Zoetis Inc. (NYSE:ZTS) Q4 2023 Earnings Call Transcript

Zoetis Inc. (NYSE:ZTS) Q4 2023 Earnings Call Transcript February 14, 2024

Zoetis Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Fourth Quarter and Full-year 2023 Financial Results Conference Call and Webcast for Zoetis. Hosting the call today is Steve Frank, 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 made available approximately two hours after the conclusion of the call via dial-in or on our Investor Relations section of zoetis.com. [Operator Instructions]. It is now my pleasure to turn the floor over to Steve Frank. Steve, you may begin.

Steve Frank: Thank you, operator. Good morning, everyone, and welcome to the Zoetis fourth quarter and full-year 2023 earnings call. I am joined today by Kristin Peck, our Chief Executive Officer; and Wetteny Joseph, 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 that actual results could differ materially from those projections. For a list and description of certain factors that could cause results to differ, I refer you to the forward-looking statements in today’s press release and our SEC filings, including, but not limited to, our 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 the company’s 8-K filing dated today, Tuesday, February 13, 2024. We also cite operational results, which exclude the impact of foreign exchange. With that, I will turn the call over to Kristin.

Kristin Peck: Thank you, Steve and welcome, everyone, to our fourth quarter and full-year 2023 earnings call. Today, we reported strong full-year results driven by the success of our diverse portfolio across markets and species, game-changing innovation, and the outstanding commitment of our purpose-driven colleagues. We delivered 7% operational revenue growth, growing faster than the industry, propelled by steady demand for innovative products that enable our customers and the animals they care for to thrive. With the ongoing momentum of our monoclonal antibodies for osteoarthritis or OA pain, we saw segment growth of 6% of the US and 9% operational growth internationally. Our companion animal portfolio remains a key growth driver, up 8% operationally, and we saw a return to growth for our livestock portfolio, up 6% operationally.

While we continue to operate in an environment of global uncertainty, our diversity across markets, species, and therapeutic areas, has sustained our performance, further demonstrating that animal health is a durable, essential, and growing industry. Our track record of innovation, from pioneering breakthroughs to product lifecycle enhancements, has solidified our position as the industry leader, consistently growing above the market and enables us to create market-leading franchises. We don’t just follow trends, we make markets. The launch of Librela and Solensia, the first two injectable monoclonal antibodies for the alleviation of osteoarthritis, is fundamentally improving the quality of life for dogs and cats, and strengthening the human-animal bond.

That’s why today Librela remains the number one selling OA pain product in Europe. At Investor Day last May, and again at the J.P. Morgan Healthcare Conference, I shared that our own pain franchise could have peak sales exceeding $1 billion, and we are excited about Librela’s performance since its US launch in October, which reaffirms that view. Due to high clinic penetration, we’ve activated our direct-to-consumer or DTC efforts faster than any other product in our history, which we expect to provide a tailwind for commercial growth. Similarly, Solensia has also been well received, with strong clinic penetration around the world, with increased opportunity as we generate more awareness of OA pain in cats. Within our dermatology franchise, we’ve established ourselves as the trusted partner to veterinarians, and after nearly a decade of impressive growth, we still believe we have room to expand this market.

Increasing pet owner’s awareness that itch is a medical condition that requires treatment, improved compliance, and the opportunity to address even more unmet needs, underpins our optimism. We remain confident that we can sustain growth thanks to our differentiated products like Cytopoint and Apoquel chewable, the first and only chewable treatment for the control of allergic itch and inflammation in dogs. Our parasiticides portfolio, and particularly Simparica Trio, remains a key growth driver, even in the face of increasing competition. This continued success highlights our strategic execution, label strength, and the efficacy of our products. The performance across our key product franchises not only reinforces our market-leading position, but also better innovation consistently meet the evolving demands in veterinary medicine.

