碩騰 (ZTS) 2015 Q4 法說會逐字稿

Good day and welcome to the fourth-quarter and full-year 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.

(Operator Instructions)

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

Thank you, operator. Good morning. Welcome to the Zoetis fourth-quarter and full-year 2015 earnings call. I'm 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 that our remarks today will include forward-looking statements and actual results could differ materially from those projections. For a full 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 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, February 16, 2016. We also cite operational results which exclude the impact of foreign exchange.

With that, I'll turn the call over to Juan Ramon.

Thank you, John. Good morning, everyone.

In today's call, I will provide perspective based on the performance for the full-year 2015 and our goals for 2016. Paul will discuss some of the fourth-quarter highlights, the 2015 net results and our guidance for 2016 and 2017. In 2015, we affirmed Zoetis' reputation as a global leader in the animal health industry with a strong financial performance, continued investment in our future growth and a commitment to creating value for our customers and shareholders.

For 2015, our diverse portfolio enabled us to grow our revenues by 8% operationally. We've had particular strength coming from R&D innovations and acquired products from Abbott Animal Health.

In our three years as a public Company, we have been delivering consistent operational revenue growth. We expect our 2015 to show again that we are growing faster than the industry. We grew our adjusted net income by 24% operationally and grew our adjusted EBIT margin from 25% to 28%, as we continue our focus on greater efficiency in our business.

Even while we are scrutinizing our efficiency, we also continue to allocate resources for future growth. We invested $1.6 billion in 2015 across strategic acquisitions, internal research and development and capital expenditures in areas like manufacturing and supply. Finally in 2015, we returned approximately $370 million in excess capital to our shareholders in the form of dividends and share repurchases. This performance reflects a disciplined implementation of our business plan and our colleagues' recommended dedication to serving our customers.

I'm pleased to say that as a result, we met our guidance for revenue and exceeded our guidance for adjusted net income in 2015. On a reported basis, we had flat revenue growth due to an 800 basis point impact from foreign currency, but we still grew our reported adjusted net income by 13%, thanks to our continued focus on achieving our efficiency goals. Looking ahead to 2016, first and foremost, we are focused on delivering our financial guidance for the year.

We are projecting 2% to 4% operational revenue growth, which reflects the impact of our SKU reduction and changes to our operations in Venezuela. Excluding those impacts, we expect to grow revenues 8% to 10% operationally, with 2 percentage points coming from the regional PHARMAQ business.

Organic growth is expected to be faster than the market again. For 2017, we expect to continue growing faster than the market at the rate of 5% to 9%, as we are confident in our end markets, business model, the prospect for new product launches, improved product supply and progress in our efficiency goals.

We also are confident in our pricing strategy. Our prices are defined by the value that we can demonstrate to our customers, who buy and pay for the product we sell to them, with no influence from third-party payers.

In January, we updated our adjusted EPS guidance for 2016 and 2017 to reflect the impact of the European Commission decision on our tax rate. To date, we are pleased to reaffirm our 2016 and 2017 guidance for adjusted earnings per share despite the negative impact of foreign currency and the change in our operations in Venezuela, which will have a negative impact of $0.06 in 2016 and $0.08 in 2017.

Our second objective for 2016 is to ensure the successful launch of new products that are critical for our long-term revenue growth. We are increasing supply for APOQUEL and also launching in new markets.

This product already surpassed $100 million with a limited availability in 2015. We see significant room to grow from this level with long-term peak sales of more than $300 million.

In another important breakthrough in the area of dermatology, our canine antibody therapy against atopic dermatitis has been introduced in the US to veterinarian and dermatologists. We are preparing for broader market availability later in 2016. Meanwhile, Simparica, a new oral parasiticide, will help us to better compete in the global market of flea and tick problems, a market of approximately $3 billion.

Simparica was approved in the EU later last year. We are awaiting approval in the US this quarter. We expect the launch in both the US and EU in the first quarter of 2016 and see sales ramp up during this year.

Our third major objective this year is enhancing supply and customer service, an area where we fell short last year. As we continue with our supply network strategy, we are making steady improvements, most notably, in APOQUEL. We are also investing to build capacity in product categories that will be an important part of our future revenue base.

In the near term, we believe that the simplified supply change with fewer manufacturing plants focused on expanding their set of products will improve our performance. We also remain on track to complete the global implementation of our new enterprise resource planning system, or ERP, in the first quarter. The ERP will support our overall efficiency goals and will help us better manage the processes and information to run our business.

As we continue to refine these systems over the course of the year, we will make certain we are exceeding our customer expectations. Our fourth major objective is around capital allocation and how we maximize our cost structure, investment in R&D and business development. We are making good progress reshaping our cost structure, as part of the overall efficiency plan we announced last May.

That work has been accelerated and the additional cost savings has been included in our guidance. It is equally important to realize that while we are implementing these plans, we have remained committed to building the three interconnected capabilities that drive our success with customers: unit sales, innovative R&D and high quality and reliable manufacturing and supply. The implementation has been well resourced even as we go through changes in other areas of the Company.

Our investment in R&D continues showing high return and support for our future growth. I'm very pleased to say that our efforts to refresh our portfolio with innovative vaccines offerings, especially in companion animal, are paying off. Last year, we launched a new combination vaccine for dogs across the EU called Versican Plus and it has been very well received by customers.

In the fourth quarter, Zoetis was granted a conditional license from the USDA to market our canine influenza vaccine, the first conditionally licensed vaccine to help control disease as associated with canine influenza, the virus that's H3N2. In December, we received our US license for VANGUARD crLyme, a vaccine that aids in the prevention of conditions associated with Lyme disease in dogs. In November, we expanded our INNOVATOR horse vaccine franchise in the US with a launch of our vaccine to aid in the prevention of leptospirosis.

