Welcome to the First Quarter 2024 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 available approximately 2 hours after the conclusion of the call via dial-in or on the Investor Relations section of zoetis.com. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Thank you, operator. Good morning, everyone, and welcome to the Zoetis First Quarter 2024 Earnings Call. I am joined today by Kristin Peck, our Chief Executive Officer; and 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 the company's 8-K filing dated today, Thursday, May 2, 2024. We also cite operational results, which exclude the impact of foreign exchange. And with that, I will turn the call over to Kristin.

Thank you, Steve, and good morning, everyone, and welcome to our first quarter earnings call for 2024. Today, we reported outstanding first quarter results, underscored by steady demand for our products, a focused strategy, and our purpose-driven colleagues. We delivered 12% operational revenue growth and grew adjusted net income 15% operationally in line with the tenet of our value proposition. Driven by the launch of our osteoarthritis pain franchise, the U.S. led the way with 16% growth and 8% operational growth internationally. More specifically, globally, Librela grew 189% operationally, including $40 million in sales in the U.S., in line with our expectations. The powerful human-animal bond fueled demand for our companion animal portfolio with 20% growth operationally, while livestock declined 1% operationally. This quarter's results, even amidst global uncertainty, are a testament, once again, to the power of our diverse and durable portfolio across markets, species, and therapeutic areas. It also highlights the continued rise and resilience of the animal health industry. Our purpose and performance are rooted in science, which has always been the great disruptor. As animal health is increasingly essential for nutrition and companionship, caregivers demand even more high-quality innovation. That means we identify the most prevalent areas of unmet veterinary needs and invest in, develop, manufacture, and deliver life-changing products that customers have been waiting for. Take, for example, Librela and Solensia, our injectable monoclonal antibodies to treat OA pain in dogs and cats, which are helping millions of pets return to play. With more than 18 million doses distributed worldwide, we are providing long-lasting relief to animals, many of whom were previously undiagnosed or untreated due to limitations of NSAIDs. With nearly 40% of all dogs suffering from OA pain globally, we believe just one-third of those are being treated. So we're just scratching the surface of care. And cats are visiting the clinic more often. In fact, we're helping curb clinic fears with Bonqat, the first FDA-approved product to alleviate anxiety in cats, which means we're expanding care in a historically under-medicalized area of the market. We understand that social media is a forum for convening, a place for pet owners to connect and share, but we also have a responsibility to empower our customers to make informed decisions grounded in science and data. We are unwavering in our commitment to rigorous safety and quality standards, which has earned us the trust and confidence of veterinarians worldwide. Backed by that commitment, Librela and Solensia are safe and effective. They are anchored in 10 years of science and have been used in Europe for more than three years. In the U.S., 78% of veterinarians who are at the center of care are very satisfied with Librela. This is driven by real-world experience and is consistent with the feedback we hear in other markets. Our research indicates that 46% of veterinarians globally will treat OA earlier and 65% will treat more dogs now that Librela is available. To accurately reaffirm the safety and efficacy of these therapies, we are doubling down, working directly with veterinarians who need these products, hosting live sessions with our Chief Medical Officer, and expanding online education and training while deploying capital to expand our DTC strategy. And veterinarians continue to be confident in Librela as evidenced by a recent blind survey of U.S. vets confirming that perception and intent to prescribe remain unchanged. We remain confident that OA pain could be our next $1 billion franchise because we are meeting the needs of an underserved market. We are growing by nearly every metric, including adoption, penetration, reorder rates, patient share, and expanded utilization. Looking at our four-week rolling average in the U.S., we're excited to report that sales steadily increased through April. Our performance speaks to the power of the human-animal bond. Discerning pet owners want options, and they will work with their vets to find relief for their best friends. Beyond OA pain, Zoetis has been able to lead the market in other key categories because we deeply understand our customers' needs. This allows us to not only compete in existing markets but to create entirely new ones. Science has created something completely unique to our industry: two $1 billion franchises. Our parasiticide portfolio expanded the total market based on deep customer insights. Before Simparica and Simparica Trio, we were #5 in this category. These innovations changed how we compete. Today, we are #2 and continue gaining share and growing the market even in the face of competition. Similarly, we were the first to recognize that new therapies were needed to treat canine itch safely and effectively. That market foresight changed the treatment paradigm and revolutionized pet care. A decade of dermatology has led to three products: 20 major life cycle enhancements, including Cytopoint, the first-ever animal health monoclonal antibody, and the first chewable with Apoquel chew. From what was once believed to be just a $100 million market, it has grown to $1.4 billion because we know what our customers need. Today, more than 18 million dogs are treated for allergic itch and atopic dermatitis, and another 13 million remain untreated globally. We built a $1 billion franchise and demonstrated the durability of our portfolio. We will continue growing this franchise underpinned by strong brand equity, first-mover advantage, life cycle innovations, and strong customer relationships. We've led in parasiticides, dermatology, and now OA pain. Each time our innovations have created new categories in animal health, you've seen the total industry opportunity expand. Now moving to livestock. I'm sure you all saw the news this week on the announcement of our agreement with Phibro Animal Health to sell our global medicated feed additives and certain water-soluble product portfolios and related assets for $350 million. This deal is another great example of Zoetis' disciplined capital allocation strategy to focus investments in areas with the greatest growth potential and innovation that are aligned with our key capabilities. I'm confident that under Phibro's management, the global reach of these products will continue to expand to meet customer needs worldwide. We remain very committed to livestock and are sharpening our focus on our core innovative livestock growth areas, including preventative antibiotic alternatives and genetics. In summary, for more than 70 years, Zoetis has been leading the industry with our commitment to innovation. We've invested over $5 billion in R&D since our IPO, which has brought more than 300 product lines to the market. Science is and always has been the great disruptor and at the core of our success in delivering the innovations that veterinarians, livestock producers, and pet owners expect from us. Our pursuit of science has led to breakthroughs in dermatology, like Cytopoint and Apoquel chew; in parasiticide with Simparica Trio; and now the latest in OA pain with Librela and Solensia that are revolutionizing animal health. Blazing new trails isn't easy. But time and again, our purpose-driven colleagues have proven their ability to expand our industry leadership and forge entirely new markets. We remain committed to delivering strong growth through our innovative franchises and diverse portfolio while continuing to invest for the future. Looking ahead to the remainder of 2024, our increased operational guidance reflects the resilience of the animal health market and the execution of our strategic growth priorities. We will continue to be disciplined, yet adaptable in our approach to the opportunities, potential challenges, and economic shifts that occur throughout the year. And with that, I will turn it over to Wetteny.

