Welcome to the Third Quarter 2017 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, Vice President of Investor Relations for Zoetis. 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 it will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial in or on the Investor Relations section of zoetis.com. At this time all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. It is not my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Thank you, operator. Good morning and welcome to the Zoetis third quarter 2017 earnings call. I am joined today by Juan Ramón 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, 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 in the company's 8-K filing dated today, November 2, 2017. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramón. Juan Ramón Alaix - Zoetis, Inc.: Thank you, Steve. Good morning, everyone. Our performance through the first nine months has been consistent with the guidance we provided at the beginning of the year. Companion animal has continued to drive our revenue growth in 2017, based on an innovative dermatology portfolio, our new oral parasiticide, Simparica, and other new products and lifecycle innovations. We have also accelerated our revenues and adjusted earnings and improved our margins in the third quarter, as our cost improvement have become more fully reflected in our results. We…

Thank you, Juan Ramón, and good morning, everyone. We delivered another solid quarter with top line growth coming from our dermatology portfolio and new companion animal products, and with strong performance from our international livestock portfolio in key markets, including Brazil, Australia, Japan, and Mexico. Total company revenue grew 8% operationally, excluding a favorable 1% impact from foreign exchange. Of that 8%, 4% came from dermatology products, 4% came from Simparica and other new products, and the remaining portfolio was relatively flat. Unlike recent quarters, our product rationalization has limited impact on our growth this quarter, and we expect the same for the fourth quarter. Now, a few revenue highlight. Our dermatology portfolio once again surpassed the $100 million mark with $124 million in sales in the quarter. As we've indicated in the past, Q2 and Q3 are the peak seasons for dermatitis in the U.S. Sales of Simparica were $25 million in the quarter, growing 280% over the prior year and 21% sequentially. In terms of the bottom line, we delivered 25% operational growth in both adjusted net income and adjusted diluted EPS. We were able to achieve this significant level of growth due to the full year impact of cost reductions from our operational efficiency initiative, as well as leveraging our infrastructure. Our performance in this quarter is another example of our ability to execute on our value proposition of growing adjusted earnings faster than sales over the long-term. Now on to segment revenue. Our International segment generated operational revenue growth of 11%, while the U.S. grew 6%. Our International segment displayed balanced growth across both species and markets. This growth is a testament to our diversity, not only from a product portfolio perspective, but geographically as well. Turning to some key markets in the quarter. Starting with…

Thank you. We'll take our first question from Derik de Bruin with Bank of America Merrill Lynch. Please go ahead.

Hi, thanks. This is Mike Ryskin on for Derik actually. Thanks for all the color on the quarter in terms of the moving parts for the companion animal portfolio and livestock as well. I was just wondering you mentioned that you expect U.S. cattle to return to growth in the fourth quarter. In terms of the impact you saw in the current quarter, could you breakdown how much of it was the lower incidence of disease risk versus the MFA headwinds? And then a quick follow-up in terms of volume and price contribution overall in the quarter. It sounds like you didn't see any price benefit. Is there an expectation that you will return to sort of 100 bps to 200 bps in 4Q and going forward, and what were the drivers of that? Thanks again. Juan Ramón Alaix - Zoetis, Inc.: So, thank you, Mike. So definitely, we expect the U.S. cattle return to growth in the fourth quarter. You ask what were the drivers of the impact on the third quarter. Definitely, some of the impacts have been related to the Veterinary Feed Directive that had more permanent and higher impact that we initially estimated. So this has been year-to-date, as Glenn mentioned, something like $30 million. The other impact that was specific to the quarter, was some promotional activities that we did in the third quarter of last year that we didn't repeat this year. And this had a negative impact in this quarter. And finally, we have seen that the animals because of the weather condition has been showing healthier conditions, and this has been mainly affected the use of some premium antibiotics. We expect this type of things being corrected in the fourth quarter, and then, as I said in the fourth quarter showing a positive growth in U.S. cattle. Then the second question was about price volume, and Glenn will respond to that.

Yes. So Mike, in terms of price and volume, for the overall business we saw about 8% volume growth and relatively flat price. And that flat price is really driven by two things. A, we saw positive price movements in international as we were able to take advantage of inflationary markets. And then, we did slightly decline in the U.S. in price in the quarter, really just driven by certain promotions that we had in the quarter. Over the long-term, we still expect to return to positive price increasing for the business. Juan Ramón Alaix - Zoetis, Inc.: Next question, please.

