Good morning, everyone. Welcome to the 2019 Zoetis Annual Meeting here in Short Hills. I'm Bill Prout, Vice President and Chief Communications Officer for Zoetis. I'd like to cover a few housekeeping items before we begin. At this time, please take your seats, turn off your cell phones, or set them to vibrate. I would ask you to look to the back of the room at this time and identify the nearest exit in case we need to leave in the event of an emergency. Today's meeting is being webcast live and will be available for replay on the zoetis.com investor relations website. Slides of the presentation and the CEO's remarks will be available on our website at the conclusion of today's meeting. As a reminder, the presentations during today's Annual Shareholder Meeting contain forward-looking statements which reflect Zoetis' current views and expectations.
Forward-looking statements are subject to risks and uncertainties and are not guarantees of future performance or actions. You can refer to this slide or our public filings for a better understanding of the limitations behind any forward-looking statement made today. Today's presentations also reflect our use of non-GAAP financial measures. This slide explains their use and limitations. You can find a reconciliation of our GAAP and non-GAAP measures in our latest earnings release and on our website. With that, I will now turn the meeting over to our Chairman, Mr. Michael McCallister. Mike?
Thank you very much. Good morning, everyone. Thank you for being here. The meeting will now come to order. I'm Michael McCallister, Chairman of the Board of Zoetis. I'll act as Chairman of the meeting. Heidi Chen, General Counsel and Corporate Secretary of Zoetis, will act as Secretary of the meeting. Joining us is Juan Ramón Alaix, Chief Executive Officer of Zoetis. I'd like to welcome everyone to the 2019 Annual Shareholders Meeting of Zoetis and thank you for your interest in our company. Prior to the meeting, we provided each shareholder with a copy of our annual report on Form 10-K and our proxy statement, either by mail or online. Copies of these documents are also available at the registration desk today for any shareholder who does not have one.
The rules of conduct for this meeting are also available. We ask all participants to follow these rules so we can conduct an orderly meeting. At this time, I'd like to ask Heidi to give the report for the Corporate Secretary.
Thank you, Mr. Chairman. As noted in our notice and proxy statement, the record date for voting at this meeting was the close of business on March 21st, 2019. A list of shareholders on the record date is and has been available for review. To serve as the Inspector of Elections for this annual meeting to Zoetis, the board of directors has appointed Philip Meyer from Computershare. An affidavit will be incorporated into the minutes of this meeting attesting that notice of this meeting was properly given, that the shareholder list has been maintained for review, and that the Inspector of Elections has been sworn in. The shareholder list shows that holders of 479,149,357 shares of common Zoetis stock are entitled to vote at the meeting.
Based on a preliminary report, the Inspector of Elections has informed me that there are represented in person or by proxy 423,694,438 shares of Zoetis common stock, or approximately 88.43% of all shares entitled to vote at this meeting. That indicates the presence of a quorum.
Thank you, Heidi. Based on the report, a quorum is present, and the meeting is properly convened for the transaction of business. In terms of our proceedings today, we will conduct the business portion of our meeting first, then Juan Ramón will provide a brief report on the state of the business and will be available for questions at that time. The first order of business is a description of matters that have been properly brought before this meeting. The deadline for proposals for consideration at this meeting was February 14th, 2019. I'll now ask the secretary to report on the business for today's meeting.
Thanks, Mike. There are three items of business being conducted at today's meeting, each of which has been detailed in the proxy statement. First, there's the election of our Class III directors of the company, and those directors in Class III whose term expire at this annual meeting are Mr. Juan Ramón Alaix, Mr. Paul Bisaro, Mr. Frank D'Amelio, and Mr. Mike McCallister. Each of these directors has been nominated by the board of directors to stand for election for a three-year term that will expire at Zoetis' annual meeting of shareholders in 2022.
We'll now pause for any questions on the first item of business and ask that you limit your questions to the item being voted on. Please raise your hand if you have a question, and a microphone will be provided so that you can be heard. Seeing none, we move on. Heidi?
The second item of business is an advisory vote to approve the company's executive compensation. As disclosed in the proxy statement, our board recommends a vote for the approval of the company's executive compensation.
We'll now pause for any questions on this topic. Seeing none. Heidi?
The third and final item of business is the ratification and the appointment of KPMG LLP as the company's independent registered public accounting firm for the year ending December 31st, 2019. I'd like to ask the representatives of KPMG who are here with us today, Mike Shannon, Corey Temple, Shawn Mairagas, and Beth Pozos to please stand. Thank you. Our board of directors has ratified the selection of KPMG and recommends that you vote for this proposal.
