碩騰 (ZTS) 2015 Q2 法說會逐字稿

Good day and welcome to the second quarter 2015 financial results conference call and webcast for Zoetis. Hosting the call today is John O'Connor, Vice President of Investor Relations, for Zoetis. 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. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation.

(Operator Instructions)

It's now my pleasure to turn the floor over to John O'Connor. John, you may begin.

Thank you. Good morning, and welcome to the Zoetis second quarter 2015 earnings call. I am joined today by Juan Ramon Alaix, our Chief Executive Officer; and Paul Herendeen, our Chief Financial Officer.

Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and 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 statements in today's press release and our SEC filings, including, but not limited to: our 2014 annual report, on Form 10-K, and our reports on form 10-Q. 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, August 4, 2015.

We also say operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon.

Thank you, John, and good morning, everyone. Today, I will discuss our performance for the second quarter and provide updates related to the integration of Abbott Animal Health, the performance of new products, and progress on our operational efficiency program. Paul will then will provide additional perspective on the quarter, and comment on our guidance for 2015, 2016, 2017. All the growth rate that I'm discussing today are rational, excluding the impact of foreign currency. I am very pleased to report that this quarter, we generated very strong revenue and adjusted net income and growth based on the strength and the diversity of our business. The growth this quarter was driven by the positive performance of our portfolio, in both companion animal and livestock. The addition of Abbott Animal Health and the growth of APOQUEL and other new products and the continued discipline on operating expenses.

In the quarter, we generated operational growth of 11% of revenue and 20% in adjusted net income, delivering adjusted diluted EPS of $0.42 per share. This performance continued to demonstrate our long-term valuable position, and grow adjusted earnings faster than sales. In the quarter, APOQUEL contributed 2% of revenue growth, or $19 million. Abbott Animal Health accounted for 2% of the revenue growth, or $25 million, and another 2% came from new product launches. The remaining at 5% is related to [swine total] performance including a 2% price increase.

In livestock, we view 8% even by some growth in cattle and swine. Cattle then grew 9% with continued favorable market conditions in the US and Brazil, partially offset by the impact of the [full] reductions in [Australia]. Swine products also made a contribution this quarter, growing 14% based on strong sales in the US and China. In the US, the markets for swine [population] continued for building after the original impact of PEDv. We continue adoption of our key brands and a positive impact in terms like our better (inaudible) ACTOGAIN. Quarter revenue grew 1% reflecting new product launches, which were partially offset by the customer rotation of medicated feed additives in certain Latin American markets.

Turning to companion animal. Revenue grew 15% due to additional sales from the Abbott Animal Health and the continued performance of key brands such as APOQUEL in the (inaudible) space and some whole and (inaudible) production insights. We feel very good about the progress we have made on the duration of Abbott Animal Health and we expect to achieve the target we've set from the condition in terms of revenue and cost percentages.

Now switching to Sarolaner operational updates. We completed the go live profile of our ERP system in the US at the beginning of May as scheduled. From a systems and control point of view, the completion was successful. However, due to a large number of our customers electrically impacted by our change of systems, we've had customers experiencing a disruption in their services. The variability of these shipments and these issues have been resolved. And customers should see the level of our service improving and returning to the quality they expect and deserve from us.

Foreign presentation in other countries will remain on track to complete the growing ERP program by the end of Q1 2016. As for the Abbott growth, since the beginning of the year, we've had significant increase product supply, and today more than 13,000 veterinarians have access to APOQUEL in the US and more in markets outside of the US. We have the manufacturing capacity to meet the future demands of the public but the process of scaling up the active pharmaceutical ingredient, or API, as we [meet challenging].

We have now made the necessary changes to improve the process and we are continuing to ramp up the manufacturing. While the situation is improving, we are not yet meeting all our market demand and our first priority is to manage a solution of available supply to our locations and to fulfill all of this for our current customers. With that in mind, we have temporarily suspended taking new first-time customers orders for APOQUEL in most markets. We remain committed to making APOQUEL available to more new customers as soon as possible. [Meeting with these change in our operating] expectations, we now expect revenue for APOQUEL to be about $150 million in 2015 and increasing really early in 2016. The productivity of our investment in new product notion and following the product development continue to support our future growth at (inaudible).

