Zoetis Inc. (ZTS) Q2 2026 Earnings Call Transcript

Welcome to the second quarter, 2026 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 two hours after the conclusion of this call via dial-in or on the Investor Relations section of Zoetis.com. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-ups. Your line will be muted when you complete your question. When posing your question, please pick up your handset to allow optimal sound quality. It is now my pleasure to turn the call over to Steve Frank. Steve, you may begin.

Thank you, Operator. Good morning, everyone, and welcome to the Zoetta second quarter 2026 earnings call. I am joined today by Kristen Peck, Chief Executive Officer, and Whitney Joseph, Chief Financial Officer. This morning, we issued a press release announcing our financial results. Before we begin, I would like to remind you that the release and corresponding earnings presentation, which we will reference during this call, are available on the Investor Relations section of our website, and that many of our statements today may be considered 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 in our company's Exchange Act reports filed with the SEC. Additionally, today's remarks will include certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures can be found in the earnings press release and our company's 8K filing dated today, August 6, 2026. We will also reference reported and organic operational growth. organic operational growth excludes the effect of foreign currency as well as acquisitions and divestitures which individually impacts the lettuce growth by 1% or less unless otherwise stated all revenue growth performance metrics will be based on organic operational performance with that I will turn the call over to Crystal thank you Steve good morning everyone and thank you for joining us today I will start with the operating environment because it's important context for both our performance and the actions we're taking.

