John O'Connor - Vice President of Investor Relations Juan Ramon Alaix - Chief Executive Officer Paul Herendeen - Chief Financial Officer.

Louise Chen - Guggenheim Securities Alex Arfaei - BMO Capital Mark Schoenebaum - Evercore ISI Kevin Ellich - Piper Jaffray Erin Wilson - Bank of America Merrill Lynch John Kreger - William Blair Chris Schott - JP Morgan Jamie Rubin - Goldman Sachs Jeff Holford - Jefferies Liav Abraham - Citi Kathy Miner - Cowen and Company David Reisinger - Morgan Stanley.

Welcome to the Fourth Quarter 2014 Financial Results Conference Call and webcast for Zoetis. Hosting the call today is John O'Connor, Vice President of Investor Relations for Zoetis. The presentation materials and additional financial tables are currently posted on the Investor Relations section of Zoetis.com.

The presentation slides can be managed by you, the viewer, and will not be forwarded automatically. In addition, a replay of this call will be available approximately two hours after the conclusion of this call via dial-in or on the Investor Relations section of Zoetis.com.

At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to John O'Connor. John, you may begin..

Thank you, operator. Good morning and welcome to the Zoetis fourth quarter 2014 earnings call. I am joined today by Juan Ramon Alaix, our Chief Executive Officer and Paul Herendeen, our Chief Financial Officer. Slides presented on this call are available on the Investor Relations section of our Web site.

Before we begin, I'll remind you that our remarks today will include forward-looking statements and actual results could differ materially from those projections.

For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statement in today's press release and our SEC filings, including but not limited to, our 2013 annual report on Form 10-K and our reports on Form 10-Q.

Our remarks today will also include references to certain financial measures which were not prepared in accordance with Generally Accepted Accounting Principles, or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S.

GAAP measures is included in the financial tables that accompany our press release and the company's 8-K filing dated today, February 11, 2015. We also cite operational results which exclude the impact of foreign exchange. With that, I will turn the call over to Juan Ramon..

Thank you, John. Good morning to everyone. In my remarks today, I will discuss our 2014 performance, provide an update on the Zoetis revenue growth versus industry growth, review recent sponsor from the full portfolio and then with our outlook for 2015. 2014 was a year when we made significant progress in creating value.

We are growing revenue faster than the market. We improved our margins despite absorbing additional costs required to operate as a fully independent company. We continue to advance our product portfolio through internal R&D initiatives. We communicated a 15% increase in our dividend and $500 million share repurchase program.

This week, we announced that we completed the acquisition of Abbott Animal Health. We also continue to build a culture that delivers results, creates a high sense of ownership from our colleagues and focuses on generating short and long-term value for customers and shareholders.

For the year, we delivered operational revenue growth of 7%, adjusted net income growth of 13%, and adjusted diluted EPS growth of 11%. Both revenue and adjusted diluted EPS exceeded the high end of our guidance. Here are some details of 2014 revenue by species on an operational basis. In livestock, total revenue grew 9% to $3.1 billion.

This reflects favorable market conditions for our producers and a strong performance of key Zoetis brands across affective vaccines and medicated feed additives. Livestock markets benefited from strong meat and milk prices as well as less expensive animal feed.

These generated strong producer profits and in these market producers increased the medical treatment of animals to preserve their value. This has benefited many premium Zoetis brands.

Cattle grew in revenues by 10% to $1.7 billion, with exceptional growth coming from beef cattle markets like the U.S., Brazil and Canada, as well as from our China business. In some key markets we see signs that the process of cattle expansion has begun.

In the near-term, the high value of animals will continue to support our growth as producers have placed their premium on the health of their herds. Swine revenue grew 9% to $695 million with strong growth in many countries around the world.

New and recent protein production such as ENGAIN, DRAXXIN 25, Relan N and our PCV2 franchise continue to grow in the market that experienced challenges due to disease outbreaks and trade restrictions. Poultry revenue grew 6% to $568 million with the strong growth coming from the U.S. and Latin America.

Our growth portfolio in poultry, integrated coccidiosis management programs, namely ropic brought value to producers and led to increased customer penetration in key markets. Turning to companion animal, revenue grew 4% to $1.6 billion.

Across all regions we saw strong growth of key brands, including APOQUEL, ProHeart 6, CONVENIA, CERENIA and feline REVOLUTION. These gains were partially offset by declines in the vaccines and RIMADYL due to increased competition. For 2014, APOQUEL achieved sales of 34 million in an environment of constrained supply.

For 2015, we are on track to increase supply in [etrin] and we expect APOQUEL revenues to be between $150 million and $175 million this year. Building on several years of solid revenue performance, we continue to deliver stronger revenue growth in 2014. We are also pleased that Zoetis continues to outpace the animal health industry.