The US Department of Agriculture has granted a conditional license for a first trial of first-of-its-kind antibody therapy that targets interleukin-31, or IL-31, to help reduce clinical signs associated with atopic dermatitis in dogs. It represents another major breakthrough from our R&D platform based on new scientific insights into the pathway of allergic skin conditions. We continue to receive approvals for new indications and formulations of our key products and to expand many products into new markets. In the second quarter, for example, we received approval of a new label claims in the US and European Union for CERENIA, an antiemetic to treat and prevent acute vomiting in dogs and cats.

We continue expanding the breadth of our FOSTERA swine vaccine franchise. We have new label claims in Canada and Latin America. And DRAXXIN 25, an injectable anti-infective which will tap an important market for swine, was launched in additional European markets, such as Spain, Italy, and Portugal.

Now to chief concerns, comments and updates on the operational efficiency program we announced that last quarter. As you will recall the program we announced it to [sign to simply file] operations, improve our cost structure and better allocate the resources for future long-term growth. We expect to generate cost savings of at least $300 million in 2017 and improve our adjusted EBITDA margin from 25% in 2014 to approximately 34% in 2017, as we review complexity and achieve greater focus on key brands and markets.

Our visual leader is moving ahead with elimination of approximately 5000 SKUs from our total of 13,000, and changing our solution model in about 25 markets. Approximately 45 countries will remain with our direct sales model and generate 95% of our revenue. Meanwhile, we have begun the process of selling or executing seven manufacturing sites. And another few sites will be sold or exited in a later phase as part of our supply network strategy. We've also started job reductions as we reorganize and streamline our operations. We are making very good progress on implementation of our operational efficiency program. And I'm very optimistic about delivering or exceeding the target of $300 million in savings by 2017.

While we are making these changes on efficiency, we remain absolutely committed to the moment that has been driving our success. Our direct selling approach and world-class salesforce [creating] us from the competition. Our investment in relation, the drive breakthrough products and also ensure the lifecycle development of our portfolio, and our high-quality manufacturing and supply.

In summary, we deliver excellent second quarter operational resource; with various sources of revenue growth across our portfolio. We remain well-positioned for profitable growth based on our core capabilities, diverse portfolio, and focus on [expense control]. And we are seeing new initial progress on the efficiency program that will make us even more competitive and profitable for the long term. I will now ask Paul to provide some comments on the quarter. Paul?

Good morning. The financial highlights of the quarter are regular growth and cost discipline. Revenues were up 11% operationally compared to Q2 in 2014 with growth coming principally from the addition of acquired Abbott Animal Health products, the ramp up of APOQUEL sales and strength in our livestock portfolio.

With respect to operating expenses, we especially took ownership to reduce expenses in order to preserve our 2015 profit guidance in the face of currency headwinds and animal health growth of operating expenses to 2% on an operational basis compared to the prior-year quarter and keeps us on track to deliver on the 2015 portion of the efficiency initiative that we announced back in May.

Strong revenue performance in animal gross profit margins mainly due to the favorable impact of FX on cost of goods sold and expense control enabled us to report very strong adjusted net income growth of 20% operationally and 14% on a reported basis. While [Europe looked no mean], we know what's coming next. While good performance in the 98% window looks great in the headline, we think about our business in terms of the year, or even years. We don't guide to quarters and we don't manage the quarters so please view this quarter as a strong quarter and view it as what it is, an indication that we remain solidly on track to deliver our 2015 guidance and beyond. With that as a backdrop, I want to note that we narrowed our 2015 guidance towards the upper end of the range. Good stuff indeed.

Our FX rate and I want to, again, call your attention the impact of FX on our reported results. Foreign exchange rates continued to mute our reported revenue and profit growth. FX rates reduced our reported sales by some $106 million compared to Q2 of 2014, or roughly 1,000 basis points, while adjusted net income growth was reduced by $12 million, or roughly 600 basis points compared with the prior-year second quarter. We measure our business and measure our performance on an operational basis or on a constant currency basis and on that basis, we delivered. As part of the operational efficiency program we announced in May, we consolidated from four of the reporting segments to two: US and International. From here forward, our financial reporting will reflect this new structure.

A few weeks ago we issued and 8-K to provide you with a historical view of our 2014 and [first] quarter 2015 results in this new reporting structure and I hope this helps you update the financial models and prepare for today's call. The consolidation of our business into two segments will reduce the cost and complexity of our operations and also improves our decision-making and accountability at the local market level where we drive value.