Thank you, and good morning, everyone. As Kristin mentioned, we had an outstanding start to the year driven by the underlying strength of our companion animal portfolio, particularly our innovative products, as well as price growth across all species. In the first quarter, we generated revenue of $2.2 billion, growing 10% on a reported basis and 12% on an operational basis. Adjusted net income of $634 million grew 4% on a reported basis and 15% on an operational basis. Our 12% operational revenue growth was due to the underlying strength of our companion animal portfolio, aided by the impact of a weak comparative quarter in our U.S. companion animal business. However, the majority of this growth was offset by headwinds related to economic conditions in China, the impact of a tough comparative quarter in livestock due to the timing of supply for certain products last year, and inventory destocking related to our U.S. diagnostics sales model change. Of the 12% operational revenue growth, 7% is from price with 5% growth in volume. While we saw price growth across our portfolio, price was favorably impacted by hyperinflationary markets, especially Argentina, which contributed 2% to our overall price growth. The volume growth was driven primarily by new products, including our monoclonal antibodies for OA pain, Librela and Solensia, as well as our key dermatology products and Simparica Trio. On a segment basis, the U.S. posted $1.2 billion in revenue, growing 16% on the quarter, while our International segment reported revenue of $1 billion with operational growth of 8% in the quarter. Our companion animal portfolio was the main driver of revenue growth in Q1, growing 20% operationally. This growth was partially offset by livestock, which declined 1% on an operational basis. We saw double-digit operational companion animal growth in both our U.S. and International segments again this quarter, driven by the strong performance of our innovative products with contributions from both volume and price. Simparica Trio was the primary driver of growth in the quarter, generating $243 million globally, representing operational growth of 61%. We saw strong demand for Trio as well as continued growth in patient share even with competition. Our OA pain meds were also a significant contributor to growth, posting $131 million in the quarter. Global growth came from the impact of new launch markets, both in the U.S. and internationally. In our early launch EU markets, recent vet surveys showed an increase in muscle on therapy and expansion into more moderate OA cases. Our key dermatology products grew 25% operationally in the quarter with $360 million in global revenue. Growth within dermatology was driven primarily by our Apoquel franchise, where we are seeing solid conversion to Apoquel Chewable, including a modest impact from initial distributor stocking in the U.S. Cytopoint growth continues to be driven by vet and pet owner preference for injectable methods of treatment. Our global companion animal diagnostics portfolio declined 12% operationally with declines in the U.S. driven by our distribution model change. These declines were anticipated as our distribution partners sold off their remaining inventory due to our transition to a direct-only model for our U.S. diagnostics portfolio. U.S. declines were partially offset by growth internationally. Our livestock portfolio declined 1% operationally, as expected, driven by a tough comparative quarter in the prior year especially in the U.S. as well as impacts from the ongoing economic conditions in China. This decline was partially offset by price growth in our other International markets. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.2 billion in the quarter, growing 16% with companion animal growth of 25% and livestock posting a 7% decline. The companion animal performance in the quarter was driven by Simparica Trio, our key dermatology portfolio, and the impact of the launch of Librela in the U.S. as well as the impact of a weak comparative quarter. Our outstanding U.S. companion animal growth came in the quarter where we saw vet clinic visits decrease 1.5%. We continued to see growth in the therapeutic visits while wellness visits drove the decline. Sales outgrowth in the retail and home delivery continued to outpace vet clinic fulfillment, which is based on growing pet owner preference for these alternative channels. This dynamic is expected to put continued pressure on total vet clinic visits without impacting our expectations for revenue. Despite the visit decline, revenue and spend per visit in the clinic grew 4.5% and 6%, respectively, which reflects continued pet owner willingness to pay. Turning to product performance. Simparica Trio posted sales of $205 million in the quarter, growing 61%. We continue to be the market leader in the triple-combination parasiticide space. Our leading footprint across channels has allowed us to continue to drive dosage growth through increased compliance even with declines in wellness visits at the clinic. In addition to a weak comparable period in the prior year, we are seeing favorable price realization due to more targeted discount programs to vets as well as channel dynamics. The dermatology product sales in the U.S. were $233 million for the quarter, growing 27%. We saw growth in both price and volume and across both Apoquel and Cytopoint. Both also benefited from a weak comparable period in the prior year. Market demand for our dermatology products remained high. In the quarter, we saw growth in both our patient share as well as higher periodic visits in the clinic. Additionally, growth of retail autoship programs continued to bolster compliance. At the beginning of April, we made Apoquel Chewable available through our distribution partners. Our pain meds, Librela and Solensia, posted a combined $57 million in U.S. sales in Q1. Librela generated $40 million in the quarter with underlying vet demand continuing to build on the momentum from our full launch in Q4 of last year. Excluding the impact of the initial clinic stocking, which we provided last quarter, we are seeing robust sequential quarter growth in Librela, in line with expectations. We continued to see good growth in penetration as well as strong reorder rates, which are approaching 80%, all of which points to positive real-world satisfaction in the clinic and among pet owners. We remain confident not just in the safety and efficacy of Librela, but also in our expected performance. As Kristin alluded to, we have seen steady increasing trends in our trailing four-week sales average in the U.S., even into April, after the increased media attention. We continued to see steady progress in Solensia, which had U.S. sales of $17 million in the quarter, more than doubling our prior year's Q1 sales. We have indicated the feline market needs significant development, but we are pleased with our progress thus far. Solensia is now the market-leading product for feline OA pain in the U.S., and we have seen a significant increase in the medicalized patient pool since launch. Our U.S. companion animal diagnostics portfolio declined 21% in the quarter, driven primarily by distributor inventory work-downs following our channel strategy change. This destocking is in line with our expectations and has negligible impact on our underlying clinic demand. U.S. livestock