Market Overview

Zoetis Announces Second Quarter 2018 Results

Share:
  • Reports Revenue of $1.4 Billion, Growing 12%, and Net Income of
    $384 Million, or $0.79 per Diluted Share, Growing 55% and 58%,
    respectively, on a Reported Basis for Second Quarter 2018
  • Reports Adjusted Net Income of $375 Million, or Adjusted Diluted
    EPS of $0.77, for Second Quarter 2018
  • Delivers 9% Operational Growth in Revenue and 37% Operational
    Growth in Adjusted Net Income for Second Quarter 2018
  • Updates Full Year 2018 Revenue Guidance to $5.700 - $5.800 Billion
    and Diluted EPS of $2.72 - $2.89 on a Reported Basis, or $3.00 - $3.10
    on an Adjusted Basis

Zoetis
Inc
. (NYSE:ZTS) today reported its financial results for the second
quarter of 2018 and updated its guidance for full year 2018.

The company reported revenue of $1.4 billion for the second quarter of
2018, an increase of 12% compared with the second quarter of 2017. Net
income for the second quarter of 2018 was $384 million, or $0.79 per
diluted share, an increase of 55% and 58%, respectively, on a reported
basis.

Adjusted net income1 for the second quarter of 2018 was $375
million, or $0.77 per diluted share, an increase of 44% and 45%,
respectively, on a reported basis. Adjusted net income for the second
quarter of 2018 excludes the net impact for purchase accounting
adjustments, acquisition-related costs and certain significant items.

On an operational2 basis, revenue for the second quarter of
2018 increased 9%, excluding the impact of foreign currency. Adjusted
net income for the second quarter of 2018 increased 37% operationally,
excluding the impact of foreign currency.

EXECUTIVE COMMENTARY

"We continue to perform well through the first half of 2018 primarily
based on the performance of new parasiticides and vaccines, our
dermatology portfolio, as well as contributions from the rest of our
in-line portfolio," said Juan Ramón Alaix, Chief Executive Officer of
Zoetis. "Our acquisition of Abaxis this week also demonstrates our
ongoing commitment to strategic portfolio expansions and value creation
for our customers and shareholders. We are updating our guidance to
reflect the addition of Abaxis and changes in foreign exchange, and we
are confident in our ability to meet these goals for the full year."

QUARTERLY HIGHLIGHTS

Zoetis organizes and manages its commercial operations across two
regional segments: the United States (U.S.) and International. Within
these segments, the company delivers a diverse portfolio of products for
livestock and companion animals tailored to local trends and customer
needs. In the second quarter of 2018:

  • Revenue in the International segment was $728 million, an
    increase of 15% on a reported basis and 10% operationally compared
    with the second quarter of 2017. Sales of companion animal products
    grew 24% on a reported basis and 17% on an operational basis. Growth
    resulted primarily from increased sales across multiple markets for
    our dermatology portfolio, and two new parasiticide products, Simparica®
    (sarolaner) for dogs and Stronghold® Plus
    (selamectin/sarolaner) for cats. In China, we also saw increased sales
    of vaccines, as well as our Revolution® (selamectin)
    parasiticide for dogs. Sales of livestock products grew 10% on a
    reported basis and 6% operationally, despite a decline in Brazil as a
    result of a national trucking industry strike. All species contributed
    to growth in the quarter, with cattle and swine products performing
    particularly well. Growth of cattle products was driven by favorable
    market conditions, with Canada, the UK and several smaller emerging
    markets also contributing to growth. Growth in our swine portfolio was
    largely driven by the Suvaxyn® PCV combo vaccine that
    launched late last year, as well as a strong demand for our products
    in other emerging markets.
  • Revenue in the U.S. segment was $677 million, an increase of 9%
    compared with the second quarter of 2017. Sales of companion animal
    products grew 15% on a reported basis, driven primarily by our
    dermatology portfolio and Simparica. This growth was partially offset
    by lower sales of certain in-line products due to anticipated
    competition. Sales of livestock products grew 1%, with growth in
    poultry and swine, offset by cattle. Our poultry portfolio grew as a
    result of increased sales of alternatives to antibiotic medicated feed
    additives, while growth in our swine portfolio was the result of
    increased customer adoption of the recently launched Fostera Gold®
    PCV MH vaccine. Sales of cattle products declined due to increased
    competition for certain medicated feed additives and unfavorable
    market conditions in dairy.

Zoetis continues to drive demand and strengthen its diverse portfolio
through business development initiatives and approvals of major products
in new markets. Since our last quarterly earnings announcement:

  • Zoetis completed the acquisition of Abaxis, Inc., a leader in
    the development, manufacture and marketing of diagnostic instruments
    for veterinary point-of-care services for $83 per share in cash, or
    approximately $2.0 billion in aggregate. The acquisition enhances
    Zoetis' presence in veterinary diagnostics, a category of the animal
    health industry with approximately 10% compound annual growth3
    over the last three years.
  • The company announced a five-year collaboration agreement with Regeneron
    Pharmaceuticals
    to develop monoclonal antibody (mAb) therapeutics.
    This collaboration exemplifies Zoetis' commitment to lead the animal
    health industry in mAb therapeutics, and will enhance the company's
    R&D platform and pipeline of monoclonal antibody therapeutics for
    veterinary use.
  • Zoetis continued to bring leading companion animal products to new
    markets. Cytopoint® (lokivetmab), a mAb that
    is part of Zoetis' canine dermatology portfolio, was approved in
    Brazil and Australia. Simparica, an oral flea and tick
    medication for dogs, was approved in Costa Rica. Additionally, Stronghold
    Plus/Revolution
    ® Plus, a topical
    combination parasiticide for cats was approved in Japan, New Zealand
    and Serbia.
  • The company continued to broaden its Fostera® swine
    vaccine franchise with approval in Canada of Fostera Gold PCV
    MH
    . This vaccine, first approved in the U.S. earlier this year,
    provides livestock farmers with greater options and flexibility in
    protecting pigs from porcine circovirus (PCV2) and Mycoplasma
    hyopneumoniae (M. hyo).

FINANCIAL GUIDANCE

Zoetis is updating its full year 2018 guidance, which includes:

  • Revenue between $5.700 billion to $5.800 billion
  • Reported diluted EPS between $2.72 to $2.89
  • Adjusted diluted EPS between $3.00 to $3.10

This guidance reflects foreign exchange rates as of mid-July and
includes the partial year impact of Abaxis, based on preliminary
estimates for certain significant items and purchase accounting
adjustments. Additional details on guidance are included in the
financial tables and will be discussed on the company's conference call
this morning.

WEBCAST & CONFERENCE CALL DETAILS

Zoetis will host a webcast and conference call at 8:30 a.m. (ET) today,
during which company executives will review second quarter 2018 results,
discuss financial guidance and respond to questions from financial
analysts. Investors and the public may access the live webcast by
visiting the Zoetis website at http://investor.zoetis.com/events-presentations.
A replay of the webcast will be archived and made available on Aug. 2,
2018.

About Zoetis

Zoetis
is the leading animal health company, dedicated to supporting its
customers and their businesses. Building on more than 60 years of
experience in animal health, Zoetis discovers, develops, manufactures
and markets veterinary vaccines and medicines, complemented by
diagnostic products, genetic tests, biodevices and a range of services.
Zoetis serves veterinarians, livestock producers and people who raise
and care for farm and companion animals with sales of its products in
more than 100 countries. In 2017, the company generated annual revenue
of $5.3 billion with approximately 9,000 employees. For more
information, visit www.zoetis.com.

1 Adjusted net income and its components and
adjusted diluted earnings per share (non-GAAP financial measures) are
defined as reported net income attributable to Zoetis and reported
diluted earnings per share, excluding purchase accounting adjustments,
acquisition-related costs and certain significant items.

2 Operational revenue growth (a non-GAAP financial
measure) is defined as growth excluding the impact of foreign exchange.

3 Based on internal estimates and publicly
available information.

DISCLOSURE NOTICES

Forward-Looking Statements: This
press release contains forward-looking statements, which reflect the
current views of Zoetis with respect to business plans or prospects,
future operating or financial performance, future guidance, future
operating models, expectations regarding products, expectations
regarding the performance of acquired companies and our ability to
integrate new businesses, expectations regarding the financial impact of
acquisitions, future use of cash and dividend payments, tax rate and tax
regimes, changes in the tax regimes and laws in other jurisdictions, and
other future events. These statements are not guarantees of future
performance or actions. Forward-looking statements are subject to risks
and uncertainties. If one or more of these risks or uncertainties
materialize, or if management's underlying assumptions prove to be
incorrect, actual results may differ materially from those contemplated
by a forward-looking statement. Forward-looking statements speak only as
of the date on which they are made. Zoetis expressly disclaims any
obligation to update or revise any forward-looking statement, whether as
a result of new information, future events or otherwise. A further list
and description of risks, uncertainties and other matters can be
found
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2017, including in the sections thereof captioned "Forward-Looking
Statements and Factors That May Affect Future Results" and "Item 1A.
Risk Factors," in our Quarterly Reports on Form 10-Q and in our Current
Reports on Form 8-K. These filings and subsequent filings are available
online at 
www.sec.govwww.zoetis.com,
or on request from Zoetis.

Use of Non-GAAP Financial Measures:
We use non-GAAP financial measures, such as adjusted net income,
adjusted diluted earnings per share and operational results (which
exclude the impact of foreign exchange), to assess and analyze our
results and trends and to make financial and operational decisions. We
believe these non-GAAP financial measures are also useful to investors
because they provide greater transparency regarding our operating
performance. The non-GAAP financial measures included in this press
release should not be considered alternatives to measurements required
by GAAP, such as net income, operating income, and earnings per share,
and should not be considered measures of liquidity. These non-GAAP
financial measures are unlikely to be comparable with non-GAAP
information provided by other companies. Reconciliation of non-GAAP
financial measures and GAAP financial measures are included in the
tables accompanying this press release and are posted on our website at
www.zoetis.com.

Internet Posting of Information:
We routinely post information that may be important to investors in the
'Investors' section of our website at
www.zoetis.com,
on our Facebook page at
http://www.facebook.com/zoetis
and on
Twitter
@zoetis
. We encourage investors and potential investors to
consult our website regularly and to follow us on Facebook and Twitter
for important information about us.