Meanwhile, in aquatic health, shortly after closing our deal with PHARMAQ in the fourth quarter, one of their new vaccines for salmon received an emergency license in Chile, one of the world's largest farmed fish markets. Our focus on enhancing our portfolio resulted in recent approvals for new indications and formulation of existing products.

In January, Zoetis received FDA approval for an update to the labeling for CERENIA, which allows for intravenous administration during surgical protocols that use medication that induces vomiting. We launched a new formulation of LUTALYSE, a reproductive product for use in dairy and beef cattle in the US. We're also viewed as a partner of choice for all of innovators in the industry.

In January, we enter into an agreement with Anatara Lifescience, a company in Australia. We'll be evaluating their non-antibiotic anti-infective product as an alternative to antibiotics that could treat and control infections in farm animals. Finally, in terms of business development, we'll continue to look for M&A opportunities like we did last year with Abbott Animal Health and PHARMAQ, while we continue with our internal investment in new products, lifecycle innovation and research alliances.

In summary, we delivered an excellent 2015 built in our diverse and market leading portfolio of products for animal health. We are getting significant traction in the business as we continue reducing their complexity, achieving efficiencies and freeing up resources for our most promising growth opportunities. We remain well-positioned as the industry leader based on our core capabilities and single focus on animal health.

With that, let me turn things over to Paul. Paul?

Thank you, Juan Ramon. Let me put an exclamation point on Juan Ramon's overview of 2015, what a terrific year we had.

If you think back to a year ago, we had a number of very challenging initiatives in front of us, most notably the design and implementation of the efficiency initiative that we announced in May and also the roll-out of our enterprise-wide SAP system in our most important market, the US, as well as many other key locations around the world. I can tell you that both of those projects put enormous pressure on the Company, on our colleagues and in some cases impacted our customers. But we were able to stay on task, overcome many challenges and deliver results that we're very proud of.

So let's talk about our performance. We had very strong sales growth in the US, up 13% for the full year, driven by good livestock sales primarily in cattle, the addition of Abbott Animal Health and increased supplies of APOQUEL. In the international business, we delivered operational sales growth of 4%, which reflected good performance in major markets like Brazil and China, which grew 11% and 17% respectively, partially offset by the business changes that we are making in Venezuela.

We reduced our total operating expenses by 1% on an operational basis in 2015 compared with 2014, while growing revenue 8% operationally. We kicked off our efficiency initiative in May and were able to capture meaningful savings in 2015, particularly in the second half of the year when we reduced our operating expenses by 3% on an operational basis while we were growing revenue 7% operationally.

To be fair, the true test of the operating efficiency improvements that we are making will come over the long term. Anyone can cut costs and improve profits in the short-term, the challenge is to improve profits and then grow that larger profit pool at an attractive rate. To do that, you need to be thoughtful about where, how and how much you reduce costs.

We continue to prioritize and spend behind activities that deliver value to our customers and therefore support our growth, mainly our sales forces, our R&D engine and our supply chain. So very good stuff for the full-year 2015.

Let me turn to the quarter, quickly. You can read the details of our fourth-quarter results in the press release and tables, but let me hit on a few highlights focusing on things that may be impactful on our future results, starting with revenue. Again, good operational revenue growth of 6% in the quarter, coming against a very strong quarter in 2014.

Next, improvement in operating efficiency. Total operating expenses were down 8% operationally in the quarter. This enabled us to grow adjusted net income by 29% operationally. Foreign currency continues to be a strong headwind for us, as it is for most multi-nationals.

Changes in FX rates reduced Q4 reported revenue growth compared with the prior-year quarter by some 900 basis points. There's a word for that, it's brutal. Setting aside FX, we feel very good about the underlying drivers of our operational, that is, constant currency revenue growth.

For the quarter, the 6% operational revenue growth included 3% from increased APOQUEL sales due to better supply, 3% from the acquisition of the Abbott Animal Health products, 2% from price increases across the portfolio and 1% for new products. These drivers were partially offset by a 3% decline of in line product revenues. I want to point out that's primarily related to ongoing changes to our business model in Venezuela and other countries like India, which were initiated as part of our efficiency program.

As I've said previously, the changes we've made and are making to our business model in certain markets impacted our second-half 2015 performance and will have impacts on our 2016 revenue growth. But these changes improve our prospects for longer term revenue and profit growth; that's the prize. In the case of Venezuela, you'll recall that we are reducing our activities there due to unfavorable economic conditions for multi-national companies. We've been selling down our inventories in the country, limiting our future exports to Venezuela. This quarter, we decided to revalue our assets and liabilities there based on the free floating SIMADI exchange rate.

In the case of India, we remain committed to our business there especially in our companion animal and poultry businesses with a direct field force; however, we are making changes in our approach to the dairy segment. That segment has not consolidated in the way that we had expected over the last several years. So we are eliminating our dairy field force there and pursuing a distributer partnership to serve those market needs.

It's worth noting that revenue from our other emerging market geography includes Venezuela and India and declined 3% operationally in the fourth quarter. If you want to go back, you can exclude India and Venezuela, other emerging markets would have grown by 12%. The other emerging market segment will continue to be an area where we see some noise in 2016, as it includes the countries that will be most significantly impacted by the SKU reductions, as well as market changes that we are undertaking as part of our efficiency program.

While I'm on the subject of international markets, I know there continue to be general concerns with the outlook for countries like China and Brazil, given lots of recent media reports about their slower GDP growth and their economic outlooks. Generally, demand for animal health products is tied to more stable growth drivers, namely the demand for animal proteins and the increased adoption and medicalization of pets, both of which move as a function of population, income and urbanization.

