Elanco Animal Health Incorporated

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Alonco Animal Health Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Open to analysts only. Instructions will be given at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star followed by zero for an operator assistance at any time. Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. I would like to remind everyone that this conference call is being recorded, February 24th, 2021. I will now turn the conference over to Tiffany Kanegi. Please go ahead, ma'am.

Good morning. Thank you for joining us for a Lenco Animal Health fourth quarter 2020 earnings call. I'm Tiffany Kanegi, head of investor relations. Joining me on today's call are Jeff Simmons, our president and chief executive officer, Todd Young, our Chief Financial Officer, and Katie Grissom from Investor Relations. As always, during this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms, 10-K and 10-Q, filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. You can find our press release, the slides referenced on this call, and an investor workbook in the investor section of elanco.com. The slides and the press release also contain further information about the non-GAAP financial measures that we will discuss today during this call. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff to provide the highlights.

Thanks, Tiffany. Good morning, everyone. Before our results, a quick statement on the year. 2020 was a historic year for the world and for Elanco. As the COVID-19 pandemic shuttered businesses around the world, our Elanco essential workers in the labs and plants kept our pipeline and product flowing. Our sales and technical teams shifted to serve customers in innovative ways for a virtual and curbside world, supporting the surge in telemedicine and doorstep delivery. Meanwhile, many of our functional experts doubled down on standing up Bilanco Systems, transitioning IT services from Lilly to our own, and delivering our industry's largest acquisition on time from their home offices. The Elanco team not only weathered the pandemic, keeping our customers at the center, but they transformed our company along the way. Listen, we started on our journey to create a purpose-driven company 15 years ago, and one of my biggest learnings from this past year, 2020, is that strong vision and purpose to make a difference create a level of loyalty and determination that I've never imagined. The Elanco executive team and I have deep gratitude for all that our team accomplished in 2020, and to our customers who made it all possible. Now to our results. Elanco enters 2021 with strong momentum. Our fourth quarter revenue of $1.14 billion surpassed the high end of our guidance by $70 million as U.S. Pet Health, U.S. Farm Animal, and China Swine outperformed our expectations. Our adjusted EPS of 12 cents came in at the high end of our guidance range. Our revenue overachievement and gross margin leverage were offset by what were largely one-time and targeted investments driving OPEX above our guidance. Our sales momentum and operational execution, as well as our pipeline launches year-to-date, are reflected in our increased full-year revenue, adjusted EBITDA, and adjusted EPS guidance. Let me provide the highlights from the fourth quarter before progressing to a more detailed review of our performance. Our fourth quarter revenue reflects market share gains in our U.S. pet health retail business, ongoing improvement from COVID-19 headwinds in U.S. farm animal, and a better-than-expected performance in China's wine. Importantly, we achieved further share gains in the U.S., for many of our key pet health products compared to last year, including Crudelio, Gallopran, Seresto, and the Advantage family. Our buy-sell distributor strategy is working well and continues to improve our commercial competitiveness with our channel inventory levels remaining consistent with prior quarters. At the same time, our strength and omnichannel capabilities provide unparalleled access to pet owners wherever they prefer to purchase, at the veterinarian, through specialty and mass retail, or e-commerce. We are raising our 2021 revenue guidance to reflect intact fundamentals and our focus on execution. For the year, we continue to forecast 3% to 4% underlying revenue growth from innovation and portfolio contributions. building velocity as we move past the most challenging comparisons in the first quarter. Increased revenue dollars are translating to higher than previously expected adjusted EBITDA and adjusted EPS, as Todd will detail later. We are on track for eight innovation launches in 2021 and have already recorded our first sales for Cordelio Plus in Japan and Increxa in Europe, with approval received for Increxa in the U.S., We continue to expect innovation to contribute $80 to $100 million in our 2021 revenue. Over time, innovation will deliver consistent, dependable revenue with a balance of blockbusters and complementary portfolio solutions. Our fourth quarter adjusted gross margin of 52.7% was driven by positive mixed benefit from U.S. pet health revenue outperformance, along with our continued progress on our M&Q productivity agenda. We achieved adjusted EBITDA of $176 million above the high end of guidance as well. However, our operating expenditures also exceeded guidance due to investments pressuring EPS by approximately 7 cents. This outlay, which was largely one-time and discretionary in nature, backing important projects and our people. It can be divided into