Elanco Animal Health Incorporated

on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Katie Grissom, Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us on Alanko Animal Health's third quarter 2023 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 today's 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 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 statement. Our remarks today will focus on our 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. Elanco reported a strong third quarter, delivering top line, adjusted EBITDA, and adjusted EPS growth. We exceeded our expectations on all key non-gap metrics while weathering the unfavorable strengthening of the U.S. dollar that occurred late in the quarter. Constant currency revenue growth of 5% was driven by accelerating contribution from innovation, stabilizing core volumes, and price growth. Along with the improving market conditions, constant currency revenue growth of 6% for pet health and 4% for farm animal was enabled by our differentiated global omni-channel approach, strategic leverage of our diverse portfolio, and our enhanced capabilities and leadership. We believe this provides the framework for continued top line growth for Elanco in the fourth quarter and in 2024. Starting on slide 4, in the third quarter, price growth of 4% and sequential improvement in year-over-year volume growth was driven by both pet health and farm animal, leading to adjusted EBITDA growth of 5% and adjusted EPS growth of 6%. We made significant progress on innovation in the third quarter, completing FDA submissions for three late-stage potential blockbuster products, all with a path towards approval in the first half of 2024. Improving cash generation and reducing leverage remain priorities for Elanco. In the quarter, operating cash flow was $198 million and we repaid $156 million of debt as we continue to advance efforts to improve networking capital and operating cash flow. As we look to the fourth quarter, we are tightening our full year guidance ranges to reflect third quarter outperformance and incremental headwinds from the strengthening U.S. dollar since our August call. We are raising the midpoint of our constant currency revenue growth guidance, now expecting flat to 1% growth for the year and raising the midpoint for both adjusted EBITDA and adjusted EPS guidance despite increasing FX headwinds. Moving to slide five, our 5% constant currency revenue growth for the quarter was driven primarily by our international business. In line with our expectations, the global business benefited from price, stabilizing core volumes, innovation, and improved supply. In the third quarter, U.S. pet health revenue was flat as execution across share of voice, physical availability, innovation, price, and improved supply for vaccines was offset by competitive pressure and a softer vet clinic end market later in the quarter. As the industry continues to track the impact of lower vet visits, We highlight that only about 18% of our total global businesses sold to the US vet clinic isolating our sensitivity to visit trends to a subset of our portfolio. outside of the vet clinic our leadership in the OTC business provides the diversity of channels and price points desired by many pet owners. Our recent innovation and broad OTC portfolio allow us to take advantage of the resiliency we have seen in the OTC market, particularly with value and treatment offerings, leading to year-to-date growth of 10% for OTC products and retail channels. We continue to see the growth in e-commerce for both OTC and prescription products outpace other channels, where greater enrollment in subscription programs is resulting in higher compliance rates. Overall, we believe our differentiated omni-channel approach across both prescription and OTC products, as well as vet clinic and retail channels, positions us well in pet health in the U.S. and globally. Moving to international pet health, the 16% constant currency revenue growth was driven by better economic environment in Europe as compared to the third quarter of last year and expanded commercial capabilities. contributing to double-digit growth for both Soresto and the Advantage family outside of the U.S. Additionally, new products led by Credelio Plus and AdTab contributed to growth. Next, International Farm Animal, the largest revenue contributor of our four quadrants, delivered 5% constant currency revenue growth, primarily driven by price, cattle, and poultry, where growth was enabled by strong underlying markets. Share growth in key markets like the U.K., and increased supply capacity. Finally, our U.S. farm animal business returned to growth at 2% after several quarters of decline. Growth was driven by innovation, primarily Xperia, partially offset by timing of poultry rotations and regulatory changes impacting certain cattle products. We are encouraged by Xperia's progress and remain confident in the expected annualized run rate of approximately $60 to $70 million of revenue for the product as we exit 2023. Moving to slide six, I'd like to highlight several key drivers of our innovation portfolio and productivity strategy since our last call. Starting with productivity, we are very focused on improving cash conversion to enable debt pay down. While margin expansion remains important, we are broadly prioritizing cash generation, acknowledging the leverage we currently carry. The company-wide focus is supported in part by our shift to Elanco Cash Earnings, our EVA-like bonus metric. Importantly, we have nearly completed the cash outlay necessary for project cost to support our systems integration earlier this year. With this project behind us and our continued efforts on improving networking capital, we expect improved operating cash flow next year. Moving to portfolio, price growth was 4% in the quarter with 4% in pet health and 3% in farm animal. We continue to expect at least 3% for the full year. Importantly, in