All right, guys. Good morning. John Block with Stifel. Welcome to 2024 Stifel Jaws & Paws Conference. We got a really packed day, fully loaded. We have 15 total panels. Overall, today and tomorrow, we got 22 companies, four physician panels, so a lot to talk about. I'm gonna open up our conference and welcome Elanco Animal Health and their CFO, Todd Young. Thanks, Todd, for your participation again in Jaws and Paws. Good to have you, and good to have you at the dinner last night. Guys, I'm gonna try to emcee for most of the day. If you have questions, throw up your hand. I'll certainly call on you and work everything in, but Todd, I'm just gonna pet health trends and go there. 1Q 2024 results have to be adjusted for last year's ERP implementation.
After the adjustment, you arrive at pretty solid numbers. I've got low single-digit growth for pet health in the first quarter of 2024. Maybe let's start there. Just from your perspective, can you talk about what you're seeing in the pet health market?
Sure, John. Thank you for hosting Jaws and Paws and inviting us today, as well as your coverage of the company. Overall, the U.S. pet business continues to do well for us. You know, we are pleased with how the progress has been made by Bobby Modi and his team. I think as most are aware, we increased our sales force by about 25% this year in anticipation for the new products we're bringing to the market. That sales force is getting settled in. There was a lot of training, a lot of building relationships in Q1 with the vet clinics. When you increase that much, you have to recut territories, and so it affects a broad swath of the overall grouping.
You know, we feel very good about how that's progressed and how the engagement of that sales force is progressing in preparation for these new products, while also, you know, focusing on our canine parvovirus therapy that we brought to market, as well as Bexacat and Zorbium, some of the other innovations, plus our broad parasiticide portfolio pet health portfolio for vaccines. From a general overarching perspective, you know, vet visits are down a little bit year-over-year, while average tickets are up. Price increases were taken, you know, generally by most of the industry, and that seems to have held. I think we are up 3% on price through Q1 for our pet business. Overall, you know, we continue to have the leadership position in the OTC retail side of things.
That strategy of increasing physical availability, more products, more shelf space, continues to progress well for us, and we think, you know, that's a competitive advantage where we're leaning into our leadership on that topic. So, you know, overall, U.S. pet, you know, has stabilized for us versus a couple of years ago, and I think we're set up well for the innovation we're bringing to the market this year.
Okay, very helpful. Then just let's shift over to pet health . it's just been choppy. I mean, sort of choppy going back to 2023. But maybe talk to us about, you know, that particular market and any hot spots to call out from around the globe.
Very pleased with pet health . obviously, a big Q1. Some of that was a bounce back in Spain, reflecting on, you know, an ugly Q1 of 2023. But again, really good progress there, with Seresto. The big innovation we've brought in pet health in Europe is AdTab, which is an oral flea and tick product, lotilaner. The active in Credelio is the same active in AdTab. This is a movement by the EU to allow more over-the-counter products, and so we're able to leverage our strength with advantage in Seresto to bring AdTab. And so that's off to a really good start, and a big driver of our innovation sales, as well as, you pet health in Europe. Also pleased with Brazil.
Brazil, both on the pet and farm side, has had a really strong 2023. It continues to start here in 2024. The biggest softness in pet is certainly in China. You know, we talk about expanding physical availability in the U.S., you know, more stores, getting into dollar stores, getting into grocery, continuing expansion in Walmart and warehouse clubs. China has actually been the opposite. They've had shrinkage of brick-and-mortar retailers, and so you've been having less options for physical availability as some of the big retailers have pulled back on the number of store locations. So, overall, you know, very pleased with how pet health is going, especially in Europe, but, you know, a decent amount of softness in China.
And so that hot spot that you just sort of called out in China, it's funny, when we all think about China, we think about... I think your mind goes to the farm animal side, but this is more specific pet health per your commentary, 'cause I think you're pretty well diversified on farm animal with poultry and swine.
We are. Poultry is now our biggest species in China, and it continues to go well. We've, as we've seen the shift in a lot more local producers on the swine side, we've put more resources behind poultry, and that's paid off for us.
Okay. And maybe let's just touch on farm animal. Sounds like things are going well pet health , both here and abroad. Farm animal, you sort of alluded to China, but anything else to call out on how that business is going, again, normalized for Europe?
Yeah, U.S. is performing really well. We've had a great Q4. It continues to go really strong in Q1. Some of that's resupply of vaccines. You know, we've had some vaccine supply challenges, you know, not unique in the industry. I think most of our competitors have had different vaccine outages at different points in time, but we did have supply come back in Q1 that helped on the top line. The other big one, Experior, that's our innovation of, you know, which reduces ammonia in feedlot cattle. That product has really started to take off and is just penetrating more lots across the U.S. The side benefit of Experior ramping is our portfolio effect with more Rumensin.
