Welcome to the Second Quarter 2021 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 will not be forwarded automatically. In addition, a replay of this call will be made 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 on a listen-only mode, and the floor will be open for your questions following the presentation. Operator Instructions. And it’s now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Thank you. Good morning, everyone, and welcome to the Zoetis second quarter 2021 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and by Wetteny Joseph, 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, Thursday, August 5, 2021. 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 good morning, everyone. I hope you and your loved ones are all staying healthy and getting vaccinated for COVID-19. I’d like to start the call by welcoming our new Chief Financial Officer, Wetteny Joseph, who is joining me on the call today. As the former CFO of Catalent, Wetteny is a veteran of the biopharma industry and is very familiar with many of you in the investment community. Wetteny joined us on June 1 and is off to a fast start learning all about the company and animal health, from cattle guarding and drive impacts to pet care trends and parasiticide season. I am confident that Wetteny will make a strong contribution to our ongoing market performance, value creation, and leadership in animal health. I also want to take a moment to thank Glenn David for his partnership and all of his contributions to Zoetis as CFO over the last five years. Glenn has taken on a new role overseeing our international operations and other business units including PHARMAQ, BioDevices, and Pumpkin Pet Insurance. I know he will bring his signature leadership qualities, business skills, and industry knowledge to this role and continue driving profitable growth in these areas. Now turning to the second quarter, we achieved strong results once again with 22% operational growth in revenue and 28% operational growth in adjusted net income. Our companion animal portfolio generated 36% operational revenue growth, driven by our pet care parasiticides, key dermatology products, vaccines, and diagnostics. Meanwhile, livestock product sales were up 3% operationally and remain in line with our expectations for more moderate growth this year. The second quarter results also reflected favorable comparisons to last year's second quarter when the uncertainty of COVID-19 and related lockdowns were more severely felt across the animal health industry. We are raising full-year guidance for revenue and adjusted net income again this quarter to reflect our first half performance and confidence in the underlying growth drivers of our business. We remain on track for a very strong year and continue to focus on sustaining our investment in long-term growth opportunities. With the strong cash flow and positive outlook, we are investing internally and externally in innovative new products, market expansion plans, and direct-to-consumer promotions that will support future growth. Our team has been delivering strong growth, based on internally developed companion animal parasiticides, led by our Simparica and PROHEART Revolution Plus franchises. We’ve redefined care for the dermatology category with our development of Apoquel and Cytopoint, and we see more growth potential coming from our monoclonal antibodies for osteoarthritis pain, new vector vaccines for poultry, and the industry's first cloud-based diagnostic platform with AI capabilities. In terms of our monoclonal antibodies for alleviation of OA pain in dogs and cats, we continue to anticipate U.S. approval for Librela and Solensia in 2022. Meanwhile, initial customer response from vet and pet owners in Europe has been excellent, and we recently received approval of Solensia in Canada. I always say, with great pride, that we have the best field force in the animal health industry, and we will continue to expand the scope, effectiveness, and digital tools in ways that can enhance our customers’ experience and support our growth objectives. We've also seen a positive return on our investments in direct-to-consumer promotions for Simparica, Apoquel, and disease awareness over the years. DTC remains an area of ongoing investment to support our parasiticide and dermatology portfolios. Finally, we continue to look externally for business development opportunities that can complement our portfolio and expand our market presence or capabilities. Yesterday, we announced plans to acquire Jurox, a privately held animal health company based in Australia, expected to close in the first half of 2022. The acquisition will provide us with growth opportunities, manufacturing capacity, and increased capabilities in Australia, our fifth largest market, and also bring us a range of companion animal and livestock products primed for global expansion. As I wrap up my remarks, our growth story for this year remains very consistent based on three recurring catalysts. First, our companion animal portfolio, driven by our triple combination Simparica Trio and other parasiticides, our dermatology treatments, Apoquel and Cytopoint, new monoclonal antibodies for pain, and our Vet Scan diagnostic systems. The entire portfolio is benefiting from strong pet care trends in terms of increasing clinic visits, rising spend per visit, and a focus on diagnostics and specialty care, especially among newer and younger generations of pet owners. Recent estimates for market growth in companion and animal products are in the high single digits, and Zoetis continues to expect to grow faster than the market. We are gaining share in the approximately $5 billion global parasiticides market for pets, and we are excited by veterinarian and pet owner responses to our new monoclonal antibodies for pain. We also continue to see progress in the early launch of VetScan Imagyst, which leads to our second catalyst for growth, diagnostics, which posted 38% operational revenue growth in the second quarter and access to vet clinics in the U.S. rebounded from the year-ago quarter. Our third growth catalyst is international, where we continued to generate strong operational growth, driven by China and Brazil, which grew at 30% and 40% respectively. All our catalysts for growth are buoyed by our priority to champion a healthier and more sustainable future, the commitments to our communities, animals, and the planet. You can read more about our progress on these ESG goals in our first Sustainability Report, which was published in June. In closing, we had a great second quarter and we're focused on delivering our record-setting year. The market dynamics in animal health remain strong, steady, and resilient, even during the challenging times, based on people's unbreakable bond with animals. For the remainder of the year, our diverse portfolio, innovative pet care products, strength in diagnostics, and expansion in international markets will continue to drive our performance. Now, let me hand things off to Wetteny.

