Elanco Animal Health Incorporated

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.

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.

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.