Are there any questions on this item?
The entities thereof. I represent a corporation with pension funds that hold shares in Zoetis. The corporate pension funds collectively have assets worth in billions of dollars and hold 190,000 shares of the company's common stock. The corporate pension fund believes that audit firms' independence is critical to protecting the integrity of corporate financial reporting. Given the audit firm and corporate client relationships today are generally longstanding, such a regulation requires that the engagement partner be rotated every five years. To the chair of the Audit Committee or a representative of KPMG, please describe any possible partnership conflicts that may be indicated to make a decision in selection for that new partner.
You want to take it? Do you want it, Greg?
I think Greg.
Greg.
They're asking the Chair of the Audit.
I'm the Chair of the Audit Committee and Gregory Norden. Thanks for the question. We follow actually the recommendations that you mentioned. The Audit Committee is responsible for hiring the independent public accountants who are responsible for assessing the fairness of statements represented to us. I think we follow the partner rotation policy that you commented on.
Yeah, thanks.
My name is Nick Shine, I'm the Lead Audit Partner, and I'm in the third year of my five-year rotation, which all of us are required to rotate as Audit Partner for five years.
Any other questions on this topic? Okay. The reporting Inspector of Elections with respect to the votes cast will be given after the polls close. If there are any shareholders present who have not voted already by proxy or wish to change their previous proxy vote, please raise your hand and a ballot will be provided. We'll now open the polls. Madam Secretary.
Pursuant to the procedure set out in the company's bylaws, the polls will now open at, what time is it?
10:10.
10:10, for matters to be voted upon today.
While the polls remain open, I'd like to introduce those members of our Board of Directors who are here today. As I call your name, I'd ask each of you to stand and be recognized. Juan Ramón Alaix, our Chief Executive Officer. Paul Bisaro, Executive Chairman of Amneal Pharmaceuticals. Frank D'Amelio, Chief Financial Officer and Executive Vice President, Global Supply and Business Operations of Pfizer. Sanjay Khosla, former Executive Vice President and President, Developing Markets of Kraft Foods, now Mondelez International. Gregory Norden, you just saw Greg, former Senior Vice President and Chief Financial Officer of Wyeth. Louise Parent
Greg
former Executive Vice President and General Counsel of American Express Company. Dr. Willie Reed, Dean of the College of Veterinary Medicine at Purdue University. Dr. Linda Rhodes, former Chief Executive Officer and Chief Scientific Officer at Aratana Therapeutics. William Steere Jr., former Chairman and Chief Executive Officer of Pfizer. Our remaining director, Robert Scully, a former member of the office of the chairman at Morgan Stanley, was unable to attend today's meeting. As chairman, I'd like to recognize the service you guys provide, and ladies. On behalf of our shareholders, thank you for your work and your commitment and the great work you've done this year. Heidi?
Yes. Great. The polls are now closed at 10:11 A.M. The Inspector of Elections has presented his preliminary report to me, a copy of which will be filed with the minutes of this meeting. The results of the voting are as follows. First, the following nominees have been elected as Class III directors for a three-year term expiring at the 2022 annual meeting of shareholders. Mr. Juan Ramón Alaix, Mr. Paul Bisaro, Mr. Frank D'Amelio, and Mr. Michael McCallister. Second, the advisory vote with respect to the compensation of the company's named executive officers has been approved. Finally, the resolution ratifying and approving the selection of KPMG LLP as the company's independent registered public accounting firm for the year ending December 31, 2019, has been adopted. Mike.
Thank you. I'll now entertain a motion to adjourn the business portion of this meeting.
So moved.
Is there a second?
Aye.
All in favor? Okay, great. The motion is carried, and the business portion of the meeting is adjourned. We'll now proceed with a brief presentation by our CEO. I'd like to ask Juan Ramón to come up and do just that.
Thank you, Mike, and good morning, everyone. As I reflect on our results and performance, three words come to my mind: reliable, innovative, and customer-focused. In 2018, we delivered our sixth consecutive year of operational revenue growth and increased profitability. We made further investments in our business through our internal R&D team and through acquisitions and external partnerships. These investments have generated many new products and should continue bringing innovation that will help us to advance the care of animals and grow our business. All of this has enabled us to create value for you, our shareholders. In 2018, we achieved a 10% operational revenue growth. Even if we exclude the revenue related to the acquisition of Abaxis, our organic operational growth was 8%. Once again, outperforming the animal health market, which grew about 6% in 2018. We also increased our profitability faster than revenues.
