John O'Connor - VP, IR Juan Ramon Alaix - CEO Paul Herendeen - CFO

Kevin Ellich - Piper Jaffray Louise Chen - Guggenheim Securities Erin Wilson - Bank of America Merrill Lynch John Kreger - William Blair Chris Schott - JPMorgan Kathy Miner - Cowen and Company Alex Arfaei - BMO Capital Markets Mark Schoenebaum - Evercore ISI Jeff Holford - Jefferies

Thank you. Good morning and welcome to the Zoetis second quarter 2015 earnings call.

I am joined today by Juan Ramon Alaix, our Chief Executive Officer; and Paul Herendeen, our Chief Financial Officer. Before we begin, I'll remind you that the slides presented on this call are available on the Investor Relations section of our website and 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 statements in today's press release and our SEC filings, including, but not limited to, our 2014 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 earnings press release and in the company's 8-K filing dated today, August 4, 2015. We also say operational results which exclude the impact of foreign exchange.

With that, I will turn the call over to Juan Ramon.

Thank you, John and good morning, everyone. Today, I will discuss our performance for the second quarter and provide updates related to the integration of Abbott Animal Health, the performance of new products and progress on our operational efficiency program.

Paul will then will provide additional perspective on the quarter and comment on our guidance for 2015, 2016, 2017. All the growth rate that I'm discussing today are rational, excluding the impact of foreign currency.

I am very pleased to report that this quarter, we generated very strong revenue and adjusted net income and growth based on the strength and the diversity of our business. The growth this quarter was driven by the positive performance of our portfolio, in both companion animal and livestock.

The addition of Abbott Animal Health and the growth of APOQUEL and other new products and the continued discipline on operating expenses. In the quarter, we generated operational growth of 11% of revenue and 20% in adjusted net income or adjusted diluted EPS of $0.42 per share.

This performance continued to demonstrate our long-term valuable position and grow adjusted earnings faster than sales. In the quarter, APOQUEL contributed 2% of revenue growth or $19 million.

Abbott Animal Health accounted for 2% of the revenue growth or $25 million and another 2% came from new product launches. The remaining at 5% is related to both performance including a 2% price increase.

In livestock, we view 8% even by some growth in cattle and swine. Cattle then grew 9% with continued favorable market conditions in the U.S.

and Brazil, partially offset by the impact of the full reductions in poultry. Swine products also made a contribution this quarter, growing 14% based on strong sales in the U.S.

and China. In the U.S., the markets for swine continued for building after the original impact of PEDv.

We continue adoption of our key brands and a positive impact in terms like our better ACTOGAIN. Quarter revenue grew 1% reflecting new product launches which were partially offset by the customer rotation of medicated feed additives in certain Latin American markets.

Turning to companion animal, revenue grew 15% due to additional sales from the Abbott Animal Health and the continued performance of key brands such as APOQUEL in the [indiscernible] space and some whole and production insights. We feel very good about the progress we have made on the duration of Abbott Animal Health and we expect to achieve the target we've set from the condition in terms of revenue and cost percentages.

Now switching to Sarolaner operational updates, we completed the go live profile of our ERP system in the U.S. at the beginning of May as scheduled.

From a systems and control point of view, the completion was successful. However, due to a large number of our customers electrically impacted by our change of systems, we've had customers experiencing a disruption in their services.

The variability of these shipments and these issues have been resolved. And customers should see the level of our service improving and turning to the quality they expect and deserve from us.

Foreign presentation in other countries will remain on track to complete the growing ERP product by the end of Q1 2016. As for the Abbott growth, since the beginning of the year, we've had significant increase product supply and today more than 13,000 veterinarians have access to APOQUEL in the U.S.

and more in markets outside of the U.S.. We have the manufacturing capacity to meet the future demands of the public but the process of scaling up the active pharmaceutical ingredient or API, as we mentioned to you.

We have now made the necessary changes to improve the process and we're continuing to ramp up the manufacturing . While the situation is improving, we're not yet meeting all our market demand and our first priority is to manage a solution of available supply to our locations and to fulfill August for our current customers.

