Zoetis Inc.
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

Welcome to the Zoetis First Quarter 2013 Financial Results Conference Call and Webcast. Hosting the call today from Zoetis is Vice President of Investor Relations Dina Fede. The presentation materials and additional financial tables are currently posted on the Investor Relation sections of Zoetis.com. In addition, a replay of this call will be available approximately two hours after the conclusion of the call via dial-in or in the Investor Relations section of Zoetis.com. At this time, all participants have been placed in a listen-only-mode and the floor will be open to your questions following the presentation. (Operator instructions) It is now my pleasure to turn the call over to Dina Fede. Dina, you may begin.

[Dina Fede:]

Thank you. Good morning everyone and welcome to the Zoetis First Quarter 2013 Earnings Call. I am joined today by Juan Ramón Alaix, our Chief Executive Officer; and Rick Passov, our Chief Financial Officer. Juan Ramón and Rick will provide an overview of our business, our financial results for the quarter and our 2013 guidance. We will then open the call for you questions. We are also providing a simultaneous webcast for this morning's call. For your reference a PDF version of the slides we're presenting and a transcript of a call will be available on the website later today. Our remarks today will include forward-looking statements and actual results could differ materially from those projections. For a list and descriptions of certain factors that could cause the result to differ I refer you to the forward-looking statement in today's press release and our SEC filing including, but not limited to our 2012 10-K. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles or U.S. GAAP. Our reconciliation of these non-GAAP financial measures to the most directly comparable U.S GAAP measure is included in the financial table that accompany our earnings press release and is a company's 8-K filing dated today, April 30th, 2013. With that I will turn the call over to Juan Ramón.

[Juan Ramón Alaix:]

Thank you, Dina, and hello everyone. Thank you for joining today's earning call. I am very pleased to have the opportunity to speak with you about our results for the first quarter of 2013. Since our IPO in February, the entire Zoetis team has been focused on establishing our new company. The 9,000 plus Zoetis colleagues are on the world have demonstrated their passion for building on our six decade history and singular focus on animal health to continue to bring our customers quality products, services and commitment to their business. It has been a crucial time as we continue to establish our new company, and I am very pleased to share that the work we are doing is already paying up. In the first quarter 2013, we reported revenue growth of 4%, 5% operational and adjusted net income growth of 18%. The performance demonstrate our commitment to continue to grow earnings through right allocation of resources and the pursuit of our growth strategies. We believe that our diversity across many dimensions is our competitive strength. These dimensions include region, species, product and therapeutic area. One example that reflects this strength is the performance of our U.S. business. Here, the drought continued to impact sales of our cattle products. This was balanced by a growth in companion animal sales and strong performance of our poultry and swine products. As Dina mentioned, Rick Passov, our Chief Financial Officer, will provide more details of information associated with each of the regions related on the call. He will also provide our full-year 2013 net guidance. Let me first highlight the three interconnected capabilities of Zoetis which I believe continue to contribute to the overall performance of our company. The first of these is our direct sales and marketing model. Our worldwide geographic footprint enables Zoetis to have a field force present in about 70 countries, in both develop and emerging markets. We are active in 120 plus countries and we are leader in nearly all of the main regions in which we operate. We work constantly with our customers to provide them innovative products, services and support that will make a difference for their businesses. We also strive to make doing business with us easy, efficient and meaningful. The second capability is leadership in product research and development, which is best evidence through our expenses and the diverse product portfolio. In addition to our R&D program for new products, we also apply a focus on brand lifecycle management. These involve efforts to improve the performance and delivery of our current product lines, the expansions of product indications across species and the pursuit of approval across new geographies. For example, in Japan, we recently achieved registration of Fostera PCV, a vaccine for swine respiratory diseases. Also, in Japan, we recently launched DRAXXIN, an injectable antibiotic for cattle and swine. That is one of our top-selling products globally. And in China, we saw a launch of Convenia, an antibiotic for cats and dogs, first launched in European and European Union in 2006, which is now one of our premier companion animal products. And finally, on our capabilities, our high quality products, which are delivered by our world-class manufacturing operations. We continue to play some important emphasis on our internal factoring and supply capability. It provide us with key advantage in the animal health care market. We are continually looking to enhance our operation effectiveness and bring innovation to our processes. These will increase our manufacturing efficiencies and expand production margins. Most importantly, these have been achieved while delivering high levels of the quality and consistent levels of supply. In spite of economy crisis, weather-related challenges around the world and even disease outbreaks in some countries, we believe the fundamentals of our animal health industry are very strong. What we are seeing today on longer term provides continued opportunity for our company. The population of our world continues to grow. By 2050 it could be more than 9 billion people. In addition, emerging markets are seeing growth in the middle class sectors of their societies. These factors are creating increased levels of consumption of animal protein at a time of limited natural resources including at our land and water. These are significant opportunity for animal health companies that can bring the innovation to face the challenge to produce more with less. Furthermore, improved standards of living are leading the high levels of pet ownership and more spending on the medical care of these animals. These creating opportunities to grow trend in similar expenditure within the pet care sector both in established and emerging markets. Here, at Zoetis, we are continued to partner with veterinarians and livestock producers across the globe to better understand the ways in which we can support them. For example, last month in Argentina we signed an agreement with a large dairy partner to perform genomic tests on their herds using Clarifide, a genetic marker. Through the use of these products, Zoetis is helping these partners to make informed decisions and manage their livestock more efficiently. As well as work under taken to maintain our market leading position and support our customers, we are also delivering on our plans to stand up the company. I’m pleased with the proudest we have made on this important work since the IPO and the plant we have in place to progress this. And with that, let me thank you for your attention and your interest in Zoetis. I will now hand over to Rick Passov, our Chief Financial Officer, and ask him to walk us through the financials. Rick?