Fundamentals in the animal health segments of both China and Brazil remain strong and here is the proof. For the full-year 2015, we grew revenue in China and Brazil on an operational basis 17% and 11% respectively. In the fourth quarter, China and Brazil grew 14% and 10% respectively.

Both markets, on a constant currency basis, are growing at healthy rates. The growth prospects of these markets remain solid, so I pose the question rhetorically, why is that? Well, for China, it's two things.

One is the fact that the consumption of animal proteins in China is growing and has continued to grow even in changing economic times. Second is the goal of the Chinese government to see an improvement in the productivity, safety and quality of their food supply.

That means moving from smaller farms producing animal proteins to a more industrialized model. That model requires more animal health products to maintain and drive the productivity of the business. Frankly, as I'm saying this, the second factor should be the first, it's a powerful driver and it will last for many years.

Now turning to Brazil. Brazil is a very developed livestock market. Domestic consumption of animal protein only a part of the equation. Brazil is a significant exporter of meat.

So to the extent that the consumption falls within their borders, they have the opportunity to use exports to maintain the health of their livestock businesses. With the weakness of the real, exports are even more attractive today. So counter to what you might conclude when seeing negative headlines about conditions in Brazil, the Brazilian livestock industry and the supporting animal health industry are quite strong.

Using China and Brazil as examples, the key take-away should be that we operate in an industry that's very resilient -- now, I use that word quite a bit -- even in times of economic stress. That applies to developed as well as emerging markets.

Turning to restructuring charges. This quarter, we had significant one-time costs that drove a decrease in our reported GAAP net income and earnings per share. Let me explain this quarter's major charges in terms of the three buckets that we use.

First, the stand up costs, which are mainly associated with our separation from Pfizer, totaled $34 million in the quarter. That work will be substantially completed by mid 2016.

We recorded $4 million of costs associated with our supply network strategy. We are still in the early days of that initiative. We also recorded $52 million of one-time costs associated with our operational efficiency initiative, which reflected the acceleration of some of those plans and the associated costs into the fourth-quarter of 2015.

Finally, we have taken accounting actions related to the revaluation of our bolivar denominated assets and liabilities in Venezuela this quarter. We believe it's appropriate to change in the SIMADI rate as our exchange rate for Venezuela and accordingly we recorded changes of approximately $93 million in the fourth quarter. In the fourth quarter, we also announced the sale or exit of five manufacturing sites in the US, India and Taiwan, which we expect to generate proceeds in excess of $80 million of cash during 2016.

Turning to guidance. We provided a bridge in our tables and slides to help show the changes in our guidance for 2016 and 2017 to spotlight the impact of changes in FX rates and changes to our operations in Venezuela. We now expect for the full-year 2016 revenue will be between $4.65 billion to $4.775 billion, reported diluted EPS of between $1.30 and $1.48 per share and adjusted diluted EPS between $1.71 and $1.81 per share.

For full-year 2017, we expect revenue between $4.95 billion to $5.15 billion, reported diluted EPS of between $1.95 to $2.13 per share and adjusted diluted EPS between $2.18 and $2.32 per share. Our revised guidance reflects the impact of the European Commission's decision on Belgium's tax rulings and the related effect on our earnings which we disclosed in early January. Our effective tax rate on, excuse me, effective tax rate on adjusted pretax income is expected to be approximately 33% in 2016 and 30% in 2017.

In January, we communicated that the changes to our tax rate reduced our expectations for adjusted diluted EPS guidance for 2016 and 2017 by $0.13 and $0.06 per share, respectively. Note that we expect to record one-time net tax charges during 2016 of approximately $55 million of which approximately $35 million to $45 million will be recorded in Q1. These Q1 charges relate to the nullification of our Belgian tax ruling by the European Commission for the periods from 2013 through 2015.

Included in the total $55 million charge is an estimate of the future impact of the revaluation of deferred tax accounts currently associated with our Belgian operation. You can see these $55 million of one-time costs footnoted in our guidance bridge for 2016. Our revised guidance today also reflects our latest views of our operations in Venezuela, updated FX rates as of the end of January and other efficiency improvements to offset some of those impacts.

Here is some really good news. Other than the impact of the change to our expected tax rate due to the EC ruling, a factor over which we had no control, we're holding our guidance range for adjusted earnings per share for both 2016 and 2017. We expect the momentum that we carried through Q4, combined with the expected pace and magnitude of the efficiency initiative, should enable us to offset the unrelenting headwinds of FX rates and the change to our business model in Venezuela.

We're proud of that. Since I have the floor and I like to talk about our Company, here is my summary of the year. Looking back at 2015, what you see is another year where the global animal health industry posted solid mid single digit growth despite many challenges in many economies around the world.

You saw our Company, Zoetis, deliver strong operational growth of revenue, up 8%, by pulling all of the levers that we have available to us. The best animal health sales forces on the planet, the most productive R&D team in the industry, value generative M&A and a supply chain that is a core strength of the Company. We delivered operational growth of adjusted earnings per share of 24% for the year. I'm going to repeat that because it's awesome.

Adjusted earnings per share for the full-year 2015 increased 24% on a constant currency basis to $1.77 per share. I call out the $1.77 because while we always measure ourselves on a constant currency basis, at the end of the day we put an actual dollar amount on the tape. Way back in November of 2014, we put 2015 guidance -- excuse me, 2015 guidance on the table.

We guided to revenue in the range of $4.85 billion to $4.95 billion and adjusted earnings per share of $1.61 to $1.68. Since that time we like many multi-national companies have been battered by FX, that dramatically reduced our reported revenues but here is where we are different from many of those other multi-nationals.

