碩騰 (ZTS) 2013 Q4 法說會逐字稿

Welcome to the fourth-quarter 2013 financial results conference call and webcast for Zoetis. Hosting the call today from Zoetis is Vice President of Investor Relations, Dina Fede.

The presentation materials and additional financial tables are currently posted on the Investor Relations section of Zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition a replay of this call will be available approximately two hours after the conclusion of this call, via dial-in or on the investor relations section of Zoetis.com.

(Operator Instructions)

It is now my pleasure to turn the floor over to Dina Fede, Vice President of Investor Relations. Dina, you may begin.

Thank you, Zach. Thank you, everyone, and good morning, and welcome to Zoetis fourth-quarter 2013 earnings call. I'm joined today by Juan Ramon Alaix, our CEO; and Rick Passov, our CFO.

Our remarks today will include forward-looking statements, and actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release, and our SEC filings, including but not limited to our 2012 10-K and 2013 10-Qs.

Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles, or US GAAP. A reconciliation of these non-GAAP financial measures to the most directly-comparable US GAAP measures is included in the financial tables that accompany our earnings press release, and in the Company's 8-K filing, dated today, February 11, 2014.

And finally, since Zoetis was not a standalone Company in 2012, our financial statements covering periods prior to the IPO do not necessarily reflect what the results of operations would have been, had we operated as a stand-alone public company, which may make comparisons to prior periods difficult in certain instances. With that, I will turn the call over to Juan Ramon.

Thank you, Dina. Good morning, everyone. On February 1, we celebrated our one-year anniversary, and in this first year, we have made significant progress in standing up Zoetis as an independent public company, building the infrastructure to support our business, and delivering on our financial and strategic objectives.

We concluded the year with operational revenue growth of 7%, and adjusted net income growth of 32%. At this previous level we delivered 8% operational growth in companion animal, and operational growth of 6% in livestock. Companion animal products now account for 36% of our total annual revenues, with livestock products accounting for 64%.

In companion animal, sales of products for cats and dogs grew by 8%, driven by strong performance in the US, Latin America and Asia. And moderate growth in Western Europe and Australia, with a 4% decline in the sales of equine products.

In some countries such as the US, there are signs of recovery in the equine market after five years of decline. With the addition of Apoquel in 2014 to our already strong companion animal portfolio, we expect to continue the positive sales growth in this segment, and I will talk more about this product later on today's call. In livestock, sales of swine and poultry portfolio grew operationally by 12% and 10%.

These industries have recovered faster than expected from the drought that affected the US in 2012. These were due to lower feed costs and higher meat prices in 2013. And given the shortened production cycle, allowing operations to more rapidly replenish the supply of animals.

In cattle, where we delivered operational growth of 3%, the US had a stronger showing in 2013, especially in the fourth quarter. We also saw strong performance in India and Mexico. This performance continued to be balanced by the impact of ongoing drought conditions in a number of markets, including Australia.

And now let me share with you the performance of our foreign regions. In Asia-Pacific, on an operational basis, revenue grew in line with total Zoetis revenue.

This is consistent with our expectations, which we have lowered during the year, to reflect the continuing impact of the drought in Australia and New Zealand. These two markets represent one-third of revenues for the region.

Significant growth in the region came from the mentioned markets of China, India, and Southeast Asia, as well as a good performance in Japan, another large market for Zoetis. This was tempered by the flat growth in Australia and New Zealand, where as I mentioned, dry weather conditions remain.

In Canada/Latin America, as I have noted previously, results of the region are primarily influenced by the performance of the two largest markets of Brazil and Canada. These countries account for over 60% of the region's sales.

For 2013, Brazil was the key driver of the region's growth. With the market as more companion animal business, growing at a significant pace.

We delivered a slower growth rate in livestock. With strong growth in poultry and swine, offset by the flat growth in cattle. Despite the relatively flat industry performance in Canada, Zoetis delivered growth in these markets, and this was driven by market conditions positively impacting our anti-infective portfolio and cattle virus, and a stronger than anticipated sales of flea and tick sale products.

In Europe/Africa/Middle East, emerging markets contributed significantly to 2013 growth. In Russia, we see a longer-term growth trend in the livestock industry, where there is an increasing focus on self-sufficiency in the food supply.

In Western Europe, where we had our largest markets, while the economy challenge remained for our customers, we grew modestly. We delivered very strong growth across all species in the US, our largest division.

In companion animal we saw the benefit of realigning our field force to more effectively cover our customer base. This was in addition to the positive outcomes of our new cross portfolio pricing programs. In livestock, strong growth in poultry and swine was offset by the two very different six-month performance periods in cattle, the largest species in our US livestock business.

