Elanco Animal Health Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to Elanco's Animal Health Second 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Thank you. I would now like to hand the call over to Katie Grissom, Head of Investor Relations. Katie, you may begin.

Good morning. Thank you for joining us for a Lango Animal Health second quarter 2024 earnings call. I'm Katie Grissom, Head of Investor Relations in ESG. 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 discussed in today's earnings press release, as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking 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 will now turn the call over to Jeff.

Thanks, Katie. Good morning, everyone. Elanco continued to deliver in the second quarter, exceeding the top end of our guidance range on our key metrics, revenue, adjusted EBITDA, and adjusted EPS. With four consecutive quarters of underlying revenue growth behind us, we continue to make significant progress on our three strategic outcomes, growing revenue, improving cash flow, and notably delivering innovation. Beginning on slide four, since our last earnings call, we delivered consistent operational results and achieved key milestones in advancing our innovation, portfolio, and productivity strategy. Elanco delivered our fourth consecutive quarter of underlying revenue growth, driven by strength in U.S. farm animal, international pet health, and added contributions from new products. On innovation, commercial activities are underway for Bovair after the FDA completed its review in May. Senrelia and Crudelio Quattro continue to track in line with our late June update, and we continue to expect to launch a potential blockbuster in each of the next three quarters. For Zendrelia, the final 60-day administrative window is underway, with approval expected in late September. Cordelia Oquatro remains on track for final approval in the fourth quarter. With improved operating cash flow and the proceeds from the sale of our aqua business, we have repaid $1.3 billion of debt in 2024 and expect net leverage to be in the mid-four times level by the end of the year. Looking forward, we remain confident in our full-year outlook. We now expect organic constant currency revenue growth to be 3% to 4% for the full year. This reflects the removal of the aqua business, maintained expectations for the base business in the second half, and the expected increase in innovation contributions shared in June. Excluding aqua, we are maintaining expectations for adjusted EBITDA with improved sales, offsetting increased investments in strategic launches in the second half. We are also maintaining our adjusted EPS guidance with lower interest and tax expense offsetting the removal of aqua. Finally, we issued our 2023 ESG report demonstrating progress on Elanco's healthy purpose, sustainability efforts in our internal operations, customer collaborations, and beyond. Moving to slide five, we provide year-over-year revenue growth for the first half of the year. This view excludes the quarterly phasing created by last year's ERP integration. In the first half of 2024, we delivered constant currency revenue growth of 4%, building on the mid-single-digit growth in the back half of 2023. Looking deeper at our four business areas, starting with U.S. Pet Health. Our consistent strategic enablers drove improved execution over the last 18 months. Despite a competitive environment, this allows us to maintain a high level of optimism for the future of U.S. pet health as we bring Zanreli and Credelio Quattro to the market over the next two quarters. In the first half of the year, U.S. pet health revenue declined 3%. On the retail side, the underlying business is strong, as dispensing growth, a key indicator of product demand, accelerated significantly in May and June this year and continued into July. This growth was driven by increased share of voice from targeted investments in our flagship brands, expanded physical availability with more than 10,000 new points of distribution, as well as capitalizing on the elasticity of Seresto. However, retailer purchasing patterns created variability in our reported results, impacting net sales growth in the quarter. Todd will provide more details later, but we anticipate this dynamic to normalize in the back half of the year when retailers are expected to begin to order more in line with dispensing trends. On the vet clinic side, improved vaccine supply and innovation drove stabilization across the business through the first six months of the year. The launch of our canine parvovirus monoclonal antibody, or CPMA, is progressing nicely. We have placed the product in a third of our target clinics and continue to strategically invest to drive penetration. However, competition in the U.S. vet clinic, particularly in parasiticides and pain, continues to pressure our business. Strategic investments to expand the sales force and increase opportunities with corporate clinics are laying the groundwork for improved performance as we look towards enhancing our portfolio with the addition of Zenrelia in the fourth quarter of this year and Credelio Quattro in the first quarter of next. Next, revenue for our international pet health business grew 11% and constant currency in the first half. Our retail parasiticide leadership and share of voice continues to strengthen as we invest to drive the growth of key brands like Soresto and AdTab. We are encouraged by the performance of the Credelio family globally, led by Credelio Plus now three years into the market. Our international pet health business growth exemplifies the benefits of a strong, diverse portfolio, contributions from innovation, and a concentrated focus on major markets. all part of a well-executed strategy by Dr. Romero Cabral and his team. Moving to farm animal. Revenue for our international business was flat on a constant currency basis compared to the first half of last year. Excluding the aqua business decline, constant currency revenue growth was 2% in the first half of the year, driven by the strength in poultry, particularly offset by continued pressure in Asia's wines. Poultry and cattle represent nearly three quarters of our international farm animal business, and our momentum is strong in both areas. We have confidence in our relative market position and ability to continue to grow the business in these key areas of strength. Finally, strong delivery from the U.S. farm animal business continued with 17% revenue growth in the first half of the year, driven by cattle and poultry. Strength in cattle was driven by continued exterior adoption, remittance in growth in both beef and dairy, and improved vaccine supply. This outsized growth is the outcome of both our strategy playing out and positive market factors. Our portfolio benefited from strong demand driving higher values for both poultry and cattle, as cattle on feed remain low. On the other hand, swine, the smallest business for us, is faring less favorably with pork supply outpacing demand, pressuring producer profitability. Overall, our U.S. farm animal portfolio is well positioned in the market with scale and value that differentiates us from competitors. Dr. Jose Simas and his team are leveraging our innovation to strengthen our portfolio and increase our value proposition for customers. This, along with our differentiated data services, is