Morning, everyone.
Welcome to the 2019 Zoetis Annual Meeting here in Short Hills. I'm Bill Price, Vice President and Chief Communications Officer for Zoetis. And I'd like to cover a few housekeeping items before we begin. At this time, please take your seats, turn off your cell phones, and set them to vibrate. I would ask you to look to the back of the room.
At this time, I 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.cominvestorrelations 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 presentation during today's Annual Shareholder Meeting contains 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 McAllister. Mike?
Thank you very much. Good morning, everyone. Thank you for being here. The meeting will now come to order. I'm Michael McAllister, Chairman of the Board of Zoetis and 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 Ramona Leix, Chief Executive Officer of Zoetis. I'd like to welcome everyone to the 2019 Annual Shareholders Meeting of Zoetis and thank for your interest in our company. Prior to the meeting, we provided each shareholder with a copy of our annual report on Form 10 ks 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, and 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 to the Corporate Secretary.
Thank you, Mr. Chairman. As noted in our notice and proxy statements, the record date for voting at this meeting was the close of business on March 21, 2018. 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, the Zoetis 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. So the shareholder list shows that holders of 479,149,300 and 57 shares of common Zoetis stock are entitled to vote at the meeting. And based on a preliminary report, the Inspector of Elections has informed me that there are represented in person or by proxy 423,694,004,400 and 38 shares of Zoetis common stock or approximately 88.43 percent of all shares entitled to vote at this meeting. And 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 and then Juan Ramon will provide a brief report on the state of the business and we'll 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 14, 2019.
I'll now ask the Secretary to report on the business for today's meeting.
Thanks, Mike. There are 3 items of business being conducted at today's meeting, each of which has been detailed in the proxy statement. So 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 Ramona Life, Mr.
Paul Bizarro, Mr. Frank Emilio and Mr. Mike McAllister. Each of these directors has been nominated by the Board of Directors to stand for election for a 3 year term that will expire at Zoetis' Annual Meeting of Shareholders 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 accounting public accounting firm for the year ending December 31, 2019. So I'd like to ask the representatives of KT and G who are here with us today, Mike Shannon, Corey Temple, Sean Mara Caicos and Beth Sapozzo 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? We follow actually the recommendation that you mentioned. The
My name is Mamshen. I'm the
lead only partner and I'm in the 3rd year of
my 5 year rotation, which I was required to rotate about that for 5 years. Any other questions on this topic? Okay. Reporting of speculative 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 the ballot will be provided.
We'll now open the polls. Madam Secretary?
Pursuant to the procedures 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. Wanda Loner Lakes, our Chief Executive Officer Paul Dezzaro, Executive Chairman of Amneal Pharmaceuticals Frank D'Amelios, Chief Financial Officer and Executive Vice President, Global Supply and Business Operations of Pfizer Sanjay Kosla, Former Executive Vice President and President of Developing Markets of Kraft Foods, now Mondelez International Gregory Nordon, you just saw Greg, former Senior Vice President and Chief Financial Officer of Wyatt Louise Pannert, former Executive Vice President and General Counsel of American Express Company Doctor. Willie Reed, Dean of the College of Veterinary Medicine at Purdue University Doctor. Linda Rhodes, former Chief Executive Officer and Chief Scientific Officer at Aratana Therapeutics and William Steer, 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. Mr. 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. The Inspector of Election has presented his preliminary report to me, a copy of which will be filed with the minutes of this meeting. So the results of the voting are as follows: 1st, the following nominees have been elected as Class III directors for a 3 year term expiring at the 2022 Annual Meeting of Shareholders: Mr. Juan Ramona Life, Mr.
Paul Tesoro, Mr. Frank D'Amelio and Mr. Michael McAllister. 2nd, the advisory vote with respect to the compensation of the company's named executive officers has been approved. And finally, the resolution ratifying and approving the selection of KPMG, LC 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. 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 Ramon 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 6th consecutive year of operational revenue growth and increased profitability. We made further investments in our business through our internal R and 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.
