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Text: I am joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer.
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.
We also cite operational results, which exclude the impact of foreign exchange.
Once again, I hope you and your loved ones are safe and healthy as this pandemic continues to be pervasive and unpredictable with COVID cases spiking again in several regions of the U.S. and around the world.
We are all facing the uncertainty and fatigue that has come with this pandemic, but I'm also grateful and see today to share results that reflect the resilience of the animal health industry, the outstanding performance of our colleagues at Zoetis and the essential value we are providing our customers.
At Zoetis, we've stayed very responsive to the needs of our colleagues and customers throughout the year.
We've prioritized their health and safety while also ensuring that a consistent and reliable supply of products is getting to the clinics, farms and pet owners who need them.
Our global supply chain and manufacturing operations are running well with safety and quality as our top priority, and we've maintained operations at normal capacity and with no loss output.
As we look ahead, we're fortifying our network of suppliers and building inventory levels while also planning further contingencies for supply and distribution in the months ahead.
Our R&D programs also remained on track despite the pandemic challenges, and our field force has been very adaptive to the changing protocols, lockdowns and customer needs in various markets.
Our diverse and innovative portfolio has been driving growth this quarter with companion animal products up 20% operationally and livestock product sales up 9% operationally.
Our newest parasiticides, including Simparica Trio, REVOLUTION PLUS and ProHeart 12 led the way again along with vaccines, key dermatology products and our diagnostics portfolio, including reference labs.
The third quarter also benefited from sales growth in the U.S. cattle market and China swine market.
As a result of the sales growth and target investments, we delivered adjusted net income growth of 20% operationally for the third quarter.
Reflecting at our nine month performance and despite expectations for a more modest fourth quarter, we are increasing our revenue and adjusted net income guidance for the full year.
Glenn will provide more details around guidance updates in his remarks.
This year has shown once again that animal health is a steady and reliable sector even in times of economic hardship.
The world's fundamental need for nutrition, comfort and companionship provided by animals has proven durable and enduring over time.
In the U.S., veterinary clinic revenues for pets are increasing at double-digit rates.
Pet owners are focusing again on wellness and chronic illness, not just emergency visits and acute care.
While spending more time with their pets, pet owners are much more attuned to their dogs' and cats' health, observing conditions like itchiness, dermatitis and pain.
While clinic visits are relatively flat in the U.S., we are actually seeing an increase in average spend per visit.
We expect to continue to see our strength coming from companion animal products, especially our parasiticides and key dermatology portfolios across global markets.
Simparica to Trio's launch and penetration into new clinics in the U.S. and elsewhere is going well despite the headwinds of COVID-19.
And we're seeing a good return to our direct-to-consumer advertising and digital campaigns for Simparica and APOQUEL.
Meanwhile, in the livestock sector, producers are adapting to the changes in their end markets for protein.
And our third quarter growth was driven by increased sales in cattle, swine and fish.
The spike in COVID cases, limitations on dining out and shifts in production capacities will continue to make livestock a longer-term recovery story that may vary by region and species, another reason our diverse portfolio and global footprint is such an advantage.
Looking ahead, we have stayed focused on advancing our five key priorities: drive innovative growth, enhance customer experience, lead in digital and data analytics, cultivate a high-performing organization and champion a healthier and more sustainable future.
Throughout the year, we have stayed on track with our execution and investments in these areas, supported by a strong cash position and clear strategy.
In the third quarter, we achieved an important milestone for our pipeline for pain management in pets.
As you know, there's been limited innovation in this area over the last 20 years and we're excited by the potential of monoclonal antibodies or mAbs to be the next breakthrough in long-term pain management.
We've been building on our research and leadership in monoclonal antibodies for several years and gave valuable experience in the development and launch of our dermatology product, CYTOPOINT in 2016.
In September, Zoetis received a positive opinion on our latest mAb, Librela, from the committee for veterinary medicinal products in Europe.
Upon full approval by the European Commission, the Librela will be the first injectable monoclonal antibody licensed for alleviation of pain associated with osteoarthritis in dogs.
The European Commission approval is anticipated later this year with a potential launch in the first half of 2021.
We have additional regulatory submissions for Librela under review by health authorities in the United States, Latin America and Asia Pacific.
And we are progressing with similar regulatory reviews for monoclonal antibody therapy that can help manage osteoarthritis pain in cats, a condition that is vastly under-diagnosed or treated in cats today.
We also continue to bring our leading product into new markets.
On the companion animal side, Simparica was recently approved in China and CYTOPOINT and REVOLUTION PLUS gained approvals in additional markets in Asia and Latin America, respectively.