helping to stabilize and, in some cases like Reminson, grow our base business. We expect continued growth from innovation with the incremental opportunity in Heifers for Xperia and the launch of Bover, which I'll touch on more in a moment. Moving now to slide six, let's look at the strategic drivers for our innovation portfolio and productivity strategy. Starting with portfolio, our base business continues to stabilize and amplify our message through our increased sales force and digital engagement with veterinarians and farmers globally, as well as increased pricing capabilities. We've seen the portfolio strengthen even more in places where we've introduced new innovation. We see this with Credelio Plus in ADTAB and International Pet, Xperia in U.S. Cattle, and in poultry globally. We remain confident that the launch of Xenrelia and Credelio Quatro will provide a similar catalyst for our US pet health business. Regarding productivity, we are delivering improved operating cash flow and debt pay down. We've taken a cross-functional approach to successfully diagnose, evaluate, and deliver solutions to improve processes and reduce balance sheet inventory. In addition, we have transitioned from using cash from operations to fund necessary stand up and integration cost to utilizing that cash for debt pay down. As I said earlier, with a combined proceeds from the close of our aqua sale and improved year to date operating cash flow of $286 million, we have repaid 1.3 billion of debt in 2024 and expect net leverage to be in the mid four times level by the end of 2024. Now let's get to innovation on slide seven. Innovation sales contributed $109 million in the quarter with $209 million in the first half of 2024. In June, we increased innovation sales expectations to $400 to $450 million for the full year. The just over $30 million improvement at the midpoint is driven by the strong ongoing performance of Xperia and AdTab and the inclusion of Bouvier and Zenrelia in the 2024 expectations. We remain on track to deliver 600 to $700 million in sales from our innovation portfolio by the end of 2025. On slide eight, we reflect progress on our late stage innovation timeline as we continue to advance our ambition of delivering consistent high impact innovation. On slide nine, let's review further details on our three late stage potential blockbusters with one expected to launch in each of the next three quarters. First on Bovair, we continue to make good progress in the steps necessary to successfully commercialize. To date, we have approximately 500,000 dairy cows activated in our Uplook database, which tracks methane reduction based on approved protocols, and it enables farmers to monetize carbon. The majority of state registrations are complete. However, we're still awaiting California, a key dairy state. Atheon is negotiating contracts with several consumer goods companies to purchase carbon based on the feeding of bovair and ramens into dairy cows. While the overall process is complex, we believe this creates a sustained competitive advantage for Elanco and will enable our next era of farm animal growth from innovation. Overall, we're encouraged by the progress and high interest across the value chain while we expect producers to begin feeding Bovair to dairy cows in the coming months. Next on Xenrelia. Before the end of June, we received confirmation from the FDA that all major technical sections, effectiveness, safety, and CM&C were complete. We're pleased to share that the final 60-day administrative review period is underway in the U.S. We expect the final FDA approval in late September with a nearly immediate launch in the U.S. in early October. We're also excited to begin globalizing the product with launch in Brazil expected in the fourth quarter as well. We're very encouraged about the opportunity for Elanco to enter the more than $1.5 billion global canine dermatology market and for the blockbuster potential of Xenrelia. We continue to expect that Xenrelia will be positively differentiated from the current JAK inhibitor on the market with regards to effectiveness and convenience. Our view is informed by our expected U.S. label and the head-to-head data submitted as part of the EU data package. As shared in June, the expected U.S. label will include a box warning related to our vaccine response study. We expect this label language will slow the initial product adoption curve in the US as we believe it will require focused veterinary education on the product. Our expectations for treatment days being limited by approximately 25% is based on expected language in the box warning related to vaccine usage. We have done extensive and broad market research that concludes efficacy and value matter most to veterinarians. And even with the expected label, there is strong interest in Xenrelia as a treatment option for canine dermatology. Bobby Modi and the US Pet Health Commercial Organization have an extensive launch plan and are eager to bring this product to customers. The sales force is being trained on the product, marketing materials are in final development, and we are lining up key opinion leaders. Upon approval, The team will activate a vet-focused engagement plan that leverages robust technical data that we are confident will allow the merits of the product to drive clinic adoption. Within days of approval, we intend to host a conference call for the investment community to provide clarity on the label, our differentiation, and our sales and marketing approach to help underwrite the opportunity we see for Zinrelia to contribute meaningful, accretive sales and EBITDA for Elanco. We look forward to providing more details in the coming months. Finally, on Credelio Quattro. As previously shared, two of the three major technical sections, effectiveness and safety, are complete. We expect the final administrator review to begin later this quarter, with a final approval expected in the fourth quarter of this year. In addition to the regulatory process, we are finalizing the manufacturing scale-up to optimize launch, which is targeted for the first quarter of 2025. We're very excited to bring this differentiated potential blockbuster to the largest and one of the fastest-growing market segments in our business. We estimate the U.S. parasiticide market at approximately $3.8 billion, with the broad-spectrum products now making up nearly 25% of the market, demonstrating the massive gains since their introduction just three years ago. We expect the addition of Crudelio Quattro to our portfolio of U.S. prescription parasiticides, which represents about $300 million of sales in 2023, to significantly enhance the growth of our U.S. pet health business in 2025 and beyond. We expect these pet health innovations to position Elanco very competitively in the U.S. Vet Clinic as just the second company to bring a comprehensive product offering to veterinarians. with broad-spectrum parasiticides, dermatology, vaccines, and therapeutics. We are encouraged by the progress by our R&D and regulatory colleagues, the diligence by our manufacturing teams to prepare product supply, the creativity of the marketing team to prepare for competitive launches, and the engagement and sheer excitement of our commercial colleagues as we enter this important era for Elanco. Now I'll pass it to Todd to provide more on our second quarter results and financial guidance.