Elanco Animal Health Incorporated

Good morning. My name is Joelle and I will be your conference operator today. At this time, I would like to welcome everyone to the 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 and followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Katie Grissom, you may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health fourth quarter and full year 2021 earnings call. I'm Katie Grissom, 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, Ellen DeBrobender, our executive vice president of innovation and regulatory affairs, and Scott Perucker from investor relations. The slides referenced during this call are available on the investor relations section of elenco.com. Today's discussion will include forward-looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors discussed in today's earnings press release, as well as in our latest form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements. Our remarks today will focus on non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we will be happy to take your questions. I'll now turn the call over to Jeff.

Thanks, Katie. Good morning, everyone. Today we look forward to sharing our fourth quarter and full year results, as well as introducing our financial guidance for the first quarter and full year of 2022. Additionally, as you heard, we're excited to have Ellen with us today. She'll share a brief update on our pipeline and the progress she has made since joining the team last October. While the world continued to adapt to the COVID-19 pandemic and its challenges in 2021, at Elanco, it underscored the significance of what we do. The role of pets as our constant companions has never been more significant and ready access to sustainable, affordable protein remains top of mind. We remain optimistic and confident in the importance of our industry and the valuable role of veterinarians, farmers, and pet owners in caring for animals. Starting on slide four, the Elanco story is one of building, delivering, and strengthening. We are building a global leader in the attractive animal health industry. We are consistently delivering. while taking actions to further strengthen our company and our value proposition. 2021 marked our third full year as a public company. Since the IPO, we have made strategic decisions, including the acquisitions of Bayer Animal Health and Kindred Bio that position Elanco for long-term delivery and value creation. We've instilled a relentless focus toward ongoing corporate simplification, building a fit-for-purpose animal health company as we have completed the full separation from Lilly and continued our integration of Bayer. With the fourth quarter of 2021, we are reporting our first full year as a combined company with Bayer. Compared to when Elanco went public, today we are more diverse, more global, with more comprehensive product portfolios. We have also improved our revenue mix, balanced between pet health and farm animal and U.S. and international. We're an omnichannel leader providing for pet owners in the veterinary clinic and in retail and in e-commerce. Ultimately, we have built a diverse global business that we expect to deliver durable growth and significant margin expansion. That level of transformation, particularly amidst a challenging environment, is significant. None of this would be possible without the dedication, commitment, and ownership mindset of our globally lanco team the resiliency they demonstrated their achievements and discipline focused on execution must be commended the leadership team and i have deep appreciation and are truly grateful for all they have achieved the fourth quarter represents the fifth quarter of outperformance on our key metrics in 2021 we recorded 4.765 billion dollars in revenue growing approximately 7% compared to our 2020 pro forma combined company revenue, with pet health growing 10% and farm animal up 6%. We launched new, innovative products, advanced our pipeline, and our focus brand Galluprant became a blockbuster. We improved our adjusted gross margin to 56.6%, making progress towards our target of 60% by 2023. We delivered $226 million of adjusted EBITDA synergies, all contributing to our $1.057 billion in adjusted EBITDA, representing 22.2% of sales and adjusted EPS of $1.05. We ended the year with $638 million in cash and equivalents and saw improvement in key operational metrics, including reduced days of sales outstanding. We achieved our net leverage ratio target of five and a half times while funding the Kindred bio acquisition. And finally, we have been proactive and decisive, taking strategic actions to strengthen our business and further solidify our trajectory to deliver expanded value. We have optimized our R&D manufacturing footprint, which is expected to reduce CapEx and improve working capital. We also have expanded our pipeline with Kindred Bio and concentrated our R&D resources on our late-stage pet health assets, while also balancing for the future. We increased both the value of the pipeline and the probability of success for our key programs. And in November, we announced changes to streamline and simplify our organization, including shifting our marketing teams to be more integrated with commercial colleagues and closer