Welcome to the Fourth Quarter 2014 Financial Results Conference Call and webcast for Zoetis. Hosting the call today is John O'Connor, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of Zoetis.com. The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or on the Investor Relations section of Zoetis.com. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to John O'Connor. John, you may begin.

Thank you, operator. Good morning and welcome to the Zoetis fourth quarter 2014 earnings call. I am joined today by Juan Ramon Alaix, our Chief Executive Officer and Paul Herendeen, our Chief Financial Officer. Slides presented on this call are available on the Investor Relations section of our Web site. Before we begin, I'll remind you that our remarks today will include forward-looking statements and actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including but not limited to, our 2013 annual report on Form 10-K and our reports on Form 10-Q. Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S. GAAP measures is included in the financial tables that accompany our press release and the company's 8-K filing dated today, February 11, 2015. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon.

Thank you, John. Good morning to everyone. In my remarks today, I will discuss our 2014 performance, provide an update on the Zoetis revenue growth versus industry growth, review recent sponsor from the full portfolio and then with our outlook for 2015. 2014 was a year when we made significant progress in creating value. We are growing revenue faster than the market. We improved our margins despite absorbing additional costs required to operate as a fully independent company. We continue to advance our product portfolio through internal R&D initiatives. We communicated a 15% increase in our dividend and $500 million share repurchase program. This week, we announced that we completed the acquisition of Abbott Animal Health. We also continue to build a culture that delivers results, creates a high sense of ownership from our colleagues and focuses on generating short and long-term value for customers and shareholders. For the year, we delivered operational revenue growth of 7%, adjusted net income growth of 13%, and adjusted diluted EPS growth of 11%. Both revenue and adjusted diluted EPS exceeded the high end of our guidance. Here are some details of 2014 revenue by species on an operational basis. In livestock, total revenue grew 9% to $3.1 billion. This reflects favorable market conditions for our producers and a strong performance of key Zoetis brands across affective vaccines and medicated feed additives. Livestock markets benefited from strong meat and milk prices as well as less expensive animal feed. These generated strong producer profits and in these market producers increased the medical treatment of animals to preserve their value. This has benefited many premium Zoetis brands. Cattle grew in revenues by 10% to $1.7 billion, with exceptional growth coming from beef cattle markets like the U.S., Brazil and Canada, as well as from our China…

Thank you, Juan Ramon, and good morning, everyone. Thanks for joining us. I am going to review our performance compared with our full year 2014 guidance, provide some color on the fourth quarter results and update you on our full year guidance for 2015. I hope to do all that quickly so that we have plenty of time for Q&A, so here we go. Starting with full year 2014 results, the big stories here are revenue, revenue growth and revenue growth from a variety of sources. In 2014, we delivered 7% operational growth in revenue, the second consecutive year of 7% operational growth and second consecutive year of growth above the long-term industry trend. Pretty good, right? Even better, in the fourth quarter we delivered 9% operational growth versus Q4 of 2013, overcoming some significant FX headwinds to post 5% reported growth with positive operational trends that are heading right into 2015. Changes in FX rates reduced our Q4 reported growth rate, but we were able to overcome that and still put a solid growth number on the board. Good stuff indeed. Since mid-November FX rates have continued to move against us. I will help you think about the impact of FX rates on 2015 in a minute. Now for a look at our full-year performance versus guidance. As you can see on the Web cast slides, our revenue of 4.8 billion exceeded the high end of our expectations. The operating growth of 7% was driven by 9% growth in livestock and 4% in companion animal. On a regional basis, the U.S. accounted for almost half of our growth, up 8% compared with 2013. CLAR accounted for about third of our operational growth, up 13%. APAC was about 11% of our operational growth, up 5%, and EuAfME accounted for about…

(Operator Instructions). Our first question is coming from Louise Chen, with Guggenheim Securities. Your line is now open.

My question here is since it's hard to find good companies to comp Zoetis's operating margin to, could you provide us a framework for thinking about where Zoetis's operating margin could improve to over the longer-term, beyond the 30% that you had forecasted at Investor Day?

Thank you, Louise, for the question. So we are convinced that now that we are finishing our work in standing up Zoetis on implementing new systems that will support our future operations, we can really identify opportunities for being more efficient in many lines of our P&L. That is something that we will continue in define business opportunities and seeing ways of improving our margins in the medium and long term.

Our next question comes from Alex Arfaei, with BMO Capital. Your line is open.

