarding the dermatology question or Librela?

Yes. We had a very strong quarter for dermatology in the second quarter and expect another strong quarter and a solid second half for dermatology, particularly driven by Cytopoint. Regarding Librela, I want to provide some additional insight into our thoughts on that. We are very pleased to have received approval in May, which aligns with our expectations shared over the last two or three quarters. We anticipated approval in the first half of the year, followed by an early experience program and a launch later this year, and we remain on track for that. We plan to start the early experience program next month, with the launch expected around November. Considering the holidays and the typically slower period for clinics, we do not expect a significant contribution to growth this year. However, we are seeing great performance outside the U.S. and are launching in other markets as expected, achieving an 89% growth rate for Librela in the quarter. We have accounted for that growth in our guidance, but again, it will not make a significant contribution.

Good morning. Thanks for taking the question. Just first on EPS and guidance. I just wanted to clarify the beat was pretty strong in the quarter, I think about $0.09 relative to the industry. EPS at the midpoint for guidance came up 3 points and just clarify, is that entirely the delta between those two? Is that entirely FX, or is there anything else there we should be keeping in mind? And then as we think of the rest of the year, kind of following up on that guidance, I think you said 4% pricing in the quarter. Can you just remind us when some of these pricing increases came in? Does the benefit of pricing kind of slow down in the back half? And does that imply any improvements in volume and guidance? Thanks.

Yes, I'm glad to provide an answer. In our guidance today, we've highlighted two main factors. First, as mentioned last quarter, we've been closely monitoring foreign exchange due to the volatility in certain currencies we deal with. Consequently, we've adjusted our guidance for foreign exchange at the revenue line, which is negative, amounting to roughly 75 basis points of growth on a reported basis affected by foreign exchange. However, this has a positive impact on earnings per share, contributing about $0.03. What this indicates from an adjusted perspective is primarily driven by foreign exchange. Also, from a reported standpoint, we are factoring in some gains from a couple of deals that are increasing the earnings per share rate. Regarding the second half of the year, we anticipate a robust performance from companion animals compared to livestock due to the comparisons. In the third quarter, we observed slightly lower operating expenses than in the fourth quarter from the previous year. Therefore, I expect operating expenses to be somewhat higher in the third quarter relative to the fourth quarter for the remainder of the year. Additionally, pricing adjustments typically occur early in the year, although some markets may see midyear price increases. Overall, pricing changes tend to happen early in the year and align with the performance we've indicated in our numbers.

Hi, thank you very much. This is [indiscernible] filling in for Chris. My first question is about dermatology. Could you update us on your life cycle management status? What additional insights do you have regarding the evolution of your dermatology portfolio in the coming years, particularly regarding potential new mechanisms or methods of administration? My second question is about Europe. You had a very strong quarter for companion products outside the U.S. Can you provide some details on the trends you're observing there and your expectations for the second half of the year? Thank you.

Sure. Thanks for the question. I'll address your inquiries and let Wetteny add to them. Life cycle innovation is essential in dermatology, and we are focusing on it in various areas. We received approval in the recent quarter for Apoquel Chewable, which was already approved outside the U.S. This approval is significant for numerous pet owners who struggle with giving their dogs pills since the chewable form offers considerable value. We're also exploring monoclonal antibodies and longer-acting solutions in this area, as well as life cycle innovation for other species since dermatology issues are common among companion animals. The market is substantial, and we will continue to lead in innovation and address life cycle opportunities across multiple areas, including small molecules and monoclonal antibodies for different species. Regarding Europe, it appears that growth has exceeded expectations for the year, particularly due to energy challenges we anticipated during the winter. We've seen strong performance, especially in Northern Europe. However, Southern Europe does not seem to be performing as well, facing greater inflation and severe weather conditions such as heat waves and drought in regions like Spain. Nonetheless, we see strong demand continuing in Northern Europe and anticipate ongoing growth there. Wetteny, would you like to add anything?

Yes. Look, I think just stepping back from a companion animal performance perspective, we've continued to see strength there across our international markets. Even in emerging markets, just in Poland recently you're seeing a real uptick in terms of companion animal continuing to take hold. I think some of the innovation that we have may take some time to take hold in other markets outside the U.S. and it takes longer to get to those peak sales. We are continuing to see really strong derm growth across our international markets and so on. So we believe that is sustainable. The first half, we've seen really strong growth there in terms of companion animal. Across international, we saw 17% operational growth in companion animal in the quarter following a 10% growth in Q1. I would continue to expect double-digit growth, maybe not at the level we saw in Q2 in the back half for international, we continue to see double-digit growth there.

Hi. Thanks for taking my question. So I wanted to ask you about some of the pushes and pulls to your commitment to the mid to high single-digit revenue growth that you've talked about over the next 3 to 5 years? Thank you.