to the customer to more efficiently drive our business in 2022 and beyond. As you can see, the Elanco team delivered this past year. We are confident that we have the right team and the right structure to drive our business forward in 2022 as we continue to advance our IPP strategy and make progress on our longer-term commitments, despite the expected challenges from inflation, supply chain, COVID-19, and competition. Let's now move to slide five, where I'll provide the highlights of our 2021 financial results. For each of our key metrics, revenue, adjusted EBITDA, and adjusted EPS, we outperformed our initial expectations set forth at our December 2020 investor day. Our results demonstrate progress toward our long-term margin expansion targets with profitability and earnings delivery enabled by the continued implementation of productivity efforts and synergy realization in the year on the top line last year is representative of elanco's durable diverse growth profile as i shared we grew seven percent compared to our 2020 pro forma combined company revenue our growth came from multiple areas across species across geographies and from innovation in 2021 we grew and four out of five species, with pet health growing 10% and farm animal growing 6%, led by poultry and cattle compared to our 2020 pro forma combined company revenues. We grew in all three commercial regions, with our international business also delivering 7% on a pro forma basis. Contributing to that, China represented over one percentage point of growth for the total company. Our well-positioned farm animal business also grew, and grew market share nicely in 2021. And globally, we launched new innovative products to kick off the next era of innovation for Elanco. Our broad, diverse portfolio provides Elanco with a wide range of pathways to deliver growth as evidenced in 2021. In our December 2020 Investor Day, we introduced a growth formula to describe our revenue expectations and our long-term growth algorithms. over time we expect average annual top line growth of three to four percent with varying contributions from our categories of focus core defend and innovation brands on slide six i'll go deeper on our 2021 revenue performance through this lens first in our defend category the advantage family delivered 517 million in sales growing approximately 2% on a pro forma basis, driven by the growth of Advocate in China. Remenson grew last year as well, bouncing back from the COVID-related impacts in the U.S. beef production industry in 2020, and is continuing to exceed our expectations for maintaining market share despite generic competition for nearly two and a half years. Our ability to differentiate Remenson's attributes Our value beyond product offerings and portfolio selling approach is resonating with customers. And rounding out our defend category, Trifexis, continues to experience competitive pressures in the U.S. market, but it remains a profitable blockbuster product, delivering sales of $137 million in 2021. Our core category, which represents dozens of key portfolio products, delivered approximately one percentage point of growth. That was offset by decreased contract manufacturing revenue as well. Growth was led by our pet health vaccines in the U.S., where we have strong momentum and are excited to drive innovation in our differentiated portfolio of highly purified, low-injection volume vaccines. On our focus brands, they delivered approximately three percentage points of growth, led by Credelio, Interceptor Plus, Claro, and our newest blockbuster, Gallup Brands. Seresto delivered 394 million in 2021, a year-over-year decline after an exceptionally strong 2021. Importantly, the two-year stacked growth of Seresto was approximately 21% in 2021 compared with 2019. And for the fourth quarter, it was 19% over 2019. This year, we have a robust activation plan for Soresto, leveraging a breadth of pet owner engagement touchpoints, including direct-to-consumer advertising while improving our digital shelf space and expanding into additional retail channels, as well as growing our vet clinic penetration by adding Soresto to our distributor buy-sell agreements in the US. We expect Soresto to return to growth in 2022. Finally, on innovation, our revenue from innovation-related products launched and 2021 was $72 million. We saw a strong uptake from our pet health launches led by Credelio Plus, while Encrexa was a valuable addition to our cattle portfolio. Also in Q4, both Zoeshield and Xperia laid solid foundations for 2022. Over the last year, with the introduction of Zoeshield and Clinicox, we've vastly expanded our presence in the poultry raised without antibiotics or RWA market. As a result of this and process optimization challenges limiting improvement for cost of sales, we have decided to discontinue the sales of COSABATI. Now moving to slide seven. I'd like to introduce our expectations for 2022. In line with our statements in early January, we expect to grow revenue two to 3% at constant currency. We expect innovation-related revenue to contribute approximately 120 to 160 million in revenue this year, representing an incremental 48 to 88 million over 2021, contributing one to two percentage points of growth for the total company. We expect