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.

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 year-over-year changes in our reported results. Starting on slide 11, we delivered $1.193 billion of revenue, representing a decrease of 1% on a reported basis. Excluding unfavorable impact of foreign exchange rates and the divestiture of our aqua business, we achieved organic constant currency growth of 4% compared to the first quarter of 2024. Price and volume each contributed 2% in the quarter. Relative to our Q1 guidance in February, we had an $11 million sales benefit from the weaker U.S. dollar. Slide 12 shows revenue by the four quadrants of our business. Total pet health revenue increased 1% in constant currency in the first quarter, with price growth of 2%. In the U.S., pet health revenue declined 3%, driven by a headwind to growth from moving certain legacy Bayer products into distribution in Q1 of 2024, a challenging retail environment and soft demand for vaccines, offset by sales from key innovation products. Outside the U.S., our pet health business grew 5% in constant currency, driven by continued strong demand of ADTAP across Europe and Credelio in multiple geographies. Zinrelio sales in three international markets contributed, while soft demand in the China market was a headwind in the quarter. Globally, our farm animal business achieved 7% growth in organic constant currency. The U.S. farm animal business grew 17%, driven by continued demand for Xperia and the launch of Pradalex in the quarter. This growth was partially offset by the expected timing of poultry rotations. Outside the U.S., our farm animal business contributed 2% in organic constant currency. Strength in cattle and swine in APAC was partially offset by the tough comparable from the Q2 2024 Keckstone recall and our strategic two-different approach in certain geographies. Continuing down the income statement on slide 13, gross margin increased 10 basis points to 57.4% due to price, strong manufacturing performance, and beneficial product mix, even with the challenge of our highest margin business, USOTC, declining in the quarter. These positive factors were partially offset by inflation and foreign exchange headwinds. Operating expenses rose 3% year-over-year this quarter, driven by investments supporting our pet health product launches and continued R&D investments focused on our late-stage pipeline and geographic expansion opportunities. Interest expense was $40 million compared to $66 million last year, with the savings primarily attributable to the significant debt reduction achieved in 2024 from the divestiture of our Aqua business. Slide 14 compares Q1 adjusted EBITDA year-over-year. Adjusted EBITDA was $276 million, a decrease of $18 million. Excluding the impact of the aqua divestiture and foreign exchange headwinds, adjusted EBITDA increased $8 million in the quarter, reflecting on the underlying business strength. Approximately $5 million of adjusted EBITDA relative to our February guidance came from the weaker U.S. dollar that benefited revenue. Adjusted EPS was $0.37 in the quarter. The $0.03 year-over-year improvement was primarily driven by a favorable discrete tax rate benefit and the interest expense savings from debt reduction resulting from the July 2024 ACWA divestiture. On slide 15, we provide an update on our cash, debt, and working capital. Cash used from operations was $4 million in the quarter, reflecting... typical seasonality of our cash usage. We ended the quarter with net debt of $3.933 billion and a net leverage ratio of 4.4 times adjusted EBITDA. Now, let's move to our financial guidance starting on slide 17. We have maintained our expectations for organic constant currency revenue growth of 4% to 6%, while raising our revenue dollar range to reflect approximately $65 to $70 million from the favorable impact of foreign exchange rates since the February earnings call. We have good line of sight to the mid-single-digit growth given the strong Q1 performance already at 4%, with our innovation quickly ramping on top of a stable base. We continue to expect operating expenses to be up approximately 6% in constant currency with strategic investments in the global launches of our innovation portfolio. We also continue to expect H1 to represent a relatively smaller portion of full-year adjusted EBITDA versus the 61% weighting in 2024 and 2023 as the first half commercial investments impact operating expenses earlier in the year, and then they drive greater contributions to revenue in the second half. Our adjusted EBITDA and adjusted EPS ranges are unchanged from February. Our year-to-date performance, proactive intervention plans covering various scenarios around tariffs, and the foreign exchange tailwinds are balanced by macroeconomic challenges and uncertainty. We have reasons to feel confident in our ability to deliver our 2025 goals, including the accelerating trends we are seeing in March and April. However, as Jeff explained, a prudent approach is warranted in this dynamic environment. We have also updated our cash and balance sheet expectations for 2025. With the proceeds of the Lodaliner U.S. royalty monetization combined with cash generated from the business, we now expect between $450 and $500 million of cash available for debt paydown this year. As a result, we now anticipate end-of-the-year net leverage of 3.9 times to 4.3 times adjusted EBITDA. Slide 18 provides year-over-year bridges for 2025 adjusted EBITDA and adjusted EPS, and slide 23 in the appendix provides a number of additional assumptions to help support your modeling efforts. On slide 19, we provide our financial guidance for the second quarter. We expect organic constant currency revenue growth of 4% to 6%, largely driven by the positive momentum in our U.S. pet health business. On a reported basis, we expect $1.175 billion to $1.195 billion in revenue. Our investments in recently launched products continue, with a planned approximately 11% year-over-year increase in operating expenses as we head into the peak parasiticide and allergy season. Consequently, we expect adjusted EBITDA of $200 million to $220 million and adjusted EPS of 17 cents to 21 cents. These ranges include a minimal impact from tariffs given the timing of their implementation and are mitigating actions. The expected adjusted effective tax rate in Q2 is 25% to 27%. Now I'll hand it back to Jeff for closing comments.

