Zoetis Inc. (ZTS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Zoetis, Inc.'s 2021 Annual Shareholders Meeting. I would like to introduce you to Mr. Mike McCallister, Chairman of the Board of Zoetis Incorporated. Mr. McCallister, you may begin.

Good morning, and welcome to the 2021 Annual Shareholders Meeting. I'm Mike McCallister, Chairman of the Board, and I'd like to thank you for your interest in our company and welcome you to our virtual shareholders' meeting. At this time, I'd like to introduce the other Board members who are participating in today's meetings. Kristin Peck, who serves as our Chief Executive Officer; Paul Bisaro; Frank D’Amelio; Sanjay Khosla; Tonie Leatherberry; Gregory Norden; Louise Parent; Dr. Willie Reed; Dr. Linda Rhodes and Robert Scully. In addition, Heidi Chen, Executive Vice President, General Counsel and Company Secretary, is also participating in today's meeting. Also present online today are representatives of KPMG, our independent auditors and a representative from Carl T. Hagberg & Associates, who is serving as inspector of election. All will be available to answer appropriate questions during the question-and-answer session of the meeting. I'd like to now call the 2021 Annual Shareholder Meeting to order. I'll be serving as the chair of the meeting, and Heidi Chen will serve as secretary of the meeting. Prior to the meeting, we provided each shareholder with copies of our annual report and our proxy statement, either by mail or online. Copies of these documents and the rules of conduct and agenda for the meeting are available on the meeting website. As a reminder, shareholders attending the virtual meeting will be able to vote their shares online while the polls are open by logging into the meeting website as a shareholder and clicking the voting button at the bottom of their screen. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is required. Please note that if we experience technical difficulties during the meeting and are required to adjourn, we will promptly notify shareholders of the decision and relevant details via the meeting website. I'll now turn the meeting over to Heidi to begin the formal matters to be discussed at this meeting. Heidi?

Thank you, Mr. Chairman. We are conducting this meeting in accordance with our bylaws and the meeting rules of conduct and procedures. The meeting rules and agenda are available on the meeting website. A list of shareholders on the record date is available by clicking the link at the bottom of the meeting website, and has been made available for review at the company's offices in Parsippany, New Jersey. We will begin by attending to the formal business of the meeting. After the formal meeting is adjourned, our CEO, Kristin Peck, will provide brief remarks. After that, we will hold a question-and-answer session. Shareholders logged into the meeting website are able to submit questions through the end of the Q&A session. [Operator Instructions] This meeting is held pursuant to the notice of annual meeting sent to all shareholders of record as of the close of business on March 26, 2021. We have received an affidavit of mailing from Broadridge Financial Solutions, our proxy mailing service provider, indicating that notice of the meeting has been duly given. A copy of our proxy statement is available on our company's Investor Relations website and the SEC's website at www.sec.gov. I hereby declare that there is a quorum present. Accordingly, the meeting is duly constituted, and we may now proceed with the business of the meeting. The polls are now open for voting. We will close the polls after the proposals have been presented. There are 4 items of business to be voted on at this meeting. The first item is the election to the Board of Directors of the Class II Director nominees, whose terms expire at this annual meeting, each to hold office for a 3-year term that will expire in the 2024 annual meeting of shareholders or until their successors are duly elected and qualified. The director nominees are: Sanjay Khosla, Antoinette Leatherberry, Willie Reed and Linda Rhodes. As disclosed in the proxy statement, our Board recommends a vote for the election of each of Mr. Khosla, Ms. Leatherberry, Dr. Reed and Dr. Rhodes. The second item of business is an advisory vote to approve the executive compensation of our named executive officers. As disclosed in the proxy statement, our Board recommends a vote for approval of the company's executive compensation. The third item of business is the ratification of the appointment of KPMG LLP as our independent registered public accounting firm for 2021. Our Board recommends that you vote for this proposal. And finally, the fourth item of business is a shareholder proposal regarding simple majority vote. Mr. [ Glenn Beatty ], a representative of Mr. John Chevedden, will present this proposal. Mr. Chevedden's proposal and supporting argument is contained in the proxy statement and is deemed submitted. We understand Mr. [ Beatty ] wishes to make a brief statement in support of the proposal. Operator, would you please open Mr. [ Beatty's ] line? Mr. [ Beatty ], please go ahead.

Can you hear me?

Yes. We can hear you, Mr. [ Beatty ].