declined 7% in the quarter while our underlying business performance in the quarter was as expected. Our results are reflective of a strong comparative period in Q1 of 2023, in which we grew 15% due to the return of supply on several products, primarily in cattle. Sales of swine products declined due to decreased sales of vaccines as well as JAKs. In poultry, we saw declines as a result of increased generic competition in our medicated feed additive products. Moving on to our International segment where revenue grew 3% on a reported basis and 8% excluding the impact of foreign exchange. Companion animal grew 14% operationally and livestock grew 2% operationally. Increased sales of our international companion animal products were driven by oral pain meds, key dermatology products, vaccines, and small animal parasiticides. This growth was partially offset by impacts in China. Our International OA pain meds grew 67% operationally to $74 million in combined revenue in the quarter. International Librela sales were $159 million, growing 71% operationally. Growth is balanced across new launch markets and our first wave EU markets. We continue to see evolution in the European markets, where we have seen expansion in Librela's use in moderate OA cases, which according to the latest vet surveys now represents the majority of the Librela patients in Europe. We remain pleased with the success of our DTC advertising campaigns in increasing pet owner awareness of OA. Solensia sales were $15 million internationally in the quarter, growing 54% on an operational basis. Our International key dermatology portfolio grew 23% operationally in the quarter, posting $127 million in sales. We saw double-digit operational growth across most of our major markets, driven by higher compliance and new patients. Growth was also favorably impacted by pre-priced increased buy-ups in Japan and certain European markets. Our International small animal parasiticides portfolio grew 6% operationally driven by our Simparica franchise with Simparica Trio growing 58% operationally to $38 million in sales. Trio growth benefited from continued uptake in Europe driven by key account penetration and sales force effectiveness as well as contributions from Trio's launch in China. Simparica posted $56 million in revenue, growing 22% on an operational basis in the quarter. This growth was partially offset by a 29% operational decline in our Revolution franchise, which generates a high proportion of sales in China. International livestock grew 2% operationally in the quarter driven by price increases as in high inflationary markets. Price growth was partially offset by volume declines across all of our species, driven by a tough comparative period in the prior year due to the return of supply of certain livestock products. The volume declines in livestock were driven by cattle due to a tough comparable period related to supply and worsening market conditions in Australia. Our International swine portfolio saw volume declines driven by China, where we saw lower hog prices as well as a reduction in herd sizes. In sheep, we saw declines from herd reductions due to expected weather conditions in Australia and New Zealand as well as supply constraints on a key product. As we mentioned last quarter, we continue to see economic challenges in China, where low consumer spending and higher urban unemployment have reduced spending. We are also seeing a slowdown in livestock with lower pork prices and smaller herd sizes. The impact on our growth is expected to moderate late in the year, but we expect to continue to see headwinds throughout the year across both companion animal and livestock. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 70.7% declined 10 basis points on a reported basis compared to the prior year. Foreign exchange had an unfavorable impact of 180 basis points on our reported adjusted gross margins. Excluding FX, we saw higher margins due to price increases, favorable mix, and lower freight costs partially offset by higher manufacturing costs, especially in hyperinflationary markets. Adjusted operating expenses increased 11% operationally, driven primarily by SG&A growth of 10% operationally, mainly due to higher compensation-related expenses as well as increased advertising and promotion spend on our OA pain meds. R&D grew 13% on an operational basis, driven by higher project spend related to both recent acquisitions as well as advancements of our pipeline candidates. The adjusted effective tax rate for the quarter was 19.7%, a decrease of 80 basis points, primarily due to a higher benefit in the U.S. related to foreign-derived intangible income and a more favorable jurisdictional mix of earnings. Finally, adjusted net income grew 15% operationally despite a $31 million headwind to growth from the nonrecurring benefit of our prior year royalty settlement. Adjusted diluted EPS grew 17% operationally for the quarter. Capital expenditures in the first quarter were $140 million. In the quarter, we repurchased $339 million of Zoetis shares. Before moving to guidance, I wanted to comment on our recent announcement to divest our medicated food additive portfolio and certain water-soluble products to Phibro Animal Health. This is a transaction that demonstrates Zoetis' disciplined capital allocation strategy to focus our investments on innovative solutions that advance animal health, productivity, and sustainability. This divestiture will allow us to remain focused on other livestock solutions, including vaccine, biologic, and genetic programs that are more aligned with our strategic priorities. Now moving on to guidance for full year 2024. As we have mentioned, we had an outstanding first quarter that highlighted our ability to deliver through multiple sources of growth. Our performance in companion animal, especially in parasiticides and our key dermatology franchises, exceeded our expectations. Additionally, we continue to be pleased with the progress of the U.S. launch of Librela and are confident in our ability to meet expectations. We are, therefore, raising our 2024 operational guidance provided during February's earnings call. Note that guidance reflects foreign exchange rates as of late April. The updated foreign exchange rates negatively impacted our reported revenue guidance by approximately 2% and our reported adjusted net income guidance by approximately 4% when compared to our initial guidance issued in February. For the year, we expect revenue between $9.05 billion and $9.20 billion, representing a range of 8.5% to 10.5% operational growth. Our increase in operational growth is reflective of Argentina's pricing impact as well as the performance in our companion animal parasiticides and key dermatology products. We now expect our full-year operational growth for Simparica Trio to be double-digit while we expect growth in our key dermatology products to be in the high single-digit range. As we stated earlier, we remain pleased with our U.S. launch of Librela. Our expectations for Librela for the year remain unchanged. Moving down the P&L, we now expect adjusted net income to be in the range of $2.62 billion to $2.67 billion, representing operational growth of 13% to 15%. And finally, we expect adjusted diluted EPS to be in the range of $5.71 to $5.81 and reported diluted EPS to be in the range of $5.34 to $5.44.