Thanks, Todd. We started the year saying 2025 is about delivering, not promising, and that's exactly what we're continuing to do. Elanco delivered a strong first quarter, outperforming our expectations across all key metrics. Growth is accelerating, with revenue guidance being raised, and innovation and cash are tracking ahead of expectations. We also continue to accelerate deleveraging, reducing debt while investing in launches and key markets. Our organization is engaged, energized, and well-equipped to navigate these dynamic market conditions. Our people share my confidence and excitement into the balance of the year. Truly, Elanco is in a position of strength. We are taking a prudent approach and executing our playbook in a dynamic external environment. We have the right teams, interventions, and actions to keep progressing towards our goals, to transform animal care, and to deliver lasting value creation for shareholders and for society. With that, I'll turn it over to Tiffany 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 instructions for the Q&A session, and then we'll take the first caller.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of John Block from Steeple. Your line is open.

Great. Thanks, guys. Good morning. Todd, I'd love to hear just a little bit more about the 2Q guidance. I think, you know, the 2Q investments would seem to be dampening the near-term EBITDA result. I think you talked about 11% constant currency op-ex spend, but 6% for the full year. If you could just talk about the cadence there, and then maybe, you know, the leverage going forward as that spend sort of subsides looking forward.

Sure, John, thanks for the question. And yes, we're, you know, we've said from the start, we're going to have a no regrets launch approach on our big six blockbusters. So in Q2, we're at the heart of the northern hemisphere parasiticide season. And so we are investing behind Cordelia Quattro. It's off to a great start. As you heard in the prepared remarks, you know, sales from distribution to vet clinics, we took a 10% share already. The product is resonating with its tick kill quickness, the tapeworm coverage, as well as heartworm coverage from month one. So overall, we're going to be putting a lot of media dollars behind that, and that's increasing the spend. Also, in Europe, ADTAP continues to have a nice run, doubling year over year in Q1. And part of the timing in Europe is there's a lot of sales in Q1, and then the investment to pull that sale out to consumers happens in Q2. So there is a little timing mismatch between the revenue and the investment. But fundamentally, given the importance of Northern Hemisphere, uh parasuicide season to us we really think of elenco on our first half second half basis and you know we're over achieving our expectations here in the first half relative to the start of the year on the back of um these investments um in ad tab credo quattro ends in relia but that's the cadence and then we're going to get the the lift here in the back half as those investments in q2 really pay off to drive revenue on a continued accelerating basis to get to our mid single digit growth for the full year Got it.

Very helpful. And maybe just, I hate to burn one here, but I just want to be really clear. So on the tariffs, if nothing were to incrementally occur from here, you have what, 25 million in EBITDA from the FX moves that's not reflected in the guidance. You know, you'll just sort of, for now, keep that in your back pocket to see how the pharma exemption plays out. Maybe if you could just talk to that and, and, Jeff, I'll just sort of ask an offshoot to the second part of that question. Some of your wording around Zenrelia, the label change or potential seemed a little bit more fulsome or upbeat relative to past. So maybe if you can give a little bit more details there on the potential timing behind that if that were to occur. Thank you.