We'll take our next question from Kevin Ellich with Craig-Hallum. Please go ahead.

Good morning. Thanks for taking the questions, and congrats on a nice quarter. Juan Ramón, I guess starting off with the aquaculture business, really strong growth driven by Norway. Can you talk about that new product that you launched, and is that also available in Chile and how big do you think aquaculture can be over time for you guys? Juan Ramón Alaix - Zoetis, Inc.: Well, the product that we launched in Norway is specific to Norway. It's pancreatic disease that there is a vaccine or it's a condition that is quite prevalent in some part of Norway. And we were not participating in this business. Now, we have a vaccine and this vaccine is performing extremely well, and also having a positive impact in the rest of the portfolio. We are not expecting that pancreatic disease affecting Chile, but in Chile for instance we have the SRS disease, which is not affecting Norway. So we – as in many other parts of our business some of the diseases are very specific to countries or regions that's why we need to also – to respond to these diseases. We have different products depending on countries of origin. This year, we initially forecasted $125 million in revenues for the farm fish because we had some challenge in the second quarter in Chile also related to this SRS vaccine. We had some negative impact in the quarter that has been solved in the third quarter, and we expect continue growing on the SRS in Chile. But because of the impact of the second quarter, we have adjusted our projection for the year, about $110 million, $115 million. Long term, I think we expect that this business will be growing faster than the average of the animal health industry, animal health industry growing at 5% to 6%. We expect the farm fish growing faster, especially the area of vaccines in where we are leading, and we expect that we will continue bringing innovation to the market. Next question, please.

We'll take the next question from Alex Arfaei with BMO Capital Markets.

Good morning. Thank you very much for taking the questions. First, I just want to clarify, I understood the comments on U.S. livestock correctly. So you not only expect to return to growth in 4Q, but you expect in line with the market growth in 2018, and could you tell us what your expectations for the market is? And then, just a broader question, Glenn, I think you said 4% of the growth is coming from derm, 4% of the growth is coming from Simparica, and the rest of business was flat. That clearly doesn't – that clearly implies that you need new products for growth. And the issues on the U.S. livestock aside, I just want to get a better sense as to how you think you're competitively positioned, and particularly the derm space, I'm sure this growth hasn't gone unnoticed by your competitors. So, as these launches moderate, A, how do you think, you will compete relative to the competitors? And yeah, I'll stop there. Thank you very much. Juan Ramón Alaix - Zoetis, Inc.: Thank you, Alex. I will respond to the U.S. livestock question first, and then we'll discuss about the competitive landscape in dermatology. So first, as I said that we expect the fourth quarter, the U.S. cattle business returning to growth. In the U.S., the poultry business is doing very well. Pork has been challenging during the year. In both cases, cattle and pork or swine, we expect growth in 2018. I mentioned that in the swine or pork business, we expect to grow at or above market growth. In the case of cattle, what we see is that there are positive factors; export remains strong. We expect also that the number of animals will continue growing in 2018. The market is a little…

We'll go next to Louise Chen with Cantor Fitzgerald. Please go ahead.

Hi. Thanks for taking my question here. So, now that you've optimized your operating platform, how do we or how should we think about your cash flow generation going forward, and how do you prioritize this cash? And then, the second thing here is just that you had a very robust gross margin this quarter, how sustainable is that going forward? Thank you. Juan Ramón Alaix - Zoetis, Inc.: I will ask Glenn to cover these two questions. Thank you, Louise.

So, from a cash flow generation perspective, I think when you look at 2017, we've guided that we see our operating cash flow pretty closely approximating adjusted net income and that implies significant growth in cash flow this year, as we get out of lot of the cost related to our operational efficiency initiative, the implementation of SAP and other cost. And we continue to expect to drive cash flow growth at a faster pace than adjusted net income, as we do have opportunities in working capital, particularly in inventory that we'll continue to leverage. In terms of the gross margin, so we saw nice improvement in gross margin in Q3. And just as a reminder, in the first half of the year, we had gross margin of about 65%. As we moved into Q3, our gross margin is 67.9%. As we got away from the cost of the previous years' inventory and how we worked that through our P&L, and this was exactly as we expected and it does give us greater confidence in our full-year guidance of cost of goods at approximately 33%. And in terms of how that moves forward, while we're not giving specific guidance for 2018 at this point, we still are committed to the 200 basis point improvement in gross margin by 2020, and we do expect to see some of that come forward in 2018. Juan Ramón Alaix - Zoetis, Inc.: Next question please.