According to the latest data, for the 12 months ending Q3 2014, Zoetis revenue grew 5.5% while the animal health market grew by 4.6%. This growth includes the negative impact of currency movements. The steady interaction of our new products and investment in life cycle management contributed to steady revenue growth.

In 2014, Zoetis achieved more than 180 product approvals, representing new products, new indications, new formulations, new combinations and geographic expansion of our portfolio. We recorded several important product milestones in recent months.

This past November Zoetis submitted to the FDA a filing for zoromandis, which is the active ingredient of our new flea and tick oral parasiticide for dogs. And last month, we completed the filing for the same product in the EU and Canada. The global market for flea and tick parasiticides is about $2.5 billion to $3.4 billion.

And launching a new product in this category is an opportunity with broad bacteria potential for Zoetis. Although bacteria for the animal health industry is generally prone to generating more than $100 million a year. Now let me turn to another milestone that illustrates continued integration from our R&D investment.

We are pleased to announce that Zoetis has submitted a filing to the USDA for a novel antibody therapy to treat atopic dermatitis in dogs. Based on the USDA guidance, we are expecting a conditional license this year. Our progress in this therapeutic area further reinforces our industry leadership innovation.

We have been active in building a platform in monoclonal antibodies that will have a broad application across species and medical conditions. The first potential product from this platform builds on our knowledge base in the area of canine dermatology. We are excited to bring another treatment option to veterinarians.

In addition to novel products, Zoetis continues to drive demand and strengthen its diverse product portfolio through investments in product life cycle development. This past November, the FDA got a new label claim for DRAXXIN 25 in the U.S. to treat smaller cats. This follows the approval of DRAXXIN 25 label claims for pigs in July 2015.

We also achieved additional label claims for the FOSTERA PRRS and vaccine for swine which is now licensed in the U.S. for reproductive protection. This product was first approved for respiratory protection in 2012. Zoetis PEDv vaccine continued to expand geographically, receiving permission to import and sell in Canada.

Zoetis also launched the vaccine in China which broadens our range of vaccines in the world's largest swine market. As I mentioned, we just closed the purchase of Abbott Animal Health. This business is focused on the veterinary surgical market. It will strengthen our pain and sedation product portfolio and expand our diagnostic business.

This acquisition is aligned with our value creation strategy to enhance our portfolio. We are adding leading brands and we believe Zoetis is gaining industry leading field force. I know at present we’ll expand both the reach and penetration of the new portfolio. Zoetis also invests in animal health innovation through research partnerships.

We recently announced that Zoetis was chosen to lead a research team to develop digital technologies for improved swine health and production efficiencies. Paul will address our 2015 guidance later in the call, but I would like to give you our perspective on the animal health industry on some factors that will drive Zoetis in 2015.

The animal health industry is forecasted to grow in the 5% to 6% range operationally over the next five years, with growth in any given year above or below these rates. Looking to 2015, we expect operational revenue growth for Zoetis to keep pace with or outpace the animal health market.

We also expect adjusted net income to grow faster than revenue as we leverage our business model and continue to focus on improving cost efficiencies. Now, our perspective by species; the outlook for companion animal is positive.

Increased pet ownership and higher pet expense rates are driving the growth in emerging markets while specialty care is contributing to growth in more developed markets. For Zoetis, we must expect that the sales of APOQUEL will have a positive impact on growth in this segment. The outlook for livestock in 2015 is also positive.

Producers will remain very profitable although at lower levels than in 2014. For Zoetis our premium products will remain an important factor to protect the health and value of livestock animals.

And the line the ban for animal health products that remain strong, despite economic events such as lower growth in GDP, significant movements in the exchange rate, lower oil prices or international trade developments.

We are monitoring the current business environment and all the exchange rates we don't see any significant impact on our business from these factors. As the past has shown again we'll have industry resilient to these and other microeconomic factors.

Within the industry, Zoetis is highly diversify across many dimensions and this diversity has allow us to successfully manage through many market conditions in the past. The drivers of growth in animal health remain unchanged.

Animal proteins and companionship from pets are basic needs, so we are confident about the future prospects and our ability to grow under volatile market conditions. So, I will now turn it over to Paul to talk about results for the fourth quarter, the year and guidance for 2015..

Thank you, Juan Ramon, and good morning, everyone. Thanks for joining us. I am going to review our performance compared with our full year 2014 guidance, provide some color on the fourth quarter results and update you on our full year guidance for 2015. I hope to do all that quickly so that we have plenty of time for Q&A, so here we go.

