Dina Fede Juan Ramón Alaix - Chief Executive Officer and Director Richard A. Passov - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Christopher T. Schott - JP Morgan Chase & Co, Research Division Kevin K.

Ellich - Piper Jaffray Companies, Research Division Louise Alesandra Chen - Guggenheim Securities, LLC, Research Division Mark J. Schoenebaum - ISI Group Inc., Research Division Charles Anthony Butler - Barclays Capital, Research Division Erin E.

Wilson - BofA Merrill Lynch, Research Division Jami Rubin - Goldman Sachs Group Inc., Research Division David Risinger - Morgan Stanley, Research Division

Thank you. Good morning, and welcome to the Zoetis Third Quarter Earnings Call.

I'm 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 results, and then we'll open the call for your questions.

Before we begin, let me remind you that the earnings press release and financial tables can be found on the Investor Relations section of the Zoetis website. We're also providing a simultaneous webcast of this morning's call, which can be accessed on the website as well.

And a PDF version of the slides representing and a transcript of the 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 description of the 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 2012 10-K and our 2013 10-Qs. Our remarks today will also include references to certain financial measures that were not prepared in accordance with Generally Accepted Accounting Principles or U.S.

GAAP. These non-GAAP adjusted figures exclude the impact of purchase accounting adjustments, acquisition-related costs and certain significant items, such as the recurring costs of becoming a stand-alone public company.

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, November 5, 2013.

We also cite operational results, which exclude the impact of foreign exchange. 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.

Finally, let me remind you that since Zoetis was not a stand-alone company in 2012, our financial statements covering periods prior to the IPO were derived from the consolidated financial statements and accounting records of Pfizer. These financials include allocations for direct costs and indirect costs that were attributed to the animal health business of Pfizer.

As such, the combined financial statements for these periods do not necessarily reflect what the results of operations would have been had we operated as a stand-alone public company, which can make comparisons to the prior periods difficult in certain instances. With that, I will turn the call over to Juan Ramón.

Thank you, Dina, and hello, everyone. Welcome to our third quarter earnings call.

Today, I will walk you through the continued progress Zoetis is making and share my perspective on some of the trends impacting our company, our industry and the customers that we serve. Let me start saying that I am very pleased with our third quarter results, 9% operational revenue growth and diluted adjusted EPS of $0.34.

Once again, our diverse portfolio of products across geographies, species and therapeutic areas was a key factor in delivering results during this quarter. This performance also illustrates the value of the contribution that Zoetis colleagues around the world bring, and the strong and meaningful partnership we have developed with our customers.

I will outline the highlights of our business segment performance, and then Rick Passov will provide some additional comments on our financial results. At the segment level, Zoetis continues to see the benefits of our business model, and we saw growth across all regions.

Some of this growth reflects more normalized weather patterns for our customers in North America, continued market acceptance of our products, new launches such as vaccines for swine and poultry in certain countries, the continued focus of pet owners on the health of their animals and our focus on emerging markets. These more than offset the challenges in some of our markets related to competitive market dynamics, changing regulatory environments and economic conditions.

Now for a few highlights of this performance. In Asia Pacific, we saw strong growth in markets like India, China, Thailand and New Zealand.

These were somewhat offset by the ongoing impact of drought conditions and livestock problems Australia. On a year-to-date basis, the APAC region grew 5% operationally versus total company growth of 6%.

However, we expect the region to deliver growth for the year largely in line with the total company growth rate, as conditions in these diverse markets are expected to improve. In Canada, Latin America, we saw growth in our 2 largest markets in the region, Brazil and Canada, as well as Venezuela.

In Brazil, we saw strong growth in poultry while cattle sales were relatively flat. In Europe/Africa/Middle East, we delivered strong growth from livestock products in emerging markets such as Russia, Turkey and South Africa, and growth in companion animals business, mainly in Western Europe.