It was a year of two halves, if you'd like. In the first half of 2013, the cattle business saw the impact of higher corn prices affecting the producers demand for our products. Growth in cattle sales picked up in the second half of the year, as prices corn prices fell.

For 2014, we expect limited growth in our cattle business, as ranchers hold back heifers from slaughter for breeding purposes. This action, while tempering growth in 2014, is a positive long-term trend for the animal health industry, as it indicates the beginning of herd rebuilding. For total Zoetis, operational revenue growth of 7% comprised approximately 5% volume growth and 2% price.

Now, let me provide some recent business highlights from the quarter. This demonstrates the importance of the three core interconnected capabilities of our Company.

We continue to benefit from our best-in-class sales force. The commercial team remains focused on partnering with our customers to make their businesses successful. We are deepening these relationships with our customers through development of aligned platforms, so they might easily access our products as well is to help them better engage their clients.

According to the latest available external market data, Zoetis grew its revenues faster than the market for both the 9 and the 12 month periods ending September 30, 2013. This performance is based on the latest information available, and we expect to continue to grow faster than the market on a total year basis for 2013.

Our investment in R&D has been productive. Through the year, we have delivered a number of minimal additions and enhancements to our product portfolio. In fact, in 2013 we received many approvals, including those for new medicines, claim extensions, or entrants into new markets.

Some of our most recent approval has been for poultry and swine. In swine, we have a continued to maximize our investment in the Fostera brand, with the approval of the Fostera poultry vaccine in new markets, including Mexico, Korea, and Thailand.

Building on the success of Fostera, and thanks to the continued innovation from our R&D team, we recently received US approval of our Fostera PCV MH product. This is a new combination vaccine for swine, and the first to offer one bottle, one dose convenience with the flexibility of two dose immunization.

Also in the swine portfolio in 2013, we launched the first product for our China joint venture, Rui Lan An. This product is performing very well. We believe that the product could account for a growing percentage of our revenues in China, and become a top ten product in our portfolio in the market in 2014.

And now, a few words on Apoquel. This exciting and new product was recently launched in the US, Germany, Austria, and the UK. Apoquel is scheduled to launch in the rest of the European Union, as well as New Zealand in 2014.

Apoquel has been well-received by veterinarians and those of their clients that participated in our clinical trials, and in the early experience programs in the US. Customer demand to date has really been very high, and we are truly excited about its long-term potential. However, as [a novelty] had a problem with the novel mechanism of action and with only a few weeks on the market, it is hard to estimate what the ultimate rate of uptake will be in this product's first year.

To help manage expectations in this earlier stage, we currently believe that Apoquel could contribute approximately 1% of our revenues in 2014. It is, of course, dependent upon customer acceptance levels.

Changing gears, through the year, we have spoken about how our customers' businesses have been impacted by a number of disease outbreaks. You will recall that we have talked previously about porcine epidemic diarrhea virus or PEdV, which is affecting swine herds. This is been a serious impact on the industry in the United States, and is now active in 23 states.

Cold weather is contributing to the spread of the outbreak, which is impacting, according to recent reports, up to 30% of sows in the US. With information available today, we expect a reduction of approximately 4% of the US swine herd, and this impact has been incorporated in our guidance range. We will continue monitoring the evolution of the outbreak, in the [signing news], and the impact in our revenues.

As you may know, Zoetis has recently announced a research partnership with Iowa State University to identify a vaccine candidate to help control the virus. The partnership is one element of Zoetis' ongoing effort to support swine veterinarians and pork producers in the control of PEdV. Also in 2013, Zoetis began correlating with the University of Minnesota to develop a diagnostic test for the disease.

Another disease outbreak, albeit on a smaller scale, has been a new strain of bronchitis affecting poultry flocks. This is a virus that is been first identified by poultry producers in the US state of Georgia in 2008, but one that had begun to spread to other southern US states. In 2013, in line with the continuing impact of the disease, we formed an internal task force to deliver the USDA conditionally-licensed vaccine intended for this virus.

This provides a valuable tool for our customers in reducing the effects of the disease. Efforts are currently underway to obtain a full USDA license for the vaccine. Our response to both of these disease outbreaks fully demonstrate our partnership with our customers, and the way in which our colleagues work to meet their needs.

We have remained focused on ensuring a steady supply of quality medicines to our customers and the market. In 2013, we delivered sustained improvement in our product availability metrics, ensuring that we can more reliably meet the demands of our customers around the world. In 2014, our manufacturing and supply organization will include a full-year of cost associated with the central manufacturing functions that were built through 2013.

We are also facing some product mix headwinds. Higher sales in the medicated feed additive and poultry, together with some products not fully meeting our expectations.