As we begin in 2024, we will stay disciplined and adaptable to the evolving macroeconomic and geopolitical backdrop around the world, and focus on executing our plans and continuing to grow faster than the market. Two durable global trends give us confidence in that future growth, the powerful human-animal bond, and the world’s growing need for a sustainable supply of animal protein. Our commitment to operational excellence ensures we are ready to scale to meet those demands and navigate unforeseen challenges, while delivering shareholder value. Looking ahead, we are committed to our track record of value creation and above-market performance. Our dedication to innovation remains the cornerstone of our market-leading position. We’ve consistently demonstrated agility, outpacing the market to bring groundbreaking solutions that meet and exceed customer expectations.

We will continue to leverage that advantage and we’re guiding to a range of 7% to 9% operational revenue growth in 2024, and adjusted net income growth in the range of 9% to 11% operationally, which reflects our ongoing investments in R&D, supply chains, and commercial excellence, to cultivate new markets, drive growth, and create value. As you’ve heard me say time and time again, we are confident in our strategy, portfolio, pipeline, and capabilities to deliver value to shareholders and customers, while performing above the market. Our focus positions us well to navigate potential challenges and capitalize on emerging opportunities. In closing, we’ll continue our relentless pursuit to exceed customer expectations and invest in advancing the capabilities that differentiate Zoetis.

As we look to 2024, I could not be more excited about our future. Our key growth drivers will continue to showcase our commitment to nurturing the world and humankind by advancing care for animals, and our ongoing innovations will expand the market, reaffirm our best-in-class product portfolio, and defend our position amid competition. I want to reiterate the four tenets of our value proposition discussed on Investor Day. We will grow revenue faster than the market. We will invest in innovation and growth capabilities. We commit to growing adjusted net income faster than revenue, and we’ll return excess capital to shareholders. While there is need and demand to improve the quality of life for animals, Zoetis will continue leading the way and setting the standard for performance and growth.

This is core to our vision, to be the most trusted and valued animal health company, shaping the future of animal care through innovation, customer obsession, and purpose-driven colleagues. Thank you. Now, let me hand it over to Wetteny. Wetteny?

Wetteny Joseph: Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a strong year in 2023, with revenue of $8.5 billion and adjusted net income of $2.5 billion. Our full-year revenue was near the top end of our guidance range, while our adjusted net income was slightly below our guidance range, primarily due to the impact of foreign exchange, as well as an impairment charge related to a prior acquisition. Our revenue growth was broad, with strong growth across both our US and international segments, both our companion animal and livestock portfolios, and due to both price and volume. Full-year revenue grew 6% on a reported basis and 7% operationally, with adjusted net income anchoring 7% on both a reported and operational basis.

Of the 7% operational revenue growth, 5% is from price and 2% is from volume. Volume growth was driven primarily by new products, including our monoclonal antibodies for OA pain, Librela, and Solensia, as well as our key dermatology products and Simparica Trio. On a segment basis, our US business posted $4.6 billion in revenue, growing 6% on the year, while our international segment reported revenue of $3.9 billion, with operational growth of 9% on the full year. Additionally, while China represents less than 5% of our global revenues, the ongoing economic weakness there continues to impact our business, and represented a half a percentage point drag on our total company operational revenue growth for the year, entirely in volume. Our full-year growth was driven by continued demand for our innovative companion animal portfolio, which grew 8% operationally.

Our livestock portfolio also had a strong year, with operational growth of 6%. Performance in companion animal was led by OA pain mAbs, which posted $321 million in global revenue for the year. Growth came from first wave European markets, as well as from the impact of new launch markets in 2023, including the US. We continue to see penetration of our pain mAbs grow within vet clinics, and a high level of satisfaction amongst both vets and pet owners. Our key dermatology products generated $1.4 billion in sales globally, posting strong growth of 8% for the year on an operational basis. Simparica Trio contributed global revenue of $813 million in 2023, representing growth of 9% operationally, despite distributor inventory headwinds in Q1 and aggressive competitive promotions for much of the year.