And finally, in the U.S., we saw growth across all segments of our business. In particular, cattle products experienced significant growth compared to the same quarter last year, which was hurt by the severe drought conditions.

Although cattle placement declined in the third quarter compared to 1 year ago, September trends were positive, and the market anticipated favorable trends to continue into October. The expectations of increased cattle movement have resulted in higher demand for animal health products in the third quarter.

From a global perspective, livestock sales grew by 8% operationally and companion animal sales grew by 11% operationally. Again, through these results, we see the strength of our portfolio, scale, global presence and business model.

Weather conditions continue to improve for many of our livestock producers. This is, of course, positive news for those who have been managing their businesses in often very difficult circumstances during the last 12 months.

But challenges remain for our customers in Australia, where the drought is having a significant impact. In the third quarter, we also saw continued disease outbreaks in both the livestock and the companion animal sectors.

These outbreaks can have a serious impact on the health of animals, and in the case of livestock producers, in their profitability. You may recall on our last earnings call that I talked about the outbreak of the porcine epidemic diarrhea virus, or PEDv.

The virus typically affects pigs in the nursery and it has sadly continued to spread. The disease has been reported in at least 17 U.S.

states. There is no vaccine at this time, and producers and veterinarians remain on high alert.

Of note, researchers of the U.S. Department of Agriculture say that PEDv does not pose a threat to human health or to food safety.

We are closely monitoring the situation and its impact on our customers. We do not currently expect this outbreak to materially impact our 2013 financial results.

Zoetis continues to support the University of Minnesota with the development of a rapid diagnostic test for the disease, and collaborating with the university is just one way in which Zoetis is investing in finding a solution to combat the virus. Also, in the Asia Pacific region, we have partnered with authorities in Taiwan to respond to their first confirmed cases of rabies in more than 50 years in the country.

We work with the Taiwanese government to import 700,000 doses of rabies vaccine, Defensor 3, and this enabled the government to implement its emergency vaccination program and mitigate the spread of the disease to animals and humans in the country. This quarter's performance has been achieved while we continue our efforts to stand up our company and to build out our infrastructure.

This includes, as examples, opening Zoetis offices in a number of European locations and establishing our own financial shared services teams. This and other projects are all focused on enabling Zoetis to operate independently.

We continue to partner with regulatory agencies around the world to bring new, innovative animal health products to the market, as well as new formulations and indications, combination of products and geographical extension of our existing portfolio. During this quarter, and of particular note, we saw that APOQUEL has now received approval from the European Commission.

Total market approval for this product include the United States, New Zealand and 27 countries in Europe. APOQUEL is indicated for the treatment of certain types of pruritus in dogs at least 12 months of age.

In the U.S. and EU, roughly 8.2 million and 5.2 million dogs, respectively, are treated for itchiness.

There are a number of factors that can trigger an itchy reaction such as infections, dermatitis and parasites. The length of treatment using current products varies from days or weeks for acute cases of each, to months for chronic allergic dogs.

Options to address itchiness in dogs, including the type and length of any product prescribed or suggested, will vary based on diagnostics and the treatment philosophy of the veterinarians and the preference of the pet owners. We also recently received approval in the U.S.

of 2 generic formulations of ractopamine, a beta-agonist. The 2 products will be marketed as ENGAIN, which has been approved for swine, and ACTOGAIN, which has been approved for cattle.

We currently expect these products to launch sometime in 2014. As you may know, ractopamine is a feed additive that helps cattle and pigs direct their food energy towards producing high-quality lean meat rather than fat.

The product has been safely used for more than a decade and widely adopted in the U.S., Canada, Australia and Brazil. We are excited to bring these products to Zoetis, and most importantly, to our customers.

In addition, through our approach to managing our existing brands, we are actively pursuing claims extensions for launching existing products into new geographies. We receive multiple approvals around the world each quarter.

