Good afternoon, everybody. I'm Chris Schott at J.P. Morgan, and it's my pleasure to be introducing Elanco today. From the company, we have Jeff Simmons, the company's President and CEO, and we're gonna have the company's CFO, Todd Young, join us for Q&A. With that, I'm gonna turn it over to Jeff.
All right, thanks, Chris, and thanks for all the great work you and J.P. Morgan are doing in animal health. Before I begin, I'll quickly reference slide 2, just on the disclaimer for forward-looking statements, and with that, I will get started. Hey, 2024 marks a very important year for Elanco. It is our seventieth year as an animal health company, the longest-standing brand in this durable, attractive industry. And we have a lot of great things that are happening this year as well, that I'll get into, and Todd will as well. And listen, given animal health brings a lot of interest to J.P. Morgan, it's the beginning of the year, we're gonna level set and really cover a few things in detail and some prepared remarks, and then Todd and I will join Chris for some Q&A.
So I'm gonna cover three things. I'm gonna first just talk a little bit about our perspective of the animal health industry and where it stands today. Second is a little background on Elanco, the momentum, the progress that we are making today with our strategy. And then third is really just the overall belief that we have and some positioning around how we are as a company and the value proposition that lies ahead for our company. So with that, let me get started. Now, I'll start really before I get into the background of the industry and just say that to get into a broader overview, I wanna kind of ground everyone on Elanco and the current state. We delivered top-line growth and improvement throughout all of 2023...
or improvement over 2023, with a return to consistent, constant currency revenue growth of 5% in the third quarter. Improvement was driven by, an accelerating contribution from innovation, stabilizing core volumes and price growth, and we expect the upward trajectory to continue in 2024. We expanded gross margin in the first three quarters of the year and are prioritizing cash flow, for debt paydown. We made meaningful progress on our pipeline. We had 3 FDA submissions made for potential blockbuster products in the third quarter, all with a path towards approval in the first half of 2024. We're executing on our key deliverables of growth, innovation, and improved cash conversion, and look forward to reporting fourth quarter results in twenty twenty..., at the end of February.
So with that, let me transition a little bit to the background of the industry, and I'll move to slide 4. The animal health, medicines, and vaccine market represent an estimated $38 billion in size. The industry has delivered historically a 5- and 10-year CAGR of around 5%, with reported growth in each of the last 20 years. This attractive industry growth is driven by innovative products and solutions that address growing needs of veterinarians, farmers, and pet owners. And as a cash pay business, I think this is important, the customer's willingness to pay is driven by value, and the industry has historically fared well during times of this economic uncertainty, as customers prioritize the animals in their care, and we expect this durability to continue.
In 2024, we see the $15 billion global pet health market growing in line with historical mid-single digits. Growth in this space continues to be driven by rising global pet ownership and increased humanization of pets with higher expectation of care, creating increased willingness to spend. Capacity constraints in the veterinary community continue to limit visit growth, highlighting a clear need for vet practice optimization, as well as more vets needed to be entered into the profession and the industry. We expect innovation will continue to be rewarded, and increased compliance and convenience, enabled by omni-channel options, will continue to drive growth. On the farm animal side, consistent with recent years, this $23 billion global industry is expected to grow in 2024, although at a lower rate than pet health.
Farm animal growth will be driven by the continued rise in global demand for animal protein, aligned with GDP growth, popularity of high-protein diets, as well as efficient global trade. Producers globally, on the farm animal side, are focused on food safety, disease prevention, and productivity. And as global demand, as demand for protein increases, sustainable production of meat and milk has never mattered more. I believe in 2024, we will see the convergence between animal health and environmental health. This intersection of calories and climate creates the next era of industry opportunity, and it positions livestock as a major contributor for climate solution rather than a detractor. Just last month, at COP 28, the United Nations highlighted the need for livestock efficiency to meet increased calorie needs, while pointing to feed additives as one of the opportunities to reduce methane emissions.
We have made tangible progress as a company to create a market in this space, whereby we can reduce methane, not animals, while adding a value stream for farmers. In 2024, we expect these trends in farm animal to be balanced by negative, cyclical trends in U.S. cattle and the continued uncertainty in Chinese protein markets. I think when you look at animal health companies, to take advantage of some of these tailwinds I've described, animal health companies must do the following: deliver consistent, high-impact innovation.... maintain broad scale and global reach, have robust, diverse portfolios, and have value-added capabilities. And over the last five years as a public company, Elanco strategically invested in these capabilities, expanded reach, and poised to drive improved profitability as we grow this top line. Let's move now to slide 5, take a closer look at how we are executing on our strategy.
