Elanco Animal Health Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the Elaine Coe Animal Health Inc. Q2 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker 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. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Tiffany Kanega. Thank you. You may begin.

Good morning. Thank you for joining us for Elanco Animal Health second 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 2 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 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. As I reflect on our progress in the nearly eight months since our investor day, we see evidence that our transformation is creating sustainable, long-term value for our customers, our shareholders, and our globally land-goed team. Our results demonstrate we are executing against the strategy we laid out in December. Second quarter revenue, EBITDA, and EPS on slide four were all above our expectations. continuing to build on the strong momentum our business has shown since closing the Bayer acquisition a year ago. Revenue of $1.279 billion surpassed the midpoint of our guidance range by nearly $40 million, with outperformance in both sides of our now relatively balanced business between pet health and farm animal. Our adjusted EPS of 28 cents was 4 cents above the midpoint of guidance range, including an approximately $0.03 headwind from discrete items in the quarter that pushed our tax rate to nearly 30%, more than offset by approximately $0.07 of operating improvement. Adjusted EBITDA of $291 million was $29 million above the midpoint, demonstrating good flow through and showing significant headway toward our long-term margin targets. Today, we are raising our 2021 full-year revenue guidance for the third time by $15 million at the midpoint to $4.68 to $4.73 billion. The business is delivering beyond our long-term growth algorithm, providing total revenue up 5% to 7%. This includes approximately 4% to 5% for our underlying business, with a reduced innovation range entirely due to external challenges for Zooshield, which I'll discuss later, that is more than offset by portfolio gains in a good industry backdrop. While we exit the second quarter with strong momentum, we're taking a balanced approach to the rest of the year, factoring in many moving pieces, including seasonality, moderation in pandemic-driven pet health tailwinds in the vet clinic, and ongoing competitive dynamics. During the second quarter, we made two strategic moves with some near-term implications and important medium and long-term benefits. First, we announced the bolt-on acquisition of Kindred Bio, which can contribute three potential blockbusters alongside our own dermatology assets and more quickly build a presence in this essential part of the industry. The transaction also provides attractive shots on goal and other therapeutic fields, including securing full ownership of the canine parvovirus therapy. We've completed antitrust review and expect the transaction to close this month. Second, we announced the exit of the three manufacturing sites. In further streamlining our footprint, we're accelerating our gross margin efforts, reducing annual CapEx and improving working capital. Todd will provide details on how these two decisions impact our revenue, EBITDA, and EPS in 2021. Both strategic moves are examples of Elanco's increasing position of strength from continued transformation, driving value creation. We're taking the next steps in our journey to build a global, independent, fit-for-purpose animal health leader. with consistent double-digit adjusted EBITDA and adjusted EPS growth in a durable industry. Moving now to overall pet health for the quarter on slide five, the global business drove approximately two-thirds of the upside versus the midpoint of the guidance, reaching $685 million in revenue for the quarter, with continued good execution in a competitive but favorable pet industry. As you know, pet spending has many structural tailwinds, which were amplified during the pandemic. Industry research shows that the number of U.S. pet-owning households surged by nearly 6% in 2020 versus the slightly positive pre-COVID run rate. This trend is not isolated to America, with 3.2 million U.K. households having acquired a pet since the start of the pandemic, and a 2020 survey shows by the Japan Pet Food Association, showing a 15% increase in dog and cat ownership. This increased pet ownership also drove greater vet clinic traffic in the second quarter. Trends were most robust in April, up strong double digits against last year's quarantine impacts. Our pet health vaccine business was a standout in the quarter in this beneficial vet clinic backdrop. Vaccines were a key driver of Elanco's 2% improvement in price, reinforcing that our channel strategy is working and creating real demand. Our aggregate channel inventory levels at distribution remain consistent with prior quarters in the U.S. and across the global business. Turning to parasiticides, second quarter global Soresto revenue was $129 million, down 1% year over year, and global A family revenue was $148 million, down 3%. Both faced similar dynamics with a tough comparison against last year's retailer-driven stock-in, and Soresto also lapped a meaningful increase in points of distribution at certain major retailers. Additionally, cooler and wetter weather in May across many parts of the U.S. impacted seasonal traffic in the broader OTC channel as seen in the Nielsen data. Seresto and A-family trends rebounded in June alongside the industry with more favorable weather. Moreover, both achieved gains outside the U.S. in the quarter, leading our overall performance in international pet health. We remain on track toward full-year expectations for Seresto. The brand's resilient performance demonstrates high levels of confidence among consumers and veterinarians. Let me add that the EPA 60-day public comment period, which opened July 13th following an NGO petition, is a standard and expected practice. We have full confidence in Soresto's strong safety profile, which is supported by registrations from more than 80 regulatory bodies around the world, and our robust pharmacovigilance process. We continue to see a long runway to grow this trusted brand. Rounding out parasiticides, the Credelio franchise drove healthy growth across its combined platform of U.S. vet clinics, retail, and international, along with the launches of both Credelio Plus and Credelio Cat. In the