This enables to enhance our brand portfolio of products, and a few examples from this third quarter include BOVI-SHIELD GOLD ONE SHOT, which has been approved in Canada for use in cattle. Canada decisions builds on the recent approval for this combination of product received from the U.S.

in the second quarter. FACTREL has been approved for use in the U.S.

with LUTALYSE for fixed-time artificial insemination of dairy cattle. Its approval allows producers to improve the reproductive performance of their herds.

Also in the U.S., we saw approval of EXCENEL RTU EZ for cattle and swine. These are the formulation of one of our existing products, EXCENEL RTU, with an improved delivery method making the product even easier to use.

We will launch this enhanced product to U.S. cattle and pork markets in the fourth quarter.

All these activities enable us to deliver our innovation and capabilities to both existing and new markets, and leverage our global presence and scale to benefit customers around the world. I would now like to mention another topic we have discussed in the past.

We are expecting the U.S. FDA to issue final guidance 2013, which will establish the procedures for eliminating growth promotion indication for medically important antibiotics.

Zoetis supports the U.S. FDA's efforts, and we are committed to working with our veterinary and livestock producer customers through this process.

As we said previously, we don't expect this to have a material impact on our future financial results. With 3 quarters now reported in our first year, I am very pleased with how we are meeting our commitments to customers, delivering financial results and setting a solid foundation for our future.

External benchmark data shows that during the first half of the year, Zoetis revenue grew faster than the market. Data for our current quarter is not yet available.

I continue to see great potential in our business and our industry over the coming years, and look forward to continuing our discussions. And with that, let me thank you for your attention and your interest in Zoetis.

And I will now hand the call over to Rick and ask him to walk us through the third quarter financial results and guidance for 2013. Rick?

Thank you, Juan Ramón. I'll now provide some additional details on our financial results for the third quarter.

Revenue was approximately $1.1 billion, an increase of approximately 8% year-over-year, including a negative impact of 1 percentage point from foreign exchange. Excluding this FX impact, revenue grew 9%, and I will discuss the key drivers in a minute.

Turning to net income. Reported net income of $131 million and diluted earnings per share of $0.26 decreased by 19%, primarily driven by certain stand-up costs associated with our full separation from Pfizer.

On an adjusted basis, net income of $172 million and diluted earnings per share of $0.34 showed an increase of approximately 12% and 10%, respectively. The adjusted net income excludes the impact of $8 million of purchase accounting adjustments and $33 million of certain significant items, including stand-up costs associated with our separation from Pfizer.

Turning now to our adjusted net income statement. Revenue was up 9% operationally, excluding the impact of foreign exchange.

As Juan Ramón indicated, our operational increase was supported by higher sales across all species. Companion animal growth was driven primarily by higher sales in large developed markets, while livestock growth benefited from more normalized weather patterns in North America and good growth in many emerging markets around the world.

However, we continue to see a negative impact on cattle revenues in Australia from ongoing drought conditions, while cattle revenues in Brazil are being impacted by increased local competition. Adjusted cost of sales was approximately 34.7% of revenues versus 35 -- excuse me, 34.5% in the year ago quarter.

This reflects the impact of product mix and faster growth in emerging markets, partly offset by the benefit of relatively higher growth in the U.S. Adjusted SG&A increased 9% operationally, in line with our revenue growth, while adjusted R&D expense decreased 1% operationally.

Adjusted net interest expense was $29 million in the third quarter of 2013, reflecting our debt issuance in January of this year. Adjusted other income and deductions in the quarter decreased to income of $7 million in the third quarter of 2013 from income of $10 million in the third quarter of 2012.

Our effective adjusted tax rate for the third quarter was approximately 29.5%. And again, our adjusted net income increased approximately 12% to $172 million for the third quarter or 16% operational growth.

Now on to our segment results, which I will discuss on an operational basis. Segment earnings are pretax numbers and are reported on an adjusted basis.

Beginning with the U.S. third quarter revenue was $495 million, an increase of 10%.