Good morning and congratulations on a strong quarter. Juan Ramon, you mentioned strong market conditions and profitability in the livestock market. Clearly a key driver here, can you clarify on your outlook, when you say you expect this to continue in the near-term, what is the timeframe you put on that one-year or two-year? I want to get a sense of how long you think the cycle will last? And Paul, a follow-up if I may, you got a significant FX benefit on cost of goods sold this quarter. You lowered revenue guidance because of FX. I am just wondering why not raise gross margin guidance to reflect an FX benefit? Thank you.

Thank you, Alex. In my comment I refer to the outlook was in for this year. So, we mentioned that in 2014, the conditions in livestock were very positive; the price of milk and meat was very high. Also there were low costs on feeding the animals. We expect that most of these conditions will remain in 2015, although we see maybe in some of the species like swine, maybe a lot of more attention in terms of price because of more supply of product. Since some of the rates that were affecting 2014, maybe we’ll have a lower impact in ‘15 like the PEDv outbreak. So, we expect that the conditions will remain favorable, although for some of the species, maybe less profitable than in 2014.

Thanks for the question, Alex. I'll take the question regarding the FX benefit that flowed through cost of goods sold. I want to point out that the timing of the way FX flows through our cost of goods sold is somewhat difficult to predict and also when you recognize it as we did in 2014 that does not necessarily translate into a continued benefit flowing through in 2015, point of fact that could very easily turn around on us on a reported basis.

And we’ll take our next question Kevin Ellich with Piper Jaffray. Your line is open. My apologies, we actually have Mark Schoenebaum. Line is now open with Evercore ISI.

Also my congratulations to Paul on a great job since you've taken the reins as CFO and to John on the IR front. Just a question on, I'm intrigued by your comments around your antibody platform. I haven't heard you talk about that before. You gave a little bit of detail during your prepared remarks, but I'd be interested in knowing more if possible, like how broad this program really is. Are you pursuing antibodies outside of companion animal dermatology or should we think of this is mainly a derm program? And the impact, if any that you think this antibody program will have on your P&L once commercial. Gross margins on the human health side tend to be a bit lower on antibodies than they are for small molecules. And then also of course on a CapEx -- long-term CapEx projection, sometimes building plants capable of producing large quantities of biologics can be expensive. I am wondering if that's already something that you've got your footprint or if these products are going to be big, we should be altering our models to some degree? Thanks a lot.

Thank you, Mark. The monoclonal antibody that we mentioned today, it's a product that we neutralized the canine interleukin, which is also a key cytokine which is involved in the atopic dermatitis and also involved in sending the signs of itching to the brain of the animals. We have been investing in biopharmaceuticals for now several years. And we have been also introducing the products in these categories, not only on antibodies but on biopharmaceuticals. A good example is Improvac that was launched some years ago. And we also focus our attention to platforms that we also increase, the product portfolio that also will meet the demands of the market. We are very pleased that Zoetis is not only leading in pharmaceuticals, we have many examples like APOQUEL, that we've shown very strong leadership in that category, but also in vaccines. In 2014, we had the opportunity also to bring to the market a solution for an outbreak that it was a highly significant impact in the swine industry in the U.S., I am referring to the PEDv vaccine. And now we have used monoclonal antibody, we’re also showing that also we are leading in biopharmaceuticals. We're very pleased also that our model, which is combining investment in innovation with investment in the protecting of our current portfolio is showing a high level of productivity and leading the industry in all different areas of innovation.

Mark, it's Paul. First, thank you for the kind words. Yes, I had the very good fortune to join an outstanding team here. So, while I’ll take the complement, I'd also say that it's a team game here. I also want to pile on a little bit on the R&D front, because from an investor perspective I kind of think of Zoetis is kind of like two-in-one. You have a large growing portfolio of existing business and we also have this robust R&D engine, that if it were on its own, would represent an attractive investment opportunity in its own right. So great question, thank you.

We will now take a question from Kevin Ellich, with Piper Jaffray.

Given your strong operational growth, I was just wondering if you'd break out the difference between volume and what type of pricing increases you are pushing through. And then could you maybe talk about the performance of some of your new products like ACTOGAIN and ENGAIN, and if you'd noticed any significant market share.

Paul will answer the first part of the question and then I will make some comments about the new product launches.