One example of this product is Improvac/Improvest. This novelty global product that changes animal husbandry practices in the swine industry in a very important way. We have been successful with this products in Latin America, but not yet realized its full potential in Europe and the US.

All these elements will represent a challenge to gross margin improvements in 2014. Zoetis' first-year results, as well as our 2014 guidance, illustrates the importance of our diverse portfolio and the strength of our business model. We are committed to our long-term objectives to deliver revenue growth, in line with the factors on the market, and realize adjusted earnings growth faster than revenues.

I believe that we are well-positioned to bring added value to our customers, colleagues, and shareholders. And with that, I will now ask Rick to walk us through the financial results. Rick?

Thank you Juan Ramon, and good morning. I will start with a review of the fourth-quarter results, and then I'll lay out our guidance for full-year 2014.

Turning to the income statement slide, for the fourth quarter, revenue was approximately $1.25 billion, an increase of approximately 7% year over year, including a negative impact of 2 percentage points from foreign-exchange. Adjusted net income was $180 million, and diluted earnings per share was $0.36. Adjusted net income for the quarter excludes the after-tax impact of $75 million or $0.15 per diluted share for purchase accounting adjustments, acquisition-related costs, and certain significant items.

As we mentioned on last quarter's call our fourth quarter reported results include $13 million in one-time charges related to the integration of our branded generics R&D into our global R&D operations, the divestiture of certain assets in our aquaculture business, and our decision to exit the manufacturing of intermediate ingredients that we believe we can source more effectively from third parties. Also, as I mentioned on our last call, during the fourth quarter, we continued to assess the carrying value of certain assets. As a result, we took a one-time charge of $17 million to reflect the impairment of one of our manufacturing facilities.

And finally in the fourth quarter, as we continued the transition to our own shared services operation, we wrote off approximately $17 million of inventory and intercompany accounts that were transferred to us as part of the separation from Pfizer. Because these expenses relate to the periods prior to 2012, and prior to our initial public offering, we do not consider them to be reflective of our current operations, and are therefore excluding them from our adjusted earnings, a non-GAAP measure.

Turning now to our adjusted net income slide, which I will speak to on an operational basis. Again, revenue was up 9%, excluding the impact of foreign-exchange. Companion animal sales grew $27 million or 7%, and livestock sales grew $76 million, or 10%.

Adjusted cost of sales was 35.4% of revenue versus 36.3% in the year-ago quarter. This reflects the impact of a favorable comparison to the year-ago quarter, which included certain expenses associated with establishing our own compensation plans, as well as other items related to separating from Pfizer.

Adjusted SG&A decreased by approximately 6% in the fourth quarter. This reflects good expense control, as well as, similar to COGS, a favorable comparison to the fourth quarter of 2012.

Adjusted R&D expense decreased approximately 1%, adjusted other income and deductions decreased to $0 in the fourth quarter of 2013. This was primarily due to a royalty true-up, combined with losses on foreign-exchange exposures.

Our effective adjusted tax rate for the fourth quarter was approximately 29%, reflecting the jurisdictional mix of income, and the full-year benefit for the US R&D tax credit. And again, on an operational basis, our adjusted net income was $180 million.

Now, onto our segment results. I will discuss these on an operational basis, and it should be noted that segment earnings are pretax numbers, and reported on an adjusted basis.

Beginning with the US, fourth-quarter revenue was $516 million, an increase of 7%. Sales of livestock products grew 8%, with contributions across cattle, swine, and poultry. Cattle products showed stronger-than-expected growth, particularly during the later part of the quarter, driven by the continued improvement of market conditions in the US.

Swine and poultry products continued to benefit from customer acceptance of recently-launched vaccine products. Sales of companion animal products grew 5%, and US segment earnings increased by 11%,due to revenue growth and improvements in gross margin, driven by price and volume.

Now, turning to our Europe, Africa and Middle East region. In EuAfME, fourth-quarter revenue was $330 million, an increase of 9% operationally. Sales of livestock products grew 9%, driven primarily from recently-launched swine and poultry vaccine products, particularly in Germany and Russia.

Sales of companion animal products also grew 9%, and benefited again this quarter from increased sales associated with third-party manufacturing agreements. Excluding these sales, companion animal product sales grew 5%. EuAfME segment earnings increased 24% operationally, driven by revenue growth and expense efficiencies in the quarter.

Turning to our Canada and Latin America segment, or CLAR, fourth-quarter revenue was $223 million, an increase of 8% operationally. Sales of livestock products grew 7%, driven largely by improved market conditions for cattle in Brazil, and by increases in sales of medicated feed additives in poultry.

