Elanco Animal Health Incorporated

Ladies and gentlemen, thank you for standing by. Welcome everyone to the Alankua Animal Health First Quarter 2024 Earnings Conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the one once again. Thank you. I will now like to call over to Katie Grissom, Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for Alankua Animal Health First Quarter 2024 Earnings Call. I'm Katie Grissom, Head of Investor Relations. Joining me on the call today 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 alankua.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 the 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. Reconciliation 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. Alankua was poised for a very exciting 2024. Our strong business momentum continued in the first quarter, reinforced by the diversity of our portfolio and geographic results. In the quarter, we exceeded the top end of our guidance range on our key metrics, revenue, adjusted EBITDA, and adjusted EPS. We are encouraged by the strong progress of our late stage pipeline, which has advanced significantly over the last several months. The Oney-Lanko approach to collaboration and decision-making is driving positive and productive outcomes across the world. Energy, resiliency, and creativity are filling our halls and permeating our conversations with customers. Our focus for the year remains on growth, innovation, and cash, with many proof points to start the year. Beginning on slide four, our underlying business is off to a very encouraging start in 2024. As you may remember, our quarterly results in the first half of last year were impacted by a shift in customer purchasing related to our ERP system integration from the second quarter into the first quarter of 2023. As determined last year, we estimate the shift was $90 to $110 million. I will focus my comments on our underlying growth, excluding the estimated impact of the shift. For the first quarter, underlying revenue growth continued in the -single-digit range, estimated at 3 to 5 percent in the first quarter, building on the constant growth in both the third and fourth quarters last year. We remain confident in our late-stage innovation. Based on our dialogue with the FDA and the status of the packages submitted, we have increased certainty in the expected approval timing for Bovair, Zanrelia, and Cradello Quattro. We continue to expect to bring differentiated products to the market, with revenue contribution expected from all three products in the second half of the year. On cash in the quarter, we reduced net debt and improved operating cash flow by nearly $150 million year over year as a result of our disciplined focus on improving networking capital and the benefit of completing our ERP system integration. We reduced balance sheet inventory even as we built inventory for new products. We continue to expect the sale of our aqua business to close around mid-year. Finally, we're increasing our expectations for constant currency revenue growth for the full year, now at 2 percent to 3 percent growth. We are updating our key guidance metrics to reflect the unfavorable impact of increased strength of the U.S. dollar since February, with constant currency expectations improving on both adjusted EBITDA and adjusted EPS. Moving to slide five, I'll review our business performance in the first quarter. We delivered revenue of $1.205 billion with both sides of our business performing well in the first quarter. For pet health, we estimate constant currency underlying growth was 5 to 7 percent globally. This includes approximately 3 percent underlying revenue growth in the U.S. with improved supply and increased innovation sales, partially offset by competitive and macro headwinds. Reduced consumer activity as a result of adverse weather was felt in the industry in January, and as expected, dispensing improved sequentially in both February and March as we see this momentum also carrying into the second quarter. Our OTC retail business is performing well. Based on our market analysis of the retail channel, our Advantage Classic brands for dogs and cats were both top $3 growth brands in the quarter. Our portfolio has benefited from the increased physical availability and higher than expected overall market share for the Advantage family and retail channels. In addition, we're encouraged by Soresto. Our investment in the new bold DTC advertising campaign this season drove a five point improvement in unaided awareness for the brand. This is an important leading indicator to share growth. Broadly across our OTC portfolio, we are leveraging our market leadership to drive growth by implementing key initiatives in store and online across brands and retailers as we enter the heart of the North American parasiticide season. In the U.S. vet clinic market, visits continue to be pressured primarily as a result of labor and capacity constraints. Despite this impact and continued competitive innovation, the consistent execution of our strategy is strengthening Lanko's position, driving inline or better than expected market share performance. Our expanded vet sales force has significantly increased our share voice, an important leading indicator expected to lift the portfolio as the year progresses. Additionally, our innovation is elevating the relevance of our portfolio. We are focused on enhancing our partnership with strategic partners, investing in corporate accounts while also investing in key platforms used by the veterinarians. Our K9 parvo virus monoclonal antibody or CPMA continues to ramp with sales improving sequentially each month to start the year. In late April, we launched a new marketing campaign geared towards both pet owners and veterinarians to raise awareness of the virus, how it spreads, and the effectiveness of Elanco's breakthrough treatment. These efforts include the first ever online parvo tracking tool empowering pet owners and the veterinary community with game-changing intelligence to help keep puppies safe. With expanded supply capacity, we are enhancing our targeting efforts to drive penetration. Early data shows when clinics have the product in the freezer, outcomes for puppies, pet owners, and the clinic staff are improved, leading to ordering. We expect continued ramp for the product throughout the year. Now moving to international pet health, where we estimate underlying constant currency revenue growth was approximately 9% in the first quarter on a -over-year basis. In line with our expectations, growth was driven by improved demand for OTC parasiticide products led by Ceresco in certain European markets, including Spain. Additionally, we continue to see increased demand for the Cordelio family and a strong ramp for AdTab in Europe. We are meaningfully investing in the launch of AdTab, including point of sale as well as digital and traditional -to-consumer advertising, which is permitted for OTC products in the region. Employing the same principles as the U.S., our strategic focus on physical availability and share voice is driving a strong launch curve with limited cannibalization of our existing leading portfolio of collars and topicals in Europe. Now shifting to farm animal, globally we estimate underlying constant currency revenue growth was 1 to 2%, in the U.S. approximately 11% of underlying growth was driven by poultry and cattle. In poultry, we benefited from the rotations and extended use of our products in the quarter. Going forward this year, we expect increased use of our oniphores as the market continues to shift from no antibiotic ever programs to no