Elanco Animal Health Incorporated

Q3 2021 Earnings Conference Call

11/5/2021

spk03: Hello and welcome to the Alanko Animal Health Inc. Q3 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Tiffany Kanega. Please go ahead, ma'am.
spk04: Good morning. Thank you for joining us for a Lanco Animal Health third 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 Scott Perucker 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 pipelines 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.
spk07: Thanks, Tiffany. Good morning, everyone. We are approaching the anniversary of our Investor Day, an important moment in our journey of transformation. That established, one, our commitments for the newly combined Elanco, as well as provided unprecedented transparency, as well as marking an inflection point towards sustainable value creation. This quarter of delivery represents our fourth quarter of consistently exceeding revenue guidance since our investor day. As we progress through 2021, it is clear our long-term growth algorithm is on track, and we are executing against our IPP strategy and commitments as laid out last December. Third quarter revenue on slide four was $1.131 billion. which surpassed the midpoint of our guidance range by nearly $45 million, with overperformance once again in both sides of our business, pet health and farm animal. Our adjusted EPS of 19 cents was 2 cents above the midpoint of guidance, and adjusted EBITDA of $211 million was $4 million above the midpoint. We are expanding margins while also reinvesting for future growth despite inflationary pressures as discussed in August. Today, we are raising our 2021 full-year revenue guidance and maintaining adjusted EBITDA and adjusted EPS guidance we provided in August, all three of which stand well above our initial targets from the December investor day. You can see that on slide five. At the midpoint, we anticipate revenue $190 million or 4% higher than the original December guidance. Adjusted EBITDA guidance is $85 million or 9% higher than originally stated. And adjusted EPS is 11 cents or 12% higher. 2021 is shaping up to be a strong step toward our long-term growth algorithm, providing total year expected revenue up approximately 7%, reflecting the durability and diverse nature of our combined business. Our growth this year includes gains for our focus brands, momentum at retail, global execution for parasiticides and pain, and share gains in U.S. farm animals. These tailwinds are balanced with competitive dynamics, reemergence pressure, reemerging pressure from African swine fever, and generic challenges. We are also making steady headway toward our long-term margin targets with approximately 300 basis points of adjusted EBITDA expansion anticipated this year on a pro forma combined company basis. Our margin expansion in 2021 is representative of the company-wide priority given to this important metric, with a comprehensive plan to sustain this trajectory towards our goal of 31% by 2024. Our teams are well-positioned to execute on the core business, while several recent strategic actions are enabling accelerated long-term value creation. The Kindred Bio acquisition closed at the end of August and advances Elanco's access to the fast-growing billion-dollar-plus dermatology market. With a combination of Elanco's internal pipeline plus the Kindred Bio additions, we expect to be a key leader in this next era of pet health growth. Kindred Bio's three potential blockbusters launching by 2025, as well as full ownership of the canine parvovirus therapy, adds approximately $100 million to our innovation revenue expectations, bringing the total to $600 to $700 million by 2025. As part of our increased focus on high-value, late-stage pet health pipeline progress, we welcomed Ellen DeBrabander, our new head of innovation, a few weeks ago. She's a highly accomplished R&D leader with a proven track record in animal health blockbuster development and is ideally suited to drive execution, ultimately building on the strong foundation established during Erin Schott's tenure. Erin is now leading the potential carve-out of our early-stage microbiome R&D platform in which we may retain a minority stake. The separation is expected to be completed by the end of the first quarter of 2022. We hope to have more details to share with you as this date approaches. Finally, on the productivity front, in June, we announced the exit of three manufacturing sites. On August 1st, the sale of the Shawnee site closed. And further streamlining our footprint, we're accelerating our gross margin efforts, reducing annual CapEx, and improving working capital. We believe all these strategic actions will combine to support consistent double-digit adjusted EBITDA and adjusted EPS growth ahead. On slide six, we provide the key drivers of our third quarter revenue performance. On a pro forma combined company basis, we grew approximately 6%, assuming the Bayer acquisition had occurred on January 1st, 2020. Pet Health drove approximately one-third of the upside versus the midpoint of guidance, reaching $527 million in revenue for the quarter. Trends are moderating on incrementally tougher comparisons, leading to low single-digit year-over-year increases in U.S. vet clinic traffic during the quarter. However, growth is still very healthy on a multi-year basis. In turn, our vaccine business saw strong EDI performance. As we evaluate the stickiness of the trends in PATS post-COVID that matter, first the improved vet clinic experience, as well as the wellness programs and improving compliance should represent longer-term market expansion factors on the other side of the pandemic. Turning to parasiticides, third quarter Soresto revenue was $52 million, while global Advantage family revenue was $121 million, each up 9% year over year. Both saw healthy gains in the U.S. and led our continued strength in international pet health. Soresto revenue was up 28% compared to 2019, back more in line with historical two-year trends. as the OTC parasiticide channel rebounded from transient weather-related challenges in May. We remain on track towards full-year expectations for Seresto, with key initiatives already in place going into next year, creating a long runway to grow this trusted brand. Moving to Credelio, the global franchise is performing well in a competitive field. Credelio is the second fastest growing brand in global oral parasiticide market, according to the industry data for the second quarter, the most recent available data. The flagship product achieved quarter and year-to-date EDI growth in the U.S., supplemented by international expansion and the launches of Credelio Plus and Credelio Cat. We continue to see good traction in the pairing opportunity with Interceptor Plus, And our sales and marketing teams across the world are driving our OTC and scripted parasiticide portfolio across retail, e-commerce, and the vet clinic as rising pet numbers and greater compliance provide a favorable and durable industry backdrop. Anticipated and expected declines in our older brands, Trifexis and Confortis, as well as a divested product, drove legacy Elanco Pet Health down 2% for the quarter. Finally, in therapeutics, Gallup brand outpaced the branded U.S. in said market, according to the kinetic data. The brand continues to grow nicely as a leader in pain, making progress towards becoming our 10th blockbuster. Turning now to the farm animal business. Legacy of Lanto was up 8% in the third quarter. We saw demand-driven strength and share growth in our global cattle business. In the U.S., cattle on feed numbers have remained elevated versus historic levels, and placements were higher year over year. We achieved strong EDI performance in cattle and swine for Reminson, Optiflex, and Denegard in the quarter. Our U.S. farm animal growth reflects our value-based products in the presence of higher feed costs, as well as our comprehensive portfolio, our value beyond product offerings, and the beneficial industry dynamics. In China's swine, we experienced ongoing headwinds from the reemergence of African swine fever, as discussed on our last call in August. Over supply through financially induced herd liquidation has kept hog prices broadly at their lowest levels for the year, down about 60% since the start in January. We expect these macro challenges to continue in the fourth quarter. Our overall swine business remains competitive, with a strong portfolio targeting larger producers that are better positioned in the markets. So in turn, we believe we are well positioned for outsized success as the market rebounds. Our total Chinese business is still poised to deliver at least a percentage point of growth to total Elanco revenue in 2021. Finally, we drove double-digit growth in international poultry and aqua as many of our international markets recovered from the 2020 pandemic impacts. Global poultry markets have seen significant improvement, with most regions now moving into profitable conditions, benefiting from increased demand and reopened economies. In aqua, salmon prices have been consistently positive year over year since mid-July, which is driving the use of our DNA vaccine, Clinaf, to protect Atlantic salmon from pancreatic disease. Turning to slides seven and eight, since our investor day, we are growing, we are transforming, and Elanco is elevating our business while prioritizing innovation. We have consistently outperformed revenue guidance since Q4 of last year. At the same time, we are on track towards our synergy commitments and our long-term margin and net leverage targets. We are moving with speed and decisiveness through several recent strategic actions to drive discipline execution against each of the three pillars of our IPP strategy to enable accelerated value creation. Slide nine outlines our innovation progress in 2021 with details around all eight products which have now launched. We continue to expect these launches to contribute $65 to $85 million in revenue this year. On the pet health side, where innovation is running above expectations, Credelio Plus launched in Australia in the quarter in time for the local parasiticide season. Credelio Cat and Allura are performing well and expanding our feline portfolio. In farm animal, exterior acceptance continues to grow with both producers and packers. The total value proposition is being substantiated in the field with expanded use from those that have tested the product in production systems. We have doubled the number of cattle on the product since the second quarter. We continue to see potential for blockbuster status for this unique product, the first U.S. FDA product. approved product labeled to reduce ammonia gas emissions. As part of Elanco's pledge to be our customers' lead partner on their journey to net zero emissions, we hosted leaders from across the global animal protein industry ahead of the United Nations Food Systems Summit to position animal agriculture as a meaningful solution to climate change while identifying opportunities to help our industry accelerate progress. Additionally, Elanco was recently named among the top 20 of Fortune's 2021 Change the World list, which recognizes companies that have made an important social or environmental impact through their profit-making strategy and operations. Our team's commitment to our purpose and continued execution in creating value for farmers, pet owners, veterinarians, stakeholders, and society as a whole. With that, I'll hand it over to Todd to provide more color on our results and our outlook.