Yeah, John, you're reading slide 18 correctly. We've got a $25 million EBITDA tailwind from the weaker dollar. We decided not to reflect that in increasing our guidance here in May, just given the uncertainty with the pharma exemption. If everything holds as it is, then yeah, there'd be a $25 million upside from FX on our base business that would push us close to $900 million of EBITDA at the high end of the range or $875 at the mid.

Yeah, John, and on the Xenrelia label, a lot of good constructive dialogue. As we've said, we've got two work streams, one on the language of the label that's more short-term and one on the overall label itself. And I would just emphasize, yes, we continue to have good dialogue with the FDA. Some of the regulatory changes, we do not see any impact to us materially. The reviewers are all in place. That dialogue is going forward. And on that language change, yes, the data's been with the CBM for some time. We expect an answer. It is on an ADUFA-type timeline as we get into the second half of this year. And again, we stand by the science and we'll continue to work with the CBM on this. And I think it also is demonstrated out in the field, as I highlighted in my comments, the efficacy of Xenrelia continues to resonate as we move from 8,000 clinics to 11,000 clinics. We're in 35% of the clinics today. And then the less restricted markets outside of the U.S., it's ramping really well. We're in three key markets. We got three major markets coming in the second half, which will also be part of Todd's point of the increased ramping of revenue in the second half as well. So yes, we're very happy with where we stand today with the CVM and we'll continue to work with them going forward.

Thank you. Your next question comes from a line of Michael Riskin from Bank of America.

Your line is open. Great. Thanks for taking the question guys and congrats to the strong start to the year. Um, I'm going to pick up where, um, where John just left off on the innovation front. Um, you know, you sound really positive on, on all the innovation updates. Uh, you know, you talked about the rally, I talked about Quattro, um, 198 million in the first quarter is certainly well ahead of where we had you. Um, I realized there's some seasonality with some of these products in terms of comparing the animal and the first half of the year, but still given these are newer, you still think they would ramp through the year. So could you just walk us through, you know, between that and the raising the full year innovation by 20 million? I think you'd be able to raise even more. So just sort of what you saw, if you could parse out, you know, the jump to 198 million in the first quarter, just, you know, the thought process for the rest of the year.

Yeah. Thank you, Michael. And I appreciate the question because I think that's when you look to Elanco, this is what really differentiates us is in my 35 years, I've never had a slide like we just showed on a, six major innovations and another one coming in aisle 31. So, you know, what I think has maybe been misunderstood in the past or last year is the basket of the six innovations overall holistically. And so what I would tell you is that's what's driving the growth is what we're calling the big six soon to become the big seven. major products and major markets that are going to be globalizing with really low cannibalization. We're seeing that play out more so in Q1 than in the other quarter, and we continue to see it ramping going forward. We don't want to get ahead of ourselves. We're in launch mode, and as Todd said, we're in the northern hemisphere parasiticide season, and that's key. I would note a few that I would just highlight, and since the last quarter, and that's Crudelio Quatro to build on some of Todd's comments. I mean, we believe, one, the marketplace continues to get bigger. The majority of puppy starts are in this segment, a broad-spectrum Indecto. So this is the biggest animal health segment growing the fastest, and we believe that this has the potential to be the best product. And here are the proof points that I would lean in on, because we do think this is the biggest material driver going forward. Vet acceptance, to Todd's point, I mean, a 10% dollar share is ahead of our expectation. Two-thirds of that shift is coming from the competition and new starts, and the cannibalization is more favorable than we thought. And, you know, the second is the differentiation that Todd said. And I would highlight, I think another element of differentiation that's coming unsolicited by vets and pet owners is the palatability of the product. So, you know, we think that is definitely, we're entering new clinics with Credelio Quattro. It's helping the total portfolio, and we have a special product in Credelio Quattro, and we're going to globalize that product, as we've said. I'll point also to Xperia. We highlighted, Michael, for the first time, what we believe the size of the market can be for Xperia in Canada and the U.S., and as we've highlighted, 2%, 200% growth, and cattle numbers, more dose more days it's a sticky product that's adding a lot of value right now is cattle numbers are still down and ramping and we will be bringing that product into geo expansion into a couple new markets in the second half of this year as well so it's the basket of innovation it's also credelio the franchise overall for credelio is another key driver so um look we're an execution story and uh you know we are going to lean in and we are going to invest pretty significantly on these launches in the second quarter, as Todd mentioned, driving some of the EBITDA hole.