It's real concerns that the consolidation segment might reduce visibility into our performance. Let me say that we believe that the revised disclosure providing revenue details on most on -- excuse me, providing revenue details on our most important countries rather than a somewhat arbitrary geographic grouping, should give you better visibility into the results and how we drive our results. And to at least organize the leads, you will see revenue for the US and international segments as well as additional breakdown showing revenue for our top 11 international countries. This gives you visibility into the markets that account for nearly 80% of our sales. Approximately 20% of remaining revenue are being grouped and reported as other developed markets and other emerging markets. I will caution you that with the increased granularity of the revenue we're reporting, you will see quarter-to-quarter fluctuations and I would not read too much into that if you are looking at a single quarter in a single market in isolation.

One of the strengths of our business models include geographic diversity of our revenue and profit streams, particularly in livestock. We participate in global markets and strength and weaknesses in individual markets are generally offset by performance in other markets. Finally, we also provided an enhanced disclosure of the two segments, showing revenue, cost of sales, operating expenses and pre-tax earnings. I hope you will agree that our new financial reporting model is an improvement over the prior model.

Let me call your attention to a few highlights from the quarter. Juan mentioned this earlier but it's worth repeating because it's a great way to illustrate the ways in which we can grow our top-line. [Top-line as we knew]. We delivered operational growth of 11% in the quarter, of which 3% was unit growth of in line products, 2% was from price, 2% was from growth of APOQUEL, 2% was from the additional acquired Abbott Animal Health products and 2% was from a range of new product introductions. I need to go second quarter, we covered all of the ways we certainly can deliver operational revenue growth.

Next, looking at the US, very strong growth of 17% over the prior-year quarter. We delivered growth in all species: companion animal, cattle, swine, poultry, and equine. In companion animals, the big drivers for the additional (inaudible) Abbott products and APOQUEL. In cattle, we had a continuation of favorable conditions to supporting use of our premium products and we increased sales of the ACTOGAIN. In swine, (inaudible) sizes are recovering from the PEDv outbreak and you had the positive impact of new products in the portfolio, the PEDv vaccine and [medicine].

Finally, poultry grew largely from the reintroduction of our ZOAMIX product. In the international group, which grew 6% operationally, the top three countries contributing to new growth for Brazil, up 9%, mainly due to the favorable conditions in the livestock segment and new product launches; China, which was up 26%, with our livestock business benefiting from higher anti-infective use in some key swine accounts and growth in companion animal, driven by from momentum from (inaudible); and then finally in the UK, which was up 12% based on strong performance of stronghold and the addition of the Abbott Animal Health products.

Moving to species international group; livestock was up 6%, with cattle and swine offsetting lower sales of poultry products. Companion animal group, 8% operationally, primarily from sales of APOQUEL in Spain, India and Germany. A pick-up in sales of [Cydectin] products in Western Europe, Australia, Canada and China, and strong vaccine sales in China. I should note that other emerging markets grew 10% operationally and that included growth in Venezuela. You will recall that we are reducing our activities in Venezuela pending an improvement in the economic environment there for multinational companies. We're slowing down on inventories in the country and we will limit our future exports to Venezuela. Accordingly, sales in growth in this market will trend downward over the balance of the year and continue into 2016 at significantly lower levels. The impact of our reduced emphasis in Venezuela is reflected in our guidance for 2015, 2016 and 2017.

Let me turn you to our operational efficiency initiative and I will give this from the finance guy perspective. I will start with the punch line. We are on track to deliver our target of at least $300 million of operating expense reductions by calendar 2017. As we implement the changes needed to deliver those savings where we will intact the interconnected capabilities with (technical difficulty) advantage, our industry leading direct sales force, our highly productive R&D engine and our global supply chain.

When we enter 2017, we will do so with a direct presence in all of the markets around the globe that matter. And we will be promoting a portfolio comprised of the products that matter to our customers and have the best prospects for delivering revenue and profit growth. We want to be transparent with we respect to one-time costs and I want to call your attention to targets in the second quarter and broken down into three buckets. First, the standup and other one-time costs, which are mainly associated with our separation from Pfizer totaling $39 million in the quarter. The lion's share of the standup cost should be behind us at the Q2 of 2016. Next, we recorded $263 million with costs associated with operational efficiency initiative, mainly from severance in (inaudible) attributed by the changes to our organization. This included about $25 million in non-cash charges. And, finally, there's a bucket for our supply network strategy which had $15 million of charges as we're still in the early stages of this initiative. You can see on our webcast line the current estimates of one-time costs expected to be recorded in 2015 to 2017. Please note the cash forecasts for these projects remains the same as our previous guidance.