Throughout 2015, we held the line on our guidance for adjusted earnings per share. In November of 2015, we actually raised the range to $1.70 to $1.74 and now we report actual results of $1.77 per share. We're able to do that because we, as a management team, brought forward a plan in May of last year to improve the efficiency of our cost structure. Then we, as a team, got after it and reduced and controlled expenses to give us the best shot at delivering to you, our shareholders, the best earnings we could under the circumstances. As I love to say, pretty good.

So here is my pitch. The global animal health industry is not just resilient. It has characteristics that point to an extended period of predictable mid single-digit growth.

The number one Company in the global animal health industry is Zoetis. In the three years since we've been public, we put results on the Board that support what we see as our key value drivers. First, we can grow our revenues at a rate equal to or faster than the mid single-digit growth expected for our industry.

Second, we can leverage our expense structure to drive increasing operating margins, delivering profit growth faster than revenue growth. Third, we can intelligently allocate our capital and actively manage our capital structure to grow adjusted earnings per share faster than operating profits. In today's dystopian financial markets where investors may be looking for shelter from the storm, I think my suggestion would be to look at companies in reverse alphabetical order and start with Z for Zoetis.

That's it for my prepared remarks, let's get to Q&A. Keith?

(Operator Instructions)

Kevin Ellich, Piper Jaffrey.

I guess Paul, could you just go back to the contributions from acquisitions in the quarter? I kind of missed those prepared remarks.

Then I guess Juan Ramon, I wanted to get an update on Simparica as well. I think in the press release it says that you expect approval now in Q1. I think previously you said first half of 2016, so I guess what's the change? What should we expect heading into western vet?

Yes, I'll start, Kevin. Good morning, it's Paul. I'll start with the components of the growth. So we had 6% operational revenue growth in the quarter and recognize, we're going with whole percentages here, so there's rounding that comes into play. But it was 3% from increased APOQUEL sales, 3% from the acquisition of the Abbott Animal Health products, 2% from price increase across the portfolio and 1% for new products. Then, the offset to that was about a 3% decline of I guess what we'll call revenues of all other products and again, that is primarily related to the change in our business model in Venezuela and countries like India and places that were affected by our efficiency initiatives. I hope that answers the question.

Thank you, Paul. I will take the question on Simparica. So we submitted to the FDA all the information and that based on the normal timing for approval that we expect Simparica to approve -- to be approved in the US in the first quarter. This all will be depending on the finalization of the FDA.

Louise Chen, Guggenheim.

So I do see slide 18 in your presentation, but I was wondering if you could help us better understand the underlying sales growth for the year without the impact from restructuring and SKU reductions? Then also do you expect your sales growth to accelerate after these programs are completed? When might we actually see that? Thanks.

Sure, Louise, it's Paul. Let me take that. Thank you for asking the question, Louise, because if you just take the headline and say, gee, we're looking at 2% to 4% operational growth in revenue next year, people say where? What's up with that?

So let's start with -- from the 2% to 4%, the operational efficiency initiative, the effect on SKUs and now Venezuela and other markets where we are going to change our model, reduced that by some 600 basis points. You can see that if you look at that slide 18. 600 basis points, so there's 8% to 10% if you're thinking about what our actual expectations are for normalized operational revenue growth in 2016 versus 2015.

If you want to take PHARMAQ out of the equation to go, what's the organic portion of that? It's about 200 basis points. So as you look at that slide, again, I call everyone's attention to it, we tried our level best to help you think about the strength of 2016, because it is quite a strong year, by showing you this waterfall slide.

So 2% to 4%, 600 basis points of the efficiency initiative SKU reductions, Venezuela, India, et cetera. gets you to 8% to 10%, if you want to look at that on an organic basis, it would be 6% to 8% by taking PHARMAQ out of the mix.

I do, before I concede the floor, I want to say two things before I talk about 2017 -- about 2015, I'm sorry, about 2016 because we did change from 3% to 5% operational growth to 2% to 4%. That is predominantly because we had previously articulated that range at the midpoint of our 2015 guidance for revenue. As you saw, we had strong revenue in Q4 and for 2015, it was about $25 million higher than that and that accounts for the change from 3% to 5% down to 2% to 4%.

We feel really good about what we put on the table in 2015. As we think about it, we really are excited about 2016 even though it will be masked a little bit by the changes that we are making to our model.

Now, last before I concede the floor. You asked, a question about what could we expect in 2017? We expect a return to the same kind of solid growth that you would expect -- you would have expected in 2016 but for the change in the efficiency initiative. We are currently forecasting on an operational basis, 5% to 9%. That's pretty solid. That's being driven mainly by new products.

Alex Arfaei, BMO Capital Markets.

Thank you for all the details on the slides. Congratulations on a strong operational performance in 2015.

Paul, cost of sales grew at a higher rate than revenues in the quarter and as a result, gross margin was lower year-over-year and sequentially versus \3Q. I was wondering if you could give us your thoughts there on gross margin?

Just a general question for the both of you. Your stock has obviously been underperforming despite this strong operational performance. I'm wondering if you could give us your thoughts on that and is there an opportunity for more aggressive share buyback at these levels? Thank you.

Sure, it's Paul. I'll take the Q4 margin. That was predominantly due to FX. Again, I would look at the full year and how we came out and it was in line with what -- it was in line with what we were expecting. I know Alex, we traveled together a little bit.

You look at a quarter and there can be a lot of variability that sneaks into the equation, you're comparing against this, that and the other thing. Things happen in the 90-day period that smooth themselves out over the year. I would look at the 65-odd percent margin that we put on the Board for the full year. That's indicative of the strength. But that one thing in the fourth quarter was FX. FX is hard to forecast when it flows through cost of sales but it sure does.