Starting with full year 2014 results, the big stories here are revenue, revenue growth and revenue growth from a variety of sources. In 2014, we delivered 7% operational growth in revenue, the second consecutive year of 7% operational growth and second consecutive year of growth above the long-term industry trend.

Pretty good, right? Even better, in the fourth quarter we delivered 9% operational growth versus Q4 of 2013, overcoming some significant FX headwinds to post 5% reported growth with positive operational trends that are heading right into 2015.

Changes in FX rates reduced our Q4 reported growth rate, but we were able to overcome that and still put a solid growth number on the board. Good stuff indeed. Since mid-November FX rates have continued to move against us. I will help you think about the impact of FX rates on 2015 in a minute. Now for a look at our full-year performance versus guidance.

As you can see on the Web cast slides, our revenue of 4.8 billion exceeded the high end of our expectations. The operating growth of 7% was driven by 9% growth in livestock and 4% in companion animal. On a regional basis, the U.S. accounted for almost half of our growth, up 8% compared with 2013.

CLAR accounted for about third of our operational growth, up 13%. APAC was about 11% of our operational growth, up 5%, and EuAfME accounted for about 8% of our operational growth, it was up 2% versus 2013. But in going to belt, and all growth rates are on an operational basis.

Continuing with 2014 performance compared with our guidance, our adjusted cost of sales as a percentage of revenue was 35.1%, a bit better than our guidance of 35.5%, and that's primarily due to the positive impact of changes in foreign exchange rates.

Adjusted SG&A meanwhile, was 1.507 billion for the full year, approximately 27 million higher than the top end of our guidance range. There were a number of factors that contributed to the increase in SG&A above expectations.

First, as we trended above our revenue forecast for the latter part of the quarter, we saw an increase in costs associated with higher revenue, such as sales incentive compensation and distribution expenses. We also authorized additional promotional spending in the quarter, spending that is expected to support revenue growth into 2015.

Next, we accelerated some actions in Q4 that triggered additional G&A expense in the quarter, including for example, severance, software license expense and some additional business development expenses. As successful as we have been in driving our top line, we are still a young Company, just finishing up our second year on our own.

We have plenty of work remaining to build and fine-tune our G&A organizations and the systems needed to support our global business model. As that process continues, there will be opportunities to move forward and towards a more efficient cost structure. In other items, adjusted R&D expense came in at 393 million, in line with our full-year guidance.

This continues to be an essential investment for both developing new products and managing the life cycle of the more than 300 product lines that provide us with our durable and growing revenue streams. Our adjusted effective tax rate for the full year was almost 27%, and 18% in the fourth quarter.

This reflected the full-year impact of the R&D tax credit which, you will recall, was not anticipated in our guidance. Also contributing to the lower-than-expected tax rate was a resolution of prior tax matters and changes in the mix of our earnings.

It's important to know that the elements that drove the rate down below our and your expectations were not structural and we continue to expect that our tax rate in 2015 will be approximately 29%. As with our 2014 guidance, our tax rate guidance for 2015 does not include the potential benefit of an extension of the R&D tax credit.

We exceeded the top end of our guidance for adjusted diluted EPS by $0.03 a share, posting $1.57 per share for the full-year.

This was due to the strong revenues and the lower-than-expected tax rate, offset in part by increased spending in the fourth quarter And finally, we exceeded our range on certain significant items and acquisition-related costs for 2014.

This was the result of costs associated with certain shareholder activities and some changes associated with our global manufacturing organization. As a result, our reported diluted EPS came in at $1.16, the lower end of our guidance range. Now let me switch gears and dive a bit more into the fourth quarter results.

You can see our income statement and adjusted income statement slides on our Web cast. Repeating from my opening remarks, fourth quarter revenue grew 9% operationally and 5% on a reported basis.

And while nine minus five equals four, there is some rounding in there so the negative impact of currency movements on our growth rate was roughly 330 basis points. Our U.S. and CLAR segments demonstrated strong double-digit sales growth, leading the way for Zoetis , while the APAC segment grew modestly and EuAfME declined 1% on an operational basis.

On the last call I talked about the hazards of reading too much into any one quarter in isolation. EuAfME illustrates that clearly. In Q1 revenue was down 4% operationally and in Q2 revenue was up 4% operationally. In Q3 was up 12% operationally in Q4 it declined 1%.

But for the year, operational growth for EuAfME was about 2%, broadly in line with the long-term expected growth rate for that segment. Moving to SG&A. Our adjusted SG&A expenses in the fourth quarter were up 14% operationally due to the timing of promotional spending and other items that I called out earlier in my discussion of the full-year.

Our adjusted R&D expense was up 4% operationally in the quarter. R&D, as I had noted before, can vary quarter to quarter due to the timing of clinical trials and other factors. For the full year we performed in line with our guidance.