Sales of livestock products grew 11%, driven by cattle, poultry and swine. Results reflected increased volumes and the benefit of price increases taken in the first quarter.

We saw strong growth in sales of cattle products, the largest contributor to livestock growth, which benefited from an unusually weak year-ago quarter, when the impact of the drought was most evident. Sales of poultry products were driven -- were strong as well, primarily due to medical feed additives.

Swine products increased, driven primarily by continued customer acceptance of new products. Meanwhile, sales of companion animal products grew 10%.

This increase was driven by sales of small animal products, reflecting the benefit of price increases taken in the first quarter, as well as the positive impact of promotional efforts. And equine sales were relatively flat.

U.S. segment earnings increased 23% due to strong revenue growth, favorable product mix and timing of certain promotional spend.

Now turning to our Europe/Africa/Middle East region. In EuAfME, third quarter revenue was $270 million, an increase of 9% operationally.

Sales of livestock products grew 7% operationally. This reflects an increase in cattle product sales across many emerging markets, tempered by a continued decline in sales of cattle products in Western Europe due to challenging market dynamics and the competitive environment.

Sales of swine products continue to benefit from customer acceptance of a new vaccine across many markets. Sales of companion animal products grew 15% operationally and benefited again this quarter from increased sales associated with third-party manufacturing agreements.

Excluding these sales, companion animal product sales grew approximately 5% operationally. This growth was driven by sales of anti-infective and parasiticide products for small animals.

EuAfME segments earnings increased 1% operationally. The benefit of increased revenue was largely offset by the unfavorable impact of product and geographic mix.

In addition, results in the year-ago quarter were favorably impacted by certain adjustments, which can make comparisons to prior periods difficult. Turning to our Canada and Latin America segment or CLAR.

Third quarter revenue was approximately $171 million, an increase of 9% operationally. Sales of livestock products grew 6% operationally, driven by sales of cattle and poultry products.

Cattle product sales increased primarily due to growth in Venezuela, Canada and Mexico, while sales in Brazil were relatively flat, reflecting the impact of increased local competition. Sales of poultry products were driven by medical feed additives, primarily in Brazil.

Meanwhile, sales of companion animal products grew 19% operationally, largely due to growth in Canada based on the timing of the parasiticide season, our ability to maintain market share gained from a competitor supply issue in the year ago quarter and the timing of price increases. In addition, we continue to benefit from increased demand in Brazil.

CLAR segment earnings increased 24% operationally. This increase was primarily driven by revenue growth and favorable product mix.

In addition, results in the year ago quarter were unfavorably impacted by certain adjustments, which can make comparisons to prior periods difficult. In APAC, third quarter sales were $167 million, an increase of 7% operationally.

Sales of livestock products grew 8% operationally, driven primarily by growth in emerging markets across swine, poultry and cattle. Increased swine product sales came from continued customer acceptance of new products in China.

Poultry product sales benefited from ongoing customer acceptance of products in emerging markets and the resolution of a license registration issue in India. Cattle product sales growth was primarily driven by performance in New Zealand, partially offset by the impact of prolonged drought conditions in Australia.

Sales of companion animal products grew 3% operationally, driven by increases in developed markets, such as Japan and Taiwan, and in emerging markets such as China. This growth was partially offset by declines in Australia due to increased competition.

APAC segment operating earnings increased 3% operationally. This reflects unfavorable product and geographic mix and increased investment in promotional activities.

Now let us turn to guidance for full year 2013. We have reported 3 quarters in the fiscal year and remain confident in our ability to deliver on our full year financial guidance.

As a result, we are narrowing our adjusted financial guidance for the full year 2013 to reflect our performance year-to-date. We now expect adjusted EPS of between $1.38 and $1.42 per share.

In addition, we remain on track to the guidance we gave for non-recurring costs related to stand-up activities and the remaining integration costs associated with prior acquisitions. Year-to-date, we have booked $147 million for these non-recurring costs.