Next guidance to 2015. Based on our strong performance in Q2, we now in a range for revenue and adjusted EPS towards the top end of our range for revenue to $4.7 billion to $4.775 billion and adjusted EPS to $1.63 to $1.68 per share. With respect operating expenses, as I said earlier, we made excellent progress paring back operating expenses in the first half of 2015. It's real important to note that there are some natural seasonal trends to how we incur expenses. In 2014, we incurred 45% of our total operating expenses in the first half of the year and 55% in the second half, with Q4 being our highest expensed quarter. That's a trend that you'd expect to see continued into 2015 but we expect to have a balance between Q3 and Q4 than in the past which was more heavily loaded in Q4. Please keep that in mind as you think about the balance of this year.

Turning to our longer-term guidance for 2016 and 2017, we are affirming our expectations for 2016 and 2017 and call your attention to the table that's included as part of our press release. While thinking about the longer-term, I want to point out that we assume a constant diluted share count of approximately 502 million shares outstanding. As we said on our last call, but worth repeating, we intend to use our share repurchase program to at least offset the dilution related to the equity-based compensation that we provide to our colleagues. And I want to reiterate that the efficiency initiative will trigger an acceleration of some dilution under those plans. During second quarter we repurchased 2.1 million shares for $98 million, an average price of $46.19 per share. Next, we saw that we recently filed on shelf registration statement. While we have no immediate plans to raise capital, the shelf provides us with the financial flexibility and access to capital markets quickly and when and if appropriate.

Looking now ahead over the next six quarters or so, we had a number of calls with our cash including our standup cost, the cost of implementing the efficiency initiative, our dividend, ongoing share repurchases and a $400 million debt maturity in February of next year. So it makes sense to be prepared for that, right? That concludes our prepared remarks and we will now open the line for your questions.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Good morning and thanks for taking the question. One, Ramon, just wondering if you could give us a little bit more detail behind your comments on the APOQUEL supply and what is going on with the ERP implementations with the bills billing issues?

Okay, I will answer the APOQUEL question and then I will ask Paul to provide details of the presentation of the ERP, not only in the US but also in other markets in where we are implementing this new system for us. So in terms of APOQUEL, as I said, we were able to increase significantly the supply from equity but still we are facing some challenge in ramping up on the manufacturing of API.

In API, as we explained in some of the comments, it's a very complex manufacturing process and we had some delay in terms of permitting all the needs for finished goods. Now we have a process that, in our opinion, will meet the demands of the market and we expect that very soon that we will be able to meet all the market demands in our expectation.

In 2015, as I said, we plan to sell about $150 million, 1-5-0 and that will significantly increase the revenues in 2016. I'm very confident that the situation is under control. We have all the capacity that we need to use the API and also to produce the finished goods in very soon the market will start getting all the needs from our customers. For now Paul will provide an update on the ERP.

Great, thanks, Juan. I got an e-mail here that said it sounded like I was talking to through a tin can so I changed microphones. I hope this is better sound quality for everybody. Let me start by saying when we went live with the implementation of SAP in the US at the beginning of May, from high level, the go-live was and continues to be a success and that's not to say that everything is perfect.

I would say on the good side, there is one rule reference and we have full control of our key business processes and we have full integrity of our financial information. We have work to do as in addressing the ways in which our system changes has impacted on our customers. The US segment of our business, our systems interface with tens of thousands of customers and the overwhelming majority have been systems working well but that doesn't matter if you're a customer where our systems change has led to issues with respect to you, you being the customer.

So addressing all of those issues and it continues to be a top priority for us and we will continue to commit resources for resolving outstanding issues. And I can assure you and I'm sure others on the line, including, I'm sure, some of our customers this is something that Juan and I think about every day.

Last thing on this, I hope, is I've been involved in a number of SAP implementations and all of them have been successful and none of them have been without bumps in the road. We are going to call this implementation a success where our customers are happy with the level of our customer service and we have work to do there and we are on it and we are on it every day.

Next question, please.

Louise Chen, Guggenheim.

Hi, thanks for taking my question. Paul, I don't -- I now you don't manage to the quarters but I was curious how we should think about third quarter and fourth quarter maybe more qualitatively in terms of EPS progression because you did announce a meaningful beat in second quarter but you didn't raise your guidance as much is the beat? Thanks

Yes. Thanks, Louise. It's Paul and I'll obviously take that one.

A couple of things; let's look at the year, and let's think about it in two halves. Please keep in mind, and as I mentioned earlier during my prepared remarks, that the net revenue we're actually down on the second half of the year and as Juan had called out, we repaired our expectations to APOQUEL to the lower end of our communicated range.