As we have discussed in prior quarters, the companion animal market is being shaped by several interconnected forces. Those dynamics continued in the second quarter and in some areas intensified. Veterinary clinic visits declined across markets, extending a multi-year trend that has occurred alongside price increases that have outpaced broader consumer inflation. As a result, pet owners have become more selective in how they spend, which is showing up in visitation patterns and purchasing decisions. In parallel, clinic revenue has increasingly shifted toward urgent and emergency care, while premium preventative and chronic care remain under pressure. These are broad pet care market dynamics and not unique to Zoetis, but they matter more for us because of where we lead. Competitive intensity has increased, and many of the categories facing the greatest pressure are categories Zoetis pioneered or helped establish as standards of care. Historically, when more companies invest behind a therapeutic category, that activity helps expand the market by increasing disease awareness, deepening veterinary engagement, and educating pet owners. This is not what we are seeing today. Instead, in a slower growth market, the nature of competition has changed. New entrants are using higher levels of discounting, rebates, cross-portfolio bundling, and other incentives to compete for existing patients. And overall, these headwinds have created near-term pressure. At the same time, the level of competitive activity reinforces the enduring attractiveness of the categories Zoetis' health shaped over many years. Our ability to maintain leadership positions, even amid simultaneous competitive launches, gives us confidence in the actions we are taking to strengthen our near-term position and create the right foundation for growth over time. With that, I will turn to our second quarter performance, which reflects these dynamics and fell short of our expectations. On an organic operational basis, revenue and adjusted net income declined 1% and 2% respectively. By segment, revenue grew 6% internationally, supported by broad-based growth in emerging markets, while the U.S. declined 7%. Our diversified portfolio continued to provide resilience, with livestock delivering another quarter of strong 11% revenue growth. However, that strength was more than offset by continued pressure across key parts of our companion animal portfolio, which declined 6% in the quarter. Looking ahead, we have updated the outlook for the year to reflect our first half results and the headwinds we expect to continue in the near term. We are moving with urgency as we navigate the current environment. Throughout today's call, you will hear me discuss the actions we are taking to maintain our leadership and drive growth. We are focused on sharpening commercial execution, strengthening our competitive positions, exercising greater cost discipline, and continuing to invest in the innovation that we believe will define the next chapter of growth for Zoetis. We are also evolving our leadership team to more closely align with our talent and organizational structure with the execution of these initiatives. In June, we promoted ABE NIAC to EDP and president of our U.S. commercial operations. Abey previously led our global diagnostics division and demonstrated that he's a high-impact leader who can drive strong revenue growth while also advancing innovation and building out key capabilities. Now in his new role, Abey is laser-focused on driving stronger performance and accountability in our U.S. commercial operations. As we announced today alongside our earnings report, Jay Zaccara will also be joining Zoetis as our EDP, Chief Financial Officer, and Chief Operating Officer. This is a newly created role that will give Jay broad oversight of all finance functions as well as global manufacturing and supply. We are in an important moment that requires speed and agility, and this change is all about enabling faster decision-making, greater connectivity across the supply chain, and accelerated turnarounds from strategic planning to execution. We are confident that we found the right leader with the right background to step into this new role. Jay possesses the unique combination of skills we are seeking. He comes to the Wettest with an impressive background in life sciences, having served as CFO of both GE Healthcare and Baxter. He also has a track record of designing and executing strategies that balance investments and innovations with operational rigor. I look forward to partnering closely with Jay, and I know he's eager to get started in a few weeks on August 17th. And I want to take a moment to express my sincere gratitude to Wettney. Whatney has been a valued partner to me at every turn over the past five years. I know I speak for the board and everyone at Zolettus when I thank him for his strong leadership and many important contributions, and we wish him all the best in his next chapter. With that, let's dive deeper into each of our key franchises. I will start with our key dermatology franchise, where the broader companion animal pressures are most visible. The dynamics affecting this franchise remained largely consistent with what we described last quarter, but the pace and intensity of pressure increased in the second quarter and continued to weigh on top-line growth. In Q2, the category itself continued to soften. In the U.S., for example, canine puritic clinic visits remained down more than 2% in the second quarter. Historically, growth in alternative channels, particularly for Apoquel, helped offset softer clinic traffic, but in the current environment, growth in those channels also moderated, reflecting broader end-market softness across the category. At the same time, competitive activity intensified globally, with new entrants using higher levels of launch-related promotional incentives to establish share. This resulted in continued share pressure, especially in a market that is not expanding. Given the market size and intensity, our strategy is clear. Compete with discipline, reinforce the differentiated value of our portfolio, and direct incremental sales and marketing dollars where they can have the greatest impact, protecting share, influencing demand, and driving conversion. This is how we manage the portfolio, focusing resources where the need is immediate while continuing to support our broader companion animal priorities with discipline. Targeted pricing and affordability actions are also being deployed where appropriate, helping us stay competitive in the near term while preserving the value of our franchise. And innovation remains central to the strategy. The anticipated U.S. approval of long-acting Cytopoint later this year would strengthen our dermatology portfolio with another differentiated option, helping veterinarians deliver effective care with greater convenience and value for pet owners. In parasiticides, the Semperica franchise was flat in the quarter with double-digit international growth, offset by continued pressure in the U.S. The dynamics vary by market, but the common thread is that affordability, channel behavior, and promotional activity are playing a larger role in purchase decisions for pet owners and veterinarians. Internationally, the franchise benefited from increased usage as well as the continued launch of Semperica Trio in Brazil, reinforcing the relevance of triple combination protection in markets where adoption is still building. In the U.S., franchise performance was pressured by continued clinic dynamics, including declines in sweet-tick and heartworm visits, as well as more competitive and promotional environments. Unlike in prior periods, growth in retail was not enough to offset. We are taking targeted actions to stabilize performance, including more competitive pricing, enhanced pet owner promotions, and competitive capture where we see the greatest opportunity to protect and grow volumes. Elsewhere in our small animal parrot