These costs, along with purchase accounting adjustments, are excluded from our adjusted numbers. Subsequent to the third quarter, we have taken the following decisions that will result in onetime charges of up to approximately $20 million and which will be reflected in fourth quarter reported results.

We recently integrated research and development for our branded generics business into our global R&D operations. We are exiting assets associated with manufacturing intermediate ingredients for certain products that we believe we can source more effectively from third parties.

And finally, we have decided to divest certain assets in our aquaculture business. Including all of these items, which will be excluded from our adjusted numbers, we now expect the range of total non-recurring costs to be between $200 million and $240 million for fiscal 2013.

So including the impact of these items, our reported diluted EPS for the full year is now expected to be between $0.98 and $1.02 per share. Finally, we continue to evaluate opportunities to improve our operations and assess the carrying value of certain assets based on changes in events and circumstances.

At this point, I don't expect any ongoing reviews to materially impact the range for non-recurring costs that we are providing with this update. 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 questions. Dina?

Thank you, Rick. Operator, we're ready for our first question, please?

Just had a couple parted question here. So we saw a strong recovery in the U.S.

kind of livestock and cattle market this quarter. How do you see the market growth playing out from here as we look out the next year or 2, as grain prices have normalized?

I guess, what are you hearing from your customers on herd recovery? I'm just trying to understand how that dynamic plays out as we annualize these drought comps.

And the second question was on expenses. We saw a step-up in SG&A this quarter.

Is this a sign of higher spend going forward? Or are we just seeing some promotional spend as this livestock market recovers?

Thank you, Chris. Let me answer the questions and maybe Rick also will add some comments.

On the U.S. livestock, a significant portion of the U.S.

is related to cattle. We saw this quarter that cattle performed extremely well.

But again, compared to last year, where the drought conditions were affecting the business significantly, we expect the last part of the year normalized in terms of movement of animals to the feedlot. It is true that we have fewer animals than last year.

We expect also that the cattle business will take 2 to 3 years to rebuild the herd. And this is what we had been already communicating, that in cattle it takes longer to rebuild the herd, while in swine and poultry we have seen that this recovery has been much faster.

And this is also reflected in our revenues, because in the first 9 months, poultry and swine in the U.S. have performed very well.

In terms of expenses as SG&A, so we had in the last quarter the delay on the parasiticide season. And also related to that, we decided also to postpone some of the promotional activities until the time of the parasiticide season.

This occurred in the third quarter, and the third quarter has been impacted in terms of promotional expenses that were mostly delayed from the second quarter. In terms of expenses, we are reconfirming our guidance.

And you can see that we have also lowered the upper range of our guidance on expenses, SG&A as well as R&D. Rick, you want to add any other comment?

The only thing I would add is that if I look at total operating expense in Q3 versus Q3 of last year, we're slightly better. If I look at total operating expense year-to-date through this year versus last year, we're more than slightly better.

Also year-to-date, we're under where we expect to be for the full year and that gives us the ability to continue to support promotional spend into the fourth quarter. And the last thing that I would say is that, in addition to the timing of promotional spend in the third quarter that Juan Ramón described, there is also the increase in enabling functions spend, which is higher, Q3 versus Q2, than it has been in the prior quarters.

So when I look at total SG&A, this quarter being basically where it was last quarter and better year-to-date, including the enabling functions spend, we're definitely on track to where we expect to be.

Operationally, in terms of revenues, we are growing year-to-date by 6%, while expenses are growing year-to-date only by 2%.

I guess, first off, on the new products that you talked about, Juan Ramón, APOQUEL, EXCENEL and the beta-agonist, just wondering if you could give us some color on how you expect these products to ramp into 2014? And then also, we saw a small acquisition this quarter -- or after the quarter closed in October, Advanced Food Technologies.

