Zoetis Reports First Quarter 2016 Results

  • For First Quarter 2016, Zoetis Delivers 12% Operational Growth in
    Revenue and 28% Operational Growth in Adjusted Net Income, Excluding
    Foreign Exchange

    • Reported First Quarter 2016 Revenue of $1.2 Billion and
      Reported Net Income of $204 Million, or $0.41 per Diluted Share
    • First Quarter 2016 Adjusted Net Income of $239 Million, or
      Adjusted Diluted EPS of $0.48

    FLORHAM PARK, N.J.–(BUSINESS WIRE)–$ZTS #animalhealthZoetis
    Inc.
    (NYSE:ZTS) today reported its financial results for the first
    quarter of 2016 and updated its guidance for full year 2016 and full
    year 2017.

    The company reported revenue of $1.2 billion for the first quarter of
    2016, an increase of 5% compared with the first quarter of 2015. Revenue
    reflected an operational1 increase of 12%, excluding
    the impact of foreign currency.

    Net income for the first quarter of 2016 was $204 million, or $0.41 per
    diluted share, an increase of 24%, compared with the first quarter of
    2015. Adjusted net income2 for the first quarter of 2016 was
    $239 million, or $0.48 per diluted share, an increase of 15% and 17%,
    respectively. Adjusted net income for the first quarter of 2016 excludes
    the net impact of $35 million, or $0.07 per diluted share, for purchase
    accounting adjustments, acquisition-related costs and certain
    significant items. On an operational basis, adjusted net income for the
    first quarter of 2016 increased 28%, with foreign currency having a
    negative impact of 13 percentage points.

    Due to accounting calendars, the first quarter of 2016 includes six
    additional calendar days compared with the first quarter of 2015,
    resulting in higher sales, costs and expenses. The company estimates the
    impact of the additional days to be approximately 6 percentage points of
    operational growth.

    EXECUTIVE COMMENTARY

    “Zoetis delivered solid operational revenue growth in the first quarter,
    with the full benefit of our diverse portfolio and business model on
    display. The growth in companion animal products drove our performance,
    while we experienced softer growth in our livestock products and a
    negative impact from the product rationalization and market changes in
    Venezuela and India that we communicated last year,” said Zoetis Chief
    Executive Officer Juan Ramón Alaix. “Our core capabilities in direct
    customer interaction, R&D and manufacturing keep us well-positioned to
    lead the animal health industry.”

    “The execution of our operational efficiency program continues to help
    us grow adjusted net income faster than sales, and we are on track to
    exceed our initial targets,” said Alaix. “With improved foreign exchange
    rates and the positive momentum of the business, we are increasing our
    adjusted diluted EPS guidance for 2016 and 2017.”

    Paul Herendeen, Executive Vice President and Chief Financial Officer of
    Zoetis, said, “There was a lot going on in our results for the first
    quarter including having six extra days due to our financial calendar
    and seeing the impact of changes we are making to rationalize our
    product portfolio and geographic footprint. Looking through the noise,
    we posted another solid quarter. Foreign exchange rates continued to
    constrain our reported revenue growth — reducing reported revenue by
    700 basis points compared with the prior year quarter — but we expect a
    more muted impact over the balance of the year based on current rates.
    We are off to a great start in 2016 and are confident that we will enter
    2017 with the right product portfolio, focused in the right countries
    and with the right level of resources to deliver revenue growth over the
    long term that is equal to or faster than the markets in which we
    compete.”