Sales of companion animal products grew 14%, largely driven by sales in Canada, due to favorable weather conditions, and increasing medicalization of pets in Brazil. CLAR segment earnings increased 24% operationally, driven by revenue growth and expense efficiencies, as well as a favorable comparison to the year-ago quarter.

In our Asia-Pacific or APAC region, fourth-quarter sales were $185 million, an increase of 14% operationally. Sales of livestock products grew 16%. India had strong poultry and cattle product sales. For poultry, this was in part due to the resolution of prior-year product registration issues for several of our vaccines.

In Japan, swine sales benefited from recently-launched vaccines, and China was also a leading contributor, mainly in swine products. Growth in these markets more than offset the negative impact of drought conditions in Australia on sales of cattle and sheep products.

Sales of companion animal products grew 8%, led by good performance for recently-launched products, primarily in Japan. This was partially offset by a decline in sales in Australia, reflecting the benefit in the year-ago quarter of equine vaccine sales from the launch of our Hendra vaccine. APAC segment operating earnings increased 70% operationally, benefiting from revenue growth, expense efficiencies, the timing of promotional spend, as well as a favorable true-up on pricing for certain purchases.

Now let me turn to guidance for full-year 2014. Our guidance for 2014 reflects foreign-exchange rates from late January.

For full year 2014, we expect reported revenue of approximately $4.65 billion to $4.75 billion. This reflects an unfavorable impact of approximately 2 percentage points, or approximately $100 million, related to the year over year impact from foreign exchange.

Our guidance on adjusted cost of goods sold for full-year 2014 is approximately 35.5% of revenue, roughly flat year over year. This reflects the anticipated benefit of price, volume, and ongoing cost saving efforts, offset by the full-year impact of costs incurred to build our global supply functions, as well as among other things, headwinds from unfavorable mix.

Adjusted SG&A expenses are expected to be between $1.43 billion and $1.48 billion. Adjusted R&D expenses are expected to be between $390 million and $405 million.

For the full-year 2014, the midpoint of our guidance implies an improvement in the ratio of the total adjusted SG&A and R&D to revenue of approximately 50 basis points. We are targeting this improvement, despite the fact that 2014 will reflect a full-year of expenses for the stand-alone corporate functions that we are ramping up throughout 2013.

Also, as we pointed out during the first two quarters of 2013, total adjusted SG&A and R&D expense was less than the full-year run rate. As a result, year over year growth rate comparisons for the first two quarters of 2014 are expected to be unfavorable.

Our effective tax rate on adjusted income is expected to be approximately 29% for the full year. This guidance does not reflect the potential renewal of the US R&D tax credit in 2014, and we expected adjusted EPS of between $1.48 and $1.54 per share.

In addition to the FX impact on revenue discussed earlier, our EPS guidance also includes approximately a $0.01 impact in OID from the recent devaluation of the Argentine Peso. For 2014, we estimate pretax charges of between $165 million and $185 million, which primarily relate to stand-up and acquisition-related costs.

Including the impact of these items, our reported diluted EPS for the full-year 2014 is expected to be between $1.15 and $1.21 per share. Our annual guidance reflects our confidence in the diversity of our portfolio, the strength of our business model, and our view of the evolving market conditions for animal health products this year.

In closing, now that we have a year behind us, I would like to provide an update on our perspectives on capital allocation. First, we remain committed to maintaining an investment grade rating, and feel that we would be able to do this, while targeting a leverage ratio, debt to EBITDA of approximately 2.5 times.

In the near-term, we remain focused on completing the stand-up of Zoetis, and incurring our recurring costs in 2014, which I discussed earlier. For 2015, we expect stand-up and acquisition-related costs to be less than half of what we expect to incur in 2014, and we will continue to selectively invest in opportunities to profitably grow our business.

Beyond that, we will look to return capital to shareholders. In our first year of operations as a public company, we increased our dividend by 11%.

As we move past the elevated spend associated with standing up our infrastructure, we believe our free cash flow should support increasing our dividends, at or above earnings growth for some period of time. Of course, this is based on current expectations, and any future increase would be subject to Board approval.

That concludes my prepared remarks, and now we will open the line for your questions. Dina?

Operator, we're ready for questions.

(Operator Instructions)

Chris Schott with JPMorgan.

The first question here, you reported two consecutive very strong top line results, with roughly 9% constant currency growth. I was a bit surprised by the 3% sales growth guidance in 2014, more like 5% constant currency. Can you elaborate a little but more what is happening here, that you are seeing that slower growth?

The second question was on operating margins. I think you mentioned 100 or 150 basis points of expansion this year, despite some unfavorable year-over-year expense comps.