I will speak to the history because that's what we can do with respect to price and volume. Let's start with the quarter. We had total growth, as I said, operational growth 9%. Of that 9%, roughly 2% came from price and 7% came from volume. So strong in the quarter. Take that for the full-year, 7% operational growth. Again, 2% came from price and roughly 5% from volume. We got a lot more pricing leverage in emerging markets than in developed markets. I don't know if it's all that productive to go through the specifics of it, but I hope that, in general, answers your question.

Then back to your question on ACTOGAIN or ENGAIN. Both products performance are doing well and exceeding our initial projections. One of the factors that has been also impacting the higher revenue than expected, it was withdrawn off of one competitor product one year ago. So very pleased, with also the acceptance of our two products from customers, and these two products, ENGAIN is for the swine producers and ACTOGAIN for cattle producers. Both performing above expectations.

Our next question comes from Erin Wilson, with Bank of America Merrill Lynch. Your line is open.

I was reading some of the literature on APOQUEL on the Web site and it continues to say that April's launch time frame or replenish supply. Will this be the same? Will it be fully ramped up that point? Or will there still be order limits in place over the course of the year? Is this all Incorporated into your guidance at this point? And then on new products, could you speak to the opportunity in diagnostics, any attraction you're seeing with your feline rapid assay? Is that an area you expect to build as to acquisitions? Do you anticipate any product launches in diagnostics overall?

Thank you, Erin. On APOQUEL, definitely we expect that from April we'll increase significantly the production of the product, or the product availability to the veterinary market. We expect that from April we will be able to meet all the demands from the customers. And we expect also that through the year, demand will increase and then we will be able to supply all these demands with the product that will be available. As I said in my remarks, we are forecasting for 2015 revenues from $150 million to $175 million. And we are convinced that this will be a significant quality in our portfolio, and we are very pleased that all the constraints that we face in 2014 will be over in 2015 from April. In terms of diagnostics, the diagnostics has been always -- since some years ago an area and where we have been also investing. We are convinced that this very complementary to our current portfolio and we also expect that with our internal efforts and also the acquisition of Abbott Animal Health, this will enhance our portfolio and definitely we will also consider any external opportunity and even further expressing our portfolio diagnostics.

It is Paul just a follow-up a little bit area. So the modelers out there and I know there are plenty, with respect to APOQUEL, we get through the first quarter and when we have supply we would expect a stair step for sales of APOQUEL and then with growth to follow. So I hope that provides a little better color.

Our next question comes from John Kreger, with William Blair.

Juan Ramon you mentioned the new oral flea and tick product that has been filed. Do think that will be in a position to be fully launched by spring 2016 season? And then a quick second question I believe on Investor Day you talked about efforts to optimize your manufacturing. Program, which I know is big and complex around the world. Can you just give us an update on the timing for that broader effort?

We expect [indiscernible] to be available sometime in 2016, which will depend on the approval from the FDA as well as the approval from EMA in Europe. And also in Canada also we expect approval. And we are working to make sure that the product will be available for the next parasitic campaign in April or around spring next year. Something that it will depend on FDA, but we expect to provide to FDA all the information needed to get this product approved on time. In terms of manufacturing, we mentioned during our Investor Day that from now until 2020, we expect an improvement in our cost by 200 basis points. And plans are moving ahead. And there is no any reason to think that we’ll not be delivering on the objective that we have. Now also we mentioned that we have three phases of our plan. We are now on Phase 1, in this Phase 1, we’ll be delivering these 200 basis points, then we’ll go into the next phase that we’ll be going to further analyze our plan network and then finally the third phase will be how we need to invest in manufacturing to achieve higher profitability or lower cost and also making sure that we have the technologies that will be needed to support our future revenues. Next question please.

Our next question comes from Chris Schott with JP Morgan. Your line is open.

Just to two quick ones here. First following up an earlier pricing question, can you just elaborate a little more on the drivers of pricing particularly on the production side of the business? I guess specifically is there more opportunity to selectively raise or reset price when you see healthy market dynamics that we’re seeing for your customers in the current environment? And second with just a broader business development kind of question, in area I think we all have a little bit less visibility into, but when you look at these Abbott type transaction that seem to make a lot of sense for Zoetis. How broad is an opportunity effect do you see on the business development front and given some of the anti-trust issues in the space are there realistically larger targets that Zoetis could pursue or should we really think of Abbott type transactions being the real focus here? Thanks very much.