    QUARTERLY HIGHLIGHTS

    Zoetis organizes and manages its business across two regional operating
    segments: the United States (U.S.) and International. Within these
    segments, the company delivers a diverse portfolio of products for
    livestock and companion animals tailored to local trends and customer
    needs. These segment results reflect the six additional calendar days
    mentioned above. In the first quarter of 2016:

    • Revenue in the U.S. segment was $582 million, an increase of
      12% compared with the first quarter of 2015. Sales of companion animal
      products grew 32%, due primarily to increased sales of APOQUEL®,
      initial sales of other products into expanded distribution
      relationships, and the addition of products acquired from Abbott
      Animal Health. Livestock revenue declined 4% due to decreased sales of
      cattle and swine products. In cattle, our premium products were
      impacted by mild winter weather that resulted in decreased disease
      risk and incidence, while certain swine products were impacted by
      increased competition. Poultry products partially offset these
      declines as customers rotated onto our medicated feed additive
      products.
    • Revenue in the International segment was $567 million, an
      increase of 13% operationally compared with the first quarter of 2015.
      Sales of livestock products grew 9% operationally, driven by the
      addition of revenue, primarily in Chile and Norway, from recently
      acquired PHARMAQ. Additionally, sales of cattle products grew in
      France and Brazil. Growth in France was due to lower than normal sales
      in the year-ago quarter resulting from implementation of new
      legislation, while growth in Brazil was driven by price increases and
      favorable market conditions. Livestock growth, however, was partially
      offset by business reductions in Venezuela and India and product
      rationalization. Sales of companion animal products increased 23%
      operationally, driven in part from increased sales of APOQUEL in
      existing markets – primarily the United Kingdom, Spain, and Germany –
      and new markets – France and Australia. Growth also benefited from
      performance in China and Japan. In China, growth was driven by demand
      for our vaccines portfolio, while Japan’s growth was driven by
      competitor supply issues and timing of customer purchases.
      Additionally, sales of products acquired from Abbott Animal Health
      benefited companion animal growth.

    Zoetis continues to drive demand and strengthen its diverse portfolio of
    products through lifecycle innovations, strong customer relationships
    and access to new markets and technologies. The company is focused on
    improving the performance and delivery of its current product lines;
    expanding product indications across species; pursuing approvals in new
    geographies; and developing innovative medicines, treatments and
    solutions for emerging diseases and unmet customer needs. Some recent
    highlights include:

    • Zoetis expanded its line of livestock vaccines in China in the first
      quarter. In March, the company received approval for RUI LAN WEN™,
      the first combination vaccine approved in China to help protect pigs
      against classical swine fever (CSF) and porcine reproductive and
      respiratory syndrome (PRRS) prevalent in China. This is the second
      vaccine resulting from the Zoetis Jilin Guoyuan joint venture in
      China. Zoetis also gained approval in China for POULVAC®
      MAREK CVI+HVT
      , a vaccine to help prevent Marek’s disease in
      poultry.
    • The company has received licenses from the USDA for a new VANGUARD®
      B Oral
      vaccine and three new VANGUARD®
      Intranasal Rapid Resp
      vaccines. Zoetis is now the first and only
      manufacturer to offer oral, intranasal and injectable options for
      vaccinating dogs against Bordetella bronchiseptica, which is
      considered a common pathogen in canine infectious respiratory disease.
    • At the end of the first quarter, Zoetis was granted a conditional
      license from the U.S. Department of Agriculture (USDA) for Avian
      Influenza Vaccine, H5N1 Subtype, Killed Virus
      3.
      The vaccine is intended for use in chickens as an aid in the
      prevention of disease caused by avian influenza virus H5N1, a highly
      pathogenic disease that caused the largest animal health emergency in
      U.S. history during the spring and summer of 2015, according to the
      USDA. Zoetis is participating in a competitive bidding process to
      supply the USDA with this vaccine for the National Veterinary
      Stockpile should they decide a vaccination strategy is needed.

    Zoetis continues to expand major products into new markets.

    • Following an approval last year in the EU markets, Zoetis received
      approval for SIMPARICA™ (sarolaner) in the U.S. and Canada and SIMPARIC
      in Brazil; this is a new oral parasiticide for dogs that enables the
      company to compete in the fastest growing segment of the approximately
      $3 billion global market of flea and tick products.
    • With the approval of APOQUEL in Japan in the first quarter, the
      product is now approved in all major markets. APOQUEL®
      (oclacitinib tablet) is a novel Janus Kinase inhibitor for the control
      of pruritus, or itching, associated with allergic dermatitis and the
      control of atopic dermatitis in dogs at least 12 months of age.
    • Zoetis also received a conditional license in Canada for Canine
      Atopic Dermatitis Immunotherapeutic
      3, a
      first-of-its-kind antibody therapy that targets and neutralizes
      interleukin-31 (IL-31) to help reduce clinical signs associated with
      atopic dermatitis in dogs.