Okay. I mean, you kind of preempted my second question talking about Quattro, but I'll still dig into that. You know, that 10% dollar share, that really stuck out to us, given we know what Semperica Trio reported. We've got a pretty good sense of where NextCard Plus is. That's a pretty impressive 1Q. I guess the footnote there is it's 10% of clinic sales versus sort of sellout. Is there any reason you think that should differ dramatically? I guess I'm just trying to kind of ask how much pre-stocking may there have been from vets in that first quarter because you would think that that 10% should just grow over time and that can get to a pretty healthy number for the full year. So just talk about the in-clinic versus out-clinic sales there. Thanks.

Yeah, Michael, you're thinking about it correctly. It's a great start. We're getting it onto the shelves of a lot of vet clinics. That's where we're getting that 10% dollar share from distribution into the vet clinics. As we mentioned in the prepared remarks, we feel pretty good. We've got pretty lean inventories at the distribution. They had multiple orders during the course of the quarter, and now we're really making these investments we talked about in Q2 to have the consumer as excited as as the vets are, about this great product. And so, with that, you know, we do expect to, you know, start to get that outbound sales to be growing and taking share with consumers as well. But there is a little bit of a timing there, but we're really pleased with what Bobby Modi and his team did executing across the U.S. to launch Credo and Quattro with a great start.

Thanks, Bobby, to Ben.

Your next question comes from a line of Andrea Alfonso from UBS. Your line is open.

Thanks so much, everyone, for taking the question. I really appreciate all the color that you've provided so far in Fenrelia, but just probing a little bit more on what you've seen in the quarter-to-quarter ramp. Particularly curious about, you know, you discussed rates, but curious about the makeup of order sizes of initial orders versus reorders. And if you could, you know, sort of discuss the receptivity and uptake for the specialists versus the general vets. And if I may build on just sort of the question that Michael just raised, would you be able to characterize whether maybe Zenrelia or Quattro was the relatively greater driver of the $20 million increase in innovation revenue expectations? Thanks so much.

Yeah, I'll take the first one, Todd. You can grab the second one. Thank you, Andrea, for the question. Look, as we look at Zenrelia, the first thing we do is we step back and see a market that's going to probably eclipse $2 billion. It continues to grow. beyond what everyone's expecting. I mean, it's a double-digit growth market. It's global. And we're excited about Zenrelia. We're excited about IL31 that's staying on track for a late 2025 approval. And as you know, we've got a few other key assets here in the rest of the decade that we're coming into it. So overall, the DERM market continues to be robust, resilient, and continues to grow. And we're ramping, as we've said. The key thing is get into formularies and to lean into these clinics. And every month, we have an increased number of clinics that are using Xenrelia in their formulary permanently. I think the message, the headline, and the buzz in the industry from Brazil and Japan back to the US is the efficacy of this product. It's outstanding efficacy. It's been put in some of the toughest cases, and it's performed. And so we're ramping up use. I think I would point to a couple of statistics And that is that this 26% of vets that are not using as we come into the derm season are expecting to use. That's where we're targeting our focus. Our investment's a little bit more in the ground game than in DTC where we're doing tech to tech sessions, as well as the sampling program is working. We're getting good conversion when people sample it, when they put dogs on it, they then move it into a more of a mainstay product. Our challenge is ultimately about moving more clinics from a second line treatment or a tough case treatment to first line treatment. And we believe the derm season that we're coming into is really important. Remember that we see, you know, when you look at the derm season, We're coming into the months. We've just come out of the lowest season in July to September. There's 25% more volume than it is in the low months. So we've got to lean in here and actually get increased use. And most of that investment, though, is going to be more in the sampling and the tech-to-tech. And then we're looking for, you know, continued less restrictive labels in the big market of Europe. UK and Australia, $600 million to $700 million market outside the U.S. that will be entering heavily in the biggest markets in the second half of this year.

