Elanco Animal Health Incorporated

Good day and thank you for standing by. Welcome to the Elanco Animal Health Incorporated Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Tiffany Kanega. Please go ahead.

Good morning. Thank you for joining us for a Lenco Animal Health first quarter 2021 earnings call. I'm Tiffany Kanega, 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 and the slides referenced on this call in the investor section of elanco.com. The slides and 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 moving to Q1 results, I want to acknowledge our team and the challenges that they've overcome in the last two years through both the COVID and the African swine fever pandemics, the completion of our separation and independent system stand-up, and the integration of Bayer Animal Health. in what remains a difficult environment they've stayed focused on accelerating sustainable long-term value for customers for yourselves as shareholders and each other as you all know over the past two years in elanco we have made several hard strategic decisions four of these decisions stand out to me first the bayer animal health acquisition not long after the ipo also transforming our distributor strategy as well as changing commercial leadership and accelerating our restructuring. Today, we are seeing the payoff from those choices and from the discipline execution that I believe truly sets Elanco on a path to be a global animal health leader. Elanco started 2021 with better than expected sales, profits, and EBITDA. building on the strong momentum our business has shown since we closed the Bayer acquisition in August of 2020. Turning to Q1 results on slide three, our first quarter revenue of $1.242 billion surpassed the midpoint of our guidance range by over $80 million, with broad-based outperformance across many categories and geographies. Our adjusted EPS of 37 cents landed 15 cents above the midpoint of guidance, with expense leverage and synergy execution driving strong flow-through to bring adjusted EBITDA to $343 million. Our expectation for continued sales momentum and operational execution is reflected in our increased full-year guidance for revenue, adjusted EBITDA, and adjusted EPS. This includes the eight innovation launches in 2021, which remain on track to contribute $80 to $100 million in revenue this year. Our raised outlook demonstrates execution against our strengthened and expanded IPP strategy and continues to be in line with our long-term growth algorithm. I'd like to take a moment to address Seresto on slides five and six before progressing to a more detailed review of our performance in the first quarter. Today in a separate 8K, filing, we released additional scientific data to correct the misinformation spread through media reports regarding our Seresto flea and tick collar. The filing includes conclusions from a comprehensive review of adverse event data which we have also provided directly to regulators and legislators. First and foremost, let me emphasize the health and the well-being of pets and their ability to enrich the lives of people through companionship is core to what we do and who we are at Elanco. One of our greatest concerns from these stories is that pet owners stop using safe, proven products to protect their pets from potentially harmful fleas and ticks, which can transmit dangerous disease and impact pets' quality of life. The potential danger around non-use presents a risk to pets and their owners. That's why our team has worked tirelessly to clarify the science and safety around this trusted brand. So let me summarize and be clear on Seresto. First, the product's strong safety profile is supported by registrations from more than 80 regulatory bodies around the world and our robust pharmacovigilance process. Also, there is no scientific evidence in clinical studies or pharmacovigilance reporting to substantiate that Seresto's active ingredients cause pet deaths. We are providing additional product surveillance information on Seresto to the EPA And we've shared information with the House of Representatives Subcommittee on Economic and Consumer Policy to set the record straight. We continue to actively cooperate with both on any supplemental requests for facts. Our proprietary market research indicates high levels of confidence among consumers and veterinarians, bolstered by our proactive efforts to share the facts with pet owners, retailers, and veterinary clinics. Importantly, in terms of revenue, in the first quarter, we saw no deviation in two-year growth for global Seresto compared to historical trends. April revenue in the U.S. is ahead of our original expectations from the start of 2021, and we are on track towards full-year expectations for the Seresto brand. I'd like to highlight a few details I think are particularly noteworthy. Since the launch of Seresto in 2012, more than 28.5 million collars have been distributed across the U.S. Through our robust pharmacovigilance investigation process, 12 pet deaths have been classified as probably or possibly caused by the Seresto collar, using an internationally recognized classification system known as the ABON