And finally as I mentioned earlier, our catch rate in the quarter was 18%, due to a number of factors that got worked out in the fourth quarter. You also have a full set of regional tables and quarterly commentaries in the press release and Web cast slides.

With that material available to you, let me just highlight a few takeaways on the revenue and profitability for each segment. Beginning with the U.S., fourth quarter revenue increased 14% driven by very strong livestock sales, which were up 19%, a truly stellar quarter for the largest segment of our business.

The growth in livestock products, especially cattle in United States was based on higher demand for our premium products as producers continue to benefit from strong market conditions, some of which Juan Ramon just touched on.

In companion animal products in the U.S., we generated growth of 7% driven by APOQUEL and other key brands, and despite continued competition for RIMADYL and competitive pressure in vaccines and parasiticides. Based on the U.S. segment strong sales and lower relative expense growth, their segment earnings increased by 20%.

In Europe, Africa and Middle East, revenue decreased 1% on an operational basis compared with the fourth quarter 2013.

This was the result of revenue increases in Southern Europe and Germany, driven by livestock as well as APOQUEL sales in the UK and Germany, with those increases more than offset by declines in other markets such as France and Russia.

In France, we had anticipated some softness in the fourth quarter based on the fact that customers bought large amounts of anti-infectives in the third quarter ahead of more restrictive legislative changes that went into effect January 1st.

The EuAfME segment earnings decreased by 4% operationally in the quarter, primarily due to declines in revenue and the timing of promotional spending. Moving to CLAR, which is our Canada and Latin American segment, we generated an increase of 16% operationally compared with the fourth quarter 2013.

Brazil and Canada are the principal drivers in the CLAR region, given their relative size, and we saw growth in both livestock and companion animal products in these two countries. In Canada we saw significant cattle product sales due to strong market conditions for producers.

Increased medicalization rates for companion animals in Brazil have been a driver of growth there as well. We also saw strong growth in Venezuela and other emerging markets in Central and South America. These high inflationary markets afford attractive growth opportunities that need to be carefully monitored.

The CLAR segment earnings increased 20% on an operational basis, driven by the revenue growth and limited growth in operating expenses. Finally, in Asia Pacific we had an increase of 4% operationally compared to the fourth quarter of 2013.

Sales of livestock products did well, particularly in Australia, Southeast Asia and across the board in emerging markets. A growing vaccine portfolio for swine and new parasiticide products continued to drive our performance there.

Sales of companion animal products, however, declined 6% operationally, primarily due to the termination of a distributor agreement in Japan that we talked about last quarter. The APAC segment operating earnings increased 6% operationally due to the revenue growth and limited growth in operating expenses.

Now let me turn to guidance for the full year 2015, which we first provided at our Investor Day in mid-November. We’re updating certain elements of our full year guidance today to reflect three things. First, a factor over which we have no control and that’s FX rates.

We're adjusting our guidance based on the changes in foreign currency exchange rates from mid-November when we first reported our guidance for 2015 to reflect rates as of late January. In those roughly 70 days the U.S. dollar strengthened against almost all of the major currencies in which we transact.

For emphasis and in round numbers, the dollar was up 9% versus the euro, 8% versus the Canadian dollar, 8% versus the Aussie dollar, 4% versus the British pound, 1% against the Japanese yen and against the Brazilian real it was flat. Those are our top six currencies.

The movement in exchange rates since mid-November reduced our revenue expectations for full year 2015 by 125 million or 255 basis points, based on the midpoint of our initial guidance range.

We now expect the full year impact of FX to be about 600 basis points or almost 300 million on our full year 2015 revenue as compared with our 2014 actual results. I want to repeat that for emphasis.

Since mid-November the change in FX rate reduced our expectations for the full year 2015 by 255 basis points or 125 million, comparing our revised expectations for 2015 back to 2014 actual results, the changes in FX rates account for a 600 basis point reduction in our expected growth rate.

So natural hedging from expenses denominated in foreign currencies reduces the dollar impact of the movements in FX at adjusted net income, where the negative impact of the change rate was roughly $30 million or roughly 360 basis points down from the midpoint of our initial guidance range. Something for you to be aware of, if the U.S.

dollar continues to strengthen against our major currencies, that can put upward pressure on our effective tax rate. At this point, we are affirming our guidance for our tax rate at approximately 29%, not including the R&D tax credit. But for emphasis, I am going to repeat something I just said, continued strengthening of the U.S.

dollar could cause us to have to revisit that guidance. So that's another part we can monitor but don't control. The part we can control are our operating expenses in 2015. In addition to the expense reductions driven by the change in FX rates, we revised downward our range of expectations for SG&A expenses by an additional $35 million.

