Zoetis Inc. (NYSE:ZTS) Q4 2022 Earnings Call Transcript

Page 2 of 10

Wetteny Joseph: No. Look, I’ll just add a couple of points. Going back to Trio, we expect, as Kristin said, for Trio to grow significantly in the year, although as we now are well into our third year with a product, we wouldn’t expect it to continue to grow at 58%, which is what it did in 2022. Now the timing of our supply recovery in 2022 and the fact that as we see competition come in, it may drive some promotional activities that might drive some variability in terms of quarter-to-quarter in terms of where the growth is. But for the total year, we expect significant growth on Trio. And then on the R&D spend, it’s our practice that we don’t actually dictate what the investment in R&D is going to be. We let the pipeline dictated.

And so as we see programs either coming into research or coming out of research into development or into late development as those programs require spending, and we do a full ROI spec, etcetera, on them, we go ahead and fund those. And so we’re very pleased to see that the pipeline is demanding this level of investment and we will still be able to deliver faster growth at ANI in revenue based on our guide of 6% to 8% of revenue and 7% to 9% at adjusted net income.

Operator: Our next question comes from Jon Block from Stifel.

Jon Block: Great. Thanks, guys and good morning. Wetteny, the 4Q GM of 68.1% was a little bit below us for the quarter, but the 2023 guidance of 70% to 70.5% was certainly solid. So maybe if you can just talk to the drivers for €˜23 gross margin or those the supply chain easing, maybe a little bit about the cadence? And then maybe just sort of as a tack on to that or the second question. In 2022, it was sort of a tale of two halves for atopic derm. One H was operational around 20%, two H operational, I think it was closer to 10%. I think you guys alluded to solid growth in €˜23, but do you want to just frame that for us? Is it a continued deceleration of atopic derm into €˜23 with no competition because I think you clarified that? Or can we expect some level of stabilization, call it, in that high single, low double-digit range for the atopic derm franchise? Thanks, guys.

Wetteny Joseph: Yes. So I’ll start and see if Kristin would add anything here. Let’s start with gross margins. Look, if you look at the year, we were able to expand margins on the year. And certainly, as we explained in the prepared commentary, we saw FX come in to the tune of about 80 basis point headwind against gross margin in the fourth quarter. And certainly, we’ve seen input costs or some manufacturing costs impact the gross margin picture that you saw in the fourth quarter. But given where OpEx came in, you saw substantial growth at ANI versus revenue where revenue came in at 9% in the quarter ANI coming and 27% growth in the quarter. I think as we go into 2023, given the timing of our price increases, which started at the beginning of the year, as you know, certainly, we’ve seen some inflation in input costs coming out of €˜22, but we go into €˜23 price increases that start to change that as we go into €˜23, which is why we give guidance where we see about 40 basis point margin €“ gross margin expansion on the year.

Page 2 of 10