Still expect we'd sell more than 4 times last year's volume but towards the low end of our former year -- our previously articulated range for APOQUEL. Also bear in mind that you're looking at our business in the second half of the year in our livestock business and that's been chugging along quite nicely, I think, with some very tough comps in the second half of the year. So realistically, from the revenue perspective, we're going to be making our guidance range and we think that's pretty good. We are on track for 2015. We're on track for 2016 and we're on track for 2017.

Now on the expense side, which, I think really has drives more of the question of that around income, the income and where should you be, I did call out in my prepared remarks and phasing around that and it's at 55% of our OpEx in last year came in the second half of our year. We're expecting similar phasing in the second half of this year although less pronounced than you saw last year between Q3 and Q4, so you really need to take that into account in order to think about the full year.

We tightened our guidance range. We continue to be on track and we think for a very solid 2015 with a lot of moving parts and on into 2016 and 2017.

Next question.

Erin Wilson, Bank of America.

Thanks. Can you speak to the recent acquisition of KL Products in the poultry segment and will that be a meaningful contributor going forward?

And how should we think about capital deployment more broadly as it relates to acquisition? How would you characterized your deal pipeline right now and are you looking at both small and large targets? Thanks.

Thank you, Erin, for the question. The first on the KL acquisition. This is a small acquisition but it's an acquisition that also reinforces our presence in the poultry and reinforces our presence also in the revised part of our business.

So we entered into a revised business some years ago with an acquisition of Embrex; these are devices surviving to the heart ratio the ability to vaccinate the eggs. And it's a very efficient device, vaccinating up to 60,000 eggs per hour.

Whether to this device and we are carry the problems but also we have strengthened our position in this part of the business. So it is more consuming but at the same time, we agree on that we also provide some additional relations with our customers and provide some additional service to them. Paul will respond to the capital deployment.

On the capital deployment, I can't resist going through the whole diagram of how we think about capital allocation. We, first and foremost, we look for invest in our business and see opportunities to drive significant value, for example, through increased investment in R&D and sales and marketing. Not to sure we are but that would be our first call because we have a business that can generate organic growth in line or vast in the markets in which we compete with these investments and that would lead to a solid organic growth in earnings.

Now, next step, M&A, it's added into our organic global -- it would be added to organic growth. I think a good example from the Abbott acquisition earlier this year, which is fitting in quite nicely and helping us with our results. We think we, I think at the end of Q1 perhaps, might be even shorter than that but we mentioned that anatomy of line of sight towards completing the standup year, I described us as tanned, rested and ready to look at M&A opportunities that are out there in the market.

And we are looking for leverage in the places where we have expertise and where we can leverage our core capabilities. Broad spectrum, we look at pipeline assets. We look at A-market products, technologies and we look at company acquisitions.

I want to point out that we use a return date sign mark to evaluate transactions. We're looking for deals that add value and cash flow and retail will be value generated to our shareholders as we look to pursue those deals. We've got some capacity to do deals and we are interested in saying that there are certainly areas that are adjacencies for us or areas where we're currently underrepresented and we'd like to do that

And we continue assessing any possibility that we make fiscal sense, we will generate significant from so far revenues and cost with lots of financial volume. Also very important, also we did incorporate in this assessment any antitrust in partners that we may have. That's really where we see M&A as a way to complement our internal growth, our operational growth and internal growth, and that really increase the value to our shareholders.

Next question please.

John Kreger, William Blair.

Hi, thanks very much. My question relates to the atopic dermatitis franchise that you're building.

Can you talk about apropos be positioned versus the new IL-31 antibody? And do you expect to do a full launch of the new antibody now or wait for more clinical data? Thanks

Thank you, John. APOQUEL is an oral treatment compared to IL-31 that will be an injectable. APOQUEL is a pill -- a daily pill that will need to be taken on acute and also chronic conditions of the dog.

While IL-31, it's a mold injectable so it's different and it will depend also on the ingredients and definitely we see both of the problems very complementary. And maybe one much more focus on the first-line treatment and while IL-31 can be used more for chronic conditions and for those dogs that require some additional attention from veterinarians and follow-up from veterinarians.

The full launch of the product will be when we get the full license. So we continue to review the methodologies in the US and through the use of the product, then we gain details on the quickest in the data that will be used to present this information to the USDA. And then finally get final approval for food license in about one year.

Next question, please.