This reflects targeted reductions in spending intended to help offset the FX impact on 2015 adjusted net income. Additionally we completed the acquisition of the assets of Abbott Animal Health this week.

With that done now, we will begin integration and expect a positive impact of approximately 75 million to revenue for our full-year 2015 results, an accretion of $0.01 per share to adjusted diluted EPS for the full-year 2015.

Taking the FX rate changes and our reduction of expected SG&A into account as well as the Abbott transaction, our revised guidance calls for revenue in the range of 4.8 billion to 4.9 billion and results in our holding our guidance for adjusted diluted EPS in the range of $1.61 to $1.68 per share.

The net $50 million reduction in the revenue range represents a roughly 125 million, or 2.5%, decrease driven by the change in the FX rates.

Meanwhile, the combination of the natural FX hedges inherent in our business and our targeted $35 million of OpEx reductions and the overall impact of Abbott, all those things combined enabled us to maintain our earlier adjusted diluted EPS guidance for 2015.

While we provided out guidance in November, we expressed growth targets based on the midpoints of our 2014 guidance ranges. With 2014 now final, it won't be freshening the growth rates implied by our guidance.

The more significant revenue base that we delivered in 2014 and our guidance as revised today to include Abbott and the expected expense reductions, we are expecting revenue growth on an operational basis in the range of 6.5% to 8.5% and growth of adjusted net income in the range of 11% to 16%.

All the other details of our guidance are included in the table attached to our press release. Please note that our guidance does not reflect any future currency devaluation in Venezuela.

While we do not guide on a quarterly basis, I will remind you of a comment I made at our Investor Day in November about the trajectory of our overall performance in 2015. We still expect the year to start low and end high. A key driver of our growth in 2015 will be the additional supply of APOQUEL, but we will not see that supply increase until Q2.

I also want to note that the revenue impact of the Abbott acquisition in Q1 is nominal, less than $5 million. And that there will be a negative impact on reported Q1 results based on the changes in FX rates since my comments in November.

To sum up the quarter and the year, we continue with very strong revenue and earnings growth, demonstrating the strength of our global business model. The diversity of our business across species, product lines, geographies and therapeutic areas is one of our core strengths.

Our global footprint enables us to overcome weaknesses in some regions and deliver consistent revenue and earnings growth. We demonstrated an ability to drive gross margin improvements and operating expense containment in our regional statements, while continue to absorb some of the impact and buildup of costs for our corporate functions.

Foreign currency was a significant factor on our reported results in the quarter and for the year, and we have updated our full-year 2015 guidance based on the rates in effect as of late January 2015. We expect to deliver strong revenue and profit growth on an operational basis in 2015, 6.5% to 8.5% for revenue and 11% to 16% for adjusted net income.

While the currency headwinds are expected to be a drag on our reported results and growth rates, we have taken steps to mitigate some of those impacts and will continue to pursue means of protecting and growing our adjusted net income throughout the year. That concludes my prepared remarks and we'll now open the line for your questions.

Operator?.

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

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

Thank you, Louise, for the question. So we are convinced that now that we are finishing our work in standing up Zoetis on implementing new systems that will support our future operations, we can really identify opportunities for being more efficient in many lines of our P&L.

That is something that we will continue in define business opportunities and seeing ways of improving our margins in the medium and long term..

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

Good morning and congratulations on a strong quarter. Juan Ramon, you mentioned strong market conditions and profitability in the livestock market.

Clearly a key driver here, can you clarify on your outlook, when you say you expect this to continue in the near-term, what is the timeframe you put on that one-year or two-year? I want to get a sense of how long you think the cycle will last? And Paul, a follow-up if I may, you got a significant FX benefit on cost of goods sold this quarter.

You lowered revenue guidance because of FX. I am just wondering why not raise gross margin guidance to reflect an FX benefit? Thank you..

Thank you, Alex. In my comment I refer to the outlook was in for this year. So, we mentioned that in 2014, the conditions in livestock were very positive; the price of milk and meat was very high. Also there were low costs on feeding the animals.

We expect that most of these conditions will remain in 2015, although we see maybe in some of the species like swine, maybe a lot of more attention in terms of price because of more supply of product. Since some of the rates that were affecting 2014, maybe we’ll have a lower impact in ‘15 like the PEDv outbreak.

So, we expect that the conditions will remain favorable, although for some of the species, maybe less profitable than in 2014..

Thanks for the question, Alex. I'll take the question regarding the FX benefit that flowed through cost of goods sold.

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

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

Also my congratulations to Paul on a great job since you've taken the reins as CFO and to John on the IR front. Just a question on, I'm intrigued by your comments around your antibody platform. I haven't heard you talk about that before.