Thank you, Kristin, and good morning, everyone. Before I discuss our second quarter performance, I would like to take a moment to express how excited I am to join Zoetis, a company with an exceptional opportunity for meaningful long-term growth, driven by the durability and resiliency of the existing portfolio, a robust product pipeline, and a key focus on future innovation. I look forward to leading an outstanding finance organization and maintaining the financial principles and investment strategies, which position Zoetis as the world leader in animal health. I would also like to express my appreciation to the Zoetis colleagues and the investment community for such a warm and gracious welcome. I had the pleasure of speaking with several of our investors since becoming CFO, and I look forward to connecting with many more in the coming weeks. Now shifting the focus to earnings. This morning, I will provide commentary on our second quarter financial results, the key contributing factors to our performance, and an update on our improved full-year 2021 guidance. In the second quarter, we generated revenue of $1.9 billion, growing 26% on a reported basis and 22% operationally. Adjusted net income of $566 million was an increase of 33% on a reported basis and 28% operationally. Operational revenue grew 22% with 2% from price and 20% from volume. Volume growth includes 12% from other inline products, 6% from new products, and 2% from key dermatology products. We delivered another strong quarter and remain encouraged by the performance of our business, the health of the overall industry, and our outlook for the future. It is worth noting that Q2 2020 is a favorable comparative period due to the impact of COVID-19. The pandemic caused widespread uncertainty last year, which led to clinic closures, supply chain disruptions, and shifts in consumer demand from restaurant and foodservice to grocery stores. This materially impacted several aspects of our companion animal and livestock businesses. Now let's dive further into the details of the quarter. Companion animal products led the way in terms of species growth, growing 36% operationally, with livestock growing 3% operationally in the quarter. Performance in companion animal was again driven by our parasiticides portfolio, led by sales of Simparica Trio, with significant contributions from the broader portfolio. We also continue to see growth in our key dermatology products, Apoquel and Cytopoint, as well as in vaccines and diagnostics. Simparica Trio continued to perform exceptionally well, posting revenue of $139 million, representing growth of more than 200% versus the comparable 2020 period. In addition to sales, we are exceeding our other performance measures as well, such as clinic penetration, share within penetrated clinics, and reordering rates. The strength of our entire companion animal parasiticides portfolio was evident again this quarter, growing 50% operationally, with meaningful growth in the ProHeart and Revolution strong growth franchises in addition to the Simparica franchise. Having the broadest and most innovative portfolio within a larger and expanding therapeutic area is bullish on future growth in parasiticides. Global sales of our key dermatology portfolio were $280 million in the quarter, growing 22% operationally. Cytopoint had a particularly strong quarter, growing 42% operationally and generating quarterly revenue of $100 million for the first time since launch. Year-to-date sales for key dermatology products of $524 million in our view remains unchanged, and we expect sales to exceed $1 billion this year. Our diagnostics portfolio had operational growth of 38% in Q2, led by increases in consumable and estimate revenue as the business continues to recover from the impact of the pandemic. With our sustained investments in diagnostics, the newest technology we are bringing to the market, and the ability to leverage the breadth of our medicines and vaccines portfolio, we are well-positioned to grow faster than the diagnostics market, which is expected to grow double digits and outpace the overall animal health markets. Livestock growth in the quarter was primarily driven by our cattle and swine businesses. Cattle grew 3% and swine grew 6% operationally, despite price reductions as part of our generic defense strategy and higher input costs, weighing on producer profitability in the U.S. Data suggests the food service and restaurant industries continued to recover in the second quarter, which is a crucial dynamic for demand for our premium products. Poultry was the only species to decline in the quarter, which fell 4% as producers in the U.S. expanded their use of lower-cost alternatives to our products. The decline in poultry partially offset the growth in cattle, swine, and fish products. Now let's discuss the revenue growth by segment for the quarter. U.S. revenue grew 22%, with sales of companion animal products growing 34% and livestock product sales declining 8%. U.S. quarterly revenue exceeded $1 billion for the first time in company history. For companion animals, pet ownership and pet spending trends remain robust. Placement revenue increased double digits in the quarter and patient visits and spend per visit were up as well. While we expect some of the trends to moderate, we believe we will remain above pre-COVID-19 levels. In addition, a meaningful portion of pet acquisitions, which occurred during the pandemic were by millennials and Gen Z. This infuses a solid foundation of younger pet ownership, who are willing to spend disproportionately more on all aspects of pet care than prior generations and will be a key growth driver for companion animal medicines, vaccines, and diagnostics moving forward. Our companion animal parasiticides portfolio was the largest contributor to companion animal growth in the U.S., growing 59% in the quarter. Key hematology products, vaccines, and diagnostics also contributed to growth. Simparica Trio had an incredibly strong quarter in the U.S., with sales of $120 million generating the highest revenue by a single product in the U.S. for Q2. The Simparica franchise generated sales of $153 million, growing 96% and remained the number two brand in the U.S. flea tick and heartworm markets. Key dermatology sales were $197 million for the quarter, growing 23% with significant growth for Apoquel and Cytopoint. Diagnostics sales increased 22% in the quarter with growth in instruments, rapid tests, point-of-care consumables, and reference lab revenue. U.S. livestock sales fell 8% in the quarter, driven by declines in cattle and poultry, with swine essentially flat for the quarter. Q2 cattle sales were negatively impacted by a promotional program in the first quarter of this year, which pulled forward a portion of second quarter sales. Additionally, price reductions as part of our generic defense strategy and higher input costs weighing on beef and dairy end-markets, presented challenges to our cattle business this quarter. Poultry declined in the quarter, as producers expanded their use of lower-cost alternatives to our premium products due to higher feed costs, labor wages, and smaller flock sizes reducing disease pressure. We also face generic