Prompt:
Human: We are looking forward to discussing our record third quarter performance and the enhancements to our capital allocation priorities announced yesterday, as well as providing an update on our strategy execution.
Joining me on todays call is U.S. Steel President and CEO, Dave Burritt; Senior Vice President and CFO, Christie Breves; and Senior Vice President and Chief Strategy and Sustainability Officer, Rich Fruehauf.
I would now like to turn the conference call over to U.S. Steel President and CEO, Dave Burritt, who will begin on slide four.
As Kevin just mentioned, we delivered record performance in the third quarter, record net earnings, record EBITDA, record EBITDA margin and record quality and reliability.
Our record-setting performance in the third quarter and throughout 2021 has truly transformed our business and demonstrates the progress we are making in pursuit of best.
By year-end, we will have transformed the balance sheet by repaying over $3 billion of debt, achieving our deleveraging target ahead of schedule.
We expect to have total liquidity of approximately $5 billion, creating the foundation to confidently execute our strategy and invest in our competitive advantages and we will have put the business in position to deliver another strong year in 2022.
Our transformed balance sheet, the ability to prefund critical strategic investments, and continued optimism for our business gives us confidence to return capital to stockholders while executing the next phase of our Best for All strategy.
We believe the market is significantly undervaluing the progress weve made and the value our strategy is creating and now is the time to be more balanced in our capital allocation priorities.
Our strategy is truly best for all, of course, including our stockholders.
Were delivering strong performance year-to-date.
Continued bullish outlook for 2022 and beyond and expectations for a super cycle continuing put us in a position to move faster on the next phase of our strategy execution while beginning to reward stockholders with direct returns.
Our biggest challenges remain lowering our capital and carbon intensity.
Investments in mini mill steelmaking, like the construction of a second mini mill, while investing in our competitive advantages can deliver on these objectives and reposition the company for the future.
The solution is to continue moving toward a more balanced capital allocation strategy by successfully executing our Best for All strategy with mini mill number two and an electrical steel line and coating line at Big River Steel.
We are moving quickly on our path forward by expanding our competitive advantages through strategic investments that help us achieve our strategic objectives aligned with long-term value creation, improved through cycle earnings and cash flow and reduced capital and carbon intensity.
Whether youre looking only at next year or our ability to build long-term value, we believe that investors are undervaluing our progress and potential.
But not our customers.
They are noticing the transformation thats taking place at U.S. Steel and the importance of a regional supply chain.
Our industry-leading finishing line capabilities are increasing our value proposition and customers are excited about the opportunities we are creating together.
Whether it is advanced high-strength steels, differentiated electrical steels or green and sustainable steels, discussions with customers continue to shift from transactional to strategic.
We continue to create longer-term value with customers by prioritizing innovation, differentiation and strategic goals, and we look forward to building deeper relationships that unlock the value of U.S. Steel for our customers and provide them the certainty of a regional supply chain.
slide six further emphasizes our progress and performance.
We are encouraged by our record-setting performance, performance that is outpacing even those records being achieved by direct competitors.
But there is more we can do.
As we said, our goal is to be the best steel competitor.
And while there is certainly much more opportunity ahead, weve clearly come a long way quickly.
As we always say at U.S. Steel, safety first, and Im so pleased with the U.S. Steel team for continuing to prioritize safety and for embodying our steel principles each day.
Moving to our margin performance.
Our enterprise EBITDA margin reflects the disciplined, value-focused approach weve taken to our footprint.
With revenues of nearly $6 billion in the quarter, the quality of our earnings demonstrates a business model that is increasingly built upon capability and cost differentiation.
From our iron ore advantage to our integrated assets and from the newest mini mill in the country to the most efficient mill in Eastern Europe, our diversified footprint is extracting significant value from todays stronger for longer market.
While the competition isnt standing still, the actions weve taken over the past several years to invest in our assets, streamline our footprint and add capabilities have created significant value, leading to out-performance versus peers this quarter.
Our mini mill performance also continues to be the industry leader, further widening its performance versus other mini mill producers.
Our position as a mini mill leader creates the perfect platform for high-return investments in capabilities that expand our margins, reduces our carbon and capital intensity and furthers our customer value proposition for sustainable green steel solutions.
Those investments continue to be supported by strong liquidity, and we are moving forward with investments that create enduring value while rewarding stockholders for the progress weve made so far.
slide seven expands on what makes U.S. Steel unique and why Best for All will continue to grow the competitive advantages of U.S. Steel.
We are investing to get better, not bigger, and expanding our three competitive advantages that differentiate us versus the competitors.
First, low-cost iron ore; second, lower greenhouse gas emission mini mill steelmaking; and third, best-in-class finishing capabilities.
Those competitive advantages are built on a foundation of research and innovation and deep customer relationships.
We are pleased to report the first step in our metallic strategy, which pivots our iron ore advantage in Minnesota toward our growing fleet of EAFs.
We are finalizing an agreement with a strategic partner to produce up to 500,000 tons annually of pig iron at Gary Works.
Under the contemplated deal, our potential partner would fund, install and operate pig iron production assets, which we would supply with excess liquid iron production.
This potential partnership would further enhance the cost structure of Big River Steel by in-sourcing high-value metallics while driving blast furnace efficiencies at Gary Works.
The permitting process has begun, and we expect pig iron production at Gary to begin in early 2023.
This is an efficient and quick way to expand our iron ore advantage to our mini mills, and we continue to evaluate other opportunities to extract additional value from iron ore.
slide nine provides some additional context on our mini mill number two investment.
Last month, we commenced the site selection process to build a new state-of-the-art mini mill.
This new mini mill will provide differentiated steelmaking supported by a comprehensive suite of finishing assets, including advanced high-strength steel galvanizing, hot-rolled galvanizing, painting and slitting.
We are expanding our mini mill steelmaking capability as we continue to transition toward sustainable, lower greenhouse gas emission steelmaking.
This investment is a platform to provide our customers with more of the Greens deal they expect from like-minded partners like U.S. Steel.
Were in the process of filing permits in multiple states and are on track to begin construction as early as the first half of 2022.
Mini mill number two will be built by the same experienced construction team who built Phase 2A of Big River Steel, ahead of schedule, under budget and fully ramped in record time.
We expect the value-added capabilities of mini mill number two to drive an approximately $650 million of incremental EBITDA contribution from this investment once fully ramped.
Also yesterday, we announced plans to build a new coating line at Big River Steel.
slide 10 has the details.
This line will have 325,000 tons of annual capability and will sustainably produce both Galvalum and galvanized product.
We expect the investment to contribute another $60 million of annual run rate EBITDA to Big Rivers already industry-leading results.
We expect the line to produce a mix of 75% Galvalum and 25% hot-dip galvanizing.
Galvalum capabilities create opportunities to target the higher value construction market, including exposed building panels.
Hot dip galvanizing capabilities create additional opportunities to serve the appliance, automotive and construction markets.
The investments we are making at Big River are natural extensions of the Big River campus and further utilize the state-of-the-art capabilities of the facility as we provide customers with sustainable steels to help meet their own decarbonization objectives.
As we continue to demonstrate our industry-leading position at Big River, were excited to expand the mini mill footprint, invest in downstream capabilities and further enhance the commercial mix of our business model.
The progress we have made in 2021 is undeniable.
Over the past several quarters, weve transformed our balance sheet.
When we closed on the Big River Steel acquisition at the start of the year, we carried $7 billion of debt and expect to end the year with $3.9 billion.
Weve extended the maturity profile and expect next years run rate cash interest expense to be approximately $225 million.
Our pension plan is overfunded, an enviable position that others in our industry are not close to achieving.
We are in a clear position of strength.
So while well continue to look at the ability to delever further as debt becomes callable, we are very confident that this level of debt puts us in a sustainable and manageable position to support investments in our business.
Next, we continue to believe the highest source of long-term value creation is from investing in expanding competitive advantages that reshape our earnings profile and reduce our capital and carbon intensity.
Our cash and liquidity position more than supports these high-return projects and allows us to execute with confidence.
And today, given the undeniable progress weve seen over the past several quarters, we are announcing enhancements to our capital allocation priorities that begin to directly reward stockholders with the improvements weve made to the business.
We believe the market is not rewarding us for the strong performance we expect in 2022 and is not yet recognizing the long-term value creation potential of our Best for All strategy.
