John O'Connor - Vice President, Investor Relations Juan Ramón Alaix - Chief Executive Officer & Director Paul S. Herendeen - Chief Financial Officer & Executive Vice President.

Kevin K. Ellich - Piper Jaffray & Co (Broker) Louise Chen - Guggenheim Securities LLC Alex Arfaei - BMO Capital Markets (United States) Erin Wilson - Credit Suisse Securities (USA) LLC (Broker) John C. Kreger - William Blair & Co. LLC Christopher Schott - JPMorgan Securities LLC Jami Rubin - Goldman Sachs & Co. Douglas Tsao - Barclays Capital, Inc.

Mark J. Schoenebaum - Evercore ISI David R. Risinger - Morgan Stanley & Co. LLC Kathy M. Miner - Cowen & Co. LLC Jeffrey Holford - Jefferies LLC.

Good day and welcome to the fourth quarter and full year 2015 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 opened for your questions following the presentation. In the interest of time, we ask that you limit yourself to one question and then queue up again with any follow-ups. It's now my pleasure to turn the floor over to John O'Connor. You may begin, sir..

Thank you, operator. Good morning and welcome to the Zoetis fourth quarter and full year 2015 earnings call. I'm joined today by Juan Ramón Alaix, our Chief Executive Officer; and Paul Herendeen, our Chief Financial Officer.

Before we begin I'll remind you that the slides presented on this call are available on the Investor Relations section of our website, and that our remarks today will include forward-looking statements and actual results could differ materially from those projections.

For a full 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 2014 annual report on Form 10-K and our reports on Form 10-Q.

Our remarks today will also include references to certain financial measures which were not prepared in accordance with generally accepted accounting principles or U.S. GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable U.S.

GAAP measures is included in the financial tables that accompany our earnings press release and in the company's 8-K filing dated today, February 16, 2016. We also cite operational results, which exclude the impact of foreign exchange. With that I will turn the call over to Juan Ramón..

U.S. sales, innovative R&D, and high quality and reliable manufacturing and supply. The implementation has been resourced, even as we go through changes in other areas of the company. Our investment in R&D continues showing high return and support for our future growth.

I am very pleased to say that our efforts to refresh our portfolio with innovative vaccines offerings, especially in companion animal are paying off. Last year, we launched a new combination vaccine for dogs across the EU called Versican Plus, and has been very well received by customers.

In the fourth quarter, Zoetis was granted a conditional license from the USDA to market our canine influenza vaccine, the first conditional licensed vaccine to help control disease associated with canine influenza, the virus that is H3N2. In December, we received our U.S.

license for VANGUARD crLyme, a vaccine that aids in the prevention of conditions associated with Lyme disease in dogs. And in November, we expanded our INNOVATOR horse vaccine franchise in the U.S. with the launch of our vaccine to aid in the prevention of leptospirosis.

Meanwhile in aquatic health, shortly after closing our deal with PHARMAQ in the fourth quarter, one of their new vaccines for salmon received an emergency license in Chile, one of the world's largest farmed fish markets. Our focus on enhancing our portfolio resulted in recent approvals for new indications and formulation of existing products.

In January, Zoetis received FDA approval for an update to the labeling for CERENIA, which allow for intravenous administration during the surgical protocols that use medication that induces vomiting. We launched a new formulation of LUTALYSE, a reproductive product for use in dairy and beef cattle, in the U.S.

We are also viewed as a partner of choice, for all innovators in the industry. In January we enter into an agreement with Anatara Lifesciences, a company in Australia. We'll be evaluating their non-antibiotic, anti-infective product as an alternative to antibiotics that could treat and control infections in farm animals.

And finally, in terms of business development, we'll continue to look for M&A opportunities like we did last year with Abbott Animal Health and PHARMAQ, while we continue with our internal investment in new products, lifecycle innovation and research alliances.

In summary, we delivered an excellent 2015, built in our diverse and market-leading portfolio of products for animal health. We are getting significant traction in the business as we continue reducing complexity, achieving efficiencies, and freeing up resources for our most promising growth opportunities.

And we remain well positioned as the industry leader based on our core capabilities and singular focus on animal health. With that, let me turn things over to Paul.

Paul?.

the best animal health sales forces on the planet, the most productive R&D team in the industry, value-generative M&A, and a supply chain that is a core strength of the company. And we delivered operational growth of adjusted earnings per share of 24% for the year. And I'm going to repeat that because it's awesome.