Next question comes from Jami Rubin with Goldman Sachs. Please go ahead. Jami Rubin - Goldman Sachs & Co. LLC: (41:34-41:44). Juan Ramón Alaix - Zoetis, Inc.: We couldn't hear you. Are you still there? So, next question please.

We'll take the next question from Erin Wright with Credit Suisse. Please go ahead.

Thanks. A follow-up on the gross margin trend in terms of species mix and profitability. What were sort of the major components driving that gross margin trend in the quarter? And curious why, I guess, it wasn't even higher given the disproportionate exposure to presumably a higher margin business, and I think you mentioned promotional activity around that, but how much was that a contributing factor and will that continue? And then, the second part on the VFD. I guess, how do you expect to offset this, I guess near-term? As we head into 2018, do you anticipate incremental headwinds from the VFD in medicinal feed additives in the U.S. alone in 2018. And is this greater than what you've kind of experienced, I guess in 2017, and what have you sort of gleaned from (42:47) or can compare it to what has transpired in Europe in terms of those regulations? Thanks. Juan Ramón Alaix - Zoetis, Inc.: Thank you, Erin. Glenn, do you want to answer the gross margin question, please.

So, in terms of gross margin for the quarter, Erin, and what are the components that drive it, and why it couldn't necessarily be even more favorable. There are number of factors in terms of gross margin. So, A, there is the product component that you referenced. But there is also the market mix component. And when you look at the quarter in particular, we saw stronger growth in our international market versus U.S. and as our international markets generally have lower gross margin than the U.S. in total that did impact the quarter. Juan Ramón Alaix - Zoetis, Inc.: And in terms of the VFD, we think that the impact has been mostly affecting 2017, and it's pretty much now the impact or the volume of products affected by these new directive been rebased. We expect that some minor impact in 2018, but not having a significant impact in our revenue growth. Next question please.

We'll go next to John Kreger with William Blair. Please go ahead. John C. Kreger - William Blair & Co. LLC: Hi, thanks very much. Could you give us an update on generics on your business. So, both in terms of what brands are seeing the most erosion from generic pressures, and then, conversely how is your generic business doing? Thanks. Juan Ramón Alaix - Zoetis, Inc.: Thank you, John. So, in terms of generic, we have not seen an acceleration of penetration in this year, so it's in line with our expectations. We continue supporting our products that are affected by generic competition with lifecycle innovation, and an example has been the introduction of the chewable formulation for Clavamox. Clavamox is doing very well, and we are delivering the results in line with our projections. In the case of Rimadyl, it's a combination of not only generic, but the introduction of our new products. But still, what we have seen in terms of a generic penetration for Rimadyl it's in line with the trends that we already projected or already discussed in previous meetings. We still think that the impact over time, it's about 20% to 40% and will remain what we still project for this type of generic competition. Next question, please.

We'll go next to Jon Block with Stifel. Please go ahead. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Great. Thanks. Good morning. I'll ask two questions upfront. First one, Glenn, just to push you a little bit on the gross margin, is there any sort of (45:41) the cadence of gross margin? In other words, per your full year guidance, it looks like you should be exiting this year or 4Q 2017 at around 65% or even 69%. You do call out a lot of investment and manufacturing in the coming quarters, so just wondering if that weighs a bit in 2018. I know you said higher next year, but I just want to be as clear as possible, without be a little bit higher of the full year 2017 number? And then just maybe, Juan Ramón, the peak sales of $500 million plus for the derm portfolio, those numbers have been tremendous, but maybe a time line for this to be achieved? In other words, this quarter you can annualize it out to $0.5 billion-ish. I know you benefited from seasonality in the DTC, but is the thought that you can get to that sort of peak number within the next 12 to 24 months? Thanks, guys. Juan Ramón Alaix - Zoetis, Inc.: Thank you, Jon, and let me answer the dermatology portfolio projection, and then Glenn will cover the gross margin question. So, we think that these peak sales of more than $500 million. We expect to generate that in the next two or three years. So, it's not talking about peak sales on five years, no, in this case, two or three years and is what we expected to achieve this more than $500 million in sales for Apoquel and Cytopoint combined. Glenn?

So Jon, just to go a little deeper into the gross margin, so your question on Q4, I mean if you look at the year-to-date gross margin, we're sitting at approximately 66%. Our guidance would imply approximately 67%, right, which would imply a better Q4. Some of the drivers of that, as Juan Ramón mentioned, we do expect the U.S. cattle to return to growth and some of the premium anti-infectives there as well generate a higher margin and that is one impact that will give us better margin as we look into Q4. In terms of 2018 and my comments there, that was referring to full year 2017 expectations on cost of goods and an improvement over that as we move in 2018. Juan Ramón Alaix - Zoetis, Inc.: Next question, please.

