Welcome to the Third Quarter 2013 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today from Zoetis is Vice President of Investor Relations, Dina Fede. The presentation materials and additional financial tables are currently posted on the Investor Relations section of zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately 2 hours after the conclusion of this call via dial-in or on the Investor Relations section of zoetis.com. [Operator Instructions] It is now my pleasure to turn the floor over to Dina Fede, Vice President of Investor Relations. Dina, you may begin.

Thank you. Good morning, and welcome to the Zoetis Third Quarter Earnings Call. I'm joined today by Juan Ramón Alaix, our Chief Executive Officer; and Rick Passov, our Chief Financial Officer. Juan Ramón and Rick will provide an overview of results, and then we'll open the call for your questions. Before we begin, let me remind you that the earnings press release and financial tables can be found on the Investor Relations section of the Zoetis website. We're also providing a simultaneous webcast of this morning's call, which can be accessed on the website as well. And a PDF version of the slides representing and a transcript of the call will be available on the website later today. Our remarks today will include forward-looking statements, and actual results could differ materially from those projections. For a list and description of the certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including, but not limited to our 2012 10-K and our 2013 10-Qs. Our remarks today will also include references to certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. These non-GAAP adjusted figures exclude the impact of purchase accounting adjustments, acquisition-related costs and certain significant items, such as the recurring costs of becoming a stand-alone public company. 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, November 5, 2013. We also cite operational results, which exclude the impact of foreign exchange. We believe that providing these views of our performance, which are used by management to evaluate the business, will enhance your…

Thank you, Juan Ramón. I'll now provide some additional details on our financial results for the third quarter. Revenue was approximately $1.1 billion, an increase of approximately 8% year-over-year, including a negative impact of 1 percentage point from foreign exchange. Excluding this FX impact, revenue grew 9%, and I will discuss the key drivers in a minute. Turning to net income. Reported net income of $131 million and diluted earnings per share of $0.26 decreased by 19%, primarily driven by certain stand-up costs associated with our full separation from Pfizer. On an adjusted basis, net income of $172 million and diluted earnings per share of $0.34 showed an increase of approximately 12% and 10%, respectively. The adjusted net income excludes the impact of $8 million of purchase accounting adjustments and $33 million of certain significant items, including stand-up costs associated with our separation from Pfizer. Turning now to our adjusted net income statement. Revenue was up 9% operationally, excluding the impact of foreign exchange. As Juan Ramón indicated, our operational increase was supported by higher sales across all species. Companion animal growth was driven primarily by higher sales in large developed markets, while livestock growth benefited from more normalized weather patterns in North America and good growth in many emerging markets around the world. However, we continue to see a negative impact on cattle revenues in Australia from ongoing drought conditions, while cattle revenues in Brazil are being impacted by increased local competition. Adjusted cost of sales was approximately 34.7% of revenues versus 35 -- excuse me, 34.5% in the year ago quarter. This reflects the impact of product mix and faster growth in emerging markets, partly offset by the benefit of relatively higher growth in the U.S. Adjusted SG&A increased 9% operationally, in line with our revenue growth, while…

Thank you, Rick. Operator, we're ready for our first question, please?

[Operator Instructions] Our first question is coming from Chris Schott with JPMorgan. Christopher T. Schott - JP Morgan Chase & Co, Research Division: Just had a couple parted question here. So we saw a strong recovery in the U.S. kind of livestock and cattle market this quarter. How do you see the market growth playing out from here as we look out the next year or 2, as grain prices have normalized? I guess, what are you hearing from your customers on herd recovery? I'm just trying to understand how that dynamic plays out as we annualize these drought comps. And the second question was on expenses. We saw a step-up in SG&A this quarter. Is this a sign of higher spend going forward? Or are we just seeing some promotional spend as this livestock market recovers? Juan Ramón Alaix: Thank you, Chris. Let me answer the questions and maybe Rick also will add some comments. On the U.S. livestock, a significant portion of the U.S. is related to cattle. We saw this quarter that cattle performed extremely well. But again, compared to last year, where the drought conditions were affecting the business significantly, we expect the last part of the year normalized in terms of movement of animals to the feedlot. It is true that we have fewer animals than last year. We expect also that the cattle business will take 2 to 3 years to rebuild the herd. And this is what we had been already communicating, that in cattle it takes longer to rebuild the herd, while in swine and poultry we have seen that this recovery has been much faster. And this is also reflected in our revenues, because in the first 9 months, poultry and swine in the U.S. have performed very well. In terms of expenses as SG&A, so we had in the last quarter the delay on the parasiticide season. And also related to that, we decided also to postpone some of the promotional activities until the time of the parasiticide season. This occurred in the third quarter, and the third quarter has been impacted in terms of promotional expenses that were mostly delayed from the second quarter. In terms of expenses, we are reconfirming our guidance. And you can see that we have also lowered the upper range of our guidance on expenses, SG&A as well as R&D. Rick, you want to add any other comment?