While our products serve pet owners, veterinarians, and farmers, and the animals in their care, we know that we're not just in the animal business, but also the people business. We believe in Elanco, making animals' lives better, makes life better. Elanco is an independent global animal health leader with revenue balanced between the U.S. and international markets. We focus on products, medicines, and vaccines for two primary sectors: pet health, including dogs and cats, and farm animals, which primarily include cattle, swine, poultry, and aqua. Since our 2018 IPO, we've successfully completed our separation and stand up, increased our exposure to the higher margin pet health market by acquiring Bayer Animal Health, and taken decisive actions to capture value and deliver productivity.
Last year, we completed the systems integration of Bayer Animal Health business, allowing us to move past significant cash outlays with a focus now on debt paydown and delevering in 2024. On innovation, our pipeline is maturing with opportunities to introduce six potential blockbuster products in the US market by 2025. Two of those, Experior and our parvovirus monoclonal antibody, are already on the market and expected to contribute to growth in 2024, while we have a path to three additional approvals in the first half of this year. We also continue to invest in important commercial capabilities and expanded share of voice that will maximize the value of our current portfolio and expected launches in 2024. I'll go into each of these in just a moment. These actions and progress are building momentum in Elanco.
We've invested in transform to build a global company that has the scale, the diversity, the pipeline, and the optimized infrastructure that allows us to reach the world's animals to be a valuable partner to our customers. The diversity that we have created in our business, across species, therapeutic areas, and channels, makes us durable and positions us to capitalize on these market opportunities. Moving to slide six, let's take a deeper look at how we're driving success. In Elanco, we've had a very consistent strategy focused with three pillars, innovation, portfolio, and productivity, or IPP, with customers always at the center. We aim to deliver consistent, high-impact innovation while optimizing our diverse portfolio to grow market share. Our company's wide strategic productivity efforts have supported margin expansion since the IPO, with improved cash flow and debt paydown expected in 2024.
We are poised to optimize our ability to serve customers and create long-term value. Turning to innovation on slide 7, we are committed to consistent investment in R&D to drive growth over the long term. Under the leadership of Dr. Ellen de Brabander, our team is making strong progress on efforts to transform care, bringing new solutions to our customers' greatest challenges. We're in the midst of launching one of the most exciting pipelines in our 70-year history, primarily in high value, the pet and the health market, and pioneering a new frontier in the livestock sustainability market. Our R&D organization is streamlined and optimized really around three clear parallel priorities. First, we're focused on the late-stage pipeline, targeting high-value market segments where we have first-in-class differentiated assets. We are balancing our late-stage efforts with investments to maximize the value of our current portfolio and refill the pipeline.
A key differentiator in animal health is the importance of extending the life and value of existing brands and targeted lifecycle management. It's a top of mind for us right now, and it's been a key contributor to stabilizing our base business. Finally, in order to deliver consistent, high-impact innovation in the years to come, we are refilling our early-stage pipeline with the next wave of innovation, focused on first and best-in-class opportunities. Our targeted areas of focus here include a concentrated efforts, really on the next generation of products for pet parasiticides, dermatology and pain, and in livestock sustainability. Additionally, we're opportunistic for platform-aligned targets, such as monoclonal antibodies broadly and other major emerging spaces of high unmet needs. We see a bright future ahead for Elanco with this next wave of innovation, and we're excited to share more as we progress.
Slide 8 is a slide we've used in the past that highlights the six expected potential blockbuster products in major markets. We've already launched two of these. First, Experior, the first ever FDA-approved product with environmental claim for the reduction in ammonia gases in cattle, and our canine parvovirus monoclonal antibody, CPMA, revolutionary product that saves puppies from unnecessary death when faced with this highly contagious disease. We've completed our planned capacity expansion and expect unconstrained supply for CPMA in 2024. Both Experior and CPMA ended the year with strong momentum and are expected to be key growth drivers in 2024. In addition, we have three key late-stage assets that have a path to US FDA approval in the first half of 2024, which we expect to contribute to growth primarily in the second half of the year....