spk11: Thanks, Jeff. Slide 10 summarizes our financial performance highlights, including our reported net income and earnings per share. On slide 31 to 33 in the appendix, you can find a summary of the adjustments made to the reported results to arrive at our adjusted presentation. I'll focus my comments on our third quarter adjusted measures in order to provide insights on the underlying trends in our business, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results. Looking at the adjusted measures on slide 11, you'll see that total Elanco revenue increased 27% on the quarter on a reported basis, with one point of benefit from foreign exchange from legacy Elanco. there was a visual representation of our revenue outperformance versus the guidance range we provided in August. The key drivers in order of magnitude were global cattle outperformance, global pet health and the retail channel, international poultry recovery, aqua, and currency tailwinds. Adjusted gross margin as a percent of revenue was 55.7%, an increase of 150 basis points compared to the third quarter of last year. The year-over-year improvement, which was achieved despite higher logistics costs, reflects the bear acquisition, the benefit of positive price and volume on Elanco's legacy portfolio, and continued productivity gains. The sequential deceleration of 240 basis points versus the first half of this year reflects seasonality as we move past the northern hemisphere parasiticide season. Total operating expense increased 19% in the third quarter, driven by the addition of the Bayer Animal Health business and Kindred Bio. Operating income increased 67%, reflecting the Bayer Animal Health acquisition, our top-line execution, expense leverage and discipline, and synergy capture. Our adjusted EBITDA was $211 million, and our adjusted EBITDA margin for the quarter was 18.7% of 200 basis points versus last year. At the bottom line, Q3 adjusted net income increased 55% to $93 million, and our effective tax rate in the third quarter was 23.5%. Now let's discuss our revenue performance more closely. On Flight 13, you will see a breakdown of the contribution from Legacy Elanco and Legacy Bear portfolios by category. Legacy Bear products contributed $421 million in the quarter. Pet Health drove $527 million of revenue, or 47% of total elenco. The sequential step down to less than half of our mix reflects seasonality. Cattle contributed $256 million, or 23% of total elenco revenue in the quarter. Poultry added $173 million, representing 15%. Swine, $110 million, or 10%. And aqua, $44 million, or 4%. On slide 14, you can see the effect of price, rate, and volume on our revenue performance. To aid your analysis for our performance, the full benefit of the bear acquisition for the quarter is reflected in volume on the slide. We've achieved a 2% increase for Legacy Elanco year-to-date and expect that to hold for the full year as well. Looking further ahead, we are focused on levers to drive revenue, including greater price increases than we have implemented historically for certain SKUs, as inflationary pressure has risen, especially in transportation costs. Slide 15 provides a breakdown of overall performance between the U.S. and our international operations. We have further outlined our geographic performance by pet health and farm animal, as well as contract manufacturing, all of which benefited from the addition of BEAR. We expect to file our 10Q very soon, but moving to slide 16, let me offer a few words on working capital and debt. We ended the third quarter with $453 million in cash and equivalents on our balance sheet and net debt of $5.97 billion. On August 12th, we entered into a new seven-year $500 million credit facility consisting of a senior secured term loan to retire our $500 million as senior notes that matured on August 27th. This new loan bears interest at a floating rate of LIBOR plus 175 basis points. The terms are generally consistent with those of our existing term loan B. At the end of Q3, Elanco had $250 million drawn on its revolving credit facility that was used to fund the $440 million acquisition of Kindred Bio. We used $194 million of cash on hand to pay the remainder of the purchase price. Net leverage was 5.8 times at the end of the quarter, and we continue to expect approximately 5.5 times at the end of 2021, in line with our original projection from December 2020. Additionally, as we regularly update you, our aggregate channel inventory levels and distribution remain consistent with prior quarters in the U.S. and across our global business. Now we'll transition to our full year and fourth quarter 2021 outlook, starting on slide 18. We are raising our full-year 2021 guidance for total revenue and maintaining our ranges for adjusted EBITDA and adjusted EPS, despite a higher expected full-year 2021 tax rate at approximately 24.5% than previously expected at approximately 24%. We now anticipate 2021 revenue of $4.73 to $4.77 billion. We also expect adjusted EPS of $0.97 to $1.03 and adjusted EBITDA of $1.035 to $1.075 billion, based on an adjusted gross margin of 56.75 to 57%. We are updating our reported EPS guidance to negative 91 to negative 83 cents, reflecting two non-cash impacts from the third quarter. As part of our R&D processes, we terminated a farm animal portfolio project due to observed efficacy results. This action required a write-down of the value of this in-process R&D asset through the P&L. The second is a charge associated with the establishment of a liability for future royalty and milestone payments relating to our license agreement with Kindred Bio for the parvovirus therapy, which was settled upon the closing of the acquisition. Moving to slide 19, we are providing guidance for the fourth quarter of 2021. We expect revenue of $1.078 to $1.118 billion, adjusted EBITDA of $190 to $230 million, and adjusted EPS of 13 to 19 cents. Our fourth quarter revenue guidance reflects a year-over-year decline. I want to emphasize that we do not have a fundamental change in our core business performance, but are reflecting a number of well-known one-time impacts from last year. These fourth quarter comparisons include four