competition for Zoamix, our alternative to antibiotics in medicated feed additives. To summarize, our U.S. operations delivered another strong quarter, led by our innovative and robust companion animal portfolio. The end-market dynamics for companion animals remain extremely healthy, with pet ownership and pet spending trends driving an environment conducive to sustainable future growth, which is expected to more than offset the near-term weaknesses in our U.S. livestock business. Now turning to our international segment. Revenue in our international segment also grew 22% operationally in the quarter with companion animal revenue growing 41% and livestock revenue growing 10% operationally. The trends fueling strength in our international companion animal business are very similar to those in the U.S. The increasing medicalization rates and standard of care by pet owners, coupled with significant investments in advertising and promotion to support new product launches and key brands drove growth across our parasitides, vaccines, diagnostics, and key dermatology portfolios. Diagnostics were up 106% operationally in the quarter, with consumables and instrument revenue, each exceeding 100% operational growth. Librela, our monoclonal antibody for alleviating OA pain in dogs, launched in the EU in the second quarter. Feedback from the early experience trials in Q1 was encouraging, and second-quarter sales exceeded our expectations, further supporting our optimism on the long-term blockbuster potential of the product, as well as monoclonal antibodies as a platform for future growth. Our feline line monoclonal antibody for alleviation of OA pain, Solensia, began early experience programs in the second quarter with an EU launch following in Q3. As previously mentioned, OA pain in cats is a significant unmet need in animal health, and we're excited to provide pet owners with a novel product in a space that has previously lacked innovation. Meanwhile, our international livestock business had its second consecutive quarter of growth across all species led by strong operational growth in cattle and swine. Cattle growth in the quarter was driven by marketing campaigns, key account penetration, and favorable export market conditions in Brazil and several other emerging markets. Revenue growth in swine is largely attributed to China, which grew 38% operationally. The theme for growth in swine remains consistent with previous quarters, as large key accounts increased their use of our vaccines and other products as they continued to expand production as the market shifts from smaller farms to larger-scale modern operations. Our fish portfolio continues to perform very well, growing 25% operationally. Growth was driven by strong performance of Alpha Flux in Chile, vaccine volume in Norway, and the 2020 acquisition of Fish Vet Group. From a market perspective lens, all major markets grew double digits in the second quarter, with the exception of Japan, which declined slightly in Q2. China and Brazil had strong quarters, growing 30% and 40% respectively on an operational basis. Growth in companion animals across emerging markets remains a key driver of our international business, and in addition to the growth in China and Brazil, our other emerging markets companion animal business grew 68% operationally. Overall, our international segment delivered strong results, demonstrating the importance of our diversity across species and geography. The livestock business continues to perform well, and increasing pet acquisitions and pet care spending are extremely encouraging trends for long-term growth in companion animals. Now moving onto to the rest of the P&L. Adjusted gross margins of 71% are essentially flat on a reported basis compared to the prior year, as favorable product mix and price were offset by higher manufacturing costs and freight. Adjusted operating expenses increased 23% operationally, resulting from increased compensation-related costs, advertising and promotion expense, and freight. The adjusted effective tax rate for the quarter was 20%, a decrease of 230 basis points, driven by the favorable impact of a jurisdictional mix of earnings, lower GILTI tax, and an increase in favorable discrete items compared to the prior year's comparable quarter. Adjusted net income and adjusted diluted EPS grew 28% operationally for the quarter, primarily driven by revenue growth. We remain in a very strong liquidity position and continued our share buyback program, repurchasing approximately $165 million worth of shares in the quarter. The strength of our balance sheet and substantial free cash flow generation allow us to make significant investments for future growth while still returning excess cash to shareholders. Before I review our updated guidance, I would like to reiterate a point that has been discussed on prior earnings calls, which is that we expect growth to moderate in the second half of the year as a result of varying comparative periods, where pent-up demand created by COVID-19 in the first half of 2020 worked its way through the system in the second half of the year in addition to the expected increased generic competition for DRAXXIN. Adjusting for the variability in the comparative period due to the pandemic, our phasing of top-line growth would be more normalized and consistent quarter-to-quarter throughout this year. Now moving on to our updated guidance for 2021, which we are raising and narrowing as a result of our second quarter performance, strength of our product portfolio, and favorable market dynamics, which we expect to continue in the second half. Please note that our guidance reflects foreign exchange rates as of mid-July. For revenue, we are raising and narrowing our guidance range. We’ve projected revenue now between $7.625 billion and $7.7 billion and operational revenue growth between 12.5% and 13.5% for the full year versus the 10.5% to 12% in our May guidance. Adjusted SG&A expense for the year are expected to be between $1.87 billion and $1.91 billion, versus $1.82 billion and $1.87 billion in our prior guidance. The increased spend represents additional advertising and promotion investments, a significant portion of which will occur in the third quarter, as well as compensation-related costs due to the company performance. Adjusted net income is now expected to be in the range of $2.135 billion and $2.175 billion, representing operational growth of 13% to 15%, compared to our prior guidance of 12% to 14%. Adjusted diluted EPS is now expected to be in the range of $4.47 to $4.55 and reported diluted EPS to be in the range of $4.09 to $4.19. Now to summarize before we move on to Q&A. Our strong performance in the first half of 2021 continues to underscore the value of our diversity, innovation, and durable business model. We again raised and narrowed our full-year 2021 guidance and expect to grow faster than the markets. We continue to focus on long-term sustainable growth by investing in our pipeline, including infrastructure to support current and future product launches and remain very positive in our outlook for sustainable growth beyond this year. Now I’ll hand things over to the operator to open the line for your questions.