portfolio, we benefited from the breadth and diversity of our offerings, with revolution growing on increased feline visits, highlighting the value of having multiple ways to drive essential preventative care in dogs and cats. Turning to canine OA pain, revenue declined in the quarter against a strong comparison. While we saw both year-over-year and sequential growth internationally with contributions from LaNibia, U.S. performance remained under pressure with canine pain-related visits declining more than 2% in the quarter. For canine OA pain, medical affairs remains one of the most important levers for category development. This is a market where specialist engagement and scientific education are essential to strengthening veterinary confidence and expanding use. With Librella and the early wave of market approvals for long-acting Lanivia, including most recently in Great Britain and Switzerland, we are giving vets greater flexibility and convenience. Encouraging early experience is driving the acceleration of Lanivia launches in Canada and Europe, reinforcing our conviction in the long-term opportunity and belief that This expanded portfolio can help bring the category back to growth over time. Separately, feline OA pain grew in the quarter, demonstrating continued traction in a category that remained early in its development. The context here is important. While overall clinic visits remain pressured, feline visits were a positive outlier in the quarter, and recent industry research points to a more durable feline opportunity with kitten hope cohorts remaining above pre-pandemic baseline. At the same time, cats remain historically under-medicalized with a meaningful gap between the number of cats in households and the number receiving regular veterinary care. That gap is especially relevant in OA pain where the condition remains under diagnosed and undertreated. Since the launch of Silencia, we have seen how innovation can help begin to close that gap, expanding feline clinic visits and giving vets a new reason to engage cat owners. Portela builds on that progress. With three-month long-acting profile, its launch in Canada and the EU provides veterinarians a broader set of options and greater convenience in treating feline OA pain. Early feedback has been encouraging, reinforcing our confidence this expanded portfolio can help build the category over time and support continued medicalization. Turning to companion animal diagnostics, revenue grew 12% in the quarter, reflecting sustained demand for diagnostic tools and services, particularly in urgent and emergency care. During the quarter, we expanded the capabilities of VetScan OptiCell, further strengthening our point-of-care diagnostic offerings. We also completed the acquisition of VitalRAS, a veterinary teleradiology services platform which will extend our capabilities beyond in vitro testing and into veterinary imaging interpretation, supporting our vision of a more complete, end-to-end virtual reference lab. Together, these developments reinforce why diagnostics is an important catalyst for Zoetis and a clear example of how we are deepening our customer relationships. Our platforms strengthen veterinary workflows, increase our daily relevance in the clinic, and help veterinarians move from diagnostic insight to treatment decisions faster. And as earlier detection becomes increasingly important, our diagnostics capabilities can support adoption, reinforce standards of care, and create a stronger launch pathway for our pipeline. We are also continuing to advance our diagnostics pipeline with Vetscan Omnimax, our new multimodal chemistry platform, and one of our potential blockbuster opportunities, with commercial validation still expected by year-end. In livestock, we delivered strong 11% growth in the quarter. with an especially strong contribution from the U.S. Performance was led by cattle and poultry, reflecting continued demand for our broad portfolio of medicines and vaccines that help producers protect animal health, improve productivity, and manage evolving disease threats. In cattle, increased demand for Dectimax related to New World's brewworm incursion underscores the role the lettuce plays as a trusted partner when veterinarians and producers need effective tools quickly. Poultry also contributed meaningfully, with growth driven primarily by vaccines in key markets, supported by our hatchery programs, new contracts, and tender wins. I also want to highlight the broad-based strength we saw in emerging markets, with contributions across livestock, companion animal, and diagnostics. That performance reflects the value of our global footprint and ability to capture demand across a diverse set of markets. Stepping back, these results reinforce two important points. First, the near-term pressures affecting parts of our companion animal and our full-year outlook. And second, the value of our diversified portfolio to provide balance. That combination is why we are staying disciplined on costs, targeted in commercial investment, and focused on advancing the innovation that it can expand markets over time. With that context, we are revising our full-year outlook to reflect the marking conditions we expect to persist in the near term and the actions we are taking in response. Since our last call, pressure in parts of our companion animal portfolio has been more pronounced than our prior outlook assumed, as reflected in our Q2 results, which fell below our expectations. The change is driven by primarily continued clinic visit declines, more value-conscious pet owner behavior, and elevated promotional activity in key categories, particularly dermatology and U.S. parasiticides. We now expect organic operational revenue growth to decline 3% to 1% and organic operational growth to decline 9% to 5% in adjusted net income. Even as we navigate near-term pressure, we are confident in the long-term fundamentals and in our ability to lead through this cycle by defending leadership positions, investing behind the highest return opportunities, and continuing to build the next wave of innovation. Before I close, I want to recognize our colleagues around the world whose focus and commitment to customers are critical to delivering against our priorities and close with how we are thinking about the path forward. We are operating in a more competitive and value-conscious environment than we have seen in recent years, and we are not assuming the market gets easier. We are adapting to the market in front of us. We are responding with focus and discipline, sharpening execution and companion animals, allocating capital with discipline, exercising greater cross-discipline, and continuing to advance the innovation that has always differentiated Zoetis. At the same time, the longer-term fundamentals of animal health remain strong. Our current portfolio gives us scale and resilience. Our pipeline, with 12 potential blockbusters over the next several years, creates meaningful opportunity to shape standards of care and create new markets. We're also investing in the ecosystem around animal health. Our latest sustainability report highlights the completion of the driven-to-care aspiration we set in 2021 and our continued investment in the resilience of veterinary health care teams around the world. Because leading in animal health is not only about the products we bring to market, it's about strengthening this system of care. Zoetis has built leading categories before. We know how to defend them, evolve them, and build what comes next. So while we are realistic about the near-term environment, reflected in our updated guidance. We remain confident in the long-term strength of our business and our ability to lead animal health into the next chapter. Whitney will walk through our financial results in a moment. So before I hand it over, I want to say thank you again. We appreciate everything he's done over the last five years and his commitment to ensuring a smooth transition. So with that, Whitney?