How do we think about long-term leverage in the model when we look beyond 2014 and some of these one-time factors getting behind the Company? Can we think about more in the 150 end or even larger margin expansion opportunities over time? Thanks very much.

Let me take the first question on our revenues position for 2014. In 2013, we had significant growth in two species, swine and poultry.

Swine grew by 4%, and poultry by 10%. We also -- and we think that these two species will have more moderated growth in 2014, much more in line with the market growth.

The second element that we also included in our projections for 2014 was in companion animal. We expected entrants of new classes of molecules in parasiticide.

We expect some additional competition for Rimadyl, generic competition for Rimadyl in the US. And of course this will be balanced with the launch of Apoquel, that also will generate a significant growth.

In cattle, which is the largest livestock species, we expect that in 2014 the cattle ranchers will rebuild the herd, and as a consequence of that, there will be less animals placed in feedlots, and this will have an impact in terms of the sales of our products. Considering all these elements, we think that the projections we're making for 2014 are realistic, and also in line with what we can expect from the market growth. Maybe Rick can provide some details on gross margin.

Yes Chris, I just want to make sure that my numbers were heard correctly, and that I understood the numbers that you discussed. On operating margin, in 2013, roughly, there is a 300 basis point improvement. What I said in my comments was that the ratio of SG&A to R&D in 2014, based on the midpoint of our guidance, is going to be a roughly 50 basis point improvement thereabouts.

And then as we also spoke on the call, gross margin had a modest improvement over 2013, and our outlook there is flat for 2014, and we described some of the reasons that are driving that. In terms of a longer-term perspective, again, we go back to the basic premise, we believe we will grow at or in line with market. We believe over the long-term, our expenses will grow considerably less than that, and we think that the margin from there pencils out.

Operator, next question please.

Kevin Ellich with Piper Jaffray.

Just following up on the underlying market growth assumptions, are you seeing greater use of medications by hog farmers, with PEdV going around the country? And also, with 9 million pounds of beef recalled out in California and a plant shutdown, doesn't that make the existing cattle herd even more valuable, so that could also drive the increased use of medications?

Thank you for the question Kevin, and you are right. We expect that with fewer animals, that these animals will have more value to the cattle producers. And we expect that also they will ensure that they have the right healthcare protocols to keep these animals productive.

But this will be compensated in some way because of the fewer animals that will be available for placement in 2014. Based on the assumption that the ranchers will start rebuilding the herd, and this will keep these animals for this purpose.

In terms of greater use of medicines because of PEdV, what we have seen is that definitely with PEdV, it's reducing the number of animals available. I mentioned that the sows affected by the PEdV in the US, it's about 30%. And these are expected to have an impact, of a reduction of 4% in terms of total animals available in the market.

What the producers are indicating, is that the way that they expect to compensate these fewer animals, it will be to have these animals longer, in terms of reaching higher weights, that will also contain the number of pork available to the market. This may represent an opportunity if they keep these animals longer, also to keep these animals under certain healthcare protocols. Although when they reach a certain weight, they are less vulnerable to infections or other diseases.

Operator, next question please.

Louise Chen with Guggenheim.

We had quite a few calls this morning from investors, regarding the guidance that you gave for 2014, and maybe some more explanation behind it, but I will just delve back on that again. I am curious how we should think about modeling your top line and bottom line growth, longer-term.

I understand some of the headwinds this year, and should we just be patient? That 2013/2014 there are some meaningful headwinds, and then after that we should get to the growth rates that people had expected at the time of the IPO, which is more 6% to 7% top line and double-digit bottom line growth.

In terms of revenues, we see that Zoetis will be growing in this five-year companion animal growth, in line with the market. And the market is expected to grow around 5% to 6%. We also expect that our expenses will be in line with inflation, and we also expect that we will generate gross margin improvement over time.

Let me provide maybe some comments on why we are not meeting our objectives for 2014 for gross margin. One element, it's the mix of products.

In 2013, we had significant growth in swine and poultry. Especially in poultry, the margins are lower.

And this is also creating some mix challenge in terms of gross margin. We also had some geographies, that also impacted the mix of geography, are also impacting our geography We are growing faster in some of the emerging markets, and these emerging markets still have lower margin than more developed markets.

The third element is that in 2014, we are facing some unexpected synergies, like freight. Again, it is something that definitely we are working, and we expect this is something that will not have long-term impact, since we will be able to achieve our targets in terms of these kinds of costs.

We see that also, some of these additional impact in cost will be offset by cost reductions, also will be offset by pricing. But there are some elements that also are affecting our gross margin improvement in 2014.

We were expecting to generate significant growth out of a product that has significant potential, it is called Improvest/Improvac. This product has been extremely successful in Brazil, and we were expecting the same kind of success in Europe and the US.

