Elanco Animal Health Incorporated

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 Alanko Animal Health's first quarter 2025 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 discussed in today's earnings press release, as well as in our Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements. 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. References to organic performance exclude the estimated impact of the aqua business, which was divested July 9th, 2024. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco exceeded first quarter guidance for revenue, adjusted EBITDA, and adjusted EPS. Continuing our momentum from the end of 2024, we've delivered a high-quality quarter with 4% organic constant currency revenue growth, evenly driven by price and volume. This strong Q1 performance represents our seventh quarter of underlying growth. On innovation, after delivering $198 million of first quarter revenue from our new products, we are raising our full year expectations to $660 million to $740 million. We are pleased by the commercialization of our basket of six potential blockbusters with the most recently launched product, Cordelio Quattro, off to a great start, surpassing our expectations to date. With a relentless focus on cash, we are deleveraging faster than planned, improving our net leverage target for year-end to 3.9 to 4.3 times, reflecting strong working capital performance, favorable currency, and the monetization of our Lana Lanner U.S. royalty stream for $295 million that we announced earlier this week. Looking ahead, we have raised our 2025 full-year revenue guidance for FX, and we are maintaining our outlook for organic constant currency growth of 4% to 6%. We continue to expect accelerating quarter-on-quarter growth, with Q2 up 4% to 6%. March and April trends have provided early proof points, and innovation continues to ramp on top of a strong base business. We also continue to expect full-year adjusted EBITDA of $830 to $870 million and adjusted EPS of $0.80 to $0.86. The Elanco strategy is working and offsetting external uncertainty. Our prudent approach recognizes our first quarter outperformance, recent momentum, and favorable effects, balanced by expected tariff impact and a dynamic macroeconomic backdrop. Our execution and our one ELANCO global operating model give us the agility needed to cover various scenarios that may emerge in this external environment, including tariff and trade impacts, regulatory and policy changes, and shifts in the consumer sentiment and spending. We have a dedicated team implementing a multifaceted intervention plan to allow us to deliver even during these turbulent times, and we will remain focused on growth, innovation, and cash as the right priorities to expand our long-term value proposition. Let's take a moment to walk through how we're covering our expected tariff exposure on slide five. You remember that with our late February call, we outlined $3 to $4 million of potential impact from the first 10% imposed on China. We would strongly caution against extrapolating that impact to the 145% imposed today without also considering the pharmaceutical exemption and our intervention plans already in action. Since late February, we've begun implementing several mitigating strategies, including supply chain optimization, inventory management, tactical pricing and select geographies, and strategic API sourcing. We believe the total net impact in 2025 to Elanco adjusted EBITDA from tariffs as they stand as of May 5th is an estimated $16 to $20 million, almost entirely related to the tariffs imposed by the U.S. and China. This negative impact is fully offset by our first quarter outperformance as we are maintaining our full-year adjusted EBITDA and adjusted EPS guidance. We have a balanced profile of risks and further mitigating strategies, also allowing for maintained guidance. While we benefit from the pharma exemption today, if this policy is removed and a 5% to 25% tariff is imposed, we estimate our incremental exposure at $10 million to $30 million in 2025. This risk and others, including potential economic slowdown, are offset by anticipated foreign exchange favorability based on April rates and a targeted value-based pricing increase. Elanco is well-positioned to overcome macroeconomic challenges and uncertainty to deliver our plan. Turning to the first quarter revenue performance on slide six, we break down the 4% underlying organic constant currency revenue growth. This chart highlights the importance of our diverse portfolio, with three of our four business areas growing. We achieved the top end of our expected growth range in Q1, despite the challenging U.S. retail backdrop in January and February. Our U.S. retail business declined 21% during that two-month period, driven by cooler weather that significantly impacted consumer spending. January was the coldest on record since 1988. Tick bites reported by the CDC tracked at an eight-year low. Importantly, retailers have broadly observed that when the weather cooperates, consumers engage, citing better trends into the spring. Our results support this, with March rebounding to a positive 13% growth and strength carrying into April as we enter the heart of the North American parasiticide season. Our leadership in the U.S. retail market has never been more relevant with the consumer under pressure. We provide a superior value proposition for pet owners with our strong OTC portfolio and broad physical availability. In