And in livestock, received approval in Japan for two of our leading swine vaccines, Fostera Gold PCV MH and Fostera Gold PCV, all great examples of how we build and expand our innovation-based franchises.
Last quarter, I previewed our latest diagnostics innovation, VetScan Imagyst, which features a cloud-based artificial intelligence platform.
Since then, we have launched it in Australia, Ireland, New Zealand, the U.K. and the U.S. and customers have been enthusiastic about its potential to simplify point-of-care workloads and improve the consistency of results.
And finally, we remain committed to creating a healthier and more sustainable world through our work as a leader in animal health.
We've been formalizing our strategy this year and look forward to sharing baseline metrics that are aligned with leading ESG reporting standards before the end of this month.
Now let me hand it off to Glenn, who will speak more about our third quarter results and updated guidance for the full year.
We delivered another solid quarter with significant growth in both our companion animal and livestock portfolios.
And we continue to be encouraged by the strength and resiliency of our business despite the challenging environment due to the pandemic.
Today, I will provide commentary on our Q3 results, update you on our improved full year 2020 guidance and discuss our expectations for Q4.
In the third quarter, we generated revenue of $1.8 billion, growing 13% on a reported basis and 15% operationally.
Adjusted net income of $524 million was an increase of 15% on a reported basis and 20% operationally.
Foreign exchange negatively impacted revenue in the quarter by 2%, driven primarily by the strengthening of the U.S. dollar.
Operational revenue growth was 15% with contributions of 2% from price and 13% from volume.
Volume growth of 13% includes 5% from other in-line products, 4% from new products, 3% from key dermatology products and 1% from acquisitions.
Companion animal products led the way in terms of species growth, growing 20% operationally with livestock growing 9% operationally in the quarter.
Performance in companion animal was driven by our parasiticides portfolio, which includes sales of Simparica Trio in the U.S., certain European markets, Canada and Australia.
We also saw growth in our small animal vaccine portfolio and our key dermatology products, CYTOPOINT and APOQUEL.
The positive momentum for Simparica Trio continued in the third quarter, and we expect full year incremental revenue of between $125 million to $150 million.
As we've previously mentioned, the COVID-19 pandemic has limited our ability to visit and penetrate clinics at the rate we had originally expected.
However, we are finding that once the clinic has converted to Simparica Trio, the adoption level within the clinic is resulting in meaningful incremental market share.
We're also extremely pleased with the performance of our broader parasiticide portfolio, which, in the U.S., gained an additional 6% market share in the fleet, tick and heartworm segment for the third quarter versus the same period in the prior year.
Global sales of our key dermatology portfolio were $251 million in the quarter, growing 16% operationally and contributing 3% to overall revenue growth.
Our diagnostics portfolio also contributed to growth due to the continued recovery of wellness visits following a slowdown from social distancing restrictions earlier in the year.
Livestock growth in the quarter was primarily driven by our U.S. cattle business seeing a return to historical distributor buying patterns following the impact of COVID-19 in the second quarter.
In addition, the fall cattle run occurred earlier in the year, causing a portion of fourth quarter sales to be pulled forward into the third quarter.
And as a result, we expect a significantly weaker fourth quarter in cattle than we typically deliver.
For the remaining livestock species, swine returned to growth in the quarter, resulting from expanding herd production in key accounts and increased biosecurity measures in the wake of African swine fever in China.
We also remain encouraged by the strength of our aquaculture business, which posted a fourth consecutive quarter of double-digit growth.
Poultry declined modestly in the quarter, which partially offset the growth in cattle, swine and fish.
New products contributed 4% growth in the quarter, driven by companion animal parasiticides, Simparica Trio, REVOLUTION PLUS and ProHeart 12.
Recent acquisitions contributed 1% of growth this quarter, including our expansion to reference labs and the Platinum Performance nutritionals business.
Now let's discuss the revenue growth by segment for the quarter.
U.S. revenue grew 18% with companion animal products growing 21% and livestock sales increasing by 13%.
For companion animal, we continued to be encouraged by vet clinic trends with revenue per clinic up 12% in the quarter and demand for our products remaining robust.
Companion animal growth in the quarter were driven by sales of our Simparica franchise as well as key dermatology products.
We continued to invest in direct-to-consumer advertising in both therapeutic areas, and we have seen a good return on that investment.
Simparica Trio continued to perform well in the U.S. with sales of $44 million despite difficult market conditions for a new product launch.
Key dermatology sales were $180 million for the quarter, growing 17%, with significant growth for CYTOPOINT and APOQUEL, resulting from additional patient share and an expanding addressable market.
Diagnostic sales increased 28% in the quarter as a result of our reference lab acquisitions and increased point-of-care consumable usage.
U.S. livestock grew 13% in the quarter, driven primarily by cattle.