[Rick Passov:]

Thank you, Juan Ramon, and let me add my welcome to everyone joining us today. When we conducted our pre-IPO road show a few months, we enjoyed the opportunity to introduce the financial community to Zoetis. With today’s conference call, we look forward to beginning a regular cycle of communication with you. Let me begin by explaining the basis of how we present our financial this year. While our results are reported in accordance with US GAAP, our commentary will largely speak to financial results on an adjusted basis. These adjusted figures including adjusted net income and adjusted earnings per share are non-GAAP measures. They exclude the impact of purchase accounting adjustments, acquisition-related costs and certain significant items such as the non-recurring costs of becoming a standalone public company. We also cite operational results, which excludes the impact of foreign exchange and demonstrate the underlying performance of our business. We believe that providing these views of our performance, which are used by management to evaluate the business, will enhance your understanding of our financial results. Our financial results reflect how we manage our business on a regional basis. In addition to the company’s overall income statement, we provide revenues and earnings for our four regional operating segments, the United States, Europe, Africa and Middle East or EuAfME; Canada and Latin America or CLAR; and Asia Pacific or APAC. While we manage the business by regional segments, we are also providing supplemental information about each segment's total revenue broken down by livestock and companion animal categories. These and other additional details are included in the tables accompanying our press release, which are also located on our website. Given we were not a standalone company in 2012, let me briefly discuss the basis for our year-over- year comparisons. As indicated in our recent 10-K filing, our financial statements for 2012 and prior years have been derived from the consolidated financial statements and accounting records of Pfizer. These include allocations for direct costs and indirect costs, which were attributed to the animal health business of Pfizer. Some of these allocations, for example, were for certain support functions that were provided on the centralized basis within Pfizer such as expenses for certain aspect of business technology, facilities and other corporate functions. Pfizer will continue to provide some of the services to Zoetis under transitional service agreements or what you may hear us call TSAs. As we noted in prior filings, the combined financial statements for 2012 do not necessarily reflect what the results of operations would have been had we operated as a standalone public company. As a result, this can make comparisons to the prior year difficult in certain instances. First quarter 2013 financials will include allocations from Pfizer through our IPO. For all periods going forward, our results will be based on a direct cost associated with the standalone operations, not allocations. Those results will include costs related to services we receive from Pfizer under the TSAs that I mentioned. Turning now to our financial results for the first quarter of 2013, our first quarter 2013 revenues were approximately $1.09 billion, an increase of approximately 4% year-over-year including a negative impact of 1% from foreign exchange. We reported operational growth across each of our regional segments led by increased revenues in the US segment. Reported net income of $140 million and diluted earnings per share of $0.28 increased approximately 26% and 26% respectively. On an adjusted basis, net income of $179 million and diluted earnings per share of $0.36 showed an increase of approximately 18% and 20% respectively. The adjusted net income excludes the impact of $9 million of purchase accounting adjustments, $4 million of acquisition related costs and $27 million of certain significant items. We believe this first quarter results represent a solid start of the year showing the diversity of our business across products, species and geographies, and demonstrate an ability to grow earnings faster than sales. Turning to our adjusted net income statement, revenues were up about 5% operationally excluding the impact of foreign exchange. Adjusted cost of sales was approximately 36.5% of revenues versus 37.1% in the year ago quarter. Adjusted SG&A and adjusted R&D expense both decreased approximately 3%. Since we continue to build our infrastructure, our SG&A expenses this quarter do not yet reflect our expected full run rate of expenses for 2013. Adjusted interest expense increased to $22 million