Operator Instructions. And we will take our first question from Michael Ryskin with Bank of America.

Thanks for taking the question. As always, I will congratulate you on another strong quarter. I want to start with Simparica Trio, just a really breakout quarter with $139 million. I mean, by our projections, something in the $450,000 to $500,000 range has been out of the picture for the rest of the year. So I just want to get a better sense of where you're seeing an incremental growth coming from? I mean, we did note a little bit of a tick-down in regular Simparica in the U.S. year-over-year. So just wondering if you could kind of elaborate again on cannibalization and revenue expectations as you move forward? And then, my second question will be on the operating leverage. I was wondering—we’ve talked about this in the past—but definitely saw a notable step up sequentially in SG&A, coming in somewhat above my estimates. You mentioned a lot of the advertising spend, a lot of compensation-related expenses. Could you just give us a sense of how much this is expected to persist going forward? Obviously, it’s going to play a big role in the operating leverage in the second half of the year, and given some of the comps, I want to get a better sense of what goes into that $490 million and how to think about that?

Great. Thanks, Mike. I'll take the first question, and I'll let Wetteny take the second question on the leverage. Yes, Simparica and Simparica Trio had a phenomenal quarter. Overall, as Wetteny mentioned, we had 50% growth in parasiticides. But as you look at the quarter for Trio with the $139 million, it was incredibly strong. I would say, Trio is and has been outpacing our expectations. In fact, the Simparica franchise in Q2 was the second largest in the flea tick and heartworm space. So, we're very excited. We expect to continue to see this product grow. The market itself has now grown to over $5 billion. So, we remain super excited. We're doing well both on our penetration of clinics as well as reorder rates. So we see strong momentum that we think will continue into the second half of the year. So, I’ll let Wetteny take your second question.