Wondering if you could give us some more color on the size of that deal, and what else you guys are looking at on the M&A front?

On APOQUEL. So definitely, APOQUEL, it's a product that is expected by the market.

It's covering unmet need to treat dogs suffering from itchiness. The current treatments are corticosteroids and also some other products that are available to the veterinarians.

Also, in some cases, the veterinarians are also using many different alternatives, different pharmaceuticals to treat these dogs. We expect that in 2014, when the product will be launched, the adoption will be gradual, switching current treatment to APOQUEL.

We are convinced that, in the long term, APOQUEL will be an important product in our portfolio. In terms of beta-agonist, so we are also entering into this market with 2 generic formulations: one for swine, the other one for cattle.

The swine product will be launched in the first quarter. The cattle product will be launched in the second half of 2014.

Again, so it's something that we think that will be an opportunity for Zoetis to incorporate 2 products which are used by livestock producers in the U.S, and also will fill a gap that we have in our portfolio, that we'll be able really to offer to our customers a larger range of products and solutions to treat and to prevent diseases. In terms of the acquisition of -- that we also announced in this quarter, it's a small company.

Definitely, it is small, but it's following the strategy that we already started some years ago to really complement our portfolio, our core business, vaccines and pharmaceuticals, with complementary spaces. And we entered in devices, in poultry devices, with the acquisition of Embrex some years ago.

We also have now in diagnostics with the acquisition of Synbiotics. We're also offering services to our customers, and these food safety products also will complement our portfolio.

And we will enter in a space that it's growing importance because its consumers and also governments are demanding higher food safety, and we think that we can bring our commercial strength and also our expertise in R&D to really leverage this acquisition. That, again, is a small one and we have some revenues in 2014, but not significant earnings.

My question was if you had any thoughts on some of your competitors who have been talking about spinning out or selling their animal health businesses. And I was just wondering how that may affect you, or what do you think about that?

Well, I must say that -- thank you for the question, Louise. We are focused on making sure that we are meeting our objectives in 2013 and at the same time that we are standing up Zoetis.

As you can imagine, this has significant complexity that we need to manage, but I think we are showing that we are able to manage the complexity and delivering strong results. I think it's something that -- speculating on other companies, I think, is probably something that we should not really enter, but continued focus on delivering the value to our customers and our shareholders.

Just -- maybe just building on the last question. If Novartis or Merck were to decide to part with their animal health company, would that something you guys would consider bidding on?

Or should we, as investors and analysts, really think about that as outside the scope of your capabilities right now, given some balance sheet constraints, as well as maybe some F -- perhaps FTC issues? And then given the SG&A in the quarter, over the long term, Rick, is it reasonable that investors should still expect the SG&A, as a percent of revenues, to decline over the long term?

Well, I would -- thank you, Mark, for the question. And maybe I will repeat that it's -- this is something that other companies are really considering a strategic option for their animal health business.

We are convinced that we have the critical mass and also the diversity in terms of our geographies, species and therapeutic areas to be successful. Definitely considering M&A will be part of our model.

But at this point it's something that we need to really to ensure that we are meeting our commitments in 2013 and '14. And in terms of M&A, I would say that, at this point, we are focused on areas that will be smaller, will be complementary, filling gaps in our portfolio or adding some complementary spaces, like the acquisition that we just announced.

In terms of SG&A, maybe, Rick, you want to answer this question?

Sure. So Mark, as you can see, in 2013, there's very good operating leverage in the business.

In 2014, as we've spoken about in the past, we're going to continue to build out our own infrastructure, look across all of our processes and gain operating efficiencies, and we think that continues to drive operating leverage. And beyond that, I'm not going to make a long-term prediction.

But I do think that the leverage that we see in '13 can be sustained, especially as we get into 2014, to some degree.

The question's around the initiation of your eCommerce business earlier in the spring. You made reference to a number of customers that had signed up and a number of customers that had used it, and I wondered if we could get an update?