As I mentioned, purchasing patterns returned to historical levels and we saw earlier movement from pasture to feedlot, both contributing to a significant volume increase for our products.
To summarize, U.S. performance was once again strong in what remains a difficult market environment.
We remain enthusiastic about the recovery and trends we're observing in companion animal products.
While livestock delivered an exceptional third quarter, as we've indicated in the past, we do not expect a sustainable recovery until the middle of 2021.
Revenue in our International segment grew 11% operationally in the quarter with growth across all species with the exception of poultry, which was flat in the quarter.
Companion animal revenue grew 20% operationally and livestock revenue grew 6% operationally.
Increased sales in companion animal products resulted from growth in our parasiticide portfolio, vaccines and our key dermatology products.
Parasiticide growth in the quarter was driven by the Simparica franchise, including the continued adoption of Simparica Trio, as well as increased promotional activity for REVOLUTION.
In the EU, limited access to veterinary clinics due to COVID-19 restrictions presented challenges for companion animal product sales in the second quarter, but in the third quarter we saw pent-up demand begin to work its way through the system, particularly for small animal vaccines.
Companion animal diagnostics grew 17% in the quarter led by an increase in point-of-care consumable usage.
International livestock growth in the quarter were driven by swine, fish and cattle.
Swine delivered another strong quarter with 16% operational revenue growth, primarily driven by China, which grew 159%.
While a significant portion of China's growth reflects the impact of African swine fever in the prior year, we're continuing to see expansion in our key accounts as production shifts from smaller forms to large-scale operations.
Our fish portfolio delivered another strong quarter, growing 10% operationally, driven by an increase in market share in vaccines and the acquisition of Fish Vet Group.
Overall, our International segment delivered strong results and was a key contributor to revenue growth with significant growth in companion animal, swine and fish.
We are also encouraged to see cattle return to growth in what are still difficult market conditions as a result of the COVID-19 pandemic.
Now moving on to the rest of the P&L.
Adjusted gross margin of 69.6% fell 50 basis points on a reported basis compared to the prior year as a result of negative FX, the manufacturing costs and recent acquisitions.
This was partially offset by favorable product mix and price increases.
Adjusted operating expenses increased 9% operationally, resulting from increased advertising and promotion expense for Simparica Trio and APOQUEL.
We have strategically reallocated savings, mainly from T&E costs into these high-return promotional programs, which have been successful in increasing sales.
The adjusted effective tax rate for the quarter was 20%, a decrease of 50 basis points, driven by the impact of net discrete tax benefits.
Adjusted net income for the quarter grew 20% operationally primarily driven by revenue growth, and adjusted diluted earnings per share grew 21% operationally.
The strength of our balance sheet, along with the significant free cash flow we generate, has enabled us to execute on our investment priorities including direct-to-consumer advertising, internal R&D and external business development.
While we suspended our share repurchase program for the last two quarters to preserve cash during the pandemic, we remain committed to our 2020 dividend.
In addition, share repurchases are a critical component of our shareholder distribution strategy and we'll continue to evaluate the appropriate time to resume the program.
Now moving on to our updated guidance for 2020.
We are raising guidance for a second consecutive quarter as a result of our third quarter performance and the improving companion animal market environment.
While the COVID-19 pandemic presents challenges and risks, we remain confident in the resiliency and durability of our diverse portfolio.
Please note that our guidance reflects foreign exchange rates as of late October.
For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.55 billion and $6.625 billion and operational revenue growth of between 7% and 8% for the full year versus the 3% to 6% in our August guidance.
Adjusted net income is now expected to be in the range of $1.79 billion to $1.825 billion representing operational growth of 6% to 8% compared to our prior guidance of 1% to 5%.
Adjusted diluted earnings per share is now expected to be in the range of $3.76 to $3.81 and reported diluted earnings per share to be in the range of $3.38 to $3.45.
We are anticipating a deceleration of revenue growth in the fourth quarter resulting from weaker performance in our livestock business.
The impact will filter down to adjusted net income, which will also be affected by increased expense as we invest in future revenue growth.
In addition, adjusted net income has a difficult comparative period as a result of nonrecurring discrete tax benefits recorded in Q4 2019.
In closing, we delivered another strong quarter demonstrating the resiliency of our business even in these challenging market conditions.
I'd like to once again express how extremely proud we are of our colleagues and the commitment they have demonstrated toward our customers and our company.

user
q3 revenue $1.8 billion versus refinitiv ibes estimate of $1.63 billion.
sees fy 2020 earnings per share $3.38 to $3.45.
sees fy 2020 revenue $6.55 billion to $6.625 billion.
sees fy 2020 adjusted earnings per share $3.76 to $3.81.

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