in the first quarter of 2013 from $8 million in the first quarter of 2012. This increase reflects our debt issuance in January of this year. Adjusted other income and deductions in the quarter declined to a deduction of $2 million in the first quarter of 2013 from income of $6 million in the first quarter of 2012. This decline is primarily driven by the non-recurring impact of the Venezuela currency devaluation. Our effective adjusted tax rate for the first quarter was approximately 29% including the non-recurring benefit of a US R&D credit which was retroactively extended in January of 2013. And finally, our adjusted net income increased approximately 18% to $179 million for the first quarter. Now, on to our operating segment results which I will discuss on an operational basis. These segment earnings are pre-tax numbers and are reported on an adjusted basis as I described earlier. Beginning with the US, first quarter revenues were $454 million, an increase of 7%, and earnings grew approximately 8%. Companion animal revenues increased by approximately 13%. This growth reflects, among other things, continuing demand for products and the positive impact of the competitor supply issue which has now been resolved. Livestock revenues in the US grew 2% versus the year ago quarter. Strong sales of both poultry and swine products were largely offset by a decline in product sales for cattle due to the negative impact of ongoing drought conditions in the US. In EuAfME, first quarter sales were $290 million, an increase of approximately 4%, while earnings increased about 16%. These results were driven primarily by herd companion animal product sales increased to approximately 6% and by 3% growth in sales of livestock products especially in swine and poultry. Results were also favorably impacted by the timing of price increases in certain European markets. In EuAfME, we continued to see challenging economic conditions particularly in Southern Europe and we expect an unseasonably cold weather across much of Europe will likely delay the start of the parasiticide season, which normally begins early in the second quarter. In CLAR, first quarter sales were $171 million, an increase of approximately 4%, while earnings increased about 9%. Results in this region are largely driven by performance in its two largest markets Brazil and Canada. Livestock product sales increased 6% primarily due to these two markets. Sales growth of cattle products in Canada was driven a strong fall calf season, while in Brazil we saw growth in both swine and poultry product sales. Sales of companion animal products decreased 5%, primarily due to the favorable impact in the year ago quarter of a competitor supply issue in Canada. In Latin American market, this quarter particularly in Brazil we continued to see growth in companion animal product sales. Finally, in APAC, first quarter sales were $175 million, an increase of 2%, while earnings in the region increased 6%. Livestock product sales increased to approximately 3% driven largely by our sales of swine products particularly in Australia, while drought conditions in Southern Australia continue to impact the dairy industry, and Japan continues to be impacted by the ongoing economic challenges in that market. Finally, companion animal product sales in APAC increased by approximately 2% operationally. Now, let us turn to guidance for 2013. This guidance assumes a blend of actual exchange rates in effect during the first quarter of 2013 and mid April exchange rates for the remainder of the year. We expect reported revenues of approximately $4.425 billion to $4.525 billion for the full year. We expected an adjusted to cost to sales as percentage of revenue to be between 35% and 36%. Adjusted SG&A expenses are expected to be between $1.385 billion and $1.435 billion. Adjusted R&D expenses are expected to be between $385 million and $415 million, and we expect the tax rate on adjusted income of approximately 29.5% for the full year. We also expect to incur non-reoccurring costs largely related to standing up the company of between approximately $200 million to $240 million in 2013. These costs will be excluded from our adjusted numbers. While our quarterly results are subject to some variability related to weather patterns and herd management decisions, our annual guidance reflects our confidence in the diversity of our portfolio, the strength of our business model and our view of the evolving market conditions for animal health products this year. That concludes my prepared remarks and now we'll open the line for your questions. Dina?

[Dina Fede:]

Thank you, Rick. Thank you, Juan Ramón. Operator, we are ready for our first question.