The second thing I think you asked a question about the share price. Yes, we're watching our Company along with many others lose value at least in the eyes of shareholders or people that are holding our stock. We continue to do what we can do. We're driving real fundamental value.

You posed the question about our share buyback and the scale of that, et cetera. I'll point out that in -- when we were last in the window, I guess which was in the early part of November, stock was $43 or $44, I think.

I'm going from memory here. $43 or $44, and we elected at that point in time to increase the pace of our purchases as everybody can do the math, we bought about $50 million a quarter through 2015. We're currently buying stock back at a pace of about $75 million a quarter. I know that's not a ton but as I said also many times, we have a lot of calls on cash in 2016, but even so, we elected to increase the pace at which we were wanting to acquire share, so I hope that answers the questions.

I will add a comment here, Alex. I think that in many cases, our Company is still associated with the human pharmaceutical industry. On discussions on prices, for instance, have been affected with the human pharmaceutical industry, while this should not be having any impact in our share value.

Our prices, as I mentioned in my comments, are completely independent on third-party payers. We price based on the value that we can demonstrate to our customers. Our customers are not only buying and paying the products they buy from us. So this is something that, in my opinion, should be also included when different investors or analysts also define the value of Zoetis and also the value of the animal health industry in general.

Erin Wilson, Credit Suisse.

How should we think about the quarterly progression of the US livestock business? Could you characterize the overall health of the US livestock industry just more broadly?

Then one on R&D, on the parasiticide front, should we expect that you're ready to launch as soon as Simparica gets approval in the US? Then with the potential flea, tick and heartworm combination chewable product? Longer term, how long in the pipeline -- or how far along in the pipeline is this product? When should we expect it I guess to launch? Is it in the guidance?

So thank you, Erin, for your question. In terms of the launch of Simparica, we are ready to launch as soon as we get approval from the FDA. We also are ready to launch not only in the US but also in the European markets and the team is ready. The plans are in place and we have a product to supply to the market.

You also asked a question about the livestock progression in the US, and definitely we have seen that in general the livestock has been performing well in 2015. In terms of the quarters, the fourth quarter has been stronger than expected because already in the last year, we reported very strong revenue growth. In this year also, we grew significantly.

In terms of the different areas of livestock, we see also opportunities in cattle. We see opportunities in poultry and we see opportunities also in swine.

We expect also in 2016, the momentum will continue. We see positive trends in the cattle industry, mainly on the beef but we expect that the number of animals that will increase by 3.5%. This will -- expect also will drive additional use of animal health products. You also asked about --

The combination product.

The flea and tick and the heartworm, definitely our R&D team is working on developing this product and finalizing all the information for submitting all those years to the FDA. We have not yet communicated when we plan to have this product into the market. As we get closer to the finalization of all the different filings, then we will communicate to the market. This has not been included in our guidance for 2017.

John Kreger, William Blair.

You mentioned that you had some issues last year with customer service, I think you said mainly around APOQUEL. Can you just expand upon that? Is that issue behind you? How comfortable are you that you will not have any kind of residual issues as we move through 2016?

Then Paul, maybe just talk a little bit more about longer term. Your tax rate thoughts, do you think 30% is the long-term right number to use? Or is there an opportunity to maybe push that lower? Thanks.

So we have supply issues for APOQUEL and the supply issue has been resolved now. We have now the process for diffraction of the active product ingredient that have been the bottleneck of manufacturing APOQUEL. We have a process which is much more robust and much more consistent.

We are really producing all the products that will be delivered in 2016. We're increasing significantly the supply for the market. We are also planning to expand APOQUEL to the rest of the world, where the product has been approved. We plan to do that in 2016. So we are convinced that APOQUEL will deliver significant growth and all the issues that we face in 2015 will be behind us.

We also reported in 2015 that the implementation of the new ERP also created some issues, in terms of deliveries of products into the market. We are very pleased now how the implementation of the ERP has been now performing in the US.

We have now 90% of our orders delivered the same day, which is a significant achievement. We are working on improving that, the rest of the functions that also are provided to the customers.

We expect that also the ERP will be supporting our operations in a very efficient way in 2016. And it is something that we plan to finalize all the implementation of the new system in this quarter. Then moving forward, really to maximize the way that we will be supporting our business.

John, it's Paul. I'll take the tax question. First, let me just say that we were very disappointed with the European Commission's kind of stating that the Belgian tax rulings like we had are illegal and essentially nullified our arrangement there. We're disappointed because the Belgians have been very supportive. We built a terrific operation there.

I think I said in a prior public forum, the Belgians and the country had been one of the more responsible countries with respect to tax policy and how they've used it to attract employment and investment into their country. It's a shame, so set that aside. We're very disappointed and obviously it was not something that we were planning on.

Let's pretend that didn't happen for a second. We had previously articulated we thought our tax rate in, call it, 2017 would have been on the order of 28%, our adjusted ETR roughly 28%, and now it's 30%. So we lost a couple hundred basis points there in 2017. But what I would suggest to you is just as we had articulated with respect to our structure before this happened, we can grind that down -- but we will be grinding it down.

Frustrating thing for us is, we were doing pretty well fine-tuning our global operating model to be efficient and here, we have to go back and we have to change course a little bit. So not something that -- it's not a happy day for us, but we are responding the best way that we can. I think the way we look at it is we just have 200 basis points higher ETR in 2017. Now our job is to grind that down.

Chris Schott, JPMorgan.

Just a couple here. First, on the 6% impact from the SKU reduction in 2016, I guess now that we're further along in that process, any surprises in terms of customer behavior in terms of these SKU changes? I guess is there an opportunity for that number to be lower than 6%, either through uptake of alternative Zoetis products or just other initiatives you put in place?