    FINANCIAL GUIDANCE

    Zoetis’ guidance for the full year 2016 and the full year 2017 continues
    to reflect the company’s confidence in its diverse portfolio, the
    strength of its business model, and the stability and predictability of
    the animal health industry.

    Zoetis has updated elements of its guidance today to reflect foreign
    exchange rates as of April and current views of its operations.
    Considering these factors, the company’s guidance for the full year 2016
    and the full year 2017 is the following:

    Full Year 2016:

    • Revenue of between $4.775 billion to $4.875 billion
    • Reported diluted EPS for the full year of between $1.41 to $1.56 per
      share
    • Adjusted diluted EPS for the full year between $1.83 to $1.90 per share

    Full Year 2017 (updated solely for foreign exchange rates):

    • Revenue of between $5.075 billion to $5.275 billion
    • Reported diluted EPS for the full year of between $2.01 to $2.19 per
      share
    • Adjusted diluted EPS for the full year between $2.24 to $2.38 per share

    Additional guidance on other items such as expenses and tax rate is
    included in the financial tables and will be discussed on the company’s
    conference call this morning.

    WEBCAST & CONFERENCE CALL DETAILS

    Zoetis will host a webcast and conference call at 8:30 a.m. (EDT) today,
    during which company executives will review first quarter 2016 results,
    discuss 2016 financial guidance and respond to questions from financial
    analysts. Investors and the public may access the live webcast by
    visiting the Zoetis website at http://www.zoetis.com/events-and-presentations.
    A replay of the webcast will be archived and made available on May 4,
    2016.

    About Zoetis

    Zoetis
    (zô-EH-tis) is the leading animal health company, dedicated to
    supporting its customers and their businesses. Building on more than 60
    years of experience in animal health, Zoetis discovers, develops,
    manufactures and markets veterinary vaccines and medicines, complemented
    by diagnostic products and genetic tests and supported by a range of
    services. Zoetis serves veterinarians, livestock producers and people
    who raise and care for farm and companion animals with sales of its
    products in more than 100 countries. In 2015, the company generated
    annual revenue of $4.8 billion with approximately 9,000 employees. For
    more information, visit www.zoetis.com.

    1 Operational revenue growth is defined as revenue
    growth excluding the impact of foreign exchange.

    2 Adjusted net income and its components and
    adjusted diluted earnings per share (non-GAAP financial measures) are
    defined as reported net income attributable to Zoetis and reported
    diluted earnings per share, excluding purchase accounting adjustments,
    acquisition-related costs and certain significant items.

    3This product license is conditional. Efficacy and
    potency tests are in progress.

    DISCLOSURE NOTICES

    Forward-Looking Statements: This
    press release contains forward-looking statements, which reflect the
    current views of Zoetis with respect to business plans or prospects,
    future operating or financial performance, future guidance, future
    operating models, expectations regarding products, future use of cash
    and dividend payments, tax rate and tax regimes, changes in the tax
    regimes and laws in other jurisdictions, and other future events. These
    statements are not guarantees of future performance or actions.
    Forward-looking statements are subject to risks and uncertainties. If
    one or more of these risks or uncertainties materialize, or if
    management’s underlying assumptions prove to be incorrect, actual
    results may differ materially from those contemplated by a
    forward-looking statement. Forward-looking statements speak only as of
    the date on which they are made. Zoetis expressly disclaims any
    obligation to update or revise any forward-looking statement, whether as
    a result of new information, future events or otherwise. A further list
    and description of risks, uncertainties and other matters can be found
    in our Annual Report on Form 10-K for the fiscal year ended December 31,
    2015, including in the sections thereof captioned “Forward-Looking
    Information and Factors That May Affect Future Results” and “Item 1A.
    Risk Factors,” in our Quarterly Reports on Form 10-Q and in our Current
    Reports on Form 8-K. These filings and subsequent filings are available
    online at 
    www.sec.govwww.zoetis.com,
    or on request from Zoetis.