Todd? Andrea, on your question of what's driving the raise on innovation, it's really the complete portfolio. I mean, I think we've talked a lot here on, you know, ADTAB and the strength we're seeing in Europe, the growth of, you know, Cordelia Plus outside the U.S., You throw in Xperia, continuing adding more and more cows on Bovair, Quattro, Anzen Relia. So, you know, overall, you know, we're really pleased with the complete portfolio across the globe.

Our next question comes from a line of Brandon Vasquez from William Blair. Your line is open.

Hey, everyone. Thanks for taking the question. So maybe I want to hit on the innovation guidance again. And maybe, you know, I can appreciate you typically don't give kind of the revenue buckets, which is fine. But maybe can you just talk to us about, like, what are the top three? I'll take another stab at asking this question and put, like, what are the top three revenue contributors to that innovation bucket in 2025? Just to give investors kind of a little bit of a snippet of what we should be focusing on as the real growth drivers within that segment. And then I had a follow-up. Thanks.

Yeah, as a reminder, Xperia went over $100 million last year. It got heifer clearance in November. And so if you want just the biggest dollar driver, I will give you that, and that's Xperia. Jose Simas and the team here at U.S. Cattle and the team in Canada are really making inroads, and we're winning in U.S. farm animals. You can see it, 17% growth in Q1. It continues to have great growth last year. It's adding Bovera to the dairy portfolio. You know, that team is really executing well and is the big driver. So the number one product, Brandon, from a dollar perspective is Xperia. And then, again, we're not going to get into each of the individual ones, but, again, with the start that Quattro has had, you know, it is capturing more than we expected, and that is going to be a big play just given – It is the best product on the market. It just kills everything and it kills it fast and it has sustainability. So we believe that's going to be the differentiator and really excited for customers to keep getting Cordova Quattro on their dogs. Every dog wants to be a Quattro dog.

Brandon, I would also just say another note that I know we had investor questions a year and a half ago about the base business. And I would point to a couple things that I like to see. I've been a lot in the field the last three months is Innovations in each portfolio are making the base stronger. So we had a good quarter in Europe with Seresto and AdTab, or excuse me, Seresto and the A family because of AdTab. Rementin continues to do very well because of Bovair and Xperia, both in dairy and beef. And Crudelio Quattro, as I mentioned, has taken 500 clinics and are buying additional Elanco products. like Gallup and other products that they've never purchased before. So what excites me too is our base is as strong as it's been because our portfolios are getting better because of the innovation. I would point to that because that was a common question we got a lot last year and even earlier than that.

Great. That's super helpful. And one follow-up here quickly is just this has just been hard to gauge and other competitors have been talking about it as well, but just Spend a minute on the macro environment. I know you had a little bit of volatility. You do want to detail. Again, others have seen that too, so not overly surprising, but expectations on how things are holding up so far on the consumer side of things and expectations and how that's trending into the rest of the year. Thanks, guys.

Yeah, I'll make a couple comments, Todd, if there's anything else. I think I want to emphasize the headline is Elanco is an execution story. We're not a pet visit. a dependent story, and I really point to, yes, we need to be continuing to look at this as a durable market, but we do need to continue to monitor, you know, consumers and spend in the economy, and we're doing that. But I would say that given where we stand today with our omni-channel, you know, capabilities that we've set up, our innovation that we're launching, all the stuff that's happening with compliance and drop shipping and all of our Patrick O' You know expertise that we got from Bayer and our company and the globalization we're taking those are the things that will drive Elanco going forward and we're quite insulated from Patrick O' A worry of a one or 2% change in a pet visit and we think that all of this leads to our ability to take price where we can make vets and farmers more money and continue to have compliance grow. I will also highlight one other key trend that I think is important that doesn't get talked about enough, just as Todd mentioned on Xperia, but as leaders in farm animal, animal protein and this whole making America and really making the world healthy, animal protein is on the uptake. And we've seen some initial statistics here as we look at 24 going into 25, and we're spending a lot of time in the boardrooms of our major protein companies around the world because we see a big opportunity. The dairy industry has just announced a $10 billion US investment in dairy products because of protein. Last year, they had a record of $104 billion in animal protein here in the US, while plant-based meat saw a 20% decline. And on average, Americans ate nearly 7% more meat last year than before. The pandemic so helping our customers with regulatory with pathways for more use with innovation and ultimately what we do. Making protein more valuable and healthy and more abundant and affordable for consumers that's a trend that I don't think we've pointed to and what excites us about our farm animal business as we go forward.