Unfortunately the market is taking longer in these two important regions, and these are having an impact in terms of revenues, but also in terms of volume that we will be absorbing, significant cost and our operations. We still remain convinced that this product is really providing a significant opportunity, not only in terms of replacing surgical castration in pigs to eliminate boar taint, but also adding feed enhancement, that will result in higher productivity for swine producers.

This product has a significant opportunity, and we expect that this product will generate revenues, and also a positive impact in our gross margin in the future. We expect that our actions that we are taking in 2014 will result in cost of goods improvement in 2015 and 2016, and also beyond. So we are committed to improve our gross margin, and we see that this situation in 2014 is a temporary situation, that we expect to halt in the future.

Operator, next question, please.

Alex Arfaei with BMO Capital Markets.

Could you please talk about business development strategy, and whether you are primarily focused on livestock or companion animal businesses, it would seem there a number of promising companion animals, which add new assets out there. And if I may follow-up, your revenues this quarter benefited from, again, from third-party manufacturing agreements.

How should we think about the opportunity in 2014? Thank you.

Let me start with the business development, and also Rick can provide comments on the third-party manufacturing agreements. In terms of BD, we will remain focused on ensuring that we maximize the opportunities that we have in our portfolio, and also the opportunities that we will generate through our investments in R&D.

We will not exclude opportunities in terms of adding perhaps for a third-turn species or third-turn classes, in where we can fill gaps, or also expanding our presence in some of the markets. But definitely it is something that we will consider opportunities as they come.

There will be two conditions, that always will be in our analysis. One, the strategic fit, and second, that the differentials have supported that position.

We have not really focused on either livestock or companion animal. I think it's something that we will be open to any opportunity that will meet these two conditions.

And then Alex on the question on the third-party manufacturing, to remind us again of what that is. We are obligated to provide supply for some of the divested products, plus we also now have a small component of third-party manufacturing that we do on behalf of Pfizer.

We do expect that the amount of this volume for us will decline around 15% year-over-year probably in the early $50 million, to somewhere in the early $40 million. And we have not made a long-term decision about the extent to which we will decide to continue on some of these contracts as they decline, or what kind of partnership will remain with Pfizer, or in the long-term, where this fits into our overall manufacturing operations.

Operator, next question please.

Robert Willoughby with Bank of America.

It is Erin Wilson. Juan Ramon, going back to the revenue growth questions in the press release, and in the prepared remarks, you state that the 2014 outlook supports your overall long-term goal of faster than market growth, but the guidance seems to call for at least in line if not below the industry trend.

What is the disconnect there, in light of the new product launches, and recent strength you have seen? My second question would be, just broadly speaking to the slower growth in livestock markets and inherently lower margin business, positively impact the product mix from a gross margin standpoint? Could there be upside to your estimates there?

In terms of our performance against the market, the information available today, it's the third quarter year-to-date, and where we have been growing significantly faster than the market in 2013, and we expect also the fourth quarter to confirm these results. If what we -- always communicated, it is our commitment to grow in line faster than market, on an companion animal terms.

And if you take our growth in 2015, and also with the predictions we are making for 2014 we think that this growth in companion animal growth will be faster than the market. We expect that the new products will add some additional revenues, and Apoquel is a very good example, but you need also to keep in mind that in 2013, we also launched a significant number of products.

We generated very positive growth of new products in 2013. And I think it is something that definitely we are convinced, that at the end of the year, so the growth that we will be generating will be supporting this growth, faster than the market, or in line with the market.

The second question was is lower livestock growth positive for growth in gross margin. There are many different elements in these statements.

One, I mentioned that we are growing now faster than -- in poultry and swine, than in cattle. And this is having an impact in our gross margin.

Second element, we have also been growing, at least in 2013, so we have now a higher base of medicated feed additives. Also, with the lower margin than pharmaceuticals or vaccines.

And the third element is growth in emerging markets. And this growth in emerging markets, there are two components, definitely the companion animal, but also, they are growing very fast in terms of livestock. All these elements are driving our gross margin performance in 2014.

Rick, anything you want to add? Any other comment?

The only small amount of color I would add is, just if we look also, Erin, I think you had said the lower growth that we might be anticipating on a relative basis year-over-year in livestock would be an improvement in margin. I think Juan Ramon answered that. I think also, it's worth pointing out, that in companion animal we have new products, and we also have some new competitors, and those things are balanced in our forecast for the companion animal growth in 2014 as well.

Operator, next question please.

Mark Schoenebaum with ISI Group.

Thanks for all the very clear commentary. Rick, I want to make sure I've got some math correct. You mentioned -- I think you I heard you say something about $100 million currency impact to your 2014 guidance.