the third quarter, we saw volume growth in both pet health and farm animal. Contributing to this, our manufacturing and quality organization delivered improved supply for vaccines in cattle and pet health and expanded capacity in poultry, contributing to growth. Overall, we see our core portfolio volume stabilizing with increased competitiveness of the overall portfolio, driven by first stronger commercial capabilities and then our global omni-channel approach and then with the complement of adding innovation into our total portfolio. Now on innovation, our already launched products continue to gain momentum, led by Experian NutriQuest on the farm animal side and Credelio Plus and OTC Retail Innovations on the pet health side, with Lifecycle Management contributing across both. We continue to expect $210 to $250 million of revenue contribution from these new innovations this year. Our canine parvovirus monoclonal antibody remains on track for supply-constrained sales of $5 to $7 million in 2023, and we expect increased supply availability from our expanded capacity in early 2024, allowing the product to be a key contributor to innovation growth next year. On the late-stage pipeline, we have completed FDA submissions for Cordelia Oquatro, Bover, and our JAK inhibitor for canine dermatology, which upon approval will be known as Xenrelia. These three potential blockbusters continue to have a path towards U.S. approval in the first half of 2024. Additionally, we initiated globalization of Xenrelia with submissions in Canada and Japan. We've updated our innovation chart on slide 7 of today's presentation. This is an exciting time at Elanco as we return to revenue growth as a company. We are entering a new era of opportunity in pet health and in the emerging space of livestock sustainability. We believe these areas will be the drivers of sustainable growth going forward. So let me share a few specifics on our progress in each area. For pet health, we are focused on increasing our commercial competitiveness and have previously highlighted the strategic enablers of enhancing our share of voice expanding physical availability, optimizing pricing, and leveraging innovation. To enhance our share of voice, we're expanding our U.S. pet health sales team to deepen relationships with veterinary clinics. We are targeting a 25% expansion, approximately 75 professionals across our veterinarian sales team. There is strong interest from experienced animal health professionals, bringing with them relationships and expertise. For our veterinary clinic-facing team, the expansion will create smaller territories, allowing for more time with clinics, and this is expected to drive increased penetration and reorder rates. Next, in the share of voice area, over the last several years, we have transformed our commercial model using data, analytics, and digital tools to more efficiently and effectively reach veterinary clinics through multi-channel approach. Through connected touch points, we can reach over 80% of our priority clinics via two or more channels, creating an integrated online and offline experience. When implementing this optimized experience with Zorbium, our post-operative pain product for cats, we saw a 2X increase in sales. Next, we've developed an AI-based recommendation engine, enhancing our ability of our sales force to deliver the right message at the right time to our customers, leading to increased sales in a pilot earlier this year. We rolled out this virtual assistant platform broadly, enabling reps to better prioritize and personalize engagements, deepen relationships, and improve conversion. With these enhancements, our sales force is simply more efficient. Products launched using this multi-channel approach and analytics-informed engagement strategy reduce the average time to purchase after launch by 28%. On the OTC side, in the area of physical availability, our U.S. pet health retail team, leveraging their CPG experience, has reimagined the opportunity for our OTC parasiticides portfolio. For context, today OTC flea and tick pet products are sold in about 75% of brick and mortar universe in the U.S. However, Elanco products are only sold in about 25% of those distribution points. creating meaningful opportunities to expand physical availability of our products. We are targeting expanded points of distribution in channels like grocery, dollar stores, warehouse clubs, and pharmacy, with many already secured for next year. Paired with the opportunity to expand with existing customers, this is expected to be a volume growth driver next year and beyond. Now transitioning to progress we are helping to shape in the livestock sustainability market. Last week, Athean, in which Elanco provided seed funding, announced they have established a first-of-its-kind voluntary livestock carbon inset marketplace, creating the opportunity for a new value stream for farmers. By using validated science-based protocols for product interventions like our Reminson, producers can now monetize third-party verified greenhouse gas emissions reductions. Athean has verified its first farms, creating, certifying, and selling carbon credits within the dairy supply chain. Since last week's announcement, a leading dairy processor has committed to purchase the first credits, and we're excited about the robust demand we see from leading food companies. On slide eight, we provide an overview of the emerging ecosystem and note the importance of food manufacturers, restaurants, and retailers within the dairy supply chain who have committed to approximately 100 million metric tons of greenhouse gas emissions reductions. We see this carbon inset marketplace coming to life and expect to create significant food chain and farmer value that would enable livestock sustainability to become the next $1 to $2 billion global market in animal health, fueling Elanco's next era of farm animal growth. With that, I'll turn it over to Todd.