On the pet health side, this includes Zenrelia, our first product in the billion-dollar global canine dermatology market, and Credelio Quattro, our broad-spectrum parasiticide in the $6.5 billion global parasiticide market. We're expected. Both of these are expected to be differentiated from the current market offerings. These new drug products will greatly enhance our current portfolio offering to veterinarians and corporate groups, elevating Elanco's competitiveness overall. Rounding out the near-term assets, Bovaer is a product to reduce methane emissions in cattle. Elanco has U.S. commercial rights for the product and is helping to shape livestock sustainability market, that we believe could become a $1-$2 billion global market, fueling Elanco's next era of farm animal growth. Finally, we're progressing our IL-31 monoclonal antibody, another dermatology asset, in 2025, as we leverage our expanded monoclonal antibody platform.
Overall, Elanco's embarking on a historic innovation launch window as we speak. Ellen and her team are focused, optimizing and demonstrating proof points, positioning Elanco to deliver consistent, high-impact innovation that contributes to future growth. We remain confident in our path towards incremental annual revenue contributions of $600 million-$700 million by 2025 from innovation launched since 2020, and are excited about the next wave of innovation in the pipeline. Moving now to the second pillar of our strategy, the portfolio. We sell products in more than 90 countries, with about 200 brands, of which 10 are blockbusters or were in 2022. Our diverse global portfolio and our integrated and efficient systems, along with our competitive teams on the ground, have us well positioned to reach the world's animals.
Let's take a closer look at each one of the segments, starting in pet health. Our vision in pet health is helping pets live longer, healthier, more active lives. As a major player in the global market, we have solutions for veterinarians and pet owners in parasiticides, dermatology, pain, and other therapeutics, as well as vaccines. Blockbuster brands like Simparica, Advantage, Credelio, and Galliprant are core to our offering, with additional portfolio-enhancing products in important therapeutic areas. As I mentioned earlier, we have intentionally shifted our mix to a higher margin pet health products, going from about a third of our portfolio of our business in 2018, to today, pet health represents over a half of our business.
Elanco is a significant player in the pet health vet market, and because of the Bayer acquisition and additional investments we've made in the business, we're now the leader in the pet health retail channels, both in the U.S. and internationally. About 40% of our global pet health business is in the over-the-counter parasiticides products that do not require prescriptions. This means that we can meet pet owners where and how they want to shop for pet care, at the vet, clinic, their neighborhood store, or online, and that comes at a wide variety of price points, too, giving us multiple ways to win. Additionally, our leadership in this market space uniquely positions Elanco compared to other public competitors, and insulates a portion of our business from the capacity challenges and lower visit volumes at vet clinics.
We expect our pet health business to continue to improve in the U.S. and internationally through really four key enablers highlighted on Slide 10. First, innovation, as well as increased share of voice, expanded physical availability, and strategic price execution. The strategy is delivering already. On a year-to-date basis through Q3, global price for pets was up 5%, and the U.S. retail business grew 10%. Further, to support the anticipated approval of new products, we have invested to expand our U.S. pet health sales force by 20%, or about 75 people, most of who come to Elanco from the pet health industry. Shifting now to farm animals on Slide 11. We are focused on helping farmers improve the following, really, animal health and well-being, and raise livestock more sustainably.
Our business spans four key areas: efficiency and performance, disease prevention and treatment, food safety, where we're a global leader in salmonella prevention in poultry, and the emerging area of livestock sustainability. Our farm animal business has proven to be resilient in a variety of market conditions, as we expect to grow over time, enabled by our comprehensive complementary portfolio offerings, our value beyond product services, price and innovation, including both important lifecycle management and new opportunities, primarily in livestock sustainability. Overall, our farm animal leadership, our intentional shift into more pet health, and our late-stage pipeline is expected to, you know, create a more stable business with higher margins. Finally, on Slide 13, I'll elaborate on our productivity efforts.
Over the last several years, we took decisive actions to optimize our physical footprint and corporate structure, allowing us to deliver adjusted EBITDA synergies above initial expectations while weathering significant inflationary, foreign exchange, and other pressures. We've enhanced our ownership mentality of our global team, thanks to our shift to an EVA-like Elanco Cash Earnings compensation metric.... Importantly, we're continuing to make improvements which allow continued reinvestment in innovation and launches to drive growth and improve profitability. As we move past last year's cash outlay for our ERP systems integration and scale margin accretive innovation, we expect improved free cash flow, leading to additional delevering. As I mentioned earlier, we believe our established strategic IPP framework is the flywheel necessary to optimize serving customers and creating value over the long term, and the flywheel is increasing momentum, as we see on slide 14.