Proposal 4. Proposal for simple majority vote. Shareholders request that our Board take the steps necessary so that each voting requirement in our charter and bylaws that is explicit or implicit due to default to state law. It calls for a greater than simple majority vote to be replaced by a requirement for a majority of the votes cast for and against such proposals or a simple majority. If necessary, this means the closest standard to a majority of the votes cast for and against such proposals. Shareholders are willing to pay a premium for shares of companies that have excellent corporate governance. Supermajority voting requirements have been found to be one of the 6 management entrenchment mechanisms that are negatively related to company performance according to What Matters in Corporate Governance? by Lucian Bebchuk of the Harvard's Law School. Supermajority requirements are used to block initiatives supported by most shareholders, but opposed by a status quo management. In the past 2 weeks, this proposal has won 84% support at HollyFrontier Corporation, 89% support at Bunge Limited and 99% support at ConocoPhillips. This proposal topic also received overwhelming 99% support at the 2019 Fortive Annual Meeting. The current super majority vote requirement does not make sense. Our current 80% super majority rule means that 99% of the shares that typically vote at our annual meeting would have to approve certain modernization steps for our company to make management more accountable to shareholders. For instance, shareholders may want to change the current rule for 3-year terms for directors after seeing that Mr. Frank D’Amelio was rejected by [ our ] 60 million Zoetis votes in 2019 and is nonetheless, not subject to a shareholder vote for 3 years. In anticipation of impressive shareholder support for this proposal topic, an enlightened Zoetis Governance Committee, chaired by Mr. Michael McCallister, could have expedited adoption of this proposal topic by giving shareholders an opportunity to vote on a binding management version of this proposal at the 2021 Annual Meeting. This adoption could have taken place now instead of later. Adopting simple majority vote can be one step to make the corporate governance of Zoetis more competitive and unlock shareholder value. Management promotes the fallacy that shareholders should be apathetic about improving management accountability to shareholders with this proposal, simply because we have an average list of standard governance practices that a lot of other companies have. Please vote yes, simple majority vote Proposal 4. Thank you.

Thank you, Mr. [ Beatty ]. For the reasons stated in the proxy statement, our Board has considered this proposal and recommends a vote against the proposal. Mr. Chairman?

This concludes the presentation of the items of business that you've been asked to vote on at today's meeting. The polls are now closed. Madam secretary?

All votes are subject to final count certified by the inspector of election. We will report the final vote results on a Form 8-K filed with the SEC within 4 business days from today's meeting. Mr. Chairman?

Thanks, Heidi. There being no further business to come before the meeting, the business portion of the 2021 Annual Meeting of Shareholders of Zoetis is now adjourned. Zoetis CEO Kristin Peck, will now provide brief remarks, followed by a question-and-answer session. As a reminder, Kristin's remarks and answers provided during the Q&A session may contain forward-looking statements. Forward-looking statements are based on our current expectations, and actual results may differ materially due to risks and uncertainties described in Zoetis's SEC filings, including its 10-K and 10-Qs. With that, let me turn the meeting over to Kristin.

Thank you, Mike, and good morning, everyone. It's a pleasure joining you all today for our Annual Meeting of Shareholders. When I spoke last year, we were still in the beginning of COVID-19, and who would have predicted the wild ride we were beginning. But we've been fortunate in the U.S. recently as vaccination rates are going up and infection rates are trending down. But that is not the situation everywhere. In many countries, such as India and Brazil, improving access to vaccines and controlling infection rates are critical [ holders ] for a more comprehensive global recovery. But I remain optimistic, however, about the steady progress the world is making to beat this pandemic, and I'm very proud of what we've been doing at Zoetis in our own small way to support this effort. We've been able to keep our colleagues safe, encourage and assist them with vaccinations where possible and continue serving our customers in the care of their animals. Thanks to the resilience of our colleagues and the essential nature of our animal health products, we achieved operational revenue growth of 9% and grew adjusted net income 10% operationally in 2020. We also generated a strong cash flow that enabled us to protect jobs, [ ensures ] colleague safety, maintain reliable supply for our customers, continuing investing in our long-term growth plans and return excess capital to our shareholders. Let me share a few highlights. Over the last year, we launched Simparica Trio, our new triple combination oral parasiticide in the U.S., Canada and EU. The team pivoted to virtual launch engagements with customers, and I'm happy to say Trio is on a path to becoming our latest blockbuster in animal health. We received regulatory approvals in the EU for Librela and Solensia, our first injectable monoclonal antibodies for alleviation of osteoarthritis pain in dogs and cats. Librela launched in the EU in the first quarter, and we're seeing a great customer response from vets and dog owners, who referenced the increased activity and quality of life for their pets. We're also continuing to drive growth from our market-leading dermatology products like Apoquel and Cytopoint. Our investment in diagnostics is reaping excellent results with 47% operational growth in the most recent quarter, and our global scale and footprint continues to show why our diverse portfolio differentiates us and provides strong growth drivers, especially in markets like China and Brazil. We also continue to make progress on the 5 strategic priorities we established last year, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing culture and championing a healthier, more sustainable future. And in terms of sustainability, in March we published our long-term goals, which align to many of the United Nations Sustainable Development goals, and we will be reporting more details on specific commitments around communities, animals and the planet in our sustainability report this June. You can read more about our progress on all these priorities in our annual report. In closing, I want to thank you for your continued interest and investment in Zoetis. Rest assured, we remain committed to the 4 tenets of our shareholder value proposition: to grow revenue in line with or faster than the market, to grow adjusted net income faster than revenue, to invest in innovation and targeted growth opportunities and to return excess capital to our shareholders. I am pleased to say we're off to a very strong start in 2021 and recently raised guidance for the full year based on continued confidence in our diverse portfolio, our pipeline of innovation and the catalysts we see in pet care, diagnostics and our high-growth international markets. Now I'll hand things back to Mike and look forward to addressing any of your questions. Thanks.