Your next question comes from a line of Chris Scott from JP Morgan your line is open.

This is a Catarina on for Chris. Thank you so much for taking your questions. So first question is just around tariffs. If you think about mitigating impact, you know, kind of in the medium term, do you think there's an ability to offset some of the potential tariff pressure via price increases? And do you think that's something that the market can absorb or do expect any price action to meaningfully impact demand, particularly, I guess, on the pet side? And then the second question is just on Zinralia. Can you remind us how you're thinking about the launch of the product in Europe? Should we kind of expect a similar step of an investment ahead of that launch? And then, how quickly do you think it can ramp in that geography? And maybe anything you can say on kind of what the European label could look like if you had any discussions with the regulators. Thank you.

Sure. Catherine, with your question on tariffs, we already are taking some price in certain markets. As we said, China has been one where we are looking at those inbound tariffs and offsetting some of that impact with price. Certainly in the U.S. market, we're looking at that and considering the right way to do that in a value-based manner that we remain competitive. And again lots of uncertainty in the in the world with respect to the tariffs what retaliatory tariffs might look like you know we do have a global manufacturing footprint uh and with that you know puts in some you know positives in certain markets and negatives in other markets but overall that's the benefit of our global diversified portfolio again across both farm and pet so it is something we'll pay attention to um and right now you know you know we're not you know Consumers are continuing to take care of their pets as they always do, and we fully expect that. Again, something we're very focused on as a company.

On Centralia, just in Europe and the UK as well as Australia, markets that we have submissions in, we're in the final stage of the regulatory processes. Of course, every country is a little bit different. We're managing and responding to questions along the way. We continue to have confidence in a less restrictive label outside of the U.S. But, you know, we will continue to work closely and monitor that. We do have our key teams in Europe already trained through the first phase. We've got our sales forces right-sized, following very much a similar playbook as the U.S. So we have that all in place. And then, yes, there'll be a variable cost that will increase as we have in what we're doing right now with AdTab. We'll do some of that with Zenreli as we get into the second half And, you know, expect to launch this product again with no regrets because it's a major market. International derm is growing as fast or faster than the U.S., and it's a $600 million to $700 million market. We know that Xenrelia, as we watch it in Brazil, Japan, Canada, has great potential in these markets.

Thank you.

Your next question comes from the line of Navantai from BNP Paribas. Your line is open.

Hi, good morning. I had a question on the strong, sorry, on the U.S. retail environment. We know that the latest indicated a strong U.S. retail environment. Can you discuss the drivers in addition to the cold weather of that challenging U.S. retail environment for Elanco in January, February? And also, if you can discuss what you're seeing in terms of positive trends in March and April for your key franchises. Thank you.

Yeah, Yvonne, I think the key difference there is Zoetis was speaking to the retail RX market. Chewy, Amazon is just coming with that retail. And that's really about driving auto ship, driving compliance. And we're seeing really great success there. A lot of Gallup brands. goes through that, it's just easy to get your product continuous. And so that part, very strong. Our focus in the over-the-counter market, where Zoetis doesn't have any products, is a little different. It's much more consumer, you're in a lot of the cold weather, the foot traffic down, and that was indicated when we showed you know down 21 percent for those products in the first two months of the year but then rebounding in March rebounding in April and so you know overall you know we feel like you know that is never going to be you know a double digit sort of growth area because of you know we need to bring innovation there but it is a consistent player of very high margin products that provides a lot of cash flow for us and so we feel good about what the team's doing to execute and feel like we've gotten out of the cold weather and Seresto Collars will be getting purchased to prevent fleas and ticks across the US and Europe.