Our strong financial performance and the significant returns we believe we can generate by buying our own stock is the reason we are accelerating direct returns to stockholders.
Reinstating the $0.05 per share quarterly dividend and moving quickly on a $300 million stock buyback demonstrates our commitment to ensuring our strategy is indeed best for all.
Our goal is to ensure direct returns become an enduring part of our capital allocation strategy, and we believe there are catalysts that could drive additional buybacks in the future.
Aside from additional free cash flow generation, we believe there are near-term opportunities to divest noncore assets, primarily real estate, which could further accelerate or increase further authorizations.
In addition, the option for Stelco to acquire 25% of Minntac remains in place through January of 2027 and presents an opportunity to return up to $500 million of incremental capital to stockholders.
Christie will now provide details into our quarterly performance before I provide some thoughts on 2022.
Ill begin on slide 12.
As Dave mentioned earlier, the third quarter was a quarter of records.
We delivered adjusted EBITDA and EBITDA margin of over $2 billion and 34%, respectively.
This represents a nearly $750 million or a 58% increase over the second quarter.
Adjusted earnings per share in the quarter was $5.36 per diluted share.
We also generated approximately $1.3 billion of free cash flow in the quarter, including a $400 million investment in working capital.
We expect another quarter of strong free cash flow generation in the fourth quarter.
Next, let me expand on some key points related to the balance sheet.
Year-to-date, we have repaid approximately $2.7 billion of debt and expect to end the year with $3.9 billion of debt on the balance sheet, an amount we are confident is sustainable and supports the investments we are making in our business.
We ended the quarter with net debt to last 12 months EBITDA of 0.6 times and expect to end the year at 0.2 times.
With the balance sheet strengthened, 80% of our remaining debt due in 2029 and beyond and a fully funded pension plan, we are well positioned for a future of value creation.
Let me now transition into the individual segments, including expectations for the fourth quarter.
Our Flat-Rolled segment delivered record EBITDA and EBITDA margin of over $1.1 billion and 32%, respectively.
This represents an approximately 60% improvement versus the second quarter.
Higher selling prices flowing through our contract structure in the third quarter will likely continue to be a tailwind in the fourth quarter.
We expect lower volumes from our planned blast furnace outage at Gary Works and higher energy costs to be an offset.
We currently expect fourth quarter Flat-rolled EBITDA to be near our record third quarter performance.
Our mini mill segment also delivered record EBITDA and EBITDA margin.
Third quarter EBITDA was $464 million or an industry-leading 42% EBITDA margin.
Higher prices continue to be reflected in the segment results, partially offset by higher scrap and other metallics cost.
In the fourth quarter, we expect higher prices to continue to flow through the segments, primarily monthly contracts.
We currently expect the fourth quarter to be another record for our mini mill segment, potentially exceeding $500 million of EBITDA in the fourth quarter.
USSK also posted record EBITDA and EBITDA margin in the third quarter.
EBITDA was $418 million in the quarter or 33% EBITDA margin.
A 60-day outage planned on number one blast furnace will begin in November through the remainder of the year.
This will remove approximately 250,000 tons of lost steel equivalent capacity from the market in the fourth quarter.
Operational headwinds as a result of the planned outage, modestly lower shipments and changes to the pricing dynamic in Europe are expected to result in reduced fourth quarter EBITDA versus the third quarter.
I also want to take a moment to recognize and congratulate the USSK team for completing Slovakias first revolving credit facility containing sustainability-related performance targets.
The new EUR300 million unsecured sustainability-linked credit agreement reinforces our commitment to creating profitable solutions for sustainable steelmaking and replaced the previous EUR460 million credit facility.
Our Tubular segment reported similar quarter-over-quarter results.
Improved commercial performance was largely offset by higher scrap and energy costs and continued high levels of imports.
Imports continue to capture roughly half of the U.S. tubular market.
And earlier this month, we and the USW filed new OCTG trade cases.
We expect fourth quarter performance to be similar versus the third quarter as higher selling prices are offset by elevated scrap costs for the Fairfield EAF and continued high import levels.
We expect enterprise earnings in the fourth quarter to continue to reflect the strong market conditions we are seeing as we exit the year and we currently believe that our fourth quarter results will be near our record third quarter performance.
Were entering 2022 in a great position to both create value for our stockholders and deliver value to our customers.
We are executing a robust contract process with customers, in most instances, having begun discussions 90 days sooner than we have historically.
Our strategy is paying dividends.
Assuming the forward curve, which we believe to be a pessimistic view of spot prices, we fully expect average selling prices to be higher in 2022 than 2021 for our Flat-rolled segment.
Weve also listened to our customers and in some instances, have signed agreements beyond 12 months.
This creates longer uplift and supply continuity while fostering collaborative product development opportunities to solve their most difficult challenges.
Finally, we continue discussions on commercial terms for more than just price.
Leveraging continued strong interest in advanced high-strength steels, our planned NGL electrical steel line and other future sustainable steel offerings from U.S. Steel.
Customers value domestic supply chain and we value their partnership.
We are delighted to hear from multiple auto customers who are foreshadowing that the trough of the chip shortage could be behind us.
They are beginning to add to the fourth quarter and first quarter build schedules and indicating to us increasing usage rates starting as early as next week.
Kevin, lets move to Q&A.
We ask that you each please limit yourself to one question and a follow-up so everyone has the opportunity to ask a question.
 Assistant:

Chosen response: q3 adjusted earnings per share $5.36.


Prompt:
Human: I hope you are all well and safe.
Joining me virtually today are Bryan Hanson, our President and CEO; and CFO, Suketu Upadhyay.
Just given the backdrop of COVID, let me just start by saying that I certainly hope that all of you are doing well and staying safe and continuing to, as much as it's frustrating I'm sure by now, continuing to social distance and wear your masks.
I think at this point we're all pretty good at it so let's make sure that we continue to do it.
And as a result of that continue to deliver for our customers and our patients and move with our mission forward.
And I'll just continue to be very proud of everything this team has accomplished against a significantly challenging backdrop in 2020.
So I'm proud of you and glad to see what you've been able to do, and I'm looking forward to what you can do in 2021.
And here we are, right?
We're in 2021 and there's going to be challenges.
We've seen already early on in 2021, but I'm confident that we're ready to deal with the challenges as ZB, and I'm pretty confident we're going to see real opportunities for 2021 as well.
And there's just a lot of updates that I want to share with you today, but I'm going to keep my comments to a minimum, if possible.
I really want to make sure that we have time for Suketu to get into a little more detail on Q4 and then, ultimately, say how that's going to translate into 2021.
Now we're not going to give too many specifics on 20201, but he'll give you some color on what we're seeing from Q4 and, again, the impact we think that's going to have on 2021.
So for today I'm going to kind of keep it to three main topics.
The first is really how we're continuing to navigate COVID-19 and, to continue inside of that, to ensure that we're executing against our strategy.
The second one is really going to talk about the ongoing transformation of the company.
We really are making sure that we're moving forward with active portfolio management, and, obviously, we're taking the next steps there with the planned spin-off of our Spine and Dental business.
So we'll talk a bit about that.
And then third, I want to make sure that we again touch upon our long-term growth strategy and how it positions us to drive growth, obviously as a company, but also value for you and value for us.
And so, let's start again navigating the challenges and executing here in the short-term.
There's just no doubt that COVID, unfortunately, remains a challenge.
Coming out of Q4, we're seeing the pandemic pressure and the surges continue and, frankly, worsen across pretty much all of our regions and markets.
There's clearly more lockdown measures that we're seeing throughout Europe, Middle East and Africa; to a far lesser extent but still impacting Asia-Pacific as well.
And certainly, in the Americas, we're all seeing it in the U.S.
It may be different by state, but clearly seeing increased pressure as a result of surges in the pandemic so all of that is kind of the backdrop that we saw coming out of Q4.
And, unfortunately, this pressure, in the corresponding decline and elective procedures, grew throughout Q4 and actually was worse at the end of December.
And at this point, we expect that increase in pressure will continue throughout Q1 at least and will impact all three of our regions.
As a matter of fact, we're actually seeing this probably increase in pressure coming out of Q4.
So we would expect Q1 to be a little more challenging than even what we saw in Q4.
But even given that backdrop, I'd say that I'm optimistic.