Next question comes from Chris Schott, JPMorgan. Please go ahead.

Good morning and thanks for the question. This is Wendy Lin on for Chris Schott. Congratulations on the strong quarter and the positive business update.

But you've had several big presence, with APOQUEL and the IL-31 and that and they're coming soon. Can you talk about how you think about the anticipated case of additional R&D development? Should we expect another large product launch in every two years and every year?

And then just on business development, you said in the past that you're business development operates are smaller and mid-sized deals and that these opportunities tend to be more therapeutic than geographic-focused in the Abbott deal. Are there any therapeutic or geographic areas that are particularly attractive and are you interested in continuing to building devices or diagnostics? Thank you.

Thank you, Wendy. I will try to go through all of the different questions that you raised, starting with the path line.

Actually, we are very pleased with the productivity of our investment in our R&D. We've been able to use APOQUEL but also to show we are a strong player in terms of the vaccines and we had the opportunity to introduce also the vaccine for R&D in record time.

And now we have also IL-31 and that will also complement our franchise there in the dermatology space and we also expect in 2016, gaining approval for an oral. But we should decide that is an important segment and where we are today, we are underrepresented. We expect to involve both the US and also the European end markets.

Definitely, we are focused on bringing innovation and, in my opinion, now we are showing that we are leaving not only in terms of revenue but also in terms of innovation. And we've been showing many examples of how are our team is delivering this kind of innovation. But at the same time, we are continuing with the part which is equally important which is extending the lifecycle of our portfolio.

And this will represent a significant part of our investment; in fact, most of our R&D budget is allocated to ensure that our products remain competitive and we achieve greater by combining products and increasing the indications and also geographical expansion. So we're very pleased with our product innovation and also with the pipeline. Definitely we like to see that the deliveries of this success continues in the future.

In terms of business development, that you ask, we are now in a situation that we contemplate business development from a provisional first time. We have a significant presence in all of the typical areas, and we have a significant presence in non-geographics and also in other species. But we see opportunities in term basis to fill gaps that also strengthen our position. But it will be only when it makes sense from a financial point of view.

In terms of other areas, we are very open to contemplate opportunities outside of our core business. We have re-entered in some of these complementary spaces, in genetics, in devices and diagnostics. And we will continue assessing the probabilities in these areas that we will reinforce our position.

Before we jump off, as I want to go back to the kind of how you think about the productivity and the pace of things coming out of our R&D in terms because it is one of our competitive strengths. We often talk about and this is in round numbers, everybody, but we often talk about our industry growing mid-single digits over time with, if you talk about it 5%, using as an example, 5% growth industry and you have 2% coming from units, 2% coming from price, 1% coming from new products. Our goal is to deliver more from self-developed products to now 1%.

And again, I don't want to focus too much on one quarter but if you look in our quarter, second quarter of this year, we delivered 2% of our growth year-over-year from introduction, of products that have been in line less than a year. Products like ACTOGAIN, ENGAIN, Relan N, and the PEDv vaccine and CERENIA in the collection of all other products that are in line for less than one year.

There is lots of things that are included in our R&D that are not in the same categories perhaps like an APOQUEL or Sarolaner or perhaps even an IL-31. But we cook along and that growth is, one, meaningful and two, the extent that we can grow faster than market at large, that helps us deliver on one of our valued propositions, which is our ability to grow our sales at a rate faster than the markets.

Next question, please.

Kathy Miner, Cowen and Company.

Thank you. Good morning. I was wondering if you could give us a little more of an update on your outlook for the livestock by species: cattle, swine and poultry? And specifically, as we get through the end of 2015 and into 2016 and also if you could point out where the tough comparisons are for the second half that you mentioned earlier? Thank you.

Starting with livestock, we see that the market conditions are still stable. We'll start with cattle. Cattle, the price of beef, remains high. We see that also the value of the animals that remain are very high and this also creates an opportunity to continue providing both veterinarians and user the product they need to keep the animals healthy and productive.

Swine and poultry are also two species that has been met for funding very well. Swine, in this quarter, represented the growth of 14% while in the quarter, poultry was showing only 1%. But one of the advantages of Zoetis is that we have had presence in all species and we can really maximize opportunities despite of some temporary challenges in one species or one critical area or one geography.

So in that respect, we see that the prospect for livestock remains positive and we see that continually in 2016. You also asked about -- (multiple speakers) Paul will cover it.

