Elanco Animal Health Incorporated

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's fourth 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 star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number one once again. Thank you. I would now like to hand the call over To Tiffany Kanega, Head of Investor Relations, you may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter 2024 earnings call. I'm Tiffany Kanega, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Beth Haney 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 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. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. 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 will be happy to take your questions. I will now turn the call over to Jess.

Thanks tiffany good morning everyone elanco enters 2025 with momentum fourth quarter revenue adjusted EBITDA adjusted EPS and net leverage we're all in line with our expectations. we're pleased to report our six straight quarter of revenue growth up 4% on an organic constant currency basis with growth across both our pet health and farm animal businesses. I want to open by highlighting several accomplishments from the full year, which position us well for accelerating growth into 2025. 2024 organic constant currency revenue growth of 3% represents a meaningful step up from 2022 and 2023, driven by our innovation, a stabilizing base, pricing, and importantly, the durability of our diverse portfolio and balanced geographic presence. That 3% reflects growth in both pet health and farm animal and market share gains in global pet retail and U.S. farm animal where we hold leadership positions. Additionally, we experienced broad-based organic constant currency top line growth across our top five product franchises and in nine of our top 10 countries. We have launched our diverse portfolio of innovation with six potential blockbusters now in the market. Through focused commercial execution across global markets, we exceeded our innovation revenue target for 2024. We have also raised the range for 2025, reflecting our confidence in the continued contributions from these new products. Additionally, in 2024, we concentrated our strategic focus on the highest impact opportunities, successfully divesting our aqua business. The sale proceeds combined with more than a half billion dollars in operating cash flow allowed us to pay down approximately 25% of our debt and support increased investments in our strategic product launches. When we started 2024, we highlighted the three value drivers for Elanco, growth, innovation, and cash. We have made strong progress on each front. We accelerated growth, Launched all six key products, exceeded our innovation plan while delivering our biggest year yet of operating cash flow. Looking to 2025, growth, innovation, and cash remain the priorities to expand our value proposition. We continue to anticipate an acceleration in organic constant currency revenue growth of 4% to 6%. Excluding the anticipated impacts of FX and the aqua divestiture, we expect adjusted EBITDA to grow 1% to 5%. With the increasing contribution from innovation and stabilization of our base business, we expect sustained growth over time, while our optimized infrastructure and product mix should enable margin expansion in 2026 and beyond. Notably, like many other global corporations, we are negatively impacted by the stronger dollar. On slide five, to highlight the strength of our core business, we broke out the impact of foreign exchange on our fourth quarter results and 2025 guidance. Our global team is focused on commercial execution, and full-year underlying expectations are essentially unchanged. Overall, we are pleased with our fourth quarter performance against this dynamic macroeconomic backdrop and remain confident in accelerating fundamentals in 2025. Turning to the fourth quarter, on slide six, we break down the 4% underlying organic constant currency revenue growth, which excludes the impact of the aqua divestiture in prior periods. All four areas delivered growth or were stable in the quarter, marking our best broad-based performance in more than three years. U.S. farm animal was up 6% led by cattle. Xperia reached blockbuster status from the U.S. sales alone, benefiting from the use in heifers that began in November after we received FDA combo clearance. This growth supported demand for Reminson, demonstrating the increasing value of our comprehensive portfolio. International farm animal was flat despite challenging swine economics in Asia. The sequential improvement from the 3% decline in the third quarter was driven by stronger global poultry demand and less impact from our due different commercial model changes in certain geographies. International pet health delivered robust growth of 11% driven by continued strength of ADTAB and Seresto. We now expect ad tab peak sales to exceed $100 million, reflecting successful DTC efforts in Europe. By geography, international pet health achieved growth across a very diverse range of markets