The second question was just as we're looking out to 2016, just any dynamics we should be keeping in mind for modeling this year in terms of quarterly progression? Are there any particularly difficult or easy comps that we should be watching as we are thinking of the quarters this year? Thanks very much.

Thank you, Chris. Where we have related very carefully when we decided to review the SKUs on how will be the impact to our customers, we made sure that none of the SKUs that we are eliminating has no alternative to our customers. These alternatives can be from our competitors or can be alternatives in our portfolio. The 6% impact in our revenues is the net result of reduction and also the assumption that some of these reduction of SKUs will be moved to other SKUs in our portfolio.

In terms of reaction from customers, I think in some cases, well, they would like to have these products in their portfolio, but they also understand that more important than offering 13,000 SKUs, it's ensuring that we have a reliable supply.

What they want is to make sure that when they place an order, they get the order on time to treat or protect the animals. These -- one of the important and strategic rationales for our SKU rationalization was not only to improve gross margin but also to ensure that our supply to the market is much more consistent and we can meet all customers' expectations.

Then Paul will take the question on the facing in terms of our quarters.

Right. I think there are two things I'd be mindful of is one is, how the SKU reduction plays out with respect to our revenues. Recall that we announced this program in the middle part of 2015. So we're just starting to see here in Q4 and on into Q1 and Q2 the impacts of the SKU rationalization. It will be -- relative to the prior year, it will be a significant factor that will have to keep our eye on.

The second part is, with respect to our cost -- our efficiency initiative, we continue to ramp up the amount of savings that we're seeing flow through. Of course the first half of last year, you had a modest amount of cost containment or that occurred in the first half, but that steps up. We currently are tracking as you saw with an 8% operational reduction in operating expenses in Q4, tracking at a much lower rate.

So that will be a very helpful driver on the operating expense side in the first half of the year. Then that benefit, if you will, comparing back to the prior year will moderate over the second half of the year. I think that's about all we want to cover on phasing.

I'll just say it again and again and again, we look at our business on a yearly basis. I know you have to and that's what you do and all. We will try to be as helpful as we can with respect to the phasing, but we run our business on an annual basis.

Jami Rubin, Goldman Sachs.

Just a couple. First, Paul, maybe you can answer this. On the 2% contribution from price, can you talk about the outlooks -- how did that look on a global basis, US versus outside of the US? What is the outlook for price increases going forward, both in the US and across different geographies?

Then Juan Ramon, just a question for you. As you are now -- congratulations, three years as an independent Company. It's been very exciting to see how Zoetis has evolved and achieved such tremendous success in a short period of time. Congratulations.

But maybe you could just sort of step back and tell us, when I look at the industry, the animal health industry, it doesn't seem that a whole lot has changed, it still remains highly fragmented. We've seen a little bit of movement with Novartis swapping its business to Lilly, you've made a couple small acquisitions but by and large the industry hasn't changed much.

Do you see more consolidation going forward? Or do you see some of your peers spinning out their animal health businesses like you have done for yourself? What does this all mean for your future in terms of M&A? Thanks very much.

Thank you, Jami, I will try to answer both questions. So in terms of the 2% -- so the 2%, as you mentioned, it's global increase. In terms of where we see this 2% in the different geographies definitely we have been very consistent in the US with price increases of around 3% and in the rest of the markets, it depends, in high inflationary markets we increased significantly the prices to compensate for inflation and in [some cases] to compensate for foreign exchange. In some markets where the economies are -- the inflation it's very stable or probably not having any inflation at all. So we are also trying to adjust our prices based on this situation. So in Europe or Japan or some other markets, we have been increasing prices but at a lower rate than in the US or some of the markets where we had the opportunity to increase the prices because of inflation.

The second question was related to the consolidation of the industry. Well, the top four or five now animal health companies, represent almost 70% of the total market, which has already been increased significantly from some years ago.

Do I see opportunities for further consolidation? I think there's still opportunities especially on the second tier of companies. After these four or five companies, we see opportunities for the consolidation.

We expect now the merger of Boehringer Ingelheim and Merial being completed. This another round of consolidation and maybe in the future also we will see some additional consolidation. Definitely, the consolidation will be limited because of anti-trust issues. But without these anti-trust issues or managing these anti-trust issues, definitely consolidation can represent a good opportunity for the animal health industry.

The last comment I want to add is that the top 10 companies in the animal health represent something like 80% of the total market. On the 20%, which is remaining, we have maybe hundreds of companies that I expect that theis will be a significant consolidation here.

Paul will add some comments in terms of the pricing.

Yes, sure. Jami, You asked a specific question, I think trying to get to, where is our pricing power. For the full year, emphasis full year, our price added approximately a little better than 2% overall. But US was about 2% and international was about 3%, again, a lot of rounding here but more price increases outside the US than in.

Doug Tsao, Barclays.

Maybe if you could provide a little bit more of an update in terms of how you will sort of increase the availability of APOQUEL. Is this -- will you start now in terms of broadening the number of veterinarians who will have access to the product? Or is it going to be focused more on current -- expanding the new patients?

Also, if you'd just provide some commentary in terms of the MFA business And how it's faring right now? One of your competitors spoke about some regulatory headwinds in that business and whether you're seeing those as well. Thank you.

Thank you, Doug. In terms of the increase of our APOQUEL, so let me start saying that we have now two sources of the production of API. The second source that will be a company in Switzerland, which is called Siegfried, that will double the capacity of the production of the active product ingredients.

We plan to now offer APOQUEL to more veterinarians and also to offer more available product to existing veterinarians. At the same time, also the plan is to use the product in the rest of the markets, where the product was put on hold because of product availability. So we are convinced that during 2016, we'll be able to meet all the demand from the markets.