We'll take the next question from David Risinger with Morgan Stanley. Please go ahead. David R. Risinger - Morgan Stanley & Co. LLC: Yes, thanks very much. So, I have two questions please. The first is, with respect to your companion animal product launch ramps, could you provide some color on where those stand ex-U.S.? And basically where you are in ramping up new companion animal products ex-U.S.? And then second, looking ahead to future innovation in R&D, will it continue to be more heavily weighted towards companion animal or should we think about the pace of livestock, new product launches accelerating? Thank you. Juan Ramón Alaix - Zoetis, Inc.: Thank you Dave. Glenn, will provide details of sales U.S. and ex-U.S., and then I will respond to your question on the R&D.

So, in terms of the new companion animal products U.S. and ex-U.S. the ramp is definitely ahead of the curve, in terms of the U.S., just based on the timing of launches and the availability of the products. So, for example we just recently launched Cytopoint outside of the U.S. in Europe. So, in terms of the breakout between – so for total derm, we had sales of $124 million with $89 million in the U.S. and $35 million international; for Simparica, we had sales of $25 million, $17 million of that is in the U.S. and $8 million is in international. Juan Ramón Alaix - Zoetis, Inc.: Thank you, Glenn. In terms of where we invest in R&D, I think we have a good distribution of investment between livestock and companion animal. We have been successful in new products in companion animal, but this is not an implication that in the future we'll not be bringing products in poultry, swine or cattle, and also now including fish. One of the example, is that we expected to introduce a new poultry vaccines in the vector technology in the U.S. in 2018. And also, we expect to have new PCV vaccines for swine in the U.S. also in 2018. So, we continue investing in all the different areas of our portfolio, and we are not just targeting companion animal. On the contrary, we are trying really to diversify our investment and maintain the diversity in our portfolio. Next question, please.

We'll go next to Kathy Miner with Cowen & Company. Please go ahead. Kathy M. Miner - Cowen & Co. LLC: Thank you. Good morning, Juan Ramón. Given the recent comments from a large competitor, if Elanco, Merial and Merck Animal Health all became independent companies, what would be the impact on Zoetis, and how would you size up each of these as a potential competitor? Thank you. Juan Ramón Alaix - Zoetis, Inc.: First, the decisions of other companies, definitely we cannot make any comment. But definitely having competitors that will be competing with us as a public companies, I don't see that as a negative. On the contrary, you will see that our financials are very good – are very good now, if we compare to other companies in animal health. And in my opinion, you will see that our margins are significantly higher than any other competitor. So, having this public information in my opinion will be only positive to us. Next question, please.

We'll take the next question from Gregg Gilbert with Deutsche Bank. Please go ahead.

Hi. This is Esther Rajavelu on for Gregg Gilbert. Thank you for taking my question. On the companion portfolio, can you please discuss the trends you're seeing on the use of Cytopoint versus Apoquel? How are vets choosing between the two, and any pet owner feedback you may have on one product versus the other? Juan Ramón Alaix - Zoetis, Inc.: Well, we provide information about the two products to the veterinarians, it's up to them to decide, which one is meeting best the needs of their patients; Apoquel it's oral, Cytopoint, it's injectable. In some cases, while injectable is a preferred option for treating these type of medical condition. In the case of Cytopoint/Apoquel decisions, I think it's up to veterinarians, and in some cases that they are even combining the two products, depending on why they feel it's the best for their patients. And in terms of Cytopoint, the feedback has been extremely positive. So, we know that with Apoquel, it's now very well established in the market. Cytopoint, it was more recent, but I think feedback that we are getting from veterinarians is extremely positive; in terms of efficacy, but also in terms of side effects. So in both cases, excellent feedback from the market. Next question, please.

And it appears we have no further questions at this time. I'll return the floor to Juan Ramón for any closing remarks. Juan Ramón Alaix - Zoetis, Inc.: Thank you very much for joining us. And again, so we have delivered very strong results in this quarter. We are very confident on the fourth quarter, and that's why we are also raising our guidance for 2017. So, thank you very much.

Okay. Ladies and gentlemen, this will conclude today's program. We thank you for your participation. You may now disconnect. Have a great day.