Yes, in terms of SG&A, indeed, the step up that you see in terms of our trend there is really largely driven by R&D investments, as well as advertising and promotion behind our strong brands, given the momentum that we have in the market and the strong market conditions that we are in. We are really putting advertising behind our key brands. You mentioned Simparica as a franchise, both Trio, particularly in the U.S. and other markets, but also Simparica continues to grow internationally for us, and we want to take advantage of the momentum that we have in this very large market, $5 billion plus. And so, we'll continue to do that as we enter into the back half of the year, particularly in Q3, as we said in the prepared commentary. But that's largely what’s driving it. In terms of compensation-related costs, this really more of a variable component that is aligned with the performance of the company.

And we will take our next question from Jon Block with Stifel.

Great. Thanks, guys. Good morning. Kristin, maybe I'll start on the monoclonal, and I know it's early, but how are you seeing Librela being used in these international practices? In other words, is it market expansion? Is it taking share from other solutions or cannibalization or remedial? Any color you have there would be helpful. And then just to shift gears on livestock, it's always choppy and can move around. But is there anything more structural going on in the U.S. market regarding generic competition? And maybe, on that last point, how is traction playing out? You mentioned that it seems like maybe less impact to date, but is the overall year assumption still unchanged? Thanks, guys.

Sure. Thanks, Jon. Good to hear from you. I'll take the first question, and I'll let Wetteny take the second question on livestock. We have been very excited at the uptick in Librela. As for your question about how it is really being used, we've seen really strong efficacy of the product. The feedback we've gotten through early experience in our first quarter of sales is just really quick efficacy. They are noticing differences pretty quickly—it’s improving quality of life and better sociability. So we believe more and more vets are looking at this as a first-line therapy. We do think that there are significant opportunities for Librela to grow the category. The dog categories you've talked about before are currently at $400 million. But we believe by bringing this type of innovation to the market and supporting it globally, we have the ability to potentially double that market. If you look at how many dogs there are, how many have OA pain, and how many are treated, we look at the opportunity to grow this market in a few ways: certainly by getting more animals, increasing days on treatment, ensuring better compliance, and then, certainly with the price of this product being at a premium to what is already in the market. So, Wetteny, do you want to take the second question on livestock?

Yes, sure. Look, in terms of livestock, we don't see a structural change here. The performance that we're seeing is right in line with our expectations. Livestock grew 3% on the quarter. And as we've said, livestock tends to grow somewhere around the 4% range in the past, but we expect it to be in low single digits this year. The global growth in that area is driven by international markets, particularly when you think about emerging markets like China and Brazil, etc. In the U.S. with the generic competition for DRAXXIN, we expected to see some headwind there, and it's really playing out in line with our expectations. One more point I'll make is, if you recall, in Q1, we had some promotions in line with our generic defense strategy that really accelerated some of our revenue into Q1 from Q2. So that's playing out a little bit in terms of what you're seeing in the livestock figures for the U.S. But we expect to see further declines in livestock for the remainder of the year, and all that’s factored into the guidance that we raised today as well.

And we will take our next question from Louise Chen with Cantor.

Hi. Thanks for taking my question here. Just curious how durable you think this increase in the vet visit, plus spend per pet will be over the longer term? Thank you.

Thanks, Louise. Great to hear from you. Yes, we're very confident in the durability of the companion animal trends that you've seen throughout 2020 and 2021. So, as you look in the quarter, we saw overall clinic revenues up 14%, and that was equally split between vet visits and spend per visit. Our confidence in these durable trends really has to do with a few things: one, there are more pets, and we've talked about that for a number of quarters. The other thing is the increase in the standard of care and expectations of pet owners, greater use across the portfolio, greater use of diagnostics, and more people home, noticing more about their pets. But the other really important trend that's going to continue to play out is who is adopting a lot more of these pets, and that's a lot of millennials and Gen Z. They tend to spend more on their pets and are very engaged in their care. So, we see these durable trends that will continue and will remain a big growth driver for the company over the coming years.

And we will take our next question from John Kreger with William Blair.

Hi. Thanks very much. I have a gross margin question. I realize the monoclonals are sort of a new class for you guys as Solensia and Librela ramp, do you expect the gross margin on those products to be better or worse than what you see across your traditional product portfolio?

Yes. Look, we certainly expect to be priced at a significant premium to existing therapies, including remedial due to the safety and efficacy profile of these products. So, I would say it would be above the average gross margin that you see across our portfolio.

Great. Thanks, Wetteny.

Thanks, John.