And then on the same thought, Rick, is there some reason that, that, certainly in the U.S., I recognize, can -- or is it already demonstrating some improvement in overall operating margin?

In terms of the eCommerce, it's true that I provided some details on the last call. I don't have in front of me what is the number of customers that are already signed off on this eCommerce.

What I had is the feedback of the U.S. team has been positive, and the feedback from our customers is also very positive.

So I think it's something that we are adding to the way that we are interacting with customers, and we see as additional way of really providing support and services to our customers. In terms of the improvement in operating margin, you mean for the U.S.

or in general. I think it's -- definitely, we are committed and is something that we mentioned many times that we are committed to grow our revenues in line or faster than the market.

And we are also committed to improve margin faster than revenues. And we'll achieve that over time by the right actions in terms of gross margin, the cost of the products sold, the right strategy in terms of pricing and control on our operating expenses.

And we are convinced that this is something that we'll be able to deliver in the future.

And this is Erin filling in for Willoughby this morning. First question on SG&A expense again.

So should we think about some of your cost structure initiatives as essentially being pushed out into 2014? Can you discuss those dynamics, just flesh it out a little bit?

And then my second question is in U.S. companion animal.

It was also very strong. Are these trends sustainable going forward?

And how should we think about the underlying utilization trends for the companion animal segment, in the U.S. in particular?

We'll have the opportunity to discuss about our 2014 guidance next year. We don't see, at this point, any reason why what we have been describing in the past will change, and we are confident that we will continue with discipline in terms of SG&A and having the right level of investment to support our revenue growth aspirations.

The U.S. companion animal business, as you said, it's doing very well in the U.S., and we are growing in all the different categories.

Definitely, with the launch of APOQUEL, we expect also to generate growth in the future in 2014. And we think that the level of our business model, which is, as we said many times, direct interaction with customers; deliver innovation; at the same time that we deliver innovation, also making sure that we protect our existing portfolio with new formulations or combination of products, new combination of vaccines; and also the quality of our manufacturing are very strong elements really to sustain our growth in the companion animal business in the U.S., as well as in other markets.

Erin, I'll just add a little bit to the comment that you made on SG&A. There's nothing kind of off-track or that's changing in terms of how we see spend evolving this year.

In the guidance that we're giving you now, we are actually narrowing our full year guidance for SG&A, as well as R&D. So with respect to our expectations as we gave them to you in April, we're performing at or better than how we expected there.

Quarter-to-quarter, there are variations in spend, partly, as we had said earlier, in Q1 and Q2, the pace of spend on the enabling functions was somewhat slower than we expected, and then also, as Juan Ramón pointed out, higher promotional spend in the second half. But the guidance that we're giving you now, if I can point out again, is narrowed versus April.

That includes our expectations of spend for the full year. And as I pencil through that guidance, I get to the performance, the operating leverage that we expected and therefore, the kind of expense control that we believe exists in the model.

And Rick, I don't mean to beat a dead horse. I think the surprise this quarter was the nice top line beat, which didn't translate into an earnings meet.

And if I look out at models, we are assuming improvements in operating margins. And I'm just, again, trying to understand if there's still significant juice enough just by achieving synergies or efficiencies as a stand-alone company, or eventually will we have to see further consolidation with, specifically, your business model in order to see improvements in operating margins going forward, sort of beyond 2014, if you could kind of speak broadly?

Well, again, I mean, I think I would just, again, reaffirm the guidance that we're giving you. The way I look at this is at the beginning of this year, we set out to achieve the operating leverage that we've discussed, and we're basically on track to do that.

And the narrowing of our total year spend, I think, reinforces that. And again, quarter-to-quarter, there are going to be variations in spend to either support various promotional campaigns, or in this particular quarter, the growth in enabling functions year-over-year.