Our companion animal diagnostics portfolio recorded $356 million in revenue and grew 7% operational, with growth contributions from both the US and international. Our livestock portfolio had a strong year, with 6% operational revenue growth, driven by both price and volume. Moving on to our Q4 financial results, which was another strong quarter. We closed Q4 with revenue of $2.2 billion, representing an increase of 8% on both a reported and operational basis, posting our third consecutive quarter of at least 8% operational revenue growth despite a tough comparative, particularly in US companion animal. Adjusted net income of $569 million is an increase of 6% on both a reported and an operational basis. Of the 8% operational revenue growth, 6% is from price and 2% is on volume.

Volume growth consisted of 4% growth from new products and a 2% decline in our inline products. Volume from our key dermatology products was flat in the quarter. On a segment basis, our US business posted $1.2 billion in revenue, growing 9% on the quarter, while our international segment reported revenue of $982 million, with operational growth of 8% on the quarter. Our companion animal portfolio was the main driver of revenue growth in the quarter, growing 10% operationally. Livestock also contributed, with operational growth of 6%. We saw double-digit companion animal growth in both our US and our international segments, driven by our innovative products. Our OA pain mAbs were the primary driver of growth, posting $124 million in combined revenue in the quarter.

Global growth came primarily from the impact of new launch markets, bolstered by the Q4 full launch of Librela in the US. Simparica Trio generated $208 million globally in the quarter, representing growth of 21% operationally. Price was the primary driver of growth in the quarter, followed by volume growth, driven by expanded DTC advertising support globally, as well as from increased field force focus. Our key dermatology products generated $375 million in sales globally, posting growth of 7% on an operational basis. Our companion animal diagnostics portfolio recorded revenue of $87 million and grew 8% operationally, with growth contributions from both the US and international. Our livestock products ended the year on a strong note, with growth of 6% operationally, growing in both our US and international segments.

Growth was driven equally by price, which grew despite headwinds from drags in price decreases, as well as by volume, with growth in Synovex from our expanded label claims. Now, moving on to revenue growth by segment for the quarter. US revenue was $1.2 billion in the quarter, growing 9%, with companion animal sales growing 10%, and livestock sales growing 4%. Companion animal again posted double-digit growth in the quarter, bolstered by the full launch of Librela at the start of the quarter, all while facing a tough comparative quarter with promotional activity and heavier than normal pre-price buying at the end of last year. In the US, vet clinic visits were flat on the quarter and flat for the year, while we continue to see solid clinical revenue and revenue per visit, growth of 6% for the quarter and 7.5% for the year.

Our US companion animal revenue growth continues to outpace veterinary clinic revenue growth due in part to our innovative therapeutics, as well as our strong presence in the retail channel. Moving on to product performance, growth in the US was driven by our pain mAbs, Simparica Trio, and our key dermatology portfolio. Our combined pain mAbs posted $58 million in US sales in Q4. We moved to a full launch of Librela in the US early in the fourth quarter, and we have been pleased with the results our field force has been able to drive thus far. Librela posted $44 million in US sales in the quarter, which is at the higher end of our initial expectations. It’s important to note that while we are not leveraging distribution for our pain mAbs, there’s a significant clinic stocking impact in the first few months after launch.

We have seen higher than expected penetration and reorder rates through the end of the year, as well as rapid patient share growth in the canine pain category. Solensia had sales of $14 million in Q4 in the US. We have seen a marked increase in feline vet visits and feline revenue growth in the clinic. In the US, feline OA patients are up 23% for 2023. Simparica Trio posted US sales of $185 million in the quarter, growing 17%. Growth was driven primarily by price as we were in promotions in Q4 of 2022 following our Q3 2022 supply challenges, and in advance of a then expected competitor launch in early 2023. In our second quarter, with competition in the triple combination space, we continue to see patient share growth in Simparica Trio. We remain confident in our ability to compete and grow in this space through the strength of our label, retail channel presence, strong corporate and specialty relationships, and the significant advantage of being first to market.