[Operator:]

Operator instructions. Our first question comes from the site of Chris Schott with JPMorgan. Go ahead, your line is open.

[Chris Schott:]

Great, thanks very much and congrats on the first quarter out here. I just had two quick questions. The first one is just if this is your initial guidance call, can you just walk through some of the factors that could put you at the high or low end of your revenue range this year? And I guess that you were discussing that specifically what's reflected in these numbers in terms of a recovery from the drought in the US? My second question was SG&A, the guidance looking like a second year in a row here of expenses that are kind of flattish. Do you have a longer term model, I know you're not providing guidance beyond 2013, but is it fair to think about SG&A that that's flat or that we could see inflation like growth in SG&A as we think about the model evolving over the next few years? Thanks very much.

[Juan Ramón Alaix:]

Thank you, Chris, and let me provide some comments on the two questions and probably Rick will explain some of my remarks. So, first, I think there is still some uncertainties related to the drought, and depending on the impact of the drought we will be able to really to go higher or lower in the range that that we have provided. Also, we expect some recovery in European market that also can drive some of the revenues that we expect for the year and, again, this will impact the total revenues that that will be really reported at the end of the year. In terms of SG&A, I think definitely our model is to grow revenues faster than expenses, and it is something that definitely we achieve that in the past and we will continue really growing revenues much faster than expenses. So, Rick, do you want to add some other comments?

[Rick Passov:]

No, I think all I would add just in particular with respect to Q1 is that SG&A does reflect the pace of building up infrastructure here, and I think as you will see when you do the math, the number is a little bit less than what we expect it to be on a run rate to revenue for the full year.

[Operator:]

We will go next to Robert Willoughby with Bank of America. Go ahead, you line is open.

[Ann Wilson:]

Hi, this is Ann Wilson in for Bob today. I understand I guess the lingering effect of the drought or rain on the US livestock business near term but could you comment on the impacts of a later or possibly reduce corn planting expected this year? Would that be, potentially have a meaning for impact and how should we think about that going forward?

[Juan Ramón Alaix:]

At this point, there are still uncertainties about the corn production in the US for 2013. We know that we moved from a drought last year from now a flood in some parts of the corn belt that is really delaying seeding corn in the US. At the same time, we know that some of the markets they saw the opportunity of the high prices of corn last year really to increase the production of corn. So, at this point, it's a little bit complicated to know what will be the level of price of corn in 2013. What we see today is that the price is lower than the record price in 2013, that it was close to $9 the bushel, and now we are around $6 and $6.5 or so. I think this is something that will create probably a better opportunity for our livestock producer in terms of the input cost.

[Ann Wilson:]

Okay. Great and what was --

[Operator:]

We will go next to David Risinger with Morgan Stanley. Go ahead, your line is open.

[David Risinger:]

Thanks very much and congrats on the results. I wanted to ask two questions please. The first is a high level question about Europe. (inaudible) had said a week ago that meat supply is exceeding demand ex-US and that is slowing livestock industry growth. Could you please offer your comments on that? And then, second, a financial question for Rick. Could you talk about tax rate reduction opportunities to take the tax rate below 29% in the out years? Thanks very much.

[Juan Ramón Alaix:]

Thank you, David. One of the strengths of Zoetis is the diversity of our portfolio in terms of the geographies, in terms of species, in terms of (inaudible) carriers. And what we have seen in the first quarter has been a reduction on sales of cattle products. But we increased significantly revenues generated by swine and poultry in many different geographies. We also had a very strong performance in companion animal. In terms of the price of the meat, I think it is -- we think that in some parts of the geographies where there where extra supply of meat and then this drop price down. But this is something that we expect some -- well, these are temporary adjustment and we do not see that this will have a significant impact in the rest of the year. We are still committed to our numbers that has been provided to here to-date. And what we will see is that among different quarters are some fluctuations in terms of the results. But definitely our industry should be really accessed on yearly basis and this were we think that we are focused on delivering our numbers at the end of the year. Rick, do you want really to maybe expand of these question and also to answer the tax rate?

[Rick Passov:]

I will just turn to the tax rate actually and, David, just say that the tax rate that we are providing in our guidance is a good estimate of what we think our tax rate will be over the long-term, it may vary somewhat around the estimated rate but that it's clearly our intended target. And when you look at the rate comparative similarly situated multi nationals it's a rate that I think you would expect to see.