Thank you for the kind words, Kristen. Zoetis is a remarkable company with a strong foundation, talented people, and a bright future ahead. It has been a privilege to serve as CFO for the past five years. As Kristen noted, I'll remain as a special advisor on financial matters until early 2027 to help ensure a smooth transition for all. I look forward to watching Zoetis' success for years to come. I know great things fly ahead for this team. With that, let me turn to our financial results for the second quarter. Second quarter global revenue was $2.5 billion, flat on a reported basis and down 1% on an organic operational basis, driven by a 1% decline in volume with price approximately flat. In response to competitive conditions, we took select targeted actions across various franchises, rose to net investments in dermatology, and price adjustments on Serenia and Convenia in the U.S. in response to generic competition. These actions weighed on near-term price utilization in a quarter, as well as on the full-year expectations in our revised guidance. But they are deliberate and targeted steps to protect volume, defend share, and support long-term franchise health. Adjusted net income was $781 million, down 2% on an organic operational basis. Importantly, we continue to demonstrate strong P&L discipline, protecting profitability through cost actions while staying focused on the investment behind our highest return opportunities. Our global companion animal revenue was $1.7 billion, down 6% in the quarter. key dermatology was 395 million dollars down 16 percent the category remained affected by softer demand including lower periodic visits in the u.s alongside elevated competitive activity we have begun taking actions grounded in competing with discipline reinforcing the differentiated value of our portfolio and focusing resources where they most effectively protect share and support demands. Oepainmabs delivered $147 million, down 3% globally. Canine oepainmabs, which consist of the combined cells of libella and lanivia, delivered $105 million, down 8%. Freeline oepainmabs, consisting of silencia and portella, delivered $42 million, up 12%. We saw early contributions from Lunaria and Portela in the EU and Canada, and we were encouraged by the initial experience program as we broadened the ORA Payne portfolio internationally. We recently announced full launch in those markets and continue to expect expansion into other markets in the coming year. Semperica franchise was $442 million, flat globally. Semperica Trio posted $350 million, down 1%, while Semperica posted $91 million, up 4%. Internationally, the franchise delivered strong growth driven by Semperica Trio's continued market share gains and broad-based Semperica performance across most markets. While in the U.S., software and market demand and a more competitive environment weighed on both price and volume. We also continue to see generic headwinds on Serenia and Convenia in the U.S., and we have adjusted pricing accordingly. Companion Animal Diagnostics delivered $118 million, up 12%. Growth was driven by the continued adoption of innovative diagnostic technologies, including VetScan Images and OptiCell. This business continues to perform well and reinforces the value of our recent innovation in the space. Livestock delivered $731 million, up 11%, supported by broad-based demand for healthy and affordable protein globally, improved supply, and elevated cattle demand, particularly in the U.S. Now, let's move on to our segment results for the quarter. U.S. revenue was $1.3 billion, down 7%. U.S. companion animal was $1 billion, down 11%. The quarter reflected continued pressure from clinic traffic and affordability dynamics alongside intensifying competition in key franchises. At the same time, we are moving with urgency, sharpening our commercial execution, deploying targeted levers to defend share, and taking the steps necessary to stabilize performance in this environment. U.S. Key Dermatology was $251 million, down 18%. For Apoquil, price has become a more prominent factor in prescribing decisions, while software periodic visits have created a more challenging demand environment. Together, these factors have a magnifying effect on the impact of competition. We deploy targeted gross-to-net investments to defend volume and slow share loss, which results in lower realized price in Apoquil. In alternative channels, we face a tougher comparison from prior retailer dynamics, but even normalizing for these factors growth moderated and was not enough to offset clinic declines. Cytopoint's decline in the quarter reflects broader clinic and affordability pressures, creating headwinds for premium therapy adoption broadly across companion animals. In the U.S., our dermatology franchise remains the clear market leader, with approximately 86% of in-clinic share in Q2, despite share declining 5 points sequentially and 10 points year-over-year. We continue to see a meaningful pool of untreated and undertreated atopic dogs, and we remain focused on demand generation and new patient adoption over time. U.S. Empirica franchise was $308 million, down 6%, reflecting softer flea, tick, and heartworm visits and a more competitive and promotional environment. Sempraca Trio maintained its position as the clear market leader in oral parasitocytes, holding in-clinic market share of approximately 21% in Q2, nearly double that of its nearest competitor. Our puppy share of approximately 28% meaningfully outpaced overall share, signaling continued room for expansion even as the broader market declined and competitive pressure intensified. U.S. OA pain labs were $51 million, down 18%. Canine OA pain labs were $34 million, down 24%, reflecting a high year-over-year comparison, software clinic visit trends in the same value-conscious environment that is impacting other premium therapies. Importantly, veterinarian and pet owner satisfaction and confidence in labuela remains high, and the long-term opportunity remains significant. it. We remain focused on driving patient adoption and access over time, as well as broadening our offering with our expected Lanivia approval. Feline OA pain maps were $17 million, down 2%, as pet owner affordability pressures on premium therapies offset an otherwise encouraging improvement in feline cleaning visits in the quarter. Serenia and convenient generic competition continue to drive our decline this quarter. Our pricing actions are beginning to support dose recapture, albeit at a lower price point. U.S. livestock was $222 million, up 23%, reflecting industry dynamics as well as the strength of our portfolio and the durability of underlying demand across the business. Performance was driven by growth-based strength in cattle, supported by favorable producer economics, improved product supply, and elevated the demand for parasiticides in response to the new world screwworm outbreak, a combination that resulted in a particularly strong quarter. We do expect second half growth to moderate from Q2's pace to the mid-single-digit range, as several of the dynamics that contributed to Q2's outperformance are transitory. Overall, the fundamentals of our U.S. lifestyle business remain solid, and we remain confident in the long-term outlook, supported by continued strong underlying demand and the breadth of our product portfolio. Turning to international performance, we delivered revenue of $1.2 billion, up 6%. Growth was broad-based across parasiticides, OA pain, diagnostics, and livestock, partially offset by continued pressure in K-dermatology. International companion animal delivered $664 million, up 5%. Developed markets, particularly in Europe, remain more competitive and demand has been uneven. Even in that backdrop, we're holding our ground by staying disciplined on price and promotions and executing market-by-market commercial actions. Emerging markets again provided a meaningful tailwind, supported by continued category development and less competition. International Semperica franchise was $134 million, up 19%. Semperica Trio delivered $67 million, up 34%, reflecting the continued expansion of the triple combination standard of care, with broad-based growth driven by market share gains and key account wins. Semperica was $67 million, up 7%, with broad-based demand across regions, reflecting the continued strength of the brand and effective commercial execution, particularly in markets where lower hardware prevalence drives demand for single-agent protection. The dermatology was $144 million, down 13%, with the dynamics we described at the segment level playing out most visibly in this franchise. Pressure was most pronounced in developed European markets, where competitive penetration has been deepest and the promotional environment most intense. Our approach has been disciplined. We defend share where it matters most. First, we enforce the differentiated value of our portfolio and tailor actions market by market to compete effectively while protecting the long-term value of the franchise. International OA Pay MAPS was $96 million, up 7% internationally, driven by the early launch contribution of Lanivia and Portela in the EU and Canada, which reflects the broadening of our OA Pay MAPS franchise internationally. K9 OA Pay MAPS delivered $71 million, up 2%, driven by the contributions from Lanivia. We saw some moderation in Lubella as patients migrated to the new, long-acting formulation, a dynamic we anticipated and one that we view as net positive for the overall franchise. Similarly, our free line-away pain maps delivered $24 million, up 24% driven by the launch of Portela. It is worth noting that the contributions from both Lanivia and Portela this quarter reflect limited early experience launches, making these initial results particularly encouraging as we transitioned into full launch across the EU and Canada. International livestock was $509 million, up 6%. Cattle delivered strong growth internationally in the quarter, supported by continued global protein demand and improved product availability across key markets. This strength was partially offset by weaker performance in Brazil, reflecting macroeconomic headwinds and lower medicalization following the end of mandatory foot-and-mouth disease vaccinations. Fultry continued its strong performance, primarily driven by the Middle East and Asia, supported by deeper penetration with key accounts and favorable meet price dynamics. Now, let me walk down the P&L. Adjusted gross margin was 72.9%, down approximately 40 basis points on a reported basis. For an exchange was an unfavorable impact of roughly 50 basis points. Excluding FX, gross margin increased about 10 basis points, reflecting lower manufacturing costs and productivity, partially offset by unfavorable mix. Adjusted operating expenses were $764 million, down 2% operational. This reflects continued progress in our comprehensive cost and productivity program and disciplined spend management across the organization, while continuing to prioritize investment behind our highest return growth opportunities and innovation pipeline. Adjusted SG&A was $586 million, down 4% operation only, driven primarily by lower compensation-related expenses and reduced discretionary spend. Adjusted R&D was $173 million, up 4% operation only, driven mainly by timing of project spend. Adjusted net income was $781 million, down 2% on an organic operational basis. Turning to capital deployment, we repurchased over $550 million dollars of shares in the quarter above our historical quarterly average excluding the convertible funded buyback in q4 of last year we view this level of buyback activity as a deliberate and attractive use of capital at our current valuation reflecting our confidence in the long-term strength of the business and our commitment to returning value to shareholders benefiting from the lower share count adjusted diluted dps was one dollar eighty seven cents of 4% year-over-year. Now turning to our updated guidance for full year 2026. Our outlook reflects the operating environment we see today, particularly in parts of U.S. Campanian Animal, and the actions we are taking to manage through this period with discipline, as well as the strong contributions we have seen from livestock and diagnostics and the expectation of continued growth from those businesses. The foreign exchange rates embedded in our guidance as of late July. We are revising our full-year revenue guidance to a range of $9.12 to $9.32 billion, representing a decline of 3% to 1% year-over-year on an organic operational basis, reflecting the continued pressure we are seeing across key comparing animal franchises and ongoing challenges with vet planning visits and affordability, including our gross-to-net actions to defend share. We are also incorporating self-strengths through July, which have not yet indicated market stabilization. The high N of R range assumes contained competitive and pricing pressures in the second half, with manageable share losses in dermatology and parasitocytes, and continued strength in livestock and diagnostics. The low end reflects a scenario where competitive and pricing pressures accelerate, with greater DERM and PARIS share losses, July weakness carrying through the second half, and slower livestock uptake. We now expect adjusted net income to be in the range of $2.57 to $2.62 billion, representing a decline of 9% to 5% year-over-year on an organic operational basis, reflective of the revenue headwinds noted above, partially offset by the cost and productivity actions we are executing across the organization. Finally, we are updating our EPS expectations. We now expect adjusted diluted EPS of $6.15 to $6.25, and reported diluted EPS of $5.55 to $5.65. Overall, this guidance reflects a realistic view of the near term, while we continue to invest behind the pipeline and take the actions needed to strengthen execution and position the business for improved momentum. To close, we're operating in a dynamic environment. Some U.S. companion animal categories are facing near-term pressure, while international livestock and diagnostics are performing well and demonstrating the resilience of our portfolio. We are focused on what we control, sharpening commercial execution, deploying targeted investments to protect volume and share, and maintaining cost discipline, while continuing to advance the innovation that supports long-term growth. With that, I'll turn it back to the operator for your questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. In the interest of time, we ask that you limit yourself to one question and then queue up with any follow-ups. Your line will be muted when you complete your question. When posing your question, please pick up your handset to allow optimal sound quality. We'll take our first question from Erin Wright with Morgan Stanley. Your line is open.