With that in mind, we have temporarily suspended taking new first-time customers' orders for APOQUEL in most markets. We remain committed to making APOQUEL available to new customers as soon as possible.

Even with these change in our operating products, we now expect revenue for APOQUEL to be about $150 million in 2015 and increasing really early in 2016. The productivity of our investment in new product notion and following the product development continue to support our future growth at.

The U.S. Department of Agriculture has granted a conditional license for a first trial of first-of-its-kind antibody therapy that targets interleukin-31 or IL-31, to help reduce clinical signs associated with atopic dermatitis in dogs.

It represents another major breakthrough from our R&D platform based on new scientific insights into the pathway of allergic skin conditions. We continue to receive approvals for new indications and formulations of our key products and we have expanded many products into new markets.

In the second quarter, for example, we seeked approval of a new label claims in the U.S. and European Union for CERENIA, an antiemetic to treat and prevent acute vomiting in dogs and cats.

We continue expanding the breadth of our FOSTERA swine vaccine franchise. We have new label claims in Canada and Latin America.

And DRAXXIN 25, an injectable anti-infective which will tapped an important market for swine, was launched in additional European markets, such as Spain, Italy and Portugal. Now to achieve concerns, comments and update on the operational efficiency program, we announced that last quarter.

I do want to recall the program we announced it to simplify operations, improve our cost structure and better allocate the resources for future long-term growth. We expect to generate cost savings of at least $300 million in 2017 and improve our adjusted EBITDA margin from 25% in 2014 to approximately 34% in 2017, as we review complexity and achieve greater focus on key brands and markets.

Our visual leader is moving ahead with elimination of approximately 5000 SKUs from our total of 13,000 and changing or solution model in about 25 markets. Approximately 45 countries will remain with our direct sales model and generate 95% of our revenue.

Meanwhile, we have begun the process of selling or executing seven manufacturing sites. And another few sites will be sold or exited in a later phase as part of our supply network strategy.

We've also started job reduction as we reorganize and streamline our operations. We're making very good progress on implementation of our operational efficiency program.

And I'm very optimistic about delivering or exceeding the target of $300 million in savings by 2017. While we're making these changes on efficiency, we remain absolutely committed to the moment that has been driving our success.

Our direct selling approach and world-class sales reinforce creating us from the competition. Our investment in relation, the drive breakthrough products and also ensure the lifecycle development of our portfolio and our high-quality manufacturing and supply.

In summary, we deliver excellent second quarter operational resource; with various sources of revenue growth across our portfolio. We remain well-positioned for profitable growth based upon on our core capabilities, diverse portfolio and focus on expansion growth.

And we're seeing new initial progress on the efficiency program that made us get more competitive and profitable for the long term. I will now ask Paul to provide some comments on the quarter.

Paul?

Good morning. The financial highlights of the quarter are regular growth and cost discipline.

Revenues were up 11% operationally compared to Q3 in 2014 with growth coming principally from the addition of acquired Abbott Animal Health products, the ramp up of APOQUEL and of those and strength in our livestock portfolio. With respect to operating expenses, we especially took ownership to reduce expense in order to preserve our 2015 profit guidance in the face of currency headwinds and animal health growth of operating expenses to 2% on an operational basis compared to the prior-year quarter and keeps us on track to deliver on the 2015 portion of the efficiency initiative that we announced back in May.

Strong revenue performance in animal gross profit margins mainly due to the favorable impact of FX on cost of goods sold and expense control enabled us to report very strong adjusted net income growth of 20% operationally and 14% on a reported basis. While the year looked no mean, we know what's coming next.

While good performance in the 98% window looks great in the headline, we think about our business in terms of the year or even years. We don't guide to quarters and we don't manage the quarters so please view this quarter as a strong quarter and view it as what it is, an indication that we remain solidly on track to deliver our 2015 guidance and beyond.

With that as a backdrop, I want to note that we narrowed our 2015 guidance towards the upper end of the range. Good stuff indeed.

Our FX rate and I want to, again, call your attention the impact of FX on our reported results. Foreign exchange rates continued to mute our reported revenue and profit growth.

