Elanco Animal Health Incorporated

Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's second 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, Bob Van Himbergen, 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 latest 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 include the estimated impact of the aqua business, which was divested July 9, 2024, and certain royalty and milestone rates that were sold to a third party in May 2025. 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. I'd like to begin with a thank you to the Global Elanco team for these strong results and in recognition of many years of loyalty and steadfast hard work across the business. Our priorities have been consistent and clear growth, innovation and cash. By focusing on our customers and delivering a diverse portfolio of innovative solutions, we accelerated growth and achieved strong cash generation in the second quarter. As highlighted on slide four, Elanco continues to deliver, growing 8% organic constant currency in the quarter and exceeding the high end of guidance for revenue, adjusted EBITDA, and adjusted EPS. Growth was driven by both price and volume and led by the U.S. pet health up 11%. This marks eight consecutive quarters of underlying growth. Innovation is outperforming expectations, achieving $420 million in first half revenue. We are once again raising our full year expectations by an additional $60 million to $720 million to $800 million. The consistent outperformance reflects a diverse basket of current and potential blockbusters in major markets with meaningful differentiation, bringing added value to the marketplace. And importantly, this portfolio of innovation is also driving more stability in our base business. Also, we are de-levering faster than planned with our commercial and operational outperformance and strong focus on cash. Our quarter end net leverage ratio improved to 4.0 times, reflecting the strong second quarter results and working capital discipline, as well as the proceeds from the Lott & Lanner royalty monetization. With this momentum, we are improving our net leverage target for year end to 3.8 to 4.1 times. On tariffs, our intervention actions and FX tailwinds are mitigating potential impacts and risks. We now estimate a 2025 net impact of $10 to $14 million, which is less than our prior assumption and more than offset by the first half outperformance. We believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent execution and good momentum to date, we've arrived at the midpoint of 2025 in a strong position to raise our top and bottom line outlook. For the full year, we now expect organic constant currency growth of 5% to 6%, adjusted EBITDA of $850 to $890 million, and adjusted EPS of 85 to 91 cents. This guidance raised takes a prudent and disciplined approach with a strong balance between opportunities and business momentum while considering the dynamic environment. Overall, entering the second half of 2025, we believe we are well positioned to navigate external uncertainty and execute our long-term growth strategy. By delivering our diverse portfolio of innovation and building on our leadership in pet health retail and farm animal, We are on a clear path to becoming a company with consistent competitive revenue growth, a higher margin profile, a stronger balance sheet with stronger cash flows, and higher returns on invested capital. Turning to the second quarter revenue performance on slide five, we break down the 8% underlying organic constant currency revenue growth. This chart highlights the broad strength we're seeing across our global business with all four quadrants growing nicely. U.S. Pet Health led the quarter, up 11%, driven across both vet clinic and U.S. retail. Cordelia Oquatro and Zenrelia provided substantial contributions, which I will review in more detail shortly. Our innovation lessens the impact of vet visit volume declines and benefit the greater portfolio, with vaccines and pain also both positive in the quarter. At retail, our OTC parasiticide portfolio performed well, with Seresto and A-Family sales both recovering to double-digit growth. We are pleased with our performance and a delayed peak season as we continue to build on our leadership position and expand our physical availability. Moving to international pet health, we delivered 7% organic constant currency revenue growth driven by AdTab, Senrelia, and Credelio. We see meaningful tailwinds for our innovation through geographic expansion, including ADTAB's successful launch in the UK in April, and Zenrelia's positive performance in Brazil, Canada, and Japan. The U.S. farm animal business delivered another solid quarter, up 5%, and reinforcing our market leadership. Our recent data shows market leadership in beef, poultry, and swine, reflecting the strength of our portfolio, our customer-centric approach, and our continued commitment to the space. Xperia leads the way with rapid adoption in heifers since we received FDA combo clearance in late 2024. Xperia is also driving portfolio benefits with other cattle products like Reminson partially offset by a difficult comparison from vaccine resupply in the second quarter of last year. Finally, International Farm Animal was up 6% in organic constant currency with growth coming from poultry and swine. We did observe some pre-tariff buying to satisfy customer demand, primarily in China. Importantly, underlying growth was healthy even when