We're currently rolling those out around the world.
We do believe the vaccines are going to change the COVID-19 dynamic, and we're going to see positive impact as a result of it.
As soon as we start to see the surges stop, we see the impact of COVID end, and we're confident that the recovery's going to mean that the normal patient flow is going to start again and we're going to have the pull-through effect of a sizable patient backlog that's been created over the past number of quarters.
We expect that when that recovery occurs, we're going to see a period of what I would define as normal market growth augmented by deferred procedures that will be coming in as well.
And we're going be ready for that, and we're excited about that.
So as much as it's going to be a little rocky in the short-term and potentially more challenging than what we saw at the fourth quarter, we see a light at the end of the tunnel.
And that's a good thing.
The big question is when?
When is that going to happen?
We know the vaccine is going to have the impact.
The big question is when.
And that's certainly going to be the key variable we're going to be looking at as we try to predict what 2021 is going to look like.
So while I would just say, against this backdrop of COVID, what is clear to us is we can't control when the vaccines allow the surges to stop, but what we can control inside of that is how we execute; how we execute our strategy.
And I have confidence we're going to continue to move it forward.
Our core business is strong.
Our execution is on point.
I would just say momentum around our key commercial launches and programs continues to be strong, and I would say that, overall, our commercial confidence is better than it has ever been.
So I'll just give a few examples of this.
I can say it all day long, but unless we talk about it and actually it reflects in the numbers, who cares.
So let's first start with ROSA Knee.
Obviously, this is something that everyone is going to be paying attention to.
Certainly, I am, and on note, we said we're going to hit between 200 to 300 cumulative placements by the end of 2020.
Obviously, you know that we were in that range as of Q3.
So I'm happy to report that not only did we achieve that goal, we achieved the high-end of that goal.
And I would tell you that the momentum is strong coming into 2021.
Q4 was actually our strongest quarter as of the date of launch of ROSA Knee.
So we've had some pretty strong quarters in the past.
Q4 was our best, and we're on the high-end of the goal that we set for the year.
And as I've said before, with some of the new launches that we have coming, specifically associated with [Indecipherable], I feel pretty confident that 2021 is going to continue to show that kind of resilience and strength for ROSA Knee.
On the percent of revision side, again, this product continues to be very successful for us.
We now showed that in Q4, we actually had the strongest quarter-over-quarter growth that we've seen since launch.
We did realize our 2020 expectations of $100 million in gross revenue and almost $40 million in net of cannibalization revenue during the year.
And I would just tell you that that's just the beginning because Persona Revision serves as a really compelling tip of the spear product for our commercial team.
Once we get Persona Revision in, we've got an opportunity to hunt for the typical primary knee as well.
So we're very excited about that launch and it continues to be strong.
On the hip side, Avenir Complete continues to be a strong one for us.
Even in the pandemic, it continues to beat our expectations.
And if I just look at Q4 specifically, we grew about 30% over Q3, again, even with the increased pressures of the pandemic in Q4, so very excited with what we're able to do with Avenir Complete.
And we expect big things to continue with this product throughout 2021.
And as you obviously know, we also expect at the end of 2021 to launch the ROSA Hip, which again gives us a lot of confidence in the Hip category for our business.
And then finally for Signature ONE Planner, we demonstrated this again, strong sequential growth with registrations up nearly 25% in Q4 over Q3.
And we expect utilization to continue to expand significantly in 2021 with really a goal of having more than 50% of our shoulder procedures using pre-surgical planning.
And that's important for a lot of reasons.
Remember the pre-surgical plan creates stickiness with the customer, but it also enhances our ability to get more guides and augments using the procedure, which can really take-up the ASP for that procedure.
So again, exciting stuff for Signature ONE Planner as well.
So all-in we continue to execute -- we continue to execute as a team.
The way we're showing up every day, the way we're showing up in the market frankly versus our peers gives me confidence in our business as does our continued innovation and our product launches.
We're going to see more this year, some pretty pivotal innovation that we're going to see this year.
As I mentioned before we're going to see ROSA Partial Knee, we're going to see ROSA Hip and we're also going to see the first smart implant, Persona-IQ, launched this year so definitely exciting for us from an innovation standpoint in 2021.
We continue the transformation of ZB.
That's been the goal since I got here.
You've heard me talk about our three phases of transformation.
First was the hearts and minds and the execution challenges that we had in the very beginning.
It's what we talked about a lot in the beginning.
The second phase of this was really building a more robust longer-term strategy, making sure that we brought innovation to the market and getting our execution straight.
We're clearly well into that phase.
And third is our portfolio transformation, and that's the goal of active portfolio management to change the complexion of the organization so that we can have better goal of sustained mid-single-digit growth.
And I'm proud to say that we're squarely positioned in Phase III now as well.
And as you've seen by our recent announcement, we're going to continue to move this forward.
We have the portfolio management strategy and the process in place and to have built a pretty strong capability to move us forward in this area.
Late last year, we executed a number of smaller, but still important, M&A deals to fill portfolio gaps and to better position us in higher-growth areas that we do believe we have a right to win in.
I truly believe by separating out these businesses, we're going to create two stronger companies, two companies that are going to be better positioned to meet customer needs and improve patient lives.
And ultimately, and very importantly, deliver greater value to you, our shareholders.
Let me give you a bit more detail on why we believe this is an opportunity for value creation and really why we think it delivers value for ZB and NewCo.
First of all, the transaction increases our management focus and resource prioritization.
We truly do believe for both companies, we think about NewCo and we think it's going to thrive as an independent company with prioritized capital allocation to pursue strategies and growth opportunities and truly investments inside of Spine and Dental.
That has not been a focus for ZB.
It will absolutely be a focus for NewCo.
And for Zimmer Biomet, the transaction is an important next step in our transition into a more streamlined company with sharper focus and greater and more optimized resource allocation toward innovation in those core businesses that we are committed to, that are profitable for us, where we see attractive markets with a right to win in those markets and be market leaders.
And really the second thing is it's going to drive increased growth and efficiency for both companies.
We really do believe that.
And simply put, we expect that these two companies with their simplified operating models and just reduced complexity and increased focus will be able to grow revenue, margin and earnings per share faster than they would if we remain combined as one company.
And Suke's going to talk more about the specific financial impact that we expect in just a few minutes, but just know it's positive for both organizations, financially speaking, as we separate the organizations.
And third, it's going to enhance value creation for our patients and our providers and all of our key stakeholders including our own team members.
This is the next step in ZB's transformation, and it underscores our commitment to ensuring long term priorities remain aligned with shareholders' best interest.
It's going to drive the business forward to meet customer needs and advance our mission to alleviate pain and improve the quality of life of people around the world.
We think we can do it better as two separate organizations, OK?
So that's the backdrop of the spin.
And today obviously is just day one in terms of announcements around this process.
You can absolutely expect that we're going to continue to provide updates as we move forward, as NewCo takes shape, and as we move toward the transaction close, which we're currently expecting to be around mid-2022, OK?
So we're confident in these steps we're taking and our ability to keep executing and in our overall ZB strategy, and that brings me really to the third and really the final topic that I have for these remarks.
And it's our plan to drive long-term growth and ultimately as a result of that deliver increased value for you, and to do that, we remain fully committed and confident in ZB's long-term growth and margin expansion expectations.
In fact, the spin-off transaction that we're going to do over the next year serves to de-risk if not accelerate our path to that 4% to 5% growth rate that we have talked about and our 30% operating margin profile by the end of 2023.
And to get there, to be able to deliver on both of those, we're going to have to be committed to our priority growth areas.
And we've talked about these in the past.
I'm going to remind you of them again.
The key areas of concentration for us would be Knee, Hips and S.E.T. If we think about Knees first and foremost, we need to be able to grow above market rates here.
And we're going to continue to focus on the fastest growth sub-markets of Knees, for us that's going to be robotics, data and informatics, and cementless and Revision.
We feel we have plenty of innovation and momentum here to continue to grow sustainably above market rates in Knee.
From a Hip perspective, it's a little less ambitious in the beginning.
We just said that we need to grow at market in the short-term with the idea that over that over the long-term, particularly after ROSA Hip is launched, that we will grow above market in Hip as well.
And I can tell you, based on our performance so far and the ROSA Hip application being launched later in 2021 and the Avenir Complete momentum that we have, we feel confident we're going to be able to do that as well.
