Wetteny N. Joseph
Executive Vice President and Chief Financial Officer at Zoetis
Thank you, Kristin, and good morning, everyone. As Kristin mentioned, we had a very strong quarter with growth across a number of our core franchises and the continued resilience of our end markets. Today, I will focus my comments on our second quarter financial performance, the key drivers contributing to our performance and provide an update on our full year 2022 guidance. In the second quarter, we generated revenue of $2.1 billion, growing five percent on a reported basis and eight percent on an operational basis. Adjusted net income of $567 million was flat on a reported basis and grew nine percenton an operational basis. Of the eight percent operational revenue growth, three percent is from price and five percent from volume. Volume growth consisted of six percent from new products, which includes the Simparica Trio and Librela, two percent from key dermatology products, while other in-line products declined three percent. The decline in other inline products was expected and largely the result of the impact of intermittent supply challenges and generic competition for DRAXXIN. Companion animal products continue to be the primary driver of growth, growing 14% operational with livestock declining one percent on an operational basis in the quarter. Simparica Trio was the largest contributor to growth in the quarter. Trio posted global revenue of $237 million, representing operational growth of 72% versus the comparable 2021 period.
We also continue to experience better-than-expected results from our Trio franchise outside the U.S. where we had sales of almost $30 million. We expect to continue to grow the addressable market for flea, tick and heartworm globally and see significant headroom for growth with brands like Simparica and Trio. Meanwhile, our key dermatology products, Apoquel and Cytopoint had significant global growth again with $315 million of revenue, representing 16% operational growth against a robust prior year in which these products were 22% operationally in the second quarter of 2021. In Europe, our monoclonal antibodies for osteoarthritis pain in dogs and cats also meaningfully contributed to growth posting $31 million in sales. Our global companion animal diagnostics portfolio recorded $83 million in revenue in Q2, declining nine percent operationally. Growth in our international diagnostics portfolio was more than offset by a decline in our U.S. business in the quarter. In the U.S., we experienced a decrease in sales resulting from our new growth in market model and the build-out of a sizable and new dedicated field force for diagnostics. While disruptive in the short term, this investment is putting the necessary fundamental elements in place to position and grow our diagnostics portfolio over the long run. We expect the effectiveness of our new diagnostic sales force to improve gradually for the remainder of the year.
Diagnostics remains core to our business and a key long-term growth driver for Zoetis. Sales of livestock products declined one percent operationally in the quarter, negatively impacting growth across the portfolio were global generic competition for DRAXXIN and the war in Ukraine. China swine products again declined due to lower pork prices and COVID-related lockdowns. Our U.S. poultry portfolio also continues to be challenged by generics and cheaper alternatives to Zoamix. Meanwhile, our fish portfolio again grew double digits in the quarter. And along with the strength of our sheep products in Australia, partially offset the broader decline. Overall, livestock performance in the quarter continues to be in line with our expectations. Now moving on to revenue growth by segment for the quarter. U.S. revenue was $1.1 billion in the quarter, growing nine percent with companion animal products growing 13% and livestock sales declining seven percent. Focusing first on companion animal. U.S. vet practice revenue trends continue to be positive with practice revenue growing approximately five percent. Spending per visit remained strong again this quarter, increasing over seven percent. Visit declined more than two percent, primarily due to challenging prior year comparisons.
In terms of vet line traffic, it is worth noting that business in the second quarter were above the number of visits pre-COVID in the second quarter of 2019 and the trend line for growth in visits over the last several years continues to slope favorably. I would also like to point out that our companion animal portfolio in the U.S. had volume growth of eight percent in the quarter. Our injectable portfolio of products that must be administered in the vet clinic also saw volume growth in the quarter. These products include Cytopoint, vaccines and Poulvac. Underlying demand for veterinary care remains robust throughout the country even as people return to work. While labor challenges do exist as they do across most industries, we believe that clinic revenue will continue to grow at levels above what we were seeing prior to COVID as the standard of veterinary care continues to increase through innovation, better demographics, higher compliance and more pets. Companion animal growth of 13% in the U.S. was driven largely by sales from Simparica Trio as well as key dermatology products. Growth of Simparica Trio was again strong in the quarter with sales of $208 million in the U.S., growing 74%. We are pleased to see that a significant number of Trio customers are new to the flea, tick and heartworm category altogether. In addition, we continue to meet our clinic penetration targets and take share within individual clinics.
These dynamics will provide additional runway for future expansion of both the broader market and revenue growth for Trio. Key dermatology product sales were $219 million for the quarter, growing 11% with Apoquel and Cytopoint each significantly contributing to growth. Year-to-date, our derm portfolio grew 16%. Our investments to support our derm portfolio have been instrumental in driving more patients into the clinics and we will continue to invest meaningfully in this space as a large portion of dogs with dermatitis remain undertreated, representing an opportunity to further expand the market. U.S. livestock declined seven percent in the quarter, driven primarily by sales of cattle products as a result of generic competition for DRAXXIN. Meanwhile, our poultry portfolio continues to be negatively impacted by the expanded use of lower cost alternatives and generic competition for Zoamix. Swine products sales grew in the quarter as a result of increased disease prevalence and favorable market conditions for producers. Moving on to our international segment, where revenue grew two percent on a reported basis and eight percent operationally in the quarter. Companion animal revenue grew 16% operationally and livestock revenue grew two percent operationally. Increased sales of companion animal products resulted from growth of modifying studies for alleviation of osteoarthritis pain, our key dermatology products and the Simparica franchise.