The only thing I would add is that if I look at total operating expense in Q3 versus Q3 of last year, we're slightly better. If I look at total operating expense year-to-date through this year versus last year, we're more than slightly better. Also year-to-date, we're under where we expect to be for the full year and that gives us the ability to continue to support promotional spend into the fourth quarter. And the last thing that I would say is that, in addition to the timing of promotional spend in the third quarter that Juan Ramón described, there is also the increase in enabling functions spend, which is higher, Q3 versus Q2, than it has been in the prior quarters. So when I look at total SG&A, this quarter being basically where it was last quarter and better year-to-date, including the enabling functions spend, we're definitely on track to where we expect to be. Juan Ramón Alaix: Operationally, in terms of revenues, we are growing year-to-date by 6%, while expenses are growing year-to-date only by 2%.

And we'll go next to Kevin Ellich with Piper Jaffray.

I guess, first off, on the new products that you talked about, Juan Ramón, APOQUEL, EXCENEL and the beta-agonist, just wondering if you could give us some color on how you expect these products to ramp into 2014? And then also, we saw a small acquisition this quarter -- or after the quarter closed in October, Advanced Food Technologies. Wondering if you could give us some more color on the size of that deal, and what else you guys are looking at on the M&A front? Juan Ramón Alaix: On APOQUEL. So definitely, APOQUEL, it's a product that is expected by the market. It's covering unmet need to treat dogs suffering from itchiness. The current treatments are corticosteroids and also some other products that are available to the veterinarians. Also, in some cases, the veterinarians are also using many different alternatives, different pharmaceuticals to treat these dogs. We expect that in 2014, when the product will be launched, the adoption will be gradual, switching current treatment to APOQUEL. We are convinced that, in the long term, APOQUEL will be an important product in our portfolio. In terms of beta-agonist, so we are also entering into this market with 2 generic formulations: one for swine, the other one for cattle. The swine product will be launched in the first quarter. The cattle product will be launched in the second half of 2014. Again, so it's something that we think that will be an opportunity for Zoetis to incorporate 2 products which are used by livestock producers in the U.S, and also will fill a gap that we have in our portfolio, that we'll be able really to offer to our customers a larger range of products and solutions to treat and to prevent diseases. In terms of the acquisition of -- that we also announced in this quarter, it's a small company. Definitely, it is small, but it's following the strategy that we already started some years ago to really complement our portfolio, our core business, vaccines and pharmaceuticals, with complementary spaces. And we entered in devices, in poultry devices, with the acquisition of Embrex some years ago. We also have now in diagnostics with the acquisition of Synbiotics. We're also offering services to our customers, and these food safety products also will complement our portfolio. And we will enter in a space that it's growing importance because its consumers and also governments are demanding higher food safety, and we think that we can bring our commercial strength and also our expertise in R&D to really leverage this acquisition. That, again, is a small one and we have some revenues in 2014, but not significant earnings.

[Operator Instructions] We'll move next to Louise Chen with Guggenheim.

My question was if you had any thoughts on some of your competitors who have been talking about spinning out or selling their animal health businesses. And I was just wondering how that may affect you, or what do you think about that? Juan Ramón Alaix: Well, I must say that -- thank you for the question, Louise. We are focused on making sure that we are meeting our objectives in 2013 and at the same time that we are standing up Zoetis. As you can imagine, this has significant complexity that we need to manage, but I think we are showing that we are able to manage the complexity and delivering strong results. I think it's something that -- speculating on other companies, I think, is probably something that we should not really enter, but continued focus on delivering the value to our customers and our shareholders.

We'll go next to Mark Schoenebaum with ISI Group.

Just -- maybe just building on the last question. If Novartis or Merck were to decide to part with their animal health company, would that something you guys would consider bidding on? Or should we, as investors and analysts, really think about that as outside the scope of your capabilities right now, given some balance sheet constraints, as well as maybe some F -- perhaps FTC issues? And then given the SG&A in the quarter, over the long term, Rick, is it reasonable that investors should still expect the SG&A, as a percent of revenues, to decline over the long term? Juan Ramón Alaix: Well, I would -- thank you, Mark, for the question. And maybe I will repeat that it's -- this is something that other companies are really considering a strategic option for their animal health business. We are convinced that we have the critical mass and also the diversity in terms of our geographies, species and therapeutic areas to be successful. Definitely considering M&A will be part of our model. But at this point it's something that we need to really to ensure that we are meeting our commitments in 2013 and '14. And in terms of M&A, I would say that, at this point, we are focused on areas that will be smaller, will be complementary, filling gaps in our portfolio or adding some complementary spaces, like the acquisition that we just announced. In terms of SG&A, maybe, Rick, you want to answer this question?