           
ZOETIS INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME(a)

(UNAUDITED)
(millions of dollars, except per share data)
 
Second Quarter Six Months
2018   2017 % Change 2018   2017 % Change
Revenue $ 1,415 $ 1,269 12 $ 2,781 $ 2,500 11
Costs and expenses:
Cost of sales(b) 447 440 2 894 883 1
Selling, general and administrative expenses(b) 359 336 7 697 645 8
Research and development expenses(b) 102 86 19 199 176 13
Amortization of intangible assets(c) 23 23 46 45 2
Restructuring charges/(reversals) and certain acquisition-related
costs
5 * 7 (1 ) *
Interest expense 46 41 12 93 82 13
Other (income)/deductions–net (4 ) (2 ) 100 (9 ) (12 ) (25)
Income before provision for taxes on income 437 345 27 854 682 25
Provision for taxes on income 55   98   (44) 122   196   (38)
Net income before allocation to noncontrolling interests 382 247 55 732 486 51
Less: Net (loss)/income attributable to noncontrolling interests (2 )   * (4 ) 1   *
Net income attributable to Zoetis $ 384   $ 247   55 $ 736   $ 485   52
 
Earnings per share—basic $ 0.79   $ 0.50   58 $ 1.52   $ 0.99   54
 
Earnings per share—diluted $ 0.79   $ 0.50   58 $ 1.51   $ 0.98   54
 
Weighted-average shares used to calculate earnings per share
Basic 483.8   490.8   484.8   491.6  
Diluted 487.5   494.0   488.6   494.6  
* Calculation not meaningful.
 
(a)   The condensed consolidated statements of income present the three
and six months ended June 30, 2018, and July 2, 2017. Subsidiaries
operating outside the United States are included for the three and
six months ended May 31, 2018 and May 28, 2017.
(b) Exclusive of amortization of intangible assets, except as discussed
in footnote (c) below.
(c)

Amortization expense related to finite-lived acquired intangible
assets that contribute to our ability to sell, manufacture,
research, market and distribute products, compounds and
intellectual property is included in Amortization of intangible
assets
as these intangible assets benefit multiple business
functions. Amortization expense related to finite-lived acquired
intangible assets that are associated with a single function is
included in Cost of sales, Selling, general and administrative
expenses or Research and development expenses
, as appropriate.

 
Certain amounts and percentages may reflect rounding adjustments.
 
         
ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
     
Quarter ended June 30, 2018

GAAP
Reported(a)

 

Purchase
Accounting
Adjustments

 

Acquisition-
Related
Costs(1)

 

Certain
Significant
Items(2)

 

Non-GAAP
Adjusted(b)

Cost of sales(c) $ 447 $ (2 ) $ $ (2 ) $ 443
Gross profit 968 2 2 972
Selling, general and administrative expenses(c) 359 (2 ) 357
Amortization of intangible assets(d) 23 (19 ) 4
Restructuring charges/(reversals) and certain acquisition-related
costs
5 (5 )
Income before provision for taxes on income 437 23 7 467
Provision for taxes on income 55 4 35 94
Net income attributable to Zoetis 384 19 (28 ) 375
Earnings per common share attributable to Zoetis–diluted 0.79 0.04 (0.06 ) 0.77
 
 
Quarter ended July 2, 2017

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales(c) $ 440 $ (1 ) $ $ (2 ) $ 437
Gross profit 829 1 2 832
Selling, general and administrative expenses(c) 336 (2 ) (1 ) 333
Amortization of intangible assets(d) 23 (18 ) 5
Restructuring charges/(reversals) and certain acquisition-related
costs
(2 ) 2
Other (income)/deductions–net (2 ) 2
Income before provision for taxes on income 345 21 2 (1 ) 367
Provision for taxes on income 98 6 1 1 106
Net income attributable to Zoetis 247 15 1 (2 ) 261
Earnings per common share attributable to Zoetis–diluted 0.50 0.03 0.53
 
         
ZOETIS INC.
RECONCILIATION OF GAAP REPORTED TO NON-GAAP ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions of dollars, except per share data)
     
Six months ended June 30, 2018

GAAP
Reported(a)

 

Purchase
Accounting
Adjustments

 

Acquisition-
Related
Costs(1)

 

Certain
Significant
Items(2)

 

Non-GAAP
Adjusted(b)

Cost of sales(c) $ 894 $ (4 ) $ $ (3 ) $ 887
Gross profit 1,887 4 3 1,894
Selling, general and administrative expenses(c) 697 (3 ) (1 ) 693
Research and development expenses(c) 199 (1 ) 198
Amortization of intangible assets(d) 46 (38 ) 8
Restructuring charges/(reversals) and certain acquisition-related
costs
7 (1 ) (6 )
Income before provision for taxes on income 854 46 1 10 911
Provision for taxes on income 122 15 38 175
Net income attributable to Zoetis 736 31 1 (28 ) 740
Earnings per common share attributable to Zoetis–diluted 1.51 0.06 (0.06 ) 1.51
 
Six months ended July 2, 2017

GAAP
Reported(a)