U.S. market, Credelio maintained robust double-digit EDI growth in the second quarter, representing outbound sales into the vet clinics or alternative channels, and trends remained especially strong at retail. This focus brand is performing well in light of industry innovation, which is driving greater-than-anticipated share erosion from our older defend brand, Trifexis. We will continue to maximize profitability with targeted investments across our portfolio and grow revenue through new innovation as we compete for greater share of the expanding, growing global parasiticide market. Our combined international portfolio is highly competitive in both parasiticides and therapeutics, bolstered by our outperformance from new innovation like Credelio Plus. Finally, in therapeutics, Gallup Rant continued It's global expansion and also posted double-digit EDI growth in the second quarter with year-to-date share gains in the branded U.S. inset market, according to the kinetic data. While we exceeded second quarter guidance and exit the quarter with good momentum, we head into the remainder of the year with a number of variables to consider. We believe pet health is recalibrating back towards normalcy against tougher comparisons and with a natural moderation of tailwinds from the puppy boom. We're watching vet clinic trends in light of the limited practice capacity and labor constraints. We're monitoring pet ownership trends as the economy opens up, offset by potential impacts in the Delta and other variants. Additionally, we recognize the increasing competitive nature of the industry, especially in the U.S. and ecto-parasiticides. In balance, our pet health strategy is tracking to overall expectations. Innovation is performing ahead of plan, driving growth alongside focused brand contributions. We have established omni-channel leadership and digital initiatives to generate long-term growth with expansion in new regions like China, all supporting our full-year outlook and more consistent and competitive levels of pet health growth over time. Turning now to our farm animal business. In the second quarter, we saw demand-driven improvement in our U.S. cattle and swine businesses with protein benefiting from a return to food service. The first half of 2021 also benefited from higher numbers of cattle on feed. Elevated and volatile feed costs continue to pressure producer economics, likely extending through the back half of the year. However, they enhanced the value proposition for our efficiency products, like Skycis, Optiflex, and Remensin, which all outperformed our forecasts in the quarter. In China's swine, we experienced experienced impacts from the reemergence of African swine fever. Hog prices ended the quarter down about 65% since the start of the year, severely pressuring profitability for Chinese producers. The sow herd reduction is likely to also impact the third quarter. But overall, we still expect our China business to deliver at least a percentage point of growth to total elanco revenue in 2021. Finally, international poultry and aqua will remain negatively affected by unfavorable macroeconomic conditions and reduced consumption as expected, but are exhibiting green shoots of industry improvement. We are seeing easing pressure on Clinav as salmon prices improve, averaging up double digits year over year during the quarter. Clinav is also beginning to benefit from our recently published Phase 4 study, demonstrating superior ROI versus alternatives. Q2 also saw a very robust lift from the timing of aqua orders shifting into the period from the third quarter. While we do remain cautious around these businesses, we anticipate overall improvement ahead against a soft COVID-driven comparison. As you will see on slide six, our second quarter outperformance is driven by discipline execution against our strengthened and expanded IPP strategy. I'd like to share more on our innovation progress on slide seven with details around the eight launches planned this year. Pet health innovation is running above expectations, and I'm pleased with the global team's commercial execution around each of these three launches. Credelio Plus is exceeding planned in Japan and Europe and is on track to launch in Australia in Q3 in time for the local parasiticide season. While differing thresholds around heartworm production prevent us from bringing this product to the U.S., Credelio Plus is proving to be very competitive in the $1.5 billion international market. Meanwhile, Credelio Cat and Allura are growing our feline portfolio. In farm animal, Encrexa is faring well in a competitive and unprecedented market dynamic. It remains early days for Xperia, but we're making important strides towards achieving Packer ecosystem integration with continued potential for blockbuster status. Xperia's value proposition is being validated in the field and Packer acceptance is growing, now reaching seven Packers versus one at the end of Q1. The first Xperia customers have now reordered product and expanded use. finally zoa shield which we source externally to build our portfolio in the raised without antibiotic space zoa shield is currently facing greater than anticipated market supply of the leading competitive product as a result we're taking a prudent approach to total pipeline forecasts in 2021 reducing our innovation revenue outlook by 15 million dollars to $65 to $85 million. However, we remain confident in the value contributions of Zoeshield to our poultry portfolio. It's important to understand that this year's reduction does not impact 2025 total innovation potential of $600 to $700 million, which we raised in mid-June with the announcement of the Kindred bioacquisition. Before I turn the call over, let me say a few words on the regulatory item. On July 1, Elanco received a subpoena from the SEC relating to our channel inventory and sales practices prior to mid-2020. We've cooperated in providing documents and information to the SEC and will continue to do so. We believe strongly that our actions were appropriate. Finally, I'd like to just stop and thank our entire global team for continued diligent execution and focus during these unprecedented times. From our South Africa colleagues determining how to reach customers amid riots to those in Vietnam sleeping in our plant to ensure supply amid another COVID lockdown. Their commitment to our purpose is unwavering and inspiring. With that, I'll hand it over to Todd to provide more color on our results and our outlook.