And as far as S.E.T. goes, we just want to grow at market, if not the higher end of market, and to do that we're going to focus on the most attractive sub-elements of S.E.T. for us.
And that's, for us, again, going to be sports, medicine, and extremities.
Those are key areas of concentration for us that we're going to invest internally, we're going to look for external ways to build scale, and we're going to build commercial infrastructure as well.
So let me close by saying that I continue to be more confident about ZB's future than ever.
I know I say that a lot recently, but I really do feel the momentum right now.
I truly believe that we are well-positioned for success and that our strategy is absolutely working.
And our transformation is well under way, and our proven ability to rise to challenges and face adversity, I think, has prepared us well for navigating the current environment and really, for that matter, any environment in front of us.
It was your focus on our mission, our strategy and how we show up and execute every day is unmatched.
It's what makes ZB and what makes me confident that we're going to continue to deliver.
Before jumping into the details, I'd like to summarize the quarter as one where we made significant progress across a number of strategic and operational fronts, all in the backdrop of heightened market pressure.
While revenue and profitability were challenged due to the pandemic, we executed extremely well against the things we can control, positioning ourselves to win for an eventual market recovery and beyond.
Net sales in the fourth quarter were $2.085 billion, a reported decrease of 1.9% and a constant currency decrease of 3.7% versus 2019.
We did not experience any material day rate differences in our year-over-year comparisons.
Our consolidated regional results were in line with expectations despite deepening pandemic pressure on global elective procedures as we exited the year.
While the market softened through the quarter, execution remained strong across all regions.
Beginning with Asia-Pacific, the region grew 2% versus Q4 2019 with growth across all three of our largest markets of Japan, China and Australia/New Zealand.
While COVID pressure on elective procedures increased toward the end of the quarter the impact is less pronounced than what we have been seeing in EMEA and the Americas.
We are excited about the uptake we're seeing in ROSA in the region, and with the solid performance across our Knee and Hip businesses.
As expected, the EMEA region was hardest hit by COVID-19, decreasing 17.5% versus 2019, with all sub-regions in decline.
Surges in the virus leading to policy actions and government lockdowns negatively impacted elective procedures across the region.
Lastly, the Americas region was about flat, decreasing 0.3% compared to 2019, driven by continued COVID headwinds in Latin America, in tandem with a softening U.S. market.
The U.S. was flat despite increased pressure on elective procedures.
Performance was buoyed by continued strong demand for recent innovative product introductions.
Strong execution by our commercial organization and some favorable impact related to the order timing and year-end purchases as some accounts increased their buying patterns to utilize remaining 2020 budgets.
Turning to our business performance for Q4, the Global Knee business declined 4.8% negatively impacted by the ongoing pressures in EMEA.
However, the U.S. Knee business continued to grow, increasing 1.8%, and Asia-Pacific Knee business returned to growth, increasing 2.9%.
Overall, execution was strong, with continued momentum for Persona and ROSA Knee.
Our Global Hip business decreased 3.4%, again driven by declines in EMEA.
Both U.S. Hips and APAC Hips continued their growth trends, increasing 1.4% and 1.3% respectively.
Sports, Extremity, and Trauma sales declined 3.3%.
Dental, Spine and CMFT continued to deliver better execution, increasing 0.8%, and finally, our Other category was down 9.3%.
Moving to the P&L, we reported GAAP diluted earnings per share of $1.59 and adjusted diluted earnings per share of $2.11.
On an adjusted basis, with revenue down 3.7%, earnings per share was down about 10% driven by a lower operating margin and a higher share count, which more than offset the favorable tax rate in the quarter.
Lower adjusted operating margin was driven by lower revenue and an expected year-over-year decline in gross margins.
Adjusted gross margin was 71.3%, sequentially better than Q3, but lower than Q4 2019.
Versus the prior-year, favorable geographic mix was more than offset by lower volumes, ongoing pricing pressure and the impact from prior period deferred costs.
Opex was down versus the prior-year as we implemented several cost containment initiatives as part of our response to the pandemic, in addition to the realization of our transformation programs that were ultimately reinvested back into R&D and commercial infrastructure to help drive consistent above-market growth in priority areas.
Based on our performance versus market over the recent quarters, our reinvestment of efficiency savings is translating into strong returns.
The Q4 adjusted tax rate of 15% was better than the previous year due to geographic mix of income and certain discrete benefits in the quarter, related to recent audit settlements.
Turning to cash and liquidity in the quarter, free cash flow totaled $329 million, higher than the same period in 2019, driven by better working capital and lower capital expenditures, and we utilized better-than-expected cash flow to pay down $250 million of debt ahead of schedule, ending the year with cash and cash equivalents of approximately $800 million.
Now moving to 2021, due to the ongoing uncertainty related to COVID-19 and its impact on elective procedures, we will not be providing full-year financial guidance at this time.
We recognize that this is challenging for you as you build your 2021 models; however, we will reserve financial guidance until we have more certainty around the outlook of elective procedures relative to COVID surges and related vaccine adoption.
We strive to be credible and transparent, and to that end, I will provide additional quarterly details and broader full year shaping as an interim measure.
So far, through January, we've seen COVID pressure continuing to intensify from the end of December.
Based on what we've seen so far in the quarter, and in tandem with our latest estimates for procedure cadence, we project that Q1 revenue will be down in the low-single-digit to mid-single-digit percentage range versus Q1 2020.
Now we have optimism and confidence that we'll see a positive vaccine impact on elective procedures this year, and once we do, we expect elective procedure volumes to return to pre-pandemic levels and the sizable patient backlog to serve as a tailwind to underlying market growth.
As we turn to the P&L, we expect that the impact of COVID-19 on sales volumes will put pressure on adjusted operating margins and earnings leverage until we return to consistent pre-COVID revenue levels and growth rates as I just discussed.
Despite this near-term pressure, our confidence in the market recovery and the longer-term financial profile of the company is driving continued investment into priority areas of the business.
We expect that adjusted gross margin will stabilize in 2021 with quarterly margin levels broadly in-line with what we saw in the back half of 2020.
We could see some fluctuation from quarter-to-quarter depending on a number of variables including volumes, price, foreign currency, mix and other drivers that can change results over time.
Regarding operating expenses, sequentially versus the fourth quarter of 2020, we expect non-commission spending in Q1 to be modestly lower with increases in future quarters opex investments as the impact of the pandemic abates.
We expect interest expense to increase in the mid-single-digit versus 2020 as the benefit from lower debt balances is more than offset by the renewal of net investment hedge positions.
Our tax rate is expected to be modestly higher than the full year 2020 rate and could fluctuate over the year as a result of variability and geographic mix of income due to the pandemic.
Also, we are not projecting any material U.S. corporate Tax Reform to be implemented in 2021.
We project that the full year share count in 2021 will continue to increase modestly versus Q4 of 2020 and we are not planning for any share buybacks in the year.
And in terms of capital allocation, we remain committed to maintaining our investment-grade rating and are planning to pay down an additional $500 million of debt in 2021.
Now, let's turn to today's announcement related to our intent to spin the Spine and Dental businesses into an independent, publicly traded company.
The transaction will be structured with tax redistribution of newly issued new co-shares to ZB shareholders.
As Bryan mentioned, we believe that this tax-efficient transaction, which is expected to close in mid-2022, subject to certain conditions, will drive greater focus for each company with enhanced prioritization of capital allocation while accelerating growth and providing the platform for greater shareholder value.
In terms of the NewCo financial profile, 2019 and 2020 pro forma revenues totaled approximately $1.022 billion and $897 million respectively and is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion.
We expect NewCo to have a financial profile generally in-line with its peer group and a capital structure supportive of innovation and investment over time.
Importantly, the transaction will empower NewCo to pursue a more-focused investment and execution strategy.
ZB delivered 2019 and 2020 pro forma revenue of $6.96 billion and $6.128 billion respectively.
For post-spin ZB, the transaction is expected to deliver an improved growth profile with accretion to our revenue growth of approximately 50 basis points over the course of our five-year strategic planning period.
We also expect that it will expand our adjusted EBITDA and operating margins on a pro forma basis by approximately 125 basis points.
With that, you should have even greater confidence in our operating margin expansion goals.
We remain committed to at least 30% adjusted operating margins by the end of 2023, and with this transaction we have the opportunity to accelerate the timing of that goal.