These core brands continue to benefit from our international direct-to-consumer promotional campaigns and we remain excited with the long-term prospects of these programs. We continue to be pleased with the performance of our monoclonal antibodies for OA pain with Librela generating $26 million and Solensia delivering five million dollar in second quarter sales. Librela remains on track to exceed $100 million in revenue this year. As we have mentioned in prior quarters, Librela is the number one pain product in the EU with the underlying performance metrics being very favorable for future growth. Reordering rates remain high. Compliance continues to exceed our initial expectations, and we continue to see significant opportunity to expand the pain market with a meaningful percentage of dogs on Librela being new to the market. It is also worth noting that we are observing similar pet owner and vet clinic trends in many of our key international markets that we are seeing in the U.S. The higher standard of care and better demographics as well as a more rapid adoption of innovation continues to expand markets for our products, and we expect these trends to continue. Volume growth in our international and companion animal portfolio was 10% in the second quarter, and we also saw growth across our injectable products, including monoclonal antibodies, vaccines and Cytopoint. Meanwhile, international livestock grew 2% operationally in the quarter with solid growth across fish, cattle and sheep. Our fish portfolio experienced increased demand for vaccines in key salmon markets, including Chile and Norway.
Cattle grew through favorable market conditions and price in key emerging markets, including Australia, Turkey, China and the U.K. Sales of shoe products grew as a result of favorable market conditions and new product launches in Australia. Growth was partially offset by continued weakness with the price of pork and COVID-related supply challenges in China as well as unfavorable producer rotational programs with MFAs in Europe and reduced stock sizes in Latin America impacting poultry. Now moving on to the rest of the P&L for the quarter. Adjusted gross margins of 69.8% decreased 120 basis points on a comparable basis to the prior year, resulting primarily from unfavorable foreign exchange impacts as well as higher manufacturing, freight and other costs partially offset by favorable price and mix. Adjusted operating expense increased 10% operationally with SG&A growth of eight percent operationally, driven by promotional and marketing expenses related to key brands and new product launches as well as T&E costs beginning to return to pre-COVID levels. R&D expenses increased 16% operationally due to higher compensation costs, increased spending on projects and higher operating costs. The adjusted effective tax rate for the quarter was 20.7%, an increase of 70 basis points, driven by changes in jurisdictional mix of earnings and lower discrete tax benefits related to share-based payments. And finally, adjusted net income grew nine percent operationally and adjusted diluted EPS grew 10% operationally for the quarter. Capital expenditures in the second quarter were $146 million.
We are still anticipating a significant increase in capex expenditures for the back half of 2022, primarily related to investments in Ireland, the U.S. and China to support manufacturing capacity needed to meet our long-term growth demands. In the quarter, we returned over $600 million to shareholders through a combination of share repurchases and dividends. We repurchased approximately $450 million of Zoetis shares, representing our largest share repurchase ever. Now moving on to our updated guidance for the full year 2022. For operational revenue growth, we are maintaining the midpoint and narrowing the range of growth to 9.5% to 10.5%, previously nine to 11 percent. We are increasing our operational growth expectations for adjusted net income to a range of 11% to 13%, previously 10% to 13%. This change in guidance signals increased confidence in the back half of the year due to the continuing outperformance of companion animal, easing of certain supply constraints and an improvement in our business in China. Please note that our guidance for adjusted interest expense and/or ID was changed to reflect favorable changes to interest income. Foreign exchange rates on our updated guidance as of late July and reflect the continued strengthening of the U.S. dollar. Beginning with revenue for the full year 2022 due to the narrowing of our range and the impact of foreign exchange, we are now projecting revenue of between $8.225 billion and $8.325 billion. We now expect adjusted net income to be in the range of $2.35 billion to $2.39 billion.
And finally, we expect adjusted diluted EPS to be in the range of $4.97 to $5.05 and reported diluted EPS to be in the range of $4.65 to $4.75. While guidance represent our outlook for the full year, due to the unique factors impacting our business in 2022, I would like to note that our guidance for growth, especially for revenue and adjusted net income will be rated towards the end of the year. While we expect operating expenses to be incurred at a similar rate across the back half of the year, we are noting an easier OpEx pop in Q4 than Q3 due to heavy spending in the fourth quarter of last year. Also, in Q3 of last year, we experienced an unusually low adjusted effective tax rate of 16.7% due to favorability related to foreign-derived intangible income and certain discrete items. We do not expect similar favorability this year. Our full year 2022 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 over the long term. Our success will continue to come from our diversified portfolio of enduring brands driven by multiple sources of in-line growth, productive innovation, and an infrastructure to develop and expand markets globally. We expect to continue to execute across multiple dimensions of our business and capitalize on favorable end market dynamics for the foreseeable future.
Now I'll hand things over to the operator to open the line for your questions. Operator?