items of note. First, we had a large retail customer order for approximately $10 million of the OTC pair of suicides in the fourth quarter of 2020 versus the first quarter of 2021. Second, we had $10 million from incremental U.S. cattle vaccine and implant revenue due to competitor stockouts. Third, we are facing a $20 million year-over-year decline in contract manufacturing due to the sale of our Shawnee manufacturing facility to TRX and the discontinued human growth hormone production for Lilly from our Speed facility. Fourth, we exited certain low-margin product sales at the start of 2021, representing $20 million. Excluding the $60 million in total revenue-specific comparisons, our range reflects underlying growth of flat to 3.5%, also incorporating the challenges of African swine fever flipping from a tailwind in 2020 to a headwind in 2021. Our global teams continue to pursue productivity initiatives and synergy capture on both cost of goods sold and OpEx, which are expected to drive fourth quarter adjusted EBITDA of $35 million year-over-year at the midpoint of our guidance range and adjusted EPS of $0.04 at the midpoint. As we close out 2021 and head toward 2022, I want to note that we will provide initial 2022 guidance with our fourth quarter results in late February. While our balanced global portfolio continues to provide solutions to farmers, pet owners, and veterinarians around the world, we look forward to discussing our continued progression against our long-term growth algorithm with our anticipated growth in revenue, adjusted EBITDA, and adjusted EPS in 2022. Now I'll hand it back to Jeff for closing comments.
spk07: Thanks, Todd. To summarize, we continue to consistently post strong quarterly results as we move through 2021, further extending our track record of execution since acquiring Bayer Animal Health. The durability and diverse nature of our global business and our commercial execution is expected to drive approximately 7% of revenue growth this year, and adjusted EBITDA growth of approximately 21%, and an increase in adjusted EBITDA margin by approximately 300 basis points. Our teams are focused on delivering on our financial commitments in 2021 and excited to continue to grow revenue, adjusted EBITDA, and adjusted EPS in 2022, while delivering on our vision of food and companionship enriching life. Finally, I'd like to wish Tiffany success as she leaves Elanco after today to pursue an exciting opportunity outside of animal health. Our treasurer, Dave Pugh, with 27 years of combined experience across Lilly and Elanco will serve as our interim head of investor relations. I expect a seamless transition in our shareholder engagement under Dave's leadership, and we will continue to prioritize consistency, transparency, and accountability. With that, I'll turn it over to Tiffany to moderate the Q&A.
spk04: Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow-up. Lisa, please provide the instructions for the Q&A session, and then we'll take the first caller.
spk03: At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Michael Riskin with Bank of America.
spk12: Great. Thanks for taking the question, guys, and congrats on the quarter. I'm going to squeeze in both my first and my follow-up right away. So first, Jeff, in light of your comments just now that this year you're seeing 7% performer growth, how do we take that comp into account when we're thinking about next year and the year beyond? Is the Is the numbers we should be thinking of more comp-adjusted relative to that long-term run rate of 3% to 4%? And for the follow-up, you highlighted Kindred and the potential DERM blockbusters, maintaining a 2025 innovation target of $600 million to $700 million. Can you provide any updates on timing for some of those blockbusters, specifically a DERM product or a combo endoactive parasiticide? Is early 2023 doable, or should we be thinking more like 2024 for those areas? Thanks.
spk07: Thanks, Michael. First on 2022, you know, as we said, we do continue to see growth on revenue, EBITDA and EPS going forward. We also, as Todd stated, will share that guidance in our Q4 results in February. I think a few things just important to note to back up. Very clearly, I think this quarter, now four sequential quarters, is proving the strategy and the algorithm are right. 21 is creating momentum that will carry into 22. We have a more durable and diverse company. I think our plans are more balanced. And here's what I think will be the key contributors as we go forward for growth in 22. I mean, first, our focus brands, Soresto, Gallup, Prant, the Cordelio franchise, to innovation, this year's innovation and next year's innovation, the Omni channel with digital support. and the farm animal business continuing, we believe, to lead growth in that segment against, I think, good industry backdrops for our portfolios in both pet and farm animal. And we'll convert that revenue growth, I think, as well as anybody in the industry in continued margin expansion. So, you know, we're going to hold to the and our belief in this growth algorithm that we shared a year ago. And that will be really our North Star as we go forward. And I want to emphasize, you know, we do see, you know, durable growth as we go into 2022 by these things that I just mentioned. You know, relative to Kindred, I think I would just back up and say, first of all, we closed it in August, Michael. World-class team. We've kept all that team in place, retained all the key people. There's already becoming, you know, a really nice complement and leverage between our DERM development teams and their DERM development teams. We're engaging on a regular basis. Ellen has been on board only a couple weeks. but is already engaged and very much integrated right into the center of all that. And, yes, we solidified $100 million, the four assets. We believe these assets can be differentiated, play nicely in our portfolio. I'm not going to highlight specifics any more than what we highlighted during the Investor Day conference at this time. As innovation progresses and starts to impact the results and the plans, we'll continue to communicate more of that as we go forward.