You gave a little bit of detail during your prepared remarks, but I'd be interested in knowing more if possible, like how broad this program really is.

Are you pursuing antibodies outside of companion animal dermatology or should we think of this is mainly a derm program? And the impact, if any that you think this antibody program will have on your P&L once commercial. Gross margins on the human health side tend to be a bit lower on antibodies than they are for small molecules.

And then also of course on a CapEx -- long-term CapEx projection, sometimes building plants capable of producing large quantities of biologics can be expensive. I am wondering if that's already something that you've got your footprint or if these products are going to be big, we should be altering our models to some degree? Thanks a lot..

Thank you, Mark. The monoclonal antibody that we mentioned today, it's a product that we neutralized the canine interleukin, which is also a key cytokine which is involved in the atopic dermatitis and also involved in sending the signs of itching to the brain of the animals. We have been investing in biopharmaceuticals for now several years.

And we have been also introducing the products in these categories, not only on antibodies but on biopharmaceuticals. A good example is Improvac that was launched some years ago. And we also focus our attention to platforms that we also increase, the product portfolio that also will meet the demands of the market.

We are very pleased that Zoetis is not only leading in pharmaceuticals, we have many examples like APOQUEL, that we've shown very strong leadership in that category, but also in vaccines.

In 2014, we had the opportunity also to bring to the market a solution for an outbreak that it was a highly significant impact in the swine industry in the U.S., I am referring to the PEDv vaccine. And now we have used monoclonal antibody, we’re also showing that also we are leading in biopharmaceuticals.

We're very pleased also that our model, which is combining investment in innovation with investment in the protecting of our current portfolio is showing a high level of productivity and leading the industry in all different areas of innovation..

Mark, it's Paul. First, thank you for the kind words. Yes, I had the very good fortune to join an outstanding team here. So, while I’ll take the complement, I'd also say that it's a team game here. I also want to pile on a little bit on the R&D front, because from an investor perspective I kind of think of Zoetis is kind of like two-in-one.

You have a large growing portfolio of existing business and we also have this robust R&D engine, that if it were on its own, would represent an attractive investment opportunity in its own right. So great question, thank you..

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

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

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

I will speak to the history because that's what we can do with respect to price and volume. Let's start with the quarter. We had total growth, as I said, operational growth 9%. Of that 9%, roughly 2% came from price and 7% came from volume. So strong in the quarter. Take that for the full-year, 7% operational growth.

Again, 2% came from price and roughly 5% from volume. We got a lot more pricing leverage in emerging markets than in developed markets. I don't know if it's all that productive to go through the specifics of it, but I hope that, in general, answers your question. .

Then back to your question on ACTOGAIN or ENGAIN. Both products performance are doing well and exceeding our initial projections. One of the factors that has been also impacting the higher revenue than expected, it was withdrawn off of one competitor product one year ago.

So very pleased, with also the acceptance of our two products from customers, and these two products, ENGAIN is for the swine producers and ACTOGAIN for cattle producers. Both performing above expectations. .

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

I was reading some of the literature on APOQUEL on the Web site and it continues to say that April's launch time frame or replenish supply.

Will this be the same? Will it be fully ramped up that point? Or will there still be order limits in place over the course of the year? Is this all Incorporated into your guidance at this point? And then on new products, could you speak to the opportunity in diagnostics, any attraction you're seeing with your feline rapid assay? Is that an area you expect to build as to acquisitions? Do you anticipate any product launches in diagnostics overall?.

Thank you, Erin. On APOQUEL, definitely we expect that from April we'll increase significantly the production of the product, or the product availability to the veterinary market. We expect that from April we will be able to meet all the demands from the customers.

And we expect also that through the year, demand will increase and then we will be able to supply all these demands with the product that will be available. As I said in my remarks, we are forecasting for 2015 revenues from $150 million to $175 million.

And we are convinced that this will be a significant quality in our portfolio, and we are very pleased that all the constraints that we face in 2014 will be over in 2015 from April. In terms of diagnostics, the diagnostics has been always -- since some years ago an area and where we have been also investing.

We are convinced that this very complementary to our current portfolio and we also expect that with our internal efforts and also the acquisition of Abbott Animal Health, this will enhance our portfolio and definitely we will also consider any external opportunity and even further expressing our portfolio diagnostics. .

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

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

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

Can you just give us an update on the timing for that broader effort?.

We expect [indiscernible] to be available sometime in 2016, which will depend on the approval from the FDA as well as the approval from EMA in Europe. And also in Canada also we expect approval. And we are working to make sure that the product will be available for the next parasitic campaign in April or around spring next year.

