Corrected Transcript
21-May-2015
Zoetis, Inc.
(ZTS)
BMO Farm to Market Conference
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Zoetis, Inc. (ZTS)
Corrected Transcript
BMO Farm to Market Conference
21-May-2015
CORPORATE PARTICIPANTS
Juan Ramón Alaix
Chief Executive Officer & Director
Glenn David
Senior Vice President-Finance Operations
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Alex Arfaei
BMO Capital Markets (United States)
......................................................................................................................................................................................................................................................
MANAGEMENT DISCUSSION SECTION
Alex Arfaei
BMO Capital Markets (United States)
Okay. Good afternoon, folks. My name is Alex Arfaei. I'm the pharmaceuticals analyst here at BMO Capital
Markets. This afternoon, I am delighted to welcome Zoetis for the second time now to our Farm to Market
Conference.
Zoetis is the world's leading animal health company. This is a very exciting time for the company. They just
recently reported very strong 1Q 2015 results, growing top-line operationally by 6%; bottom line by 14%. They
announced a margin expansion initiative to significantly improve their operating leverage for the next three years,
and they're also launching some of the leading drugs, some of which they can't make quickly enough, apparently,
because they're so high demand. They're both in leading products in companion animal, as well as livestock.
Joining us from the company to represent the company will be Juan Ramón Alaix, CEO. And we also have Glenn
David, Senior VP of Finance.
With that, I'll turn it over to Juan Ramón. Thank you.
......................................................................................................................................................................................................................................................
Juan Ramón Alaix
Chief Executive Officer & Director
So thank you, Alex. So I will be making forward-looking statements today, and I will discuss non-GAAP financial
measures. Please refer to our filing for risks associated with both.
Zoetis is the world leader in the animal health industry. And we define the animal health industry as the products
related to vaccines, medicines, medicated feed additives and also parasiticides. It's an industry of $24 billion,
which is expected to grow to $33 billion by year 2020. The industry, animal health industry, has two segments,
companion animal and livestock. In the case of Zoetis, 65% of our revenues are generated in livestock and 34% are
generated in companion animal. There is 1% related to the production of pharmaceutical ingredients that we sell
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Corrected Transcript
21-May-2015
to third parties. In the last five years, so the animal health industry has been growing by 5% to 6% and we expect
similar growth in the future.
And in terms of the two segments, the growth in companion animal will be slightly below livestock. Let me give
some details of how the growth in livestock will be generated. So we expect more animals that will be meeting the
demand of proteins, animal proteins, in the world. This will be around a 1% to 2% increase.
We also expect that producers will increase the level of sophistication in their production, mainly in emerging
markets. And this will generate more additional production of animal protein and also more use of animal health
products, about 2% to 3%. And then we also expect price increases. So in total, so we expect that the livestock
industry will be growing the next years around 6%.
In the last two years as a public company, we grew faster than the market. And also we improved significantly our
margins in these first two years, at the time that we were also separating from Pfizer, and also standing up the
company and building our infrastructure.
In these first two years, we have consolidated our presence in the market. And, as you can see, we are leading the
animal health industry. And we are 30% or more larger than the second in the industry, and 11 times larger than
number 10 in the animal health industry.
Our business model has been a key driver in terms of our performance, and our business model is defined by three
interconnected capabilities. We have direct interaction with our customers through a leading field force
organization. We also have the largest investment in terms of R&D. And we combine our investment in new
product innovation with investment in lifecycle management. Our top 25 products have been in the market for an
average time of 27 years, which is the result of the right investment in terms of lifecycle management.
And finally, we have also, as part of our core capabilities, the quality of our manufacturing with reliable supply and
a focus on generating gross profit improvement. These capabilities represent a competitive advantage and will
remain an essential foundation for our long-term growth in the animal health industry.
Today, I like to share with you the details of the operational efficiency plan that we announced on May 5. Since the
beginning of Zoetis as a public independent company, we have been planning how to improve our margins. Why I
have decided now to move forward with our operational efficiency program.
Well, first, because after two years from separating from Pfizer, now we have full control of our operations. We
have full control of corporate function. We have full control of manufacturing. And also very important also, we
are also building our own systems. And through that, we have identified significant opportunities for efficiencies.
Second, while the breadth of our portfolio and global footprint is a competitive advantage and remain a strength
in our company, we have seen that certain elements of this breadth are creating complexities that are – is a barrier
to bringing value to our customer and to generate long-term growth.
Third, we are beginning to see the benefits of implementing our ERP system. The result in – of the
implementation will be higher standardization and the potential to simplify our business that will allow us to
increase our productivity and streamline our operations. We plan to complete the final stages of the ERP in the
first quarter of 2016. And finally, with all these in place, we remain focused on growing revenues and finding
better ways of allocate resources to generate opportunities both internal and external. When we complete this
initiative, Zoetis will be a stronger, simpler and much more cost efficient organization.