the U.S. vet clinic, our revenue was flat in the quarter. Importantly, as we discussed on our earnings call a year ago, we are lapping an approximate $13 million benefit related to moving certain legacy Bayer products into distribution. Excluding this impact in the comparison, our vet clinic revenue growth would be approximately 8%. We benefited from the early and ramping contributions from Cordelia Quatro and Zenrelia, which I will cover more in depth shortly. Altogether, we see a rebounding retail environment, good early traction for innovation, and a solid underlying fundamentals in our portfolio, all driving our expectation for U.S. pet health to return to a step up in growth in Q2. Moving now to international pet health, we delivered 5% organic constant currency revenue growth driven by AdTab, Credelio, and Soresto. Our international pet health business remains a clear example of the value of innovation, with new products driving two percentage points of growth for totally Lanco in the quarter. Specifically, ads have more than doubled its revenue in the first quarter compared to last year, and we continue to be very pleased with Zenreli's performance in Brazil, Canada, and Japan. The power of innovation and a diverse portfolio is also clear in the U.S. farm animal business, up 17%. with continued strength in cattle. Xperia again led the way with rapid adoption in heifers since we received FDA combo clearance in November. International Farm was up 2% in organic constant currency, with growth and ruminants partly offset by the impact the Keckstone recall and our commercial model changes in certain geographies from last year. We estimate these two items created a combined 4 percentage point headwind to our year-over-year growth. Looking at slide seven, we delivered $198 million of innovation revenue in the first quarter. This outperformance, with growing momentum from our big six portfolio of potential blockbusters, leads us to increase our expected innovation contribution for 2025 by $20 million at both ends of the range to $660 million to $740 million. We expect a consistent flow of high-impact innovation to fuel our growth for the next decade through targeted areas, including our monoclonal antibody platform. In the near term, we continue to expect this platform to deliver our IL-31 approval in the fourth quarter of this year with commercialization in the first half of 2026. We remain in close dialogue with the USDA where we believe recent changes have not materially impacted the review team and process. Let's dig deeper on the progress of these six products on slide 8, starting with Xenrelia. Xenrelia is our entry into the $1.9 billion rapidly growing global dermatology market, and it continues to make meaningful strides in clinic penetration. Xenrelia is now used in approximately 11,000 U.S. vet clinics, or 35% of the total, up from 8,000 total clinics when we updated you in late February. Of this 11,000 today, about 8,000 have fully adopted the product and about 3,000 are piloting use. And in line with positive trends broadly across our U.S. pet health business, we're encouraged by the progression of the Xenrelia sales. Importantly, as vets experience the strong and consistent efficacy of the product firsthand, they are responding. One in three clinics that have received samples has purchased Xenrelia and integrated it into their DERM portfolios. Our reorder rates have climbed to 70%, up approximately 10 percentage points since late February. And we expect continued momentum as we've entered the allergy season. Our survey work shows that 26% of vets not using Xenrelia today expect to use it in the future, with the majority of that cohort citing seasonal allergies and frustrations with current options. Customers are responding, too, with broadly positive reviews, applauding the efficacy, convenience, and the value of the product. We are continuing with targeted outreach to pet owners, and we are increasing our focus on tech-to-tech sessions, which have proven to be highly effective. The biggest challenge we face in the U.S. for Zenreli is moving beyond second-line treatment, where it has been positioned in various clinics. Also, we are actively engaged in the process to update the U.S. label. Data supporting a language change on the current label is already under CVM review, and we expect to receive feedback later this year. In addition, we've already initiated new studies for a more comprehensive label change. Overall, we continue our robust engagement with the FDA, and we will keep you updated with our progress on both fronts. Outside the U.S., where we have less restrictive labels, we are very pleased with the launch of Zenreli in Brazil, Canada, and Japan. which is a great start to capturing share in the $600 to $700 million international dermatology market. Brazil, the first international market to launch, has outperformed our initial expectations for both penetration and sales, with efficacy being the key driver for switching to Xenrelia. We continue to expect approvals in Europe, the UK, and Australia this year. Moving to Crudelio Quattro, we launched and shipped product in January ahead of the parasiticide season. We are very encouraged by the early results with share capture ahead of expectations, while cannibalization has also been favorable to our assumptions. In the span of just a few short months, we've already achieved approximately 10% dollar share of broad-spectrum sales in the U.S. vet clinics. Approximately two-thirds