However, we will continue to balance margin acceleration against investment opportunities to accelerate durable top-line growth.
Ultimately, this transaction provides greater optionality to invest more in the business while delivering a leading margin profile and that's an incredibly powerful lever.
In the terms of capital structure, post-spin we will prioritize proceeds toward debt pay down to maintain our investment-grade rating.
We're truly excited about this transformational opportunity to increase value for investors and will continue to provide more details as execution of the spin progresses.
To summarize, while the pandemic continued to pressure our growth and earnings profile in the quarter, we made substantial progress on many fronts, including, very strong performance versus the market, progress on our efficiency programs that enabled the increased investment for growth, free cash flow generation that was ahead of revenue growth, strengthening of our balance sheet through early pay down of debt, integrating our strategic and accretive tuck-in M&A deals, and positioning ourselves to execute the spin-off of our Spine and Dental business as a platform for greater value.
I'm truly proud of what the ZB team accomplished in the quarter and throughout 2020.
Before we start the Q&A session, a reminder to please limit yourself to a single question and one follow up so that we can get through as many questions as possible during the call.
With that, operator, may we have the first question, please?
 Assistant:

Chosen response:
compname announces q4 adj earnings per share of $2.11.
q4 adjusted earnings per share $2.11.
q4 earnings per share $1.59.
q4 sales $2.085 billion versus refinitiv ibes estimate of $2.08 billion.
not providing financial guidance at this time.


Prompt:
Human: I'm joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer.
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.
We also cite operational results, which exclude the impact of foreign exchange.
I hope you and your loved ones remain safe and healthy as the COVID-19 pandemic continues to affect all of our professional and personal lives.
In the second quarter, we delivered better-than-expected results given uncertainty around the COVID-19 pandemic.
In terms of numbers, our revenue grew 4% operationally, with the U.S. segment up 6% and International up 3%.
Our companion animal products continue to drive our business performance, with 13% operational growth, while livestock products declined 5%.
Our adjusted net income increased 4% operationally in the second quarter.
We have built a very strong companion animal portfolio over the last several years based on our internal innovation.
And these products helped offset some of the deeper market challenges in the livestock market today.
Our recently launched parasiticides, Simparica Trio, ProHeart 12 and Revolution Plus as well as our key dermatology portfolio of Apoquel and Cytopoint, provide a solid foundation that has continued to perform well this year.
We continue to be very pleased with the performance of our new triple-combination parasiticide for dogs, Simparica Trio as well as the strength of the overall Simparica franchise.
Glenn will share more details in his remarks.
Our continued focus on meaningful innovation and the diversity of our portfolio across species, products and geographies remain core advantages for Zoetis during times of economic uncertainty.
And we've also seen the essential nature of animal health playing an important role in the resiliency of our business and our industry at this time.
In terms of COVID-19, our veterinary and producer customers are under increased pressure to deliver critical animal care and maintain a reliable global food supply, and we are fortunate to be able to support them in this mission.
We continue to put the safety of our colleagues and customers first during this pandemic, and we've been very pleased with our team's ability to maintain productivity, even with safety and social distancing adjustments at our facilities as well as the ongoing use of remote work arrangements for the majority of our colleagues.
Our field force has returned to meeting with customers in many geographies based on local guidance and practices.
We monitor and adapt these plans on a daily basis based on local feedback and adjustments in markets that may be experiencing increased COVID-19 cases.
Our teams are excited to be back out with our customers, but we're also preserving the lessons we have learned from effective online interactions, webinars and e-commerce to evolve our sales and support.
In terms of supply chain, Zoetis has maintained a reliable inventory of critical medicines, vaccines and diagnostics to our customers and distributors in more than 100 markets around the world.
And our research development programs remain on track in terms of filings, clinical trials and interactions with regulatory agencies.
We remain confident in the progress of regulatory reviews of our monoclonal antibody candidates for pain in cats and dogs.
Our submissions are proceeding as expected.
This year continues to be uncharted territory due to COVID-19 and the related trends affecting our customers.
However, the underlying demand for healthy pets and a reliable source of protein remains fundamental to the global economy.
In the second quarter, we benefited from the veterinary clinics in the U.S. recovering much more quickly from the COVID-19 impact than we anticipated.
Veterinary practices in the U.S. adapted quickly to curbside visits and mobile clinics to deliver critical care and maintain relationships with their customers.
We also saw an acceleration of companion animal product sales through e-commerce channels as a result of the lockdowns in many states.
Veterinarians and pet owners are adapting more quickly to these online options as a way to fill prescriptions for parasiticides and other medicines.
We also know people are spending more time at home with their pets.
They may be observing conditions such as itchiness or pain, which have previously gone unnoticed.
And so we are actually seeing an increase in spend per visit in U.S. clinics.
Meanwhile, outside the U.S., companion animal veterinary clinic performance has been in line with expectations despite wide market-by-market variations based on local dynamics.
For Zoetis, we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially our parasiticides and key dermatology portfolio.
We plan to continue investing in direct-to-consumer advertising and digital marketing to support these products.
Livestock is a very different picture and remains very challenged by the pandemic, especially in the U.S. Producers are adjusting to new market demands and distribution needs from foodservice and restaurant channels to more grocery and retail channels, while also managing ongoing labor, safety and trade issues.
As expected, U.S. livestock in the second quarter saw a significant downturn as we expect that to remain a challenge for the rest of the year.
The pace of return to more foodservice and restaurant demand, along with increased export opportunities, will be the most significant factors in the recovery of livestock producers in the U.S. Internationally, livestock grew and performed in line with expectations across a diverse set of markets.
We saw very positive results in places like China, where they're further along in their COVID-19 recovery, but we will be sensitive to see how Latin America and markets like Brazil perform in the remainder of the year due to COVID.
As we look ahead, we remain focused on advancing our five key priorities to ensure our long-term success, driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high-performing organization and championing a healthier, more sustainable future.
We've continued to make important investments in products and innovations across the continuum of care from prediction and prevention to detection and treatment of disease, Supporting successful launches as well as new life cycle innovations and expansions of major products into new markets continue to be the cornerstones of our durable and steady performance.
In the second quarter, we expanded major vaccine franchises with the approval of our Vanguard B Oral for dogs in Brazil and our Fostera Gold PCV MH and Fostera Gold PCVMetastim for vaccines for pigs in Australia.
We also continue to strengthen our diagnostic and digital capabilities, building on recent acquisitions in point-of-care and reference labs, along with additional investments.
We plan to launch a new diagnostic platform for pet care in the third quarter called VetScan Imagyst.
We are very excited about the potential for this disruptive innovation, which will be the first system to bring clinical pathology right to the point of care.
This new multipurpose platform uses a combination of image recognition technology, algorithms and cloud-based artificial intelligence to deliver rapid testing results to the clinic.
Its first indication will be for testing fecal samples for parasites, making it quick and easy to test and treat pets in the same visit.
We'll have more to say in the coming weeks as we prepare for a global launch.
We also view diagnostics as playing an important role in the continuum of care for fish.
In the second quarter, we acquired Fish Vet Group to add more diagnostic tools to our aquaculture portfolio, including environmental testing, which is critical to fish farming.
Finally, at Zoetis, our key priority around high-performing teams is tied to creating a culture where all colleagues feel valued and included and is reflected in our commitment to promoting inclusion, diversity and equity across our organization.
Our leadership and Board are dedicated to being a force for positive change across the globe to drive greater equity and inclusion.
And we have dedicated financial and people resources to do so.
Now let me hand off to Glenn, who will speak more about our second quarter results and updated guidance for the full year.
I hope everyone is safe, healthy and adapting to what is certainly an unprecedented time for all of us.
Today, I will provide additional commentary on our Q2 financial results, provide an update on our liquidity position and review our improved full year 2020 guidance.
Beginning with the second quarter results.
We generated revenue of $1.5 billion, which was flat on a reported basis and 4% growth operationally.
Adjusted net income of $427 million decreased 2% on a reported basis and increased 4% operationally.
Foreign exchange in the quarter had an unfavorable impact of 4% on revenue.
This was driven primarily by the U.S. dollar strengthening against the Brazilian real, Australian dollar, Mexican peso and euro.
Operational revenue growth of 4% was driven by 2% price and 2% volume.