Thank you, Kristin. I'll now open the meeting to any questions.

The first question received from Mr. [ Jason Friedman ]. Mr. Chairman, the Carpenter Funds hold a total of 499,700 shares of the company's stock. We believe that the company's executive compensation plan should be designed primarily to drive the successful execution of the Board's long-term strategic business plan. Today's public company executive compensation plans are largely formulaic, peer-related plans with simplistic annual Say on Pay voting reinforcing plan homogeneity. Would you or the Chair of the Compensation Committee speak to whether Zoetis might be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan. Thank you.

It is true that the strategy lays out the future of the company over a number of years. And if you look at the proxy, it's very detailed, and it's pretty clear in there that the compensation of our executives is very heavily weighted toward long-term performance, and we think that's the right way to do it. We review it, obviously, every year. And we're pretty happy with how it's performed historically. And we are going to continue to do the obvious homework necessary to make sure we're paying our people appropriately, and it's consistent with our long-term plans.

Thank You. The second question received anonymously. Please give examples of product innovations that are about to enter the marketplace.

Kristin, you want that one?

Sure. Thank you. We're quite excited with the productivity of our R&D pipeline. And then I think if you look at our growth since inception, where we've beat the market, a lot of that has been driven by our innovative growth. Particularly as you look at 2021, we're quite excited about the launch of both Librela and Solensia, as I mentioned in my opening remarks, which are monoclonal antibodies for the alleviation of pain in dogs and cats. We look forward to continuing to see approvals there and launches in new markets around the world. We're also excited to continue to see launches around the world of products such as Simparica Trio and additional market approvals in Cytopoint, as well as for some of our vaccines for livestock such as Fostera PCV and PCV M. hyo as well as the innovations you're seeing in poultry and our vector vaccines. And in diagnostics, with the launch of our Imagyst, AI, cloud-based diagnostic [ for fecal ] throughout the world. So we're really excited about these innovations and look forward to more to come. Thank you.

Thank you. Our third question received anonymously. Which is better, share buybacks or dividends?

I'll take that. This is something the Board looks at, obviously, on an ongoing basis. It's always a question of balancing what the best way to deploy capital. And we will continue to decide how best to do that, in the best interest of our shareholders and the company's future, and the required capital for R&D and other things we need to invest in to make this a successful company. So I don't know that there's a straightforward answer to that. Both are good in the right circumstances.

Thank you. And the fourth question, regarding the management proposal, are there any new focuses of CEO pay incentives in the past year?

Well, the CEO goals and objectives obviously get adjusted every single year. So every year, they're going to be different or tweaked in some fashion to meet whatever the needs are of the situation and the upcoming compensation period. So the answer is yes, it's an ongoing process that happens every year, and there's constant changes being made.

Thank you. That was the final question.

Okay. As there are no further questions, we'll conclude the 2021 Zoetis Annual Shareholder Meeting. Before I go, though, it's sort of a bittersweet morning because we have 2 of our Board members that are not going to be with us going forward. Mr. Bill Steere, who joined the Zoetis Board back at the time of the spinoff of Pfizer, is stepping down this year. I want to thank Bill for his experience, guidance leadership he provided to us here over many years. He brought in a lot of experience as CEO from Pfizer to us. It was very helpful to us in the standing up of the company and the success we've enjoyed. So thanks, Bill. Secondly, Juan Ramón Alaix is stepping down from the Board as well. Juan Ramón has been our outstanding CEO for a number of years. He stepped down at the end of 2020 -- '19, 2019. And he was obviously very instrumental in the standing up of this company and the building of the culture. He led the strategic direction of this company. We are now the market leader in our space. A lot of that has to do with his leadership and guidance. So I'd like to say thanks on behalf of the shareholders, the management team, the Board to Juan Ramón for his great leadership over the last almost 10 years. So with that, we may now end the meeting. Thank you for participation. Thank you for your interest in Zoetis, and you can now disconnect. Thank you. Have a good day.

Thank you for attending. You may now disconnect.