And all of this has enabled us to create value for you, our shareholders. In 2018, we achieved 10% operational revenue growth. And 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 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 several key carriers.
Our companion animal products performed very well. Based on growth, our key dermatology brands like Apoquel and Cytopoint, parasiticide like Simparica and the addition of Abaxis diagnostic portfolio. In livestock, our swine, poultry and fish portfolio each delivered strong growth with more modest growth gains in products for cattle. In 2018, compared to prior years, we allocated more resources to R and 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 $430,000,000 in our research and development programs to bring new products to the market and ensure ongoing life cycle innovations. We present our canine dermatology portfolio with new indications for Cytopoint, which now covers allergic as well as atopic dermatitis in the U. S. And we also expanded the product in international markets. Simparica, our oral parasiticide for dogs, continued its successful rollout with additional approval in countries outside the U.
S. And Revolution Plus, our topical combination parasiticides for cats, gained additional approvals in the U. S, Japan and Canada following the introduction in Europe and other international markets, where it's known as Stronghold Plus. We also strengthened our vaccine portfolio with market approvals of Forstera Gold PCV NH and Subaxin Silco, which give livestock farmers more options and flexibility in protecting pigs from diseases. And we received approval in the U.
S. For Core EQ Innovator, the first and only vaccine for horses that protect them against 5 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 $4,000,000,000 veterinary diagnostic market, which had a compound annual growth rate of approximately 10% in the last 3 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, and we are making good progress on the integration of this company to date. We also acquired a digital technology company called Smart Bone. 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. And we are advancing our leadership in monoclonal antibodies with the partnership with Regeneron. But already, our monoclonal antibody programs have a great potential for 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. And 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.
And 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 Tala Island to help increase supply of our market leading deep sealants for the dairy business, and we expect to complete the construction of our machine manufacturing facility in Suzhou, China by the end of 2019. Our strong financial performance continued to generate cash that we use to reinvest in the business and return to you our shareholders. We have been allocating excess cash, dividends and share repurchase programs.
We increased our dividends from $98,000,000 in 2013 to $243,000,000 in 2018. And last December, we increased our dividends by 30%. In 2018, we purchased shares for $700,000,000 and authorized a $2,000,000,000 multiyear share repurchase program as part of our strategic 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 6 strategic imperatives.
1st, delivering more innovation across core areas of vaccines and medicines. And in the complementary spaces where we have been adding genetics, diagnostics, bio devices, digital and data analytics. 2nd, 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 upgrades like the recent African swine fever in China and other markets. 3rd, maximizing opportunities in faster growing markets and making the most of our investments in places like China and Brazil.
4th, developing more data and digital technologies that can improve current models of our production and pet care. 5th, supporting our customers' direct engagement with pet owners and consumers and promoting the important role of veterinarians in animal health decisions and 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 contribution 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 Essoitis an award winning workplace for the past several years with recognition from Forbes, Working Mother Magazine and the National Association of Female Executive in the U. S. As well as other company awards in several markets outside the U. S.
I know I speak for everyone at Sverdix 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 would be glad to take questions about the business before we close the
meeting. I really understand shareholders. Actually, I have 4 questions. First, because I think I can't believe how
much, I'll just do it, 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. And I was wondering, are more of your sales for domestic animal pets, cats and gloves as opposed to your livestock? Where are the majority of your sales for domestic store, your livestock?
Okay. So I think it's a good comment and good question. So the our companion animal business has been growing faster than livestock. When we separated from Fighter back in 2013, Distribution of revenues was 65% livestock, 35% companion animal. Last year, we rebalanced the portfolio and now it's 55 livestock, 45% companion animal.
We expect also that companion animal also will continue growing faster in 2019. But as I said, it's important that we continue investing in all different species because this has been helping us to manage cycles. In some cases, these cycles are affecting companion animals, in some cases, livestock. And 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, is any research being done to use medication as opposed to surgery for like hidden stones and animals?