FX rates reduced our reported sales by some $106 million compared to Q2 of 2014 or roughly 1,000 basis points, while adjusted net income growth was reduced by $12 million or roughly 600 basis points compared with the prior-year second quarter. We measure our performance on an operational basis or on a constant currency basis and on that basis, we delivered.

As part of the operational efficiency program we announced in May, we consolidated from four of the reporting segments to two, U.S. and International.

From here forward, our financial reporting will reflect this new structure. A few weeks ago we issued and 8-K to provide a historical view of our 2014 and third quarter 2015 results in this new reporting structure and I hope this helps you update the financial models and prepare for today's call.

The consolidation of our business into two segments will reduce the cost and complexity of our operations and also improves our decision-making and accountability at the local market level where we drive value. It's real concerns that the consolidation segment might reduce visibility into our performance.

Let me say that we believe that the revised disclosure providing revenue details on most on -- excuse me, providing revenue details on our most important countries rather than a somewhat arbitrary geographic grouping, should give you better visibility into the results and how we drive our results. And to at least organize the leads, you will see revenue for the U.S.

and international segments as well as additional breakdown showing revenue for our top net 11 international countries. This gives you visibility into the markets that account for nearly 80% of our sales.

Approximately 20% of remaining revenue are being grouped and reported as other developed markets and other emerging markets. I will caution you that with the increased granularity of the revenue we're reporting, you will see quarter-to-quarter fluctuations and I would not read too much into that if you are looking at a single quarter in a single market in isolation.

One of the strength of our business models is the geographic diversity of our revenue and profit streams, particularly in livestock. We participate in global markets and strength and weaknesses in digital markets are generally offset by performance in other markets.

Finally, we also provided an important disclosure of the two segments, showing revenue, cost of sales, operating expenses and pre-tax earnings. I hope you will agree that our new financial reporting model is an improvement over the prior model.

Let me call your attention to a few highlights from the quarter. Juan mentioned this earlier but it's worth repeating because it's a great way to illustrate the ways in which we can grow our top-line.

Top-line as we knew. We delivered operational growth of 11% in the quarter, of which 3% was unit growth of in line products, 2% was from price, 2% was from growth of APOQUEL, 2% was from the additional acquired Abbott Animal Health products and 2% was from a range of new product introductions.

I need to go second quarter, we covered all of the ways we certainly can deliver operational revenue growth. Next, looking at the U.S., very strong growth of 17% over the prior-year quarter, we delivered growth in all species, companion animal, cattle, swine, poultry and equine.

In companion animals, the big drivers for the other share of the Abbott products and APOQUEL. In cattle, we had a continuation of favorable conditions to putting use of our premium products and we increased sales of the ACTOGAIN.

In swine, product sizes impact from the PEDv outbreak and you had the positive impact of new products in the portfolio, the PEDv vaccine and medicine. Finally, poultry grew largely from the introduction of our ZOAMIX Project.

In the international group which grew 6% operationally, the top three countries contributing to the growth for Brazil, up 9%, mainly due to the favorable conditions in the livestock segment and new product launches; China which was up 26%, with our livestock business benefiting from higher anti-infective use in some key swine accounts and growth in companion animal, driven by from momentum from [indiscernible]; and then finally in the UK which was up 12% based on strong performance of stronghold and the addition of the Abbott Animal Health products. We do have species international group; livestock was up 6%, with cattle and swine offsetting lower sales of poultry products.

Companion animal group, 8% operationally, primarily from sales of APOQUEL in Spain, India and Germany. A pick-up in sales of swine products in Western Europe, Australia, Canada and China and strong vaccine sales in China.

I should note that other emerging markets grew 10% operationally and that included growth in Venezuela. You will recall that we're reducing our activities in Venezuela pending an improvement in the economic environment there for multinational companies.

We're slowing down on inventories in the country and we will limit our future exports to Venezuela. Accordingly, sales growth in this market will trend downward over the balance of the year and continue into 2016 at significantly lower levels.

The impact of our reduced emphasis in Venezuela is reflected in our guidance for 2015, 2016 and 2017. Let me turn you to our operational efficiency initiative and I will give this from the finance guy perspective.