[Operator:]

We will go next to Louise Chen with Guggenheim. Go ahead, your line is open.

[Louise Chen:]

Hi, good morning. Thank you for the question. I was curious, if you could provide more color behind the specifics that would drive down your cost of goods sold and SG&A over time? Thank you.

[Juan Ramón Alaix:]

Okay. Thank you, Louise. And I will just provide a general comment and I will ask Rick to go into the details. Definitely, we will see in terms of cost of goods that will benefit on probably two or three important factors. One will be price increase. And I like to really confirm that in the first quarter we increased the prices across species and across geographies. And second, we also continue focus on cost improvements in our manufacturing network. In terms of SG&A, I think definitely we will continue having the right discipline in terms of allocation of resources. And we expect SG&A growing lower than revenues and this is something that has been done in the past and we will continue in the future. Rick?

[Rick Passov:]

I will just repeat, Louise and again thank you for a question. Volume, price increase, some products moving back into our network and very good cost discipline across the country -- the company.

[Operator:]

We will go next to Kevin Ellich with Piper Jaffray. Go ahead your line is open.

[Kevin Ellich:]

Good morning. Thanks for taking questions. I guess just wanted to ask about the strong companion animal growth in U.S. Curious as to what you think the sustainable growth is in that segment and what opportunities you see in terms of using your balance sheet and cash flow, so I guess also what are your thoughts on capital allocation may be extending it to diagnostics or something like that?

[Juan Ramón Alaix:]

Well, thank you, Kevin. And we are very pleased with the performance of companion animal in the U.S. We are enjoying a very good momentum in terms of sales. But in the first quarter, we also had the positive impact of one competitor facing supply issues. This supply issue has been solved and this competitor is already back into the market in the U.S. But still, we think that our companion animal is very strong in the U.S. We also apply price increases in the U.S. in the first quarter, and this was well accepted by our customer which is showing the right partnership that we are having with them. And we are optimistic about the future performance of companion animal in the U.S. because I think we have right strategies, the right programs and also the interaction with the customer, direct interaction with the customer that is allowing really to maximize our product portfolio. And Rick will answer on the capital allocation.

[Rick Passov:]

Kevin, again, thank you for the question. Our priorities for capital allocation are going to be as follows. Over the next few years, we are going to complete the stand up of our own infrastructure which will call for elevated levels of spend that we discussed both on this call and in our 10-K. We'll position ourselves for certain amount of deleveraging as we come closer to our first debt securities. We will pay the dividend that we've declared. And we will pursue some M&A bolt on acquisitions that leverage our core strengths. And then, beyond that, an ongoing capital allocation discipline is going to be hall mark of Zoetis.

[Juan Ramón Alaix:]

Let me add one comment on companion animal in the U.S. We have seen that the visit to clinics are now increasing in the U.S. And also the expend of pet owners per pet is also increasing. So, this is good trend and our presence in many different (inaudible) areas in companion animal really providing to us quite opportunity for performance and we expect that this performance will be sustainable over in 2013.

[Operator:]

The next to Mark Schoenebaum with ISI Group. Go ahead, your line is open.

[Mark Schoenebaum:]

Hey, guys, thanks a lot for taking the question and congratulations on well managed, a very well managed quarter. I had, first question is a housekeeping one. I didn’t hear on the prepared remarks. Would it be possible for you to give us price versus volume growth in both the congenial segment and the livestock segment on a worldwide basis? Also, if you could provide a regionally in the U.S., that would be really helpful price versus volume. And the second question is more like along term speculative thing, your question, but the avian flu in China. I know your China business right now is very small, but has this had any, any material impact to that small business segment for you, and maybe you can give history lesson the impact that prior avian flus have had on the business, if any? Thank you very much.

[Juan Ramón Alaix:]

Thank you, Mark, and our prices strategy is really depending on many same factors including species, including also geographies, including also competition. So it is difficult really to provide a global comment on our price strategy. That's really in emerging markets volume is much higher than price while in developed markets price is higher than that volume. In the U.S. that's really a in, we have seen that many of the species, price has been growing at a higher rate than volume. But it is something that is part of our model and we don't see that as a negative. On the contrary, it's a good opportunity for really to apply price strategies that will maximize our margins across many different geographies and species. In terms of the avian flu, well you mentioned that it still something that it's not a significant impact. So China for us represent a little bit less than that 2% of our total revenues, and the majority of this revenues as rated in the swine business. So the poultry business, it's definitely a future growing opportunity, but it's really having a minimal impact in our total revenues. What we are concerned is really how we can really provide the support to our customers in China and also how we can minimize the impact of the avian flu in many people in China. And definitely we will see that the avian flu that, in my opinion will also be temporary, will have significant impact in our future revenues.