of share capture has come from competitive broad-spectrum Indecto products or new starts, highlighting the high veterinary interest in Crudelio Quattro's differentiated profiles. All of our distributors have ordered multiple times within the quarter and inventories of distribution are still running relatively lean. We attribute our initial success to strong vet response to the three dimensions of differentiation for Cordelia Quatro. First broad coverage, including multiple species of tapeworms, the speed of tick kill and heartworm coverage from month one. Both vet clinics and pet owners have proactively shared how pleased they are with the palatability of Cordelia Quatro to dogs. Having seen this robust clinic demand, we're now increasing DTC investment to activate even more pet owners. We're also preparing for a global launch with approval submissions made in Australia, Canada, and Japan. In Europe, our pet health business has been led by the strength of ADTAP, our OTC flea and tick product for both dogs and cats. We've seen accelerating growth, doubling sales year over year, with a clear runway for further gains. AdTab was approved and launched in the UK in April, and we are strategically increasing brand building DTC in the second quarter beyond our initial expectations, reflecting the attractive returns we're seeing on our investment. AdTab is quickly gaining share, and we're also seeing minimal cannibalization of our existing portfolio. Finally, in pet health, our canine parvovirus monoclonal antibody is the first and only USDA conditionally approved treatment for parvo. Making CPMA widely available is crucial in our fight against this devastating virus, including in shelter environments where resources are often strained. We are focused on increasing access to this lifesaving treatment, and we continue to explore strategic interventions to address the cost of treatment and to accelerate clinic penetration across all channels. In farm animal, Xperia continues to rapidly grow in a market which we now estimate has potential size of over $350 million in the U.S. and Canada, with other additional international expansion opportunities. We have unlocked more of this market for Xperia through the benefit of the U.S. heifer clearance in November. We are confident in Xperia's growth trajectory in the U.S. and Canada and the product's continued ability to drive overall portfolio benefits. Lastly, with respect to Bovair, we remain encouraged by the strong demand from dairy farmers and CPGs. Since February, we've doubled the number of cows on the product. However, adoption and our margins have been impacted near term as government incentives have not yet been released. Moving forward to optimize Bovair's economic value and to enhance dairy farmer flexibility, we intend to expand our label as well as lower manufacturing costs. Importantly, the Bovair demand is robust, with April being our most significant month of new cows starting, while customer retention is high, consistent with farm animal feeding like Xperia. We do believe that Bovair can become another farm animal, Elanco Blockbuster, and create the next major market in farm animal health. Overall, the basket of the big six innovations is outperforming and driving accelerating growth for the entire company. Moving to slide nine, we highlight all three elements of our IPP or innovation portfolio and productivity strategy. Our innovation builds on our portfolio, which remains a key source of our resilience, enabling this robust growth even in challenging times. Our diverse, durable product portfolio is balanced across geographies and species. In US Pet Health, we gain share in each of the four key markets in our comprehensive portfolio, para, inseds, derm, and vaccines. Vet clinics prioritize partners who offer a complete set of solutions, allowing us to leverage innovation to lift our broader pet health portfolio. As an example, over 500 U.S. clinics that adopted Credelio Quattro and Q1 also bought, for the first time, Ethery Lanco products. In U.S. farm animal, we continue to build on our market leadership and targeted innovations like Pradilax, a treatment for bovine and swine respiratory disease conveniently given as a one low-volume shot bolstering our wide portfolio of solutions. Finally, on productivity, earlier this week, we announced the monetization of our Lot-O-Lantern milestones and U.S. royalties for $295 million. This is a great example of Elanco pioneering new value streams and translating animal health into human health. Monetizing this non-core part of our portfolio accelerates our deleveraging objectives. The transaction, combined with our more favorable foreign exchange rates positively impacting our cash balances and additional improvements in working capital, is driving our net leverage target for 2025 down to 3.9 to 4.3 times adjusted EBITDA. We also remain focused on the cost discipline as an element within our control in this challenging macro backdrop. while we still strategically continue to invest in our innovation product launches and the expansion of our Elwood, Kansas, and Fort Dodge, Iowa facilities, which are progressing as planned. Our ongoing company-wide productivity agenda was further evidenced by the gross margin expansion in the quarter driven by better than expected manufacturing performance with good management of absorption, losses, and expenses. With that, I'll pass it to Todd to provide more on the first quarter results and financial guidance.