I will start with the punch line. We're on track to deliver at least $300 million of operating expense reductions by calendar 2017.

As we implement the changes needed to deliver those savings where we will intact the interconnected capabilities with [Technical Difficulty] advantage, our leading direct sales force, our highly productive R&D engine and our global supply chain. When we enter 2017, we will do so with a direct presence in all of the markets around the globe that matter.

And we will be promoting a portfolio comprised of the products that matter to our customers and have the best prospects for delivering revenue and profit growth. We want to be transparent with we respect to one-time costs and I want to call your attention to targets in the second quarter and broken down into three buckets.

First, the standup and other one-time costs which are mainly associated with our separation from Pfizer totaling $39 million in the quarter. The lion's share of the standup cost should be behind us at the Q2 of 2016.

Next, we recorded $263 million with costs associated with operational efficiency initiative, mainly for 2017 after attributed by the changes to our organization. This included about $25 million in non-cash charges.

And, finally, there's a bucket for our supply strategy which had $15 million of charges as we're still in the early stages of this initiative. You can see on our webcast line the current estimates of one-time costs expected to be recorded in 2015 to 2017.

Please note the cash forecasts for these projects remains the same as our previous guidance. Next guidance to 2016, based on our strong performance in Q2, we now in a range for revenue and adjusted EPS towards the top end of our range for revenue to $4.7 billion to $4.775 billion and adjusted EPS to $1.63 to $1.68 per share.

With respect operating expenses, as I said earlier, we made excellent progress comparing that of the operating expenses in the first half of 2015. It's real important to note that there are some natural seasonal trends to how we incur expenses.

In 2014, we incurred 45% of our total operating expenses in the first half of the year and 55% in the second half, with Q4 being our highest expensed quarter. That's a trend that you'd expect to see continued into 2015 but we expect to have a balance between Q3 and Q4 than in the past which was more heavily loaded in Q4.

Please keep that in mind as you think about the balance of this year. Turning to our longer-term guidance for 2016 and 2017, we're affirming our expectations for 2016 and 2017 and call your attention to the table that's included as part of our press release.

While thinking about the longer-term, I want to point out that we assume a constant diluted share count of approximately 502 million shares outstanding. As we said on our last call, but worth repeating, we intend to use our share repurchase program to at least offset the dilution related to the equity-based compensation that we provide to our colleagues.

And I want to reiterate that the efficiency initiative will trigger an acceleration of some dilution and to those plans. During second quarter we repurchased 2.1 million shares for $98 million, an average price of $46.19 per share.

Next, we saw that we recently filed on shelf registration statement. While we have no immediate plans to raise capital, the shelf provides us with the financial flexibility and access to capital markets quickly and when and if appropriate.

Looking now ahead over the next six quarters or so, we had a number of calls with our cash including our standup cost, the cost of implementing the efficiency initiative, our dividend, ongoing share repurchases and a $400 million debt maturity in February of next year. So it makes sense to be prepared for that, right?

That concludes our prepared remarks and we will now open the line for your questions.

Ramon and wondering if you would give us a little bit more detail behind your comments on the APOQUEL supply and what is going on with the ERP in the implementation with the billing issues?

I will answer the APOQUEL question and then I will ask Paul to provide details of the presentation of the ERP, not only in the U.S. but also in other markets where we're implementing this new system.

So in terms of APOQUEL, as I said we were able to increase significantly the supply from equity but still we're facing some challenge in ramping up and the manufacturing of API. And API is explaining some order of comments and it is a very complex manufacturing process and we had some delay in terms of permitting all the needs for finished goods.

Now we have a process that in our opinion will meet the demands of the market and we expect that very soon we will be able to meet all the market demands in the power expectation. In 2015, as I said, we plan to sell about $153 million, 1.50 and that significantly increase the revenues in 2016.

I'm very confident that the situation is under control. We have all the capacity that we need to use API and also to use the finished books in various in the market will start getting all the needs from our customers.

For now Paul will provide an update

Let me start by saying when we went live with the implementation SAP in the us in the beginning of May itself, high level and the go live was and continues to be a success and that is not to say that everything is perfect. I would say on the good side there is one reference and we have full control of our key business processes and we have full contact any of our financial information.

