Zoetis Inc. (ZTS) Earnings

Management highlights

- **Pricing and Competitive Strategy** • Rejecting broad permanent list price cuts in favor of targeted, time-bound growth-to-net investments (promotions, rebates, cross-portfolio bundling, point-of-sale discounts for pet owners and clinics) to protect volume and market share. • Growth-to-net actions are focused on defending share against new entrants in the U.S. Durham dermatology segment, while macroeconomic weakness is the primary headwind for other categories like Cytopoint and parasiticides. - **Leadership and Organizational Update** • Recent leadership changes across key roles including Head of R&D, COO, and Companion Animal division were made to build a team aligned to execute on the company's current operating environment. • Management is satisfied with the current leadership structure and focused on delivering on strategy. - **Cost Management** • SG&A decreased 4% year-over-year in Q2 from implemented cost control actions, and manufacturing costs also declined year-over-year, supporting gross margin. • Cost-cutting benefits will continue to accrue through the second half of 2026 and into 2027. - **Channel and Marketing Strategy** • The company maintains heavy investment in direct-to-consumer (DTC) marketing, with the highest ROI coming from conversion-focused advertising at retail/online points of sale where customers are already actively searching for products. • DTC investments for long-term market growth are also maintained alongside higher-ROI point-of-sale conversion spending. - **Product Portfolio Positioning** • Management confirms the company has differentiated, superior efficacy and safety profiles across its key franchise products including Apoquel, Apoquel 2, Cytopoint, and Trio compared to new competing offerings. • Management acknowledges that affordability pressures in the current macro environment lead some pet owners to try lower-priced alternative products, hence the need for aggressive promotional protection of existing share.

Guidance

- **Full-Year 2026 Revenue Guidance Update**: The updated full-year guidance reflects a downward revision of approximately $500 million from prior guidance, driven by softer-than-expected Q2 performance and changed macro/competitive assumptions. Additional FX headwinds of ~$60-$65 million are incorporated into the new guidance. - **Price Realization Guidance**: 2026 full-year price realization guidance is revised down from the prior 1% to 2% range. The new expected range is 0% to -1%, with a potential trough of -2% at the low end of the overall guidance range if competitive promotional activity accelerates further. - **Guidance Range Assumptions**: The high end of the guidance range assumes the current levels of soft macro demand and competitive promotional activity persist through the second half. The low end of the range acts as a stress test that assumes competitive and macro pressures accelerate, with corresponding incremental growth-to-net investment from the company. - **Livestock Segment Guidance**: Full-year 2026 Livestock growth is expected to land in the mid-to-high single-digit range, with transitory Q2 U.S. growth drivers stripped out for the full-year outlook. - **2027 Guidance**: Management has not issued 2027 guidance at this time.

Segment performance

Segment-level financial data (absolute revenue values and revenue contribution percentages) is not provided in the excerpted transcript. Only high-level performance for the Livestock segment is noted: global Livestock revenue grew 11% year-over-year in Q2, with 23% U.S. growth. Management states that Q2 U.S. Livestock growth included transitory drivers, and the normalized U.S. growth rate for the quarter falls in the high single-digit range. Full-year 2026 Livestock growth is expected to be in the mid-to-high single-digit range, supported by sustainable strong fundamentals.

Risks & headwinds

- Macroeconomic weakness has driven a 7% year-over-year decline in U.S. veterinary therapeutic and wellness visits, which is pressuring demand across all major product categories. • Decelerating growth in alternative sales channels has compounded demand pressure in the parasiticides category. • New competitor entry in the U.S. Durham dermatology segment has created ongoing volume and market share pressure that is expected to persist for 6 to 18 months. Competitive promotional activity is expected to remain elevated through the end of 2026. • Increased growth-to-net promotional investment puts downward pressure on average selling prices (ASPs) and margins, with more severe downside if competitive pressures accelerate. • New foreign exchange headwinds have emerged that will negatively impact top-line results in 2026.

Analyst Q&A

• Q: Erin Wright (Morgan Stanley) asked for details on how targeted pricing actions are reflected in guidance, expected share loss from new competitors in Durham and Simperica, the conservatism embedded in U.S. companion animal guidance, and an update on recent leadership changes and organizational stability. /

  A: Management confirmed pricing actions are focused on targeted, time-bound growth-to-net investments rather than permanent list price cuts, with the core goal of protecting volume and market share. Guidance assumes current soft macro demand and elevated competitive promotional activity will persist. Management stated recent leadership changes were made to build a team capable of executing in the current environment, and they are pleased with the current team structure.

• Q: Brandon Vasquez (William Blair) asked for clarification on what gross-to-net pricing actions mean for ASPs and margins, and for key changes between the new and prior guidance. /

  A: Management clarified that growth-to-net refers to targeted promotions, rebates, and bundling, not permanent list price cuts; these actions will lower net ASPs as the company prioritizes share protection. Key changes to guidance include accounting for additional growth-to-net investment costs, extra FX headwinds, and building a stress-tested low end of the guidance range for if competitive pressures accelerate.

• Q: Michael Riskin (Bank of America) asked how much cost-cutting has already been implemented and what other operational levers are being used beyond pricing, and how long competitive pressure from new entrants is expected to last. /

  A: Management confirmed 4% year-over-year SG&A decline in Q2 from ongoing cost cuts, with additional benefits from lower manufacturing costs; cost-cutting benefits will continue through the second half of 2026. Management noted new competitor entry in U.S. Durham in Q2, so share pressure is expected to persist for 6 to 18 months, and competitive pressure is fully embedded in the 2026 guidance range.

• Q: Chris Schott (J.P. Morgan) asked what will drive a pullback in promotional intensity, and what Livestock growth is realistic for the second half of 2026. /

  A: Management stated promotion intensity is a function of both macro weakness and competitive pressure; the company will pull back on growth-to-net investments once market share stabilizes quarter-over-quarter. For Livestock, after stripping out transitory Q2 drivers, full-year growth is expected to land in the mid-to-high single-digit range, supported by sustainable strong fundamentals.

• Q: John Block (Stifel) asked whether current promotional activity is focused on Durham, paras, or both, and if Zoetis' current products are differentiated enough to compete with new entrants. /

  A: Management confirmed promotions are targeted to the specific headwind of each category: competitive pressure is the primary driver of promotions in Durham, while macro weakness is the main headwind for Cytopoint and parasiticides. Management confirmed Zoetis' products have superior safety and efficacy differentiation, but acknowledges affordability pressures in the current macro environment make promotional share defense necessary to prevent customers from trying lower-priced alternatives.