Can I clarify that? Should we be adding -- if we wanted to do constant currency, should we just be adding $100 million to your revenue guidance?

If I were to do that, to try to create more of a like-for-like comparison, it looks to me like your operating margins in 2014 would expand not 50 basis points, but about 130 basis points. Is my math correct, or was there some kind of offsetting impact on the OpEx line, from the fluctuations you expected in currency?

And the follow-up is, if your revenue guidance proves conservative, if it were, as analyst investors, should we still look at your SI&A and R&D dollar guidance as the number that you are going to shoot for, even if you get lucky, and say, your revenue growth is 2% or 3% higher than what you are projecting? Basic and probably detail.

Mark no problem. Let me start back at the very beginning of the question. At the average rate of FX for us over the course of 2013, we are giving you this range of about $100 million of lost revenue.

If we were to apply the average rates in 2013 across how we expect the numbers to roll out for us in 2014. Exactly how that falls through the P&L, there are a lot of different ways that you can do it. We haven't really worked out that math for us, but you can use the P&L as an indicative model or haircut that in a number of different ways.

And in terms of, to the extent that we get more or less revenue, what is going to be the impact on SG&A as a percentage of sales, I think it depends on a lot of factors. We can find ourselves in periods of time where revenue growth is also being accompanied by more promotional activities, so it is hard for me to give you a fixed line there.

I also want to make sure that I am not misquoted on the 50 basis points that I spoke to. Again, in my prepared remarks, I was simply saying that if you take the midpoint of the guidance for just SG&A and just R&D as a percent of revenue, you'll see that there we are targeting in the midpoint range a roughly 50 basis point improvement. I am simply pointing out that in a year when we are facing peak to synergies, as part of the stand-up from -- in our stand-up efforts, we are still showing you, at least in this ratio, cost improvement benefits.

And then I would also point out that we had negative SG&A growth in 2013. So if you add up 2013 and 2014, I think you get a year representative of what Juan Ramon has described as -- an average year, that is representative of what Juan Ramon has described as our longer-term goals.

Operator, next question please.

John Kreger with William Blair.

A couple of quick follow-ups on the underlying assumptions for the 2014 guidance. Are you assuming any improvement in the economic environment, particularly on the companion side?

And what about the price versus volume mix, that underlies that 2% to 4% revenue growth expectation? Thank you.

The answer to that is not completely straightforward. We expect some economic improvement in some of the European markets. At the same time, there are uncertainties at this point, in some of the emerging economies.

And in these economies, I think it is something that, at this point, we are taking some questions in terms of growth, that these economies will generate, and also the impact that this growth will have in the animal health industry. That is why we are still providing this range, that is reflecting these uncertainties that we still have. Not only related to the economies but also related to some environmental factors that can be affecting our business.

On the second question, it's what about the pricing volume? So in 2013, we generated higher volume than price in our total revenue growth.

I mentioned that on the 7% operational growth, 5% was volume, 2% was price. We expect that in 2014 the growth will be balanced between price and volume.

And definitely we see opportunities of price increases in both livestock, and also companion animal, and also both in developed and emerging markets. Although we see that emerging markets will have a much more moderated price increases been developed markets.

Next question, please.

David Risinger with Morgan Stanley.

I have a couple of questions, mainly about the financials. First, with respect to FX, Rick, could you just talk about the impact of FX on the bottom line in 2013?

And then, obviously, FX benefits your operating expenses in 2014. Is there any way to characterize the FX driven reduction in operating costs for 2014?

And then separately, with respect to corporate costs, could you just remind us where your corporate costs are, or where they were in 2013? And how we should think about that number trending over time, and whether there are any meaningful cost reduction opportunities, or not? Thank you.

Thank you for the question, David. Let me start with the FX piece.

The FX impact for 2013 was considerably less than what we are seeing in 2014. And yes, there is an FX opponent that would be somewhat of a benefit to SG&A, but less so than you might think, depending on which geographies we are making investments for growth, and as well, less so from an R&D perspective.

And then, I am sorry what was -- the second question was the -- how to look at our corporate costs. One thing that is between 2012 and 2013 is a reallocation between what is in R&D, which is part of our corporate function, and what was in an unallocated overhead bucket in our carve out financials, and that helps you see our 2012 versus 2013 change.

And then as we have spoken, the other parts of what would call our corporate costs are a couple of things. The build-up of essential organizations for manufacturing, so we have built our own global supply points, and then as well, those functions that resided in Pfizer, where there was no analog in Zoetis, so tax, treasury, FP&A to a large degree, internal audit and so on. As well, the IT function.