We have work to do in addressing the ways in which our system changes and has enacted on our customers. The us segment of our business we interface with tens of thousands of customers and the overwhelming majority have been systems working well at that does not matter if you are a customer where our systems change has led to issues with respect to you and the customer so addressing all of those issues and it continues to be a top priority for us and we will continue to look at resources and about an outstanding issue and I'm sure you and others on the line including some of our customers this is something that Wanda and I think about every day.

Last thing on this I hope is I've been involved in a number of SAP implementations and all of them have been successful and none of them have been without bumps in the road. We're going to call this implementation of success.

Our customers are happy with the level of our customer service and we have work to do there and we're on it and we're on it every day.

Paul, I know you don't manage the quarters but I was curious how we should think about third quarter and fourth quarter were qualitatively in terms of EPS progression because you did announce a meaningful beat and second quarter but you did not raise your guidance as much is the be. Thanks

A couple of things let's talk about it in second half. Please keep in mind as I mentioned earlier during my prepared remarks that the net-net was down over the second half of the year and we paired our expectations to APOQUEL to the lower in communicated range.

Still expected to sell more than four times last year's volume but towards the low end of our previously range for APOQUEL also bear in mind you're looking at our business in the second half of the year and our livestock business that's been chugging along quite nicely thinks some very tough comps in the second half of the year. So realistically from the revenue perspective if we're going to be making our guidance range and we think that's pretty good.

We're on track for 15 and on track for 16 and on track for 17 picked out on the expense side which really has more of the question to of around income, the income and where it should be and to call out my prepared remarks and it's at 55% of our OpEx in last year came in the second half of our year. We're expecting similar phasing in the second half of this year although less pronounced than you saw last year between Q3 and Q4 so you really need to take that into account in order to think about the full-year.

We tightened our guidance range. We continue to be on track and we think for a very solid 2015 with a lot of moving parts and on into '16 and '17.

Can you speak to the recent acquisition of KL progress in the poultry segment and will that be a meaningful contributor going forward and how should we think about capital deployment more broadly as it relates to acquisition and how would you characterize the deal pipeline right now and are you looking at both small and large target? Thanks.

The first on the KL acquisition, it was a small acquisition but it's an indication that also enforce our presence in the country and will reinforce our presence also in the revised part of our business. So we're entering into a revised business some year ago and we have reason on [indiscernible] the ability to vaccinate and it's a very efficient device vaccinating up to 60,000 eggs per hour.

Whether this device we're now -- KL problems but also we have strengthened our position in this part of the business. So it's more material but at the same time we also provide some additional relations with our customers and provide some additional service to them.

Paul will respond to the capital deployment

On the capital deployment I can't resist going through the whole sort of diagram of how we think about capital allocation. First and foremost we look for invest in our business and see opportunities to drive significant value for example increased investment through R&D and sales investment that, that would be our first call because we have a business that can generate organic growth in line or in the markets in which we compete with these investments and that would lead to a solid organic growth and earnings.

Now next M&A is adamant to our organic growth it will be added to our organic growth, I think good example the Abbott acquisition earlier this year which is fitting in quite nicely and helping us with our results. We think we entered Q1 perhaps it might have been observed in that, we mentioned anatomy of line of sight towards completing the standup I described us as interested and ready to look at M&A opportunities that are out there in the market and we're looking for leverage in the places where we have expertise and where we can leverage our core capabilities, broad-spectrum we look at pipeline assets.

We look at in-market products and technologies, we look at company acquisitions. I want to point out that we use a return date to evaluate transactions and we look for deals that add value and cash flow and retail will be value generated to our shareholders as we look to pursue those deals.

We've got some capacity to do deals and we're interested in saying there are certainly areas that are adjacencies for us or areas where we currently like to do that

And we continue assessing any possibility [ph] that we make a strategic sense, we will generate synergies in terms of revenues and cost. We like the financial value.

Also very important also we did incorporate into this assessment any antitrust in partners that we may have. That's really where we see M&A as a way to complement our internal growth, our operational growth and internal growth and that will increase the value of Zoetis and value to our shareholders.