I would build on too. There's a lot of buzz about Amazon. And just to highlight, our strategy doesn't change. We're centered on physical availability. We picked up in the first quarter 48,000 more distribution points, which we brought this capability in from Bayer. We built on it with a lot of new expertise. We've got Blair Snyder out in California, many others that we brought in from the CPG industry. And Amazon has and is one of the largest customers for Elanco because of our pet retail business. So as they get into RX, you know, it is a platform. that requires unique capabilities, and we're familiar with those. We work with them every day, and we look forward to expanding into the RX business with Amazon. Ultimately, this is all about serving veterinarians and pet owners, giving them the products they want, where they want to shop, at the price points that they want to shop at, and we've got the best portfolio and global pet to do that.

Thank you. That's very helpful. And maybe a follow-up on pricing, if you could discuss your pricing expectations for the year.

Yeah, we continue to expect about 2% price for the full year. That's across the total global business and obviously varies between different areas of the business globally.

Thank you.

Your next question comes from the line of Michael DeFior from Evercore ISI. Your line is open.

Hey guys, thanks so much for taking my question and congrats on such a strong launch to the year. Just want to revisit the Xenrelia label change request. It seems like it's progressing quicker than initially expected. Do you still view this requested change potentially taking a few years to materialize? And also, if you could comment on and give any color on VET's willingness to use first line. I know it's been a short while, but given the progress, has there been any change in their willingness to use first line based on what you're hearing in the field? And have a follow-up. Thank you.

Yes, Michael. So just very for clarity, nothing's changed. We've had a two-stream approach with the CVM and working with them. One is on the language... You know, changes that are maybe more moderate to the label today, which we believe is important. We've submitted the data that that's on a new type timeline and those timelines. We started doing that immediately. As soon as we got the response on the 1st label, and that work stream is all progressing. And again, we should have an answer to that in the 2nd, half of the year. The other one is we've started dogs on a larger trial that would be more of a full, bigger label change. And that's going to take much longer. That's going to be, as we've said, you know, beyond definitely one year, maybe closer to two years. But what we're seeing with the product, it is a good investment to do for the longevity of the product overall.

And Mike, just. One of the reasons it takes longer, because I know we got this discussion at your conference, is we have to have one-year-old puppies that are unvaccinated and healthy to do the trial. And so you can't do it in a year because you don't have one-year-old puppies until you've gone at least a year. And so that's why it takes a longer time to do the clinical work on the unvaccinated dogs.

That's good. And then your second question, absolutely. We're seeing a nice ramp, as I mentioned. There's more veterinarians every month that are getting comfortable to bring Xenrelia in to first line or what I would call into their formulary to say, hey, it's option A, B, or C. And we're in that portfolio of options. But we want more. And that's really the two big drivers to get veterinarians comfortable are other veterinarians and key opinion leaders. visiting with them, sharing the data, spending time with them in a tech-to-tech dialogue, and then followed with a sampling program where vets can try this in different cases. And those are the two lead indicators. You combine that with the derm season that's coming, we believe we'll continue to see more vets move this to a first-line treatment. The efficacy is the prevailing narrative out there in the industry right now on how well Zenreli is doing in all cases and all situations.

Got it. And just my quick follow-up just on Xperia. I just noticed that based on the USDA ag data, cattle on feed seems to be below last year's levels. But again, Xperia seems to be a significant growth driver. Could you maybe explain this discrepancy and add any color on less cattle on feed but Xperia performing so strongly?

It's really the market position, Mike. I mean, Xperia continues just to be so important to that feedlot owner and the economics for them. As a reminder, we added the heifer clearance. And so that's a big driver of the uplift. That was 40% of the cattle. And so, yes, we've got low cattle on feed. That's going to be a tailwind when that reverses as part of the cattle cycle in the years to come. It really is that expanded market from heifers that helps us offset the lower cattle on feed numbers from a year ago while having Xperia continue to ramp.

Great. Thanks so much.