four categories that are roughly equal in size. First, brand building in the U.S. and China. Second, R&D acceleration and business partnerings. Third, higher incentive comp from our sales outperformance. And fourth, legal and other IT infrastructure and stabilization-related costs. We come into 2021 with our senior leadership aligned and accountable for delivering on our OPEX guidance by realizing synergies, executing with discipline, and making the necessary tradeoffs to keep driving growth. We continue to make progress in integrating Bayer Animal Health and driving our operational efficiencies. Our January 26 restructuring announcement marked the next wave of value capture actions. With this and our September actions, our headcount reductions are expected to drive approximately half of our total synergies. We believe that our savings and procurement and the rationalization of smaller and or overlapping R&D projects will deliver $40 to $50 million of our synergies in 2021. In total, we expect $160 to $175 million of cumulative synergies to be achieved in 2021, well on the way to the anticipated $300 million outlined by the end of 2023. At our December 15th investor day, we provided a detailed explanation of how our innovation portfolio and productivity strategy, or IPP, will underpin our long-term growth algorithm that we believe will drive 3% to 4% average annual revenue growth, double-digit annual adjusted EBITDA growth, and double-digit annual adjusted EPS growth. Our updated 2021 guidance today is balanced, demonstrating positive momentum in our underlying business that is in line with this algorithm. On slides three and four, let me summarize our execution in the fourth quarter. On the top line, Legacy of Lanco delivered $743 million, while Bayer contributed $396 million, with each ahead of our expectations. In pet health, our focus brand Credelio, which has now achieved blockbuster status, posted double-digit growth and U.S. market share gains year over year. We're also seeing further traction in the pairing opportunity with Interceptor Plus. Used together, these products provide pet owners with the broadest flea, tick, and worm coverage in the market today. The increase in pairing also reflects the benefits of our partnership efforts, including our dog park study last year with IDEX, showing that one in five dogs visiting dog parks in major U.S. cities tested positive for intestinal parasites. Kinetic dispensing data for the fourth quarter shows that when Interceptor Plus is sold with a flea and tick solution, it's paired with Cordelio over 50% of the time. sequentially improving from September and up double digits year over year. Meanwhile, we're actively optimizing the profitability of our defend brand, Trifexis, and applying omni-channel capabilities to grow its sales at retail during the quarter, partially offsetting its declines in the clinic. On the Bayer side, Soresto global revenue was $64 million in the fourth quarter, up 13% year over year. And A family global revenue was $100 million, up 5%, both at constant currency growth rates. In the U.S., Soresto and the A family both increased double digits, including approximately $10 million pulled into 2020 from 2021 from a large retail customer. The underlying growth for global bear of approximately 8% is an acceleration from the 4% to 5% that we estimated in the earlier portion of the year, reflecting pandemic-related retail channel tailwinds amidst rising COVID case counts. For the full year, including the period before the acquisition, Seresto revenue was over $400 million, with constant currency total growth above 20%. And while the A family was closer to 500 million, up mid-single digits year over year. Turning to pet health therapeutics, Gallup-Rant grew double digits in the fourth quarter, reflecting our positioning strategy as a first-line treatment with a differentiated safety profile and its continued global expansion. In the U.S., Gallup brand again outpaced the branded market in dollar growth compared to last year, according to the kinetic data. Rounding out the category, pet health vaccines remain strong in the quarter in a favorable vet clinic backdrop. Looking at our farm animal business in the fourth quarter, pressure from COVID on U.S. cattle and swine continued to lessen sequentially. Cattle on feed numbers are on par year over year, and processing backlog has largely dissipated. Elevated feed costs, with corn futures recently at seven-year highs, are pressuring producer economics, but also improve our value proposition through performance products. Remencin and Optiflex sales exceeded our forecast in the quarter against an incrementally better industry backdrop. and we continue to navigate generic competition within our expectations. We also benefited from approximately $10 million in incremental U.S. cattle vaccine and implant revenue due to competitor stockouts. Outside the U.S., poultry and aqua remain negatively impacted by unfavorable macroeconomic conditions and reduced consumption, with trends largely unchanged from the third quarter. International poultry challenges remain concentrated in mid-size emerging markets, including Central America, the Middle East, and India, more than offsetting growth in countries such as Brazil. In Aqua, salmon prices were down nearly 40% year over year at quarter end with reduced demand because of the pandemic. With salmon prices in some cases barely clearing production costs, we're seeing producers deterred from premium solutions like Klineath. We still expect pandemic and