spk04: All right, thanks, Mike. We'll take the next caller.
spk03: Your next question comes from the line of Umar Rafat with Evercore ISI.
spk02: Hi, this is Mike DeFiori in for Umar. Thanks so much for taking my questions, and congrats on Accor. I just got disconnected, so apologies if I missed this. Question for Ellen, just general thoughts and color on your vision for the R&D organization. that may be new or may have differed from the past. And my follow-up is, what could explain the seemingly sudden turnaround in international poultry and aqua, given the prior zooshield headwinds and macroeconomic pressures experienced there? It seemed like in the first half of the year, it's been consistently messaged that producers are suffering these macro pressures, but all of a sudden there's this turnaround in 3Q. Maybe you could offer some color there. Thank you.
spk07: Thanks, Michael. First of all, Ellen is not part of the call today. We will look to have Ellen part of the calls as we go forward. As I just mentioned, she's a couple weeks in, no problem on that. I will say just a quick highlight that, you know, she's been part of the 2022 planning process. She's integrated into the team and the pipeline in a great way and, you know, is engaging and will be key. And sharing some of her insights and we'll be able to answer those questions I know as we go into 2022. So I think that's important. You know, relative to poultry, yes, we have seen a significant rebound. As we had shared in the beginning of the year, we had predicted that in the second half of the year we would see this. A lot of this is driven by the economic pullback that was caused by COVID in mid-sized markets that we had high market shares in. We're seeing that recovery as people are now returning to stores as well as restaurants and purchasing poultry, and we're seeing prices rise. And with that, chickens are being placed back into barns, and our portfolios are winning. Zoeshield is right now just a U.S.-based product. and really unrelated to that international poultry market rebound.
spk04: Thanks, Mike. We'll take the next caller.
spk03: Your next question comes from the line of Nathan Rich with Goldman Sachs.
spk09: Hi, good morning. Maybe, Jeff, to follow up on the last question on R&D, do you expect there to be any reprioritization or narrowing in the focus of R&D priorities? You talked about maybe a greater focus on pet health, but could we see any change in the pipeline to maybe focus on some of the larger opportunities that you're going after? And then just a question probably for Todd on the inflation that you're seeing and the ability to pass on costs. Is there any kind of difference in your ability to maybe take price increases on the farm animal side versus the pet health side? Could you just maybe help us understand the dynamics there? Thank you.
spk07: Thanks for the question, Nate. I'll start on the R&D one. Absolutely. I think you highlight, and as we made the announcement on Ellen during the quarter, I would just put this in the line, just like the Kindred acquisition and just like the TRX and reducing our footprint, this is just another strategic move to strengthen our value proposition going forward. What I would share is Ellen brings a lot of experience on not only refilling pipelines, but late-stage development, as she has her name against some of the biggest pet blockbusters in the industry. With our carve-out of our early-stage microbiome platform, that is allowing us to have increased resources and focus on these especially late-stage assets. It is very clear what we must do in the portfolio. We've got an increase in pets as a percentage, an increase in blockbuster potential products going into larger markets like parasiticides, derm, pain, and even wellness. So that will be the clear agenda. Ellen's already, as I've shared, integrated into that. I don't see any change to that agenda. I will say the change of the microbiome coming out has removed work, which allows increased resources and focus on what I believe is, relative to our size, one of the most robust late-stage pipelines in the industry.
spk11: Nate, on your question of inflation, as we called out, we've increased prices 2% year-to-date and expect that to hold for the full year. We are looking for more targeted and greater price increases on a lot of our consumer OTC, retail, e-commerce-type products, as we do think the best-in-class products like Seresto have some space there. With your question, farm animal versus pet health, on the farm animal side, we're a very value-based company. product provider to farmers across the globe and look to continue to do that and where it makes sense for our products to continue to keep animals healthy, we'll look to see what kind of price we can bring. At the same time, there's a little bit more generic pressure on that side of the house at the moment as well.
spk04: Thanks, Nate. We'll take the next caller.
spk03: The next question comes from the line of Chris Schott with J.P. Morgan.
