Welcome to the Fourth Quarter and Full-year 2018 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, 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 opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Good morning, everyone, and welcome to the Zoetis fourth quarter and full-year 2018 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, 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, February 14, 2019. 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: Thank you, Steve. Good morning, everyone. Our 2018 results once again confirm the strength of our business and our leadership in the animal health industry. We delivered another year of strong performance and executed on investment plans to continue to strengthen our portfolio across the continuum of care. Our successful innovations, the high quality of our manufacturing, our best-in-class field force and the diversity of our portfolio has been driving our steady revenue growth over the years. Since we became a public company in 2013, we have consistently grown revenue…

Thank you, Juan Ramón, and good morning, everyone. As Juan Ramón noted, we had another exceptional year in 2018 with strong performance in both revenue and adjusted net income. Revenue exceeded our guidance and adjusted net income was in line with the high-end of our range. We expect our 2018 organic growth to again outperform the market once industry figures are finalized, delivering on our value proposition of organically growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. Revenue for the full-year 2018 was $5.8 billion with both reported and operational revenue growth for the year at 10%. Excluding the impact of the Abaxis acquisition, operational growth for 2018 was 8%. Of this 8%, 3% comes from price and 5% from volume. Included in the volume growth are contributions from our key dermatology portfolio of 2%, new products, including Simparica of 2% and in line products of 1%. Adjusted net income for the full-year was $1.5 billion, representing reported growth of 29% and operational growth of 31%, driven by revenue growth, gross margin improvement and a lower effective tax rate. In 2018, we grew our business operationally, across all core species, therapeutic areas and major markets. Our key dermatology portfolio and Simparica continued to grow and gained additional market share, both in the U.S. and international. For the full-year, we recognized combined revenue of $593 million for Apoquel and Cytopoint. This portfolio continued to grow rapidly in 2018 and is well positioned for future growth heading into 2019. For livestock, our diverse portfolio of products drove growth across both developed and emerging markets capitalizing on industry trends of higher protein consumption and improved productivity. Turning to the fourth quarter, reported revenue growth was 7%, which includes a negative 4% impact from…

[Operator Instructions] We’ll take today's first question from Michael Ryskin with Bank of America Merrill Lynch. Please go ahead. Your line is open.

Thanks guys. Appreciate taking the call. Congrats on the quarter. A couple of quick questions. First one, you talked about 5% market growth for the overall industry in 2019. I just wanted to go into that a little bit deeper, because in the past, we've seen something more in the 5% to 6% range. So I'm wondering what you're seeing there, if you could give a little more color on the dairy markets, cattle markets in the U.S., some of the swine issues we're hearing about internationally? And what I'm getting at with this is, what should be our expectation for the in-line portfolio in 2019? You know, if you exclude Abaxis, if you exclude the dermatology portfolio, Simparica, what's the base portfolio doing in terms of volume and price? And then I've got a quick follow-up questions on the margin expansion for 2019. Juan Ramón Alaix: Okay. Thank you, Mike. I will try to cover some of the questions, and also, I will ask Glenn to provide some additional details on how we can see the growth, the in-line growth in 2019. So I agree that in previous communication, I mentioned that we expect in the market, a growth of 5% to 6%. Then we have seen that the cattle market, especially in the U.S., both beef and dairy has been showing some weakness and we expect that rather than 5% to 6%, now, we are projecting the total market growth of 5%. We still expect that the cattle business worldwide will be showing growth, but definitely growth that will be below this 5%. The rest of the species, as I mentioned in my comments, companion animal, and also swine and poultry will be growing in line or slightly above the market and the only species that we see some market growth below the market will be cattle. Then, moving into the details of the organic growth, as part of our guidance, it's 4.5 to 6.5. And then if Glenn can provide a little bit more details of how much will be price growth and also volume growth and new products?