And your final question comes from a line of Aaron Wright from Morgan Stanley. Your line is open.

Great. Thanks for squeezing me in here. So on distributor stocking, we typically see parasiticide stockings That typically happens in the March timeframe. Sometimes it flips more into April. I guess you called out the acceleration in March and April. You have a new product with Quattro. Presumably there was initial stocking there just because it's a new product alone. And then I guess, can you talk through some of the moving pieces in terms of the stocking, destocking dynamics in pet health? And like, was there, you know, can you quantify any sort of initial stocking, I guess, from a Quattro perspective?

The main stocking issue was last year when we put the Bayer product into distribution. Without that, the U.S. pet health business would have been up 8% in the quarter. I don't really think of it as a lot of stocking, Aaron, when the distributors ordered multiple times. And I don't think in Q1 of next year we're going to be calling out that we're having to cover the initial stocking. It really was a really quick in and out to the vets. As we said, getting 10% of sales out to vets from distribution meant that, you know, The distributors were having to keep stocking as their initial orders weren't nearly good enough to fill the demand that they were getting from the vet clinics as our reps were out there really pulling that through. So I think very little in the stocking dynamics since it'll be proof this time a year from now when we're not calling out a stocking headwind on a year-over-year basis.

Okay, okay, great. Just wanted to clarify that. And then on, I guess, outside of innovation drivers like Xperia, I guess, can you just speak to the underlying health of the livestock market and how we should think about the quarterly progression from here across that business?

Yeah, I think overall, if you look at, Erin, good question. I think, you know, the headlines really is, as we just highlighted, the cattle market that matters most to Elanco, beef, confined feed, you know, you got low supply, high demand, good economics overall. On the poultry side, the global strength continues. The global numbers from Rabo and others, as you see, are 2.5% to 3% growth. We click along at that. You know, you have poultry rotations inside of that that can impact quarter to quarter, but as a whole, we continue to take share, we continue to innovate, and the global poultry business is pretty resilient. You know, there's talks of tariffs, but I think because it's so global, it's pretty insulated overall. And then swine, where we're really more North America, China-based, You know there's improved pricing that is expected balanced overall, so we see a stable market with a portfolio that can win within that stable market with the tailwind. That buzz in the boardrooms right now and protein is the opportunity and protein right now can can be really positive and we're supportive of the administration and how we can continue to make animal protein in the Center of this whole. you know, health movement and diet movement, which is really sustainable health care, is that it all starts with what you eat, and I think it's a real opportunity. So those are the trends we see. Overall, pretty stable.

Yeah, just specifically on Elanco and international, you know, we have headwinds here in Q1. A couple points on international growth in farm animal from the Keckstone recall from a year ago, as well as our exiting certain other lower margin countries. And so that team of Ramiro Cabral and his organization is really executing well, and I expect that'll help the growth acceleration we will see in Q2 as we go up to 6% constant currency growth from the 4% in Q1.

Good. Let me just make a couple of quick closing comments. Thank you for your time. Um, and, uh, we're entering no question, a much awaited period of sustained growth and accelerated value creation or an execution story. Uh, the entire organization is focused on our three drivers of value growth, innovation, cash, and Q1 was one of the highest quality quarters we've had in many years, growth accelerating, and we'll continue to accelerate the base and innovation. Innovation is a whole basket, as we just talked about, of innovation. And we're raising our guide because of the diversity of that innovation in major markets. And the whole company is really focused on cash and margins. We had our best quarter in a long time with manufacturing. There's a lot of momentum in our manufacturing organization driving margins. And it's exciting to see our cash to debt go from $150 to now $450 to $500. And I really want to emphasize tariffs. We've taken a prudent approach. James Rattling Leafs, On the current state and really any future scenario we see is inside our guidance to make that clear for you and and the positive tailwind of fx is going to be helpful so thanks to our customers. James Rattling Leafs, That farmers and pet owners for the time the relationship we are all about creating value for you, and thank you to our investors, we do believe we have a compelling value proposition. and we're going to continue to execute against growth, innovation, and cash and create a whole lot of value for yourselves. Thanks for your time. We look forward to engaging with you here in Q2. This concludes today's conference.