My question relates to the atopic dermatitis franchise that you are building. Can you talk about how APOQUEL these additions versus the new IL-31 antibody and do you expect to do a full launch of the new antibody now or wait for more clinical data.

Thanks

John. APOQUEL it's an oral treatment compared to IL-31 which is injectable.

APOQUEL is a pill that need to be taken on acute and also chronic conditions of the dog. While IL-31 it's more injectable so it's different and it will depend also on the [indiscernible] but definitely we see both of the problems very complementary and maybe one much more focus on the first line treatment and while IL-31can be used more for chronic conditions and for those dogs that require some additional attention from veterinarians and follow-up from veterinarians.

The full launch of the product will release when we get the full license. So at the beginning we plan to do the product -- we continue to review the methodologies in the U.S.

and then we will gain details on the efficacy that the data will be used to present this information to the USDA and then finally get final approval for the license in about a year.

We have had several big presence [indiscernible] with APOQUEL and IL-31 and [indiscernible]. Can you talk about how you think about the anticipated case of additional R&D development, should we expect another large product launching every two years and every year and then just on business development you said in the past that you’re looking to upgrade from smaller and mid-sized deals and that these opportunities tend to be more therapeutic and geographically focused.

Are any therapeutic or geographic areas that are particularly attractive and are you interested in continuing to build-in devices or diagnostics? Thank you.

I will try to go through all of the different questions that you raised starting with the path line. We're very pleased with the productivity of our investment in our R&D.

We've been able to produce APOQUEL but also control that we're very strong players in terms of vaccines and we had the opportunity to use also the vaccine [indiscernible] in record time and now we have also IL-31 and that will also complement our franchise dermatology space and we also expect in 2016 gaining approval for an oral parasiticide that is an important segment and where we're today we're under represented. We expect to enter this product in both U.S.

and also the European markets. Definitely we're focused on bringing innovation and, in my opinion now we're showing that we're leading not only in terms of revenue but also in terms of innovation that we've been showing many examples of how our team is delivering this kind of innovation.

At the same time, we're continuing investing in the part which is equally important which is extending the lifecycle of our portfolio. And this will present a significant part of our investment in fact most of our R&D budget is located to ensure that our problems remain competitive and we achieve that by combining products, increasing indications and also geographical expansion.

So we’re very pleased with our innovation and pipeline, we definitely we like to see that these deliveries of this success continues in the future. In terms of business development, that you ask, we're now in a situation that we contemplate business development from a provisional first time.

We have a significant presence in all of the therapeutic areas, we have facility presence in all geographies and also in all species but we still see opportunities some in cases between gaps that also strengthen our position. But it will be only when it makes sense from the financial point of view.

In terms of other areas, we're very open to contemplate opportunities outside of our core business. We enter some into these complementary spaces, in genetics, devices and diagnostics and we will continue assessing opportunities in these areas that we will reinforce our position

Before we for a jump off I want to go back to the kind of how do you think about the productivity or the pace coming out of R&D because it is one of our competitive trends. We often talk about and this is in round numbers, everybody, we often talk about our industry growing mid-single digits over time with if you thought of it is five using as an example, five is a 5% growth industry and 2% coming from units and 2% coming from price, 1% coming from new products.

Our goal is to deliver more from self-developed products to the 1% and again I don't want to focus too often on one quarter but if you look in our quarter, second quarter of this year we have 2% of our growth year-over-year from introduction, products that have been in-line less than a year. Products like [indiscernible] collection of all other products that are in line for less than a year.

So there is lots of things that are included in our R&D that are not in the same categories perhaps like an APOQUEL or Sarolaner or perhaps even an IL-31 but we go along and that growth is one, meaningful and two to the extent that we can grow faster in that market and that helps us deliver on one of our valued propositions which is our ability to grow our sales at a rate faster than the market.

I was wondering if you could give us a little more of an update on your outlook for the livestock by species of cattle, swine and poultry and specifically as we get through the end of '15 and into '16 and also if you could point out what are the tough comparisons are for the second half that you mentioned earlier? Thank you.