And this is something that I think it's another good question. Definitely, we are trying to identify all adult needs in animals. One of the according to the market, one of the most important agend need today are in the preline sector, especially related to pain, but there are other indications that will be equally important. And we have our 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.
And my first question is, if you remember the word of diversifying, it would really be a health I know there isn't health insurance there is health insurance for animals, but you don't realize how much you need it until you have it. My daughter grabbed it. Well, to make a long story short, it was second. Anyway, so it did have a kidney stone stuck in a splatter. Well, they were moving to Florida at the time, so the customer by the time she left New Jersey, it cost $3,000 for the rabbit.
Then 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, for whatever she spent in Florida. So now you're talking about $6,000 just for I should say, just for a record. They're all in their yard because they're But unfortunately, it died after 6 months. So it's $1,000 to keep it alive a month from diagnosis to us.
So anyway, I think it's an important thing to have, which you don't realize as it's something you needed.
And this is true. And 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 willing to spend in our animals. As a pet owners, this can be painful. As a shareholders of fresh varieties, it's a good opportunity.
Bob Halsy, 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 Diagnostics, there are not too many players. Diagnostics was second. And 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 of Rechenn's Labs. But we are convinced that now with the portfolio diagnostic 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. But what we see with the acquisition of Abaxis is not just growing our diagnostic portfolio, but helping us to be every day much more relevant in the clinics for companion animal 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.
And 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 no any company, which is really providing this type of tools to the market.
Good morning. My name is Alex Lopez and I represent a carpenter union pension fund that holds shares in Zoetis. The carpenter pension funds collectively have assets of $60,000,000,000 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 interest held by mutual funds, particularly passive index funds. BlackRock and Vanguard each owned 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? And 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. And I we have seen that many of these large shareholders, they are very vocal, depending and protecting the long term vision of companies. And 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.
And by definition, a company which is investing EUR 430,000,000 in R and D that normally the cycles can go up to 7, 10 years. We are focused on creating value not for the next quarter or the next year, but for many years to come. So we don't see any conflict from large investors and what we are trying to apply to our business. So we are committed to our customers, we are committed to our shareholders and we are committed for the long term.
My name is Angelo Credel,
a 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.
As you know, while we have the situation was going on with the trade
and in particular with China. The business that we're doing in China, how do we protect ourselves with 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?
And this is something that is not different to any other company doing business in China. One objective of the Pharma's jurisdiction is to improve the protection of intellectual property in China and making sure that the Chinese government respect the patent that we have, which are protecting our products. We think that it will be good to improve in that direction, but we also see that China now more and more is becoming a country of innovation. And if they improve 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. And now China, it's it was expected before the African swine fever to become the 3rd largest market for Zoetis. Number 1, the U. S. Number 2, Brazil and number 3rd, it was China.
China, we are investing. As I mentioned, we are completing the construction of a new vaccine plan that will help us to have a further penetration in the market. And we definitely would like to see that the trade discussions with U. S. And China ends in good terms.
I think will be important for our customers, probably not less important for directly for our business, but important for customers in the U. S. That depend significantly on exportations to generate their business. And we know that because of this tariff implemented in the last month, we have been limiting the opportunity to export soybean, 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.
And we 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 we'll have the continued opportunity of generating growth in China, but also the opportunity to generate 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 is no more questions, I will pass it back to Mike. Thank you.
Thank you, Juan Ramon. I've had the honor and privilege of standing before you now since 2013 when the company became public. And each year, I have the pleasure of listening to Juan Ramon talk about a terrific year that we just finished. And again, we had a great year. This is a great company and it's great to be a part of it.
So again, I'd like to thank my colleagues on the board for your insights and experience that you bring to all things here. And 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. So thank you very much. We appreciate it. With that, we will conclude the meeting.
Thank you for being here.