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Zoetis, Inc. (ZTS)
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21-May-2015
This plan will allow us to create a more focused and more profitable organization and is not representing any
change in our business model or strategy. This initiative will better position Zoetis for long-term profitable growth
with a leaner cost structure and resources that will be shift to much closer to our customers, veterinarians and
producers which are also the ones making the decisions in our industry. These changes will help us to be much
more focused on important areas that will generate long-term profitable growth.
When we decided to move into this program, one of our primary goals was to preserve what we consider is the
more important competitive advantage in our company, our business model, the scale and also the breadth of our
portfolio.
How will we achieve the objective of what we are presenting in this plan? So first, we'll be reducing that
complexity in our operations in terms of products, in terms of markets and also in terms of manufacturing plants,
and we'll be keeping those which are the most important for our future.
Second, we'll optimize our resource allocation by eliminating duplication, eliminating layers, shifting resources, as
I said, closer to our customers. And we'll have the opportunity to deliver leverage, the investment that we have
been making in terms of IT that will provide much more G&A support, much better support in G&A across the
organization.
But all these changes will not imply that we are changing the fundamentals of our business. So we are not
changing our business model, which is based, as I said, on the direct interaction with customers, investment in
R&D and quality of manufacturing. We'll continue investing in markets, species and therapeutic areas that
represent the biggest growth opportunities for Zoetis.
And we remain focused on pursuing value-added business development opportunities, and we don't see that the
implementation of this plan would represent any kind of limitation on achieving these opportunities. Today, we
approach the market with direct field force in 70 markets, while we deliver our products through distributors in
another 50 markets.
After the rationalization of our market footprint, we'll be selling direct in approximately 45 markets and through
distributors in 75 markets. But even with this shift, we expect that more than 95% of our revenues will be coming
from markets, the 45 markets, where we'll have direct interaction with customers. You see that we remain
committed to our direct model. And we see the advantage of this implementation not in terms of just cost, but the
opportunity to generate quality revenues in the future.
The second element, it's the reduction of SKUs as a way to simplify our operations. So we operate today with
approximately 13,000 SKUs that are in approximately 300 product lines. We'll reduce complexity by eliminating
5,000 SKUs, but this will only eliminate approximately 10% of our 300 product lines.
So we'll still maintain in our portfolio those products which are important for our customers and will generate the
majority of our revenues. So what we are eliminating with this SKU simplification? It's those SKU with low
growth, low margin, high cost and definitely low value to Zoetis. Most products remain, but what we are
rationalizing are doses, packaging and formulations end markets.
The initiative we announced last week or two weeks ago will have a significant impact in our cost structure and
improve our 2017 adjusted EBIT margin expectations by approximately 500 basis points. When we complete all
the program, our margin will improve by approximately 900 basis points from 2014 from 25% in 2014 to 34% in
2017.
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Zoetis, Inc. (ZTS)
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BMO Farm to Market Conference
21-May-2015
We expect this program to generate savings of $300 million. That will more than offset a reduction to our gross
profit of $100 million related to the SKU rationalization and market shift. With all these changes, we remain
committed to our long-term value proposition of growing our revenues in line or faster than the market. Also
growing adjusted net income faster than revenues, targeting value-added investment opportunities and returning
capital to our shareholders.
What is important also to understand is that with all these changes that we are implementing, we'll be generating
profits of higher margins and even during the period in where we'll be reducing also the revenues, our profits will
be continuing increasing in 2016 and 2017. On top of the plan that we announced on May 5, we also remain
committed that we'll be generating another 200 basis points that was part of our communication at the time of the
Investor Days related to our planned network study. So as I said, it's a significant opportunity to generate
significant improvement in margin, but at the same time protecting our revenues and ensuring that we'll be
growing in line or faster than the market in the future.
Thank you very much for your attention. And now, we can have – I can respond questions from you.
......................................................................................................................................................................................................................................................
QUESTION AND ANSWER SECTION
Alex Arfaei
BMO Capital Markets (United States)
Q
Great. If you have any questions, you could raise your hand and we can have the mic delivered to you. Perhaps I
can get started, Juan Ramón. If you could talk about some of your late stage pipeline assets. I believe you have
anti-parasiticide in development that's not included in your guidance. If you could talk about that. And then more
broadly, you mentioned about Zoetis and you have that nice slide in terms of how you compare with the other
ones in terms of size, but how does your R&D capabilities compare, and do you think you have a competitive
advantage there?
......................................................................................................................................................................................................................................................