Adjusted earnings per share for the full year 2015 increased 24% on a constant currency basis to $1.77 per share. I call out the $1.77 because while we always measure ourselves on a constant currency basis, at the end of the day we put an actual dollar amount on the tape.

Way back in November of 2014 we put 2015 guidance on the – excuse me – 2015 guidance on the table. We guided revenue in the range of $4.85 billion to $4.95 billion and adjusted earnings per share of $1.61 to $1.68. Since that time, we, like many multinational companies, have been battered by FX that dramatically reduced our reported revenues.

But here's where we're different from many of those other multinationals. Throughout 2015 we held the line on our guidance for adjusted earnings per share and in November of 2015 we actually raised the range to $1.70 to $1.74. And now we report actual results of $1.77 per share.

We're able to do that because we as a management team brought forward a plan in May of last year to improve the efficiency of our cost structure and then we as a team got after it and reduced and controlled expenses to give us the best shot in delivering to you, our shareholders, the best earnings we could under the circumstances.

As I love to say, pretty good. So here's my pitch. The global animal health industry is not just resilient; it has characteristics that point to an extended period of predictable mid-single-digit growth. And the number one company in the global animal health industry is Zoetis.

In the three years since we've been public, we've put results on the board that support what we see as our key value drivers. First, we can grow our revenues at a rate equal to or faster than the mid-single-digit growth rate expected for our industry.

Second, we can leverage our expense structure to drive increasing operating margins, delivering profit growth faster than revenue growth. And third, we can intelligently allocate our capital; actively manage our capital structure to grow adjusted earnings per share faster than operating profits.

In today's dystopian financial markets where investors may be looking for shelter from the storm, I think my suggestion would be to look at companies in reverse alphabetical order and start with Z for Zoetis. That's it for my prepared remarks. Let's get to Q&A.

Keith?.

Okay. We can take our first question from Kevin Ellich with Piper Jaffray. Please go ahead..

Good morning, thanks for taking the questions. I guess, Paul, could you just go back to the contributions from acquisitions in the quarter? I kind of missed those prepared remarks. And then, Juan Ramón, I wanted to get an update on SIMPARICA as well. I think in the press release it says you expect approval now in Q1.

I think previously you said first half of 2016 so I guess what's the change and what should we expect heading into Western Vet?.

Yeah, I'll start, Kevin. Good morning. It's Paul. I'll start with the components of the growth.

We had 6% operational revenue growth in the quarter and we recognize the goal was whole percentages here so there's rounding that comes into play but it was 3% from increased APOQUEL sales, 3% from the acquisition of the Abbott Animal Health products, 2% from price increase across the portfolio, and 1% from new products.

Then the offset to that was about a 3% decline of what I guess we'll call revenues of all other products. And again, that is primarily related to the change in the business model in Venezuela and countries like India and places that were affected by our efficiency initiative. I hope that answers the question..

Thank you, Paul. I will take the question on the SIMPARICA. So we submitted to the FDA all the information and based on the normal timing for approval, we expect SIMPARICA to be approved in the U.S. in the first quarter. This all will be depending on final decision of the FDA.

Next question, please?.

And our next question comes from Louise Chen with Guggenheim. Please go ahead..

Hi. Thanks for taking my question.

So I do see slide 18 in your presentation but I was wondering if you could help us better understand the underlying sales growth for the year without the impact from restructuring and SKU reductions? And then also, do you expect your sales growth to accelerate after these programs are completed? And when might we actually see that? Thanks..

Sure. Louise, its Paul.

Let me take that, and thank you for asking the question, Louise, because if you just take the headline and say, gee, we're looking at 2% to 4% operational growth in revenue next year, people say, what's up with that? So let's start with from the 2% to 4%, the operational efficiency initiative, the effect on SKUs, and now Venezuela and other markets where we're going to change our model, reduced that by some 600 basis points.

You can see that if you look at that slide 18, 600 basis points. So there's 8% to 10% if you're thinking about what our actual expectations are for normalized operational revenue growth in 2016 v. 2015. And if you want to take PHARMAQ out of the equation and go what's the organic portion of that, it's about 200 basis points.

So as you look at that slide, again I'll call everyone's attention to it, we tried our level best to help you think about the strength of 2016 because this is quite a strong year by showing you this waterfall slide.