antibiotics important to human medicine programs. In cattle, while there was a slight uptick in cattle on feed in March, we continue to see increased days on feed, broadly benefiting our medicated feed additive portfolio in beef. Medicated feed additives are the cornerstone of Elanco's diverse farm animal portfolio and innovation is enabling us to gain market share at this opportune time. We continue to be pleased with the trajectory of Exterior in the U.S. Continued adoption and expected increased use in heifers in the U.S. as well as the strength in Canada is giving us increased confidence that the product will approach blockbuster status globally in 2024. The demand for Elanco's livestock sustainability portfolio with Exterior and anticipation of Beauvaire is driving sales growth for Riemenson across both beef and dairy, further insulating one of our largest brands. And finally, for our farm animal business outside the U.S., we estimated a decline of approximately 2%. Continued demand growth for poultry was more than offset by volatility in China, notably in swine, and we continue to take a cautious approach with regards to our expectations in China for the year. Overall, in the first quarter for our global business, our launched innovation and base portfolio growth drivers delivered. We have raised our expectations for the full year constant currency revenue growth to 2 to 3% before the contributions of our late stage pipeline. Moving now to slide six, we made progress across our innovation portfolio and productivity strategy in the first quarter. On portfolio, we saw 2% price growth and the core business continues to stabilize. Regarding productivity, operating cash flow improved and the first quarter restructuring and aqua divestiture are progressing as planned. Now let's get into innovation starting on slide seven. In late 2020, we shared our expectations to deliver high impact innovation to the market by 2025. Over the last three years, we've delivered over 10 innovations, in addition to numerous regional products and life cycle management improvements. Importantly, we remain on track to generate an expected $600 to $700 million of revenue from new product innovations in 2025. Moving to slide eight, launched new products led by Xperia, NutraQuest, AdTab, Credelio Plus and Credelio Cat are performing in line with or better than expectations. This portfolio delivered $275 million in 2023, more than doubling 2022. Today, we're introducing a new quarterly disclosure of our innovation sales. In the first quarter, new product sales contributed $100 million. We now expect this basket of products to deliver 375 to $410 million for this year, excluding any contribution from our late stage pipeline. We're encouraged by the contribution of our innovation already in the market and are thrilled that the next phase of our historic launch window is right in front of us. As we have shared previously, the US regulatory process is rolling and iterative. We've had productive engagement with the FDA Center for Veterinary Medicine over the last several years and more specifically, the last several months on all three key late stage programs. Since we started submissions for these products in late 2022, the majority of the technical sections and subsections have been approved by the agency and we continue to be very confident in the approvability of these differentiated products. Moving to slide nine, both Senrelia and Credelio Quattro have progressed since February and we believe the FDA has all the data necessary to complete its review of these products. For both products, we expect that all technical sections, including labels, will be approved by the FDA before the end of June. After the approval of all technical sections, each new animal drug application or NADA undergoes an expected 60-day final administrative review, putting our full approval expectations in Q3. Now a little more on each product specifically. Senrelia is our Jack inhibitor, targeting the control of parietis and atopic dermatitis in dogs at least 12 months of age. We remain confident this product will be differentiated from the current market option. Our market research shows clear interest and desire for additional options as we will continue to prioritize the optimization of the label to provide the most meaningful differentiation. We expect to have a very efficient approval to launch window, targeting product in the market before the end of the third quarter. Additionally, we expect approval for Senrelia in several international markets starting late in 2024, our fastest globalization effort ever. Now moving to Credelio Quattro, our broad spectrum parasiticide, targeting coverage for fleas, ticks, heartworms, and other internal parasites in a single monthly dose. As we have shared previously, we expect Quattro will be differentiated from incumbent products in the market with broader coverage. Specifically, we expect to have coverage of tapeworms, including those known to be zoonotic or posing risk to humans that cannot effectively be prevented by eliminating fleas. We expect this broader coverage and the ability to prevent heartworms after the first monthly dose that we are seeking to demonstrate to the FDA will position Credelio Quattro uniquely in the market. For Quattro, we're targeting launch in the fourth quarter of this year. Finally, Beauvaire, our first in class methane-reducing feed ingredient for the U.S. dairy market is in the final stage of review with the FDA, with completion expected before the end of May. We appreciate the FDA's commitment to maintaining high standards for risk and science-based review while balancing the need to quickly bring solutions to the market. The regulatory process for Beauvaire underscores the need for the FDA's agenda to modernize our regulatory process. We are continuing to help shape the ecosystem for an inset carbon market to support progression towards the opportunity for climate-neutral farming, while also creating a revenue stream for dairy farms across the country. Several large CPG companies have indicated interest in partnering with their dairies and milk co-ops to reduce on-farm greenhouse gas emissions in their supply chains. The expected U.S. clearance of Beauvaire will mark a significant milestone in opening up the next major market opportunity in animal health, livestock sustainability. We look forward to integrating Beauvaire into our portfolio and expect to begin selling the product in the third quarter. These three late-stage products, all with blockbuster potential, are very meaningful to Elanco's growth opportunity in the near and medium term and are expected to drive adjusted EBITDA growth over time. Based on the launch timing we shared today, the expected ramp curve and peak sales for all three products continue to support our goal of $600-700 million of innovation revenue in 2025, with continued growth expected in the second half of the decade. We have an exciting few quarters ahead of us from a product approval and launch perspective. Meanwhile, Ellen DeBraw-Bander and her team remain focused on advancing all phases of the pipeline, from refilling the early-stage projects to progressing our later-stage programs. We continue to believe that our IL-31 monoclonal antibody for canine dermatology will be approved in 2025 and we are progressing many differentiated assets in both research and development. We continue to see a robust pipeline supporting our ambition to deliver consistent, high-impact innovation. With that, I'll pass it to Todd to provide more on our first quarter results and financial guidance.