(Indiscernible) dermatology product sales in the US were $252 million in the quarter, growing 6%. Cytopoint sales continue to drive growth through both price and volume, with vet and pet owners referring its injectable method of administration. (Operational) franchise growth is driven by better net price realization on lower volume due to promotional activity at the end of last year. Our US companion animal diagnostics portfolio posted growth of 9% in the quarter. US livestock grew 4% in the quarter, primarily driven by growth in poultry as a result of favorable rotations back to certain medicated feed additives and the extended use of Zoamix, as well as share gain due to competitor supply constraints. Sales of both swine and cattle products increased in the quarter, primarily as a result of increased supply of vaccines that were limited in the same quarter of the prior year.

Moving on to our international segment where revenue in the quarter grew 9% on a reported basis and 8%, excluding the impact of foreign exchange. International companion animal grew 10% operationally, and livestock grew 7% operationally. China represented a 3% drag on our international segment operational revenue growth in the quarter. Higher sales in companion animal products was led by our pain mAbs, our key dermatology products, and our small animal parasiticides portfolio. Growth in our OA pain products was equally driven by sales force focus and DTC awareness campaigns in early launching European markets, as well as continued uptake in markets launched earlier this year. Librela sales were $53 million internationally or 93% operational growth in the quarter.

Solensia sales were $13 million internationally in the quarter, growing 77% operationally. Our international key dermatology portfolio contributed $123 million in revenue, posting growth of 10% in the quarter on an operational basis. We continue to see benefit to Apoquel from our DTC awareness campaigns across several international markets and conversion to Apoquel chewable has been positive. Growth in Cytopoint continues to benefit from higher rates of conversion from Apoquel and overall market growth. Our international small animal parasiticides portfolio grew 4% operationally, driven by our Simparica franchise, with Simparica posting $48 million in revenue and growing 32% on an operational basis in the quarter, driven primarily by price, a strong parasiticide season, and demand generation in emerging markets.

Simparica Trio contributed $23 million internationally, growing 72% operationally, driven by high peak season sales in Australia and continued uptake in Europe, driven by key account penetration and field force effectiveness. This growth was partially offset by a 33% operational decline in our Revolution franchise, which generates a high proportion of sales in China where we had a tough comparative quarter due to the return of supply in Q4 of 2022, as well as the ongoing impact of the current economic conditions. Continuing on to international livestock, which was 7% operationally, driven primarily by price increases in all species, especially in high inflationary markets. Our poultry portfolio also benefited from favorable MFA rotations in certain markets.

China had an unfavorable impact on our international livestock sales in the quarter, particularly in our swine portfolio. Now, moving on to the rest of the P&L, for the quarter adjusted gross margins of 67.1% decreased 100 basis points on a reported basis compared to the prior year. On an operational basis, adjusted gross margins decreased by 20 basis points, resulting primarily from higher manufacturing costs, which were partially offset by price increases and lower freight costs. Adjusted operating expenses increased 11% operationally, driven primarily by higher SG&A expenses, which grew 10% operationally, primarily due to higher competition-related expenses, as well as a charitable contribution related to the funding of the Zoetis Foundation.

R&D expenses grew 17% on an operational basis, driven by higher compensation-related expenses, as well as portfolio progression of key pipeline projects. Finally, other income and deductions were higher in the quarter due to an impairment charge related to an acquisition. The adjusted effective tax rate for the quarter was 18.8%, a decrease of 200 basis points, primarily due to higher net discrete tax benefits in the quarter, a higher benefit in the US related to foreign derived intangible income, and a more favorable jurisdictional mix of earnings. Adjusted net income grew 6% operationally, and adjusted diluted EPS grew 7% operationally for the quarter. Capital expenditures in the fourth quarter were $198 million. For the full year, we had capital expenditures of $732 million.

Lastly, we continue to return excess capital to shareholders. For the year, we have returned approximately $1.8 billion to shareholders through a combination of share purchases and dividends. In December, we announced a 15% annual dividend increase, continuing our commitment to grow our dividend at or faster than the growth in adjusted net income. Now, moving on to our guidance for the full year of 2024. Please note that guidance reflects foreign exchange rates as of late January. We are expecting foreign exchange to have an unfavorable impact on our growth versus the prior year. At net revenue, we expect foreign exchange to negatively impact our growth by 90 basis points, with the impact being more pronounced early in the year and decreasing later in the year.