Volume growth of 2% includes 3% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 5% in other in-line products.
Companion animal products led the way in terms of species growth, growing 13% operationally, while livestock declined 5% operationally.
Companion animal performance was driven by our parasiticide portfolio, which includes sales of Simparica Trio in the U.S., Canada and certain European markets and our key dermatology products, Apoquel and Cytopoint.
Revenue from the acquisition of Platinum Performance and its nutritional products, acquired in the second half of 2019, drove the growth in equine.
Livestock declines in the quarter were driven by challenges to our U.S. livestock portfolio.
Supply chain disruptions caused by reduced animal processing capacity and shifts in consumer demand from restaurant and foodservice to grocery stores affected our customers' purchasing decisions.
This decline was partially offset by strong performance internationally with growth in swine, fish and poultry.
New products contributed 3% to overall growth in the quarter, driven by Simparica Trio, ProHeart 12, Revolution Plus and our Alpha Flux parasiticide for salmon in Chile.
We remain excited by the launch of Simparica Trio and are reaffirming the range of $100 million to $125 million for full year incremental revenue.
Trio have been more robust and cannibalization of Simparica has been less than we anticipated.
Global sales of our key dermatology portfolio were $224 million in the quarter, growing 24% operationally and contributing 3% to overall revenue growth.
Recent acquisitions contributed 1% growth this quarter, which includes Platinum Performance and our reference lab expansion strategy.
Now let's discuss the revenue growth by segment for the quarter.
U.S. revenue grew 6%, with companion animal products growing 19% and livestock products declining by 18%.
Companion animal growth in the quarter was driven by sales of the Simparica franchise, our key dermatology products and the impact of recent acquisitions.
U.S. key dermatology sales were $160 million for the quarter, growing 26%.
The continued strength of this portfolio was driven by expanded usage of both Cytopoint and Apoquel benefiting from our direct-to-consumer campaign, uptake in e-commerce channels and pet owners spending more time with their pets as a result of COVID-19.
Simparica Trio performed well in the U.S. with sales of $36 million despite challenging market conditions in Q2.
We are observing several positive trends, including rapid uptake in clinics that have adopted Trio, smaller-than-expected cannibalization of Simparica, sales coming from new patients to the category and taking share from current oral flea and tick competitors.
Diagnostic sales increased 18% in the quarter, largely driven by our reference lab acquisitions.
In addition, previous instrument placements created a solid foundation for consumables growth in the second quarter.
U.S. livestock declined 18% in the quarter, driven by lower sales across all species.
In the second quarter, we faced challenges with significant declines in feedlot placements, reduced demand from the foodservice industry and the effects that had throughout the food supply chain and our customers, in addition to increased competition.
To summarize, U.S. performance was strong in a difficult market environment.
And the diversity of our portfolio, again, proved beneficial as growth in companion animal offset the challenges faced in the U.S. by our livestock portfolio.
Our International segment had operational revenue growth of 3% in the second quarter, with more balanced performance across our companion animal and livestock portfolios.
Companion animal operational revenue growth was 2% and livestock operational growth was 4%.
Increased sales in companion animal products was a result of growth in our key dermatology portfolio and our Simparica franchise, including the launch of Simparica Trio in Canada.
While European markets were impacted significantly by COVID-19, the decline was offset by significant growth in other markets, including Japan and China.
Diagnostics had a difficult quarter as wide-scale clinic closures resulting from COVID-19 limited the ability to place instruments and negatively impacted consumable usage.
International livestock growth in the quarter was driven by swine, fish and poultry.
Swine grew double digits in the quarter, primarily driven by China, which grew 25%, as key accounts continue to expand their herds and production shifts from smaller farms to larger-scale operations.
Our fish portfolio delivered another strong quarter.
We saw favorable conditions in Chile and Norway that resulted in vaccinations being accelerated into Q2.
In addition, we continue to see an uptake of the Alpha Flux parasiticide in Chile.
Overall, our international segment was again a positive contributor to revenue growth, with performance in swine, companion animal, fish and poultry more than offsetting decline in cattle resulting from the COVID-19 pandemic.
Now moving on to the rest of the P&L.
Adjusted gross margin of 71.1% increased slightly on a reported basis compared to the prior year due to price, favorable manufacturing costs and product mix, which were partially offset by foreign exchange, recent acquisitions and higher inventory charges.
Adjusted operating expenses were flat operationally.
The incremental advertising and promotion expenses related to Simparica Trio, recent acquisitions and R&D increases were largely offset by reductions to T&E and compensation-related costs as a result of COVID-19.
The adjusted effective tax rate for the quarter was 22.3%.
The increase versus prior year is driven by the jurisdictional mix of earnings and the impact of discrete tax benefits recorded in Q2 2019.
Adjusted net income for the quarter grew 4% operationally, primarily driven by revenue growth, and adjusted diluted earnings per share grew 6% operationally.
Next, I'd like to cover our liquidity position and our capital allocation priorities.
We ended the second quarter with approximately $3.4 billion in cash and cash equivalents, including the proceeds from our $1.25 billion long-term debt issuance in May, of which $500 million is earmarked for repayment of our November 2020 maturity.
We have access to a $1 billion revolving credit facility and a coinciding commercial paper program, both of which remain undrawn.
Given our strong cash flow and balance sheet, we remain committed to our capital allocation priorities for internal investment, M&A and returning excess cash to shareholders.
Consistent with what I mentioned last quarter, we still anticipate elevated capital expenditures this year to support investments in manufacturing, information technology to support our recent acquisitions and capabilities in digital and data analytics.
With regard to returning excess cash to shareholders, we remain committed to our 2020 dividend, which represents a 22% increase over 2019.
In Q1, we repurchased $250 million in Zoetis shares before suspending the program in the second quarter in order to conserve cash.
We have approximately $1.4 billion remaining under our multiyear share repurchase program.
Now moving on to our updated guidance assumptions for 2020.
Our past performance has always given us confidence that the essential nature of our business, our diverse portfolio and the innovation we consistently bring to our customers would position us well during difficult market conditions.
After assessing recent trends and our performance in the second quarter, we are further refining and raising our full year 2020 guidance.
We expect recent positive companion animal trends in the U.S. will continue, although vet clinic revenue may moderate somewhat as pent-up demand works its way through the system.
The more recent resurgence of COVID-19 cases in parts of the U.S., and expanding rates of infection in international markets continues to create uncertainty around the duration, scope and economic impact of the pandemic.
Please note that our guidance reflects foreign exchange rates as of mid-July.
And given our global footprint, movement in foreign exchange has had an impact on revenue and adjusted net income since we issued our prior guidance in May.
Our current guidance includes favorable foreign exchange revenue of approximately $50 million and approximately $10 million at adjusted net income versus May guidance.
For revenue, we are raising and narrowing our guidance range with projected revenue now between $6.3 billion and $6.475 billion and operational revenue growth of between 3% and 6% for the full year versus a negative 2% to positive 3% we had in our May guidance.
Adjusted net income is now expected to be in the range of between $1.685 billion and $1.765 billion, representing operational growth, a positive 1% to positive 5% compared to our prior guidance of negative 9% to negative 2%.
Adjusted diluted earnings per share is now expected to be in the range of $3.52 to $3.68 and reported diluted earnings per share to be in the range of $3.14 to $3.32.
In closing, while the COVID-19 pandemic has certainly presented a set of challenges we have not seen in the past, we are extremely proud of our colleagues and the commitments they have shown toward our customers, our company and animal healthcare.
During this time, we have demonstrated the diversity and durability of our portfolio, the resiliency of our industry.
And we have confidence in our ability to continue to execute on our strategy during these uncertain times.
 Assistant:

Chosen response:
sees fy 2020 earnings per share $3.14 to $3.32.
sees fy 2020 revenue $6.3 billion to $6.475 billion.
q2 revenue $1.5 billion versus refinitiv ibes estimate of $1.36 billion.
sees fy 2020 adjusted earnings per share $3.52 to $3.68.
looking ahead, expect overall revenue growth for remainder of year to be driven largely by companion animal products.


Prompt:
Human: I am joined today by Kristin Peck, our Chief Executive Officer; and Glenn David, our Chief Financial Officer.
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.
We also cite operational results, which exclude the impact of foreign exchange.
I hope you and your loved ones are all staying healthy.