Purchase
Accounting
Adjustments

Acquisition-
Related
Costs(1)

Certain
Significant
Items(2)

Non-GAAP
Adjusted(b)

Cost of sales(c) $ 883 $ (3 ) $ $ (5 ) $ 875
Gross profit 1,617 3 5 1,625
Selling, general and administrative expenses(c) 645 (3 ) (3 ) 639
Research and development expenses(c) 176 (1 ) 175
Amortization of intangible assets(d) 45 (36 ) 9
Restructuring charges/(reversals) and certain acquisition-related
costs
(1 ) (2 ) 3
Other (income)/deductions–net (12 ) 2 (10 )
Income before provision for taxes on income 682 43 2 3 730
Provision for taxes on income 196 9 1 1 207
Net income attributable to Zoetis 485 34 1 2 522
Earnings per common share attributable to Zoetis–diluted 0.98 0.07 0.01 1.06
(a)   The condensed consolidated statements of income present the three
and six months ended June 30, 2018, and July 2, 2017. Subsidiaries
operating outside the United States are included for the three and
six months ended May 31, 2018 and May 28, 2017.
(b) Non-GAAP adjusted net income and its components and non-GAAP
adjusted diluted EPS are not, and should not be viewed as,
substitutes for U.S. GAAP net income and its components and diluted
EPS. Despite the importance of these measures to management in goal
setting and performance measurement, non-GAAP adjusted net income
and its components and non-GAAP adjusted diluted EPS are non-GAAP
financial measures that have no standardized meaning prescribed by
U.S. GAAP and, therefore, have limits in their usefulness to
investors. Because of the non-standardized definitions, non-GAAP
adjusted net income and its components and non-GAAP adjusted diluted
EPS (unlike U.S. GAAP net income and its components and diluted EPS)
may not be comparable to the calculation of similar measures of
other companies. Non-GAAP adjusted net income and its components,
and non-GAAP adjusted diluted EPS are presented solely to permit
investors to more fully understand how management assesses
performance.
(c) Exclusive of amortization of intangible assets, except as discussed
in footnote (d) below.
(d)

Amortization expense related to finite-lived acquired intangible
assets that contribute to our ability to sell, manufacture,
research, market and distribute products, compounds and
intellectual property is included in Amortization of intangible
assets
as these intangible assets benefit multiple business
functions. Amortization expense related to finite-lived acquired
intangible assets that are associated with a single function is
included in Cost of sales, Selling, general and administrative
expenses
or Research and development expenses, as appropriate.

 

See Notes to Reconciliation of GAAP Reported to Non-GAAP Adjusted
Information for notes (1) and (2).

Certain amounts may reflect rounding adjustments.
 

ZOETIS INC.
NOTES TO RECONCILIATION OF GAAP REPORTED TO NON-GAAP
ADJUSTED INFORMATION
CERTAIN LINE ITEMS
(UNAUDITED)
(millions
of dollars)

(1)  Acquisition-related costs include the following:

          Second Quarter   Six Months
2018   2017 2018   2017
Integration costs(a) $ $ 2 $ 1 $

2

Total acquisition-related costs—pre-tax 2 1 2
Income taxes(b) 1 1
Total acquisition-related costs—net of tax $ $ 1 $ 1 $ 1
(a)  

Integration costs represent external, incremental costs directly
related to integrating acquired businesses and primarily include
expenditures for consulting and the integration of systems and
processes. Included in Restructuring charges/(reversals) and
certain acquisition-related costs
.

(b)

Included in Provision for taxes on income. Income taxes
include the tax effect of the associated pre-tax amounts,
calculated by determining the jurisdictional location of the
pre-tax amounts and applying that jurisdiction's applicable tax
rate.

 
Certain amounts may reflect rounding adjustments.

(2)  Certain significant items include the following:

          Second Quarter   Six Months
2018   2017 2018   2017
Operational efficiency initiative(a) $ 1 $ 6 $ 1 $ 5
Supply network strategy(b) 3 (4 ) 5 (1 )
Other restructuring charges and cost-reduction/productivity
initiatives(c)
3 3
Other(d)   (3 ) 1   (1 )
Total certain significant items—pre-tax 7 (1 ) 10 3
Income taxes(e) 35   1   38   1  
Total certain significant items—net of tax $ (28 ) $ (2 ) $ (28 ) $ 2  
(a)  

For both the three and six months ended June 30, 2018, represents
employee termination costs of $1 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs
.

For the three months ended July 2, 2017, represents consulting
fees of $1 million, included in Selling, general and
administrative expenses
, restructuring charges of $3 million
related to employee termination costs ($2 million) and exit costs
($1 million), included in Restructuring charges/(reversals) and
certain acquisition-related costs
, and a net loss related to
sales of certain manufacturing sites and products of $2 million,
included in Other (income)/deductions—net. For the six
months ended July 2, 2017, represents consulting fees of $1
million, included in Selling, general and administrative
expenses
, restructuring charges of $2 million related to
employee termination costs ($1 million) and exit costs ($1
million), included in Restructuring charges/(reversals) and
certain acquisition-related costs
, and a net loss related to
sales of certain manufacturing sites and products of $2 million,
included in Other (income)/deductions—net.