At adjusted net income, we expect FX to negatively impact our growth by 150 basis points, with significant unfavorable impact in the first half of the year, transitioning to slight favorability in the second half of the year. As a reminder, we do not actively forecast FX, so these estimates assume rates remain where they were as of late January. For 2024, we are projecting revenue between $9.075 billion and $9.225 billion, representing a range of 7% to 9% operational growth, with growth across both price and volume. We expect companion animal to be the primary growth driver in 2024. With the expected impact of the US launch of Librela, we expect to see robust growth from our OA pain mAbs, both in the US and internationally. Our current clinic penetration levels for Librela in the US are exceeding our expectations, and as Kristin mentioned, we have launched our DTC efforts ahead of schedule to drive increased pet owner awareness.

Even with the expectation of competitive entrance, we anticipate mid to high single-digit growth in both Simparica Trio and our key dermatology portfolio. For livestock, 2023 exceeded our expectations. Our growth in the year benefited from several tailwinds, including improvements in supply in certain markets, as well as competitive out of stocks. While our outlook for the upcoming year is more optimistic than it was as we entered 2023, we do expect our growth rate to normalize and be in line with livestock industry growth. I’d like to briefly touch upon the key assumptions that underpin our expectations for revenue growth. For companion animal, we are not projecting significant change to the current vet clinic trends. We expect US visits to grow flat to 1%, and expect to see growth in therapeutic visits aided by the impact of our OA pain products.

For our companion animal parasiticides, we continue to expect meaningful growth from Simparica Trio. We expect new entrants will help continue to drive the conversion from topicals and collars to triple combination of our parasiticides, a space where we are the market leader. In our key dermatology products, we are prepared for competition and confident in our ability to defend and grow our share through our three differentiated dermatology products, the strength of our customer relationships, and the expertise we have gained from almost 10 years in the space. Lastly, while we are not assuming a change in the current economic situation in China, we do expect a headwind to growth, especially in the first half as the situation worsened over the course of 2023.

Now, moving on to the rest of the P&L. Adjusted cost of sales as a percentage of revenue is expected to be approximately 29.5%. We continue to make investments to ensure we can support expected future growth in our portfolio, especially in monoclonal antibodies. These investments are driving short-term margin impacts from lower site utilization. This is offset by price increases and favorable product mix. Adjusted SG&A expenses for the year are expected to be between $2.17 billion and $2.22 billion, with the increase from 2023 focused on supporting primary drivers of revenue growth. Adjusted R&D expenses for 2024 is expected to be between $665 million and $675 million. Spend is driven by the advancement of key pipeline projects, as well as higher compensation-related expenses.

Adjusted interest expense and other income and deductions is expected to be approximately $210 million. This is significantly higher than the prior year as our growth here is negatively impacted by the non-recurring royalty settlement income we reflected in Q1 of 2023, as well as the impact of lower interest income. Our adjusted effective tax rate for 2024 is expected to be in the range of 20% to 21%. Adjusted in income is expected to be in the range of $2.65 billion to $2.70 billion, representing operational growth of 9% to 11%. Our guidance once again reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue. We expect adjusted diluted EPS to be in the range of $5.74 to $.584, and reported diluted EPS to be in the range of $5.34 to $5.44.

And finally, we are anticipating capital expenditures in 2024 to be in the range of $800 million to $850 million. These levels remain elevated compared to historical spend levels as we continue to make investments to support our future growth. To summarize, 2023 was another strong year. Even with distributor inventory headwinds entering the year and a challenging economic environment, especially in China, we again outperformed the market. We continue to grow share even in spaces where we face new competition, and we remain confident in our ability to expand existing markets and create new ones in the future. As we move into 2024, our guidance highlights our ability to again grow faster than the market, driven by our innovative product portfolio and multiple sources of growth, as well as our ability to grow our bottom line faster than our pipeline, while making meaningful investments for the future and returning significant excess capital to our shareholders.

Now, I’ll hand things over to the operator to open the line for your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] We will take our first question from Erin Wright with Morgan Stanley. Please go ahead.