Great. Thanks for taking the question. So, I want to talk a little bit about the targeted price actions that you're taking and what's baked into guidance on that front in terms of overall net price realization in the second half. And is this just your primary stabilization lever at this point? And can you talk about some of the timing of those actions? Can you detail kind of the overall dollar share loss you anticipate in Durham and Semperica that's embedded in the guide at this point and the levels of conservatism you have in the guide on the U.S. companion animal front and kind of how that changed over the course of the quarter in terms of your thoughts there? And then just a bigger picture question for Kristen, you know, taking a step back here, and there's been a number of leadership appointments and organizational changes, not just more recently, but over the past several years, and some of the key functions like head of R&D, COO, companion, and others. So, I guess, how do you think about the balance of organizational stability and then also your continuing effort to evolve the leadership team? And do you feel like now you're at a point where that's largely in place and you can execute on the strategy? Just wanted to hear your thoughts there.

Thanks, Erin. I think that was many questions on very different topics, but we look forward to taking it. I'll start at the top. You asked about the targeted pricing. You know, as we've talked about before, you know, I think the demand for pet care and those structural tailwinds, you know, remain where they are and remain strong. I think what we're talking about from a pricing perspective, and, you know, we've been really actively going after this for the last few months, is looking not at changing overall list price, as we've talked about. It's focusing on growth to net. And we're doing this because we think our real focus is protecting our volume and gaining share. And to do that, if you overall change your list price, that is a permanent structural change versus investing in what we're doing, which is growth to net investments, which are really targeted, they're time bound, and they can demonstrate clear value. Because really, when you're thinking about these things, it's maintaining your share at a clinic, it's at point of sale with a pet owner, it may be a new start. So our real focus around growth to net pricing investments, which you saw us do in the quarter, but we're accelerating as we go through the second half, is really focused on our goal, which is how do we maintain our volume or gain it? How do we focus on protecting or gaining share? And that's why we're focused on those overall pricing sets. As we think about the overall guide, you know, we really focus on looking at the environment that we're operating in, Aaron. It's understanding both the macro, you know, environment that we're operating in, as well as some of the competitive pressures. And I think, you know, what he really talked about that, as we looked at the guide right now, we're assuming the persistence of the trends that we've currently seen, both in the, you know, softer end market demand, as well as, you know, really believing that in this environment, the competitive situation will be people persisting in more promotional activity. And we're going to be aggressive as we think about growth to net investments and rebates and pricing and, you know, pet owner point of sale to make sure that we protect our volume in a market that may not be growing as fast. As we talk about the leadership question, which you asked me about, you know, overall, you know, I am really excited about the team we have and the team we continue to build. You know, we've had some retirements, obviously, over the last years and some changes, but, you know, I'm really focused on ensuring we have the team to, you know, focus and be able to deliver in the environment that we have, and that's really been the focus of what we've been doing. So, I think that's it. I'm sure we'll get into some of these questions, certainly on the guide, more as we get through the call.