We will take our first question.

Great. First, I want to ask just about the guide change. It seems like there's just so many moving pieces right now: the FX moves, you've got all the price you're taking in Argentina, some of the stocking comments for Apoquel Chewable, and obviously, Librela. Just this early in the year to decide to raise the guide, just sort of like what went into that? And what do you see as the upside risks or downside risks to that as you go through the year? And then just a quick follow-up question, and I'll squeeze both in. My question is on margin. With all the price, with all the strength in companion, gross margin was still a little bit weaker in the quarter, and you're not raising EPS operationally for the year. So just what's going on with the gross margin and why isn't the flow-through for the companion animal portfolio better?

I'll be happy to take this, Mike. We're very pleased with the outstanding quarter to begin the year, delivering 12% operational growth in revenue and 15% in adjusted net income from an operational standpoint. I'm very satisfied with this performance. Regarding guidance, there are various factors at play, as you mentioned. The performance this quarter reflects mostly offsetting elements compared to last year's results. This ties into your later question about how we decided to increase our operational guidance. We see growth from our Trio and key dermatology products and the successful launch of Librela, both in the U.S. and internationally, which gives us confidence in the growth we achieved this quarter. While there are easier comparisons in the companion animal sector in the U.S., which we discussed last year—due to destocking and promotional timing—there are also some challenges, particularly due to strong comparisons in livestock segments because of last year's supply timing and issues in the China and Argentina markets, among others. Overall, we estimate a net tailwind of about 1 to 2 points for the quarter. However, we still achieved 15% operational growth in adjusted net income despite the royalty settlement from last year, maintaining operational growth in the same range as before. Though it's early in the year, we're confident in the market demand for our products. We're experiencing increased visits to dermatology clinics, and Trio had an excellent quarter with a 61% revenue increase totaling $243 million, led by the U.S. Wealth of data shows price realization globally, including in hyperinflationary settings like Argentina, which builds our confidence to raise guidance while maintaining assurance in our revised forecasts. Regarding margins, gross margins are down about 10 basis points and we faced nearly a 200 basis point headwind from foreign exchange factors. It's crucial to remember the significant devaluation in Argentina occurred twice last year—in December and August. The December devaluation affects our first quarter as our international operations close their books a month earlier. Thus, we're seeing the implications of that devaluation on inventories and cost of goods sold, as well as on the profit and loss statement. After excluding those impacts, we achieved about a 200 basis point operational expansion in our gross margins, which contributes to the 15% growth in adjusted net income.

And our next question comes from Jon Block with Stifel.

I guess I'll ask both upfront as well. Wetteny, I'm getting a lot of questions on Argentina, so hope this is clear. The strength of the top line was big. You raised the guide revenue by 150 bps for the year. You mentioned 200 bps of year-over-year growth in the quarter from Argentina, if I have that right. But what is the incremental growth contribution from Argentina for the year? I do think everyone is trying to figure out what the raise is, call it, like ex-Argentina due to that market's hyperinflationary environment. I hope that's clear. Let me know if it's not. And then maybe just to shift gears, Kristin, on Librela, very helpful comments on the April run rate. And I'll recheck; we hear about a safe drug that might have some issues in dogs with neurological issues and so just would love your thoughts on that. And does the company plan to do any, call it, follow-up studies maybe addressing select AEs, that would be great.

I'll take the Argentina question first and then Kristin will cover Librela. Look, the way I look at it, as we said in the prepared commentary and you quoted here, there's a 200 basis point contribution to the top line from Argentina in the quarter. And so if I were to say, look, we're still early in the year and we'll continue to look to take price in that market. And we'll have to watch how that plays out between price and volume as we go. It's a hyperinflationary market. We're pegging what we're looking at based on the actuals and what we anticipate. But again, it's still early in the year. So if you were to take this 200 basis points and you spread them for the year, in effect, you could say there's a 50 basis point contribution to the year if I don't account for any more price from here on, right? And so that's kind of how you look at it. And you'd say, well, the other 100 basis points in the raise is from the rest of the underlying business. The answer is somewhere between there, right? But certainly, contribution from the growth we're seeing, which we said is above our expectations for our derm franchise delivering $360 million, growing 25% on the quarter, as well as Trio, which continues to perform really well for us. And so those, I would say, are significant contributors to the top line guide that we gave. So we're increasing the top line by 150 basis points in terms of the range of operational growth. And Argentina is a piece of that, but I would say there is a significant contribution from the underlying business as well.