(b)

For the three months ended June 30, 2018, represents consulting
fees of $2 million, included in Cost of sales, and exit
costs of $1 million, included in Restructuring
charges/(reversals) and certain acquisition-related costs
. For
the six months ended June 30, 2018, represents consulting fees of
$3 million, included in Cost of sales, and employee
termination costs of $1 million, and exit costs of $1 million,
included in Restructuring charges/(reversals) and certain
acquisition-related costs
.

For the three months ended July 2, 2017, represents accelerated
depreciation of $1 million, included in Cost of sales, and
a reversal of previously accrued employee terminations costs of $5
million, included in Restructuring charges/(reversals) and
certain acquisition-related costs
. For the six months ended
July 2, 2017, represents accelerated depreciation of $2 million,
and consulting fees of $2 million, included in Cost of sales,
and a reversal of previously accrued employee terminations costs
of $5 million, included in Restructuring charges/(reversals)
and certain acquisition-related costs
.

(c)

For the three and six months ended June 30, 2018, represents
employee termination costs in Europe as a result of initiatives to
better align our organizational structure, included in Restructuring
charges/(reversals) and certain acquisition-related costs
.

(d) For the six months ended June 30, 2018, primarily represents charges
related to the implementation of new accounting guidance as a result
of the enactment of the Tax Cuts and Jobs Act.

For the three months ended July 2, 2017, represents costs
associated with changes to our operating model of $1 million,
included in Cost of sales, and income of $4 million related
to an insurance recovery from commercial settlements in Mexico
recorded in 2014 and 2016, included in Other
(income)/deductions—net
. For the six months ended July 2,
2017, represents costs associated with changes to our operating
model of $1 million, included in Cost of sales and $2
million, included in Selling, general and administrative
expenses
, as well as income of $4 million related to insurance
recovery from commercial settlements in Mexico recorded in 2014
and 2016, included in Other (income)/deductions—net.

(e)

Included in Provision for taxes on income. Income taxes
include the tax effect of the associated pre-tax amounts,
calculated by determining the jurisdictional location of the
pre-tax amounts and applying that jurisdiction's applicable tax
rate. For the three and six months ended June 30, 2018, also
includes a net tax benefit of $33 million and $35 million,
respectively, related to an adjustment to the provisional one-time
mandatory deemed repatriation tax on the company's undistributed
non-U.S. earnings pursuant to the Tax Cuts and Jobs Act enacted on
December 22, 2017.

For the six months ended July 2, 2017, also includes a net tax
charge of approximately $1 million, related to the revaluation of
the company's deferred tax assets and liabilities, using the rates
expected to be in place at the time of the reversal.
 
Certain amounts may reflect rounding adjustments.
 
       
ZOETIS INC.

ADJUSTED SELECTED COSTS, EXPENSES AND INCOME (a)

(UNAUDITED)
(millions of dollars)
       
Second Quarter % Change
2018   2017 Total  

Foreign
Exchange

  Operational(b)
Adjusted cost of sales $ 443 $ 437 1 % % 1 %
as a percent of revenue 31.3 % 34.4 % NA NA NA
Adjusted SG&A expenses 357 333 7 % 2 % 5 %
Adjusted R&D expenses 102 86 19 % 3 % 16 %
Adjusted net income attributable to Zoetis 375 261 44 % 7 % 37 %
 
 
Six Months % Change
2018 2017 Total

Foreign
Exchange

Operational(b)
Adjusted cost of sales $ 887 $ 875 1 % 1 % %
as a percent of revenue 31.9 % 35.0 % NA NA NA
Adjusted SG&A expenses $ 693 $ 639 8 % 2 % 6 %
Adjusted R&D expenses 198 175 13 % 2 % 11 %
Adjusted net income attributable to Zoetis 740 522 42 % 6 % 36 %
(a)   Adjusted cost of sales, adjusted selling, general, and
administrative (SG&A) expenses, adjusted research and development
(R&D) expenses, and adjusted net income attributable to Zoetis
(non-GAAP financial measures) are defined as the corresponding
reported U.S. GAAP income statement line items excluding purchase
accounting adjustments, acquisition-related costs, and certain
significant items. These adjusted income statement line item
measures are not, and should not be viewed as, substitutes for the
corresponding U.S. GAAP line items. The corresponding GAAP line
items and reconciliations of reported to adjusted information are
provided in Condensed Consolidated Statements of Operations and
Reconciliation of GAAP Reported to Non-GAAP Adjusted Information.
(b) Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
     

ZOETIS INC.
2018 GUIDANCE

             
Selected Line Items

(millions of dollars, except per share amounts)

      Full Year 2018  

Foreign exchange impact
compared to May 2018
guidance

Revenue       $5,700 to $5,800   (125)
Operational growth(a) 7% to 9%
Organic operational growth(b)       5% to 7%  
Adjusted cost of sales as a percentage of revenue(c)       Approximately 32%    
Adjusted SG&A expenses(c)       $1,410 to $1,450   (25)
Adjusted R&D expenses(c)       $415 to $430   (5)
Adjusted interest expense and other (income)/deductions(c)       Approximately $200    
Effective tax rate on adjusted income(c)       Approximately 20%    
Adjusted diluted EPS(c)       $3.00 to $3.10   (.07)
Adjusted net income(c) $1,460 to $1,510 (35)
Operational growth(a)(d)       23% to 27%  
Certain significant items and acquisition-related costs(e)       $65 to $90    

This guidance reflects the inclusion of Abaxis results for the last 5
months of the year in the U.S., and 4 months internationally, based on
our preliminary estimates including with respect to certain significant
items, acquisition-related costs and purchase accounting adjustments.
The actual impact of the acquisition on our financial results could
differ materially from these estimates.