spk12: Great. Thanks so much. Just following up on those inflation comments, I think you had previously said there was about a 3% or so impact this year from supply chain and inflation. I'm trying to get a sense of, like, as we look out to 2022, should we be kind of, like, annualizing that type of impact, or do you think there's going to be offsets? I'm just trying to get a sense of, you know, how, you know, you know. Is this a shorter-term phenomenon versus a longer-term impact? And the second question was just on parasiticides, as you kind of think about heading into, I guess, next year's kind of flea tick season, etc. Have you felt most of the impact on products like Trifexis from the newer triple coming to market, or is that something we should be thinking about either accelerating or greater impact as we go out to next year? I know with the OTC products you're doing well, I'm sure you get a sense of that legacy prescription business. Are we kind of hitting a floor there, or is there more erosion to come there? Thanks so much.
spk11: First, on your inflation question, Chris, we've got a lot of productivity initiatives continuing on a company-wide basis. A lot of that is to offset both input costs at our manufacturing facilities as well as the transportation costs. that transportation bottlenecks with, you know, shipping imports across the globe are certainly something our team are paying a lot of attention to and working to open up new trade routes to get our products out to our customers. So we're continuing to fight through it, but, you know, it certainly has been a headwind this year and will likely be a headwind into next year. But, you know, the team's doing a great job of finding ways to continue to try to strive to reach our goal of keeping costs flat as we grow volumes.
spk07: Relative, Chris, to the parasiticide market, I think you've hit on the key thing, which is this is not a surprise that some of the dynamics have played out so far this year and what we see going forward where legacy brands, ours and others, are the ones being impacted. And I do see parasiticides as the largest market. It is growing because of, I think, the entrance of innovation, but it's also very dynamic and very competitive. What I think you can see in our results this quarter and as we go forward is more of a global holistic approach to parasiticides that we took, not only with our R&D strategy, but also with the acquisition of Bayer. So new innovations expanding the market, new innovations taken from legacy brands. I would know Credelio being the second fastest-growing oral brand shows playing a franchise across cats, Credelio Plus, which is very competitive outside of the U.S., and then our holistic approach, which is the combination products of Credelio working with an Interceptor Plus in the U.S., Credelio Plus outside, the retail, and then our partnerships. We're going to continue to partner, use digital, utilize distribution as we go forward, and we believe that's working. So a holistic global approach continuing to grow going forward. Legacy brands will continue to be impacted. We haven't noted specifically how much, but we do see us and our strategy working as we go forward.
spk04: Thank you, Chris. Next caller.
spk03: Our next question comes from John Block with Stifel.
spk10: Great, guys. Thanks. Good morning. First question, I'll ask both up front as well. I guess just wide range for 4Q EBITDA and innovation. For EBITDA, I think the range is $40 million, essentially as wide as revenue. So, Todd, maybe if you could just call out some of the variables that would take us to the high end or the low end, considering we've got roughly two months left for the year. And then the quick tack on, Jeff, just on the Cordelio side, I think I heard growth I wasn't sure it had been double-digit. So for Cordelia, was the third quarter of 21 another quarter of double-digit growth for the company, or did you just reference growth overall? Thanks, guys.
spk11: So, John, on the EBITDA, as you saw, we beat the sort of midpoint of our guidance in Q3 by only $3 million. We essentially carried over the Q3 beat into our Q4 guidance, but otherwise have maintained. One thing to note, we've had less depreciation than we previously forecasted. You know, that's helping us offset some of the inflationary costs and allowing us to deliver on gross margin. But it has been, you know, negatively impacting EBITDA. There's less to add back. So, you know, overall, we're continuing to drive through and confident in delivering the guidance we're providing this morning.
spk07: Yeah, John, relative to Credelio overall, we won't and haven't given a specific by-country product growth in this category. What I will say is we're seeing growth come first globally from the Credelio franchise, driven initially by Credelio Plus and a very strong launch of that product between Japan, Europe, and Australia. And then Credelio Cats. And yes, Credelio across the globe is, as I've shared, very competitive, continues to grow, and will as we go into 2022. That's as much detail at this time that we'll get into.
spk04: Thanks, John. Next caller.
spk03: Your next question comes from the line of Balaji Purcell with Barclays.
spk01: Hi, good morning and congrats on the results. Just two specific questions from me. Firstly, on viral virus map, now, Kingred had demonstrated its case in both indications. The expectation was that they would be submitting the therapeutic claim in June. And my conversations with Congress management had indicated they expect approval of both the prophylactic and therapeutic indications for the end of the year. Is that still the goal? And if so, can you provide some context into the launch next year and your understanding of the expectations around the market? Secondly, on INCREX, do you still believe that with three additional generic telethromycins to come in, do you see a path to growth for this product over the next couple of years? Thanks.