Sure. So Mark, as you can see, in 2013, there's very good operating leverage in the business. In 2014, as we've spoken about in the past, we're going to continue to build out our own infrastructure, look across all of our processes and gain operating efficiencies, and we think that continues to drive operating leverage. And beyond that, I'm not going to make a long-term prediction. But I do think that the leverage that we see in '13 can be sustained, especially as we get into 2014, to some degree.

And we'll go next to Tony Butler with Barclays Capital.

The question's around the initiation of your eCommerce business earlier in the spring. You made reference to a number of customers that had signed up and a number of customers that had used it, and I wondered if we could get an update? And then on the same thought, Rick, is there some reason that, that, certainly in the U.S., I recognize, can -- or is it already demonstrating some improvement in overall operating margin? Juan Ramón Alaix: In terms of the eCommerce, it's true that I provided some details on the last call. I don't have in front of me what is the number of customers that are already signed off on this eCommerce. What I had is the feedback of the U.S. team has been positive, and the feedback from our customers is also very positive. So I think it's something that we are adding to the way that we are interacting with customers, and we see as additional way of really providing support and services to our customers. In terms of the improvement in operating margin, you mean for the U.S. or in general. I think it's -- definitely, we are committed and is something that we mentioned many times that we are committed to grow our revenues in line or faster than the market. And we are also committed to improve margin faster than revenues. And we'll achieve that over time by the right actions in terms of gross margin, the cost of the products sold, the right strategy in terms of pricing and control on our operating expenses. And we are convinced that this is something that we'll be able to deliver in the future.

And we'll go next to Robert Willoughby with Bank of America.

And this is Erin filling in for Willoughby this morning. First question on SG&A expense again. So should we think about some of your cost structure initiatives as essentially being pushed out into 2014? Can you discuss those dynamics, just flesh it out a little bit? And then my second question is in U.S. companion animal. It was also very strong. Are these trends sustainable going forward? And how should we think about the underlying utilization trends for the companion animal segment, in the U.S. in particular? Juan Ramón Alaix: We'll have the opportunity to discuss about our 2014 guidance next year. We don't see, at this point, any reason why what we have been describing in the past will change, and we are confident that we will continue with discipline in terms of SG&A and having the right level of investment to support our revenue growth aspirations. The U.S. companion animal business, as you said, it's doing very well in the U.S., and we are growing in all the different categories. Definitely, with the launch of APOQUEL, we expect also to generate growth in the future in 2014. And we think that the level of our business model, which is, as we said many times, direct interaction with customers; deliver innovation; at the same time that we deliver innovation, also making sure that we protect our existing portfolio with new formulations or combination of products, new combination of vaccines; and also the quality of our manufacturing are very strong elements really to sustain our growth in the companion animal business in the U.S., as well as in other markets.

Erin, I'll just add a little bit to the comment that you made on SG&A. There's nothing kind of off-track or that's changing in terms of how we see spend evolving this year. In the guidance that we're giving you now, we are actually narrowing our full year guidance for SG&A, as well as R&D. So with respect to our expectations as we gave them to you in April, we're performing at or better than how we expected there. Quarter-to-quarter, there are variations in spend, partly, as we had said earlier, in Q1 and Q2, the pace of spend on the enabling functions was somewhat slower than we expected, and then also, as Juan Ramón pointed out, higher promotional spend in the second half. But the guidance that we're giving you now, if I can point out again, is narrowed versus April. That includes our expectations of spend for the full year. And as I pencil through that guidance, I get to the performance, the operating leverage that we expected and therefore, the kind of expense control that we believe exists in the model.

And we'll go next to Jami Rubin with Goldman Sachs.

And Rick, I don't mean to beat a dead horse. I think the surprise this quarter was the nice top line beat, which didn't translate into an earnings meet. And if I look out at models, we are assuming improvements in operating margins. And I'm just, again, trying to understand if there's still significant juice enough just by achieving synergies or efficiencies as a stand-alone company, or eventually will we have to see further consolidation with, specifically, your business model in order to see improvements in operating margins going forward, sort of beyond 2014, if you could kind of speak broadly?