As we all know, we're still experiencing hard times in many regions as COVID cases continue, and new variants of the virus emerge.
But I hope you share my optimism that with progress in vaccinations and continued adherence to safety protocols, better days are ahead.
The year 2020 will be remembered for COVID-19, but for Zoetis, it also reaffirms the resilience of our business, the essential nature of animal health and the agility and dedication of our colleagues in the face of industry and personal challenges.
Throughout the year, we successfully ensured colleague safety and maintained reliable supply for our customers.
We kept driving innovation and strengthening our diverse portfolio of 13 blockbusters and more than 300 product lines across eight species and seven major product categories.
We successfully launched our triple combination parasiticide, Simparica Trio.
We also achieved approvals for the first ever long-acting monoclonal antibodies for osteoarthritis pain in dogs and cats.
With Librela's authorization for dogs in the European Union and several other markets, and Solensia's authorization for cats in Switzerland.
We also continue to build on our vaccine portfolio in livestock with the approval of our CircoMax Myco swine vaccine in the European Union.
Meanwhile, in diagnostics, we successfully launched VetScan Imagyst, a breakthrough platform using cloud based artificial intelligence for veterinary clinics.
We were able to do all this while staying anchored to our purpose and advancing the five long-term priorities, that I set out at the beginning of the year, including sustainability, where we made important progress in our ESG programs and metric reporting.
We look forward to sharing our long-term ESG goals in the coming weeks.
And finally, we delivered financial results for 2020 that were in line with the guidance we provided last February, before the impact of the global pandemic was known.
For the full year, we generated 9% operational growth in revenue primarily based on new products in our companion animal business, the continued strength of our key dermatology portfolio and growth in China.
And as part of our long-term value proposition, we once again grew revenues faster than the anticipated growth for 2020, and faster than the historical industry rates of 4% to 6%.
As part of our value proposition, we also delivered on growing our adjusted net income faster than revenue.
For the full year, we delivered operational growth of 10% in adjusted net income while adapting our operations in the pandemic and continuing investments in our pipeline and new product launches.
We generated strong fourth quarter results which Glenn will discuss in a minute, and these performance trends give us confidence in our growth drivers and strong momentum for 2021.
We expect to continue growing revenues faster than the market in 2021, driven by ongoing strength in petcare, continued expansion in markets outside the U.S., most notably China, and acceleration of our diagnostics portfolio penetration.
We are guiding operational growth of 9% to 11% in revenue for full year 2021.
Positive pet care trends during the pandemic, based on increased adoptions and people spending more time with their pets, should continue driving market growth in the near-term.
Data in the U.S., shows visits to veterinary clinics have rebounded and the average revenue per visit has continued to increase.
Over the long term, we see these trends moderating as adoption rates normalize and people eventually return to the workplace.
The Specialty Care regimens and chronic care treatments that began in the pandemic should continue, and our innovative portfolio across dermatology, parasiticide, pain, vaccines and diagnostics have us well positioned for continued growth and capturing share as these shifts occur.
In terms of livestock market, we expect low single digit market growth in 2021 as the impact from COVID-19 will still be felt, and a number of products experience loss of exclusivity.
We expect Zoetis to grow in line with the market even as we faced increased headwinds from generic competition for DRAXXIN, our leading anti-infective product.
We are confident we can leverage our lifecycle innovation strategies together with the overall diversity of our livestock portfolio, including swine product sales in China to help us address the loss of exclusivity for DRAXXIN and maintain livestock growth that will support our 2021 guidance.
Longer term, we will continue to invest in livestock innovations and data driven animal agricultural solutions.
As we continue through 2021, we will be building on the progress against our five priorities.
Driving innovative growth, enhancing customer experience, leading in digital and data analytics, cultivating a high performing organization and championing a healthier, more sustainable future.
Our investment plans and focus on growth for 2021 include, continuing the successful launch of Simparica Trio in the U.S. and other markets as well as the ongoing adoption of other new parasiticides, Revolution Plus and ProHeart 12, driving growth in dermatology through increased use of direct-to-consumer advertising and disease awareness campaigns in the U.S. and globally.
Our focus remains on growing this market and increasing customer loyalty through our innovative treatments, which we expect to help us top $1 billion in annual sales for the first time.
As noted earlier, we will be investing in the launch of the first monoclonal antibodies for osteoarthritis pain in dogs and cats in Europe in the first half of 2021, and advancing the regulatory process in the U.S. and other markets.
While we remain confident in the eventual U.S. approval of these products based on the safety and efficacy data we submitted, at this point, we believe it is unlikely we will receive approvals for Solensia or Librela in the U.S. in 2021.
We continue to work through regulatory reviews and manufacturing inspections with the FDA and we will continue to keep you updated on this progress on future calls.
And finally, we're continuing our development of digital and data solutions that will support more individualized animal care and more efficient and sustainable operations for producers.
In conclusion, I'm incredibly proud of what our people accomplished in the face of such uncertainties during 2020, and it gives me great confidence in our continued success and full-year guidance for 2021.
As we navigate through recovery from the global pandemic, and capitalize on the growth opportunities we see ahead, my optimism comes from what drove us over the last year.
The resilience and essential nature of animal health industry, the diversity, innovation and market leadership of our portfolio, and the agility and passion of our colleagues to face any challenge.
Now, let me hand it off to Glenn who will speak more about our fourth quarter results and guidance for the full year 2021.
We had another exceptional year with revenue of $6.7 billion and adjusted net income of $1.8 billion, both exceeding the high end of our November full-year guidance range.
Full year revenue grew 9% operationally and 7% on a reported basis with adjusted net income increasing 10% operationally and 5% on a reported basis.
Going deeper into the numbers, price contributed 2% to full year operational revenue growth with volume contributing 7%.
Volume growth consisted of 3% from new products, 3% from key dermatology products and 1% from acquisitions, with other in-line products flat for the year.
We again saw broad-based revenue growth with the U.S. growing 11% and International growing 7% operationally.
The innovation we brought to the market and the diversity of our portfolio was key to our strong performance, as companion animal grew 17% while livestock was flat on a year-over-year basis.
Performance in companion animal was led by our parasiticide portfolio, bolstered by the launch of Simparica Trio which generated revenue of $170 million.
This added approximately $150 million of incremental revenue and exceeded our expectations set prior to the pandemic.
Sales of Simparica also grew double-digits for the year with operational revenue growth of 16%.
Our key dermatology portfolio demonstrated continued strength in 2020 growing 23% operationally, generating revenue of $925 million and increasing more than $170 million versus prior year.
The COVID-19 pandemic created a difficult market environment for livestock.
However, we are encouraged by the resiliency displayed in 2020.
We remain optimistic that global livestock will return to modest growth in 2021 as the recovery from African swine fever in China continues and consumption patterns normalize.
Operational growth and adjusted net income of 10% were driven mainly by strong revenue growth and operating margin expansion.
Now, moving on to our Q4 financial results where we posted another strong quarter with revenue of $1.8 billion representing an increase of 9% operationally and 8% reported.
Adjusted net income of $438 million is an increase of 3% operationally and flat on a reported basis.
Operational revenue grew 9% with 2% from price and 7% from volume.
Volume growth of 7% consisted of 4% from new products, 3% from key dermatology products, 1% from acquisitions and a decline of 1% from other in-line products.
Companion animal products led the way in terms of species growth, growing 25% operationally, while livestock declined 5% operationally in the quarter.
Companion animal parasiticides grew 52% in the quarter, gaining market share in the U.S. of more than 7% within the flea, tick and heartworm segment, versus the same period in the prior year.
This includes the continued adoption of Simparica Trio which generated sales of $60 million in Q4.
Our key dermatology products, Apoquel and Cytopoint again had significant global growth in the quarter with $257 million of revenue, representing 27% operational growth versus an extremely difficult comparative period in which key derm grew 29% for the fourth quarter of last year.
Our diagnostics portfolio again made positive contributions to revenue with reference lab expansion and double-digit growth in consumables and instrument revenue.
The recovery in wellness visits continued to be a catalyst for growth following the slowdown from social distancing restrictions earlier in the year.
As we noted on our previous earnings call, the early fall cattle run pulled a portion of fourth quarter sales into the third quarter, leading to a weaker quarter in cattle than we would typically expect.
