Zoetis (ZTS) FY15 EPS Guidance Misses Consensus

Zoetis Inc. (NYSE: ZTS), the world’s leading animal health company, today hosted its first-ever Investor Day, discussing with investors and analysts the company’s leadership position in the animal health industry and the strategy and initiatives underway that will drive growth and create value for shareholders. The company also provided full-year 2015 financial guidance and outlined its longer term financial goals through 2017.

“Zoetis has become the world leader in the $23 billion market for animal health medicines and vaccines based on our unique combination of capabilities, our diverse portfolio of more than 300 product lines, our global presence in 120 countries and critical investments that we have made in our operations,” said Zoetis Chief Executive Officer Juan Ramón Alaix. “Our financial strength, strong performance as a fully independent company, and prospects for growth as the market leader position Zoetis to continue delivering sustained value to shareholders.”

“Steady and growing demand for meat and milk proteins and pets for companionship represent an attractive market opportunity for Zoetis to help keep animals healthy and productive. Our singular focus on animal health makes a difference in how we serve our customers, create innovative new products for their needs, and deliver a reliable, high-quality supply of medicines and vaccines, putting us in a strong position to continue growing in line with or faster than the market.”

Combining Three Interconnected Capabilities for Market Success

During the meeting, Alaix and the Zoetis executive team provided an in-depth review of the Zoetis business model and the unique characteristics that have established the company as the world leader in animal health, growing revenue faster than the market for the last three years (5.1% for Zoetis2 vs. 4.6% for the Animal Health Market).

• The company’s four regional presidents – Clint Lewis, Joyce Lee, Dr. Stefan Weiskopf and Dr. Alejandro Bernal – each described how they are gaining market share through the company’sdirect selling model, with approximately 3,500 customer-facing colleagues on the ground in 70 countries. The executives emphasized the unique growth drivers and distinct needs in each of the regions, which are addressed with local-market approaches and strategies.
• Dr. Catherine Knupp, Executive Vice President and President of Research & Development (R&D), described the company’s approach to R&D and building enduring brands, including Zoetis’ focus on customer needs, speed to market, its ability to leverage its global capabilities, and drivers of future revenue growth. Knupp highlighted examples of the company’s innovation with its recent dermatology breakthrough for dogs, APOQUEL®, and its continuous enhancement of the ceftiofur franchise over the last 25 years. Knupp also outlined the company’s areas of focus for future livestock and companion animal product innovations.
• Kristin Peck, Executive Vice President and Group President, discussed the company’s Manufacturing and Supply Network and how it enables Zoetis to deliver high-quality, reliable supply at competitive costs through a mix of internal and external supply sources. Peck described the company’s ongoing emphasis on productivity improvements and the high value customers place on Zoetis’ reliable, high-quality supply, its record of maintaining its manufacturing excellence, and its ability to integrate acquisitions seamlessly. She also outlined the company’s plan to further optimize its network for growth and gross margin improvement.

Future Outlook and Commitment to Generating Value for Shareholders

The company concluded its event with a discussion of its financial dynamics and expectations over a three-year horizon, including announcing guidance for full-year 2015.

“Zoetis participates in an industry where revenues are expected to grow in the mid-single digits – 5% to 6% on an operational basis3 – over the long-term,” said Zoetis Executive Vice President and Chief Financial Officer Paul Herendeen. “And, we expect to grow our revenue in line with or faster than the market based on the combination of our industry-leading field-based resources, R&D and high quality supply.

“Below the revenue line, we expect to generate modest improvements in gross margin in the near term before accelerating after 2017. After 2015, we expect to keep our operating expense growth in the range of the inflation rate,” said Herendeen. “Considering all of these factors, we believe Zoetis is a company that can grow adjusted net income1 in the low, double-digits over the long term.”

In his remarks, Herendeen indicated the company could grow revenue in the range of 5% to 7% on an operational basis3 for 2016 and 2017, and grow adjusted net income in the range of 11% to 16% on an operational basis3 for 2016 and 2017.

For full-year 2015, the company offered the following financial guidance:

• Revenue of between $4.850 billion to $4.950 billion (6.5% to 8.5% growth on an operational basis3)
• Reported diluted EPS for the full year of between $1.36 to $1.43 per share
• Adjusted diluted EPS1 for the full year between $1.61 to $1.68 per share
• Additional guidance on other items such as expenses and effective tax rate is included in the financial tables accompanying this press release and on the company’s website.

(Street sees FY15 EPS of $1.71 on revenue of $4.96 billion)

Herendeen also outlined the company’s priorities for capital allocation at the meeting:

• The company will aggressively manage its operating costs to drive revenue and support a complex growing business.
• It will use capital for value-creating business development activities that add to or complement its existing business base such as the purchase of assets of Abbott Animal Health, which the company announced yesterday, to generate additional shareholder value.
• It will return capital to shareholders through continued dividend payments and the utilization of a $500 million share repurchase authorization, which was announced separately today.

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