As we shared our recent earnings call, along with improving market conditions, third quarter constant currency revenue growth of 6% for pet health and 4% for farm animal, was enabled by our differentiated global omni-channel approach, our strategic leverage of our diverse portfolio, and our enhanced capabilities as well as leadership. We expect our growth to continue into 2024. In November, we shared our expectations for constant currency revenue growth this year, which we believe is achievable even before the expected launches of Bovaer, Credelio Quattro, and Zenrelia. The key enablers in our portfolio, leveraging innovation, share of voice, and physical availability, are expected to be key tailwinds, while we continue to face competitive pressures from innovation and generics, while the global macro uncertainty appears to be manageable going into 2024. We're excited with what lies ahead.
Finally, as I close on slide 16, we see Elanco as an attractive animal, you know, leader, animal health leader in a very attractive industry, offering really the following compelling long-term value proposition: First, our innovation portfolio and productivity strategy positions us well to deliver on our late-stage pipeline. We're gonna launch with excellence and remain focused on improving cash conversion and decreasing leverage. As we look ahead, we have a stabilizing core business that delivered both volume and price growth in the third quarter. We're preparing to launch innovation in big, high-value spaces and are pioneering new markets. We have a strategic mindset focused on optimizing our infrastructure to support future growth from innovation. Ultimately, we believe this strategy will deliver meaningful, long-term value creation for our customers and shareholders. Chris, thanks for the opportunity, and Todd and I look forward to fielding your questions.
Great. Thanks so much for the comments there. So I thought maybe just to kick off the conversation, looking back on 2023, can you just maybe elaborate on kind of what went better than expected, what went worse than expected, and just how you think about those kind of trends playing out as we go into 2024?
Yeah, I think, you know, overall, at the highest level, our company's been very focused on three things: its growth, innovation, and cash, converting EBITDA to cash. I think as we look at last year, I think what went well was our pet retail business, and the overall pet business was, I think a little better than expected. I think what Ellen is doing in the pipeline, she's creating an engine of consistent innovation. The progress that we've made, a lot of it is as expected externally, but I think what we're seeing is the engine of what I see, both on innovation as well as even the next wave on these clinical projects. And then, look, completing the ERP stand-up was a significant feat. It's worked. It's now bringing savings. That stand-up is behind us, and we're integrated.
So I think that's the positive. I think supply continues to be a challenge. We saw... You saw that quarter to quarter, especially on the vaccine side, with, especially on, you know, the, the USDA and the vaccine. That was, that was a challenge, and then, you know, I think the continued, you know, work with competition and, and moving forward. But overall, I think a solid year and net-net overall.
The only thing I'd add, our working capital management wasn't at the level we would have liked. We've done a lot of work to improve that, and it's improving in the second half as we stopped the degradation. But as we've communicated, we'll be slowing down manufacturing facilities in 2024 to manage that better and expect we'll be able to get about $250 million of cash off the balance sheet over the next couple of years.
Great. New launch is obviously gonna be a big, big focus for the company as you go through this year. Maybe just the latest around timing and confidence on some of these approvals. So I guess any update on the regulatory front of how the applications are progressing, any requests for additional data? I'm just trying to get a sense of, like, how confident are you on the first half approval timelines?
Yeah. So we've said... You know, I back up and say, you know, as I mentioned just now, through 20, you know, through 70 years, and we've got 10 blockbusters. We are now looking at 6 in the making, between the 2 that we have approved and through 2025. So we're sitting here, I think, with a historical, significant innovation. Yes, the 3 that are submitted are under the FDA, 2 of them are under ADUFA. So as we look at them, no new real news here, and that's good news. I mean, we have said it's rolling, it's iterative, the submissions are in, we're working on the regulatory side with them. It's a proactive and productive dialogue. So, you know, I think that's all moving forward.
Again, we see a path to approval for these products in the first half of 2024.
The news is good news on that front.
Yeah
It sounds like. Great. And then I guess the question... I've had this, we've had this discussion over time.
Yeah.
How do I think about investment behind the launches? I know you made some investments in 2023, but as I think about these, these are, you know, obviously very important products for the company longer term.
Yeah.
You're going into competitive markets. How do you balance kind of the gating of expenses of, you know... Do you push... hard right away? Is this more of a gradual process that you kind of pick at here and there? Just help, help me understand that.