So 2% to 4%, 600 basis points on the efficiency initiative, SKU reductions, Venezuela, India, et cetera, gets you to 8% to 10%, and if you want to look at that on an organic basis it would be 6% to 8% by taking PHARMAQ out of the mix.

Before I concede the floor, I want to say two things before I talk about 2016, because we did change from 3% to 5% operational growth to 2% to 4%. That is predominantly because we had previously articulated that range at the midpoint of our 2015 guidance for revenue.

And as you saw, we had strong revenue in Q4, and for 2015 it was about $25 million higher than that. And that accounts for the change from 3% to 5% down to 2% to 4%. We feel really good about what we put on the table in 2015.

And as we think about it, we really are excited about 2016, even though it will be masked a little bit by the changes that we are making to our model. Now last before I concede the floor, you asked the question about what could we expect in 2017.

We expect a return to the same kind of solid growth that you would have expected in 2016 but for the change in the efficiency initiative. We're currently forecasting on an operational basis 5% to 9%. That's pretty solid, and that's being driven mainly by new products. Next question, please..

And the next question comes from Alex Arfaei with BMO Capital Markets..

Good morning, folks. Thank you for all the details on the slides and congratulations on a strong operational performance in 2015. Paul, cost of sales grew at a higher rate than revenues in the quarter, and as a result gross margin was lower year over year and sequentially versus 3Q.

I was wondering if you could give us your thoughts there on gross margin. And just a general question for the both of you, your stock has obviously been underperforming despite this strong operational performance. I'm wondering if you could give us your thoughts on that.

And is there an opportunity for a more aggressive share buyback at these levels? Thank you..

Sure, it's Paul. I'll take the Q4 margin. That was predominantly due to FX. Again, I would look at the full year and how we came out, and it was in line with what we were expecting. I know, Alex, we've traveled together a little bit. You look at a quarter; there can be a lot of variability that sneaks into the equation.

You compare it against this, that and the other thing. Things happen in a 90-day period that smooth themselves out over the year. I would look at the 65%-odd margin that we put on the board for the full year, and that's indicative of the strength. But the one thing in the fourth quarter was FX.

FX is hard to forecast when it flows through cost of sales, but it sure does. The second thing I think you asked a question about the share price. We're watching our company along with many others lose value, at least in the eyes of shareholders or people who are holding our stock. We continue to do what we can do. We're driving real fundamental value.

You posed the question about our share buyback and the scale of that, et cetera. I'd point out that when we were last in the window I guess, which was in the early part of November, the stock was $43 – $44, I think, and I'm going from memory here, $43 – $44. And we elected at that point in time to increase the pace of our purchases.

As everybody can do the math, we bought about $50 million a quarter through 2015. We're currently buying stock back at a pace of about $75 million a quarter. I know that's not a ton. But as I said also many times, we had a lot of calls on cash in 2016, but even so we elected to increase the pace at which we were wanting to acquire shares.

So I hope that answers the questions..

I will add a comment here, Alex. I think that in many cases our company is still associated with the human pharmaceutical industry. And discussions on prices, for instance, have been affecting the human pharmaceutical industry, while this should not be having any impact in our share value.

Our prices, as I mentioned in my comments, are completely dependent on third-party payers. We price based on the value that we can demonstrate to our customers, and our customers are not only buying and paying the products they buy from us.

So this is something that in my opinion should be also included when different investors or analysts also define the value of Zoetis and also the value of the animal health industry in general..

Next question, please..

And the next question is from Erin Wilson with Credit Suisse..

Great, thanks for taking my questions. How should we think about the quarterly progression of the U.S. livestock business? And could you characterize the overall health of the U.S.

livestock industry just more broadly? And then one on R&D; on the parasiticide front, should we expect that you're ready to launch as soon as SIMPARICA gets approval in the U.S.? And then with the potential flea, tick, and heartworm combination chewable product, longer term, how long in the pipeline, or how far along in the pipeline is this product? And when should we expect it I guess to launch, and is it in the guidance?.

So thank you, Erin, for your question. In terms of the launch of SIMPARICA, we are ready to launch as soon as we get approval from the FDA. We're also ready to launch not only in U.S. but also in the European markets. And the team is ready, the plans are in place, and we have a product to supply to the market.

You also asked a question about the livestock progression in the U.S. And definitely we have seen that in general the livestock has been performing well in 2015.