In terms of MFAs, I think MFAs in our case continue growing very strongly. We have the advantage of Zoetis' diversity of our portfolio. It is not only diversity in terms of therapeutic areas or in terms of different types of products. But also within the MFAs, we have a lot of diversity.

For problems that will be maybe facing some challenge because changes on the approach of the use of antibiotics -- I mentioned in the medical import on antibiotics in MFAs with indication of growth promotion. This will be eliminated but in our portfolio, we also have a non-medical important antibiotics in MFAs that can be a good replacement for those that will be eliminated. We have in total, in MFAs, $500 million in sales. We grew operationally in 2015 by 8%. So definitely, we expect that those are probably the only indication of growth promotion which are medically important for human health that will have an impact in the revenues, but this impact will be minimal.

Mark Schoenebaum, Evercore ISI.

Paul, my e-mail lit up during your prepared remarks. I just want to say that it was really a brutally awesome prepared remark section, especially the part about how we should reverse the alphabet, I love that. I think it's a great idea.

But in all seriousness, I have a bunch of questions, but I'll limit it to 1.5, which is what most people have been doing. Number one, given all of the opacity -- well, you have tried to do everything you can to make it clear, but just the confusion that FX potentially creates, why not synthetically hedge against the effects on that, at least on the net income line, especially after the turmoil this year? Although you have done a great job helping us understand the effect.

Then number two, I still -- maybe I missed this, but I didn't hear you break out APOQUEL scales on 4Q. I was wondering if you could -- I apologize if I just missed it. If you could break those out in the US and also rest of world? If you already answered that one, then my question would be on the 6% to 8% normalized organic operational growth, what are the components of that for 2016 that you see? Thanks.

Sure, I'll start with the FX. I think when you're looking at trying to hedge operations or operations around the world against foreign currency exchange, you have two choices. You can either, in non-technical term, let it fly, which is what we do, with respect to the operations like many other -- many, many other multi-national companies do. Or you can attempt to hedge, if you hedge, you hedge within a quarter. The analysis that we've done has suggested that you're essentially chasing down; you limit, but the cost of the hedges ultimately make it a less than fruitful exercise.

Now, others will tell you that they can do it and that's okay. That would be their point of view.

I'd point out that a couple of the currencies that tend to be the most volatile, there are not markets for us to go out and hedge. I think they're not deep enough. They're not efficient enough. So you wouldn't be able to fully offset that. I think I loved your word, opacity, I might have mispronounced that.

We're trying our best to let the market follow along with as much of the information that we have that we can share with you, so you can decide how we're performing. We do now and we will continue to manage ourselves on an operational basis, meaning a constant currency basis. I will hope against hope perhaps that at some point in the future here, we'll see some more stability in the foreign exchange rates and that we'll have, enjoy the positive upside, not from an operational perspective but from a reported perspective of currency FX rates going in the opposite direction.

Juan Ramon, you want to take the APOQUEL sales or would you like me to?

On the APOQUEL sales, I think we had more than $100 million in 2015. It's about $110 million. This was below initial expectations. The only reason for that was ensuring that we have enough product to supply to customers and not increasing the number of our customers having access until we have determined that the product will be available. Now we're having a situation that we increased significantly the production and will be able to increase the deliveries to our customers.

Globally, in international markets, I think we had about $40 million and then the rest has been the US. But it's important to understand that in international markets there were a very limited number of countries where we have the product available in the market.

You also ask about components of our organic growth, 6% to 8%. Paul, will provide the details of this.

Sure, I'll start, first of all, we expect to continue to be able to take consistent price across our portfolio. That's a driver. Second is, there's a significant impact from new products in 2016, which frankly will be an even bigger impact on 2017 and then just performance of our portfolio.

When I'm saying new products, I'm focusing on the ones that you can see that make a difference. I'd point out that there are -- we have lots of new products that we don't talk about in necessarily individually and maybe individually don't move the needle, but in the aggregate they sure do. 6% to 8% normalized operational growth of revenue next year would be terrific. Then, again, going into 2017, new products help even more.

Mark, let me correct the total revenues that we generated internationally. Internationally was $20 million and then the rest was the US. I want to see that in the international markets, we have very limited number of markets and also limited supply. So the potential in both US and international is much higher.

David Risinger, Morgan Stanley.

So my questions are financial. Obviously, you've covered a lot of ground on the business and the outlook. So Paul, two questions. First, could you please discuss the outlook for 2016 cash flow, including cash flow from operations and then planned uses of cash? Then second, if you could just comment on the quarterly progression throughout the year, just to make sure that we set up our models appropriately and we understand the different variables to consider. Thanks very much.

Sure, I'll start with the discussion around expected cash flow. Recall that in -- that we try to call them out each and every quarter. We have a large amount of expenses that we're incurring with respect to one, the stand-up from Pfizer, second the operational efficiency initiative and now we add to the list, a potential true-up of our international taxes in light of the EUCs comments.

If you look at our guidance tables, we call out the amount or the expected amount of the acquisition costs that we expect to incur in 2016 and then again in 2017. These are sort of, I call them -- they're not normal. They will go away and most of them will go away towards the latter part of 2016. But in 2016, it's a fairly significant call on our cash.

Secondarily, we continue to be in a phase of investing in our supply chain. We continue to invest capital there. So our CapEx is tracking at a rate that exceeds our ongoing depreciation rate. So net-net, we continue to invest there. Of course, we called out that we now have a program that everybody can do their math, where at least the current expectation is we're purchasing shares at the rate of $75 million a quarter, it's $300 million this year plus our dividend. You can do that math.

Those are -- other than our earnings, the things that you need to take into consideration when thinking about our cash flow. I don't want to stop without speaking about efficiency of working capital. That is something that is to come. It's not something that you would see necessarily in 2015 and not in an enormous way in 2016.