Thank you, Louise. We are still committed to the guidance we shared at Investor Day in May. Firstly, I want to highlight the resilience of the animal health industry. Historically, this industry grows at a rate of 4% to 6%. We expect to see strong tailwinds that will support growth in the medium to long term, including increasing medicalization in emerging markets, rising population numbers, and the strength of the bond between humans and animals. Notably, 86% of pet owners are willing to spend whatever is necessary to care for their pets. However, what sets Zoetis apart is our innovation, especially in treating chronic diseases. We believe we can build on our new franchises over time. The growing global population also creates a demand for more sustainable methods of producing agriculture, meat, and proteins. Thus, we are confident that Zoetis will continue to exceed the market growth rate of 4% to 6%, as we have historically outperformed by nearly 3%. Zoetis is well diversified and recognized as the leader in innovation, with strong franchises that are continuously growing, including areas like dermatology, parasiticides, OA pain management, diagnostics, and emerging markets. Therefore, we view the industry as highly attractive and resilient. Most importantly, we believe that Zoetis, as an innovation leader, will continue to advance in this significant sector.

Good morning. This is Balaji. Thank you for taking my question. I have a brief inquiry about the global parasiticide market. During the Investor Day, you mentioned that the global parasiticide market is projected to grow from $6.3 billion in 2022 to approximately $10 billion to $12 billion by 2032, indicating a compound annual growth rate of around 6%. You also noted that Zoetis anticipates growing at a rate faster than the market in this area. Could you provide insight into the upper half of the market share for Zoetis' parasiticide business over the next 3 to 5 years? Additionally, how much of our future growth in this segment will come from new product launches, and how much will be driven by the revenue increase from Trio and Revolution Plus? Thank you.

Sure. Thanks for the question. I'll start and I'll let obviously Wetteny build there. We are the leader in parasiticides. We are really proud of that. We really see this as an important franchise. We have a broad set of products from Revolution to ProHeart to Simparica to Simparica Trio. We will be continuing to innovate in this important area. It is, by far, as you talked about, the largest therapeutic area in animal health. We really see a few things. Obviously, we are going to lead with innovation. We are going to lead with innovation in products that are easy to use, that really meet the customer demand as well as what our veterinarians are looking for. And we believe there's continued innovation in the space. We are looking at long-acting, we are looking at injectables, and we are looking at other combinations. Controlling parasites is critical to the overall health of the animal because if you don't, it creates lots of other issues for animals. So we'll continue to grow in this important space. We think it will continue to be a major contributor to Zoetis' growth over the time period. So I don't know, Wetteny, you want to add anything there?

Yes. What I would say is that parasiticide is the largest market segment within animal health and is quite competitive. If you look at the range of new medications, these are relatively recent standards of care, and we will continue to see them expand the market in terms of both dosage and pricing. Our primary focus is in the oral space, so I expect our growth to outpace that of the market. However, it remains competitive, and we will keep innovating alongside others.

Yes. The only thing I'd also add there is one other growth that we haven't talked about much today is an increase in compliance. I think if you look at retail and auto-ship and injectables, I think right now, if you believe that the research will show you the average pet is really on a bet 6 to 7 months when they should be on 12 months for many of these products. So I think if we can do a better job of driving compliance either through auto-ship on e-commerce or home delivery through the vet or dual-injectables where you can guarantee compliance. So we think there's lots of potential growth drivers for Zoetis to continue to drive this market and take share.

Hi. Good morning. This is Chris on for Steve. We had two questions. First, on the U.S. pet health market. You mentioned U.S. vet visits were flat in the quarter. Is this capacity driven? Or is it more related to demand and weakening new patient visits and oneness visits? And then second, do you expect any headwind from the restart of student loan repayments this fall? Thank you.

Thanks. Regarding vet visits, we have observed them being relatively flat on average for the first half of the year. However, they remain higher than pre-pandemic levels, so we do not view this as a demand issue. As previously mentioned, it is primarily a supply issue due to challenges within the veterinary workforce. We are actively collaborating with vets to tackle this situation. We are discovering new efficiencies in clinics and providing support in various forms, including additional vet tech and financial assistance. We do not have any concerns about demand for veterinary health care; our focus is on ensuring supply is adequate. The flat vet visits do not raise any concerns for us. Historically, vet visits have been about flat to slightly above flat, so this is not alarming. In the first half of the year, we recorded a 9% increase in both average revenue per visit and overall revenue in the clinic. We are witnessing strong demand for veterinary care and our products, and we do not anticipate any changes in this trend. Concerning your second question about student loan headwinds, we do not expect this to be a significant factor for us in the latter half of this year or in 2024.

Great. Thank you all for your questions today, and importantly, for your continued interest in Zoetis. Looking ahead, we really want to underscore that we remain confident in our full-year guidance, really because of sustainable underlying demand for animal health, as we just talked about, especially in uncertain times. We believe that the enduring strength of the human-animal bond, their willingness to spend on pet health, and the essential need for a safe and affordable food supply are all fundamental drivers of our growth. And I believe no one in the industry has a stronger set of capabilities and colleagues when it comes to meeting these customer needs, advancing animal care and creating shareholder value. So we look forward to keeping you updated on our progress, and thank you for your time today. Have a great day.