The other question was talking about the tougher comparison in livestock compared with last year. You look back in the second half of 2014 and we have launches of our more significant ramp up of ACTOGAIN, ENGAIN, DRAXXIN 25, PC, RIMADYL and things like that in the prior year that were not present in the first half of 2014 and the comparator. So that's what leads to a more difficult comparison year-over-year in the livestock space.

Next question, please.

Alex Arfaei, BMO Capital Markets.

Good morning, folks. Congratulations on a strong quarter.

Paul, can you give us your thoughts and expectations regarding potential tax from the US, which seems to be gaining traction? And specifically for your Company, as we repatriation effect an important driver for your global tax rate.

And to follow-up, if I may, you noted strong performance in Brazil driven by new product launches. Are these products already available in other major markets or can we expect similar launches for these products? Thank you.

Looking at the first one, the tax question is -- tax reform -- they have ongoing dialogue about tax reform, which by the way, will go on forever but it doesn't mean it won't gain some traction but it's important to our structure and the answer is, it could be. To the extent that we have earnings and cash that is offshore and part of our tax structure and currently, we intend to permanently deploy that capital offshore so if the rules changing, with that us, just like any other US multinational company. So we will just have to wait and see on that.

Let me then answer to your question about new problems of action in other markets. We see, in general, that companion animals are more global products. And this is something that when you have products in that segment. We try to do this around the world and this has been the case of APOQUEL and also the case of IL-31 and some of the problems in these category.

In terms of livestock, it depends. You asked about the Brazil. Brazil is a very strong market in terms of cattle but also the cattle usually have raised the conditions and we have been there in terms of definitely new problems. But in some cases very strategic to Brazil and the modest interruption has been meet global for production that has been brought into use in Brazil at the end of 2014.

We continue to try to expand our portfolio as much as we can geographically and definitely, this is part of our potential growth, ensuring that we have all of the products introducing all of our markets. Next question, please.

Mark Schoenebaum, Evercore ISI.

Okay, thank you for taking my questions. This is Vlad Nikolenko on behalf of Mark Schoenebaum.

The growth of this current quarter, I just want to continue the question about the tax. So I'm wondering how much tax optimization or tax planning is already included in the long-term guidance because it looks it's -- like the effective tax range continues to be between 29% and 30% over the next two years. So how much is already tax planning already included in your guidance and if there is any additional potential to optimize further the tax rate in the longer term?

And somewhat related to the question about M&As. Would you just be interested in introductions and for purposes of endorsements, whether they are slightly interested in emerging with a Company that is not thoroughly animal health? Thank you.

Sure and it's Paul speaking. To the first question, how much is included in our long-term guidance? We have a structure, I think we've articulated, that we think we have a solid structure based on the hand that we are dealt here.

It will allow us to maintain a tax rate in the order of, call it, 29%-ish for the playing horizon for us that goes out at least three years that we've provided guidance. We talked many times and we look for every opportunity to grind that rate down and it is a grind. It's not something that there's a magic bullet that we can put in place in the new structure and magically reduce our tax rate by 700 basis points.

We do what we can. And we think we have a good solid, supportable structure and that's what is included in our guidance over the long term.

With respect to an inversion, we talk about this as well. In more -- are precious few companies that would make sense for us to work with. And the second thing that we try to talk about at our Investor Day back in November of last year is based on our particular set of circumstances, we feel that the -- in an inversion transaction, the benefit if you focus on the entity that is currently called Zoetis, that an offshore party could get would be roughly to reduce our tax rate by some 600 basis points.

Lots of folks are suggesting that there are other ways that could be pretty dramatically beyond that. That's our point of view and that's what we said back in November and we continue to believe that. An inverse transaction while it could be helpful, it's not something, that for us, would take our tax rate down into the low double digits or single digits

So we haven't distributed any option but you need to think about this opportunity that can be justified not only because of tax but because of the strategic rationale of the position. And this is something that we include in the assessment. Next question, please.

David Risinger, Morgan Stanley.

Good morning. Thank you for taking the questions. This is Anisa filling in for Dave.

So we have a question on pricing. I'm wondering whether some of this can raise the prices in livestock and companion animal any more then you have in the past?

We are always trying to maximize gross profit and the opportunity to maximize gross profit is coming from increasing the volume, increasing prices and finding the right balance between volume and price. And to that we will find good strategy in terms of prices definitely will see opportunities to raise prices at the higher pace, we would consider that.