Something that it will depend on FDA, but we expect to provide to FDA all the information needed to get this product approved on time. In terms of manufacturing, we mentioned during our Investor Day that from now until 2020, we expect an improvement in our cost by 200 basis points. And plans are moving ahead.

And there is no any reason to think that we’ll not be delivering on the objective that we have. Now also we mentioned that we have three phases of our plan.

We are now on Phase 1, in this Phase 1, we’ll be delivering these 200 basis points, then we’ll go into the next phase that we’ll be going to further analyze our plan network and then finally the third phase will be how we need to invest in manufacturing to achieve higher profitability or lower cost and also making sure that we have the technologies that will be needed to support our future revenues.

Next question please..

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

Just to two quick ones here.

First following up an earlier pricing question, can you just elaborate a little more on the drivers of pricing particularly on the production side of the business? I guess specifically is there more opportunity to selectively raise or reset price when you see healthy market dynamics that we’re seeing for your customers in the current environment? And second with just a broader business development kind of question, in area I think we all have a little bit less visibility into, but when you look at these Abbott type transaction that seem to make a lot of sense for Zoetis.

How broad is an opportunity effect do you see on the business development front and given some of the anti-trust issues in the space are there realistically larger targets that Zoetis could pursue or should we really think of Abbott type transactions being the real focus here? Thanks very much..

In terms of pricing, the approach that we have for both like livestock and companionable is to have steady and consistent price increases. We are not trying to get the opportunity of higher prices when the conditions are more favorable to livestock producers.

And at the same time, we also apply pricing increases with these conditions as less favorable. So is -- and study that has been working very well and a study that has been extended to many markets around the world including emerging markets. And we had in 2014 very positive improvement in our prices in many of these emerging markets.

In terms of really definitely Abbott was a great opportunity that it was meeting all the requirements that we have in terms of business development opportunities including the strategic field, including the synergies, revenues and cost, also the financial value and the anti-trust issues.

Definitely we have significant market-share, you know that we have market-share which is close to 20% and these may have some intentions in terms of a larger acquisition. We’ll consider any opportunity that is available in the market.

We have a team that is aware of any kind of potential transaction that can be an opportunity for Zoetis and we will continue assessing these opportunities and as part of the evolution, we include any kind of anti-trust challenge, but we’ll limit the value of the acquisition. Next question please..

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

Sorry about that, can you hear me? Sorry about that guys. Had a little technical difficulty on my end.

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

Thank you, Jamie and let me start saying that we have very constructive dialogue with Pershing Square, since they became the largest shareholder in the fall. And they were -- they expressed interest in having a position in our board. And given that the Mr.

Doyle has a lot of operational experience and again the position of Pershing Square in our company the Board agreed to incorporate him into our Board. So, what we -- all the Board will be working including Mr. Doyle and other members of the Board, increasing the value to our shareholders. And this value can come from many different ways.

Including margins, growing revenues and any kind of potential transaction. And this is something that will be part of the discussions and maybe at this point may be stipulated is not creating any additional value to the discussion. .

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

Hi thanks very much for take my question. Going back to APOQUEL. Your 2015 guidance and commentary does suggest much higher peak sales and you get to full penetration to this so one could think of this product potentially adding 5% to 10% against your current base of revenues over the next couple of years.

And I'm interested also around the level of margin seem a much higher margin product than the rest of the business overall.

Could the potential bottom line impact from this product be a most double what it is that the top line?.

Thank you, Jeff. On APOQUEL we mentioned our peak sales are predicted between 200 million of 300 million and these based on the current knowledge of the market. Definitely we will be updating these peak sales based on what will be the reaction and the consumption of the public once the product it is available.

In over quantity to assess what is the full potential of this compound. In general, we are not providing gross margin by products, but as you know we have gross margin in our Company of 65% and we rank margins depending on the categories. The highest margins are coming from companion animal followed by cattle, swine, and poultry.

So you can imagine that companion animal much higher than the 65% average that we have at the Zoetis.

Paul do you want to add any other comments?.

Sure, just one that is the increased sales of APOQUEL certainly help. Of course we do have a mix of our portfolio for example the guidance table you all saw the addition of the Abbott assets to our total 2015 expectations. The Abbott assets are gross profit dilutive.

Now I know they are only updated guidance for 75 million of sales but we do have a portfolio so even when things like APOQUEL help, there are other parts of our portfolio that can help smooth or help – they tend to smooth that out back towards our expected 35.5% to 36% -ish range of revenues in for 2015. .

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

I am just looking back to cost efficiencies you mentioned this a couple of times during the call.

Can you go into little but more detail about the opportunities that you see here in which cost categories and over what time frame?.

It is Paul. I will take a stab at that and Juan Ramon may want to come in as well.