excluding this timing shift. We are encouraged by the continued durability and growth of global farm animal markets supported by increased demand from animal protein. Looking at slide six, we delivered $420 million of innovation revenue in the first half. This continued outperformance is driven by our broad basket of innovation, namely Credelio Quattro, Xperia, AdTab, and Zenrelia. We're increasing our expected innovation contribution for 2025 by $60 million at both ends of the range to $720 million to $800 million, representing our success in bringing multiple products to big markets around the world. You'll remember this target does not include IL-31, which remains on track for approval in the fourth quarter of this year with commercialization in the first half of 2026. Let's further discuss the progress on our major innovation products on slide seven, starting with Cordelio Quattro. We believe this is a best in class product in the fastest growing animal health market, and we're very encouraged by how it is resonating with vets and pet owners. Share capture continues to track ahead of expectations, and we're also seeing Quattro grow the market. The U.S. broad-spectrum and decto market is $1.3 billion and growing substantially at almost 40%. In June, we achieved approximately 14% dollar share of broad-spectrum sales out of vet clinics directly to pet owners. Sell-in and sell-out rates were at relatively consistent levels to each other at quarter end, reflecting healthy inventory dynamics and standard distribution fill effects typical of new launches. Strong clinic buy-in demonstrates veterinary confidence in Quattro, and sell-out levels reflect growing consumer demand with our increased DTC investment showcasing the three dimensions of differentiation. Quattro has broad coverage, including multiple species of tapeworms, speed of tick kill, and heartworm coverage from month one. We're also pleased with the continued consistent feedback from vets and pet owners really appreciating the great palatability with Cordelio Quattro. And although still early, we're quite encouraged by the performance of our DTC campaign for Quattro. We've seen dispensing sales increase as we continue to ramp investment. We are leaning more into DTC based on the long-term ROI and the growing potential we see in this product. We also remain pleased with the limited cannibalization impact, as approximately 70% of Quattro's share capture has come from competitive product switches or new starts. Additionally, it's bolstering the broader portfolio in the clinic. For example, 2,200 clinics that bought Quattro for the first time bought another Elanco product for the first time. Of those 2,200 clinics, 500 had never bought an Elanco product before. This innovation is also improving our presence with corporate accounts where we've historically under-indexed. The successful launch to give dogs Quattro-level protection is a credit to our expanded sales team, our well-informed veterinarian customers, and our distribution partners. Finally, we're preparing to take Quattro global with numerous submissions made in Australia, Canada, the EU, the UK, and Japan, setting up what we expect to be a nice geographic expansion starting in 2026. Turning to Xenrelia, this has been a robust quarter, our best quarter so far operationally, strategically, and globally. We're making steady progress, gaining share in the $1.9 billion rapidly growing dermatology market. As we moved into peak allergy season during the quarter, we achieved growth ahead of our expectations with more first-line treatment use and willingness to use. This is a testament to Zenreli's efficacy, convenience, and value with our multifaceted approach to building awareness and appreciation for these key points of differentiation. In the U.S., we have approximately 10,000 clinics buying the product with a reorder rate of almost 80%. up from 70% shared in May. Zanrelia's real-world experience, coupled with our strong tech-to-tech selling, is driving greater adoption and product usage. We've seen our patient market share in the U.S. Derm market double, from 2% in March to 4% in June. And U.S. Zanrelia sales more than doubled in Q2 versus Q1. The patient share adoption growth has been very balanced, with both average sales per clinic and the number of clinics buying growing at double-digit rates month over month in the quarter. Our market research data shows that approximately 50% of Xenrelia users are now using the product as the first-line treatment primarily for new patients or seasonal restarts versus just a second-line treatment option. We'd like to share a very recent positive update regarding the Xenrelia label. Xenrelia achieved a milestone with receipt of FDA CVM's complete letter for its safety supplement. This supplemental NADA included additional published data to address CVM's concerns for the risk of fatal vaccine-induced disease. The 60-day administrative supplemental NADA process is now underway. which is expected to result in removal of this risk language from the box warning section of the label. Once the supplemental NADA is fully approved, the revised label is expected to be made public in Q4. We're pleased with this progress and continue to actively pursue the generation of additional data to further improve the label even more. Our goal is a U.S. label that is more consistent with our international approvals. On the international front for Zenrelia, we recently received