Maybe some opening comments, and Todd, you can add a little bit on maybe the staging piece. But, you know, Chris, I think what we've looked at is first is, you know, we've been launching when we've got Zorbium, Bexacat, now Parvovirus. I think the good news is we've been building the muscle for these launches with these other products. I mean, Parvovirus, you know, we've shared that, as I mentioned in my comments, we've got unrestricted supply right now. There's, you know, everybody wants, from a clinic interest, it's really high. So the first thing is really we've been building this muscle from digital to share of voice. Second is our new sales force, our expanded sales force. Over 20% expansion is complete. Over 80% of that is coming from the industry, as we've mentioned.
So that's really the fixed cost, and that's really helping our organic, our existing portfolio. And then, you know, that will be there and in place as we come. And we. That's the first prong of any launch, is making sure that awareness is very high at the clinic to drive clinic penetration. That's the point of the arrow for the launch. And then we're gonna stage, and we're gonna ramp. I mean, the mindset with these launches, because these are major markets, these are differentiated assets, especially when you look at a derm market or a livestock sustainability market, you know, we, we will launch with no regrets, and we will put the right expenses behind it. We'll stage that. Maybe Todd, share a little bit of what we're thinking from a staging perspective.
Certainly. I think, you know, we've made the investment in the sales force expansion, so that's about a $20 million investment. Those individuals are on board, they're working. We've recut the territories and are making that transition regardless of the timing. With respect to the big investments, is often the TV ads. That will be more as sales are ramping and we're getting clinic penetration, so that'll be toggled more in line. As we've mentioned, we'd expect revenue contribution from these products in the back half of the year. So from just a timing perspective, that's how I'd be thinking about the investments on the launch.
Okay, great. And then, you've had obviously a lot of launches. You've launched some, you've got some upcoming. How would you prioritize them in terms of what, what are you seeing as the biggest-
Hmm
... opportunities to Elanco if you kind of rank order these?
Yeah, so you know, the consistent message right now is we've got two great assets that have a lot of momentum in the marketplace right now, and that's where the energy is, is what we have. So Experior, you know, it's been a challenge to get it into the feeding programs, but it has, it's ramping. We've said that it'll end the year at an annual run rate of $60 million-$70 million. We see that being a key growth driver next year. That's going well. A lot of interest. Now we've unconstrained the supply on Parvovirus, blockbuster potential when we look at that product globally and the interest there. So one will be the focus of what we have.
When we look at the other three assets, there's no question, you know, the derm market, the atopic dermatitis market, really interests us. It's new, it's expanding, it's double-digit growth. It's $1.2 billion. It's the number one reason people go to the vet clinic is, you know, a dog can kind of self-diagnose with the itching challenges. We see that, hey, there's unmet needs in that marketplace, and it actually adds one prong to the portfolio that we now will have, that few other major companies have, which is bringing derm with pain, para, vaccines.
Mm-hmm.
So that, that market is extremely, you know, of interest to us, and it's, it's accretive to us, and it's, it's an exciting global market that's still growing. There's no question that, Bovaer and opening up livestock sustainability, we've spent a lot of time preparing the inset carbon chain. Now dairy farmers are able to get another income stream from, you know, carbon in addition to protein, and our target's gonna be the U.S. dairy market. We'll have a drug approved by the FDA with the Bovaer, and we see that market as a really... That market archetype is creating a new space, and it will be really the first major time where environmental health comes into animal health, so. And then Quattro, look, it's the largest market. You know, when I started in this industry, it was $200 million.
It's now a $6.5 billion market, parasiticides, and we're coming with a product that has one of the broadest coverages, with a team that has some of the most expertise, with an omni-channel approach. So a very competitive market, but we believe we have an offering. So three differentiated markets or differentiated products in very big market spaces and... But the priority right now inside the company is the two that we have, is full execution. They'll be part of the guidance that we've set on our existing portfolio to grow next year.
Excellent. Just on the macro side, you know, pet health, I know it's maybe a little less of a driver.
Yeah.
There was a lot of focus, though, on vet visits as we went through 2023. It seems like some of the recent data is showing maybe those visit trends improving a bit. I just sense of like, what are you seeing?
Yeah
... as you look at the market out there, and how are you thinking about visit trends as we go into 2024?