Thank you, Jeff, and good morning, everyone. Today, I will focus my comments on our first quarter adjusted measures, so please refer to today's earnings press release for a detailed description of the -over-year changes in our reported results. Starting on slide 11, in the first quarter, we delivered $1.205 billion of revenue, a reported and constant currency decline of 4%, price contributed 2% in the quarter. As Jeff referenced, the -over-year comparisons for the first quarter are impacted by the ERP system blackout that occurred in 2023. Last year, we estimated sales of $90 to $110 million shifted from the second quarter into the first quarter, reflecting a 7 to 9 percentage point detriment to growth in the first quarter of this year. With limited impact from foreign exchange rates, we estimate the underlying business grew 3 to 5%, slightly ahead of our expectations. The estimated impacts are noted on slide 12 for each business area. For pet health, constant currency decline was 5%, with an estimated headwind to -over-year growth of 10 to 12 percentage points from the ERP blackout. In the U.S., pet health revenue declined 8%, including a headwind to -over-year growth of approximately 11 percentage points from the ERP blackout. The return to underlying growth was driven by price, resupply of certain vaccines that were out of stock last year, a one-time benefit related to moving certain legacy bear products into distribution, and sales of new products. In the quarter, the business also faced headwinds from the weather-impacted January, competitive innovation, and lower vet visits. Outside the U.S., our pet health business declined 3% in constant currency, with an estimated headwind to -over-year growth of approximately 12 percentage points from the ERP blackout. Underlying growth in the quarter was driven by a return to more normalized demand patterns in Spain, ramp of innovation products led by ADTAP, and higher demand for Crudello Family Products and Soresto across Europe. Globally, our farm animal business declined 3% in constant currency, with an estimated headwind to -over-year growth of 4 to 5 percentage points from the ERP blackout. In the U.S., our farm animal business grew 8%, with an estimated headwind to -over-year growth of approximately 3 percentage points from the ERP blackout. The growth in the underlying business was driven by expanded exterior adoption, vaccine resupply, and demand for Olenco Pulsary products. Outside the U.S., our farm animal business declined 8% in constant currency, with an estimated headwind to -over-year growth of approximately 6 percentage points from the ERP blackout. The decline in the underlying business was driven by weakness in Asian swine markets, partially offset by increased demand for poultry in Europe. The majority of the -over-year decline in the aqua business was a result of the ERP blackout. Continuing down the income statement on slide 13, gross margin declined 350 basis points to .3% in line with our expectations. The estimated impact on the -over-year growth of gross margin from the ERP blackout was 130 to 200 basis points, as more sales of high margin legacy bear animal health products were realized in the first quarter of 2023. The remaining decline was driven by an approximate 170 basis point headwind from slowing manufacturing output as we worked to reduce balance sheet inventory and inflation, partially offset by price growth. Operating expenses increased $6 million, primarily driven by employee-related expenses and timing of project expenses. SG&A expense grew 3%, primarily driven by the expanded U.S. pet sales force, increased promotional activity across targeted pet health brands, and employee-related expenses, partially offset by IT-related savings as a result of consolidating to one ERP system. Interest expense was $66 million compared to $64 million last year. Additionally, other expenses declined from $11 million in the first quarter last year to $4 million this year, driven by our simplified operations in certain volatile markets, including Argentina. Moving to slide 14, adjusted EBITDAO was $294 million in the quarter. The -over-year comparison is negatively impacted by an estimated $70 to $90 million benefit from the ERP blackout in the first quarter of last year. For the underlying business, the decline was driven by higher sales more than offset by our decision to increase commercial investments to drive long-term revenue growth in pet health. Adjusted EPS was $0.34 in the quarter. The -over-year comparison is negatively impacted by an estimated $0.11 to $0.14 benefit from the ERP blackout in the first quarter of last year. The slide increased underlying performance was primarily driven by a favorable tax rate. Before moving to our guidance, let me offer a few words on our cash, debt, and working capital on slide 15. Cash from operations was $2 million in the quarter. The $147 million -over-year improvement in operating cash flow reflects improvement in inventory and savings from the project spend from the completion of our Bayer ERP integration. We ended the quarter with net debt of $5.466 billion as we paid down $13 million of debt enabled by improvements in both operating and investing cash flow. At the end of March, our net leverage ratio was 6.1 times as our trailing 12-month EVDAO was negatively impacted by the ERP blackout from last year, which drove an estimated 0.4 to 0.6 turns of the increase. We continue to expect between $280 and $320 million of free cash flow available for debt pay down this year. We anticipate the year-end net leverage ratio to be between 5.2 and 5.5 times before considering the expected debt pay down from the net proceeds from the awkward divestiture. We continue to expect net proceeds to be between $1.05 to $1.1 billion, which we intend to use primarily for debt pay down, leading to an expected net debt to adjust the EVDAO ratio in the mid four times range at the end of this year. Now let's move to our financial guidance starting on slide 17. For the full year, we are tightening our guidance range to reflect first quarter outperformance and the impact of the strengthening US dollar. We are raising the bottom end of our constant currency revenue growth to 2% and updating adjusted EVDAO and adjusted EPS to reflect FX rates as of early May. As a reminder, our guidance does not include contribution from our anticipated late stage pipeline products and does not account for the expected impacts of the aqua divestiture. On slide 18, we provide further details on our updated revenue expectations. The raised constant currency growth is primarily driven by the US farm animal and international pet health businesses, both from higher innovation sales and the base portfolio. The improved outlook also accounts for expected reduced sales for Keckstone, a European cattle product. We have paused sales of the product while the manufacturing process is under review by the EMA. We expect the full year impact to be approximately $20 million of revenue and $18 million of adjusted EVDAO compared with our February guidance. Regarding FX, we now expect a $35 million headwind for the full year, $30 million higher than our February guidance. On slide 19, we provide the bridge for adjusted EVDAO and adjusted EPS compared to our February guidance. We now expect adjusted EVDAO to be between $960 million to $1 billion, inclusive of an incremental $15 million headwind from the unfavorable impact of foreign exchange rates. Excluding the FX impact, we are increasing the bottom end of our adjusted EVDAO guidance by $15 million and the top end by $5 million. Our improved constant currency assumptions reflect the Q1 overperformance and increased confidence in the full year. For adjusted EPS, we are raising our expectations to $0.88 to $0.96 for the full year despite unfavorable FX as a result of Q1 overperformance compared to our February guidance and improvements in both interest expense and tax. Slide 26 in the appendix provides updates to several of our additional assumptions. On slide 20, we provide our financial guidance for the second quarter. We expect revenue of $1.145 billion to $1.17 billion, adjusted EVDAO of $240 million to $260 million, and adjusted EPS of $0.23 to $0.26. As we shared last year and in the first quarter, as a result of the ERP system blackout 2023, approximately $100 million of revenue, $80 million of adjusted EVDAO, and $0.13 of adjusted EPS shifted into the first quarter from the second quarter of 2023, which will impact the reported growth rates for the second quarter of 2024. As shown on slide 21, the estimated headwind to -over-year revenue growth from the ERP blackout in the first quarter will unwind, contributing approximately 9 to 11 percentage points to second quarter revenue growth. Excluding the estimated impact of the ERP blackout, we expect underlying constant currency revenue growth will be 1% to 3%. The shift is also expected to positively impact -over-year growth of adjusted EVDAO and adjusted EPS in the second quarter, as shown on slide 22. In line with our results in the first quarter, our EVDAO expectations reflect manufacturing headwinds from slowing down the plants and increased investment in pet health business. Overall, we are executing ahead of our initial expectations for the year and look forward to delivering on the opportunity to launch exciting new products later this year. Now I'll hand it back to Jeff for closing comments.