By the end of this quarter, we expect to have our ERP system up and running in all of our locations around the world, which is going to give us the ability to then implement tools to much better manage primarily our investment in our inventories. Our receivables, where I think we do a pretty good job there. We're certainly doing the same things as everyone else with respect to payables.

But, yes, we will not start to see some significant cash flow from the improvement and adjusted working capital really until 2017. I wasn't specific there, David. I wasn't specific for reasons, we don't want to provide specific guidance with respect to free cash flow. But I believe we provided each of the components that would enable you to look out 2016, 2017 and then beyond. I think when you get out into the latter part of this decade, our depreciation should start to normalize at a level close to our depreciation amount. I'll stop there.

You also asked about the quarterly progression for 2016. Let me provide a couple of comments here. So first, we expect that the new product launches will have no impact in the first quarter. We expect that these products are ramping up during the year.

Also per quarter, we expect that the biggest impact we'll see from the second quarter of 2016, as we also extend the product availability in the markets even where the product has already been introduced. We also launch in new markets. In terms of expenses occurred -- also the -- our [visionary] product will have much more impact in the second half than in the first half because in the second half we plan really to complete most of the actions that we took as part of the announcement that we made in May. This also will have a specific impact in our results in the second half of the year.

Kathy Miner, Cowen and Company.

Two questions, one first on PHARMAQ. When you acquired the Company you had stated that it was growing about 17%. Is that still a good estimate going forward? Or could it be higher given their late stage pipeline that you had talked about? Also, do you continue to expect it to be neutral to EPS this year and then accretive thereafter? Or could that accelerate?

Then the second question just has to do on trends outside of the US in livestock. We saw the issue in France last year, where they changed the legislation on antibiotics. Are there any other areas that we should look for in 2016 where there may be similar changes? Thank you.

Thank you, Kathy, for the questions. In PHARMAQ, what we communicated is that we plan to generate the revenues of $100 million in 2016 and $125 million in 2017. At the end of the year, PHARMAQ reported revenues of close to $80 million. So we see a significant increase, in terms of revenues.

What we saw during the [division] when we acquired in terms of the pipeline, it's confirming now with the launch of the product in Chile, that it was under this emergency license. I will continue progressing in the plans that we have for PHARMAQ.

So we are very excited about the opportunities of PHARMAQ. We are working also in terms of integrating the two Companies but insuring that PHARMAQ remained a leader in aquatic health with enough identity to maximize the relationship with the customers that they already built through many years.

In terms of the comments that you made in France, definitely in 2015, we saw an impact because of the change of the legislation in France. This was affecting antibiotics. We expect also that antibiotics will continue highly in discussions and restrictions in some of the markets. This has been incorporated in our guidance for 2016 and 2017.

We also think that the creation of external sources are making about the top animal health industry and also the growth antibiotics are consistent with what with our prediction. So the industry will be growing about 5%, antibiotics expected to grow at about half of this rate. The advantage for Zoetis is that you have in our portfolio antibiotics which are injectable, which are considered as premium antibiotics that are kept by veterinarians as a resource to ensure that they are treating and in some cases protecting also animals against infection.

So we are confident that the impact that we have in antibiotics will be lower in our revenue but in any case, all these elements have been incorporated in our projections.

Jeff Holford, Jefferies.

I just wanted to ask a couple of questions around SANOFI and Boehringer. First off, if you expect that business combination or that potential business combination to have any impact on the competitive environment for you as you go forward into 2017 and beyond? Any specific areas of concern or opportunity there?

Then second, just as you've got two European companies coming together there. You've talked very briefly in the past about potential inversions, lack of opportunity. That's potentially two less opportunities now. Just any updated thoughts there, if that's really looking beyond you now to potentially look at any kind of inversions or spin versions out there? Thank you.

Thank you, Jeff, for the question. Definitely the SANOFI/BI merger will create a very strong competitor. They will be the second largest animal health company in our industry, but we don't think that the combination of the two companies will create additional competitive challenge to Zoetis. We have the scale, we have the diversity and we have the business model that has been proven very successful in the past and will continue also being successful in the future.

The productivity that we have in R&D is also showing very high levels. So we are confident that we will continue growing in line in fact with the market. So we operate in fact in 2016 and 2017, we're growing faster than the market despite of SANOFI/BI or despite all these additional consolidations in our industry.

SANOFI and BI, they are two European companies that potentially can be maybe an opportunity for tax inversion but also, creating a significant anti-trust issues to Zoetis. So we continue searching for opportunities to further consolidate. Not with the only objective of saving on tax, but a combination of synergies that we can generate in terms of revenues, in terms of cost opportunities, on reducing our effective tax rate and definitely creating a value to the Company.

Kevin Ellich, Piper Jaffrey.

I was just wondering if you could comment about the -- Juan Ramon, did you say you guys have supply of Simparica is ready for launch? I just wanted to make sure I had that right.

Yes, I said that Simparica product is ready for launch. As soon as we have approval for FDA, we'll be launching in the US and also in Europe. So, we have the product in our warehouses.

It does appear we have no further questions. I'll return the floor to you Juan Ramon for closing remarks.

Thank you very much. Thank you for joining us today.

As we continue through 2016, we are determined to make the most of our business model, our interconnected capabilities and the fundamental drivers of growth in animal health. We'll complete our operational changes, becoming less complex, more efficient and more agile. We will invest in global possibilities to strengthen our business.

I am confident that these steps will help improve our margins, better serve our customers and build our shareholders value over the long term. I look forward to reporting it to you on our progress in each of these areas. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. A replay of today's call will be available in two hours by dialing 800-839-6980 for US listeners and 402-220-6062 for international. Please disconnect your lines at this time. Have a wonderful day.