with contributions from Europe, the Middle East, Latin America, Asia Pacific, and Canada. Finally, the U.S. pet health revenue grew 2%, including early contributions from Zanrelia, which launched in late September. Importantly, Galloprant posted its best results since the third quarter of 2023, and our vaccine portfolio achieved 8% growth in the quarter. We continue to lead the retail market with share gains and increased points of distribution, capitalizing on positive trends and serving the one-third of pet owners who make purchases outside the veterinary clinics. Turning to slide seven, we continue to advance our innovation portfolio and productivity or IPP strategy. Starting with productivity, we paid down $1.475 billion in debt in 2024. resulting in a net leverage ratio of 4.3 times at the end of the year, down from 5.6 times to start 2024. This achievement was a direct result of the strategic ACWA transaction and a company-wide commitment to cash conversion improvement. From procurement to our incentive plans, our company has created a cultural priority on cash generation and debt paydown. On portfolio, we saw benefits across both sides of our business and around the globe, ultimately driving 2024's durable growth. In U.S. Pet Health, we are now one of the two animal health companies to offer a comprehensive portfolio with products in all four key markets, parasiticides, dermatology, vaccines, and pain and other therapeutics. That clinics prioritize partners who offer a complete set of solutions, allowing us to leverage innovation to generate a broader lift across our entire pet health portfolio. Building on the strength of our advantage brands and OTC retail leadership, we recently introduced pet protect a complete line of veterinary formulated science back supplements. Additionally, in the European pet health market, growth in ADTAP and Seresto underscores our leadership in retail parasiticides. In U.S. farm animal, the portfolio achieved $100 million in organic growth in 2024, driven by multiple species. Our recent data indicates we ended the year as the market leader in the U.S. in beef, swine, and poultry with good momentum in dairy. Our 50-year-old flagship product, Remencin, captured volume and dollar growth with revenue up 19% in the U.S. This growth was driven by our full complementary portfolio and further supported by the new value generated by the carbon inset market enablement in dairy. More recently, we launched Pradalax, a medically important antimicrobial treatment for bovine and swine respiratory disease conveniently given as a one low-volume shot. Targeted innovations like Pradalax bolster our wider portfolio of solutions, and we continue to boost our portfolio even further to bring solutions to emerging unmet needs. We've just announced our agreement with Medgene to commercialize high path avian influenza vaccines for dairy. The vaccine for use in dairy cattle is in the final stages of USDA conditional approval review. The cross-species transmission of the disease into nearly 1,000 dairy herds across the U.S., along with the zoonotic transmission, shows that more interventions are quickly needed. A cattle vaccine will be critical to slow the spreading of the virus between birds and cattle. Elanco is pleased to partner with Medgene to bring customers options to fight this devastating disease. Now on to innovations. Alanco delivered five new US product approvals and market authorizations in 2024 alone. Alan and her team have built an integrated engine well positioned to deliver a consistent flow of high impact innovation into major markets. On top of the progress made to bring late stage developments to recent approvals, Her team is focused on a robust portfolio of differentiated and transformational early and mid-stage assets, including a strong monoclonal antibody platform that address significant unmet needs in core and emerging spaces. Looking at slide eight, we delivered $140 million of innovation revenue in the fourth quarter and $461 million for the full year, surpassing our target of $420 to $450 million. With growing momentum from our six potential blockbusters, we are increasing our expected innovation contributions for 2025 to $640 million to $720 million. This does not assume any revenue from IL-31, which we expect to be approved by the USDA in the fourth quarter of 2025. Let's double click on the progress of these six blockbusters on slide nine, starting with Zenrelia. Five months ago, we launched Zenrelia and entered the $1.8 billion global dermatology market, which has demonstrated robust double-digit growth over the last decade. Zenrelia is now used in nearly 8,000 U.S. vet clinics, or approximately 30% of the total, of which about 6,000 have fully adopted the product and more than 2,000 are piloting use. Customer reviews have been positive, driven by the efficacy and the value of the product. Our reorder rate is above 60% and growing with adoption and time, a clear testament to Zenrelia's efficacy and value proposition. The number of vets willing to prescribe the product is