Thanks, Todd. This is a very exciting time at Elanco and we have momentum across our business. Our global team is highly engaged, intensely focused, and deeply committed to building on the positive trajectory we've set over the past three quarters. The strategic actions taken to sharpen our focus and invest in our commercial growth drivers are delivering results. Our focus on consistent high-impact innovation is driving immense progress. We have two potential blockbusters, Xperia and CPMA already in the market, with three more expected in the coming months. With these and our IL-31 product that's slated for next year, we are on track to deliver meaningful growth from innovation sales over the next several years. As we enter this pivotal moment in Elanco's trajectory, the stability within our leadership team and consistency of our strategy is paying off. Our base business is growing, operating cash flow is improving, and contributions from new products are exceeding expectations. These factors, combined with the durability of our diverse portfolio and geographic presence, give us the confidence to increase our expectations for constant currency growth for the full year. Elanco is on track to deliver a strong 2024 and we look forward to continuing to engage with you all throughout the year. With that, I'll turn it over to Katie to moderate the Q&A.

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. Operator, please provide the Q&A session and then we'll take the first caller.

Thank you. At this time, we'll begin the question and answer session. If you have dialed in and would like to ask a question, please press the star one on your telephone keypad to raise your hand and join the queue. If you'd like to recall your question, simply press star one again. If you are called upon to ask a question and are listening by loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We'll pause for just a moment while we compile the Q&A roster.

We can go ahead and take the first question.

Thank you. Our first question comes on the line of John Block from Stifle. Please go ahead.

Great, guys. Thanks and good morning. Jeff, interesting comments on the OTC paramarket. Why do you think the market's weak if the consumer is seemingly under pressure? Sometimes that pressure causes a trade down and I just want to make sure I understand. It does seem like you're gaining share within that market performance, even if we normalize for some of the stocking commentary, maybe if you can elaborate on that. And then I'll just ask my follow-up. For Zinrelia, it looks like you're going to compress the launch timing. Initially, you called out two to four months. It seems like it's going to move to something shorter than that. So just what changed or what will you change? Talk to us about your confidence there. And then how do we think about the launch timing internationally for Zinrelia as well? Thanks for your time.