In terms of the quarters, the fourth quarter has been stronger than expected because already in the last year, we reported very strong revenue growth, and in this year also we grew significantly.

And in terms of the different areas of livestock, we see also opportunities in cattle, we see opportunities in poultry, and we see opportunities also in swine. We expect also in 2016, the momentum will continue. We see positive trends in the cattle industry, mainly on beef; that we expect that the number of animals will increase by 3% or 3.5%.

And this will expect, also will drive additional use of animal health products. And you also asked about....

The combination product..

The flea and tick and the heartworm. Definitely, our R&D team is working on developing this product and finalizing all the information for submitting all the dossiers to the FDA. We have not yet communicated when we plan to have this product into the market.

As we get closer to the finalization of all the different filings, then we'll communicate to the market. And this has not been included in our guidance for 2017. So next question, please..

We'll go next to John Kreger with William Blair..

Hi, thanks very much. You mentioned that you had some issues last year with customer service. I think you said mainly around APOQUEL.

Can you just expand upon that? Is that issue behind you? How comfortable are you that you will not have any residual issues as we move through 2016? And then, Paul, maybe just talk a little bit more about longer term, your tax rate thoughts? Do you think 30% is the long term right number to use, or is there an opportunity to maybe push that lower? Thanks..

So we have had supply issues for APOQUEL, and the supply issue has been resolved now. We have now the process for the production of the active pharmaceutical ingredient that had been the bottleneck of manufacturing APOQUEL. We have a process which is much more robust and much more consistent.

And we are really producing all the product that will be delivered in 2016, and we'll increase significantly the supply to the market. We are also planning to expand APOQUEL to the rest of the world in where the product has been approved, and we plan to do that in 2016.

So we are convinced that APOQUEL will deliver significant growth and all the issues that we faced in 2015 will be behind us. We also reported in 2015 that the implementation of the new ERP also created some issues in terms of deliveries of products into the market.

We are very pleased now how the implementation of the ERP has been now performed in the U.S. We have now 90% of our orders delivered the same day, which is a significant achievement, and we are working on improving there, the rest of the functions that also are provided to the customers.

We expect that also the ERP, will be supporting our operations in a very efficient way in 2016. And this is something we plan to finalize all implementation of the new system in this quarter, and then moving forward, to maximize the way that we'll be supporting our business..

John, its Paul. I'll take the tax question. First let me just say we were very disappointed with the European Commission's kind of stating that the Belgium tax rulings like we had are illegal, and essentially nullified our arrangement there. We're disappointed because the Belgians have been very supportive; we've built a terrific operation there.

I think I've said in a prior public forum, the Belgians on the contrary, have been one of the more responsible countries with respect to tax policy and how they used it to attract employment and investment into their country and it's a shame. So set that aside, we're very disappointed. It obviously was not something that we were planning on.

And let's pretend that, that didn't happen for a second. We had previously articulated, we thought our tax rate in, call it 2017, would have been on the order of 28%, our adjusted ETR roughly 28%, and now it's 30%. So we lost a couple of hundred basis points there in 2017.

But what I would suggest to you is, just as we had articulated with respect to our structure before this happened, we can grind that down, but we wouldn't be grinding it down.

The frustrating thing for us is, we were doing pretty well, fine tuning our global operating model to be efficient and here we have to go back and we have to change course a little bit. So not something – it was not a happy day for us but we're responding the best way that we can.

And I think the way we look at it is we just add 200 basis points higher ETR in 2017 and our job is to grind that down. Next question, please..

And the next question comes from Chris Schott with JPMorgan..

Great. Thanks very much. Just a couple of here.

First, on the 6% impact from the SKU reduction in 2016, I guess now that we're further along in that process, any surprises in terms of customer behavior, in terms of the SKU changes? And I guess is there an opportunity for that number to be lower than 6%, either through uptake of alternatives of those products, or just other initiatives you put in place? And the second question which is as we're looking out 2016, just any dynamics we should be keeping in mind for modeling this year in terms of quarterly progression? I guess are there any particularly difficult or easy comps that we should be watching as we're kind of thinking about the quarters this year? Thanks very much..

Thank you, Chris. What we evaluated very carefully when we decided to reduce SKUs on how will be the impact to our customers, we made sure that none of the SKUs that we are eliminating has no alternative to our customers. These alternatives can be from our competitors or can be alternatives, in our portfolio.