Sure, Jon. And I'll take the second part of your question on Librela. I mean, first, I really want to underscore that we have the utmost confidence in the safety and efficacy of Librela. It has been used for over three years across the globe in over 14 million dogs and it's approved in over 50 countries. If you overall look at the rate of reported adverse events, it's about 18% per 10,000 or 0.18% globally. I think it's important to keep in mind that no single adverse event is classified under the EMEA guidelines as more than rare, which is more than 1 to 10 out of 10,000. So we remain very confident in the safety and efficacy of this product. We watch these reported adverse events very carefully. It's an important part of what every pharmaceutical company does to make sure that we understand any trends that we're seeing. We remain very confident in the data. I really want to underscore, they've been on the market for three years. We continue to watch the AEs that are coming in. And to be clear, the top adverse events today are, number one, lack of efficacy, so it's not working maybe as well as they wanted; polydipsia, which is frequent drinking; and the third being polyuria, which is frequent urination. The other ones you're talking about remain rare side effects. In other words, not more than one in 10,000. So hopefully, that answers your question.

Our next question will come from Erin Wright with Morgan Stanley.

Great. Just another one on Librela, just given the stellar trends that you were mentioning, how do we think about the quarterly progression from here in the second quarter? And also just like new patient starts, how has that looked since kind of the media attention? And then on livestock and just a broader rationalization of the business with the selling of the feed additives business, which made sense. Do you see other opportunities to further prune the portfolio and presumably this lifts your long-term top line growth targets and margin profile just on the improved mix alone and the focus you can have on these higher-growth, higher-margin businesses? What does Zoetis look like in 3 to 5 years down the road because it could be potentially more skewed to that? And how do you think about that?

Yes, I'm happy to share that we generated $100 million in revenue for Librela in Q1, marking a 189% increase from the previous year. The U.S. market played a significant role, contributing $40 million. However, we are also very satisfied with Librela's performance internationally. We experienced strong sequential growth across our international markets and continue to see increased uptake. Surveys indicate that European veterinary clinics are now reporting that over 50% of their cases involve moderate conditions, which is quite encouraging as we advance the product after three years on the market. Looking ahead, we are ramping up in the U.S., and as Kristin mentioned, our analysis over a rolling four-week basis shows that we are seeing a steady rise in Librela orders. This gives us confidence in our expectations for the product based on the guidance provided. While I won't delve into specific quarterly projections, I can say that the $40 million revenue in Q1 reflects minimal to no stocking effects. We discussed the initial stocking during the product launch in the fourth quarter, which experienced rapid penetration into over 60% of clinics. We estimated that 25% to 33% of the initial sales could be attributed to stocking, likely leaning towards the higher end. Therefore, considering this, the $40 million signifies substantial sequential growth for Librela, and we continue to observe positive momentum. It’s important to remember that we launched in several international markets last year during the second quarter, including Canada, Brazil, Australia, and Japan, which we will be comparing against. Nonetheless, we still anticipate strong, meaningful growth for the product as well as sequential growth throughout the remainder of the year.

Sure. Wetteny has covered a lot of the points on the livestock. As you and I have talked about many times, livestock historically has grown at around 2% to 4%. I know we grew less for a period of time when we were facing the LOE on DRAXXIN and with some disease outbreaks across the globe. But I think you're seeing is Zoetis, over the last year and going into this year, we're turning more to those historic levels. As you look at this year, we expect to be above that level. Again, as Wetteny mentioned, Q1 is not a good indication if you look at sort of the comparable that we had there. So we remain very confident again in livestock. We believe we'll end at the higher end of that range. As you look at the divestiture of our medicated feed additive and water-soluble portfolio and assets, we've continued to be disciplined around our capital allocation. We divested our Pumpkin Pet care last year. This is something that, as a leadership team, we continue to do. We look at every asset we have. We want to make sure that we're investing in the highest areas of growth. I think that actually is something that's just a rigorous part of how we manage the company. And I think as you look at livestock, obviously, the divestiture of the medicated feed additives portfolio will increase the overall growth of the company and the overall growth of livestock and also help overall on margins. But our real focus of the divestiture really had to do with doubling down and investing in what we see are great potential in the livestock industry and really playing to our core strengths in preventatives, into antibiotic alternatives, and into genetics as we think about vaccines and biologics and new genetic solutions. So again, we'll continue to look at our portfolio, as we always have and as we've done every year, but remain confident in livestock and especially this year in our ability to grow faster than the market.

Our next question is coming from David Westenberg with Piper Sandler.

Congrats on the quarter. So you gave a lot of commentary on April and Librela sales, and it sounds like there's week-on-week build. Just to confirm that is in clinic administration or end market that you're looking at versus like stocking or sales out from you. Veterinarians are really behind the product. It seems like there is some consumer social media kind of stuff. I just want to confirm that the DTSA advertising is on track or if there's any kind of changes there? And then just finally, if I could squeeze in just one more. In terms of your assumptions on that high single-digit in derm, what is the assumption in terms of competitive launch there?

Yes, David. Look, I'll take a stab at this and then Kristin may add some. First of all, when you look at Librela sales in the U.S., keep in mind, Librela is sold direct to clinics and the turnaround is very fast. And so there's no sort of channel dynamics to play out in terms of what we're seeing. What we're seeing from week to week is actually coming directly from what the clinics are ordering. And then look, DTC continues to be on track. As we said in our prepared commentary, part of the increase you see in our SG&A spend is really advertising and promotion behind our pain franchise, and clearly, Librela in the U.S. is a big part of that. And then when you think about derm, of course, we are very pleased with our performance here, $360 million, up 25%. Now there is some soft comp in that. But when we neutralize for that, we still see really, really strong underlying growth and strong demand. We continue to be able to take price across derm. Now of course, it's still early in the year. So as we look at, particularly in the back half, we are factoring different scenarios around what's the timing of competition. While we remain confident in our ability to continue to grow our franchises post-competition, as we're doing in Trio, there can be some near-term or short-term promotional activity that we are mindful of, right? So we do factor those into our thinking in terms of how we land at the high single-digit range, which is up from what we said last time, which was mid- to high single digit. Clearly, our confidence continues to increase there.