Yeah, thanks, John. Let me start with that second question first. Again, Zinrelia, we're looking at technical sections approved, as we said, in the second quarter. The administrative process is 60 days typically, and that would go into the third quarter. As you know, we have been and we've said very clearly that the production line and process for Zinrelia very much fits into what we do with other products like our parasiticides and made in our own facilities. So we've been preparing. We have product that is manufactured, that is ready. Of course, we'll wait for the labeling, but we do believe that we've created additional efficiencies from the time from approval to launch. And that's why we have our current expectation is to bring that product to the market actually in Q3. So that is our current plan. Relative to OTC, just real quickly, fundamentally, yes, we see strong demand for OTC products. That market is quite resilient, even in the midst of some of the dynamics. We also, I think we see a little bit of the continuum pull back from after the innovation entered the market inside the vet clinic to we're seeing the more robust demand kind of coming back to the OTC products. Our portfolio is strong and we've put our strategy to work, which I think that's what's driving a lot of this is the expanded physical availability. We're now in club, dollar, grocery, the share of voice. I think I really want to point to the Soresto. Seen probably the most jump in brand awareness on Soresto since owning the product and owning Bayer as we've seen unaided awareness up 5%. A lot of that is the Boulder campaign that I mentioned in my comments. And then we're constantly optimizing price volume. And then just overall, the innovation from the classic brands in the U.S. to even I want to note, AdTab is one of the fastest ramping products we have over in Europe in the retail market. But look, I think to your specific question, we saw the weather impact overall. We have seen some trade down occur in the OTC space. We now have a portfolio that can handle both the trade down as well as the premium products. So that portfolio is playing out. And we've seen a pretty nice jump back. January weather took it down. We've seen sequential improvement. We saw a 10% increase in March, actually, and we see that momentum carrying into the second quarter. So again, omnichannel approach that we took when we purchased Bayer is paying off. The strategy that Bobby and Romero have in place is paying off. And we continue to see this diversity as a really nice tailwind as we go into the vet clinic market now launching these new products.

Thank you.

Thank you. Our next question comes from the line of Erin Wright of Morgan Stanley. Please go ahead.

Great. Thanks. Can you remind us, I'll ask two up front here because they're a little bit related, but can you just remind us on what's embedded in the guidance as it relates to the expenses associated with the upcoming Blockbuster launches? And does this sort of increase certainty around these launches? Does that change how you're thinking about those investments that you're making ahead of those launches? And then second would be on your conversations with the FDA and what changed or what are some of the next milestones that give you that sort of clarity on the launch timing? And for instance, could you actually see approval before those timelines? And would that change your launch timeline at all?

Thanks. Thanks for the question on the launch side. We feel very good about the timing as we've laid out today. The teams are preparing from training the sales force to preparing marketing materials to be ready to go. At the same time, the biggest cost is really TV ads and running those TV ads. And so we've not included those expenses in the guide, just like we haven't included the sales of Bavair's and Relia or Crudella Quattro into the guide. We continue to believe there'll be positive relative to the guidance we've laid out today. I'll turn it back to Jeff for the FDA question.

Yeah, Aaron, I might just broaden your question a little bit and I'll get to it. I think it's really important. I know innovation and these Blockbuster products, specifically Zenrelli and Crudella, are important to all of us. So let me just add a little framing to the comments I made when I opened the call here. First, we are very pleased with the progress we've made in these key assets since February. Actually, a lot of progress has happened and that's driven our increased certainty as we move closer to the end of this approval process. Yes, the dialogue with the FDA has been rolling and iterative. We've been in a productive engagement with them, Aaron. It's been fair, constructive, frequent, and really over the last several months, we've been responding to the questions from the agency, which is very common. I believe the animal drug user fee act or ADUFA is working specific on these assets. It's been constructive. So what's changed and what has not changed since February? What has changed is many sections and subsections of these submissions have been approved. Both products have progressed. Simply, though, the back and forth interactions have taken slightly more time than when we estimated this path to first half approval. Thus, we're now moving the final 60-day administrative review into the third quarter. And I think, you know, importantly, we have increased certainty in the timing from all of this interaction that you mentioned. I think it's also important to say what hasn't changed. What hasn't changed is we continue to expect the products to be differentiated versus the current offering. We still expect all technical sections, including the label, to be approved in the first half or by the end of June. And we expect that revenue contribution is still expected in the second half for these two products as well as BoBear. And again, importantly, we believe the has what they need for the approvals and the launch planning, to your question on that, and the marketing is well underway. The U.S. Pet Health is well positioned right where we believe it needs to be relative to the launches. We're as competitive as we've ever been. A good, nice lead indicator is engagement scores in U.S. Pet Health are as high as they've probably been in years and the highest, I think, in the global company. So that's a nice lead indicator that our preparedness is ready. We will launch as soon as possible, as we've noted. We expect that right now to be Q3 for Zendrelia, Q4 for Cordelia Quattro.

Thanks. We'll take the next question.

Thank you. Our next question comes from the line of Michael Rifkin of Bank of America. Please go ahead.

Great. Thanks for taking the question and congrats on the quarter and update. I'll ask both at the same time as well. So following up on the new product approvals, especially Zendrelia and Quattro, you've been very transparent with us in terms of timing, both approval and launch, in terms of expectations for label differentiation, things like that. As you get closer to the expected date, are you seeing any change in the marketplace from the existing players, Zoetis for Derm and Zoetis and BI for Superica Trio and Nexgar Plus? Are they doing anything to build inventory? Are they having any different conversations with distributors or vets? I'm just wondering how the market that you're going to be entering is evolving as you approach the go live date in 3Q, 4Q. And then my follow-up, which will be a little bit quicker, I hope, is going to be on Rextone, the EU update you provided. It seems like a pretty meaningful flow through there, so obviously it seems like you're just sort of cutting that off. Could you give us enough, you know, a little bit more color on what exactly happened in the EU? Is there any chance that comes back at some point? Just sort of, you know, what we should look forward from that next six, 12 months? Thanks.

Yeah, very good questions, John. Thank you. Mike, excuse me, Mike, I'm sorry.