And when I include the total cost of supporting our own infrastructure and compare the Q3 of '13 to the Q3 of 2012, and basically were on top of each other, I think, in my view, that's actually a good sign coupled with reaffirming the full year guidance. So I don't -- I wouldn't read anything into this particular quarter in terms of changing what we believe the operating model is for this business, this year or going forward.

And Jami, let me add to what I mentioned on the previous question, that our financial model for the next 5 years is to grow in line or faster than the market. The market is expecting to grow compound annual growth of 6%.

We expect our margins growing faster than revenues and there will be, with the right control of expenses, that we expect to grow in line with inflation and also control on our cost of goods and also the pricing strategy. This will result in really improving long term, in this 5 years of period, improvement in terms of our margins.

We don't need, at this point, any further consolidation. We have already the critical mass that we need.

And that's really, with the critical mass and with the investment that we made already in most of the markets that we operate, we are confident that this will generate synergies in the future.

So with respect to the M&A outlook, it seems, Juan Ramón, that you downplayed the opportunity to do larger acquisitions. But as you think about the business and creating shareholder value and the opportunity to boost the value of Zoetis' stock, could you just talk about whether you would consider stepping up the company's market share through a larger transaction to take the market share globally from, let's say, 20% currently to maybe 25% or 30%?

I would think that, that would boost the value of your share significantly, even if you were to issue equity to do such a deal. So I guess, maybe my 2 questions are: Why shouldn't that be an opportunity?

And second, how do you see M&A building shareholder value if you won't consider medium- to large-sized deals?

Thank you, Dave. And I think, as you can imagine, so nothing should be excluded, at least from the internal analysis of exploring opportunities.

What are the conditions that we need really to meet for any acquisition, small, medium or a large? A strategic fit and the financials really are supporting the investment.

The experience that we had when we acquired Fort Dodge, at the time, we were a company of $2 billion, Fort Dodge was a company of $1 million -- $1 billion. We divested 10% of the combined companies, a little bit more than 10% because of antitrust issues.

Now with a market share of 20%, you can imagine that the challenge in terms of antitrust will be even higher. And this is something that we need also to include in any analysis, because we know that paying a premium price for integration[ph] and divesting at a lower price because of FTC regulations or European Union regulations will be probably not the right decision for our shareholders.

We'll continue analyzing, exploring and definitely, if it makes sense, so then we'll make that call.

Just 2 quick follow-ups. First, I assume this really didn't happen, but did you see any benefit with Zilmax coming off the market?

I know, obviously, you didn't have a beta-agonist. Just wondering if there was any other product that could have seen a bump in growth?

And then second, do you have plans to ramp production of any specific product category? It looks like medicinal feed additives or maybe implants, I believe, has been a weaker category over the last few years.

Wondering now if you have the ability to increase production as a stand-alone company?

Let me probably start with answering the first question with a general comment. I don't think it's positive for the animal health industry that any product is facing regulatory issues or customer issues.

And this is something that definitely all companies are exposed to this kind of risk. And I think it's something that, in some cases, this can benefit some of the competitors operating in this space.

We decided to launch a generic of ractopamine independently of any kind of issue related to Zilmax. And we are convinced that the product that we are launching had really something that will help producers to enhance productivity, and also to achieve the quantity of meat and affordability of meat that is required by consumers.

In terms of plans to ramp any specific category, I think one of the advantage that we have in our portfolio is the diversity in terms of many multiple dimensions, including therapeutic areas. We are convinced that there are areas that are generating some opportunities short term, while others will generate opportunities in more longer and medium term.

We want really to make sure that our strategy is really covering these opportunities in all short and long term and definitely we have products in medicinal feed additive. We also have products in implant.

And we continue really ensuring that we offer to our customers a complete range of products and solutions to treat or prevent diseases in their animals.

Thank you. Thank you, all, for your participation and interest today, and have a good day.

So thank you. Thank you for joining us today's call, and we appreciate your questions and the time you spent with us.

So bye-bye.