In terms of pricing, the approach that we have for both like livestock and companionable is to have steady and consistent price increases. We are not trying to get the opportunity of higher prices when the conditions are more favorable to livestock producers. And at the same time, we also apply pricing increases with these conditions as less favorable. So is -- and study that has been working very well and a study that has been extended to many markets around the world including emerging markets. And we had in 2014 very positive improvement in our prices in many of these emerging markets. In terms of really definitely Abbott was a great opportunity that it was meeting all the requirements that we have in terms of business development opportunities including the strategic field, including the synergies, revenues and cost, also the financial value and the anti-trust issues. Definitely we have significant market-share, you know that we have market-share which is close to 20% and these may have some intentions in terms of a larger acquisition. We’ll consider any opportunity that is available in the market. We have a team that is aware of any kind of potential transaction that can be an opportunity for Zoetis and we will continue assessing these opportunities and as part of the evolution, we include any kind of anti-trust challenge, but we’ll limit the value of the acquisition. Next question please.

Our next question comes from Jamie Rubin with Goldman Sachs. Your line is open.

Sorry about that, can you hear me? Sorry about that guys. Had a little technical difficulty on my end. Juan Ramon, can you tell you what do you think is on the agenda as a new Board member? Is the agenda more related to margin improvement or is it business development? And as a follow-up, can you remind us of the agreement with Pfizer and how it would impact a potential sale of the company, is Zoetis too large for an acquisition by a competitor or would it have to be acquired by company with essentially no animal health presence? Thanks.

Thank you, Jamie and let me start saying that we have very constructive dialogue with Pershing Square, since they became the largest shareholder in the fall. And they were -- they expressed interest in having a position in our board. And given that the Mr. Doyle has a lot of operational experience and again the position of Pershing Square in our company the Board agreed to incorporate him into our Board. So, what we -- all the Board will be working including Mr. Doyle and other members of the Board, increasing the value to our shareholders. And this value can come from many different ways. Including margins, growing revenues and any kind of potential transaction. And this is something that will be part of the discussions and maybe at this point may be stipulated is not creating any additional value to the discussion.

[Operator Instructions] We can take our next question from Jeff Holford with Jefferies. Your line is open.

Hi thanks very much for take my question. Going back to APOQUEL. Your 2015 guidance and commentary does suggest much higher peak sales and you get to full penetration to this so one could think of this product potentially adding 5% to 10% against your current base of revenues over the next couple of years. And I'm interested also around the level of margin seem a much higher margin product than the rest of the business overall. Could the potential bottom line impact from this product be a most double what it is that the top line?

Thank you, Jeff. On APOQUEL we mentioned our peak sales are predicted between 200 million of 300 million and these based on the current knowledge of the market. Definitely we will be updating these peak sales based on what will be the reaction and the consumption of the public once the product it is available. In over quantity to assess what is the full potential of this compound. In general, we are not providing gross margin by products, but as you know we have gross margin in our Company of 65% and we rank margins depending on the categories. The highest margins are coming from companion animal followed by cattle, swine, and poultry. So you can imagine that companion animal much higher than the 65% average that we have at the Zoetis . Paul do you want to add any other comments?

Sure, just one that is the increased sales of APOQUEL certainly help. Of course we do have a mix of our portfolio for example the guidance table you all saw the addition of the Abbott assets to our total 2015 expectations. The Abbott assets are gross profit dilutive. Now I know they are only updated guidance for 75 million of sales but we do have a portfolio so even when things like APOQUEL help, there are other parts of our portfolio that can help smooth or help – they tend to smooth that out back towards our expected 35.5% to 36% -ish range of revenues in for 2015.

And our next question comes from Liav Abraham with Citi. Your line is open.

I am just looking back to cost efficiencies you mentioned this a couple of times during the call. Can you go into little but more detail about the opportunities that you see here in which cost categories and over what time frame?