adjusted EBITDA to be $1.14 to $1.18 billion, representing growth of 10% at the midpoint, or an expected 210 basis point improvement for adjusted EBITDA margin. For adjusted EPS, we expect $1.18 to $1.24 or 15% growth at the midpoint. And finally, we expect to continue reducing our net leverage ratio to approximately 4.75 times adjusted EBITDA by year end. On slide eight, let's take a deeper look at some of the specific 2022 revenue drivers. We expect price growth above our historical 2% level with disciplined analysis and execution critically important as the inflationary environment extends into our industry. Overall, we expect continued growth in the global pet health market, benefiting from COVID era increase in pet ownership. And while growth from these trends is slowing, we expect it to persist as a result of the increased expectation of care and awareness of our pets. Our broad global pet health portfolio is expected to deliver growth from key focus brands, from vaccines, and the addition of newly launched products. In parasiticides, we have a diverse portfolio globally. The combination of Credelio and Interceptor Plus remains the broadest coverage available for the treatment and prevention of internal and external parasites for U.S. pet owners. And Credelio Plus provides important Indecto coverage for pet owners in several international markets. We expect the competitive pressure in parasiticides to be mainly contained to the U.S. parasiticides market with an approximate $60 million headwind. while we expect to maintain our leadership in retail channels. More broadly, Gallup Rant remains one of our key focus brands and is expected to grow double digits again in 2022. Also, as we announced earlier this week, we're excited to welcome Bobby Modi as our Executive Vice President of U.S. Pet Health on March 14th. Bobby's leadership experience, track record of building and growing consumer brands, including pet brands, positions him well to lead and grow this business. Additionally, his experience in integrating and transforming businesses, leading sales teams, and expertise across innovation, digital, and e-commerce makes him a great addition to the Elanco executive team. On the farm animal side, we expect continued stabilization of global poultry and aqua markets. We also expect an outsized contribution from our newly launched U.S. farm animal products. led by Xperia and Zooshield, which we believe will be key drivers of our innovation sales in 2022. Importantly, Xperia continued to gain traction in the field with continuously increasing packer acceptance and processing of Xperia fed cattle. We've seen a growing demand from cattle producers with 100% return use and continued expansion of routine feeding. with the number of cattle on Xperia doubling every month since November. Given Xperia's compelling proposition, growing producer demand, and assumed continued packer acceptance, we expect a substantial step up in Xperia use moving into the second quarter, as we expect it to provide the most significant incremental contribution to our innovation-related sales this year. We continue to believe it will be our next farm animal blockbuster. Xperia is building another new sizable growth market in animal health around sustainability. We have taken critical actions over the last few months to drive producer value that will catalyze Elanco's growth in this new space starting in 2022. On that note, earlier this month we announced we're piloting a new tool called Uplook that helps cattle feeders benchmark greenhouse gas emissions and identify key drivers of their operations carbon footprint, providing an important baseline for their current stewardship efforts. Additionally, we announced our investment in a startup company called Atheon that focuses on creating and really aggregating, creating and monetizing producers' sustainability efforts. Finally, we continue to leverage the expertise of Dr. Sarah Place with customers. She's the leader of our livestock sustainability efforts and one of the most respected thought leaders in this space. Elanco is building a differentiated portfolio with products, tools, and expertise that we expect will create the next new major market opportunity in the farm animal health market called livestock sustainability. And finally, we expect our business in China will again deliver at least one percentage point of growth for Total Elanco with contributions across pet health and farm animal despite headwinds in the swine business expected in at least the first half of the year. Overall for 2022, we are confident. We have a balanced plan that is expected to deliver two to three percentage points of growth in constant currency. Before we turn to Todd to go deeper on our fourth quarter results in 2022 guidance, I'd like to welcome Dr. Ellen de Brabander. Ellen is a highly accomplished R&D leader. with a proven track record in animal health product development. I have known and admired Ellen's leadership over the years as she's delivered significant innovation and created robust, sustainable R&D capabilities. In just under five months, she has quickly hit the ground running, and I'm very impressed with her immediate progress. We're excited today to introduce her to the investment community. Ellen?