Elanco Animal Health Incorporated

Good morning. My name is Rob and I will be your conference operator today. At this time, I'd like to welcome everyone to the Elanco Animal Health's first quarter 2022 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Katie Grissom, Head of Investor Relations, you may begin your conference.

Good morning. Thank you for joining us for Alanko Animal Health's first quarter 2022 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, and Scott Perucker from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.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 section discussed in today's earnings press release, as well as our latest Form 10-K and 10-Q filed with the FCC. We do not undertake any duty to update any forward-looking statement. 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'll be happy to take your questions. I'll now turn the call over to Jeff.

Thanks, Katie. Good morning, everyone. Elan goes off to a strong start in 2022 as we continue building, delivering, and strengthening our company. The first quarter marked another consistent quarter of delivery with our key three metrics, revenue, adjusted EBITDA, and adjusted earnings per share, all exceeding the midpoint of our guidance. We remain well positioned as a leader in the durable animal health industry and have taken important actions to streamline our organization for continued delivery, even in an increasingly challenging environment. Since our last earnings call, several macro dynamics have intensified. from the strengthening U.S. dollar and continued cost inflation to emerging situations with the war in the Ukraine and COVID protective measures in China. Today, we are updating our guidance for revenue, adjusted EBITDA, and adjusted EPS to reflect changes in foreign exchange rates since last February. We remain confident in our constant currency revenue growth outlook of 2% to 3% for the year and we are encouraged by the foundation we are building for Elanco's next era of growth. Reviewing our key financial metrics on slide four, we delivered 2% constant currency revenue growth in the first quarter despite the increasingly volatile macro environment. Adjusted EBITDA margin was 27.7% and we delivered adjusted EPS of 36 cents. Our portfolio delivered at the high end of our guidance with $1.225 billion of revenue, including pet health growth of 2% and farm animal growth of 1% at constant currency. Several key factors drove this growth. First, our focus brands, with growth led by Poultry & Aqua, as well as key pet health brands, Soresto, Cordelio, and Galaprant. These helped drive a 4% constant currency growth in our international business, despite the expected challenges in the swine market in China. Next, price. Price improved 2% in the quarter, and we expect it will accelerate in the second half of 2022. And finally, our innovation products are tracking in line with our expectations for the year with positive results for ZOA Shield and strong indicators for Xperia. Before we cover our updated expectations for the year, on slide five, I believe it's important to remember why animal health is such a durable business and how the industry and Elanco remain well positioned for sustained value creation in today's macro environment. First, protein and pets have proven to be essential. The role of pets as our constant companion has increased our expectation of care. With respect to protein, the availability and affordability of sustainable protein is no longer taken for granted and growing at historical levels. This animal health business is also diverse spread across the global economy, five major species groups, and multiple therapeutic classes, all providing numerous avenues to deliver growth and value to customers while limiting dependency on any one specific dimension. And finally, this remains almost entirely a cash pay business, where innovation and value-added services are rewarded by customers. I would specifically point to a few key trends we're watching this year. First is the improving pet owner experience, which transformed during COVID. While vet visits are normalizing, the transition to omni-channel and direct-to-door purchasing, both through e-commerce and the veterinarian, has improved convenience and compliance and is supporting higher pet owner spend. A recent Elanco survey showed a third of pet owners expect to spend more on their pets in 2022. This is especially true of younger generations, with nearly half of Gen Z indicating they expect to increase their spending on pet care. Next, with underlying pet ownership above pre-pandemic levels, we believe this higher base, along with improved expectations of care, will continue to drive industry growth going forward. And finally, the pet industry has historically demonstrated resiliency in inflationary times. On the farm animal side, we continue to see strong long-term protein demand despite higher protein prices. Increasing global GDP and shifting diets are driving a significant increase in demand for animal protein this decade compared to last decade. In the near