Growing adjusted net income by 31% on an operational basis, consistent with our value proposition. This improvement was driven by higher sales and improved cost structure and the U.S. tax reform. Our diverse portfolio of approximately 300 products and product lines continue to drive our strong performance. In 2018, we saw growth across all major species, markets, and therapeutic areas. Our companion animal products performed very well. Based on growth, our key dermatology brands like Apoquel and Cytopoint, parasiticides like Simparica, and the addition of Abaxis diagnostic portfolio. In livestock, our swine, poultry, and fish portfolio each deliver strong growth with more modest growth gains in products for cattle. In 2018, compared to prior years, we allocated more resources to R&D projects, deployed more salespeople and direct-to-consumer campaigns, expanded many of our manufacturing capabilities, and invested in areas such as diagnostic, digital, and data analytics.
Innovation remains the foundation of our industry-leading portfolio, and we are committed to developing medicines, vaccines, and technology like genetics, diagnostics, biodevices that can truly improve animal health. In 2018, we invested more than $430 million in our research and development programs to bring new products to the market and ensure ongoing life cycle innovations. We strengthened our canine dermatology portfolio with new indications for Apoquel, which now covers allergic as well as atopic dermatitis in the U.S. We also expanded the product in international markets. Simparica, our oral parasiticide for dogs, continue its successful rollout, with additional approvals in countries outside the U.S. Revolution Plus, our topical combination parasiticide for cats, gained additional approvals in the U.S., Japan, and Canada, following the introduction in Europe and other international markets, where it is known as Stronghold Plus.
We also strengthened our vaccine portfolio with market approvals of Fostera Gold PCV MH and Suvaxyn Circo, which give livestock farmers more options and flexibility in protecting pigs from diseases. We received approval in the U.S. for CORE EQ Innovator, the first and only vaccine for horses that protect them against five core equine diseases in a single injection. We also support our growth strategies with business developmental activities. In 2018, we acquired Abaxis to increase our scale in a $4 billion veterinary diagnostic market, which had a compound annual growth rate of approximately 10% in the last three years. We see diagnostic as an important area to grow our portfolio with a tremendous opportunity for growth ahead.
With the acquisition of Abaxis, we now have the immediate scale and expertise to compete in point-of-care diagnostic globally. We are making good progress on the integration of this company to date. We also acquired a digital technology company called SmartBow. Its sensor technology and monitoring systems will be essential to our expansion in precision livestock farming and other digital and data analytic solutions emerging in animal health. We are advancing our leadership in monoclonal antibodies with the partnership with Regeneron Pharmaceuticals. Already, our monoclonal antibody data programs have a great potential. Three people treating pain in dogs and cats, a species for which today is underserved in terms of treating pain. We have also been investing to improve the services and support we bring to the customers.
This includes investing in new tools, technology, and training to our field force, as well as increasing our direct-to-consumer campaigns, which have been critical to increase demand for Apoquel, Cytopoint, and Simparica. We took important steps to expand our manufacturing capacity. In the U.S., we enlarged our production facility for poultry vaccines in Charles City, Iowa. Our expansion in Kalamazoo, Michigan, for oral and solid dose medicines is progressing ahead of schedule. Outside the U.S., we acquired a facility in Thailand to help increase supply of our market-leading EXCEDE for the dairy business. We expect to complete the construction of our feed manufacturing facility in Suzhou, China, by the end of 2019. Our strong financial performance continued to generate cash that we used to reinvest in the business and return to you, our shareholders. We have been allocating excess cash dividends on the share repurchase programs.
We increased our dividends from $98 million in 2013 to $243 million in 2018. Last December, we increased our dividends by 30%. In 2018, we repurchased shares for $700 million and authorized a $2 billion multi-year share repurchase program as part of our strategic capital allocation plans. As we look to the future of animal health, we know the importance of animals will be even greater in the coming years as a result of increased pet ownership and a growing global demand for proteins. We are confident in our ability to address these growth opportunities and evolving customer needs in the markets in where we compete by executing against six strategic imperatives. First, delivering more innovation across core areas of vaccines and medicines, and in the complementary spaces where we have been adding genetics, diagnostics, biodevices, digital, and data analytics.
