Elanco Animal Health Incorporated

Ladies and gentlemen, thank you for standing by. Welcome everyone to the Elanco Animal Health's first quarter 2024 earnings conference call. At this time, 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'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 would now like to hand the call over to Katie Grissom, head of investor relations. You may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's 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 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 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. 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 is 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 one Elanco 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 dollars. 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 mid-single-digit range, estimated at 3% to 5% in the first quarter, building on the 5% constant currency growth in both the third and fourth quarters last year. We remain confident in our late-stage innovations. 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, Xenrelia, and Credelio 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% to 3% growth. We are updating our key guidance metrics to reflect the unfavorable impact of increased strength of the US 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% globally. This includes approximately 3% 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 Seresto. Our investment in the new, bold DTC advertising campaign this season drove a five-point improvement and 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 US 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 Elanco's position. driving in-line 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 corporate accounts while also investing in key platforms used by the veterinarian. Our canine parvovirus 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 treatments. 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 reordering. we expect continue to 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 year-over-year basis. In line with our expectations, growth was driven by improved demand for OTC, parasiticide products, led by Seresto in certain European markets, including Spain. Additionally, we continue to see increased demand for the cordelia family and a strong ramp for add tab in Europe. We are meaningfully investing in the launch of that tab including point of sale, as well as digital and traditional direct 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 anaphores 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 Xperia 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 Xperia and anticipation of Bovair is driving sales growth for Reminson across both beef and dairy, further insulating one of our largest brands. And finally, for our farm animal business outside the U.S., we estimate 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 lifecycle 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, NutriQuest, 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 are 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 U.S. 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 9, both Senrelia and Credelia 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. Xenrelia is our JAK inhibitor targeting the control of pruritus and atopic dermatitis in dogs at least 12 months of age. We remain confident this product will be differentiated from the current market options. 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 Xenrelia in several international markets starting late in 2024, our fastest globalization effort ever. Now moving to Cordelia Quatro, 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 Quatro 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 Crudelio Quatro uniquely in the market. For Quatro, we're targeting launch in the fourth quarter of this year. Finally, Bovair, 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 Beauvair underscores the need for the FDA's innovation 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 Bovair 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 to $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 DeBrabander 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.