Thanks, J.D.

Sorry about that. So listen, Mike, real quick. Look, we do anticipate and we see competitive reactions in the marketplace. And this marketplace has seen a lot of innovations come. And we've made a lot of decisions over the last couple of years relative to launch. We've taken this very seriously. This is not new. We've been preparing for some time. And we've had a lot of products to be testing and building the muscle of launch from Zorbiom, Bexacat, now Parvo. And so I would say we're really well prepared. And so look, I think the first thing that I would emphasize is it comes back to a couple of basics. Share a voice to create clinical awareness that then leads to clinic penetration. That's why we've added the Salesforce. Our share of voice metrics are high. They've grown dramatically the last two quarters. That's a key lead indicator that we're looking at. We know that's important. And it's with credible, experienced people that have a lot of deep relationships and territories. That's key number one. And then look, the differentiation. We're working to optimize these labels because we know differentiation also impacts adoption. I also would note this four pillar approach we've talked about. And that's why DERM for us really helps. It'll help Quattro, but it'll also help Zanrelia and our existing portfolio to be able to say have therapeutics, vaccines, DERM now, and parasiticides. So I point to those things as well as what we're kind of calling next generation sales and launch from digital to campaigns. The thing I would note too on DERM, because it's all accretive to us. It's new. It's a big market. We're excited about Zanrelia. We're also excited about the IL-31 that's coming. As look, a few things I look to. The DERM market is large. It's growing meaningfully, not just international, but US and even this last quarter. We expect it to be differentiated, Zanrelia. And our market research continues to indicate vets are looking for more options. So this will be a key fourth pillar for us on our offering that we believe puts us in a really good place. And as I mentioned, the engagement's high. And going back to the earlier question, Zanrelia globally, we are positioned to see Zanrelia come into the marketplace, we believe, late this year in some of the international markets to be our fastest global launch ever. So that's a little bit of the launch side. Jumping to Kextone, Kextone, a key cattle product in Europe. It's a controlled release capsule that treats ketosis in the rumen of cattle. This is about a manufacturing process. It is a key product. We have taken this product off the market and our focus. And we did that with the EMA. And we believe that our manufacturing team is working very hard on the manufacturing process. We see the product coming back to the market, but don't anticipate that probably until late into 2025. And that's why we felt it was prudent to highlight that product and the removal on the market.

And Mike, the impact is both gross margin, but also some inventory write-offs as well.

Thanks, we'll take the next question.

Thank you. Our next question comes from the line of Bilaji Prasad of Barclays. Please go ahead.

Shoot, Bilaji, looks like we are not hearing you. Let's go on to the next caller and then we'll get him back in the queue.

Certainly. Our next question comes from the line of Umar Rafat of Evercore. Please go ahead.

Hi, good morning, guys. This is Mikey Fiori in for Umar. Thanks so much for taking my question. Two for me, I'll ask the first one first. Regarding bundling, you've consistently said that having a DERM asset in your portfolio will greatly enhance your bundling capabilities and therefore enhance your competitiveness in pet health. My question is, have those bundling discussions happened yet? Or do you need to wait for launch and pricing to kind of get established? I mean, you mentioned in your prepared remarks that you continue to solidify partnerships with corporate accounts and then have a follow-up.

Yeah, Mike, that's exactly right. I mean, this is quite common in a marketplace is any vet practice, whether they're corporate or general practitioner, is only gonna carry a certain number of products. And as you bring in a wider portfolio as a company, that's gonna help across the board. That fundamental kind of principle plays out no matter what the size of the clinic. And then as you get to other groups that are larger corporately, there's no question having another alternative on the DERM side is gonna help overall. And the market research shows that there's a high interest in that. So those two principles play out, Mike, and we see that happening today and a high desire for more of that going forward.

Yeah, Mike, we provide incentives to all of our customers based off volumes they purchase from us. So by them being able to purchase DERM from us now, that just gives them more ability to get savings and also then incentives to buy other products from us as they increase that volume. So that's really the incentive structure we're talking about by having a full portfolio and being only one of the four major companies to have that in the US pet site.

Got it, that's helpful. And then my follow-up question is a brief one. And I may have missed this. Could you quantify how much of the one-time Bayer channel stocking amounted to in the quarter?

It was about 10 to $15 million.

15, okay.

Thanks, we'll take the next caller.

Thank you. Our next question comes from a line of Ekaterina Kreskova from JP Morgan. Please go ahead.

Thank you so much. So first question is on Bover. Can you just remind us where you stand at this point in terms of manufacturing capacity and how we should think about capacity also for 2025 and where the implications are and kind of think about the launch of that product. And then the second question is just on the bird flu epidemic in the US, any thoughts on how that could impact producers and anything that you're watching or particularly concerned about? Thank you so much.

Yeah, thank you for the question. On Bover manufacturing, we have product here in the United States that is ready to be labeled and it's bagged, ready to go. And that has been purchased from a partnering contract manufacturer in Europe. So we do have product ready. And again, that's why we've targeted a Q3 launch of the product. And then relative to the H5N1, we're continuing to monitor this closely, work with our customers to make sure there's heightened biosecurity measures. I think a couple of things we look to, and we don't see this issue increasing over the last couple of weeks, but pretty stable. It is something we wanna keep our eyes on. I think producer profitability and also, especially the dairy consumer response are the lead indicators that we'll keep our eyes on. And I'll just emphasize overall, we've not seen and do not see any impact on our business results at this point in time from the H5N1.