term, post-pandemic stabilization of food service demand in most parts of the world is driving improvement, notably in poultry and salmon markets. Importantly, we continue to see producer profitability across most species despite increasing input cost. In times of elevated fee cost, Elanco's portfolio is highly valued by our customers as it supports improved fee conversion and efficiency. While macro factors could have short-term cross-industry impact, overall, the underlying fundamentals in animal health remain strong, and Elanco remains well-positioned to deliver in today's environment and over the long term. With this industry backdrop, we continue to expect 2% to 3% constant currency revenue growth for 2022. On slide 6, While we have adjusted our guidance for continued strength in the U.S. dollar, the underlying revenue assumptions we shared in February remain largely intact. Focused brands, pricing, international, and innovation will continue to support growth for the year, while competitive and generic pressure primarily on our defend brands, softness in China's wine, and year-over-year step-down in contract manufacturing were expected headwinds. Emerging macro pressures in the Ukraine and China and certain stockouts in the U.S. retail are expected to negatively impact the business, primarily in the second quarter. For the full year, we expect to offset these incremental headwinds with strong performance in poultry and aqua, incremental growth in pet health-focused brands in Europe, and price growth above our initial expectations, especially in international markets. Importantly, Seresto continues to be a key growth driver and is off to a strong start, growing 6% year over year in the first quarter. Our new consumer campaign for the brand is driving credibility and positive brand sentiment and is outperforming our KPIs for impressions and engagement rates. We continue to invest in the robust activation plans for the brand, optimizing the depth and the breadth, of our direct-to-consumer exposure and doubling down on e-commerce with incremental spend in targeted areas to drive conversion. Overall, we are pleased with our positioning and continue to see a nice runway of growth for Soresto. On innovation, our launch products are gaining traction in the market and we continue to expect a contribution of $120 to $160 million for the year. For Xperia, As we see the increased focus on the environmental sustainability and a growing validation of the product's value proposition, all major packers are now evaluating or fully accepting exterior-fed cattle. As a result, we're seeing strong producer demand pivot from trial to full feed yard use, including several of the country's largest cattle feeders. In addition to our revenue expectations, we're updating our guidance for adjusted EBITDA and adjusted EPS to reflect the strengthening U.S. dollar, but remain committed to our year-end net leverage target. Our consistent delivery against our company-wide productivity initiatives and the decisive actions we took to simplify the organization provide confidence in our ability to mitigate the impact of increasing cost inflation on our global business. Finally, on slide seven, I'd like to highlight progress and actions we're taking to build the foundation for the next era of growth at Elanco. On near-term innovation, we've already received five of at least seven expected portfolio-enhancing approvals in major markets for the year, primarily in pet health. Dr. Ellen DeBroadmander and her highly capable team are very encouraged by the pipeline progress we made in the first quarter, including achieving two major milestones that advance our late-stage dermatology and parasiticide development programs. We continue to expect to make five to seven regulatory submissions in major markets in 2022, with up to two being differentiated pet health potential blockbusters in the U.S. in dermatology and parasiticides. Additionally, we added another potential blockbuster to our longer-term pipeline with our recent strategic alliance with DSM to develop, manufacture, and commercialize Beauvoir in the U.S. Based on dozens of published studies, DSM has proven Beauvoir to be a revolutionary methane-reducing product for beef and dairy cattle, already approved in several international markets, including Europe. Once approved in the U.S., we expect Beauvoir to have blockbuster revenue potential in excess of $200 million annually, with initial contribution by mid-decade. We believe livestock sustainability is the next frontier of innovation and and the next new material farm animal market. The alliance with DSM further strengthens our leadership position in transforming this space, and we expect it will be foundational to Elanco's next era of growth. And finally, we completed the carve-out of our microbiome platform and pipeline by launching Biomedic under the direction of Aaron Schott. This was a great outcome for all parties, and we wish Aaron and the team at Biomedic great success. Now I'll hand it over to Todd to provide more color on our first quarter results and outlook. Todd?