The 6% impact in our revenues is the net result of reduction and also the assumption that some of these reductions of SKUs will be moved to other SKUs in our portfolio.

In terms of reaction from our customers, I think in some cases, well, they will like to have these products in their portfolio, but they also understand that more important than offering 13,000 SKUs is ensuring that we have a reliable supply.

What we want to make sure that when they place an order, they get the order on time to treat or protect the animals. And this is one of the important strategic rationales for our SKU rationalization.

It was not only to improve gross margin, but also to ensure that our supply to the market is much more consistent and we can meet all customer submissions. And then Paul will take the question on the phasing in terms of quarters..

I think there are two things that I'd be mindful of; one is how the SKU reduction plays out with respect to our revenues. You'll recall that we announced this program in the middle part of 2015, and so we're just starting to see here in Q4 an alignment to Q1 and Q2, the impacts of the SKU rationalization.

And it will be relative to the prior year, it will be a significant factor. But we will have to keep our eye on. The second part is with respect to our cost, our efficiency initiative.

We continue to ramp up the amount of savings that we are seeing flow through, and of course the first half of last year we had a modest amount of cost containment or that occurred in the first half, but that steps up and we currently are tracking, as you saw, with an 8% operational reduction in operating expenses in Q4, tracking at a much lower rate, so that will be a very helpful driver on the operating expense side in the first half of the year, and then that benefit, if you will, comparing back to the prior year will moderate over the second half of the year.

I think that's about all we want to cover on phasing. Just lastly, I'll say it again and again and again, we look at our business on a yearly basis. Trying to – I know you have to and that's what you do and all, and we'll try to be as helpful as we can with respect to the phasing but we run our business on an annual basis. Next question, please..

Our next question is from Jami Rubin with Goldman Sachs..

Thank you. Just a couple. First, Paul, maybe you can answer this. On the 2% contribution from price, can you talk about the outlook? How did that look on a global basis U.S. versus outside of the U.S.? And what is the outlook for price increases going forward both in the U.S. and across different geographies.

And then, Juan Ramón, just a question for you; as you are now, congratulations, three years as an independent company and it's been very exciting to see how Zoetis has evolved and achieved such tremendous success in a short period of time. Congratulations.

But maybe you could just sort of step back and tell us – when I look at the industry, the animal health industry, it doesn't seem that a whole lot has changed. It still remains highly fragmented. We've seen a little bit of movement with Novartis swapping its business to Lilly. You've made a couple small acquisitions.

But by and large, the industry hasn't changed much. Do you see more consolidation going forward? Or do you see some of your peers spinning out their animal health businesses like you have done for yourself? And what does this all mean for your future in terms of M&A? Thanks very much..

Thank you, Jami. And I will try to answer both questions. So in terms of the 2%, so the 2%, as you mentioned, it's a global increase. And in terms of where we see this 2% in the different geographies, definitely we have been very consistent in the U.S. with price increases of around 2%. And in the rest of the markets, it depends.

So in high inflationary markets, we increased significantly the prices to compensate for inflation and also to compensate for foreign exchange. In some markets where the economies are – the inflation is very stable or probably not having any inflation at all, so we are also trying to adjust our prices based on these situations.

So in Europe or Japan and some other markets we have been increasing prices but at a lower rate than in the U.S. or some of the markets where we had the opportunity to increase the prices because of inflation.

The second question was related to the consolidation of the industry and the top four or five now animal healthcare companies represent almost 70% of the total market, which has already been increased significantly from some years ago.

Do I see opportunities for further consolidation? I think there are still opportunities, especially on the second tier of companies, after these four or five companies we see opportunities for the consolidation.

We expect now the merger of Boehringer Ingelheim and Merial being completed, there's another round of consolidation, and maybe in the future also we'll see some additional consolidation.

Definitely the consolidation would be limited because of antitrust issues, but without these antitrust issues or managing these antitrust issues, definitely consolidation can represent a good opportunity for the animal health industry.

The last comment I want to add is that the top 10 companies in animal health represent something like 80% of the total market. On the 20% which is remaining we have maybe hundreds of companies that in -where I expect that this will be a significant consolidation here. And Paul will add some comments in terms of the pricing..

Sure. I mean Jami asked a specific question. I think Jami was trying to get to where is our pricing power. For the full year, emphasis full year, our price added approximately – a little better than 2% overall but U.S. is about 2% and international was about 3%. Again, a lot of rounding here, but more price increases outside the U.S. than in.