Sure. So in terms of just the overall breakdown, it's really consistent with our long-term expectations. So price, we would to expect to generate around 2% price this year, we're particularly strong with price at 3% for 2018. Going into 2019, probably more in line with our long-term proposition of around 2%. New products, again consistent, probably 1% to 2% and then the remainder comes from the in-line portfolio. We do consider derm part of the in-line portfolio as it has matured and has been on the market for a number of years at this point. Also in terms of your question on margin expansion, when you look at where we closed 2018, cost of goods sold, as a percent of revenue, was a little over 32%. Our guidance for 2019 is 31% to 32%. And we made significant progress in cost of goods in 2018, improving our cost of goods, as a percent of revenue by over 100 basis points. So that leaves about another 100 basis points to deliver our commitment of improving cost of goods sold as a percent of revenue by 200 basis points by 2020. You'll probably see that spread between 2019 and 2020 that attainment. Juan Ramón Alaix: Thank you. Next question please.

And we'll go next to Kevin Ellich with Craig-Hallum. Please go ahead.

Good morning. Thanks for taking the questions. So I just wanted to start off on the cost structure. I mean, it looks like some expenses this quarter came a little bit higher than we expected. And then Glenn you made comments about where you think things will line up in 2019 with increased investments in R&D. Can you just talk about some of the moving parts and given how good the year was for you in 2018? Did you pull-forward any expenses or how should we be thinking about that?

So Kevin, in terms of cost of goods, I'll start again. We had significant improvement this year of 100 basis points improvement in cost of goods. For Q4, we did see elevated cost of goods and that was really related to the impact of FX, also Abaxis and higher inventory write-offs in the quarter. Really the Q4 should not be viewed as a run rate for 2019. We have good visibility into our cost of goods, and we're confident in the guidance of 31% to 32% for 2019. As we look into 2019, from an expense perspective, consistent with what we've said, we are making investments in R&D and R&D is growing more in line or closer to revenue. As we do have many projects that we're very excited about in our pipeline that we want to make sure that we fully fund. SG&A, when you look at the operational growth is growing below revenue even with the investments that we're making in Abaxis. Juan Ramón Alaix: Thank you. Next question please.

We'll go next to Erin Wright with Credit Suisse. Please go ahead.

Great, thanks. Can you speak to the underlying performance at Abaxis and how the integration is progressing in the longer term cross-selling opportunity with diagnostic portfolio? And then my second question is on Simparica Trio. Do you think there is a possibility that you're first to market there in that category? And how should we think about your competitive positioning there? And do you still feel confident in the 2020 timeline and do you anticipate one or two review cycles from FDA. Thanks. Juan Ramón Alaix: Thank you very much, Erin. I will probably start with the comments on the Abaxis integration. Glenn, will also provide some details of Abaxis performance, and then I will also talk about the Simparica Trio. In terms of Abaxis integration, things are progressing in line or even in some cases faster than initially planned. In the U.S., both teams, Abaxis legacy team in the field force and also our teams are already working together. And as we communicated initially, the Zoetis team is already identifying the opportunities and also helping the other team also to identify customers to complete the sales. They will be also engaging, ensuring that we increase the use of consumables and this will be an opportunity for future growth. We are working definitely that in the future we will be, not only the teams that are working together, but also the portfolio will be fully integrated, and this also, it's depending in some of the work that we are doing in terms of the SAP implementation for Abaxis operations that we plan to do it in 2019. In international markets, we're also progressing pretty well. We have almost completed the hiring process of field force and also technical support, but still some positions that will be completed in the next coming months. But this team is already working together with the field force team of Zoetis, generating the demand. In most of the markets, the supply to customers will be still done through third-party distributors. And in 2020, we'll be deciding if we keep distribution or we go direct in some of the markets. But definitely, all the integration opportunities or integration plans are progressing pretty well. We are also working on continue identifying opportunities in terms of R&D and the scenario that also we are integrating the teams of – sitting in Kalamazoo, also in Denmark and Union City. Altogether are defining the future portfolio of Zoetis in both companion animal and livestock. Glenn, do you want to give details of Abaxis performance?