And our next question is coming from Balaji Prasad with Barclays.

Okay, we will take our next question from Brandon Vazquez with William Blair. First, on Librela, I'll ask two upfront here. On Librela, can you guys talk about are you starting to see any pockets of that going from maybe the more severe OA dogs and being used in the moderate OA population? Anything you guys can do to kind of help push that market development because that seems to be the bigger opportunity as this grows over the coming years. Follow-up, second question is you're spending over $600 million in R&D now. I think we're about a year out from the nice Investor Day you guys held for us last year. Any meaningful updates in the pipeline that you guys can share with us, either new products or life cycle innovation, that might be coming in the near to medium term?

Sure. Wetteny, do you want to take the first one on Librela and I can take the R&D question? Yes, I'd be happy to. Look, we continue to be very pleased with the performance of Librela, as we said, both in the U.S. and International. We completed a recent survey of vet clinics across European markets. After three years in the market, we are certainly seeing the transition to having a lot more moderate cases. In fact, vets, based on surveys, are saying more than 50% of the cases they're seeing now are moderate and even some mild cases coming into the mix. That's very encouraging. And again, that also contributed to an increase in months on therapy going somewhere between 7 and 8 months now is what we're estimating based on those surveys with vets. So that progression is what we count on and anticipate, and we're seeing that across International markets. We're still very early in the U.S. But that's the sort of progression we would expect. We'll continue to educate vets on the product, as we've talked about, to continue to drive that as we move forward. Kristin? Sure. Brandon, regarding your second question about our R&D, we experienced strong growth in R&D this quarter because we are very confident in our pipeline across several key areas that we discussed during Investor Day about a year ago. We are investing in significant therapeutic areas, particularly our long-lasting monoclonal antibodies, which will be among our near-term launches. We are not making any announcements during today's call about that. However, these are indeed part of our imminent plans. Additionally, we are excited about continuing our investments in renal, oncology, cardiovascular, and diagnostics, where we see tremendous potential. As previously mentioned, developments in renal, cardiology, and oncology are expected to progress over the next four years or more, so there are no immediate updates on those fronts. Nevertheless, we continue to launch new products. For example, I highlighted Bonqat, aimed at addressing anxiety in cats. While it may not seem like a major product overall, it is crucial for unlocking the potential of our broader portfolio. If we can encourage more cats to visit the clinic, we can sell significantly more of our other products and, importantly, address the needs of a cat population that has historically been underserved in terms of medical care. Although we don’t provide all the visibility you might desire in R&D, we have shown consistent progress with our pipeline, delivering innovative products like Librela and Solensia, as well as life cycle innovations that will extend the viability of key franchises like our long-acting monoclonal antibodies, which are expected to become available in the near term.

Our next question is coming from Steve Scala with TD Cowen.

This is Chris on for Steve Scala. We had two questions. First, on livestock, are you seeing any impacts on ongoing outbreak of H5N1 avian influenza? And then second on the U.S. companion animal market, what underlying trends are you seeing in U.S. pet adoption and abandonment rate? And are you seeing any change in share of wallet, share of consumer pet spend on medicines versus other product categories?

Thanks, Chris. I'll try to take those, and Wetteny, certainly, if there's anything I missed, you can jump in. Look, we, like all of you, are continuing to watch the outbreak of H5N1. If you look at the portfolio that we have and our capabilities, we stand ready to support both governments and customers across the globe as they look at potential solutions to address H5N1, both on the vaccine side and on the diagnostics side. To date, we have not been requested to do that. But I think like many of our peer companies, we stand ready to support government authorities when that's needed. I do want to reassure people, data has come out that the milk is safe. Data came out from this morning reassuring people that the meat base is safe. So we have not seen any impact to our business whatsoever with regards to this. This is a major issue for our customers. Our real focus is supporting them through this and making sure that we focus on what we can do certainly around biosecurity surveillance and detection, which we're more and more engaged with the U.S. FDA and others, given our diagnostics portfolio as well. So no, we have not seen any impacts to our business to date on that. Regards to the U.S., we have not seen a significant U.S. national increase in people bringing their pets back to shelters. I know there's been some isolated here and there, but as the overall U.S., that is not a trend. Those pets that they all adopted during COVID are all aging and continue to be drivers of our growth, not just in the U.S. globally. I know there has been some talk around consumer sentiment and is that really changing. Obviously, we've seen some changes in sort of collars or treats and things like that. But what's really been clear and what we've talked about for a long time is when you think about animal health care, it's essential. They are not skipping on their animal health care. If you look at the trends in the quarter as you look at increase in clinic visits, as Wetteny talked about, the reality is when their animal needs care, they are getting that care. As you look at the spend per visit in the U.S., we're seeing spend per visit up 6% in the U.S., which means, again, consumers and pet owners want to take care of their animals and they continue to invest in this. You look at the strength of the human-animal bond; this is another reason that we say animal health is a very resilient industry that people will continue to invest in the health of their pets, and that's certainly what we're seeing in the quarter. As you saw, our expanded operational guidance for the year was really driven by our companion animal portfolio as we expect for the year as well.

We'll take our next question from Nathan Rich with Goldman Sachs.