And we will take our next question from Katie Tryhane with Credit Suisse.

Hi. Thanks for my question. You highlighted the strength in diagnostics. Can you just speak about some of the advantages and success that you've had with bundling strategies with therapeutics? And can you speak to what you're seeing in terms of competitive placements for instruments? You also called out the new VetScan Imagyst platform. I mean, how has that been performing to date? And how do you expect that to contribute to growth in the business going forward? Thanks.

Thanks, Katie. As you look at diagnostics, it was a very strong quarter with 38% operational growth. Diagnostics, as we've talked about, remains a very attractive segment with double-digit growth. It's core to the way that that practice operates. Again, pets cannot tell you exactly how they are feeling. So we continue to see this being a really strong part of our continuum of care strategy. It's critical to best practices. We had incredibly strong growth, as you saw in the quarter internationally, making significant placements, very strong in the U.S., and we're focused on a few things there. Certainly, it's placements as we talked about, and we're seeing good growth there, stronger in the quarter internationally than in the U.S., but also really driving consumable use. We think that remains a big opportunity for us versus competition in getting more consumable use in the placements that we have. Then, really adding on to the innovation, if you look at the Imagyst launch, it has done better than our expectations. We continue to see very strong growth there. Right now, the indication for the VetScan Imagyst is in sequel, and that's a large market—it's about $500 million, growing at 7% to 8%. So, we see really strong growth there. I don’t know, do you want to add something?

Not it’s probably only 1%.

And we will take our next question from David Westenberg with Guggenheim Securities.

Hi. Thank you for taking the question. I am going to continue on that concept that was just asked by Katie. Can you help us conceptualize the size of the non-therapeutic revenue for Zoetis on a go-forward basis? And whether or not we should see it as a revenue contributor or as maybe a means of driving therapeutic revenue? And I am going across the categories with diagnostics, insurance, Embrex, genomics, etc. And then, just a quick clarification question to the answer to Jon Block’s question on the doubling of the pain market. Was that just in dogs? And then, cats is just a plus beyond that? Or was that $800 million or the doubling of $400 million just the dog and cat? Thank you.

I'll start and see if Kristin wants to add anything. In terms of non-therapeutics, if you look at diagnostics, for example, where we saw 38% growth this quarter, roughly $99 million of revenue on the quarter on the base of what we reported for the year. So, in relative terms, it's not the largest proportion of our revenue streams, certainly, but we are very excited about the potential for the future in the very fast-growing markets, as diagnostics which is expected to grow faster than the overall animal health space for us. Really, we expect diagnostics, as Kristin covered earlier, to have an impact on the continuum of care, and we think overall increasing the use of diagnostics as we look to medicalization across pets will have a positive effect on overall therapeutics in the long haul, and we think that's also an exciting opportunity for the long term.

Sure. And I can take your second question regarding the cat market. Yes, we think that would be incremental. It is a little hard to size the cat market today. There is really not much of an OA pain market in the U.S. There are some international products that are approved. But as we talk about doubling the dogs from $400 million to $800 million, if you recall, it’s again—it’s a little hard to size the cat market—maybe it's a $100 million. We think you can double that as well. So I think that could be a $200 million market, which would make the OA category for us across dogs and cats potentially a $1 billion market that we can play. We think this is a very exciting space for us.

And we will take our next question from Balaji Prasad with Barclays. Your line is now open.

Hi. Good morning, and thanks for your questions. Just a couple for me. Firstly, on the parasiticides market, do you have a sense of relative size of where mix got better in the quarter and if Trio growth came at the cost of competitors or from some market expansion? On the same point, you recently got a label expansion for Simparica. Could you also just describe how that takes us through the implications for it commercially? And on the guidance side, could you also just take us through what led to a 1% revenue guide change and the 2% increase in SG&A, and where those increased expenditures are going into? Thanks.

Sure. Thanks, Prasad. I'll take the first question, and I will let Wetteny take the second one. As we look—I can’t get into what our competitors' products sales are. We remain quite excited for what the comparative is doing. We did get the additional label claim that was expected, and that was included in the guidance that we had. In terms of where our sales are coming from, it’s both. We are both growing the market. I think more people are moving back into prescribed products versus some of the over-the-counter. But we’re also seeing that we are taking share from many of our competitors as well. So, it's an exciting opportunity across both dimensions. Wetteny, do you want to take this other question?

Yes. Look, one thing I would add in terms of parasiticides, I think it's a $5 billion market, that's growing around 5%, and we're gaining share in this marketplace. We do think that with a triple combo, it's improving compliance with respect to heartworm, etc., and so that we'll have the opportunity to continue to expand the market as well. So we're very pleased with the performance across our parasiticides portfolio and the share that we're gaining. We will continue to invest behind this product portfolio as well.