approval in the European Union and in Switzerland. We're encouraged that the labels are consistent with less restrictive labels in other markets outside the U.S. where product has already been approved. You remember we have done a head-to-head non-inferiority study in Europe versus the marketplace incumbent as part of the EU approval process. We are very pleased. with the results confirming Xenrelia's strong efficacy profile and reflecting what we're seeing in the global market, with more than a half million dogs treated with Xenrelia. The launch in Europe began immediately, with approval last month, orders being taken now, and product in the market before the end of the third quarter. This follows a strong start in Brazil, Canada, and Japan. Additionally, we continue to expect approvals in the UK and Australia this year, creating a significant foothold in the $600 to $700 million international DERM market. Also in Europe, we continue to see very robust growth for ADTAB, a leading oral OTC flea and tick product for both dogs and cats. Sales increased over 60% in the quarter, supported by strategic DTC investments. ADTAP anchors our comprehensive portfolio of OTC parasiticides, including oral, collar, and spot-ons, and is the only oral OTC isoxazoline for cats in the EU market, which is a key differentiator. ADTAP also was approved and launched in the UK in April with good early traction. Finally, our K9 parvovirus monoclonal antibody remains an important treatment for the deadly parvovirus. We're excited for the prophylactic claim extension to help more pets fight the disease. We're working through strategic interventions to address the cost of treatment and to accelerate clinic penetration across all channels. In farm animal, Xperia had another outstanding quarter, continuing to grow rapidly in an estimated potential market of over $350 million in the US and Canada. we're also pursuing other international expansion opportunities. We are pleased to see U.S. cattle showing the first signs of rebuilding the herd. This herd growth and strong cattle producer economics combined with growing share, sticky customer retention at over 90%, and geo-expansion should all form a nice backdrop for what we expect to be strong exterior growth ahead. Overall, We see a significant runway for Xperia's continued robust growth, up over 80% in Q2, despite a tougher compare, while additionally driving portfolio synergies. Lastly, on Bovair, we are encouraged by sustained strong demand and accelerating adoption, reflecting its economic value to dairy farmers and brand value to consumer packaged good companies. Notably, CPGs have demonstrated robust demand for Bovair. With approximately $20 per head return to the farm, Bovair can add 5 to 10% to the dairy's cash flow. Since February, we've quadrupled the number of cows on Bovair to approximately 150,000. Customer retention is likewise very high at over 90%. We expect the entire ecosystem around Bovair to support long-term use as we continue to see the product as our next farm animal blockbuster. This innovation also further establishes Elanco as a pioneer in strengthening CPG brand value all the way back to the farm. Moving to slide eight, we provide some recent highlights across all three elements of our IPP, or Innovation Portfolio Productivity Strategy. As innovation accelerates our growth, it also stabilizes our base portfolio. In U.S. Pet Health, we continue to gain share in parasiticides, NSAIDs, and DERM. Our recently approved canine influenza vaccine enhances our extensive line of true portfolio vaccines, providing a lift across the full offering. We began shipping the product last month. In June, the EPA approved our Advantage Collar for dogs. With Seresto already available as a premium eight-month product on the market, our Advantage Collar will provide pet owners and veterinarians with a four-month collar for protection under the trusted Advantage brand. We anticipate this innovation to strengthen our retail leadership with an expected U.S. launch in the first half of 2026. All of this in innovation while Ellen and her R&D team continue to progress the next era of blockbuster innovations. Finally, on productivity, we are delivering substantial progress in strengthening our balance sheet and optimizing our operations. We've improved our net leverage ratio by one and a half turns in just six quarters through a disciplined focus on cash generation. On the manufacturing front, we're on track for our strategic expansion in our facilities in Fort Dodge, Iowa and Elwood, Kansas, with the latter supporting our monoclonal antibody platform. We continue to expect CapEx to step down next year. As I close, I want to highlight an important program we have launched in Q2 called the Elanco Ascend. This is a company-wide initiative that we expect will drive additional productivity and capabilities in key areas. As we have stated before, we expect to grow adjusted EBITDA in 2026, all while investing behind our launches and positioning Elanco for improved productivity and efficiency over the rest of the decade. We expect Elanco Ascend to create a key platform to enable sustained and consistent value creation while making Elanco more competitive and innovative going forward. With that, I'll pass it to Bob to provide a few comments on where he's focused, his initial reflections, and review our second quarter results and financial guidance. Bob, welcome to your first Elanco earnings call.