[Operator:]

We'll go next to Jami Rubin with Goldman Sachs. Go ahead, your line is open.

[Jami Rubin:]

Thank you, just a couple of questions. First, as it relates to sales in Asia Pacific, it did seem to be a little light especially when you adjust for foreign exchange up only 2%, and this is the business that's been growing sort of high single digits, low double digits. I'm wondering if you can talk about how we should think about that business going forward and the factors that have put some pressure on that. And also just generally speaking, while I'm interested in your views on your company's companion animal exposure to some of your peers or some of your competitors pushing store brand OTC companion animal products and just where you see exposure in your companion animal business? Thanks.

[Juan Ramón Alaix:]

Thank you, Jami. On the revenues for APAC, so we grew by 2%. APAC is a combination of two different group of countries. So we have highly developed markets like Australia, Japan, Korea, and emerging markets India, China, South East Asia. In the developed markets, we saw in this quarter very strong growth in Australia. We faced some challenge in Japan and Korea and in emerging markets India also faced some challenge because of some regulatory issues that we expect to solve in the next following quarters and also some time -- one time in China. We are convinced that APAC will be significant on that growth generator in our total revenues and we expect also in 2013 APAC growing faster than the average for the rest of the regions in Zoetis. And --

[Rick Passov:]

Jami, I just want to add that the regulatory issues pertained to product delays and are not related to manufacturing or any other part of the network. It's just taken us a little longer to get some products registered in that market in India.

[Juan Ramón Alaix:]

Thank you, Rick. In terms of our exposure in companion animal in OTC, so we see that this segment it's mostly effecting anti-parasitic, and in our case even our anti-parasitic portfolio, its prescription portfolio. So our revolution in the U.S. it is a problem that requires a prescription of a vet. So it's not something that is really affected by the OTC. Definitely the OTC will be a challenge that we'll continue growing, mainly in anti-parasitic and anti-parasitic that will not require the precision of a vet. The majority of our portfolio, say 95% of our portfolio requires the prescription of a vet. So, in our opinion, our portfolio is not really affected by this shift from vet clinics to the OTC channel.

[Operator:]

We'll go next to Tony Butler with Barclays Capital. Go ahead, your line is open.

[Tony Butler:]

Good morning, thanks very much. Two brief questions. One is in the U.S companion Animal is quite strong, you made reference to product coming back on the market. I assume that's Sentinel related to the Revolution. Is it fair to assume that's correct? And more importantly would it also be fair to assume that that competitor would have some sort of promotional campaign underway and I'm interested more importantly about how you counter that, if you will counter that. And second, in the European market certainly culled out on the 10-K there was very strong growth for parasiticides primarily in the France and U.K. Rick, you made some comments about the delay due to weather patterns in Europe, and I just like to stress that out a little bit more. Would that imply that parasiticides would actually be -- so we have less growth on a year-over-year basis, but more importantly how do we think about that for the remainder of the year? Thanks very much.

[Juan Ramón Alaix:]

Thank you, Tony. And our companion animal business in the U.S., I think on top of this issue of, from some of our competitor, I think it's enjoying very strong momentum. Definitely we have seen that the competitor now is back in the second quarter and they are applying some promotional strategies and we feel comfortable that our strategies and also our presence and our direct interaction with our customers are the right way really to defend our portfolio. And that's really it, it will have an impact in the second quarter compared to last year because last year also this competitor was not in the market, but definitely it's something that has been included in our yearly guidance. So all these elements have been a part of our projections for 2013. Rick, do you want to make any comment on that?

[Rick Passov:]

Not on that, no.