Next question, please..

Thank you, Paul..

The next question comes from Doug Tsao with Barclays..

Hi, good morning. Thanks for taking the questions.

Maybe if you could provide a little bit more of an update in terms of how you will sort of increase the availability of APOQUEL, is this what we start now in terms of broadening the number of veterinarians who will have access to the product? Or is it going to be focused more on current – expanding to new patients? Also, if you can just provide some commentary in terms of the MFA business and how it's faring right now? One of your competitors spoke about some regulatory headwinds in that business and whether you're seeing those as well? Thank you..

Thank you, Doug. In terms of the increase for APOQUEL, so let me start saying that we have now two sources of the production of API and the second source that will be a company in Switzerland which is called Siegfried will double the capacity of the production of the active pharmaceutical ingredient.

We plan to now offer APOQUEL to more veterinarians and also to offer more available product to existing veterinarians. At the same time, also the plan is to introduce the product in the rest of the markets where the product was put on hold because of product availability.

So we are convinced that during 2016 we'll be able to meet all the demand from the market. In terms of MFAs, I think MFAs in our case continue growing very strongly and we have the advantage of – that's right this is the diversity of our portfolio.

It's not only diversity in terms of therapeutic areas or in terms of different types of products, but also within the MFAs we have a lot of diversity.

And for products that will be maybe facing some challenge because of changes on the approach of the use of antibiotics, and I mentioned in the medical important antibiotics in MFAs with indication of a growth promotion, this will be eliminated but in our portfolio we also have a non-medical important antibiotics in MFAs that can be a good replacement for those that will be eliminated.

We have in total in MFAs $500 million in sales and we grew operationally in 2015 by 8%. So definitely we expect that those are probably the only indication of growth promotion which are medically important for human health that will have an impact in the revenues but this impact will be minimum. Next question, please..

We'll go next to Mark Schoenebaum with Evercore ISI..

Hey, Paul. My email went up during your prepared remarks. I just wanted to say that it was really a brutally awesome prepared remarks section, especially the part about how we should reverse the alphabet, I love that. That's a great idea. But in all seriousness, I had a bunch of questions, but I'll limit it to 1.5 because most people have been doing it.

Number one, given all the opacity that – you guys have tried to do everything you can to make it clear but this the confusion, I guess, that FX potentially creates, why not synthetically hedge against the effects on that at least in that net income line especially after the turmoil this year, although you guys have done a great job helping us understand the effect.

And then number two, maybe I missed this, but I didn't hear you break out APOQUEL sales on 4Q. I was wondering if you could. I apologize if I just missed it, if you could break those out in the U.S. and also the rest of world.

And if you already answered that one, then my question would be the 6% to 8% normalized organic operational growth, what are the components of that for 2016 that you see? Thanks..

Sure, I'll start with the FX. I think when you're looking at trying to hedge operations around the world against foreign currencies, you have two choices. You can either, in non-technical terms, let it fly, which is what we do with respect to operations like many, many other multinational companies do, or you can attempt to hedge.

If you hedge, you hedge within a quarter, and the analysis that we've done has suggested that you're essentially chasing down. You limit the cost of the hedges, ultimately make it like a less than fruitful exercise. Now others will tell you that they can do it, and that's okay. That would be their point of view.

I point out that a couple of the currencies that tend to be the most volatile, there are not markets for us to go out and hedge. I think they're not deep enough. They're not efficient enough. And so you wouldn't be able to fully offset that. I think I love your word there, opacity. I might have mispronounced that.

We're trying our best to let the market follow along with as much of the information that we have that we can share with you so you can decide how we're performing. We do now, and we will continue to manage ourselves on an operational basis, meaning a constant currency basis.

And I will hope against hope perhaps that at some point in the future here we'll see some more stability in the foreign exchange rates, and that we'll enjoy the positive upside, not from an operational perspective, but from a reported perspective of currency, FX rates going in the opposite direction.

Juan, do you want to take the APOQUEL sales, or would you like me to?.

The APOQUEL sales, I think we had more than $100 million in 2015. It's about $110 million. This was below initial expectations. And the only reason for that was that ensuring that we have enough product to supply to customers, and not increasing the number of customers having access until we have the certainty that the product would be available.