First, just a clarification on Argentina and the price increase. I guess, the price increase you referenced coincides with the December devaluation? It sounds like that price increase wasn't contemplated in the initial operational revenue range for the year. So I guess, like, as we think about the impact going forward, I'd imagine that contribution should be similar over the balance of the year, I guess, assuming no major change in the currency dynamics in that market. So is that the correct way to think about it? And then on derm, the company decided to start selling Apoquel Chewable through distribution. Could you maybe just talk about the factors that led to that decision? And any impact on top line and margins for Apoquel as well as the broader portfolio as you think about the potential benefits of selling that portfolio through distribution?

I'll take the first one, Nathan, just on Argentina. Look, clearly, the devaluation occurred prior to us issuing guidance and we have plans and continue to see our ability to take price fairly significantly in that market perhaps beyond what we factored in. And so yes, we won't sit here and forecast what FX is going to do or what's going to happen in Argentina. It is a hyperinflationary market after all, so we'll continue to monitor that. And so we're only through one quarter here and we're all on our way through the second quarter, so we're factoring that into our thinking as well. I would say a portion, again, to what I said earlier, a portion of our increase is certainly coming from that. I would say somewhere between one-third to half of the increase we're giving in terms of operational guidance is coming from that because we are getting the operational lift from price there. The rest of it is coming from the underlying business, as we've talked about, is how I would think about that. In terms of derm, I'll start and then see if Kristin wants to add. Look, clearly, we have products in derm with Apoquel and Cytopoint, they've been in the market for over 10 years and 7 years, respectively. The level of satisfaction on these products is very high among vets and pet owners. We've launched Apoquel Chewable as an important element because, one, there's a preference from pet owners and perhaps vets to have a palatable chewable. So we see that as meeting a need in the market as well as an important part of a defense strategy. As we anticipate competition in derm, we believe that competition will more likely be a film-coated tablet. The conversion to Apoquel Chewable is important to us. We are seeing that conversion occur across international markets. In particular, if you look at Europe, we now have about a 40% conversion to chewable after being in the market the last couple of years. So that's very encouraging. We just launched in the U.S. at the same time as we launch Librela. We want to look to potentially accelerate that transition in that conversion, hence, what went into the thinking here. It's still relatively early. There are only a little bit of contribution in the quarter here from, perhaps out of the 25% growth you saw in key derm, there might be 2 points coming from that. We'll see some more of that occur in the second quarter, but it is an important part of our defense strategy.

We will take our next question from Balaji Prasad with Barclays.

Apologies for missing my spot earlier and also in case my questions are a repeat. So on Librela, curious to understand how has your messaging changed, if at all, with the vets in how they use, how it reacts for dogs that they want to treat and what does this mean for the total addressable market, one. And two, can you help us understand the quarterly cadence for the rest of the year? I think the understanding before was that 1Q was expected to be the weakest quarter and second half stronger than 1H. On the back of this print, does this alter the quarterly cadence in any way?

Sure. I'll address your first question about Librela. Wetteny will cover the second question regarding quarterly cadence. As we consider our approach to veterinarians, they are central to the care process. Our primary focus is to ensure that veterinarians are well-informed about the product, including its usage and timing. Given the recent social media attention, we have become even more committed to enhancing access to educational resources for veterinarians. We have significantly expanded our educational outreach, conducting over 1,000 webinars and offering daily interactive sessions with our Chief Medical Officer, Dr. Richard Goldstein. Our customer support team is always available to assist. The positive feedback from veterinarians reflects their growing confidence in the product, as they feel adequately informed and supported. This confidence translates to more prescriptions, as they trust in the product's safety and effectiveness. We have consistently invested in veterinary education across all markets, and with increased social media engagement, we are ensuring that any veterinarian seeking more information has access to both our internal experts and external key opinion leaders. This underlines our belief in this product line, specifically in the potential of both Librela and Solensia to reach a $1 billion franchise for Zoetis, driven by the product's proven safety and efficacy, along with our commitment to educating both veterinarians and pet owners.

Yes. And Balaji, in terms of quarterly cadence and I'll answer the question specific with respect to Librela. If you mean it for overall, I can certainly recap that conversation. But look, clearly, $40 million contribution in the first quarter. And keep in mind, we continue to see really strong growth across our international markets, which moved 71% on the quarter as well. Those will continue to drive growth for us. We won't get ultra-specific in terms of the exact contribution as the quarters go, but we would expect to continue to ramp up from that $40 million through the year. And then, of course, the fourth quarter in terms of percentage growth, we'll be lapping the $44 million that we delivered in Q4 and the first quarter of launch.

We'll take our final question from Glen Santangelo with Jefferies.

Hey, Kristin, obviously, the outlook for Trio in derm continues to be encouraging here. But just given the recent launch of BI and the Elanco launches that presumably may be coming in the second half, if you could look out to 2025 for a second. I'm kind of curious if you anticipate any sort of noticeable shift in the competitive landscape or anything that you think might impact your ability to take price? And the reason I ask is some are getting concerned about increasing competition and a weakening consumer at the same time maybe would impact the company's ability to take price increases consistent with what you have done historically. So any sort of high-level commentary, I think, would be helpful.