In terms of performance for the quarter for Abaxis, as we mentioned, we had $65 million in sales for the quarter. I want to remind you that Abaxis was on a different accounting calendar. But however, if you do normalize the accounting calendar, that would translate to approximately 8% growth. Again, within the quarter, we did have some destocking to bring Abaxis more in line with our overall levels of inventory with wholesalers. If you adjust for that destocking, the growth for the quarter is double-digit. Also for the year, again if you try to look at it on an apples-to-apples basis, the growth is double-digits for the year with and without the destocking. Juan Ramón Alaix: Thank you, Glenn. And then moving to triple combo. So let me maybe provide a little bit of a context. So when we launched Simparica as a single agent, we were two or three years behind competitors, Nexgard and Bravecto. Now with the triple combo, it will be first – second to market. But what we did is significantly reduced this gap of two or three years and then we expect that if FDA approval is coming in line with our filings and expectation is to introduce this product in 2020. So given we are second to market, we will be only second with few more different with competitor. We see a significant improvement compared to the situation that we had with Simparica. And with Simparica, we have been able to continue growing that patient share. In 2018, we increased patient share from 13.1 at the beginning of the year to 15.6 at the end of the year. So we are confident that with the efficacy and also the safety profile of Simparica and the future efficacy and safety profile of triple combo, we'll have the opportunity to have significant market share. Next question please.

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

Hi, thanks for taking my question. So my question here is, can you talk more about your pipeline as it pertains to the mAbs, livestock diagnostic and aquaculture? When will some of these new products hit the market? Do they have the potential to be blockbusters or an aggregate to be blockbusters? And then just a quick follow-up on the triple combo, is that expected to be a blockbuster product for you as well? Thank you. Juan Ramón Alaix: I'll start with the easiest question. Thank you, Louise. It's definitely, triple combo is expected to be a blockbuster. Definitely Simparica is already a blockbuster, but we expect also that the triple combo will reach this status. In terms of the rest of the pipeline, definitely there are products for livestock. These products – there are a lot of product that maybe in aggregate basis will represent a significant growth opportunity. But I will not describe these products as probably in livestock as a blockbuster potential. But definitely, it will help us, first to protect the current portfolio, and second, to bring innovation in livestock into the market. In terms of monoclonal antibodies for chronic pain, we expect that this will have the opportunity of being a blockbuster and we are convinced that the monoclonal antibodies for dogs and cats will represent significant opportunity for treating dogs and cats in a different way that is today with NSAID, especially for cats, that there is nothing especially developed for these animals in terms of pain. But we also are excited about the opportunity of developing monoclonal antibody for dermatology in cats. Again, it's an opportunity that we expect that will be coming in the next year and this will strengthen our derm portfolio, also moving another species with monoclonal antibody. Next question please.

We'll go next to John Kreger with William Blair. Please go ahead.

Hi, good morning. This is Jon Kaufman on for John Kreger. So a couple of questions on cattle here, you mentioned premium product sales in the U.S. Is that a trend that you foresee continuing in spite of market weakness? And then internationally, where are we in the cycle and some of the key markets? Looking out beyond 2019, can international growth more than offset U.S. weakness? And what are your expectations for long-term growth in this market? Thank you. Juan Ramón Alaix: Definitely, the U.S. market for cattle has been driven by our premium products. But some of our products, they face competition during the year, especially when the situation of the animal was of lower risk profile. But we also have seen that in risk situation, our premium products are the best products that we need to protect or to treat animals. So we are confident that our premium products also will remain generating growth in the future. In the U.S., definitely we see the cattle business growing below market and maybe also growing below what we expected some months ago. Because we also projected dairy recovery in the second half of 2018, then we think that it will take even longer to see a recovery on the dairy business. In the case of beef, I think, it will be always cycles, animals moving into the big lot sooner or later, but we don't see a significant change on beef. We're still projecting that beef will be slightly increased in the number of animals only by 1%. But we think that beef will be probably in line with what we expected some months ago. We expect that the overall cattle business of Zoetis will be growing in 2019 and maybe growing faster in international markets than in the U.S. And as we said many times, the diversity of our portfolio in species and geographies is helping us to manage these cycles. These are cycles that we have been facing forever. And one of the things that, not only our industry, but also Zoetis has been very consistent even in the phase of change cycles, regulatory situations, very consistently delivering growth inline with the market or even higher in the last six years of Zoetis as a public independent company. Next question please.

We'll go next to Jon Block with Stifel. Please go ahead.