Great, thanks, we'll take the next caller.

Thank you, our next question comes from Lana Brandon Vasquez from William Bear. Please go ahead.

Hi, everyone, thanks for taking the question. First on a guidance, really encouraging you guys put up a nice feed here and then raise the guidance a little bit, especially in uncertain macro times. Can you just talk about what so far in the first quarter specifically is kind of outperforming that gives you confidence in raising that guidance, especially also on the EPS line? I think on top of FX headwinds, you're still able to increase it just about a penny or so. And then the follow-up is just a quick clarification on the pipeline, I think in the prepared remarks you mentioned that you think you can get one month heartworm efficacy with quattro. Can you just confirm, is that because the FDA has already approved that or is that just how the clinical data is looking and you feel comfortable that you will get approval for that? Thank you.

Brandon, thank you for the question. Q1 was really great performance by our US farm business. We're seeing accelerating adoption of Xperia and with that continued growth and reminiscence. This is the portfolio effect we talk about with having broad-based solutions for our customers, both on the pet side and the farm side. Is by bringing those together, we continue to get ability to offset generic competition and drive growth. Poultry was really strong and we've got a PERS vaccine called Prefacent that continues to do very well in the US farm market. Then it was really international pet. Continue to see strong momentum both in Brazil as well as in Europe. ADTAB, as Jeff mentioned earlier, is doing a great job of gaining sales across the European countries as it launches and what we're seeing is less cannibalization of our topicals and collars in Europe from that launch than we originally expected. So those are the big drivers of our confidence to raise the cost and currency guidance. At EPS, one, better cash performance than we expected in Q1, team's done a really good job of focusing on improving our networking capital and delivering on cash. That allowed us not to borrow cash in Q1, which we typically do as we pay out corporate bonuses as well as some other sort of seasonal effects with rebates. That means we don't have to pay interest on that. Borrowing for the rest of the year, that allows us to reduce interest expense. And then finally on the taxes, the tax credits we're receiving from the state of Indiana is allowing us to have a little better tax expectations than we thought originally and pick up a penny there on the full year guide. With that, I'll transfer for Jeff for the second half of your question.

Yeah, thank you, Brandon. Relative to Quattro, that is correct. We've said early on that we have passed the heartworm threshold, so to have heartworm control with that high parameter that the CVM has. And yes, we're making an assumption on the one month control from the data package that we've submitted as well as the dialogue that we've had with the CVM. Thank you.

Thanks, we'll take the next caller.

Thank you, our next question, Councilman Lanner, Nathan Rich of Goldman Sachs. Please go ahead.

Hi, good morning and thanks for the questions. I had a few on the Durham products and I'll ask them upfront. On the international approvals for Zinrelia, it seems like the timing maybe shifted a little bit earlier than what you anticipated. I guess, any details on what changed there and are there certain markets where approval is expected before year end? And then also on the IL-31 monoclonal antibody, I know the timing was unchanged on the slide, but I think the submission was made maybe a quarter after Zinrelia. Is there any difference in the timeline of review by the USDA versus the FDA that we should keep in mind in terms of when in 2025 we might see that product approved?

Yeah, thank you, Nate, for the question. Relative to, let me just hit the IL-31 first. We just confirmed that this product is expected in 2025 and that's all we've noted. We've made nice progress since and we're just highlighting that that's gonna be part of the six to 700 million in a key contribution to our DERM portfolio. Internationally for Zinrelia, this is something that we've been working hard on relative to as Bayer came in, it built greater presence, more pet presence, more regulatory as well presence and all of that just to increase the capability of regulatory submissions quicker. And then Ellen's team has worked hard in terms of globalizing those packages and then customizing them in the key countries. And then we've added Tim Bennington on the marketing side, really being able to target which markets matter, and especially earlier. All of those things have come together to really accelerate. We haven't noted specifically, but you can imagine these are the big pet markets, the submissions have been made and from the dialogues with the regulatory authorities, we're confident that we're gonna see this product come into international markets in Q4, all really as an outcome from the capabilities that we've built over the last two years on global regulatory.

Thank you.

Thanks, we'll take the next caller.

Thank you, our next question comes from Lana David Westenberg of Piper Sandler, please go ahead.

Hi, thanks for taking the question and congrats on the quarter. Just a couple on the innovations front, first on the Quattro product, can you talk about a little bit on the white space for the product specifically, and then maybe just kind of talk about the category growth, namely, I'm just kind of thinking, if we see Quattro play out the differentiation on the tapeworm, broader coverage, are we seeing this as taking share from other broad spectrum parasiticides? Are we seeing this growing from the old generation oral parasiticides or do you just kind of see this as more of a market taking market growth, from maybe topicals OTC, that kind of product. And then just secondly on the injectable or monoclonal derm, these products have been in the pipeline of kindred, of course, it was not you, you guys only inherited that later. Is there something that you had to fix? Is there other kind of products, I know they had an IL-4 that could be coming in maybe 2026, 2027, maybe not ready to talk about pipeline, but it'd be curious because I do think those injectable derms have incredibly good market potential, thank you.