Did you want to take the increase in guidance question?

Yes, look, certainly, when you look at our guidance compared to where we started in the year and given the overall positive market dynamics that we see with our portfolio is performing very well. Kristin covered some of the trends around vet visits and so on. All those are contributing towards optimism, and you’ve seen the year-to-date performance that we’ve delivered. In fact, we've taken our guidance in terms of top-line operational growth up from where we started the year at 9% to 11%, to now at 12.5% to 13.5%. So full three points above where we started the year. So, we're very pleased with how we started the year. If you look at it from an overall perspective, certainly, the first half and the second half of the year, if you look purely at top-line, it's really roughly in line, pretty consistent in terms of phasing across the year. The growth rates will moderate based on last year, largely not a matter of how this year is executing for us. We're in a very positive market dynamic with very strong performance across our portfolio. Last year, given the pandemic, there was a bit of variability across the year; there was disruption in the first half of the year due to COVID-19, which created more demand that was pent-up and worked its way through the back half of the year. So, that's going to create a dynamic in terms of what the growth rates look like in terms of first half versus second half. But we are very pleased with where we are, and we are going to continue to invest behind our key portfolios and brands.

And we will take our next question from Chris Schott with JPMorgan.

Great. Thanks so much for the questions. I just want to focus a little bit more on U.S. livestock. Can you talk a little bit again about the 2Q dynamics? Because it seems like you were going up against a fairly easy comp, but this was still down about 8%. So, I was trying to get a sense of like, as we think about the rates of decline you're expecting in the business in the second half of the year, just help us conceptualize what type of erosion you're thinking about as we go up against what seems like some tougher comps for those quarters? And then, maybe from a longer-term perspective, just walk a little bit through how you're thinking about recovery for U.S. livestock as we think about both poultry and cattle as we get past some of these kind of more challenging near-term dynamics and just think about the longer-term business? Thanks so much.

Thanks, Chris. I'll start on more of the strategic drivers, and I'll let Wetteny get into some of the specifics here. Livestock really has performed as we expected. As we talked about going into the year with the LOE of DRAXXIN, we did expect a decline in general, as we talked about for the last few years. That's generally 20% to 40% over two to three years, and as we said, we thought that would be faster. As you look at the quarter, we did see a 19% decline overall in DRAXXIN specifically. I think that is one of the key factors in the U.S. And as Wetteny mentioned earlier, I think this will continue. But if you look at broader livestock historically, it's a low to mid-single-digit grower. Certainly, if you saw in 2019 with ASF in China and 2020 with COVID, it’s been lower than what you've historically seen. We do believe, as we said, that overall this will trend back to a market growth in the mid-single-digit range, maybe call it around the 4% range. Then we think the livestock will be in line with that, it could be slightly lower over the next few years if you see this year. Really, the strategic driver of that is that we have a number of products hitting exclusivity. As you look at our guidance, that's why it is baked in. So, it wasn't just DRAXXIN, we also have one in poultry you were referencing, Zoamix, and BMB as well. But again, we've got good growth in some of these other species as well. If you look at poultry, we're really excited about the growth of vector vaccines. It’s a $300 million market, growing 13%. We've already launched two of them, Newcastle and IBD, and that will be a growing portfolio for us. But I'll let Wetteny get into some of the more specific numbers, but I do think if you look at livestock just more strategically at a higher level, I think it's going to be a lower grower than companion animal. But we do think it goes back to historical levels. Wetteny, if you want to build on that?

Yes. Look, I mean, if you look at livestock across the world with protein consumption, population growth, and rising income levels, we expect those to continue to drive growth in livestock for the long term. We delivered 3% on the year as we said it’s as expected, and as covered in the prior earnings call, we expected declines in the U.S., particularly given the generic entry for DRAXXIN. Now, the first quarter did benefit a bit from two things. One, there was a little bit of a delay in terms of the entry of generic for DRAXXIN, but also we ran a promotion in the first quarter that accelerated some of our revenue into Q1, taking it out of Q2. So, if you take those into consideration, which are exactly in line with our defense strategy, livestock really is performing exactly as we expected. Now, given that the intensification of generic competition began in late first quarter into the second quarter, we expect the decline to continue, and again, they are right in line with our expectations here.

And we will take our next question from Steve Scala with Cowen.

Thank you. A local paper in Nebraska reported last week that Librela is being manufactured at the Lincoln plant. If that is correct, then is that product ultimately destined for the U.S.? And as the U.S. regulatory process evolves, can you confirm that it is still the case that no new clinical data is required? Thank you.