[Juan Ramón Alaix:]

Okay, so then in Europe, in France and the U.K. So in U.K we had the price increase in the first quarter compared to price increase in the second quarter last year. This can also have an impact in terms of the results of the first quarter. And what we see also in Europe, not only in France and U.K., in all Europe that the weather has been very cold and has been a delay on the season for ticks and flees. And definitely this can happen in the second quarter and this can also happen in fact in the total year. But this has been already incorporated in our projection for the total year. And any delay in terms of decision for parasiticides seems the animals are normally treated the mostly. This is something that will have an impact in our quarter, the second quarter, but we expect that the total year projections are the one that is going to be provided to you. Rick

[Rick Passov:]

The only thing I would say Tony again is your right that the parasiticides season is important in Europe. You and we can all see that there's a much colder season in Europe and its delaying the start of the season and we're taking our best guess now of what the impact will be in the guidance that we're providing to you.

[Juan Ramón Alaix:]

One comment that is also important to remember, it's the international markets. They're closing in February and so the quarter will start March, April, May. So these are the quarter for international. While for the U.S. is the natural quarters.

[Operator:]

And we'll go next to site of Liav Abraham with Citi. Go ahead, your line is open.

[Liav Abraham:]

Hi, good morning. Two questions please, first, I'd appreciate if you could expand a little on the weakness in the Canada, Latin America region and how you anticipate that paying out for the rest of the year and when you anticipate an acceleration in growth? And then, secondly, following on from Chris's question earlier on SG&A costs, I have a question on R&D costs and these are also looking relatively flat this year with versus last year. How should we be thinking about this line item going forward? Thank you?

[Juan Ramón Alaix:]

Thank you, Liav, and the business in Canada, Latin America grew by 4%, and this 4% I think it's something that you see in line with our expectations. So Canada, Latin America, its two big countries. Canada and Brazil they represent almost two-thirds of the total revenue of the region, and they are both countries which are highly developed in livestock and Canada highly developed also in Companion Animal. So definitely Brazil, although it's defined as an emerging market is not an emerging market for livestock because it's highly sophisticated in terms of production of animal produce. So we expect So, we expect this region growing in line with our expectations, and again it will be some fluctuations among quarters, but at the end of the year this region -- and some of the marketing in the region will be generated in stronger growth and maybe Rick you want to cover the question on SG&A and R&D.

[Rick Passov:]

Sure, I think the question was R&D and all I'll say is that's an important part of the value paradigm here that we do think that we can grow revenue faster than all of our expenses. I would include R&D and that generally be the effect of the this R&D is in part shown by the fact that revenues growing and earnings are growing at a faster pace.

[Operator:]

We'll go next to Alex Arfeai with BMO Capital Markets. Go ahead, your line is open.

[Alex Arfeai:]

Good morning, thank you for taking the questions and I'll add my congratulations as well. Two questions, are you seeing increased scrutiny by regulators as a result of recent issues in China, specifically are you seeing increased or do you see the potential for increased restrictions on use of antibiotics in livestock feed? And then as a follow-up, could you comment on the sustainability of price increases. My understanding was that a significant portion of your portfolio is subject to cheaper competition. Is pricing leverage something that we can expect going forward? Thank you.

[Juan Ramón Alaix:]

Thank you, Alex. Definitely we will see that regulatory standards will increase in all markets where we operate. We don't see that as a negative to our business because we have already these higher standards that we apply to all the countries that we operate. Maybe this way we'll facilitate competition in some of the markets in where local producers, they are applying lower standards in terms of manufacturing and regulatory approvals. In terms of the anti-infective, well, these are the discussions that has been on since many years. We have a portfolio in anti-infective which is excellent and its gold standards for treating sick animals in all the different species. And definitely we see that the we will continue collaborating that with many regulators around the world to ensure the right use of anti-infective. And one example of this collaboration, it’s the recent discussions and agreement with FDA to withdraw the indication for growth promotion of some of our products in the U.S., products which are medically important for human on for this indication. We expect that that this will have minimal impact in our revenues. In terms of the sustainability of price increases, 80% of our portfolio is really not patent protected, and this has been the case for many years. And even with this situation we have been able to increase our prices in a constant way in all different geographies and different species. So, we are confident that the business model that we have, which is combining direct interaction with customers and high quality of our products and reliable supply will allow us to really to continue applying in price increases in the future.

[Operator:]

We will go next to David Krempa with Morningstar. Go ahead, your line is open.

[David Krempa:]

Thanks for taking the call. I was just wondering if you could elaborate on why you are able to drive such strong operating leverage in Europe with just a little revenue growth but big operational income growth.

[Juan Ramón Alaix:]

Thank you, David, and I will ask Rick to answer this question.

