Zoetis Q2 Earnings Review

Zoetis reported results on Tuesday 6^th before the market opened. In this earnings review, I’ll go over the company’s financials, management’s commentary and outlook. At the end, I’ll share my take on the quarter and what I’m doing portfolio-wise. I’d argue the main topics concerning this review are Librela and management’s decision to dispose of one of Zoetis’ businesses.

The company reported record revenues of 2.36 billion dollars, representing a yearly increase of 8.3%. This was mostly driven by companion animal products, with Simparica Trio, Apoquel, and Librela especially contributing. I’ll dive into each shortly hereafter.  

Zoetis reported 1.69 billion dollars in gross profit, with a 71.7% margin, which experienced a 50bps decline YoY. Operating income came in at 906M, implying a 38.4% margin, up 50bps YoY. Lastly, Zoetis generated 624 million in profit. The net profit margin declined 440bps YoY to 26.4%. The decline is mostly attributed to the sale of Zoetis’ stake in Pumpkin Insurance Services last year, on which the company recorded a 101M pre-tax gain.

Operating cash flow during the quarter amounted to 502 million dollars, up materially YoY, though last year the company was building up their Librela inventory. Capital expenditure was 132 million, in line with the past couple of years. It is interesting to note that CapEx as a percentage of revenue is falling faster than management seem to have expected in their Investor Day, which occurred in May of last year.

Management has been keen in returning capital to shareholders. Over the past quarter, 167 million dollars were distributed in the form of dividends, or $0.43 per common share. At the same time, a record 533M were utilized in repurchasing stock, at $167 average price per share. Out of the $3.5 billion program authorized in 2021, 623M were left as of June. The board authorized a new multi-year $6 billion program.

As noted at the beginning, companion animal sales are driving most of Zoetis’ growth and keep gaining share of total sales. These recorded revenue of 1.65 billion dollars, up 10.7% YoY and exhibiting a 15.6% 5yr CAGR. On the other hand, livestock sales increased 3.4% YoY to 694M.

The following table provides a brief overview as to how each category of products is faring. Pain and sedation products grew sales by 52% YoY. More importantly, the OA pain mAb franchise, namely Librela and Solensia, reported revenues of 149 million dollars, growing 117% YoY. Librela had sales of 116M globally, up 142% YoY, after a successful launch in the US late last year. Solensia sales were 34M, growing 62% YoY. Lastly, the diagnostics business returned to healthy growth after the channel strategy change in Q1.

The two categories that are responsible of a large part of Zoetis’ past years growth are parasiticides and dermatology. The former reported record sales of 600 million dollars during the quarter, up 6% YoY. Simparica franchise generated 384 million, with Trio doing 299 million, growing 19% YoY. On the other hand, key dermatology products reported sales of 414 million, up 18% yearly.