Zoetis Inc. has reported its financial results for the first quarter of 2015 and announced a comprehensive operational efficiency initiative to enhance its long-term competitive position and profitability. The company also updated its guidance for full year 2015 and provided additional details on its outlook for 2016 and 2017 to reflect the impact of the operational efficiency plans and other factors.

The company reported revenue of $1.1 billion for the first quarter of 2015, which was flat compared to the first quarter of 2014; revenue reflected an operational increase of six per cent, excluding the impact of foreign currency.

Net income for the first quarter of 2015 was $165 million, or $0.33 per diluted share, an increase of six per cent compared to the first quarter of 2014.

Adjusted net income for the first quarter of 2015 was $207 million, or $0.41 per diluted share, an increase of eight per cent. Adjusted net income for the first quarter of 2015 excludes the net impact of $42 million, or $0.08 per diluted share, for purchase accounting adjustments, acquisition-related costs and certain significant items. On an operational basis, adjusted net income for the first quarter of 2015 increased 14 per cent, with foreign currency having a negative impact of six percentage points.

Executive commentary

Juan Ramón Alaix, Zoetis Chief Executive Officer, commented: “For the first quarter, we continued our solid financial performance from last year. Our first quarter revenue grew six per cent operationally, based on strength in the US and Latin American markets, and our adjusted net income grew 14 per cent operationally, in line with our objective to grow adjusted net income faster than sales.

“Our business model – based on direct customer interaction, R&D and manufacturing capabilities – along with excellence in execution and a singular focus on animal health are key elements of our success. As we look ahead, we intend to build on that formula and perform even better.

“For the past two years, our focus has been on delivering our operating and financial targets, while successfully establishing Zoetis as a standalone company. Now having entered the final stage of our stand-up projects and building on the strong momentum in our business, we are announcing plans to further improve our operations and better position Zoetis to drive long-term profitable growth. The implementation of our plans will allow us to become more competitive by being more focused and cost-efficient, while taking full advantage of our scale and business model,” concluded Mr Alaix.

Paul Herendeen, Executive Vice President and Chief Financial Officer of Zoetis,added: “This initiative is a natural next step in the evolution of our company. We took a comprehensive look across our business and identified opportunities to generate higher quality, profitable growth, while preserving and enhancing our competitive advantages – our customer-facing sales approach, research and development of innovative products, and high-quality manufacturing and supply.

“The operational efficiency initiative we announced today will result in a company that will generate more profit from a slightly smaller, more focused revenue base. We expect to generate cost savings of approximately $300 million in 2017 and to improve our adjusted operating margin from 25 per cent in 2014 to approximately 34 per cent in 2017.

“By 2017, we will be a company that can grow our re-based organic revenue in line with or faster than the mid-single digit growth of our markets, while holding growth in our leaned-out operating expenses to the inflation rate, thereby delivering long-term profit growth greater than our revenue growth. We will also be better positioned to create value from potential business development opportunities,” concluded Mr Herendeen.

Quarterly highlights

Zoetis organises and manages its business across four regional operating segments:

• United States (US)
• Europe/Africa/Middle East (EuAfME)
• Canada/Latin America (CLAR) and
• Asia/Pacific (APAC).

Within each of these regional segments, the company delivers a diverse portfolio of products for livestock and companion animals tailored to local trends and customer needs.

In the first quarter of 2015:

Revenue in the US was $521 million, an increase of 9 per cent compared to the first quarter of 2014. Sales of livestock products grew 14 per cent, led by growth in cattle products due to the strength of our portfolio and continued favourable market conditions.

Increases in the sales of swine products were driven by a higher population of pigs as well as sales of the PEDv vaccine.

Sales of poultry products grew primarily due to the re-introduction of ZOAMIX®, a medicated feed additive.

Companion animal product sales grew three per cent driven by the performance of key brands such as PROHEART® and REVOLUTION®, the addition of products from Abbott Animal Health, promotional programs, improved weather conditions, and new product launches in diagnostics. This growth was partially offset by competitive challenges to RIMADYL® and sedation products, as well as declines in equine products.

Revenue in EuAfME was $237 million, operationally flat compared to the first quarter of 2014. Sales of anti-infectives declined in both livestock and companion animal products due to the implementation of new legislation in France.

Livestock sales declined two per cent operationally due to the French legislation and declines in Russia, but were somewhat offset by growth in other emerging markets. Companion animal products grew four per cent operationally, led by broad growth in key brands such as CERENIA® and STRONGHOLD®, as well as improved product availability in equine products.

Revenue in CLAR was $173 million, an increase of 13 per cent operationally compared to the first quarter of 2014, with strong growth in both livestock and companion animal products. Sales of livestock products grew 13 per cent operationally, as favourable cattle and swine market dynamics across the region drove growth of premium brands, particularly in Brazil and Venezuela.

Poultry product sales declined due primarily to timing of customer product rotations in several countries.

Sales of companion animal products grew 14 per cent operationally, driven by sales in Venezuela and performance of key brands in Brazil.

Revenue in APAC was $161 million, an increase of one per cent compared to the first quarter of 2014. Growth in emerging markets was offset by declines in developed markets. Sales of livestock products grew one per cent operationally, primarily based on strong swine product sales in Southeast Asia. Swine sales in China declined as weaker market conditions led to softer demand for premium products.

Poultry sales experienced a slight decline due to weaker market conditions in South Korea and the Philippines.

Cattle sales declined in the quarter due to prolonged drought conditions in Australia and New Zealand, partially offset by emerging market growth, particularly in China and India.

Sales of companion animal products were operationally flat in the quarter, mainly due to declines in Australia and the prior termination of a distributor agreement in Japan.

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

Highlights in product development

Some highlights of the company’s product lifecycle development this quarter include expanding the reach of key products into new markets and with new indications.

For example, the BOVI-SHIELD GOLD® FP line of vaccines for certain bovine respiratory and reproductive diseases received approval for additional claims in the US to help prevent foetal infections caused by bovine viral diarrhoea (BVD) virus Types 1 and 2; this product line was first approved in the US in 2009.

FOSTERA™ PCV MH, a vaccine that helps prevent certain diseases in swine, expanded into new markets such as Thailand and Russia in the first quarter; it was first approved in the US in 2013.

CERENIA®, an anti-emetic to treat and prevent acute vomiting in dogs and cats, was approved for cats in Japan; it was first approved in Europe in 2006.