Juan Ramón Alaix
Chief Executive Officer & Director
A
So first, as we mentioned, there are some products that are in the process of being approved by regulators in U.S.
and also Europe. These products are one, an oral parasiticide for ticks and fleas, which is called Sarolaner. And
this will be a topical parasiticide that we expect that will generate an opportunity of more than $100 million. So
it's a great opportunity to be in a market which is the largest in the animal health industry and represent a
significant opportunity for growth for Zoetis.
The second product, which is not included in our guidance, is IL-31. This is another product that will be with the
indication of atopic dermatitis. And it's a biological product that will represent a good opportunity to complement
our portfolio in this market that is already having a significant opportunity with APOQUEL. So, again, there are
two products which are very exciting. And we expect that Sarolaner will be introduced in the market in 2016. And
IL-31 will be expected to have conditional license from USDA some time in 2015.
Responding to the question of our capabilities in terms of R&D, we are convinced that we are not only the
company with the highest investment in R&D, but probably with the highest productivity in terms of both new
product innovation and also in terms lifecycle management. And we have also metrics that compare how many
products have been approved by different regulators around the world.
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Zoetis, Inc. (ZTS)
BMO Farm to Market Conference
Corrected Transcript
21-May-2015
And these metrics are showing that Zoetis is ahead of the competition in terms of approval, product approvals,
and also innovation. We are convinced that today, we have the capabilities that we need in terms of
pharmaceuticals, in terms of vaccines and also in terms of biopharmaceuticals.
......................................................................................................................................................................................................................................................
Alex Arfaei
BMO Capital Markets (United States)
Q
Any questions from the audience? Go ahead.
......................................................................................................................................................................................................................................................
Q
In your slide with the sales, it seemed like the direct sales clearly are much stronger revenue and profit producing,
but you have your indirect sales growing, I can't remember what it was, to 75. I was just wondering. Why is that
growing so much when it produces much less than the direct?
......................................................................................................................................................................................................................................................
Juan Ramón Alaix
Chief Executive Officer & Director
A
I don't know if I...
......................................................................................................................................................................................................................................................
Glenn David
Senior Vice President-Finance Operations
A
Yes. The question I think is in terms of the number of markets that we have going from direct to indirect. So once
we're reducing the number of markets that we're going direct in, it increases the number of markets that we're
indirect. So the 95% of revenue relates to the markets that we have a direct sales presence in, so field force
colleagues on the floor selling directly to customers. The 5% of revenue relates to markets where we're using
distributors and we don't have a direct presence. So that's just going up from the nature of switching from direct
to indirect.
......................................................................................................................................................................................................................................................
Juan Ramón Alaix
Chief Executive Officer & Director
A
This is the confirmation that we are not changing our business model. And most of our revenues, 95% of revenues,
will be still generated in markets where we have direct interaction with our customers.
......................................................................................................................................................................................................................................................
Alex Arfaei
BMO Capital Markets (United States)
Q
Okay. Next question, please? If I could add one more. So the margin expansion initiative that you're talking in
some of these markets, changing your business model around, one of your competitive advantages that you're a
one-stop shop with your clients. To what extent do you think some of these things that you're implementing, some
of these changes that you're implementing, might disrupt that with your customers?
......................................................................................................................................................................................................................................................
Juan Ramón Alaix
Chief Executive Officer & Director
A
Well, we are convinced that the products that we are eliminating the 10%, less than 10% of the 300 product lines
we have in our portfolio, are not key to maintain our presence in the market and also provide to our customers
what they really need to keep the animals healthy and productive in livestock; and to keep healthy and live longer
in companion animals. We still have the portfolio that will be covering all the needs of our customers and also
complementing this kind of product offer, we'll be also offering services. We'll be also offering genetic markers.
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Zoetis, Inc. (ZTS)
BMO Farm to Market Conference
Corrected Transcript
21-May-2015
We'll be also offering some diagnostic tools that, in my opinion, are really meeting the needs of our customers in
the animal health industry and also very important.
So we are not only having these direct interactions with customers with our field force, we also have highly trained
veterinarians that are also part of our interaction with customers, veterinarian which are in the field and are also
providing the technical support to all the veterinarians and to producers. So the combination of all these elements
are really maintaining the one-shop model that you were mentioning.
......................................................................................................................................................................................................................................................
Alex Arfaei
Q
BMO Capital Markets (United States)
Great, great. Any other questions from the audience?
......................................................................................................................................................................................................................................................
Alex Arfaei
BMO Capital Markets (United States)
Okay. I believe this concludes this presentation and also this concludes this track of our 10th Farm-to-Market
Conference. We thank you very much for participating. Hope you can join us next year and thank you for
participating in our online poll. Have a good afternoon. Thank you.
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