We have been quite aggressive in price increases in some of the community markets in where we have high inflation and then because of that, we are also applying high price increases. In the developed markets, what we are trying to also is make sure that we remain competitive. And we are not creating a negative impact in our volume but also we have an impact to revenue in terms of cost of manufacturing. All of these are in part of what we consider in terms of price increases. Next question.

Jeff Holford and this will be our final question. Jeff, go ahead.

Thanks for taking my question. As well as the operational efficiency program being very good for helping the efficiency of the overall business, you did talk on last quarter's call about how this might make Zoetis a much better platform for integrating acquisitions.

Can you just give us a bit more feel of when this process would progress through to the point where less focus on dragging that process and the platform is more efficient and we might be able to consider larger-sized deals because I would assume at the moment with a lot of work still to do on this program, that's not something that should be in the cards right now. Thank you.

Well, the program is running and in my opinion, it's running at full speed. So we will be finalizing all of the orientation and original changes at the end of this year and they will be also a significant work done in terms of reduction of SKUs and also changing the more uncertain markets. I don't see, at this point, that our operational efficiency program is any kind of restriction -- operating any restriction for M&A.

On the contrary, now we have an operation that does appear in the endpoint and we can really maximize the opportunities of any position with the model that will be more profitable. So they will start running very well in terms of our program. I don't see any concern or issue on delivering or exceeding the target of $100 million and at the same time, considering the M&A opportunities.

It's Paul. I can't resist. I have to pile on.

The operating efficiency initiative is not a main factor in our looking at M&A opportunities. The best time to do a deal is when there is an attractive actionable deal in front of you. What I expressed earlier was we are ready and we will be able to take advantage of the situation if it presented itself and we are good to go. Next question, please?

Jami Rubin, Goldman Sachs. Please go ahead

This is Ariel in for Jami. I just wanted to follow up on the M&A question.

Can you discuss your firepower? You mentioned on many calls that you're somewhat cash restrained without operational efficiency. Are you able to do a large-scale deal and can you remind us what your max leverage ratio you're comfortable with? Are you willing to use equity?

And then just secondly, there's been a lot of new flow on restrictions with antibiotic usage in livestock so can you just give -- provide some color at what is the downside risk for your business? Thanks

Paul, do you mind answering the first question and I will take the second one?

Yes, sure. When we're thinking about M&A, let's go back and start and answer the capital structure question first since we have not expressed an upper bound of what we would put on in terms of leverage. But what we have said is we are generally thinking about target floor as roughly 2.5 times of EBITDA in our cap structure and the expectation is that in a normal course now ranging 2.5 to 3.5 times, so we're in that vicinity.

Now what we've also said is that if we have the right opportunity, we would be more aggressive in the use of debt capital in order to be able to complete a value-generative transaction. So what does that mean? It means that we would look to balance our desire to maintain a solid credit profile in excess to capital and how much debt that we put on and having to clip halfway through reducing that leverage over a period of time.

We have the capacity to do good-sized deals within our Company. And as I said, the best time to do deals is when there is an opportunity in front of you and we would use all available efforts in order to be able to fund and conclude a transaction that we felt was value-generative for all of the shareholders

And then let me take the question on antibiotics, what is the provincial risk. We have in our portfolio about 30% of our revenues coming from antibiotics. Out of this 30%, 25% is a companion animal and we see low risk and then the rest is between MSAs and also injectables products which, again, we see less risk than is probably provided to animals in feet.

There are different levels of categories on the use of antibiotics: specific use, controller, duration, and also the different species and where the problems are our use. There has been a significant room for comments in poultry where some of the producers have decided to move away from medically important antibiotics and to use non-medical important antibiotics. We have in our portfolio both and we think we can provide that to our users, mainly poultry activity, there we meet their demand and we meet also consumer demand.

And so in our opinion, I think it is a risk that is manageable and the advantage that I mentioned in many occasions but we have a portfolio which is extremely diverse in terms of species, in terms of geographies and in terms of specific areas. And also very important in terms of specific areas when they move away from antibiotics and they need to increase significantly the use of vaccines to protect this animal.

So again, we have a significant presence in vaccines so we can compensate any kind of impact on certain areas that we've increased in numbers Next question, please.

It appears we have no further questions at this time so I will turn the floor back over to Juan Ramon for any closing remarks.

Thank you very much for attending this call and thank you very much for your questions. And again, we think that we reported this quarter very strong results and we are very confident on delivering our objective in 2015. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. A replay of today's call will be available in two hour by dialing 800-695-0395 for US listeners, and 402-220-1388 for international. Please disconnect your lines at this time and have a wonderful day.