The guidance reflects foreign exchange rates as of mid-July 2018.

Reconciliations of 2018 reported guidance to 2018 adjusted guidance
follows:

                     
(millions of dollars, except per share amounts)       Reported  

Certain significant
items and
acquisition-related
costs(d)

 

Purchase
accounting

  Adjusted(b)
           
Cost of sales as a percentage of revenue       ~ 32.5%   (0.5%)       ~ 32%
SG&A expenses       $1,417 to $1,460       ($7) to $(10)   $1,410 to $1,450
R&D expenses       $415 to $430           $415 to $430
Interest expense and other (income)/deductions       ~ $200           ~ $200
Effective tax rate       ~ 18%   ~ (2)%       ~ 20%
Diluted EPS       $2.72 to $2.89   $0.05 to $0.08   $0.15 to $0.20   $3.00 to $3.10
Net income attributable to Zoetis       $1,325 to $1,410   $25 to $40   $75 to $95   $1,460 to $1,510
(a)   Operational growth (a non-GAAP financial measure) excludes the
impact of foreign exchange.
(b) Organic operational growth (a non-GAAP financial measure) excludes
the impact of the acquisition of Abaxis as well as foreign exchange.
(c) Adjusted net income and its components and adjusted diluted EPS are
defined as reported U.S. generally accepted accounting principles
(GAAP) net income and its components and reported diluted EPS
excluding purchase accounting adjustments, acquisition-related costs
and certain significant items. Adjusted cost of sales, adjusted
selling, general and administrative (SG&A) expenses, adjusted
research and development (R&D) expenses, and adjusted interest
expense and other (income)/deductions are income statement line
items prepared on the same basis, and, therefore, components of the
overall adjusted income measure. Despite the importance of these
measures to management in goal setting and performance measurement,
adjusted net income and its components and adjusted diluted EPS are
non-GAAP financial measures that have no standardized meaning
prescribed by U.S. GAAP and, therefore, have limits in their
usefulness to investors. Because of the non-standardized
definitions, adjusted net income and its components and adjusted
diluted EPS (unlike U.S. GAAP net income and its components and
diluted EPS) may not be comparable to the calculation of similar
measures of other companies. Adjusted net income and its components
and adjusted diluted EPS are presented solely to permit investors to
more fully understand how management assesses performance. Adjusted
net income and its components and adjusted diluted EPS are not, and
should not be viewed as, substitutes for U.S. GAAP net income and
its components and diluted EPS.
(d) We do not provide a reconciliation of forward-looking non-GAAP
adjusted net income operational growth to the most directly
comparable GAAP reported financial measure because we are unable to
calculate with reasonable certainty the foreign exchange impact of
unusual gains and losses, acquisition-related expenses, potential
future asset impairments and other certain significant items,
without unreasonable effort. The foreign exchange impacts of these
items are uncertain, depend on various factors, and could have a
material impact on GAAP reported results for the guidance period.
(e) Primarily includes certain nonrecurring costs related to the
acquisition of Abaxis, restructuring and other charges for the
supply network strategy. Excludes potential net gains/losses on
sales of assets. The actual impact of the acquisition of Abaxis on
our financial results could differ materially from these estimates.
 
 
ZOETIS INC.

CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES

(UNAUDITED)
(millions of dollars)
       
Second Quarter % Change
2018   2017 Total  

Foreign
Exchange

  Operational(b)
Revenue:
Livestock $ 734 $ 689 7 % 3 % 4 %
Companion Animal 671 568 18 % 2 % 16 %
Contract Manufacturing 10 12 (17 )% (3 )% (14 )%
Total Revenue $ 1,415 $ 1,269 12 % 3 % 9 %
 
 
 
U.S.
Livestock $ 271 $ 269 1 % % 1 %
Companion Animal 406 354 15 % % 15 %
Total U.S. Revenue $ 677 $ 623 9 % % 9 %
 
International
Livestock $ 463 $ 420 10 % 4 % 6 %
Companion Animal 265 214 24 % 7 % 17 %
Total International Revenue $ 728 $ 634 15 % 5 % 10 %
 
 
 
Livestock:
Cattle $ 396 $ 382 4 % 2 % 2 %
Swine 165 148 11 % 4 % 7 %
Poultry 129 122 6 % 1 % 5 %
Fish 24 19 26 % 13 % 13 %
Other 20 18 11 % 3 % 8 %
Total Livestock Revenue $ 734 $ 689 7 % 3 % 4 %
 
Companion Animal:
Dogs and Cats $ 630 $ 533 18 % 2 % 16 %
Horses 41 35 17 % 3 % 14 %
Total Companion Animal Revenue $ 671 $ 568 18 % 2 % 16 %
(a)   For a description of each segment, see Note 18A to Zoetis'
consolidated financial statements included in Zoetis' Form 10-K for
the year ended December 31, 2017.
(b) Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
 
Certain amounts and percentages may reflect rounding adjustments.
 