Now we're having a situation that we increase significantly the production, and we'll be able to increase the deliveries to our customers. Globally in international markets, I think we had about $40 million, and then the rest was in the U.S.

But it's important to understand that in international markets it was very limited number of countries where we have the product available in the market. You also asked about components of our organic growth, 6% to 8%, and Paul will provide the details of this..

Sure, I'll start. First of all, we expect to continue to be able to take consistent price across our portfolio. That's a driver. Second is there's a significant impact from new products in 2016, which frankly will be an even bigger impact on 2017, and then just performance of our portfolio.

When I say new products, I'm focusing on the ones that you can see that make a difference. I'd point out that we have lots of new products that we don't talk about necessarily individually and maybe individually don't move the needle, but in the aggregate they sure do.

6% to 8% normalized operational growth in revenue next year would be terrific, and then again going into 2017 new products help even more..

And, Mark, let me correct the total revenue that we generated internationally. Internationally was $20 million and then the rest was in the U.S. And I want to insist that in the international markets we have very limited number of markets and also limited supply. So the potential in both U.S. and international is much higher. So next question, please..

We'll go next to David Risinger with Morgan Stanley..

Yes, thanks very much. My questions are financial. Obviously, you've covered a lot of ground on the business and the outlook. So, Paul, two questions.

First, could you please discuss the outlook for 2016 cash flow, including cash flow from operations and then planned uses of cash? And then second, if you could, just comment on the quarterly progression throughout the year, just to make sure that we set up our models appropriately and we understand the different variables to consider.

Thanks very much..

one, the standup from Pfizer; second, the operational efficiency initiative; and now we add to the list a potential true-up of our international taxes in light of the EC's comments. If you look at our guidance tables, we call out the amount or the expected amount of the acquisition costs that we expect to incur in 2016 and then again in 2017.

Those are I would call them – they're not normal and they will go away, and most of them will go away towards the latter part of 2016. But in 2016 it's a fairly significant call on our cash. Secondarily, we continue to be in a phase of investing in our supply chain.

We continue to invest capital there, so our CapEx is tracking at a rate that exceeds our ongoing depreciation rate, so net-net we continue to invest there. Of course, we called out that we now have a program that everybody can do the math, where at least the current expectation is we're purchasing shares at the rate of $75 million a quarter.

It's $300 million this year plus our dividend. You can do that math. And those are other than our earnings are the things that you need to take into consideration when thinking about our cash flow. I don't want to stop without speaking about efficiency of working capital. That is something that is to come.

It's not something that you would see necessarily in 2015 and not in an enormous way in 2016. By the end of this quarter, we expect to have our ERP system up and running in all of our locations around the world, which is going to give us the ability to then implement tools, to much better manage primarily our investment in our inventories.

Our receivables, I think we do a pretty good job there, and we certainly do the same things as everyone else with respect to payables. But we will not start to see some maybe significant cash flow from the improvement in cost of working capital really until 2017. I wasn't specific there, David.

I wasn't specific for the reason we don't want to provide specific guidance with respect to free cash flow, but I believe we've provided each of the components that will enable you to look out to 2016, 2017, and then beyond.

I think when you get out into the latter part of this decade, our depreciation should start to normalize at a level close to our depreciation amount. I'll stop there..

You also asked about the quarterly progression for 2016. Let me provide a couple of comments here. So first we expect that the new product launches will have no impact in the first quarter and we expect that these products ramping up during the year.

Also APOQUEL, we expect that the biggest impact we'll see from the second quarter of 2016 as we also extend the product availability in the markets where the product has been already introduced, and we also launch in new markets.

In terms of expenses of course, also our efficiency program, will have much more impact in the second half than in the first half, because in the second half, we plan really to complete most of the actions that we took as part of the announcements that we made in May, and this also will have a positive impact in our results in the second half of the year.

Next question please..

We'll go next to Kathy Miner with Cowen & Company..

Thank you, good morning. Two questions, one first on PHARMAQ. When you acquired the company, you had stated that it was growing about 17%.

Is that still a good estimate going forward, or could it be higher given their late stage pipeline that you talked about? And also do you continue to expect it to be neutral to EPS this year and then accretive thereafter, or could that accelerate? And the second question just has to do on trends outside of the U.S. in livestock.

We saw the issue in France last year where they changed the legislation on antibiotics. Are there any other areas that we should look for in 2016 where there may be similar changes? Thank you..