It is Paul. I will take a stab at that and Juan Ramon may want to come in as well. Louise asked a question earlier on about margin expansion and I just want to point out that so far, we've done a pretty good job over the course of the last several years if you have looked at our reported operating margins going back to 2011 and up to ’14 and it's been a nice progression from ’18 to ’21 to ’24 to ’25 and I was broadly by rolling the top line while having some expense discipline meaning holding the line on expenses. Now a wise man once said to me it’s not all that impressive to grow into an expanding margin but I would say it may not be impressive but it is a good thing. That said, that what sets the stage. Even with respect to think about our 2015 we saw some headwinds in FX and we took some actions with respect to our operating expenses in order to be able to as best we could without impacting our business model reduce our expected operating expenses for 2015. The areas where we are most likely to have long-term opportunity are those areas that are away from revenue production and R&D and manufacturing. And manufacturing would be more efficient to that process as we would hope to disclose to the market at some point in the future. In the area really is around those into recall enabling functions in G&A, we are still in the process of our standup. I know that is frustrating to a lot of people where we just really completed our second year on our own. We continue to have challenges in implementing systems and building out the infrastructure that will enable us…

(Operator Instructions) And we can take our next question from Kathy Miner with Cowen and Company. Your line is open.

Just two quick follow-ups if I may. First on the stand up cost and ERP spending that you were just discussing. I believe the last time you had talked about those costs winding down the early part of 2016 can you give us an update on the timing? And second one on the oral flea and tick products, when it does come out, should we expected to be differentiated in any key ways from the products that are already out there? Thank you.

The timing on that was that we would expect to be fully up on SAP by the end of the first quarter of 2016. So 2015 is a busy year for us in that regard and we’ll still have some work in the early part of 2016, but we would expect to put that behind us in early 2016.

And about Sarolaner that is our compound, the active ingredient of our new oral parasiticides for ticks and fleas, we are still working on the label. The label is not yet finalized and not approved. And we’ll see how this is hit it's from competitors. And we know that there are already several competitors in the market, but as I said in my comments, it's a market of 2.5 billion to 3 billion. So it's a plenty of opportunities for Zoetis even in phase of several competitors. The other important point is that we have the access to the customers. We have a significant presence in all the markets, but the product will be available and the opportunity will be significant. And we are convinced that the vision of the model that we have which is our direct interaction with customers also will generate good revenues out of this product even with more or less differentiation in the market. Next question please.

We’ll now take a follow-up from Jamie Rubin with Goldman Sachs. Your line is open.

Hi, you may have missed my second part of my question if you could remind us of the agreement with Pfizer and how it impacted potential sales to the company? Thanks.

Yes, thank you, Jamie. While this agreement it's an agreement that its part of the tax matter agreement for which there are some restrictions until June 24. After this time there will be no restrictions but even with these potential restrictions until that date, there also maybe opportunities for company's considering transactions which are not affected by this tax matter agreement. Next question please.

Our next question comes from David Reisinger with Morgan Stanley. Your line is open.

Thanks very much and congratulations to the team on the strong quarter. My question is on SG&A and I guess there are a few sub parts to it and it really relates to the cross currents. So, in the fourth quarter SG&A was above expectations, yet for 2015 SG&A will be below expectations. So with respect to the fourth quarter, were there any one-time or unusual items in the non-GAAP SG&A, Paul that will not repeat in the fourth quarter of 2015? And then second on the 2015 SG&A outlook coming down $35 million, does that include any sales force rationalization and if not, what are the areas of cuts?

Yes sure, I’ll start with the SG&A in Q4, David. There were as I articulated in my prepared remarks there are some of those cost that were directly related to increase revenue. There were some dates when we get to a certain point in revenue, where we have released additional promotional spending that occurred in Q4 that might not be likely to complete unless we are trending well above our expectations again in Q4 of 2015. So I wouldn’t describe the items in there so much as one time. This is the ones that are within our adjusted SG&A. They were expenses that in large part were managed by us in the quarter, and reflect a robust revenue quarter for us and looking ahead to 2015. Thinking about the SG&A for 2015, full-year, we did reduce the range by some $35 million and no, it does not reflect any sort of a restructuring or anything. Evidence of that is if it had been a restructuring we probably would have called out in one-time cost and certain significant items restructuring charge. This was -- what I will call a normal course of business, looking at 2015, looking at where we are relative to where we want to be in us taking actions around categories that we do not think will influence that top line. So by definition, away from revenue generation mainly in enabling type functions. I hope that answers the question. Next question please.

There are no further questions. At this time I would like to turn the program back over to Mr. Juan Ramon for any additional or closing remarks.

Thank you for joining us today. On our fourth quarter results total year for 2014. And our guidance for this year. So thank you for joining us.

Thank you. This does conclude today's teleconference. A replay of today’s will be available in two hours by dialing 1 (800) 695-2185, for U.S. listeners and (402) 530-9028 for international. Please disconnect your lines at this time, and have a wonderful day.