Erin Wright: Right. Thanks for taking my questions. So, can you talk a little bit about the reorder rates and feedback and expectations around Librela for 2024 in the US and some of those stocking dynamics that we should think about quarter-to-quarter? And then a bigger picture question just on margins and profitability, and there are some moving factors in 2024, such as FX and the ramp up of Librela that weigh on margins, but can you talk a little bit more about the potential margin leverage that you could see across your business as you expand in some of those faster-growing and higher margin categories in 2025 and beyond? And if you could describe a little bit more about that longer term margin leverage. Thanks.

Kristin Peck: Thank you, Erin. I will take the first question on Librela and let Wetteny take that second question. Yes, we were very pleased with how we did with Librela in the first full quarter of launch in Q4. As you saw, we did about $44 million in the quarter, $47 million for the year, including the early experience trial. And really how we achieved that was our penetration was ahead of schedule, as we mentioned in the prepared remarks. Given that penetration, which is in the high 60s, we actually began DTC ahead of what we were expecting. Reorder rates are coming in exactly where we expected, in line with our expectations. So, that makes us really confident as we go into the year. We’re looking at what – your other question was what kind of stocking or inventory build we saw in the clinics.

It’s hard to give you a firm number. It’s somewhere between a quarter and a third, I would say, overall in stocking. But look, this is the number one selling pain product in Europe, and we have no doubt it will be that in the US as well. So, we’re quite pleased and certainly ahead of our plan on penetration. And look, with our direct-to-consumer advertising investments, we’ve already started late last year and into Q1 to drive growth in this product in the US. So, I’ll let Wetteny take the second question.

Wetteny Joseph: Yes, sure. Look, when looking at margins, yes, indeed there are some moving factors when you think about 2024 and then beyond. We do have Librela in 2023, as we said at Investor Day. If you look at our monoclonal antibodies at peak, particularly as we ramp up production in our capacity, which was built to make sure that we’re confident in being able to take advantage of demand, they started out as being dilutive to the overall company average. For example, in 2023. As we go into 2024, Librela becomes accretive to our overall margins, but still below what you would consider our innovative companion animal products. And as we exit 2024 into 2025 and beyond, it becomes more in line with our innovative companion animal products.

So, overall, beyond 2024, I won’t give you specific guidance here in terms of what to expect, but I think if you look at it, we continue to expect companion animal to outpace the growth of livestock. So, that mix will continue to be favorable for us. And as we get into the higher levels of production for monoclonal antibodies, they’re also accretive to overall margins and we’re positioned to be able to leverage our SG&A base as well. So, all of those should translate to margin expansion through the P&L over time. But as we’ve demonstrated, we’re not afraid to make the right investments behind our products, behind our key franchises as we see them, investments in R&D, as you saw in 2023. And as the guide implies, R&D will continue to grow faster than revenue as well.

So, those investments will slightly offset some of those, but we’ll position to continue to expand.

Operator: Thank you. We’ll take our next question from Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin: Great. Thanks for taking the question, guys. First, I want to touch on margins, maybe both for 2023 and 2024. So, it looks like you’re guiding – back of the envelope math, you’re guiding to about 100 bps of margin expansion in 2024, but you also did finish 2023 lower than we would’ve expected. I think 4Q especially came in significantly lower. And you called out some headwinds during the call in terms of FX. You called out some timing, some contribution to the Zoetis Charitable Foundation. Any way you could kind of back that out, give us sort of a cleaner number for what margins should have been in 2023, and then maybe what some of those one-time headwinds would have as an impact to 2024, just to give us a better sense of underlying margins and underlying EPS.

And then my second question is just following up on Librela, I don’t believe you actually quantified a target. So, I want to – just given what you did in 4Q, a major focus point, is something like $200 million to $250 million for Librela for 2024 reasonable? And especially – that’s for US, but then on the O-US side, we’ve heard some concerns maybe coming out of Europe. And it seems like Librela has sort of been a little bit flat over the last couple of quarters in international markets. So, any color on what’s going on internationally. Thanks.