coding. As a percentage of total Seresto collars sold, this results in an incident rate of 0.000042%. And very importantly, as recently reinforced by an independent third-party review, none of those 12 cases since 2012 were deemed causally linked to the active ingredients in Seresto. The cases reflect other highly unlikely but unfortunate situations, such as a collar getting caught on an object and resulting in harm. We're deeply disappointed when any adverse event or reaction occurs associated with a product. Our entire Elanco team is dedicated to ensuring the quality, safety, and efficacy of our products. In the light of the misinformation around Soresto over the last two months, we've taken proactive steps to ensure consumer understanding of the product's strong safety profile. We've offered educational materials across 20,000 veterinary clinics through enhanced in-store and online retailer advertising and directly to consumers through targeted social and online channels. In turn, our recently completed proprietary market research indicates that veterinarian and consumer confidence in Seresto remains high. Of the approximately 1,500 U.S. pet owners surveyed the week of April 23rd, 98% of Seresto users intended to repurchase the product, aligning with the loyalty data cited with the Bayer acquisition. A representative national sample of 246 veterinarians found that while about half of those veterinarians are familiar with the negative press coverage of Seresto, their reported use of the product and intent to recommend has not changed. Slide 6 shows first quarter Seresto global revenue of $152 million. Recall that in Q1 2020, the brand achieved very robust 49% growth with the strongest sales gains in the U.S., benefiting from the retailer-driven stock in due to increased consumer demand related to the pandemic. Last year also saw a meaningful increase in points of distribution at certain major retailers. In the first quarter of 2021, Seresto declined 9% versus tough comparisons and with colder February in the U.S., resulting in what are still very healthy and consistent multi-year trends. Looking at two-year global Seresto growth, first quarter 2021 revenue was up 35% versus the first quarter of 2019. U.S. retail and veterinary dispensing data from Kinetic, Nielsen, and 1010 data represents our closest view of pet owner purchasing. Two-year growth trends in March were well above a weather-impacted February and closer to January. While we do not intend to report dispensing data on a regular basis, we believe it provides important context in this case. Additionally, let me share that we have not seen any material increases in Soresto returns. Looking forward, we continue to see a long runway for this trusted brand. To fuel that growth, we're investing in omni-channel efforts and digital engagement to deepen our relationship with current customers and reach new pet owners, including additional investments in the U.S. in the second quarter. Continued expansion and market building in key emerging markets, including China, as well as a lifecycle management plan and connected care initiatives creates ample opportunity over time for this unique platform and trusted brand. Moving now to overall pet health for the quarter. On slide seven, the global business drove approximately half of the upside versus the midpoint of guidance. reaching $646 million for the quarter, with good execution in a competitive but favorable industry backdrop. The Advantage family performed well in the quarter, posting global revenue of $143 million, up 14%. Growth reflected our targeted consumer retention efforts in the U.S. and particular strength in international markets, including China. Pet health vaccines also remain strong in the quarter in a beneficial vet clinic backdrop and reflecting operational discipline under new leadership installed last August. U.S. pet health, including vaccines, was a key driver of the 2% increase in price achieved for Totally Lanco. It reinforces that our channel strategy is working and creating real demand. In the U.S. and across the global business, our aggregate channel inventory levels at distribution remain consistent with prior quarters. In parasiticides, Cordelio saw robust double-digit revenue growth. EDI accelerated from the fourth quarter, and trends were especially strong at retail. Our omni-channel leadership as one of our five key growth enablers positions us well as the retail channel outgrew this industry in the first quarter, despite beginning to cycle difficult comparisons from the consumer-driven demand. Cordelio and Interceptor Plus revenue were in line with our expectations for the quarter as the pairing opportunity continues to resonate with veterinarians and pet owners, offering comprehensive flea, tick, and worm coverage. Meanwhile, our defend brand, Trifexis, continues to see share erosion by industry innovation. We're managing declines and optimizing profitability for this older brand through targeted omni-channel efforts with trifectas growth at retail once again acting as a partial offset to decreases in the clinic. In therapeutics, Gallup-Prant had robust double-digit growth in the