Rumensin faced generic competition a few years back, but with the portfolio with Experior, it's really driving nice gains for us. When we switch over to swine, we've got a vaccine called Prevacent that attacks PRRS, and it has continued just to take market share and grow. It's a product we'll be taking internationally next year, and are excited by its opportunity across Asia. And then, on the poultry business, you know, again, we, we saw Tyson shift back to ionophores about a year ago, a little less than a year ago. That movement continues, and so our Maxiban and Monteban products continue to do well in U.S. Internationally, poultry continues to be the big driver of growth for us. You know, there's no religious connotations with poultry, and it's a very cost-effective protein.
Across most of the world, we continue to see strong growth in poultry with the Monteban, Maxiban, as well as Hemicell, which is a nutritional product that just allows for greater feed efficiency for the producers.
So, maybe just to put a bow on this, Todd, around, you know, current trends and both here and abroad, it seems like in 1Q, you guys executed, right? Even with modest vet visits. Those modest vet visits have somewhat continued into the second quarter, but you feel good about how Elanco's executing. It seems like there's a couple things that might be going your way. You mentioned ionophores, the bundling with Rumensin, and that seems to be still taking hold so far in 2Q. Is that fair?
Yeah, we feel very good about where the business is sitting. The downside in Q1 was Kextone, which is a product in Europe that is going under a recall, and so, you know, that's a pretty big impact on both the top line and our EBITDA for the year, as we called out on our, you know, Q1 results. So, if not for that, we'd be off to having a really great year. But nonetheless, we feel good about our ability to deliver the numbers we put out, ex FX, which, you know, the strong dollar continues to put pressure on our business. But overall, team's executing well, excited for the launches and excited of the base business continuing to stabilize.
Okay, great. I'm gonna continue to plow forward. You know, it's funny, sometimes when you're putting together these questions and you sort of stare at the model, and come up with some things that you wanna run by, notably the CFO. So next year in 2025, specific to farm animal constant currency growth, we have an acceleration on the top line. We've got you around 1% this year, going to roughly 3% in 2025, or, you know, almost about a $45 million implied increase. What would be the drivers behind that? Are we thinking about ongoing Experior traction, some initial contribution from Bovaer, maybe the resumption of growth in China a little bit? If you can elaborate on that, and within that answer, just talk to how we should think about Bovaer year one contribution, please.
Sure. So overall, you know, we're not looking to give guidance today on 2025, as we continue to execute here in Q2 of 2024. But we're, you know, excited where the base portfolio is going. And I think that's where we look at, you know, Experior and continuing to ramp. As we noted on the call, we put in to get a combination clearance for Experior, along with MGA, which is a product for heifers. And so that's gonna expand Experior's to heifers in the feedlots, which represents about 40% of the cattle in the feedlot. So as that comes, you know, it's generally a 180-day timing with the FDA, so, you know, late Q4, but that's, you know, something that adds to the growth rate for Experior next year.
And as we've seen, you know, as Experior grows, you know, we get good traction with Rumensin. That overall portfolio in U.S. farm continues to have leadership, and Bovaer is gonna enhance that. Very pleased with the FDA approval of Bovaer, press release we dropped yesterday. And, and that product would go into dairy, where Rumensin is our biggest product in dairy, and we think, you know, Bovaer just adds to that portfolio effect in dairy. As I mentioned, you know, we expect to have Prevacent outside the U.S. and Asia next year to help our swine business. And then, the momentum in poultry, again, is just something we feel very good about. I will add, you know, we've announced the sale of our aqua business. We're expecting that to close mid-year to Merck.
So, you know, that'll be, you know, exiting. It's a pretty substantial reduction in EBITDA. EBITDA last year in aqua was over $90 million. At the same time, you know, we're gonna be able to pay down, you know, over $1 billion of debt, and so the EPS drag will be far smaller than the EBITDA hit from the aqua business leave in the farm animal space.
Okay, so poultry doing well. Experior will open up an incremental part of the market, potentially exiting 2024. And just to go back to that Bovaer question, I had some rough math at Experior year one was $15 million, maybe a little south of that. Just if we were to throw a dart at Bovaer, are we thinking faster growth and using that as an analog year one, or slower, and why?
... I think the big difference, when it comes to adoption of Experior versus our expected adoption of Bovaer, comes to the economics for the farmer. The feedlot operators, the packers, at the time we launched Experior, were making substantial profits on every head of cattle. A lot of that was getting exported to China. As those economics contracted, and they made less, Experior adoption began, and now with, cattle on feed at the lowest point in quite some time, that secondary, you know, benefit of Experior adding weight to each of the carcass, really adds value to the feedlot operators. With that, you've seen the expansion of that feeding platform to include Experior.