Louise asked a question earlier on about margin expansion and I just want to point out that so far, we've done a pretty good job over the course of the last several years if you have looked at our reported operating margins going back to 2011 and up to ’14 and it's been a nice progression from ’18 to ’21 to ’24 to ’25 and I was broadly by rolling the top line while having some expense discipline meaning holding the line on expenses.

Now a wise man once said to me it’s not all that impressive to grow into an expanding margin but I would say it may not be impressive but it is a good thing. That said, that what sets the stage.

Even with respect to think about our 2015 we saw some headwinds in FX and we took some actions with respect to our operating expenses in order to be able to as best we could without impacting our business model reduce our expected operating expenses for 2015.

The areas where we are most likely to have long-term opportunity are those areas that are away from revenue production and R&D and manufacturing. And manufacturing would be more efficient to that process as we would hope to disclose to the market at some point in the future.

In the area really is around those into recall enabling functions in G&A, we are still in the process of our standup. I know that is frustrating to a lot of people where we just really completed our second year on our own.

We continue to have challenges in implementing systems and building out the infrastructure that will enable us to grow and control and manage what is a very complicated global business.

As we make progress along the lines of the implementation for example of our global ERP package SAP, it will give us opportunity to be more efficient in our enabling functions. Now, we look at all types of expenses and I would say -- I do say constantly in investor meetings, we can always do better.

So, we want to look at ways that we can deploy our capital within our business to the areas where we think we’ll get the most bang for our buck, and to the extent that we are successful in doing that over the next several years, we expect that we can expand our operating margin potentially beyond what you would be -- or what would be implied by our current long-term guidance.

And to refresh for everybody what we said on Investor Day was, you look out to 2015, '16, and '17 based on what you have in front of you, is you have a company that can grow from now roughly 25% operating margin and add 500 basis point so that by growing revenues and being disciplined with respect to expense.

We see opportunities to be more efficient, that would survey be additive to that. Next question please..

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

Just two quick follow-ups if I may. First on the stand up cost and ERP spending that you were just discussing.

I believe the last time you had talked about those costs winding down the early part of 2016 can you give us an update on the timing? And second one on the oral flea and tick products, when it does come out, should we expected to be differentiated in any key ways from the products that are already out there? Thank you..

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

And about Sarolaner that is our compound, the active ingredient of our new oral parasiticides for ticks and fleas, we are still working on the label. The label is not yet finalized and not approved. And we’ll see how this is hit it's from competitors.

And we know that there are already several competitors in the market, but as I said in my comments, it's a market of 2.5 billion to 3 billion. So it's a plenty of opportunities for Zoetis even in phase of several competitors. The other important point is that we have the access to the customers.

We have a significant presence in all the markets, but the product will be available and the opportunity will be significant. And we are convinced that the vision of the model that we have which is our direct interaction with customers also will generate good revenues out of this product even with more or less differentiation in the market.

Next question please..

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

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

Yes, thank you, Jamie. While this agreement it's an agreement that its part of the tax matter agreement for which there are some restrictions until June 24.

After this time there will be no restrictions but even with these potential restrictions until that date, there also maybe opportunities for company's considering transactions which are not affected by this tax matter agreement. Next question please..

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

Thanks very much and congratulations to the team on the strong quarter. My question is on SG&A and I guess there are a few sub parts to it and it really relates to the cross currents. So, in the fourth quarter SG&A was above expectations, yet for 2015 SG&A will be below expectations.

So with respect to the fourth quarter, were there any one-time or unusual items in the non-GAAP SG&A, Paul that will not repeat in the fourth quarter of 2015? And then second on the 2015 SG&A outlook coming down $35 million, does that include any sales force rationalization and if not, what are the areas of cuts?.

Yes sure, I’ll start with the SG&A in Q4, David. There were as I articulated in my prepared remarks there are some of those cost that were directly related to increase revenue.

There were some dates when we get to a certain point in revenue, where we have released additional promotional spending that occurred in Q4 that might not be likely to complete unless we are trending well above our expectations again in Q4 of 2015. So I wouldn’t describe the items in there so much as one time.

This is the ones that are within our adjusted SG&A. They were expenses that in large part were managed by us in the quarter, and reflect a robust revenue quarter for us and looking ahead to 2015. Thinking about the SG&A for 2015, full-year, we did reduce the range by some $35 million and no, it does not reflect any sort of a restructuring or anything.

Evidence of that is if it had been a restructuring we probably would have called out in one-time cost and certain significant items restructuring charge.

This was -- what I will call a normal course of business, looking at 2015, looking at where we are relative to where we want to be in us taking actions around categories that we do not think will influence that top line. So by definition, away from revenue generation mainly in enabling type functions. I hope that answers the question.

Next question please..

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

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

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