first quarter with share gains in the U.S. inset market, according to the kinetic data. Gallup-Prant is also running a bit ahead of our expectations in Europe. We're working to grow the brand to be our 10th blockbuster through our positioning strategy as first-line treatment with easy at-home dosing and through its continued global expansion. Overall, I'm encouraged by our commercial execution in pet health in the first quarter, exceeding our expectations from our last earnings call in February. We head into the remainder of the year with an optimistic but balanced view for the pet health business. Our increased full-year guidance incorporates growth from upcoming and recent innovation, omnichannel leadership, leveraging our digital ecosystem, optimizing our selected channel partners, and expanding in new geographies, including the fast-growing Chinese market, while recognizing the highly competitive nature of the pet health industry. Turning now to the farm animal business. In the first quarter, we saw stabilization in our U.S. cattle and swine businesses as the backdrop has normalized from the COVID pressure we saw in 2020. Elevated fee costs continue to pressure producer economics. However, they enhance the value proposition for our efficiency products like OptiFlex and Remensin, which outperformed our forecasts in the quarter. With Reminson, we continue to navigate generic competition, and our share assumptions remain in line with our expectations. Finally, we benefited from competitor stockouts in U.S. cattle vaccines and implants, a tailwind we do not anticipate extending into the second quarter. Outside the U.S., poultry and aqua continue to be negatively impacted by unfavorable macroeconomic conditions and reduced consumption. As we shared previously, international poultry challenges are concentrated in mid-sized emerging markets. While the outlook for global poultry industry is gradually improving, significant differences remain between countries, and the global poultry trade is still very competitive. In aqua, we were encouraged to see salmon prices inflect positive year over year to end the first quarter. We continue to look for trends in our international poultry and aqua businesses to improve mid-year with reduced pandemic and economic-related headwinds. Both species, again, remain important growth drivers for Elanco over time. And then finally, in China swine, we saw another quarter of strong recovery from African swine fever headwinds, while remaining vigilant around the potential impact of new outbreaks. Chinese producers are under pressure with hog prices down 40% over the course of the quarter, driven by sow herd reduction from new ASF spikes, as well as higher ASF-related costs and more expensive feed. The sow herd reduction is likely to impact the second quarter and third quarters. We continue to expect China across swine, poultry, and pet health to contribute a full percentage point of growth to total elanco revenue in 2021. Our first quarter results reflect progress in several key areas, including the Bayer acquisition, changing our revenue mix from 30% pet health and 70% farm animal to a 50-50 split. The commercial execution that our new leadership is bringing across U.S. pet health, U.S. farm animal, Europe and international. Our accelerated pace of synergy capture and finally the underlying demand that our teams are generating as part of changing our distribution strategy in 2020. As you will see on slide eight, our outperformance in the first quarter comes as we continue to execute against our strengthened and expanded innovation portfolio and productivity strategy or IPP. Turning to slide nine, I'd like to provide a status for the eight launches planned this year with 11 of the 13 geographic approvals received and the focus now turning towards launch execution and excellence. On the farm animal side, INCREXA is meeting our expectations in the competitive EU market and is performing well as part of the first tranche of launches in the U.S. Xperia, a first-of-its-kind product indicated to reduce ammonia gas emissions per pound of carcass weight in cattle, shipped to its first feedlot customers in the first quarter and is being fed to cattle today. We're introducing two products to support the Raised Without Antibiotics, or RWA, market. Clinicox, which launched in the first quarter, and Zooshield, which we sourced externally to build our portfolio in this key space. These two products join Kosabadi and a nutritional supplement, which has now achieved the necessary heat-stable formulation. Moving to pet health, as we shared in February, Credelio Plus launched in Japan at the beginning of the year. We have now received a marketing authorization in the EU clearing the way for a second quarter launch, while Australia remains on track for the third quarter in time for the local parasiticide season. And finally, CredelioCat and Allura have launched in the U.S., adding to our growing feline portfolio. With that, I'll turn the call to Todd to provide more color on our results, the rapid progress being made on Bayer Animal Health integration, and our independent stand-up, as well as our outlook.