spk07: Thanks, Balaji. Great, great questions. What I will say on the Parvo virus is we are continuing to progress that nicely through our pipeline. We are expecting approval and launch into the market in 2022. We're not given a whole lot more detail than that. We are working with the regulators and things are progressing nicely. We'll likely make more comments on this as we get into our 2022 guidance period. What I will say also is what we see is a market here that has, as we're looking at the launch, one that does not have needs. As you've heard from some of the data from Kindred, Banfield study shows there's 250,000 puppies every year. with parvovirus, and they're spending thousands of dollars with not really a great solution. We're going to create a market. That's one factor. Two is a supply chain, being able to have this product available in some complexities in the supply chain, as well as manufacturing. These are all factors that will drive the timing. and the size of the launch. But we're excited about this product being a great complement to our portfolio, but even more so to veterinarians today that really can't offer that new puppy owner a solution if they have parvovirus. And we believe this will give a veterinarian across the country a new opportunity. On INCREXA, what I'd say is there's two markets out there. There is Europe, where there's a lot more generics. There's numerous generics. And in the U.S., there's really only two, us and one other company. And there will be more that we're anticipating will enter. This is, you know, Balaji, we've said from the beginning, this is a portfolio play. We are leaders in confined beef cattle with our portfolio. We picked up a significant number of products from Bayer in that portfolio. And then launching in CREXA, it gives us a very strong bovine respiratory disease portfolio. And CREXA is performing a little above our expectations at this point in the U.S. producers in the U.S., and that'll be the continued case. And we continue to see this being a nice brand within our portfolio, and we'll continue to update you as we move forward, especially through the fall season as we're wrapping up now.
spk03: We'll take the next caller, please. Your next question comes from John Krieger with William Blair.
spk06: Thanks very much. Jeff, could you just give us an update on sort of where you go next with the Bayer integration to drive some of the margin goals you have? And then, Todd, maybe a quick one for you. A year from now, where would you like to see the receivable DSO relative to the 81 that you just reported? Thanks.
spk07: Yeah, John, real quick. Without question, just as we've shown by our behaviors this year, constant energy around, you know, a productivity agenda. We have a company-wide productivity agenda that is well in play, looking at everything from footprint SKUs to infrastructure costs. So as we look at kind of the next areas, we're focusing on is how we can continue to optimize all aspects of the company, especially anything that is non-value-oriented relative to pipeline, commercial, or key capabilities that we need. As we've shown with Novartis and others, we will continue on this journey with this company-wide productivity. and be very, very aggressive against it, and we'll continue to update you. But it'll be mostly across that infrastructure and SKUs that maybe are not as valued, but mostly infrastructure.
spk11: John, thanks for the question on DSOs. We're continuing to work – across the globe to be focused on cash, thinking about collections. The change relative to Q2 is driven by having more international farm animal, which has got longer payment terms as a general matter than our U.S. retail business that is influenced by the seasonality in the first half of the year. So overall, we continue to get more efficient in operating our two different systems and collecting cash from our customers around the globe. So I think we should be inside the 81 in Q3 of next year as we continue to focus on collecting our cash on a timely basis.
spk04: Thank you, John. Next caller, please.
spk03: Your next question comes from Elliot Wilber with Raymond James.
spk05: Thanks. And maybe I could just follow up. That line of questioning, Todd, is specifically a little bit difficult to track cash movement given some of the acquisitions and the swings in working capital. But thinking about this quarter and exiting the year, would you expect the company to still be operating cash flow positive on a full year basis? And a question for Jeff just around The growth opportunity in China, I heard your earlier comments. Obviously, you're still on track to deliver incrementally. Sonny's point of growth to the top line from the Chinese market, but certainly there's going to be a lot more pressures there, particularly on the livestock side going forward. So can you just talk about some of the other initiatives and growth levers that available to you in terms of continuing to drive an increasing contribution from China, maybe outside of just the swine market? Thanks.
spk11: Edward, on your question, are you operating cash flow? You'll see in the 10Q, we're going to file shortly. Year-to-date, it's $216 million. And we expect that to continue to grow in Q4 and to progress again in 2022.