So Thank you, Kathy, for the questions. In PHARMAQ, what we communicated is that we plan to generate that revenue for $100 million in 2016 and $125 million in 2017 and at the end of the year PHARMAQ reported revenues of close to $80 million, so we see a significant increase in terms of our revenues.

What we saw during the due diligence when we acquire in terms of the pipeline, it's performing now with the launch of the product in Chile that it was under this emergency license. And we will continue progressing in the plans that we have for PHARMAQ. So we are very excited about the opportunities of PHARMAQ.

We are working also in terms of integrating the two companies, but ensuring that PHARMAQ remains a leader in aquatic health with enough identity to maximize the relationship with the customers that they already built through many years.

In terms of the comments that you made, in France, definitely in 2015 we saw an impact because of the change of the legislation in France. This was affecting antibiotics. We expect also that antibiotics will continue having discussions and restrictions in some of the markets. This has been incorporated in our guidance for 2016 and 2017.

And we also think that the projections that external sources are making about the total animal health industry and also the growth in antibiotics are consistent with what with our projections. So the industry will be growing about 5%. Antibiotics is expected to grow at half of this rate.

The advantage for Zoetis is that it will have in our portfolio, antibiotics which are injectables, which are considered as premium antibiotics that are kept by veterinarians as a resource to ensure that they are treating and in some cases protecting also animals against infections.

So we are confident that the impact that it will have in antibiotics will be lower in our revenue, but in any case all these elements have been incorporated in our projections. Next question, please..

We'll go next to Jeff Holford with Jefferies.

Jeff, if you want to check your mute button please?.

Hi.

Can you hear me now?.

Yes, we can..

Okay. Great. Thank you. Good morning. I just want to ask a couple of questions around Sanofi and Boehringer.

First off, if you expect that business combination or that potential business combination to have any impact on the competitive environment for you as you go forward into 2017 and beyond, any specific areas of concern or opportunity there? And then second, just as you got two European companies coming together there.

You've talked very briefly in the past about potential inversions, lack of opportunities, that's potentially two less opportunities now. Just any updated thoughts there is that's really looking beyond you now to potentially look at any kind of inversions or spin-versions out there. Thank you..

Thank you, Jeff, for the question and definitely the Sanofi/BI merger will create a very strong competitor. It will be the second largest animal health company in our industry. But we don't think that the combination of the two companies will create additional competitive challenge to Zoetis.

We have the scale, we have the diversity, and we have the business model that has been proven very successful in the past and will continue also being successful in the future. The productivity that we have in R&D is also showing very high levels. So we are confident that we'll continue growing in line, or faster than market.

So we are projecting in fact in 2016 and 2017 we're growing faster than market despite of Sanofi/BI or despite of all these additional consolidations in our industry. Sanofi and BI, they are two European companies that potentially can be, maybe an opportunity for tax inversion, but also creating significant anti-trust issues to Zoetis.

So we continue assessing opportunities that, to further consolidate, not with the only objective of saving on tax, but a combination of synergies that we can generate in terms of revenue, in terms of costs, opportunities on reducing our effective tax rate, and definitely creating a value to the company. Next question, please..

Next we'll go for a follow-up with Kevin Ellich with Piper Jaffray..

Hey. I was just wondering if you could comment about the, I guess Juan Ramón, did you say you guys have – supply of SIMPARICA is ready for launch? I just wanted to make sure I had that right..

Yes. I said that SIMPARICA product is ready for launch and as soon as we have approval for FDA, we'll be launching that in the U.S. and also in Europe. So we have the product in our warehouses..

And it does appear we have no further questions. I'll return the floor to you, Juan Ramón, for closing remarks..

Thank you very much. And thank you for joining us today. As we continue through 2016, we are determined to make the most of our business model, our interconnected capabilities and the fundamental drivers of growth in animal health. We'll complete our operational changes, becoming less complex, more efficient and more agile.

And we'll invest in growth opportunities to strengthen our business. I am confident that these steps will help improve our margins, better serve our customers and build shareholder value over the long term. And I look forward to reporting to you on our progress in each of these areas. Thank you very much..

Okay. Ladies and gentlemen, this does conclude today's teleconference. A replay of today's call will be available in two hours by dialing 800-839-6980 for U.S. listeners and 402-220-6062 for international. Please disconnect your lines at this time, and have a wonderful day..