We'll move next to Brandon Vasquez with William Blair. Your line is open.

Hey, thanks for taking the question. And maybe I'll try to do a two-parter, too, because one of them is just a clarification on what you had just mentioned, Kristen. But when you're talking about gross to net pricing, can you just maybe clarify exactly what that means? There's a lot of questions around the pricing dynamics going on right now. Will Zoetis be realizing a net lower ASP based on that language you're using? What does that mean for margins? And then maybe the broader question that I had for you guys is, can you just compare and contrast the updated guidance versus the old guidance? What are maybe the two or three key items that change within those assumptions?

Sure. I'll take your first and let me take the more detailed question on the guide. To be clear on what we're talking about with regards to pricing is we are not changing the list price of our products. Again, this is a permanent structural change that really changes the market going forward, and it's very hard to pull back once you do it. What we're talking about is investments in what, you know, in the industry it'll call growth to net. So, you know, a promo to maintain share at a clinic, you know, it might be a cross-portfolio bundling that if, you know, buy a cross, you get a discount. It would be at point of sale to a pet owner, you know, to make it more affordable. This is what we mean by growth to net. We feel strongly about protecting both the short-term volume and share that we have, but while doing that, invest in the long-term value of our franchises. And that's why we want to be clear. We are not, and we've said this, you know, all year, lowering our overall list price. But we are going to be aggressive in defending our volume and protecting our share as we think about promotions and rebates. I'll let Whitney get into the second question more broadly on guide.

Sure, Brendan. In terms of comparing the old guide and the new guide, a few things that I would highlight here. First of all, what Kirsten just highlighted with respect to the growth to net investments that we're making in this guidance, not only are we assuming that the level of macro and competitive pressure persists, it doesn't reflect, I would say, on the high end of the guidance. The low end of the guidance, we're contemplating that they would actually accelerate. And if they accelerate, that would mean we would also do so in terms of the actions we're taking from a gross-to-net perspective, which would have additional implications. So that starts to stress test the line of the guidance for us. One other thing we have not touched on with respect to this guidance is there has been some more FX headwind. So I would put it to around $60 million, $65 million of top-line headwind, about $30 million of bottom-line headwind from FX in terms of the dollar implications here, guidance to guidance.

We'll move next to Michael Riskin with Bank of America. Your line is open.

Thanks for taking the question. You touched on price a number of times. I want to ask about some of the other actions you're taking. We've seen through some of our channel checks some pretty aggressive job cut announcements. You've talked about cost controls. Just wondering how much that's already rolled in, how much you're expecting in the second half. And you could say on that front, I guess just other levers you're taking besides price to maybe try to stem some of the bleeding here. And then if I could squeeze in a quick follow-up, the new 26 guide, you framed the upside and downside scenarios a number of times. But in terms of the competitive landscape, can I ask what your assumptions are sort of like exiting the year? I know you don't have a 27 number yet, but just do you think you can return to growth? Like, will we have absorbed all the incremental competition by the end of this year? Or do you think that, you know, this is still something we're going to be talking about next year and beyond? I'm just trying to look forward to how you see this playing out.

I'll take the first one, Mike. You're right. We've been talking about price so far on this call, but there are many other actions that we're taking. certainly is a lot of focus on commercial execution, what we're doing with respect to how we allocate dollars and investments across DTC and how we drive demand with customers, et cetera, et cetera. So in that light, we're also managing costs. We alluded to this on the last couple of calls, in fact, and you see the impact of the deliberate and meaningful actions that we're taking across our cost base to align to what the current operating environment is that we are facing. While we're still investing in areas that are really important for the long-term wealth and value creation of the company, so areas like R&D and parts of commercial, et cetera, we're continuing to prioritize, but we're taking the actions that we need. And you see that already playing out in the results. The second quarter, you saw SG&A down 4% year on year, and some of those actions are also reflective in our manufacturing costs that are down year on year that are continuing to where margins, gross margins, are landing for us. Of course, these will continue to draw benefits as we go through the back half of the year and into next year, and to the extent of the actions that we've been taking, some of which we've already contemplated in the prior guidance.

Yeah, and to get to your second half of the question, which I think is just looking at, you know, how do we see the competitive environment and how does it evolve when we, you know, get to the end of the year and we look into 2027? As you imagine, we're obviously not providing 2027 guidance today. But, I mean, look, as I think Whitney has mentioned and, you know, certainly in our script we talked about, you know, we think with a new competitor entering in Q2 in the U.S. in Durham, you know, we think, you know, that our volume and our market share will continue to be under pressure. That is assumed. And I think that will take some time to work out. Is that six, is that 12, is that 18 months? I can't tell you. And we'll see, you know, how, you know, we're really focused on commercial actions to protect that share. But given we just got a new entrant in Q2 in the U.S. and, you know, still in other markets around the world, you know, I think we're really looking at the end of 26th and 27th about making sure that our differentiated portfolio across Apoquel, Apoquel to Cytopoint, and importantly expecting, you know, the approval this year of long-acting Cytopoint, about defending those and growing those. I mean, our hope also is eventually that we continue to grow these markets, which is also our intent right now. But, you know, in this highly competitive space we're in now, where the pet owner affordability challenge is meaning some of these markets really aren't growing, particularly in Durham and Paris is under pressure, we are going to be aggressive in defending our share and protecting our market share and working to grow those, but making sure if they're not growing that we're at least protecting our share. And so we'll continue to do that. And, you know, I think as you saw in our guide and on both the low and the high end, we're assuming the competitive environment that we're operating in and some of the macro challenges that are certainly compounding that, you know, that we're going to be aggressive in this environment.