spk07: Yes, Elliot, on China, absolutely. I would start, though, with swine and say that we do believe that African swine fever has allowed us to really target these large producers, continue to bring our portfolio. We've brought therapeutic claims to our performance-based portfolio, and I believe that we're well-positioned, as I mentioned. Because of the size of it relative to our business, we do see this as something, as I mentioned, that will outsize ourselves, we believe, in this rebound. I think the other side is poultry. We've had a long history with a concentrated industry in the poultry business there. We brought in nutritional health and continue to play very nicely in the poultry business. And then what Bayer has brought, and I really will be, to answer your question specifically, the most material change to Elanco will be a strong business in the pet side. We're putting a lot of energy relative to reaching pet owners, integrating and working with veterinarians. advantage in Seresto or the Keeley brands, as well as Drontal, and doing very well. And then lastly, I would say that kind of the fourth leg to the stool in China is our aqua business, our warm water business that we have there, a warm water aqua, where it's a nice growth driver. It's still smaller, but it has a nice long runway of growth as well. So diverse portfolio, four key business units. a great Chinese leadership team, and spending a lot of time on share a voice and reaching appropriate customers the most efficiently. But we continue to see nice growth prospects, even going into 22 for China.
spk04: Thanks, Elliot. Next caller.
spk07: Your next question comes from online.
spk03: I'm not in time with Citi.
spk00: Hi, good morning. On poultry, your competitors saw a continued switch to low-cost products. So have you benefited from it in the U.S. and globally, and do you see it as a durable trend? And I have a second question on the SEC inventory, the stocking case. Maybe if you could discuss any most recent dialogue with the SEC, if any. Thank you.
spk07: Thanks, Navon. What I would say is what I've learned over 30 years in the poultry industry and spent a lot of time with those customers is they are very value-based. They have the strongest analytics of any protein group. And this becomes it's really not about low cost. It's all about maximizing value. And so what we've seen is we bring one of the largest databases of performance and health with our customers, and that service offering with our portfolio is what's allowed us to continue to grow, share, and really have the number one poultry business globally. Relative to SEC, there's nothing new to report. There's no change in the scope or the context. We're cooperating with the SEC, and again, I want to emphasize we believe strongly our actions were appropriate and confident and that our business strategy and our changes in distribution were also done very appropriate. That's all I have to comment. Nothing else new to report.
spk04: Thank you. We'll take one more call in.
spk03: Your next question comes from David Wester with Guggenheim Securities.
spk08: Thanks for taking the question. So I apologize if I missed it, but is there any way to think about kind of the value to weight context in, well, sorry, the value to weight of MSAs in context of excess freight costs that we might be seeing in the industry? And then my second question is just generally on livestock macro. Can you remind us of any of the macro trends that we saw this year that might be comping next year, both in a positive and negative direction as we kind of do our models there? Thank you.
spk07: Yeah, Dave, just quick, like at a high level, if I'm missing anything, Todd, you can jump in here. But I think without question, you touch on something that is correct. I mean, not every portfolio is the same. Across animal health companies, we do have MFAs and products that have more complexity, more weight, and more dynamics in the supply chain. As Todd said, we are working with Productivity Agenda and a lot of other interventions to offset those costs. But yes, there is an added context and challenge to some of our portfolio relative to that. On a livestock basis, what I would say at the highest level is, I think, one, on swine, I think we want to watch for as... there's an extremeness of up and down that we've seen with african swine fever we believe that that usually means you'll see you will see a rebound in probably an extreme way as well as we go in maybe to 2022 but continued pressure in in q4 but it will be i think that the swine market will be going against a very strong first half last year uh not just in china but uh you know that that benefited globally I think that's number one, and then I think number two is I think cattle continues to be a beneficiary of what the challenges were with Asia. Exports have grown the most for beef. Feed yards are as full as they've been in a long time, and I see that sustaining. And then poultry again. We see probably a positive compare in the first half if these economics continue to remain strong, especially on the international markets. So those would be the three key material ones that I would highlight.
spk04: Jeff, we'll take closing remarks from you now.
spk07: Okay. I would like to say, first of all, thank you for your interest in Elanco. I would like to thank Tiffany as she enters a new great opportunity for her that she has been very, very important to us and our relationship with all of you. And I wish her all the best going forward and look forward to Dave Pugh as our interim IR leader. I want to just emphasize, I believe this quarter represents a key milestone. Four quarters of consistent delivery. What is working is our algorithm, our investor day conference highlights of our strategy, the Bayer acquisition, our distribution changes. These decisions that we're making have been the right ones, and it's been representative of four quarters of delivery. We have lots of work to do. There's appropriate headwinds with the tailwinds. We do see a durable industry with a positive backdrop both on the pet side as well as for us in our portfolio on the farm animal side. We're a more strengthened company that's driving transformation. and we're executing everything from the new pipeline to a company-wide productivity agenda. Our engagement scores have risen this quarter as we've got a very loyal, focused employee base that I want to say thank you to as well. In very trying, challenging times in our world, Elanco continues to execute well and do work in a very important way, as noted by some of the things that we're doing on the side of improving society with animals. So with that, thank you again for your interest, and everybody have a great day.
spk03: This concludes today's conference.
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