Second, maintaining a diverse portfolio across geographies, markets, and also therapeutic areas and species. This diversity has been proven to be beneficial and resilient in the face of economic challenge, regulatory changes, and the outbreaks like the recent African swine fever in China and other markets. Third, maximizing opportunities in fast-growing markets and making the most of our investments in places like China and Brazil. Fourth, developing more data and digital technologies that can improve current models of production and pet care. Fifth, supporting our customers' direct engagement with the pet owners and consumers and promoting the important role of veterinarians in animal health decisions. Finally, enhancing our capabilities to meet customer needs across the continuum of care, from prediction and prevention to detection and treatment. I am very excited about what Zoetis will accomplish in 2019.
In 2019, we expect again to grow faster in the market based on the strength of our diverse and innovative portfolio, high-quality manufacturing, and world-class field force. I want to thank all of our colleagues for their many contributions to our business, to our shareholders, and to society. Their ongoing commitment to our customers made a difference in our results and culture, and they have made Zoetis an award-winning workplace for the past several years with recognition from Forbes, Working Mother magazine, and the National Association for Female Executives in the U.S., as well as other company awards in several markets outside the U.S. I know I speak for everyone at Zoetis when I say thank you to our shareholders for your confidence in our company. We look forward to sharing our continued success with you.
Now, I will be glad to take questions about the business before we close the meeting.
Irene Van Houten, shareholder. I actually have four questions. The first, unless I'm just misinterpreting, I can't believe how much, I'll use the word sickness or ill health there is among the animal population in America. Maybe I'm wrong because I don't know, but it's just an observation. I was wondering, are more of your sales for domestic animal, pets, cats and dogs, as opposed to your livestock? Where are the majority of your sales in, for domestic or your livestock?
Okay. I think it's a good comment and a good question. Our companion animal business has been growing faster than livestock. When we separated from Pfizer back in 2013, distribution of revenues was 65% livestock, 35% companion animal. Last year, we rebalanced the portfolio, now it's 55 livestock, 45 companion animal. We expect that companion animal will continue growing faster in 2019.
Okay.
As I said, it's important that we continue investing in all different species.
Okay.
This has been helping us to manage cycles. In some cases, these cycles are affecting companion animals, in some cases, livestock. It's good to have a good balanced portfolio to be consistent and predictable in terms of future revenue growth.
Okay. My third question is any research being done to use medication as opposed to surgery for things like kidney stones in animals?
This is something that-
To prevent surgery
I think it's another good question. Definitely, we are trying to identify all unmet needs in animals. According to the market, one of the most important unmet needs today are in the feline sector, especially related to pain, but there are other indications that will be equally important. We have programs to address all these opportunities. Definitely, we want to make sure that Zoetis remain leading, not only in terms of revenues, but in terms of innovation, in terms of bringing products that will be meeting the needs of our customers.
My fourth question is, if you've ever thought of diversifying. It would really be a help. I know there is health insurance for animals, but you don't realize how much you need it until you have a. My daughter's rabbit, well, to make a long story short, it was sick. Anyway, it did have a kidney stone stuck in its bladder. They were moving to Florida at the time, so they got from. By the time she left New Jersey, it cost $3,000 for this rabbit. They moved to Florida, and the surgery alone to remove this stone was $2,000. Plus whatever she spent. Well, I gave her the money for that. Whatever she spent in Florida. Now you're talking about $6,000 just for, well, I shouldn't say it like that, just for a rabbit. They ruin their yard, for God's sake.
Anyway. God, it sounds awful. Unfortunately, it died after six months. It really cost $1,000 to keep it alive a month from diagnosis to. Anyway, I think it's an important thing to have, which you don't realize that this is something you needed.
This is true. Definitely, insurance can be an option for many pet owners, but also it's showing how much we love our animals and how much are we willing to spend in our animals. As pet owners, this can be painful. As shareholders of Zoetis, it's a good opportunity.
Bob Halsey, shareholder. Could you tell us, without revealing any strategies that can't be talked about, what you're going to try to get to go along with Abaxis, because it's a very, very small player in the animal diagnostics business.
Well, in diagnostic, there are not too many players, diagnostic was second. It was a company focused on point of care. There are some other competitors that have a broader portfolio, including the point of care, also reference labs. We are convinced that now, with the portfolio diagnostics that in our opinion, it's meeting the technical standards that the market needs, and it's comparable to other players in this segment. With the addition of Zoetis' reach to customers, we think that we can increase the market share and penetration of the Abaxis diagnostic portfolio and generate significant growth.