Starting with livestock we see the market conditions are still favorable. If we start with cattle, the price of beef remains high.

We see that also the value of the animals remain very high and this also creates an opportunity to continue providing [indiscernible] producers the problems that they need to keep the animals healthy and productivity. Swine and poultry are also two species that have been performing very well, swine in this quarter represented the growth of 14% while in the quarter poultry was showing only 1% but one of the advantages of Zoetis is that we have a presence in all species and we can really maximize opportunities despite of some temporary challenges in one species or one in geography.

So in that respect we see that the prospect for livestock remain positive and we see that continually in 2016.

The other question was to talk about the tougher comparison in livestock compared to last year. You look back in the second half 2014 and we had margins or significant ramp up of [indiscernible] and things like that in the prior-year that were not present in the first half of 2014 and the compared year.

So that's what leads to more difficult comparison year-over-year. in the livestock space.

Paul, can you give us your thoughts and expectations regarding potential tax reform in the U.S. which seems to be gaining traction and specifically for your company as we [indiscernible] important goal for your tax rate and follow-up if I make strong performance in Brazil driven by new product launches, are these products that are already available in other major markets or can we expect similar launches for these products?

Thank you.

Looking at the first tax question is, tax is on [indiscernible] going on forever but it doesn't mean it won't create some traction but it's important to our structure and the answer is it could be to the extent that we have earnings and cash that's offshore and part of our tax structure partly intend to permanently deploy that capital offshore, the rules are changing, it affect us just like any other U.S. multinational company.

So we will just have to wait and see on that

Let me then answer to your question about product traction in other markets. We see in general that companion animals are more global produce and this is something we have that products in that segment [indiscernible] in all markets around the world and this has been the case of APOQUEL and also would be the case of IL-31 and some of the products in these categories.

In terms of livestock, it depends. You asked about the Brazil, Brazil is a very strong market in terms of cattle but also the cattle industry we have very specific conditions and we have been introducing definitely new product but in some cases very specific to Brazil and more recent interaction has been produce for reproduction that has been produce introduce in Brazil at the end of 2014.

We will continue to try to expand our portfolio as much as we can geographically and definitely this is part of our potential growth ensuring that we have all of the heavy market introducing in all of our markets.

The growth in the third quarter I just want to continue the question about the tax. So I'm wondering how much tax optimization or tax planning are already included in the long-term guidance because it looks like the effective tax continues to be between 29% and 30% for the next two years.

How much is already tax planning that was already included in the new guidance and if there is any additional potential to optimize further the tax rate in the longer term? And somewhat related to the question about M&As, what rates would be interested in introductions and for purposes whether [indiscernible] interested in merging with the company which is not truly animal health.

Thank you

So first question how much is included in our long-term guidance? We’ve a structure I think we’ve articulated that we think we have a solid structure based on the hand that we're dealt here that will allow us to maintain a tax rate in the order of call it 29%-ish for the planning horizon for us at goes out at least three years that we provided guidance.

We talked many times and we look for any opportunity to grind that rate down and it is a grind. It is not something that there is a magic bullet that we can put in place in the new structure and magically reduce our tax rate by 700 basis points.

We do what we can and we think we have a good solid supportable structure and that’s what is included in our guidance over the long-term. With respect to an inversion, we talk about this as well.

In our there are precious few companies that would make sense for us to work with and the second thing that we try to talk about at our investor day back in November of last year is based on our particular set of circumstances we feel that in an inversion transaction the benefit if you focus on the entity that’s currently called Zoetis an offshore [indiscernible] debt would be roughly reduce our tax rate by some 600 basis points market folks are suggestive that there are other ways that could be pretty dramatically beyond that and that's our point of view and that's what we said back in November and we continue to believe that. So in terms of the transaction it could be helpful and it's not something that for us would take our tax rate down into the one-time single digits

So we haven't distributed any option but you have to think about this opportunity that can be justified not only because of tax but because of the strategic rational of the position and this is something that we include in the assessment.

It's [indiscernible] filling for Dave, so I have a question on pricing. Wondering whether some of this can raise prices in livestock and companion animal anymore then you have in the past?