This was the primary driver of the 5% operational decline in livestock for the fourth quarter.
For the remainder of the livestock portfolio, swine posted a second consecutive quarter of growth with the herd rebuild continuing key accounts, as the market recovers from African swine fever in China.
Our aquaculture business grew high single digits in the quarter, and along with swine partially offset the decline in cattle and poultry.
Now moving on to revenue growth by segment for the quarter, U.S. revenue grew 11% with companion animal products growing 30% and livestock sales declining by 15%.
For companion animal, the positive trends at the vet clinic continued in Q4 with patient visits up 2% and revenue per visit increasing by 13%.
Companion animal growth in the quarter were driven by sales of our Simparica franchise as well as key dermatology products.
We maintained an increased investment in direct-to-consumer advertising in both therapeutic areas and continue to see a good return on that investment.
Simparica Trio performed well again in the quarter with sales of $56 million.
We remain extremely encouraged for the future growth of our product and the growth of the overall market segment as a material portion of Trio sales came from new patients to the category.
Key dermatology sales were $176 million for the quarter, growing 32% with significant growth for Apoquel and Cytopoint.
Our investments to support the franchise have been instrumental in driving more patients into the clinics.
Companion animal diagnostic sales increased 22% in the quarter as a result of reference lab expansion and growth in point-of-care instruments and consumables.
U.S. livestock declined 15% in the quarter driven primarily by cattle, which had a portion of Q4 sales pulled into the third quarter as a result of the earlier movement from pasture to feedlot.
The remaining species declined as well with COVID-19 and pricing pressure negatively impacting our swine business.
Poultry declines are largely attributed to product rotation and less producer profitability, leading to reduced usage of our premium products.
To summarize U.S performance, innovation and return on investment once again drove exceptionally strong growth in companion animal.
While livestock was down in the quarter, the results were in line with our expectations.
Revenue in our International segment grew 7% operationally in the quarter.
Companion animal revenue grew 17% operationally and livestock revenue grew 2% operationally.
Increased sales of companion animal products resulted from growth in our parasiticide portfolio, vaccines and key dermatology products.
Parasiticide growth in the quarter was again driven by the Simparica franchise with further adoption of Simparica Trio.
In Q4, we observed a series of favorable market trends, such as increased pet ownership and medicalization rates in Asia.
Overall, companion animal grew in every major market except Italy and the U.K., which had arguably the strictest lockdown protocols.
Companion animal diagnostics grew 16% in the quarter, led by an increase in point-of-care consumable usage.
Swine revenue grew 14% operationally, posting a third consecutive quarter of double-digit growth.
Swine sales in China grew in excess of 100% for the second straight quarter.
Key accounts expanded their use of vaccines and other products as they continue to rebuild herds from smaller farms to large-scale operations.
China total products grew 45% operationally in the quarter and 34% operationally for 2020.
Brazil was also a significant contributor to international growth in the quarter, growing 18% operationally.
For the fourth quarter and full year 2020, Brazil delivered double-digit growth in all species except poultry which modestly declined.
Overall, our International segment delivered strong results despite the challenges presented by COVID-19.
Our diversity across products and geographies enabled our international segment to again be a significant driver of growth.
Now moving on to the rest of the P&L for the quarter.
Adjusted gross margin of 67.7%, fell 80 basis points on a reported basis compared to the prior year resulting from other manufacturing costs, inventory charges, recent acquisitions and elevated freight expense.
This was partially offset by favorable product mix and price increases.
Adjusted operating expenses increased 10% operationally, resulting from increased advertising and promotion expense for Simparica Trio and Apoquel, partially offset by T&E savings.
Return on investment from our DTC campaigns has been very favorable and we remain -- and will remain an important investment to support future growth of the business.
The adjusted effective tax rate for the quarter was 13.5%, a decrease of 70 basis points, driven by the impact of net discrete tax benefits, partially offset by the jurisdictional mix of earnings.
And finally, adjusted net income and adjusted diluted earnings per share for the quarter grew 3% operationally.
In December, we announced 25% annual dividend increase, continuing our commitment to grow our dividend at or faster than the growth in adjusted net income.
In addition, we resumed our share repurchase program in January with $1.4 billion of remaining capacity under the current authorization.
Now moving on to guidance for 2021, please note that guidance reflects foreign exchange rates as of late January.
For 2021, we are projecting revenue between $7.400 billion and $7.550 billion representing 9% to 11% operational growth.
We are expecting foreign exchange favorability in 2021 of approximately 200 basis points.
We expect companion animal to be the primary driver of growth in 2021 with the continued strength of our diverse parasiticide portfolio which includes full year Simparica Trio sales.
We believe market dynamics for companion animal will remain strong in 2021 allowing for further expansion of our key dermatology products as well as our diagnostics offerings, which we anticipate will grow faster than the overall animal health market.
While we expect the pace of certain trends that accelerate in 2020 to moderate, such as increased spend per visit, our view is that 2020 has a status [Phonetic] of the higher base for future growth.
We anticipate livestock will return to global growth in 2021, primarily driven by more normalized food consumption patterns.
Geographically, we expect total Company sales growth to be relatively balanced between our U.S. and International segments.
However, we do expect continued and meaningful growth in China and other emerging markets.
I'd like to touch upon the key assumptions that underpin our expectations for revenue growth.
Beginning with dermatology, our guidance does not assume a meaningful competitive entrant in 2021 and with continued investment behind the franchise, we believe revenue will exceed $1 billion for the full year.
We also do not assume a triple combination product will launch in the U.S. in 2021 to compete against Simparica Trio.
We're extremely excited about our monoclonal antibodies for pain with both Librela and Solensia having long term blockbuster potential.
However, as Kristin mentioned, while both products will launch in the first half of 2021 in the EU and other international markets, we do not currently expect either product to receive approval in the U.S. this year.
For the remainder of the P&L, adjusted cost of sales as a percentage of revenue is expected to be approximately 30% which is relatively consistent with our cost of sales in 2020.
Adjusted SG&A expenses for the year are expected to be between $1.775 billion and $1.85 billion with the increase from 2020 focused on supporting primary drivers of revenue growth, including recent and future product launches, key brands and recent acquisitions and reference lab expansion in diagnostics.
Adjusted R&D expense for 2021 is expected to be between $500 million and $520 million as we remain committed to investing in pipeline opportunities for new therapies and lifecycle innovation.
Adjusted interest and other income deductions is expected to be approximately $260 million with the increase over 2020 driven by increased interest expense as well as lower interest income.
Our adjusted effective tax rate for 2021 is expected to be approximately 20%.
The increase in 2021 is primarily related to the impact of favorable non-recurring discrete items that occurred in 2020.
Adjusted net income is expected to be in a range of $2.08 billion to $2.13 billion, representing operational growth of 9% to 12%.
Our guidance reflects our value proposition of growing revenue in line with or faster than the market and growing adjusted net income faster than revenue, during a year when we'll be making meaningful investments to support future growth.
Consistent with 2020, we are anticipating elevated capital expenditures in 2021 to support investments in manufacturing, focused on internal sourcing of API, capacity increases and facilities to support pipeline opportunities.
We're also investing in information technology to support our recent acquisitions as well as digital capabilities and data analytics.
Finally, we expect adjusted diluted earnings per share to be in the range of $4.36 to $4.46, and reported diluted earnings per share to be in the range of $4.02 to $4.14.
While guidance represents full year expectations, we do anticipate growth will be more heavily weighted toward the first half of the year.
This is largely due to full year Simparica Trio sales and a favorable comparison versus Q2 2020 as a result of COVID-19.
To summarize, 2020 was another exceptional year in which we delivered 9% operational revenue growth and 10% operational growth in adjusted net income.
In the year that presented a unique set of challenges.
Our guidance for 2021 highlights our ability to grow revenue organically above the market and grow adjusted net income faster than revenue, even during times of elevated investment.
Before turning it over to Q&A, I'd like to express how proud I am of our colleagues and all we've accomplished amid an unprecedented set of circumstances.
While there is no assurance that the new year will be without similar challenges faced in 2020, we cannot be more excited about the opportunity to again deliver on our long-term shareholder value proposition.
 Assistant:

Chosen response:
q4 revenue $1.8 billion versus refinitiv ibes estimate of $1.73 billion.
sees fy 2021 earnings per share $4.02 to $4.14.