And the majority of the standup delta if you will, maybe I can use the word dissynergies have been occurred to date, and I think we have done a very good job of offsetting them. They don't -- on a -- where you will see the largest impact, if you will, is comparing the rate of growth in SG&A, for example in Q1 of 2014, to the rate of growth in Q1 of 2013.

And that is because, in Q1 of 2013 and Q2 of 2013, we called out that the SG&A plus R&D as a percent of revenue was below what we expected the run rate would be for the full-year, or even our indicative run rate. When you make those quarter-over-quarter, year-over-year comparisons, you will see somewhat unfavorable growth, but it will certainly balance out pretty will as we get through the rest of the year.

And then going forward, again I think that the operating leverage is going to come from the basic tenet that we keep going back to, growing at or faster than the market, and controlling operating expenses to be roughly in line with inflation. And modest gross margin improvement.

Operator, next question please.

Jami Rubin with Goldman Sachs.

This is Ariel Herman in for Jamie. Follow-up on two themes.

First, is there an updated view on your thoughts around M&A and further industry consolidation? And you see yourself as participating with that? If so, do you need M&A to sustain margin expansion?

And separately, going back to the revenue outlook, I understand there is some one-time events in 2014, such as the moderate growth in swine and poultry. But 2013 also had some one-time events such as drought, that I would have thought would have made good comps for 2014.

Thinking longer-term, how do you get back to that 5% to 6%, and how should we think about growth in each regional segment, within that overall Company growth? Thanks.

Thank you Ariel for the question. Let me answer first the second question, on the projections for 2014 and the different impact of the drought.

The drought of the US in 2012 had different impact, depending on the species. Definitely on swine and poultry, we saw that the impact in these two species in 2013 was much softer than we expected. In fact, these two species recovered very fast, even in the first half of 2013, from the drought, because of mainly at that time, the meat price grew significantly, and then in the second half of the year, the prices remained high, but also the prices for corn were much lower than in 2012.

In these two species, the drought had very little impact. In fact, swine and poultry for us grew by 12% and 10%.

It is a different -- the situation for the cattle industry. So the cattle industry in the first half of 2013 was affected by the drought, but had significant recovery in the second half of the year. In total, as I mentioned, these species grew by 3% in our revenues.

What we expect in 2014 is to have a full year of normalized weather conditions, but because of the projections for cattle are now positive, the ranchers have decided to increase the heard. The result of increasing the heard, as I mentioned, will be less animals placed in the feedlots, where the majority of the products are used, and then, the better situation in terms of weather conditions will be in some way offset by the fact that there will be fewer animals to treat in the feedlots.

If I move to the first question, in terms of my views in terms of M&A, definitely, there is been a lot of news recently from other animal health companies. I think we will not enter in speculating what will be the outcome of all these strategic reviews that other competitors are making.

We are convinced that our internal growth will be supporting our objective of growing in line, or faster than the market, in this companion animal growth in medium to long-term. And we see maybe opportunities on some of the complementary spaces, or some of the products that will be filling gaps in our portfolio.

And one important element is that we already have market share, which is close to 20%, 19%. This can create some challenge in terms of antitrust, and it is something that we will really -- understanding and monitoring all the different decisions that our competitors will be making, and then we will decide, depending on what will be available in the market.

Operator, next question please.

Liav Abraham with Citi.

Just one quick question on your tax rate. Rick, do you see any opportunities to reduce your effective tax rate going forward, and is that a focus for you at all? Thanks very much.

Thank you for the question. We get that a lot. Tax is obviously for a number of reasons are out in the -- are in front of us quite a lot.

I would say that we are seeing the opportunity for some marginal lowering of the effective tax rate, just based on the good cash flow generation of the business, and what we see our future needs are. In terms of what the ultimate degree of freedom is for us to change our tax rate, we are pretty much where we are going to be.

Plus the benefit of the R&D tax credit, which we would like to see at some point during 2014 and perhaps could add the opportunity to lower the 29% by up to about 50 basis points. I think there, that is going to be a good long-term estimate of what the effective tax rate is for Zoetis.

Operator, I think we have time for one more question, please.

David Krempa with Morningstar.

Just a quick follow-up on that tax question. Would you ever be open to an inversion that would significantly lower that tax rate, but might also bring in some human health products?

That's an interesting question. I can understand the reason why it is asked, and obviously a number of companies have found something in that strategy that works for them, but it's not something that we are contemplating.

Thank you, that concludes our call. Have a good day.

Thank you very much.

Thank you, this does conclude today's teleconference. A replay of today's call will be available in two hours by dialing 1-800-688-7945 for US listeners, and 402-220-1370 for international. Please disconnect your lines at this time, and have a wonderful day.