What we see with the addition of Abaxis is not just growing our diagnostic portfolio, but helping us to be every day much more relevant in the clinics for companion animals and providing to our customers all what they need in terms of treating and improving the health of animals. We see also the opportunity with now the new portfolio that we acquired and the expertise from Abaxis to expand our penetration not only in the U.S., but also international markets. In the future, also developing a portfolio in livestock point of care diagnostic tools. That today is something that is very much needed, and there is not any company which is really providing these type of tools to the market.
Good morning. My name is Alex Lopez, and I represent a Carpenters Union pension fund that holds shares in Zoetis. The Carpenters pension funds collectively have assets of $60 billion, and they hold 496,000 shares of the company's common stock. A topic that has received growing interest in the business press and at leading business schools is the growth and the size of the ownership interests held by mutual funds, particularly passive index funds. BlackRock and Vanguard each own in excess of 5% of the company's outstanding shares. Could you speak to your view of the growing concentration of institutional investor ownership and its impact on corporate governance? Specifically, does the increasing concentration of ownership by passive investors aggravate short-termism in the market, or alternatively, enable companies to take a longer-term strategic perspective?
Also, are there potential conflict-of-interest issues that average shareholders should be concerned about, given that these same investment companies are involved with the administration and investment of corporate retirement funds at companies where they hold large ownership positions? Thank you.
Thank you for the question. We have seen that many of these large shareholders are very vocal, defending and protecting the long-term vision of companies. In our opinion, this is very much aligned with the philosophy of Zoetis. We are not here in this business for the short term. We are in this business for the long term. By definition, a company which is investing $430 million in R&D, that normally the cycles can go up to seven, 10 years. We are focused on creating value, not for the next quarter, for the next year, but for many years to come. We don't see any conflict from large investors and what we are trying to apply to our business. We are committed to our customers, we are committed to our shareholders, and we are committed for the long term.
My name is Angelo Crivello, stockholder. I'd like to thank you and everyone at the company for the wonderful job you've been doing. It's fantastic. My question has to do with world events.
Pardon?
World events. As you know, we have the situation with going on with the trade, and in particular with China. The business that we're doing in China, how do we protect ourselves, our processes, our patents, intellectual property? As we know, China has a habit of sort of taking things that don't belong to them. How do we protect ourselves?
This is something that is no different to any other company doing business in China. One of the objectives of the Trump administration is to improve the protection of intellectual property in China and making sure that the Chinese government respects the patents that we have, which are protecting our products. We think that it will be good to improve in that direction. We also see that China now, more and more, is becoming a country of innovation. If they improve in innovation also, they will also try to protect their own innovation. Despite of this challenge that all companies face in China, we have been growing in China extremely well. We have growing double digits for many years. Now China, it was expected before the African swine fever to become the third-largest market for Zoetis.
Number 1, the U.S., number 2, Brazil, and number 3, it was China. In China, we are investing. As I mentioned, we are completing the construction of a new vaccine plant that will help us to have a further penetration in the market. We definitely would like to see that the trade discussions with U.S. and China end in good terms. I think will be important for our customers. Probably not less important directly for our business, but important for customers in the U.S. that depend significantly on exportations to generate their business. We know that because of this tariff implemented in the last month, it has been limiting the opportunity to export soybeans, but also limiting the opportunity to export pork to China. Now China, it will be facing a significant shortage of pork because of the African swine fever.
We'd like to see that U.S. farmers also have the benefit of the exportation to this market. Hopefully, these discussions will be ending in good way for both parties and will have the continued opportunity of generating a growth in China, but also the opportunity to generate a growth in other markets outside China that will be exporting their products to that country. Okay, thank you very much for your questions, and if there are no more questions, I will pass it back to Mike. Thank you.
Thank you, Juan Ramón. I've had the honor and privilege of standing before you now since 2013 when the company became public. Each year, I have the pleasure of listening to Juan Ramón talk about a terrific year that we just finished. Again, we had a great year. This is a great company, and it's great to be a part of it. Again, I'd like to thank my colleagues on the board for your insights and experience that you bring to all things here. Again, I'd like to thank the management team on behalf of the shareholders for the great work and the execution around the business plan, serving our customers in a way that grows the business and we all end up winning. Thank you very much. We appreciate it. With that, we will conclude the meeting. Thank you for being here.