We'll move next to Dave Westenberg with Piper Sandler. Your line is open.

Thank you for taking the question. First, I wanted to, you know, maybe compliment on the guide here. You missed by, you know, in the tens of millions, and you are lowering by almost a half a billion, which, you know, obviously, like, we're getting really good feedback from investors right now about that. Saying that, you know, we still need to talk about that Q2. So it's a little bit of continuation of Aaron's question around that. Can you clarify how much of the Q2 deterioration now is market contraction versus maybe some competitive pressure? And if there is a way to maybe quantify ASPs, I know you're not talking about pricing, you're talking about more like rebates, but it will have a net impact on ASPs. So if you can quantify that, that would be great. And then just pivot on kind of the same topic, you laid a great plan around like SG&A and the strategic rebates. I know a lot of contracts, particularly like with corporate groups and whatnot, tend to have these two-year kind of things. So how do we think about changes in rebates and that kind of thing, knowing that some of your customers have a two-year basis? And, again, sorry for the length, but I did want to at least call out the prudence and the guide there.

You do want to take that person?

Yeah, Dave, I'll take the first one. In terms of what we're seeing in Q2, certainly we don't guide by quarter, so it's a matter of what our expectations are for the year and what we're tracking internally. And certainly I would describe Q2 as coming in below our expectations. Now, to the core of your question, trying to bifurcate between what is macro versus what is competitive. And it's not something that we would give precision around. However, I would say both are impactful and meaningfully impactful, and they start to converge on each other because in a market that is not growing, certainly the competitive actions last longer and they're more impactful. And our response to those also meaning more meaningful with respect to the growth to net. So now that becomes something we do. Just to give you a couple of examples, if you look at the broad macro, certainly visits, therapeutic visits, and wellness visits in the U.S., flistic heartworm was down about 7%. Of course, every major category, you see downtrends on visits that have an impact. OA pain is down, soap or derm, those are 2%. So in each of those areas, that's a macro reflection. And by the way, a product like Cytopoint, for example, we saw some headwinds that are largely, if not entirely, related to that macro versus some competitive friction. So I would say it's not a bifurcation that I can give you, but both were certainly impactful, and the response that we're doing is also contributing to it.

Yeah, and I mean, I appreciate that, you know, it's very easy for you all to see list price. To see a growth to net is very hard to see, and it's very hard to see because it will be dependent, you know, by promos will run in any given month. It may be dependent to your other points on specific contracts with a customer. So, for example, you know, it may be for a customer, you know, to put us, you know, as their first and to, you know, say they'll give us X share, we give, you know, Y pricing. So, the contracts that we do are generally, you know, give or take, you know, two to three years. And so, some of those are locked in right now, but some of those are up. And so, you know, those are, I know for you all, going to be a little bit hard to see. I think we'll try to help you. But, you know, to sort of build on that, we're going to make sure that we take the actions we need to protect share and to protect volume. And so, that's what you'll see in the growth of the net. There's no way to really see that as an overall because that would be, again, customer-specific, maybe event-specific. So it might be a new start, et cetera. So that's where you're going to see some of those overall.

We'll move next to Chris Schott with JP Morgan. Your line is open.

Thanks so much. I just wanted to just touch a little bit more on the duration of some of these promotions. Are these initiatives we should assume continue until macro gets better, or is this more about the competitive dynamics you're facing with these new launches and as that competitive landscape normalizes? I'm just really trying to get my hands around what it's going to take or your ability to back off these promotions at the right time, like what the factors we should be watching that would enable that. My second question was maybe also just on livestock. Obviously, a very strong quarter. I think you said some of that was transitory. Can you just give us a sense of what type of growth it's realistic to expect for the livestock business as we think about the second half of the year? Thanks so much.

So I'll take your first question, which is really on, you know, how – what's the duration of some of these promos? I mean, there's always been some promotional activity, as you've seen, in our industry. So that's not new. I would say the intensity of the promotions is both a combination – I'll talk about where it comes in – to both the macro and the competitive situation. And so where you see cross-portfolio and things like that, you know, I think that's really focused for us right now on the competitive space that we're in. So I think if you look at some of the dedicated promos on competition, that'll be quite different. So in any given therapeutic area, there is either more of a headless. So I think what you just mentioned, if you think about Cytopoint, that's pretty much macro. We don't really have a competitor that's got in full supply against that product. I think, let's be clear, if you think about Derm, it is mostly a competitive situation that is driving the Derm situation. As you think about Paras, I think it's a little more macro. And we say that because, you know, if you look at both wellness visits down 7% overall in the quarter, but importantly, you know, the deceleration of growth across alternative channels, which had been making up for, again, you've seen paras, you know, under attack in a sense from a wellness visit for a while now, but I think what's really changed in the parasiticized category has been that also alternative channels. So in any given therapeutic area, it might be more competition or it might be more the macro situation. But I think what we're really seeing and what would be the signs, I think that's really the essence of your question, what we see. As we get to more of a stabilization of share, as we look at quarter over quarter, that starts to stabilize. I think you'll see us pull back because, again, our aggressive promos and rebating and point of sale right now is focused, as I mentioned, on protecting our share and making sure we protect our volume. So as we see that stabilized, I think those are going to be the signs that would say that we'll step off some of those growth to net investments.