Wetteny Joseph: Yes, sure, Mike. Let take this and then see what Kristin wants to add. So, take a look at margins. Indeed in 2024, we are guiding to about 100 basis points of expansion and margins. Keep in mind, when you look at 2023 and how we ended, Q4 had about 100 basis points of margin impact. And about 80 of that is from FX. So, you’re talking about roughly 20 basis points when you consider manufacturing costs and a little bit of mix. Now, looking at mix, we had clearly really strong and quite frankly a strong year in livestock. And we’re actually here at the national sales meeting for our livestock with our livestock team in Utah. And look, they’ve had a great year, and we expect livestock continue to grow as we go into 2024, but clearly ended stronger at the end.

So, that created a little bit of a mix, and as well as outperforming our expectations exiting the year is also, as I said, a bit diluted. So, when you look at mix and manufacturing costs, you’re still talking about 20 basis points of headwind exiting 2023. Most of the impact here is coming from FX, about 80 basis points. The other items that we referenced in our prepared commentary with respect to impact on the quarter and how we ended, FX as I explained, the impact on our finish here, if you take a look at FX, which is clearly non-operational, and you factor non-recurring items like the impairment charge for the prior acquisition, those two items are about $0.07 of headwind in the quarter, in 2023 in the fourth quarter. So, that’s really the vast majority of what you saw impacting us here.

Of course, we don’t forecast FX. So, what we bake into our guidance for 2024 is essentially what would happen if we assume FX rates stay where they are at the end of January here. And with that, on a constant basis, we would expect to expand margins in 2024. And so, that’s really consistent with how we’ve approached our forecasting in the past. And I won’t sit here and guess at what FX is going to do throughout the year 2024. that will have an impact either favorable or unfavorable, depending on how that goes. For the other part of your question, I just want to maybe talk a little bit about Librela, how we expect Librela. Clearly, when you think about how we will deliver on 7% to 9% operational growth in revenue, price is a pretty significant factor.

We continue to expect to be running price above our historic levels of two to three points, and perhaps slightly below what you saw in 2023 at 5%. And then Librela with the US launch clearly is going to be a significant factor. Certainly, $44 million in the quarter in Q4 was – again, very pleased to see that. We do see about a quarter to a third of that being initial stocking. So, you can model that out. In terms of what that would translate to, we’re still in the early stages of our launch, but we’re very pleased with what we’re seeing so far, as we discussed already. In international, we couldn’t be more pleased with what we’re seeing. If you look at international, the fourth quarter, you still have about 47% growth if you look at the base markets where we were launched at the beginning of the year.

And then the new markets are driving another bit of growth. You have another $12 million contribution from those new markets, in addition to the US $44 million. So, I think what we have to really take into account here is, as we’ve been launching in markets in Europe, there’s some stocking that happens from quarter to quarter as we do those launches. If you factor those out and you just focus on those markets that were already launched, we’re talking about 47% growth in the quarter, which has been consistent over the last few quarters, about 50%, give or take growth. So, we couldn’t be more pleased with what we’re seeing in the international markets. Kristin?

Kristin Peck: No, it’s great.

Operator: Thank you. We’ll move next to Jon Block with Stifel. Please go ahead.

Jon Block: Great. Thanks, guys. Good morning. Wetteny, any revenue cadence in the year to call out? You’ve got sort of that easier 1Q 2023 comp, but you were also noting more acute China headwinds in the first half. So, just how do we think about it? Do we sort of look at it on a two-year stack basis? And then on the guidance for the full year, maybe GM fell a little bit below what we were thinking, but SG&A expense, despite the investments, Kristin, that you called out, the accelerated DTC, the SG&A was a little bit lower than where our heads were at. So, maybe you can just talk through those items, why we’re only seeing, seems like low to mid-single digit SG&A growth year-over-year. I don’t know if some of that’s blunted by FX. And then just finally, I’m sorry, Librela, due to the stocking, do you still expect Librela to be up in the US 4Q 2023 to 1Q 2024 as it absorbs the stocking? Thanks, guys.