Yeah. So I think, you know, I always say, and there's a lot of people here, too, that are kind of new to the business, is, you know, 20 years of consistent growth with a lot of market volatility, seeing an average of 5% growth over time. I think when you bring that back in a cash market, the willingness to spend on, on pets continues to be the metric that matters. Now, yes, vet visits has gotten a lot of exposure, and it is challenged, especially with the capacity challenges in the clinics. We have seen some marginal improvement, maybe, in the marketplace. I think we're a little more insulated to that given our portfolio and also the retail business. But we do, we do see some marginal improvement.
Nothing structurally has changed, though, from Q3 to Q4, so I think it's minimal. I do think a lot of things that are happening at the vet clinics out there in the US to optimize, there's more convenience, there's more compliance, and there's more willingness to spend, and I think that's what's gonna make us a lot more durable in an economic time that might be a little more challenged.
Can I just ask another question on just the broader environment on price?
Yeah.
It seems like there's been some pretty healthy price, given the inflationary environment we're in, just how do we think about price going forward? Do we think about pricing coming back to more historic increased levels, or could we be still in a period of time where there's still above average price increases?
As we look across our portfolio, it's different by segment.
Okay.
-by country.
Mm-hmm.
We've increased the quality of our analytics around pricing, and that's something that, you know, we've seen this year, as we've been getting, you know, close to 4% through the first three quarters. As a reminder, we took two price increases in 2022, so it's decelerating here in the back half for us. But overall, we continue to expect positive price in 2024, as the value of the products, the consumer's willingness to spend. But we're also, you know, being very, cognizant of different items. We were pretty noisy in 2023 with MAP holidays as a result of our ERP transition, and so, you know, we've taken an approach of more of a one cost every day with Seresto.
Mm-hmm.
That will be different, but we think will add overarching value. So, think there is positive price, different by market, but a lot of thought going into it across our company.
Great. A couple questions just on the upcoming launches, on maybe Quattro first. Just, can you elaborate a little bit more how you see Elanco positioning in the market relative to Simparica Trio? It's got a bit of a head start, and then the more recent NexGard Plus launch. Just anything you can say about the strategy or just how you see the opportunity playing out for the company.
Yeah. So we, you know, we've been pretty open to say that this is a, you know, four active ingredients. It's got a very broad coverage, so there's an opportunity there for differentiation. We continue to see tapeworm and the interest in the broader coverage as a diagnostic is now in the marketplace for that. That's obvious, but I would say, Chris, as we broaden this out, what we've seen is anytime a new innovation comes, the market typically gets bigger. It has gotten bigger. That's happened when Trio came.
Mm-hmm.
Legacy products are more challenged. You know, we're gonna, we're gonna be looking at all the segments of the different clinics in the US, as well as the corporates, looking at our approach to the marketplace. It won't be just, you know, the, the newest innovation, but it'll also be some of those legacy innovations as well. So we, we think we're well positioned. We're looking at, as we've said, you know, availability, share of voice, the launch plan, making sure that, you know, we, we, we tie this into the portfolio offering that we have. We think a Zenrelia and going into Derm will also be a, a complement to, to Quat-- you know, to, to Quattro as well.
Yeah.
I think it'll be a mixture of all of those. There's a lot of players in this space, and there's a lot of room, and there's a lot of differentiation with Quattro when you look at the broader space of parasiticides as well.
You mentioned on the derm side, I think your competitor is launching a chewable product. How relevant is that from a competitive standpoint? Is that something that we could think about potentially Elanco having over time as well?
Yeah, we haven't articulated the details of the differentiation. We have a differentiated asset. We believe that differentiation will add value, and I think every launch has really two pillars. There's, there's an element of value, and there's an element of execution, and on the value side, it's gonna be the differentiation, it's gonna be things that we can offer to that veterinarian as well, and then it's gonna be, hey, how we execute, how we bring the product, and how we create awareness, and those are gonna be the combinations. So the, the good news is, derm is the number one reason that people take a pet to, to the vet clinic. It's a growing market. It's a market with a lot of opportunity. It's a market that's growing as, as fast or faster outside the U.S. than in the U.S.
We're making these submissions outside the U.S. as well for Zenrelia, so we see real opportunity here.
Great. Maybe pivoting over to Farm Animal. Just talk a little bit about the pushes and pulls-
Mm.
-for that business in 2024. I think in the remarks, you mentioned cattle and China being essentially some headwinds, but just-
Yeah
... a little bit of flavor of what we should think about.