economic-related headwinds to negatively impact our international poultry and aqua businesses into mid-2021. However, both species remain important growth drivers for Elanco over time. Moving to China swine, the business continued to see strong recovery compared to last year's African swine fever headwinds, contributing to outperformance versus guidance. Prices remained elevated for China's wine during the quarter due to tight supply and increased further in early January ahead of the Chinese New Year. Despite the recent release of frozen pork from state reserves, prices are still trending more than double the pre-ASF levels. In turn, we're seeing further investment in pig health and demand for our premium products. While ASF and other diseases remain problematic in China still today, our key customer base of large modernized farms have invested in biosecurity and are having the most success in rebuilding their herds. Moving to slide five, we continue to execute against our strengthened and expanded IPP strategy. Let me touch on a few of the key points, starting with innovation. On slide six, we provided a status update for each of the eight launches planned this year. Let me now focus on three of those. The first is Cordelio Plus in Japan in January. We are pleased with the initial reception, with strong launch sales as wholesalers and veterinary clinics stocked in the product, but it remains very early days, still ahead of the season. Last week, we received a positive opinion from the European Medicines Agency, paving the way for a second quarter launch of Cordelio Plus, our flea, tick, and worm combination product across the EU. And Australia remains on track for the third quarter, in time for the parasiticide season in that geography. Next is INCREXA. a product for cattle and swine respiratory disease. Earlier this year, INCREXA launched in the competitive EU market. In the U.S., we've received approval for cattle and swine and expect to be in the first tranche of generic launches in the market. We continue to see INCREXA as a valuable complement to our existing farm animal respiratory care portfolio that will support our overall competitiveness. This will also include our data analytics and our performance evaluation services offered through Elanco Knowledge Solutions. And finally, we have Xperia, which is indicated to reduce ammonia gas emissions from cattle. This is the first of its kind product. It provides feedlot managers with the freedom and flexibility to balance environmental stewardship and sustainability while delivering business results and animal performance beyond today's industry-leading technology. Xperia has been adopted by the first full production and processing system, and we expect to have cattle on Xperia by the end of the first quarter. Additionally, last week we received Canadian approval for Xperia, the second largest feedlot market, which will complement the U.S. launch. Looking at the total pipeline, we're advancing key development programs that we expect to deliver a consistent two to three percentage point contribution to average annual growth, representing a reliable driver of our long-term growth algorithm. Moving now to portfolio, the 14 legacy Elanco products launched or acquired since 2015 grew 5% in 2020, excluding divestitures and despite COVID-related pressures. Details are included in the appendix on slide 22. Many of these recent innovations have transitioned into our focus brands, which will drive our sales growth in 2021 and years to come. We are a strategic global leader with a robust, diverse, durable portfolio with more access to the world's animals than any point in Elanco's history. Our balance across brands, species, and geographies will allow us to maximize value and deliver on our sales growth expectations. Omnichannel is our sweet spot and one of our key growth enablers, and we're now the leader in retail and e-commerce, outpacing the double-digit industry growth in the U.S. market. Finally, on productivity. Our manufacturing organization captured $115 million in cost savings and avoidance in 2020. Since 2018, the team has delivered $250 million in cost savings and avoidance, surpassing the expected $215 million and contributing most recently to our fourth quarter gross margin expansion and outperformance. We've transitioned all of our historic Elanco legal entities onto our new Elanco ERP system, with our new shared service centers in Poland and Malaysia executing our financial transactions. We've also moved all of our legacy Elanco employees and facilities onto our own IT network infrastructure. As a result of this global effort, we plan to have exited all material Lilly TSAs on time and at the end of March. Let me summarize. Elanco is entering 2021 with strong momentum. Our fourth quarter results were at the high end or exceeded guidance on both the top and bottom line. We're gaining share in key pet health products. And our U.S. retail business was particularly strong in the fourth quarter. U.S. farm animal is seeing sequential improvement while China swine is running ahead of expectations. Our innovation pipeline is on track to yield eight launches this year with nine out of the 13 geographic approvals now received and only two without a final approval date confirmed. Our productivity agenda is intact along with rapid action towards synergy capture. We are focused on execution in 2021 against the full-year guidance ranges that we have raised today. With that, I'll turn the call to Todd to provide more color on our results and outlook. Thanks, Jeff.