And I'll take, Chris, the question on livestock. Look, we've been very pleased with the performance on livestock, not only in the quarter, but also on a year-to-date basis. I would say there are strong fundamentals here that we believe to be sustainable, likely in the mid to high single-digit range, if you want to look at this year. We look at the second quarter, particularly in the U.S., we grew total globally 11%, right? the U.S. was up 23%. Now, in that context, we're saying some of the drivers were transitory. For example, timing of supply for certain products that we had really affected the quarter, as well as demand that we're seeing for injectable parasiticized driven by the New World Squirrelworm, for example, in the U.S. So when we parse those out, we would put the quarter in the U.S. into the high single-digit range, I would say, on a normalized basis. And again, for the year, we continue to expect strong fundamentals to drive livestock performance.

I'll take our next question from John Block with Stiefel. Your line is open.

Good morning. Also a two-parter, Wendy, what's the update for 2026 price realization? Has that changed versus, I think, prior it was 1% to 2% guidance for price this year? And I just want to verify that the gross to net would show in that updated number. if there is one and you know where that update's coming from as a key franchise is it other when you fight back against the generics and then kristen regarding the promos is it derm is it paris is it both i i thought you mentioned it's u.s specific i just want to verify that and just attack on to that last one maybe a difficult question kristen do you have the better products like do you have the better ad jack product apple quote was revolutionary but it's 10 years old Trio was revolutionary, but, you know, you do have others that are resonating with a marketing approach. So it's one thing to ramp up the promos, but I think the other key question here is the products in the field and are they up to snuff to compete effectively?

So I'll take the first part of your question, John. Certainly you saw in the quarter price was flat. You're seeing the impact of the growth to net responses that we've already covered on this call at length, so I won't repeat those. And so what that would translate into, if you look at the guidance we just issued, on the range, you could be in the zero to minus 1%, potentially minus 2% as you get towards the low end of the guidance, given our response will also be accelerated with respect to what competitors are doing, which are largely competing on price today in these categories. So that's where I would range-bound it for you in terms of what this means for the year.

Yeah, and to answer your second question, which is on the promos, are they just Derm, are we talking about pairs, are we talking about both? It is most definitely both. And we're also looking at cross-portfolio bundling because I think we have a very strong portfolio. We continue, and we said on every call, that we continue to have differentiated products in each of these categories. But when pet owner affordability becomes a big issue, there becomes a question of good enough. We absolutely have differentiation in both Trio, in Apoquel, in Apoquel Chewable. We have a Chewable. We have more safety, more efficacy than, you know, anybody else who we're competing against in these markets, you know, whether we talk about Cytopoint, even Cytopoint Long Acting. We will continue to defend that differentiation. But we're also, you know, we don't want to be naive and believe that, you know, in this competitive environment with people offering significant promotional or rebate discounts, does someone now say, well, I'll try the other one and see how it is? We are starting to see in Europe, you know, people switch back after experiencing it. But our focus has to be on overall value, and our value is in the differentiation and the safety and efficacy of our products. But right now, we also have to admit that in a macro environment where affordability is a much bigger issue, we want to make sure that we're meeting our customers where they are and understanding that we need to be defending the share. And if a low enough price makes someone try another product, we want to discourage that So we're really focused, again, on the differentiation, on the overall value, but understanding the macro environment we operate in is a little bit different than it used to be.

We'll take our next question from Daniel Grossleit with Citi. Your line is open.

Hi, thanks for taking the question. One of your competitors noted that there's been a very high correlation between direct-to-consumer channel investment and market share gains. I know you mentioned the alt channel has decelerated a bit this quarter into the back half of the year, but I'm curious how, if at all, are you changing your marketing channel strategy, your investments in DTC, and if you are also seeing a correlation between or a high ROI between direct-to-consumer investment and market share retention. Thanks.

Sure. Obviously, we are heavily invested in direct-to-consumer, but importantly to this question, part of direct-to-consumer is actually advertising at a retail center or on an online site. And we do see very strong ROI. And you see the strongest ROI, and this would be obvious, because you're really focusing when you're on those sites on conversion. So you already have someone who you know is looking for the product, and you're converting it. So by far, we would absolutely agree. The highest ROI in direct-to-consumer advertising is, you know, like at the retailer where someone's actually searching for a product and you're helping, you know, convert them and you already have an interested party. We've also been really focused on continuing to grow markets as well. That ROI is important, but that's a longer-term ROI versus the ROI we're seeing as you invest at point of sale, either in the clinic or in retail, et cetera. So we are very focused as we think about these growth-to-net investments and this direct-to-consumer advertising at point-of-sale, whether that be in a clinic, whether that be on a website, or whether that be in a store.

Thank you. At this time, we've reached our allotted time for questions. I'll now turn the call back over to the CEO, Kristen Peck, for any additional or closing remarks.

Great. Thanks, everybody, for joining us today. And as always, really appreciate your questions and your interest in Zoetis. We know this is a moment that demands even greater focus and execution and we look forward to keeping you updated on our progress. I also want to reiterate that we remain confident in the long-term fundamentals of animal health in the strength and differentiation of our portfolio and our pipeline and our ability to create value. Thanks for joining us.

Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.