Great. Thanks guys. Good morning. Maybe a couple of questions and I'll try to rope into one long one. So Glenn, 150 FX basis point headwind, I thought you messaged maybe 200 basis points to 300 basis points recently at JPMorgan. So I just want to see if I'm correct, and what if anything has changed there? And then on that same question, does the midpoint of the 2019 EPS of $3.47 imply any sort of a share repo? I think just trying to flow through your numbers. I get towards the lower end of the EPS, if I use the 4Q share count. And then just to pivot over to Abaxis, when you guys bought Abaxis, Juan Ramón, they had a bunch of new products in their pipeline and your own sentiment, blood gas, rapid assay, so just any more color you can give us, in your control now for four or five months, how is the uptake been on some of these new products within that portfolio? Thanks for your time guys.

So Jon, so I'll address the FX question. So you're correct, when we're at JPMorgan, we did see a bigger impact of foreign exchange based on the rates that were applicable at that time. In terms of the guidance that we have today, we based the guidance based on FX rates as of the end of January. And as I mentioned based on that, there is 150 basis point impact to revenue. However, if you look the last few weeks, the dollar has continued to strengthen and based on the rates that we see actually as of yesterday, our revenues would be negatively impacted by about another $50 million and EPS by a few pennies. So this is currently not reflected in our guidance and something that we'll continue to monitor. The other question you had was, in terms of the midpoint and share repo, when we set our guidance range, we really only assume that will offset dilution from compensation in terms of setting our guidance, but nothing additional. Juan Ramón Alaix: Jon, then on the Abaxis question, so the focus that we have been there in the last [indiscernible] has been to ensure that all the portfolio, existing portfolio were really meeting the needs and the quality that is expected from our customers. And one of the efforts that we have been doing significantly is to make sure that our equipments are connected to the practice management system and that's really helping veterinarians to have a full integration of information from different equipments in the clinic. We have also been working on defining the priorities in terms of R&D focus and we are progressing well. In terms of, you were asking also about new products, well, definitely FLEX4 is working very well. We also are planning to introduce FLEX4 in the international market within Canada and some other markets. And we will provide a little bit more details on the future launches as we are making progress in terms of defining all the priorities and all the products that will be coming in the next coming year. So next question.

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

Thanks very much. Well, first of all, congrats on the performance. I have two high level questions. The first is with respect to Abaxis, we spoke with a consultant who suggested that it will be difficult for Abaxis to displace IDEXX at many U.S. customers. Could you speak to that, your ability to knock IDEXX out of U.S. customers and drive placements of Abaxis going forward? And then with respect to the FDA's assessment of heartworm drug efficacy and potential resistance concerns, could you just speak to where the FDA is in that process and whether the heartworm coverage that you're able to demonstrate to the FDA for TRIO will be at the 100% level or whatever level the FDA will require? Thank you. Juan Ramón Alaix: Thank you, Dave. Well, starting with the question on heartworm, definitely we have presented to the FDA all the support of 100% efficacy in terms of protection against heartworm. So what is the process of the FDA is something that probably we cannot comment. But we are confident that we have submitted all the data to support our efficacy and safety profile. We will continue working with the FDA. It's a process. It's the process of submitting the different dossiers information and also responding to questions. We are confident that the process will be able to introduce the product in 2020. About the question on, can we gain share in the U.S.? Well, the answer is, yes. And we are convinced now that Zoetis is competing with any competitor in the market on equal or even stronger conditions. In the past, Abaxis was limited in terms of access to customers and I mentioned that maybe they were meeting or visiting customers once per quarter compared to the other competitors having even more frequency than once a month. Now we have the opportunity to really be in front of our customers even more than once a month for few customers. And also very important, we have the opportunity also to combine all the diagnostics portfolio with our strong portfolio of vaccines, parasiticides, derm and so on and so forth. And also create a value proposition to the customers that it was not available at the time of Abaxis. So I understand that it maybe people that need to be convinced, but I hope and we are working hard to make them wrong in terms of the assessment that we cannot compete against IDEXX. Next question please.

We'll go next to Chris Schott with JPMorgan. Please go ahead.