growing, demonstrating the success of the tech-to-tech launch approach. This feedback gives us confidence that use per clinic will continue to increase, and that Zenrelia can and will be used increasingly as the first-line treatment over time. as we have seen in international markets. We've experienced good momentum to date and have reached critical milestones with vet education and clinic penetration, including our sampling program. We've accelerated investments in DTC and other targeted multichannel marketing into January. We are proactively communicating our message of efficacy, convenience, and value directly to pet owners ahead of the allergy season. Outside of the US, Xenrelia launched in Canada in January, joining Brazil and Japan, all with less restrictive labels than in the US. We also expect approvals in Europe, the UK, and Australia this year as part of our fastest globalization rollout to date. Now shifting to Crudelio Quattro. We launched and shipped product in January ahead of the parasiticide season. Again, it's early days for Quattro, but we are thrilled with the initial product reception, which has exceeded our expectations for distributor uptake, early clinic adoption, and vet response to the three dimensions of differentiation, broad coverage including tapeworm, speed of tick kill, and heartworm coverage from month one. These differentiators are resonating with veterinarians across the U.S. Remember that Indecticides, or flea, tick, and intestinal parasite combination products, is the fastest-growing category in pet health market today, with broad-spectrum products now representing nearly 30% of the $3.9 billion U.S. parasiticide market. And although it's early, we see notably less cannibalization of our core portfolio than with other recent launches in the Indecto space. Quattro is a meaningful, accretive growth opportunity for Elanco as it significantly increases our portfolio competitiveness and our value proposition in the U.S. vet clinic. In the European OTC market, we offer AdTab for flea and tick protection for both dogs and cats. The product leverages the same active ingredient found in Crudelio and is labeled under the Advantage family. AdTab is achieving robust growth through DTC efforts and share gains also with minimal cannibalization. In January, we shared that AdTab is now expected to become a blockbuster at peak, and we're encouraged by the brand's momentum entering the parasiticide season. Rounding out pet health, adoption of our canine parvovirus monoclonal antibody has been somewhat slower than initially expected as customers balance the vital importance of defending puppies against this deadly virus versus the cost of treatment. We continue to explore strategic interventions to accelerate clinic penetration across all channels. Additionally, we received conditional approval in Canada at the end of January. In farm animal, we remain encouraged by Bovair's progress and what we estimate can be a $2 billion carbon market. Last year, we created and substantiated the first independent carbon inset cattle market, creating additive economic value for both dairy farmers and consumer product good companies. As a proof point, in the fourth quarter, U.S. dairy farmers earned approximately $10 million in credits created by using Remensyn. More than 1 million cows, or over 11% of the U.S. dairy herd, are now enrolled in our Uplook database. Elanco's digital solution for quantifying greenhouse gas emission reductions and the first step to enabling farmers to monetize their on-farm interventions to lower their footprint. We see strong demand from farmers, and multiple CPGs have contracted with a carbon marketplace to buy Bovair credits in 2025. Our attention is now focused on the center of the value chain and bringing the product use into implementation among co-ops, processors, and feed mills. We expect Bovair's revenue trajectory to follow a positive but measured ramp through 2025 as we execute our ground game state by state, farm by farm, feed mill by feed mill. Finally, Xperia became the first farm animal blockbuster in over a decade. Xperia ended 2024 on a strong note with the benefit of the U.S. heifer clearance. The increased access is significant, opening a larger market as heifers comprise about 40% of the feedlot animals. We are confident in Xperia's growth trajectory in the U.S. and Canada in 2025, and its strong value proposition to feedlot owners allows us to increase price while leveraging greater overall portfolio strength. In summary, our global team is entering this new era for Elanco equipped with game-changing innovation and comprehensive differentiated portfolios. Our six potential blockbusters are all in the market, and we are in commercial execution mode. Early indicators on these launches are broadly positive, driving our increased expectations around innovation sales and continued confidence and acceleration to 4% to 6% organic constant currency revenue growth in 2025. With that, I'll hand it over to Todd to discuss our fourth quarter results and outlook in more detail.