Yeah, so I think every area, each species, we have some, some nice opportunities and some nice growth engines in each one of them. So, you're right. I think the two challenges are our smaller cattle market. We're in a three-year cycle on cattle. It's gonna take some time to turn.
Mm-hmm.
We see a China protein market that is improving, and we see, you know, in China, some, you know, levels right near break-even on the pig side, and it's hard to win in pigs without China. But I think on the positive side, I mean, we look at Experior being the number one growth driver for our beef business. That'll be a key driver. When you look at what we're gonna do with Bovaer and Rumensin and the carbon side will help dairy-
Mm-hmm
... nicely. And then, as Tyson has moved back to using, you know, animal, antibiotics or ionophores, that's gonna be a positive for us and our portfolio and will be a contributor as well. And then I think just overall, supply gets a little stronger. Our poultry business globally continues to remain very competitive, and we're able to take, you know, price. I think our capability on price has been stronger. To build on Todd's comment, I think inflation was a little bit of a gift because, you know, with a lot better analytics, with one ERP system, with better data, our pricing capability on bigger SKUs has been, you know, has been greater. So those are the pushes against the couple pulls. So we do see growth in farm animal next year.
We see, you know, the opportunity for continued market share growth with the innovation that we have as well.
Great. On the gross margins, just where can we think about gross margins going from here? I guess, is there anything from a manufacturing optimization that still needs to be done, or just what are the opportunities? Is it mix that drives margins up here? I'm just trying to get a sense of where that-
Certainly.
Yeah.
As a general matter, we've got the near-term headwinds from slowing down the manufacturing plants.
Yeah.
We said that's sort of 140-170 basis points of headwind in 2024. That's offset by continuing to take positive price.
Yep.
We've committed to constant currency sales growth with the existing portfolio. As we leverage greater sales, that is also a positive for our margin. And then the new products that we've been talking about, and as they scale, that has real value to margin from the positive mix, component. So overall, you know, we expect to continue to drive gross margin and operating profit higher over the next few years as we launch these, big blockbuster products. We know, you know, big products in, big, profitable spaces like U.S. cattle and U.S. pet have real value to the bottom line.
And just on leverage, I think you talked about getting to a 3x net leverage kind of ratio in the past. Is that still, like, a goal? And how quickly do you think the company can get there?
Chris, we were at 5.5x levered at the end of Q3.
Yeah.
We're gonna focus on getting out of the fives and the fours. Keep going from there-
Okay.
And then, you know, we'll continue to look at capital allocation, but we feel very good that EBITDA growth from these new products will be the way we continue to improve our debt profile. And as Jeff said, it's growth, it's drive the innovation, and convert that to cash to pay down debt. That's the focus internally.
Every employee, I don't think... I mean, we have an EVA-like Elanco Cash Earnings component, and it's real simple. I mean, we're aligning our objectives with shareholder objectives, which is, you know, every employee in Elanco knows they've got to drive EBITDA growth. And if that's a sales rep, that may be price. If it's manufacturing, it may be, you know, efficiency and productivity. And the second thing is, hey, any use of cash has to beat the cost of capital of 8.5%-9%. So the mindset in Elanco has changed a lot, even since the IPO the last couple of years, to optimize this. And cash is number one, two, and three priority is to delever. But we've got a very durable business.
You see that, and it is all about we've returned this company to growth. We're guiding to growth with our existing portfolio. We've got six blockbusters in the making, and you know, we're gonna convert this cash to delevering, so.
Excellent. Maybe just time for one last question here. Just on the cash flow point, you know, there's been a number of standalone cost integrations in the last few years. Just what does a normalized cash conversion look like for Elanco once it seems like we're going to start getting a much cleaner cash profile going forward, so?
Yeah. Right now, we have to improve the net working capital performance. That's first and foremost.
Yeah.
Then, as we launch these bigger products, that also drives efficiency.
Yeah.
Now, one thing, we will have increased CapEx in 2024 versus 2023, as we invest behind the launches and having the capacity to drive growth as well. So we certainly expect to have better free cash flow conversion going forward. We're not committing to a percentage at this point.
Okay, great. Well, I think we're just about out of time here. Obviously, a very exciting year ahead for the company, so look forward to watching the progress. But thanks for joining us.
Thanks. Thanks, Chris.
Thanks, Chris. Thanks, everyone.