Great. Thanks very much for the questions. I guess, first one was on Apoquel. I'm just trying to get a sense of where we are in the growth cycle here. So specifically how much more growth potential do you see for the product in the U.S. market? And when we think about the ex-U.S. opportunity, can you just give us little bit more color about how uptick has trended relative to the U.S. in the markets you've launched and what are the biggest ex-U.S. opportunities that you're watching? My second question was on margin expansion over time. So beyond 2019, I know you've highlighted 2019 to be of an investment year with Abaxis coming on Board and the R&D investments. But when we look beyond 2019, can we think about OpEx growth returning back down to low single-digit levels or should we think about Zoetis in a period of kind of multi-year period of OpEx investment as you have become as growth drivers [indiscernible] just beyond 2019 as we think about the longer-term model? Thanks very much. Juan Ramón Alaix: Thank you, Chris. Well, on Apoquel, I'm going to comment for the U.S. and also comment for international. In the U.S., we started the year with a patient share of 59% and we ended 63%. We still think that there are opportunities for growing patient share. Second, we still see opportunities for expanding the market. I will continue expanding the market or hoping to expand the market with DTC campaigns, that will be the third year that we are investing to create this market demand. And third, we still see opportunities for pricing. So these three elements are probably supporting the growth in the U.S. for Apoquel. Definitely, lower growth than what we have seen in previous year. So the…

Of course, Chris, there are number of opportunities for us in terms of margin expansion beyond 2019, just starting with cost of goods and beyond 2020 and delivering on the proposition of delivering a 200 basis point improvement in 2017. As we look past that, we should be able to continue to get improvements in our cost of goods as a percent of revenue. Really, the cost of goods efficiency coming from a lot of the capital investments that we're making today, which we expect to payoff in longer-term in terms of improved cost of goods and we'll continue to also get margin expansion from price. Looking at the OpEx line, from a G&A perspective, we do expect general administrative expenses to grow more in line with inflation as we already have the infrastructure established in most of our markets. Selling will probably be more between the overall inflation rate and the growth in revenue, and depending on the level of revenue growth that we have and new product introductions that we'll need to support. And then from an R&D perspective that will really depend on the opportunities that we have, but that will probably grow more in line with revenue than others. Juan Ramón Alaix: Thank you, Glenn. And then maybe adding that to the question on Apoquel or derm, I did mention that one-day we should be also facing competition. It's an area that Zoetis has created. It's not the first time that we are creating the market. We did it for pain and now with derm. But we are convinced that we have developed a significant portfolio in derm, portfolio, which is showing high level of efficacy, excellent safety profile and we'll be also adding in the future monoclonal antibodies for dermatology issues for cat. So we are confident that we have the opportunity of continue growing. Always we need to consider future competition in this respect. Next question please.

And we'll take today's final question from Kathy Miner with Cowen. Please go ahead. Your line is open.

Great, thank you for taking the question. One, just a brief follow-up on the dermatology area, and I apologize if I missed it, but did you give an update for your expectations for 2019 for dermatology, particularly as you've met or exceeded the $500 million-plus for 2018? And the second question just on M&A, does your 2019 guidance assume any small bolt-on acquisitions? And given that Abaxis is now on board, what would be the key areas we should watch for that? There might be some interest in adding? Thank you. Juan Ramón Alaix: Thank you, Kathy. And well, in terms of the sales, big sales for our derm portfolio, so in 2018, we almost reached $600 million, it was $593 million. We are projecting growth in 2019, but definitely we are not now updating in terms of big sales. We know that in the future, we'll have competition in this space, so it's a little bit complicated now, what is the full potential. We are convinced that we still have opportunities to continue growing. And as I mentioned before, we also expect to add new products to our portfolio, monoclonal antibodies for cats and maybe also working to ensure that we also apply lifecycle innovation to Apoquel to protect this franchise. And this can be in terms of formulations, in terms of expansion to other species, so it's something that will continue working on lifecycle innovation. And then you also ask if we are including any acquisitions for in 2019 guidance and the answer is no, so it's just our current portfolio including Abaxis portfolio and what we described now as organic growth including Abaxis, and that we will continue assessing opportunities in the market. We are convinced that we have the infrastructure, we have the expertise to integrate and also we have the reach to the customers and we will continue assessing opportunities available in the market and if these opportunities are meeting the criteria of strategic value creation and supported by financials. We think that we have the cash flexibility to go and acquire other companies. Juan Ramón Alaix: And I think with that, we conclude this session. So thank you very much for attending the earnings call. Thank you for your questions. And with that, we close this call. Thank you.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.