We're always trying to maximize gross profit and the opportunity to maximize gross profit is coming from including the volume, including prices and finding the right balance between volume and price. And we will find good strategy in terms of prices and definitely see opportunities to raise prices at the higher pace and we would consider that.

We have been quite aggressive and price increases in some of the emerging markets and where we have high inflation and then because of that we're also applying high price increases. In developed markets what we're trying to also is make sure we remain competitive and we're not creating a negative impact in our volume that also we have impacted revenue in terms of cost of manufacturing.

All of these is part of what we consider in terms of price increases.

So as well as operational efficiency program being very good for helping the efficiency of the overall business, you did talk on last quarter's call about how this might make Zoetis much better platform for integrating acquisitions. Can you just give us a bit more feel of when this process would progress through to the point where less focus on drug in the process and the platform is more efficient and you might be able to consider larger size deals because I would assume at the moment with a lot of work still do on this program, that’s not something that should be in the cards right now.

Thank you.

On the primary it's running and in my opinion it's running at full speed. So we will be finalizing all of the necessary changes at the end of this year and there will be also a significant work done in terms of reduction of SKUs and also changing the internal markets.

I don't see at this point that our operational efficiency program is any kind of restriction, or creating any kind of restriction for M&A. On the contrary now we have an operation that is a key endpoint and we can really maximize the opportunities for any position with the model that will be more profitable.

So they will start running well in terms of our program. I don't see any concern or issue on delivering or exceeding the target of 600 million and at the same time considering the M&A opportunities.

The operating efficiency initiative is not a gaining factor looking at our M&A opportunities. The best time to do a deal is when there is an attractive actionable deal in front of you, what I expressed earlier was we're ready and we would be able to take advantage of the situation if we could present itself, we’re good to go.

This is Arielle in for Jami. I just wanted to follow up on the M&A question.

Can you discuss your firepower. You mentioned on many calls that you’re somewhat cash restrained with operational efficiency, so are you able to do a large scale deal and can you remind us what your max leverage ratio you are comfortable with?

Are you willing to use equity and then just secondly there has been a lot of restrictions with antibiotic usage and livestock so can you just give provide color at what is the downside risk for your business. Thanks

We're thinking about M&A let's go back and start and answer the capital structure question first, we might express an upper bound of what we would put on in terms of leverage but what we have said is we're generally thinking about target for as roughly 2.5 turns of EBITDA in our cap structure and the expectation is in the normal course ranging 2.5 to 3.5 times somewhere in that vicinity. Now what we have also said is that we have the right opportunity we would be more aggressive in the use of debt capital in order to be able to complete a value generative transaction.

So what does that mean? It means that we look to balance our desire to maintain a solid credit profile and access the capital with how much debt we put on and having a clear pathway to reducing the leverage over a period of time.

We have the capacity to do good sized deals within our company. And as I said the best time to do deals is when there is an opportunity in front of you and we would use all available leverage in order to be able to formed and conclude the transaction that we felt was value generative for all the shareholders

And then let me take the question on what is the potential risk. We have in our portfolio about 30% of our revenues coming from antibiotics.

Out of this 30%, 25% is a companion animal and we see low risk and then the rest is between MSAs and also injectable products which again we see less risk than probably is provided to animals in feed. There are different levels of categories on the use of antibiotics, [indiscernible] and also the different species where the problems arise.

There has been a significant rumors or comments mainly in poultry where some of the producers have decided to move away from medical important antibiotics and to use non-medical important antibiotics. We have in our portfolio both and we think we can provide to our producers, mainly poultry activity produce that will meet their demand and also meet also consumer demand.

So in our opinion I think it is a risk that is manageable and the advantage that I mentioned in many occasions we have a portfolio which is extremely diverse in terms of species, in terms of geographies and in terms of specific areas and also very important in terms of specific areas when they move away from antibiotics they need to increase significantly the use of vaccines to protect this animal. So again we have a significant presence in vaccines so we can compensate any kind of impact on certain areas and have increased in others.

Thank you very much for attending this call and thank you very much for your questions and again we think that we reported this quarter very strong results and we're very confident on delivering our objective in 2015. Thank you very much.