 
ZOETIS INC.

CONSOLIDATED REVENUE BY SEGMENT(a) AND SPECIES

(UNAUDITED)
(millions of dollars)
       
Six Months % Change
2018   2017 Total  

Foreign
Exchange

  Operational(b)
Revenue:
Livestock $ 1,504 $ 1,392 8 % 3 % 5 %
Companion Animal 1,261 1,085 16 % 3 % 13 %
Contract Manufacturing 16 23 (30 )% 5 % (35 )%
Total Revenue $ 2,781 $ 2,500 11 % 3 % 8 %
 
 
 
U.S.
Livestock $ 563 $ 551 2 % % 2 %
Companion Animal 748 677 10 % % 10 %
Total U.S. Revenue $ 1,311 $ 1,228 7 % % 7 %
 
International
Livestock $ 941 $ 841 12 % 5 % 7 %
Companion Animal 513 408 26 % 8 % 18 %
Total International Revenue $ 1,454 $ 1,249 16 % 6 % 10 %
 
 
 
Livestock:
Cattle $ 812 $ 768 6 % 3 % 3 %
Swine 340 308 10 % 4 % 6 %
Poultry 265 238 11 % 2 % 9 %
Fish 46 40 15 % 9 % 6 %
Other 41 38 8 % 5 % 3 %
Total Livestock Revenue $ 1,504 $ 1,392 8 % 3 % 5 %
 
Companion Animal:
Dogs and Cats $ 1,179 $ 1,015 16 % 3 % 13 %
Horses 82 70 17 % 4 % 13 %
Total Companion Animal Revenue $ 1,261 $ 1,085 16 % 3 % 13 %
(a)   For a description of each segment, see Note 18A to Zoetis'
consolidated financial statements included in Zoetis' Form 10-K for
the year ended December 31, 2017.
(b) Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
 
Certain amounts and percentages may reflect rounding adjustments.
 
             
ZOETIS INC.
CONSOLIDATED REVENUE BY KEY INTERNATIONAL MARKETS
(UNAUDITED)
(millions of dollars)
       
Second Quarter % Change
2018   2017 Total  

Foreign
Exchange

  Operational(a)
Total International       $ 728   $ 634   15 % 5 %   10 %
Australia 51 43 19 % 3 % 16 %
Brazil 68 73 (7 )% (7 )% %
Canada 56 49 14 % 7 % 7 %
China 60 45 33 % 10 % 23 %
France 30 26 15 % 12 % 3 %
Germany 38 33 15 % 10 % 5 %
Italy 26 21 24 % 15 % 9 %
Japan 39 36 8 % 3 % 5 %
Mexico 26 21 24 % 2 % 22 %
Spain 30 23 30 % 14 % 16 %
United Kingdom 36 26 38 % 15 % 23 %
Other Developed 89 76 17 % 8 % 9 %
Other Emerging 179 162 10 % 1 % 9 %
 
Six Months % Change
2018 2017 Total

Foreign
Exchange

Operational(a)
Total International       $ 1,454   $ 1,249   16 % 6 %   10 %
Australia 99 83 19 % 4 % 15 %
Brazil 138 139 (1 )% (4 )% 3 %
Canada 96 83 16 % 7 % 9 %
China 124 97 28 % 10 % 18 %
France 63 55 15 % 14 % 1 %
Germany 76 61 25 % 15 % 10 %
Italy 53 43 23 % 13 % 10 %
Japan 80 70 14 % 3 % 11 %
Mexico 50 39 28 % 6 % 22 %
Spain 55 43 28 % 15 % 13 %
United Kingdom 88 69 28 % 13 % 15 %
Other developed markets 168 144 17 % 9 % 8 %
Other emerging markets 364 323 13 % 3 % 10 %
(a)   Operational revenue growth (a non-GAAP financial measure) is defined
as revenue growth excluding the impact of foreign exchange.
Certain amounts and percentages may reflect rounding adjustments.
 
   
ZOETIS INC.

SEGMENT(a) EARNINGS

(UNAUDITED)
(millions of dollars)
       
Second Quarter % Change
2018   2017 Total    

Foreign
Exchange

  Operational(b)

U.S.:

Revenue $ 677 $ 623 9 %

%

9 %
Cost of Sales 140   134   4 % % 4 %
Gross Profit 537 489 10 % % 10 %
Gross Margin 79.3 % 78.5 %
Operating Expenses 116 113 3 % % 3 %
Other (income)/deductions    

%

% %
U.S. Earnings $ 421 $ 376 12 % % 12 %
 

International:

Revenue $ 728 $ 634 15 % 5 % 10 %
Cost of Sales 229   219   5 % 4 % 1 %
Gross Profit 499 415 20 % 5 % 15 %
Gross Margin 68.5 % 65.5 %
Operating Expenses 147 126 17 % 5 % 12 %
Other (income)/deductions 2   2   % (44 )% 44 %
International Earnings $ 350 $ 287 22 % 6 % 16 %
 
Total Reportable Segments $ 771 $ 663 16 % 2 % 14 %
 
Other business activities(c) (82 ) (73 ) 12 %
Reconciling Items:
Corporate(d) (139 ) (151 ) (8 )%
Purchase accounting adjustments(e) (23 ) (21 ) 10 %
Acquisition-related costs(f) (2 ) (100 )%
Certain significant items(g) (7 ) 1 *
Other unallocated(h) (83 ) (72 ) 15 %
Total Earnings(i) $ 437   $ 345   27 %
* Calculation not meaningful.
 
