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Text: I'm 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.
I hope you and your loved ones remain safe and healthy as the COVID-19 pandemic continues to affect all of our professional and personal lives.
In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic.
In terms of numbers, our revenue grew 4% operationally, with the U.S. segment up 6% and International up 3%.
Our companion animal products continue to drive our business performance, with 13% operational growth, while livestock products declined 5%.
Our adjusted net income increased 4% operationally in the second quarter.
We have built a very strong companion animal portfolio over the last several years based on our internal innovation.
And these products helped offset some of the deeper market challenges in the livestock market today.
Our recently launched parasiticides, Simparica Trio, ProHeart 12 and Revolution Plus as well as our key dermatology portfolio of Apoquel and Cytopoint, provide a solid foundation that has continued to perform well this year.
We continue to be very pleased with the performance of our new triple-combination parasiticide for dogs, Simparica Trio as well as the strength of the overall Simparica franchise.
Glenn will share more details in his remarks.
Our continued focus on meaningful innovation and the diversity of our portfolio across species, products and geographies remain core advantages for Zoetis during times of economic uncertainty.
And we've also seen the essential nature of animal health playing an important role in the resiliency of our business and our industry at this time.
In terms of COVID-19, our veterinary and producer customers are under increased pressure to deliver critical animal care and maintain a reliable global food supply, and we are fortunate to be able to support them in this mission.
We continue to put the safety of our colleagues and customers first during this pandemic, and we've been very pleased with our team's ability to maintain productivity, even with safety and social distancing adjustments at our facilities as well as the ongoing use of remote work arrangements for the majority of our colleagues.
Our field force has returned to meeting with customers in many geographies based on local guidance and practices.
We monitor and adapt these plans on a daily basis based on local feedback and adjustments in markets that may be experiencing increased COVID-19 cases.
Our teams are excited to be back out with our customers, but we're also preserving the lessons we have learned from effective online interactions, webinars and e-commerce to evolve our sales and support.
In terms of supply chain, Zoetis has maintained a reliable inventory of critical medicines, vaccines and diagnostics to our customers and distributors in more than 100 markets around the world.
And our research development programs remain on track in terms of filings, clinical trials and interactions with regulatory agencies.
We remain confident in the progress of regulatory reviews of our monoclonal antibody candidates for pain in cats and dogs.
Our submissions are proceeding as expected.
This year continues to be uncharted territory due to COVID-19 and the related trends affecting our customers.
However, the underlying demand for healthy pets and a reliable source of protein remains fundamental to the global economy.
In the second quarter, we benefited from the veterinary clinics in the U.S. recovering much more quickly from the COVID-19 impact than we anticipated.
Veterinary practices in the U.S. adapted quickly to curbside visits and mobile clinics to deliver critical care and maintain relationships with their customers.
We also saw an acceleration of companion animal product sales through e-commerce channels as a result of the lockdowns in many states.
Veterinarians and pet owners are adapting more quickly to these online options as a way to fill prescriptions for parasiticides and other medicines.
We also know people are spending more time at home with their pets.
They may be observing conditions such as itchiness or pain, which have previously gone unnoticed.
And so we are actually seeing an increase in spend per visit in U.S. clinics.
Meanwhile, outside the U.S., companion animal veterinary clinic performance has been in line with expectations despite wide market-by-market variations based on local dynamics.
For Zoetis, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially our parasiticides and key dermatology portfolio.
We plan to continue investing in direct-to-consumer advertising and digital marketing to support these products.
Livestock is a very different picture and remains very challenged by the pandemic, especially in the U.S. Producers are adjusting to new market demands and distribution needs from foodservice and restaurant channels to more grocery and retail channels, while also managing ongoing labor, safety and trade issues.
As expected, U.S. livestock in the second quarter saw a significant downturn as we expect that to remain a challenge for the rest of the year.
The pace of return to more foodservice and restaurant demand, along with increased export opportunities, will be the most significant factors in the recovery of livestock producers in the U.S. Internationally, livestock grew and performed in line with expectations across a diverse set of markets.
We saw very positive results in places like China, where they're further along in their COVID-19 recovery, but we will be sensitive to see how Latin America and markets like Brazil perform in the remainder of the year due to COVID.
As we look ahead, we remain focused on advancing our five key priorities to ensure our long-term success, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing organization and championing a healthier, more sustainable future.
We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease, Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance.
In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCVMetastim for vaccines for pigs in Australia.
We also continue to strengthen our diagnostic and digital capabilities, building on recent acquisitions in point-of-care and reference labs, along with additional investments.
We plan to launch a new diagnostic platform for pet care in the third quarter called VetScan Imagyst.
We are very excited about the potential for this disruptive innovation, which will be the first system to bring clinical pathology right to the point of care.
This new multipurpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic.
Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit.
We'll have more to say in the coming weeks as we prepare for a global launch.
We also view diagnostics as playing an important role in the continuum of care for fish.
In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming.
Finally, at Zoetis, our key priority around high-performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.
Our leadership and Board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion.
And we have dedicated financial and people resources to do so.
Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year.
I hope everyone is safe, healthy and adapting to what is certainly an unprecedented time for all of us.
Today, I will provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance.
Beginning with the second quarter results.
We generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally.
Adjusted net income of $427 million decreased 2% on a reported basis and increased 4% operationally.
Foreign exchange in the quarter had an unfavorable impact of 4% on revenue.
This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso and euro.
Operational revenue growth of 4% was driven by 2% price and 2% volume.
Volume growth of 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other in-line products.
Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally.
Companion animal performance was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint.
Revenue from the acquisition of Platinum Performance and its nutritional products, acquired in the second half of 2019, drove the growth in equine.
Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.
Supply chain disruptions caused by reduced animal processing capacity and shifts in consumer demand from restaurant and foodservice to grocery stores affected our customers' purchasing decisions.
This decline was partially offset by strong performance internationally with growth in swine, fish and poultry.
New products contributed 3% to overall growth in the quarter, driven by Simparica Trio, ProHeart 12, Revolution Plus and our Alpha Flux parasiticide for salmon in Chile.
We remain excited by the launch of Simparica Trio and are reaffirming the range of $100 million to $125 million for full year incremental revenue.
Trio have been more robust and cannibalization of Simparica has been less than we anticipated.
Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% to overall revenue growth.
Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy.
Now let's discuss the revenue growth by segment for the quarter.
U.S. revenue grew 6%, with companion animal products growing 19% and livestock products declining by 18%.
Companion animal growth in the quarter was driven by sales of the Simparica franchise, our key dermatology products and the impact of recent acquisitions.
U.S. key dermatology sales were $160 million for the quarter, growing 26%.
The continued strength of this portfolio was driven by expanded usage of both Cytopoint and Apoquel benefiting from our direct-to-consumer campaign, uptake in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19.
Simparica Trio performed well in the U.S. with sales of $36 million despite challenging market conditions in Q2.
We are observing several positive trends, including rapid uptake in clinics that have adopted Trio, smaller-than-expected cannibalization of Simparica, sales coming from new patients to the category and taking share from current oral flea and tick competitors.
Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions.
In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter.
U.S. livestock declined 18% in the quarter, driven by lower sales across all species.
In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the foodservice industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition.
To summarize, U.S. performance was strong in a difficult market environment.
And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio.
Our International segment had operational revenue growth of 3% in the second quarter, with more balanced performance across our companion animal and livestock portfolios.
Companion animal operational revenue growth was 2% and livestock operational growth was 4%.
Increased sales in companion animal products was a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada.
While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China.
Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19 limited the ability to place instruments and negatively impacted consumable usage.
International livestock growth in the quarter was driven by swine, fish and poultry.
Swine grew double digits in the quarter, primarily driven by China, which grew 25%, as key accounts continue to expand their herds and production shifts from smaller farms to larger-scale operations.
Our fish portfolio delivered another strong quarter.
We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2.
In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile.
Overall, our international segment was again a positive contributor to revenue growth, with performance in swine, companion animal, fish and poultry more than offsetting decline in cattle resulting from the COVID-19 pandemic.
Now moving on to the rest of the P&L.
Adjusted gross margin of 71.1% increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges.
Adjusted operating expenses were flat operationally.
The incremental advertising and promotion expenses related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensation-related costs as a result of COVID-19.
The adjusted effective tax rate for the quarter was 22.3%.
The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019.
Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth, and adjusted diluted earnings per share grew 6% operationally.
Next, I'd like to cover our liquidity position and our capital allocation priorities.
We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.
We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn.
Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders.
Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics.
With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019.
In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash.
We have approximately $1.4 billion remaining under our multiyear share repurchase program.
Now moving on to our updated guidance assumptions for 2020.
Our past performance has always given us confidence that the essential nature of our business, our diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions.
After assessing recent trends and our performance in the second quarter, we are further refining and raising our full year 2020 guidance.
We expect recent positive companion animal trends in the U.S. will continue, although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system.
The more recent resurgence of COVID-19 cases in parts of the U.S., and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic.
Please note that our guidance reflects foreign exchange rates as of mid-July.
And given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May.
Our current guidance includes favorable foreign exchange revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance.
For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus a negative 2% to positive 3% we had in our May guidance.
Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 2%.
Adjusted diluted earnings per share is now expected to be in the range of $3.52 to $3.68 and reported diluted earnings per share to be in the range of $3.14 to $3.32.
In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past, we are extremely proud of our colleagues and the commitments they have shown toward our customers, our company and animal healthcare.
During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry.
And we have confidence in our ability to continue to execute on our strategy during these uncertain times.

user
sees fy 2020 earnings per share $3.14 to $3.32.
sees fy 2020 revenue $6.3 billion to $6.475 billion.
q2 revenue $1.5 billion versus refinitiv ibes estimate of $1.36 billion.
sees fy 2020 adjusted earnings per share $3.52 to $3.68.
looking ahead, expect overall revenue growth for remainder of year to be driven largely by companion animal products.

assistant