[Rick Passov:]

Well, first of all, thank you for the question. Basically, from two basic factors, the fact is gross margins in Europe are healthy. So we get a little bit of leverage in the P&L from growing the top-line and as well there is good expense control on that market. And then, I would only add that quarter-over-quarter there may be some variability in the rate of earnings growth versus revenue growth. So nothing really special or outstanding there.

[Operator:]

We will go next to Robert Willoughby with Bank of America. Go ahead your line is open.

[Ann Wilson:]

Hi, this is Ann again. What was cash flow and cash balance for the quarter, and do you have targets there for the year also on CapEx? And how is inventory management? Can you give us an outstanding balance and what you consider I guess of this big area of improvement for you going forward?

[Juan Ramón Alaix:]

Thank you, Ann. And I will ask Rick to answer these two questions.

[Rick Passov:]

Ann, as you know in our release today, we did not release balance sheet or cash flow, you will see that when we publish our 10-Q. Otherwise, we have said that in 2013 our priorities are going to be completing the separation, the elevated spend associated with that, paying our dividend. And that I do not expect significant working capital improvements this year in part because our primary focus is again all of those activities to complete the separation. And those activities include, a significant amount of product transfers and that affects our ability in this particular year to make a sole concentration on reducing inventory levels. But in general, I think you would see not a deterioration of working capital and that become a focus for us in the out years.

[Operator:]

And we have a follow-up form David Risinger with Morgan Stanley. Go ahead your line is open.

[David Risinger:]

Yes, thank you. Actually, my additional question has been asked and answered.

[Operator:]

We have a follow-up from Chris Schott with JP Morgan. Please go ahead your line is open.

[Chris Schott:]

Great. I think (inaudible) here. Just -- I think you are not giving quarterly guidance but anything you can talk through on quarterly progression from here just so we have kind of no surprises. I guess even at the high level, how are you thinking about stronger of weaker quarters the rest of this year based on what you can see today? Thanks.

[Juan Ramón Alaix:]

And Chris, thank you for the question. And what we want really it's to insist that our business should really assess on a yearly basis, that there will be some fluctuations on quarters. We have stronger quarter in Q1. There was some one-time items in this quarter. And we will see that some of these items will also have a impact in following the quarter. But rather than providing a specific guidance by quarter, we prefer that you consider or assess our business on a yearly basis, because of so many factors that it can really have an influence in our quarters but that can be compensated at the end of the year. Rick, you want to answer any other question.

[Rick Passov:]

No, I think, Chris, we have done the best job we think we can do in the comments we made on the call, as well as and what is in our press release.

[Dina Fede:]

Operator, time for one more question perhaps.

[Operator:]

We have one last question it is a follow-up from Kevin Ellich with Piper Jaffray. Go ahead, your line is open.

[Kevin Ellich:]

Hey, guy just one quick follow-up. Not to beat a dead horse here but with the drought impact in US, I was wondering if you would give us any specifics as to what is embedded in your guidance? Last year, we were hearing that herd sizes were down about 5%, now may be 7% of 9% is that what is embedded in our guidance?

[Juan Ramón Alaix:]

I think definitely the drought has been having the highest impact in the cattle business that the herd has been reduced compared to previous year, but it has been also -- now, it is the lowest inventory of animals in the cattle ever. And these are definitely having an impact in our reactions that has been incorporated in our guidance today. The cattle will take longer to recover because it takes two to three years to really build the herd, but at the same time, poultry and swine will have a much faster recovery because swine is six month, the cycle, in the case of poultry 45 days. So, we expect that in the second part of the year, these two species swine and poultry will be back to normal situation and for cattle it will take longer. But at the same time, we expect that the because of the low inventory also the value of the animals will be higher and the amount that producer will spend for animal will be also higher to protect the health of these animals. So everything has been included in our guidance and we expect that at the end of year we will have -- we'll be back to normal situation. So with that I like to thank you everyone for joining us today. And on behalf of the entire Zoetis team I appreciate you joining us for this today call, and I hope that we have been able to share with you some of the highlights from our first quarter and reinforce why we are positioned to continue to lead in our industry. Thank you very much.

[Operator:]

This does conclude today's teleconference. A replay of today's call will be available in two hours by dialling 800-283-4783 for US listeners and 402-220-0859 for international. Please disconnect your lines at this time.