(a)   For a description of each segment, see Note 18A to Zoetis'
consolidated financial statements included in Zoetis' Form 10-K for
the year ended December 31, 2017.
(b) Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
(c) Other business activities reflect the research and development costs
managed by our Research and Development organization as well as our
contract manufacturing business.
(d) Corporate includes, among other things, administration expenses,
interest expense, certain compensation costs, certain procurement
costs, and other costs not charged to our operating segments.
(e) Purchase accounting adjustments include certain charges related to
the amortization of fair value adjustments to inventory, intangible
assets and property, plant and equipment not charged to our
operating segments.
(f) Acquisition-related costs can include costs associated with
acquiring and integrating newly acquired businesses, such as
transaction costs and integration costs.
(g) Certain significant items includes substantive, unusual items that,
either as a result of their nature or size, would not be expected to
occur as part of our normal business on a regular basis. Such items
primarily include restructuring charges and implementation costs
associated with our cost-reduction/productivity initiatives that are
not associated with an acquisition, costs associated with the
operational efficiency initiative and supply network strategy,
certain legal and commercial settlements, and the impact of
divestiture-related gains and losses.
(h) Includes overhead expenses associated with our manufacturing and
supply operations not directly attributable to an operating segment,
as well as certain procurement costs.
(i) Defined as income before provision for taxes on income.
 
Certain amounts and percentages may reflect rounding adjustments.
 
       
ZOETIS INC.

SEGMENT(a) EARNINGS

(UNAUDITED)
(millions of dollars)
       
Six Months % Change
2018   2017 Total  

Foreign
Exchange

  Operational(b)

U.S.:

Revenue $ 1,311 $ 1,228 7

%

% 7 %
Cost of Sales 280   271   3 % % 3 %
Gross Profit 1,031 957 8 % % 8 %
Gross Margin 78.6 % 77.9 %
Operating Expenses 212 209 1 % % 1 %
Other (income)/deductions  

 

%

%

%

U.S. Earnings $ 819 $ 748 9 % % 9 %
 

International:

Revenue $ 1,454 $ 1,249 16 % 6 % 10 %
Cost of Sales 463   432   7 % 4 % 3 %
Gross Profit 991 817 21 % 7 % 14 %
Gross Margin 68.2 % 65.4 %
Operating Expenses 280 240 17 % 7 % 10 %
Other (income)/deductions 3   (1 ) * * *
International Earnings $ 708 $ 578 22 % 7 % 15 %
 
Total Reportable Segments $ 1,527 $ 1,326 15 % 3 % 12 %
 
Other business activities(c) (163 ) (147 ) 11 %
Reconciling Items:
Corporate(d) (292 ) (294 ) (1 )%
Purchase accounting adjustments(e) (46 ) (43 ) 7 %
Acquisition-related costs(f) (1 ) (2 ) (50 )%
Certain significant items(g) (10 ) (3 ) *
Other unallocated(h) (161 ) (155 ) 4 %
Total Earnings(i) $ 854   $ 682   25 %
* Calculation not meaningful.
 
(a) For a description of each segment, see Note 18A to Zoetis'
consolidated financial statements included in Zoetis' Form 10-K for
the year ended December 31, 2017.
(b) Operational growth (a non-GAAP financial measure) is defined as
growth excluding the impact of foreign exchange.
(c) Other business activities reflect the research and development costs
managed by our Research and Development organization as well as our
contract manufacturing business.
(d) Corporate includes, among other things, administration expenses,
interest expense, certain compensation costs, certain procurement
costs, and other costs not charged to our operating segments.
(e) Purchase accounting adjustments include certain charges related to
the amortization of fair value adjustments to inventory, intangible
assets and property, plant and equipment not charged to our
operating segments.
(f) Acquisition-related costs can include costs associated with
acquiring and integrating newly acquired businesses, such as
transaction costs and integration costs.
(g) Certain significant items includes substantive, unusual items that,
either as a result of their nature or size, would not be expected to
occur as part of our normal business on a regular basis. Such items
primarily include restructuring charges and implementation costs
associated with our cost-reduction/productivity initiatives that are
not associated with an acquisition, costs associated with the
operational efficiency initiative and supply network strategy,
certain legal and commercial settlements, and the impact of
divestiture-related gains and losses.
(h) Includes overhead expenses associated with our manufacturing and
supply operations not directly attributable to an operating segment,
as well as certain procurement costs.
(i) Defined as income before provision for taxes on income.
 
Certain amounts and percentages may reflect rounding adjustments.

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