    Use of Non-GAAP Financial Measures:
    We use non-GAAP financial measures, such as adjusted net income and
    adjusted diluted earnings per share, to assess and analyze our
    operational results and trends and to make financial and operational
    decisions. We believe these non-GAAP financial measures are also useful
    to investors because they provide greater transparency regarding our
    operating performance. The non-GAAP financial measures included in this
    press release should not be considered alternatives to measurements
    required by GAAP, such as net income, operating income, and earnings per
    share, and should not be considered measures of liquidity. These
    non-GAAP financial measures are unlikely to be comparable with non-GAAP
    information provided by other companies. Reconciliation of non-GAAP
    financial measures and GAAP financial measures are included in the
    tables accompanying this press release and are posted on our website at
    www.zoetis.com.

    Internet Posting of Information:
    We routinely post information that may be important to investors in the
    ‘Investors’ section of our website at
    www.zoetis.com,
    on our Facebook page at
    http://www.facebook.com/zoetis
    and on Twitter @zoetis. We encourage investors and potential investors
    to consult our website regularly and to follow us on Facebook and
    Twitter for important information about us.

     

    ZOETIS INC.

    CONDENSED CONSOLIDATED STATEMENTS OF INCOME(a)

    (UNAUDITED)

    (millions of dollars, except per share data)

         
     
    First Quarter
    2016   2015 % Change
    Revenue $ 1,162 $ 1,102 5
    Costs and expenses:
    Cost of sales(b) 389 394 (1 )
    Selling, general and administrative expenses(b) 315 354 (11 )
    Research and development expenses(b) 90 80 13
    Amortization of intangible assets(c) 21 15 40
    Restructuring charges and certain acquisition-related costs 2 1 100
    Interest expense 43 28 54
    Other (income)/deductions–net (30 )  

    *

    Income before provision for taxes on income 332 230 44
    Provision for taxes on income 128   65   97
    Net income before allocation to noncontrolling interests 204 165 24
    Less: Net income attributable to noncontrolling interests    
    Net income attributable to Zoetis $ 204   $ 165   24
     
    Earnings per share—basic $ 0.41   $ 0.33   24
     
    Earnings per share—diluted $ 0.41   $ 0.33   24
     
    Weighted-average shares used to calculate earnings per share (in
    thousands)
    Basic 497,399   501,146  
    Diluted 499,539   503,224  
     
    * Calculation not meaningful.
     
    (a)   The condensed consolidated statements of income present the three
    months ended April 3, 2016, and March 29, 2015. Subsidiaries
    operating outside the United States are included for the three
    months ended February 28, 2016 and February 22, 2015.
     
    (b) Exclusive of amortization of intangible assets, except as discussed
    in footnote (c) below.
     
    (c) Amortization expense related to finite-lived acquired intangible
    assets that contribute to our ability to sell, manufacture,
    research, market and distribute products, compounds and intellectual
    property is included in Amortization of intangible assets as these
    intangible assets benefit multiple business functions. Amortization
    expense related to acquired intangible assets that are associated
    with a single function is included in Cost of sales, Selling,
    general and administrative expenses or Research and development
    expenses, as appropriate.
     
    Certain amounts and percentages may reflect rounding adjustments.
     
     
       

    ZOETIS INC.

    RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION

    CERTAIN LINE ITEMS

    (UNAUDITED)

    (millions of dollars, except per share data)

     
    Quarter ended April 3, 2016

    GAAP
    Reported(a)

     

    Purchase
    Accounting
    Adjustments

     

    Acquisition-
    Related
    Costs(1)

     

    Certain
    Significant
    Items(2)

     

    Non-GAAP
    Adjusted(b)

    Revenue $ 1,162 $ $ $ $ 1,162
    Cost of sales(c) 389 (7 ) (4 ) 378
    Gross profit 773 7 4 784
    Selling, general and administrative expenses(c) 315 (1 ) (14 ) 300
    Research and development expenses(c) 90 (1 ) 89
    Amortization of intangible assets(d) 21 (17 ) 4
    Restructuring charges and certain acquisition-related costs 2

     

     

    (2 )
    Interest expense 43 43
    Other (income)/deductions–net (30 ) (1 ) 33 2
    Income before provision for taxes on income 332 26 1 (13 ) 346
    Provision for taxes on income 128 17 (2 ) (36 ) 107
    Net income attributable to Zoetis 204 9 3 23 239
    Earnings per common share attributable to Zoetis–diluted(e) 0.41 0.02 0.01 0.04 0.48
     
    Quarter ended March 29, 2015

    GAAP
    Reported(a)

    Purchase
    Accounting
    Adjustments

    Acquisition-
    Related
    Costs(1)

    Certain
    Significant
    Items(2)

    Non-GAAP
    Adjusted(b)

    Revenue $ 1,102 $ $ $ $ 1,102
    Cost of sales(c) 394 (2 ) (7 ) 385
    Gross profit 708 2 7 717
    Selling, general and administrative expenses(c) 354 (34 ) 320
    Research and development expenses(c) 80 80
    Amortization of intangible assets(d) 15 (11 ) 4
    Restructuring charges and certain acquisition-related costs 1 (1 )
    Interest expense 28 28
    Other (income)/deductions–net
    Income before provision for taxes on income 230 13 1 41 285
    Provision for taxes on income 65 7 (2 ) 8 78
    Net income attributable to Zoetis 165 6 3 33 207
    Earnings per common share attributable to Zoetis–diluted(e) 0.33 0.01 0.01 0.06 0.41
     
    (a)   The condensed consolidated statements of income present the three
    months ended April 3, 2016, and March 29, 2015. Subsidiaries
    operating outside the United States are included for the three
    months ended February 28, 2016, and February 22, 2015.
     
    (b) Non-GAAP adjusted net income and its components and non-GAAP
    adjusted diluted EPS are not, and should not be viewed as,
    substitutes for U.S. GAAP net income and its components and diluted
    EPS. Despite the importance of these measures to management in goal
    setting and performance measurement, non-GAAP adjusted net income
    and its components and non-GAAP adjusted diluted EPS are non-GAAP
    financial measures that have no standardized meaning prescribed by
    U.S. GAAP and, therefore, have limits in their usefulness to
    investors. Because of the non-standardized definitions, non-GAAP
    adjusted net income and its components and non-GAAP adjusted diluted
    EPS (unlike U.S. GAAP net income and its components and diluted EPS)
    may not be comparable to the calculation of similar measures of
    other companies. Non-GAAP adjusted net income and its components,
    and non-GAAP adjusted diluted EPS are presented solely to permit
    investors to more fully understand how management assesses
    performance.
     
    (c) Exclusive of amortization of intangible assets, except as discussed
    in footnote (d) below.
     
    (d) Amortization expense related to finite-lived acquired intangible
    assets that contribute to our ability to sell, manufacture,
    research, market and distribute products, compounds and intellectual
    property is included in Amortization of intangible assets as these
    intangible assets benefit multiple business functions. Amortization
    expense related to acquired intangible assets that are associated
    with a single function is included in Cost of sales, Selling,
    general and administrative expenses or Research and development
    expenses, as appropriate.
     
    (e) EPS amounts may not add due to rounding.
     
    See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted
    Information for notes (1) and (2).
     
    Certain amounts may reflect rounding adjustments.
     
     
       

    ZOETIS INC.

    NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED
    INFORMATION

    CERTAIN LINE ITEMS

    (UNAUDITED)

    (millions of dollars)

     

    (1) Acquisition-related costs include the following:

     
    First Quarter
    2016   2015
    Integration costs(a) $ $ 1
    Other(b) 1    
    Total acquisition-related costs—pre-tax 1 1
    Income taxes(c) (2 ) (2 )
    Total acquisition-related costs—net of tax $ 3   $ 3  
     
    (a)   Integration costs represent external, incremental costs directly
    related to integrating acquired businesses and primarily include
    expenditures for consulting and the integration of systems and
    processes. Included in Restructuring charges and certain
    acquisition-related costs.
     
    (b) Included in Other (income)/deductions—net.
     
    (c) Included in Provision for taxes on income. Income taxes include the
    tax effect of the associated pre-tax amounts, calculated by
    determining the jurisdictional location of the pre-tax amounts and
    applying that jurisdiction’s applicable tax rate, as well as a tax
    charge related to the acquisition of certain assets of Abbott Animal
    Health.
     
    Certain amounts may reflect rounding adjustments.
     
     

    (2) Certain significant items include the following:

       
    First Quarter
    2016     2015
    Operational efficiency initiative(a) $ (28 ) $ 10
    Supply network strategy(b) 3 5
    Stand-up costs(c) 12 23
    Other(d)   3
    Total certain significant items—pre-tax (13 ) 41
    Income taxes(e) (36 ) 8
    Total certain significant items—net of tax $ 23   $ 33
     
    (a)   For the three months ended April 3, 2016, comprises restructuring
    charges of $2 million related to employee termination costs ($1
    million) and exit costs ($1 million), included in Restructuring
    charges and certain acquisition-related costs, consulting fees of $3
    million, included in Selling, general and administrative expenses,
    and a $33 million gain related to the sale of certain manufacturing
    sites and products (gross proceeds received were $75 million),
    included in Other (income)/deductions—net. For the three months
    ended March 29, 2015, represents consulting fees included in
    Selling, general and administrative expenses.
     
    (b) For the three months ended April 3, 2016, comprises accelerated
    depreciation charges of $1 million and consulting fees of $2
    million, included in Cost of sales. For the three months ended March
    29, 2015, represents consulting fees included in Cost of sales.
     
    (c) Represents certain nonrecurring costs related to becoming an
    independent public company, such as new branding (including changes
    to the manufacturing process for required new packaging), the
    creation of standalone systems and infrastructure, site separation,
    and certain legal registration and patent assignment costs. Included
    in Cost of sales ($1 million and $2 million) and Selling, general
    and administrative expenses ($11 million and $21 million) for the
    three months ended April 3, 2016, and March 29, 2015, respectively.
     
    (d) For the three months ended March 29, 2015, represents charges due to
    unusual investor-related activities in Selling, general and
    administrative expenses.
     
    (e) Included in Provision for taxes on income. Income taxes include the
    tax effect of the associated pre-tax amounts, calculated by
    determining the jurisdictional location of the pre-tax amounts and
    applying that jurisdiction’s applicable tax rate. The three months
    ended April 3, 2016, also includes a net tax charge of approximately
    $35 million related to the impact of the European Commission’s
    negative decision on the excess profits rulings in Belgium. The net
    charge of approximately $35 million relates to the recovery of prior
    tax benefits for the periods 2013 through 2015 offset by the
    revaluation of the company’s deferred tax assets and liabilities
    using the rates expected to be in place at the time of the reversal.
    This net charge does not include any benefits associated with a
    successful appeal of the decision, nor does it reflect guidance we
    expect to receive from the Belgian government on the methodology and
    timing of the recovery of prior tax benefits.
     
    Certain amounts may reflect rounding adjustments.
     
     

    Contacts

    Zoetis Inc.
    Media:
    Bill
    Price, 1-973-443-2742 (o)
    william.price@zoetis.com
    or
    Elinore
    White, 1-973-443-2835 (o)
    elinore.y.white@zoetis.com
    or
    Investors:
    John
    O’Connor, 1-973-822-7088 (o)
    john.oconnor@zoetis.com
    or
    Steve
    Frank, 1-973-822-7141 (o)
    steve.frank@zoetis.com

    Read full story here

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