Sure. I'll start and then, Wetteny, you can certainly build on this one. We remain very confident, and it's really based on our historical performance. I think you can look at that; we invest in the local innovation across our franchises. We were #5, let's be clear, guys, in paras when we entered with Simparica and Simparica Trio, and we're now #2. We're facing competition from the leader in parasiticide, and we grew our share of 0.7% if you look at Q1 in the U.S. So even with very strong competition, we continue to grow share. We remain confident we can continue to grow our parasiticides and our dermatology franchises even with competition. I mean, paras has always been a very competitive space with most companies operating there. We think our strength, obviously, with the vets, our strength with pet owners, really seeing tremendous growth in our franchises for both Trio and derm in alternative channels, in home delivery, and retail. We see great strength there as you look at the autoship. We continue to increase autoship out there, which absolutely increases compliance, which we think is really important. As you look at, for example, the alternative channels, they grew 55%. Now that was a little bit of a weaker comp if you look at last year. But even if you adjust for all that, that's 25%-plus growth in the alternative channel. We really believe that we can continue to grow this franchise based on the strength of our products, the strength of our portfolio, our life cycle innovation if you look at what we're doing with Chewable, as well as leveraging some of these new channels, which have the benefit of increased compliance. Back again, it's our confidence not just for '24 but for '25. I don't know, Wetteny, if you want to add anything on that.

Look, the only thing I would say is two things. One, we are not seeing a weakening consumer. You saw us post high double-digit growth across Trio and our key derm franchise. Even if we normalize for some of the tailwinds from last year, we still have high double-digit growth across each of those. That certainly demonstrates continued demand for products and our innovation. The other one I would say is, look, as we look ahead and we're not going to give guidance specific to 2025 here, but we're confident in our ability to grow in the face of competition. Now there can be some short-term promotional activity that might have some impact. But beyond those, we're confident in our products, and we'll see what the labels are that we're going to compete against.

We'll take our next question from Chris Schott with JPMorgan.

Just two questions for me. Just continuing on Trio, can you quantify if there's a channel dynamic benefit you saw here? And just give us a little more color on maybe the size of that. And the second one was Librela U.S. Should we expect a similar dynamic in the U.S. that we saw ex-U.S., where initial uptake is more in the severe OA pets, which I think would be maybe a little bit less sensitive to some of the headlines we've seen over the past month, and then the moderate piece of the business is happening kind of a year or two or further out? Or is the U.S. market you're thinking different where those severe and moderate may be scaling kind of simultaneously with each other?

Yes, absolutely. The short answer is no. We're not seeing any channel dynamics. As I mentioned earlier, last year we experienced some dynamics in the quarter due to destocking from promotional timing the previous year and more pre-priced buy-ups, which provided some tailwind. We achieved 61% growth globally, and that same percentage applies in the U.S., totaling $205 million with a 61% increase. While there's no precise figure, our internal estimates suggest that the tailwinds from last year could account for about half of the growth we're observing. However, Trio continues to show significant growth, and there are no channel dynamics regarding inventories this year.

Sure. Regarding your question about Librela in the U.S., our historical observations from Europe and initial markets indicate it is commonly prescribed first to severe cases that urgently need a new therapy, followed by moderate cases. After three years of experience in Europe, we've learned from that approach. As we launch in the U.S., we are focused on reaching moderate cases right away. For instance, in the early Experience Trial we conducted in the U.S., we ensured a mix of mild, moderate, and more severe cases to provide a comprehensive understanding of the product's impact. Additionally, we see that over 50% of patients outside the U.S. fall into moderate to mild categories, which reflects significant growth. This strategy has also led to better compliance, which has now risen to between 7 and 8 months, up from the previous 6 to 7 months outside the U.S. Our goal in the U.S. launch and throughout the early Experience Trial is to establish this product as a first-line therapy for mild, moderate, and severe cases, facilitating quicker transitions into mild and moderate cases, similar to our achievements in Europe. This is a key focus for us as we aim to expand the brand in the U.S.

We'll take our next question from Navann Ty with BNP.

Thanks for the color on Librela. I have some follow-ups. What is the early effect from the vet from your online education sessions? And how many of vets approximately did you reach out to so far? Also interested in your early dialogue with the FDA, if any? Is that just a common surveillance after a product launch so far?

Sure. In response to your first question about the veterinarians we've contacted, we've communicated through our tech bulletins and letters from our Chief Medical Officer to nearly every veterinarian in the U.S. who is a customer of ours. We believe it's important for these veterinarians to participate, for instance, in our open office hours with Chief Medical Officer Richard Goldstein. We have invited veterinarians to these webinars and are actively collaborating with our veterinary operations group nationwide to ensure they have access to both internal and external resources; thousands of veterinarians have attended these webinars thus far. This is a standard practice for us, but we've placed an increased emphasis on finding more ways to engage with them and ensure that veterinarians' questions are addressed. The ongoing acceleration in our four-week trailing sales, as Wetteny mentioned, indicates that veterinarians are receiving the education they need to confidently prescribe this product. Regarding our discussions with the FDA, as you know from following us, we regularly engage with the FDA, which is a standard part of business when launching a new brand and expanding it. We share information within the U.S. and maintain a dialogue, including sharing global information with them. This collaboration with the FDA is routine to ensure they possess all the necessary information.

And there are no further questions at this time. I'll turn the call to the speakers for any closing remarks.

Thank you for joining today. I want to emphasize that this was an outstanding performance this quarter. I appreciate our colleagues for their dedication. I hope you recognize our commitment to creating shareholder value. This is a strong start as we look forward to continued momentum in 2024. We are focused on our customers, supported by unmatched R&D investment, expanded manufacturing capabilities, and a dedicated team. Everything we do at Zoetis is aimed at anticipating and addressing the most pressing needs in veterinary care, even before they are widely recognized. Our scientific breakthroughs have established us as a trusted partner to our customers. We will continue to invest in the talent, pipeline, and capabilities that will drive Zoetis' future growth. We remain dedicated to the safety and efficacy of our products, as our treatments change lives. Given our track record of performance, I believe our customers feel the same way. Thank you again for joining us. We look forward to engaging with you throughout the quarter.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.