Sure. We mentioned—I mentioned earlier, we do believe we will see approval in the U.S. for both Librela and Solensia in 2022 with Librela most likely in the second half. We have long-term strategies from obviously multiple sites. I don't think the U.S. will be manufactured out of Lincoln at launch. We certainly are looking at potentially adding sites just given the strength, as I mentioned earlier, of that product. So, we have been having ongoing conversations with regulatory authorities, and we remain on track for the guidance we previously provided, which is approval for both of those products, with Solensia likely earlier in the year and Librela later. But you should not expect that we are producing out of Lincoln, Nebraska, at launch for Librela.

Look, given our global footprint and presence, you should not read anything into the location of manufacturing in terms of where products are destined to. In particular, we'll continue to leverage both our footprint as well as third parties that are manufacturing. So, I wouldn't draw any conclusion from that.

And we will take our next question from Elliot Wilbur with Raymond James.

Hi guys, this is actually Michael Parolari filling in for Elliot. Thanks for taking my question. So, I believe you said in the past that Trio has had about a 90% uptake on top corporate accounts. Just wondering if you can provide an update though on penetration across all targeted accounts. And then, in relation to the DTC campaign, I know you said in your prepared remarks that it remains beneficial. But just wondering if you could give an updated timeline on how long you could see it continuing? And then also how you see incremental spend really driving ROI here. Thank you.

Sure. Thanks, Michael. We continue to see very—we are at or surpassed all the clinic penetration that we expected for Trio. So, we're quite pleased with that. Right now, we're a little more focused on reorder rates, as I mentioned. We think reorder trend for us now is—I think our penetration is where we would expect it and it’s very broad across the U.S. for Trio. We are really focused on those reorders, which we now have at 80%, continuing to grow those overall reorder rates. Direct-to-consumer advertising is critical in this category. It is $5 billion. It is a category that consumers really do go in and ask for the brand. We obviously track our ROI in this and as you've seen, and as Wetteny mentioned earlier, we will continue to invest behind this brand. We have seen incredibly strong ROI in doing so. That is why you're seeing us step up that spend. As we talked about earlier, it has outpaced our expectations. I think that has everything to do with the innovative nature of this product, but it also has to do with the investment we put behind that in direct-to-consumer advertising and investing with our field force. We will continue to do that. You should expect this year and next year, certainly, we have a window of opportunity with no competition in the U.S., and we will leverage that opportunity. We still don't know exactly when we'll see competition. At this point, we don't expect any into the second half of 2022 at the earliest, as we mentioned. But as long as we do not have competition, we will invest aggressively behind this brand. And even when we do, we will do it as well, because we've seen very strong ROI in doing that.

And we will take our next question from Navaan Ty with Citi.

Hi. Good morning. Could you comment on the capital allocation? Should we expect to see a continuity of financial policy going forward? And also, following Jurox, should we expect further geographic expansion via bolt-on acquisitions in addition to the internal investments? Thank you.

Yes, sure. So, in terms of capital allocation, you should expect consistency in terms of how we've managed capital allocation with the focus first and foremost on internal investments. We have opportunities in terms of R&D, investing behind our brands, advertising and promotion perspective, and CapEx to support our growing pipeline including monoclonal antibodies, etc. That's really our first priority. Of course, we'll take advantage of any opportunities from a business development perspective for M&A that helps to accelerate our growth in various markets and in areas as well. So that really follows in terms of investments. And then, as we have free cash flow generation that is very strong, we'll look to return cash to our shareholders. We’ve increased our dividends, as you've seen, typically faster than our revenue, and we reinitiated our share buyback program, which we are continuing. So, that remains consistent, I would say, with the best.

And then, on direct, do you want to just comment on that BD geographic expansion?

Yes. So, look, certainly in Jurox, we are excited to be bringing them on board once we get through the process here over the next six months and close the transaction. We try to bring Jurox into the Zoetis family. Australia is our fifth largest market globally. This is really at our core. It does increase our presence in a therapeutic area with the leading product as well. So, we're very excited about that opportunity and what it does for us. We will continue to look for bolt-on opportunities to bring on both the core as well as other areas of the business, whether it's diagnostics or what have you as well.

And this does conclude today's question and answer session. I will now turn the program back over to Kristin Peck for any additional or closing remarks.

Great. Thank you, everybody, for your questions today and for your continued interest in Zoetis. We look forward to keeping you updated on our business throughout the remainder of the year and continuing to deliver on our results and innovations that you and our customers expect. So, thanks so much for joining us today. Stay safe.

This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.