Well, again, I mean, I think I would just, again, reaffirm the guidance that we're giving you. The way I look at this is at the beginning of this year, we set out to achieve the operating leverage that we've discussed, and we're basically on track to do that. And the narrowing of our total year spend, I think, reinforces that. And again, quarter-to-quarter, there are going to be variations in spend to either support various promotional campaigns, or in this particular quarter, the growth in enabling functions year-over-year. And when I include the total cost of supporting our own infrastructure and compare the Q3 of '13 to the Q3 of 2012, and basically were on top of each other, I think, in my view, that's actually a good sign coupled with reaffirming the full year guidance. So I don't -- I wouldn't read anything into this particular quarter in terms of changing what we believe the operating model is for this business, this year or going forward. Juan Ramón Alaix: And Jami, let me add to what I mentioned on the previous question, that our financial model for the next 5 years is to grow in line or faster than the market. The market is expecting to grow compound annual growth of 6%. We expect our margins growing faster than revenues and there will be, with the right control of expenses, that we expect to grow in line with inflation and also control on our cost of goods and also the pricing strategy. This will result in really improving long term, in this 5 years of period, improvement in terms of our margins. We don't need, at this point, any further consolidation. We have already the critical mass that we need. And that's really, with the critical mass and with the investment that we made already in most of the markets that we operate, we are confident that this will generate synergies in the future.

We'll go next to David Risinger with Morgan Stanley.

So with respect to the M&A outlook, it seems, Juan Ramón, that you downplayed the opportunity to do larger acquisitions. But as you think about the business and creating shareholder value and the opportunity to boost the value of Zoetis' stock, could you just talk about whether you would consider stepping up the company's market share through a larger transaction to take the market share globally from, let's say, 20% currently to maybe 25% or 30%? I would think that, that would boost the value of your share significantly, even if you were to issue equity to do such a deal. So I guess, maybe my 2 questions are: Why shouldn't that be an opportunity? And second, how do you see M&A building shareholder value if you won't consider medium- to large-sized deals? Juan Ramón Alaix: Thank you, Dave. And I think, as you can imagine, so nothing should be excluded, at least from the internal analysis of exploring opportunities. What are the conditions that we need really to meet for any acquisition, small, medium or a large? A strategic fit and the financials really are supporting the investment. The experience that we had when we acquired Fort Dodge, at the time, we were a company of $2 billion, Fort Dodge was a company of $1 million -- $1 billion. We divested 10% of the combined companies, a little bit more than 10% because of antitrust issues. Now with a market share of 20%, you can imagine that the challenge in terms of antitrust will be even higher. And this is something that we need also to include in any analysis, because we know that paying a premium price for integration[ph] and divesting at a lower price because of FTC regulations or European Union regulations will be probably not the right decision for our shareholders. We'll continue analyzing, exploring and definitely, if it makes sense, so then we'll make that call.

[Operator Instructions] We'll take our next question from Kevin Ellich with Piper Jaffray.

Just 2 quick follow-ups. First, I assume this really didn't happen, but did you see any benefit with Zilmax coming off the market? I know, obviously, you didn't have a beta-agonist. Just wondering if there was any other product that could have seen a bump in growth? And then second, do you have plans to ramp production of any specific product category? It looks like medicinal feed additives or maybe implants, I believe, has been a weaker category over the last few years. Wondering now if you have the ability to increase production as a stand-alone company? Juan Ramón Alaix: Let me probably start with answering the first question with a general comment. I don't think it's positive for the animal health industry that any product is facing regulatory issues or customer issues. And this is something that definitely all companies are exposed to this kind of risk. And I think it's something that, in some cases, this can benefit some of the competitors operating in this space. We decided to launch a generic of ractopamine independently of any kind of issue related to Zilmax. And we are convinced that the product that we are launching had really something that will help producers to enhance productivity, and also to achieve the quantity of meat and affordability of meat that is required by consumers. In terms of plans to ramp any specific category, I think one of the advantage that we have in our portfolio is the diversity in terms of many multiple dimensions, including therapeutic areas. We are convinced that there are areas that are generating some opportunities short term, while others will generate opportunities in more longer and medium term. We want really to make sure that our strategy is really covering these opportunities in all short and long term and definitely we have products in medicinal feed additive. We also have products in implant. And we continue really ensuring that we offer to our customers a complete range of products and solutions to treat or prevent diseases in their animals.

Thank you. Thank you, all, for your participation and interest today, and have a good day. Juan Ramón Alaix: So thank you. Thank you for joining us today's call, and we appreciate your questions and the time you spent with us. So bye-bye.

Thank you. This does conclude today's teleconference. A replay of today's call will be available in 2 hours by dialing (800) 283-5758 for U.S. listeners and (402) 220-0863 for international. Please disconnect your lines at this time, and have a wonderful day.