Yeah, thank you for the questions, great, great questions, let me just start with that derm product. Yes, there was lots of work to do relative to the technologies inside of kindred bio. We're very happy with that acquisition, the manufacturing plant that's come with it, that's now making Parvo and will make the other monoclonal antibodies as well. And we continue to progress the pipeline, we've not noted a lot of details relative to that, but as we've highlighted, we do have a long acting and we do have the next generation of derm products that follow behind that and kindred's portfolio will play into that. But there was continued work to do and as we've noted, the USDA had asked us to increase the number of dogs and the number of treatments and so that actually is what extended the timeline, it wasn't product specific, it was really requirement specific. Relative to the parasiticide market, it's a great question, and look, this is the largest market in animal health and a couple principles play out very consistently as it's seen the most innovation come in. First is innovation usually increases the size of the market. We've seen that over the last couple innovations that have come in recently, we believe our innovation will do the same. The second is you see legacy innovation get impacted the soonest and the most rapidly and we've seen that in our own portfolio and others have as well. So we see that that is important. The third one is the oral broader spectrum is growing the fastest. So when you combine these three things together, we believe Quattro having the broadest coverage, being differentiated, combined with our omni-channel approach inside the clinic and being able to drop ship it to homes and to have this four pillar approach with Zenrelia, it puts Quattro in a very strong position. Why wouldn't you want the broadest coverage if it's available and we believe that we have that and we have credelio brand awareness that continues to climb across the marketplace. So these are all factors that we play as we bring the broadest coverage product into the largest animal health market here over the second half of this year and we're excited to do that.

All right, thanks. We'll take the next one.

Thank you. Our next question comes from Lina Steven Scala from TD Cohen. Please go ahead.

Hi, this is Chris on Steve Scala. We just had one question on the technical approval. Ask that. So what level of risk is associated with FDA administrative review once technical approval is granted? Can you undertake any march and promotional activities once technical approval is granted? And finally, will you disclose once those technical approvals are granted, hopefully in June? Thank you.

Yes, we will wait of course for final approval and final approval is when everything will be public on label and so there's nothing that will come between the technical sections being approved and the final approval that is after that 60 day administrative side. And then relative to informing, if and when we have material news on any of these products, we will share promptly and appropriately. Thank you.

Thank you. Our next question comes from Lina Navantai on BMP Barber. Please go ahead.

Hi, good morning. I have two questions please. The first one on innovation. So from your early discussions of the Salesforce with FETS to discuss upcoming innovations, do you expect incrementally stronger pricing power with the higher relevance of Elanco's portfolio? And then I have a separate question on activist investor. If you could discuss your dialogue and interactions with Angkorah to date and since the appointment of Turner and Wallace to the board since late March. Thank you.

Thank you for the questions. You know, as we've said with launching, we will look at this holistically. We will take of course, we know that the market rewards innovation on the pet side especially, and we will take a value-based approach, a holistic approach, looking at not only the product and the differentiation of the new innovation, but also the portfolio. And we will, as Todd mentioned earlier, we will also look at this from the standpoint of offering now all four pillars of the portfolio into certain clinics. We will look at potentially volume opportunities, but we'll take a value-based approach on the pricing side of the products. Relative to investors and an investor that you mentioned, our focus here is that we've come to an agreement that we've publicly communicated and that was all around the principle of keeping the energy inside the company with a concentrated focus to execute against this value agenda that's in front of us. And that was the rationale behind the decision and we're happy to continue to be executing as we go into the rest of 2024.

Thanks, we'll take the last caller.

Thank you, our last question for the day comes from Bilaji Prasad of Barclays. Please go ahead.

Hi, good morning and thank you for having me back again. So a couple from me, firstly on the significance of technical approval at an administrative review, is this scope for any of the technical approvals to be rescinded during this administrative review period? And can you clarify what exactly happens here? One, two on the parasitic side, obviously I've seen your competitor post a very strong number on Sympyrocotrio, trying to gauge what part of this is from the market expansion or market dislocation and what you have seen within the parasiticized market and kind of link to this is any incremental color on the label expectations from your discussions with FDA. Thank you.

Yeah, Bilaji, thanks for the questions. You know, in the regulatory process, there's always nuances and changes, but as we've highlighted, we believe the CVM has all the information that they need for approval. We are on a path, we believe for the technical sections to be approved by the end of June and then the administrative process will follow and typically the administrative process is pretty straightforward and on the ADUFA timeline, it's noted for 60 days and we do not expect any other new dynamics there. And then relative to the Trio market and market growth, you know, as I've highlighted, and we won't get into any more detail than we've already disclosed relative to our Quattro label, but we do believe the broader coverage is valued in the marketplace. We do believe our capability with one of the broadest inside the vet clinic, outside the vet clinic, parasitic side capabilities globally gives us great opportunity here and the market is desiring this as you see in the shift. So thank you again for the question.

And we'll definitely send it to you to close.

Yeah, just very quickly, thank you. Thanks for your interest, Elanko. We continue to say inside the company and outside the company, the three key drivers for this company through 24 and 25 is growth, innovation, cash, and I believe this quarter, again, showed proof points really for the third quarter in a row of third consecutive quarter of nice solid growth from our diverse portfolio, both farm animal, pet health, US, international, and even price and volume. On the innovation side, I really wanna note the existing innovation, $100 million in the quarter. We've got nice momentum in innovation. We're increasing our guide there and our late stage, we highlight increased certainty in the proof points so we noted all the progress since February. And then as Todd has mentioned, as inventories come down, networking capital has gone up and the cash conversion is on track and the Aqua sale for mid-year is also tracking. And ultimately, I think inside Elanko, engagement is high, our energy is on executing quarter to quarter, we've delivered another quarter and our focus is to continue to do that going forward and keep anchoring back to growth, innovation, and cash. Thank you again for the time today. We look forward to engaging with you throughout the quarter.

Thank you. This concludes today's conference call. We thank you for participating and you may now disconnect.