In the case of Bovaer, what we've been working on for the last, you know, two years in preparation for this, is creating an ecosystem that will deliver value to the dairy farmer. Right now, you know, Bovaer is a great product. You know, it will reduce the methane produced by a dairy cow by about 30%. So if used for the full time of a lactating dairy cow, it'll be like 1.2 metric tons of carbon reduced, which will be, you know, a big environmental benefit. As we noted in the press release, feeding Bovaer to 1 million cows, and there's about nine million cows in the U.S., a little over eight million lactating dairy cows, is like removing like 280,000 cars from the road. So it's a big environmental impact.
We think that will be compelling, but it doesn't provide a benefit to the farmer other than being a good global citizen. And while they're very much part of looking for that environmental sustainability, as all farmers are, what we're created with the carbon market, the incentives coming from the US, the purchase of carbon by CPGs, is the ability for the dairy farmer to make about $20 a head. That's a substantial amount per head of dairy cow relative to what they make today, which is anywhere between $5 and $40, depending on how big the dairy is, how well it's run, price of milk. So that $20 is an economic incentive that we think leads to faster adoption of Bovaer-
Okay
... than what we saw with Experior. That being said, you know, the incentives have to flow, the carbon credits have to be, you know, created, all of that. So the ecosystem is complicated, but, you know, we feel good about its ability to ramp a little quicker than Experior did in year one, understanding that we've got some limitations on supply. We're gonna be getting the product from a CMO in Europe that DSM had already contracted with, and then we have a deal with DSM as they bring on a new manufacturing facility they're currently building in Scotland, to source product from them, which will drop the cost of goods sold and increase profitability. But, from the start, you know, very much will help our top line, less impact at the bottom line.
Okay, very helpful. I'm gonna shift over to innovation, and obviously, there's a lot to talk about there. I'll start with, you know, maybe current innovation. It was $100 million in the first quarter. The midpoint of the guidance is for roughly $400 million this year. So I've gotten some incoming of, "Hey, look, one Q is a quarter of the total. Has it slowed?" And just to be clear, there's obviously seasonality in that number. But in the past years, the first quarter was closer to 21% of the full year number, and this year it's 25%. So let's focus on the class of 2024 or earlier, and is it still, does it still have a growth trajectory into 2025?
I guess some of the products that come to mind that should still grow in there are Experior, Parvo mAb, and AdTab. And is that a fair way to look at it, where maybe that, again, class of 2024 or earlier, still has a good growth trajectory into 2025?
Yes. I mean, we feel good about how those have launched. The seasonality comes into AdTab, so it's an oral parasiticide in Europe, Northern Hemisphere. Parasiticide season, big in Q1 and Q2, less so in the back half. And so that's a large part of why you see $100 million in Q1, but, you know, midpoint of the guide being $390 million for the year. As we look across Experior, as I mentioned, it continues to grow well. Getting into heifers next year will add to that growth. Parvovirus, you know, we launched late last year. We announced we've got unlimited supply now from our monoclonal antibody manufacturing facility in Kansas. That's providing us the ability to really go after the parvovirus market. We've seen really good reorder rates.
When we get a vet to have parvovirus in their freezer, they get a case, they use it, it's really effective, and then they're reordering to make sure they have it on hand. So we've got an incentive plan going right now to drive adoption by clinics, because we know once we get them, it, it just leads to them wanting to have it, just because it's been so effective in treating the animals. So, excited where Parvo goes. You know, Bexacat, Zorbium or smaller innovations we've launched in the last couple of years, those continue to grow. And then the NutriQuest nutritional portfolio we acquired also continues to make strides, both in the U.S. and internationally.
Okay.
At the same time, you know, ionophores is taking away from some of the no antibiotic ever portfolio we brought in, that's in decline. So there are some even pushes and pulls within our innovation portfolio.
Okay, pushes and pulls, some of that will actually favor the base in a way-
Yeah
... as it comes out of the innovation. So, you know, my number is, if the $400 million is a good metric this year, and it grows mid-teens, again, my number, you got $460 million next year from that bucket. You've got to be around $150 from the new class, the 2025. You know, that's just sort of the math and, you know, and the construct. Maybe we can deconstruct that 2025 class and just start with Zenrelia. $150 is a big number, so you gotta have some confidence that Zenrelia will ramp and ramp effectively. How do we think about the uptake for new dogs versus switchers, and, you know, we were fortunate to have you at the dinner last night.
Maybe we should throw in non-responders as well, if you wanna talk to that.
Yeah, overall, we're very excited to bring Zenrelia into the market. It, it's a JAK inhibitor product. As we know, you know, dermatology was not a big market until Zoetis created it with Apoquel and Cytopoint, and it's grown to be a $1.5 billion market, globally, that's continuing to grow. It's the number one reason a pet owner goes into the vet, is to address the itching dog. We're gonna be, you know, the second company to bring a JAK to the market, and we're excited about positive differentiation that we think will allow us to, you know, penetrate the market in a reasonable way. Overall, is that gonna be new dogs, is it gonna be switchers, is it gonna be non-responders?
I think we think all of those will be in play with, you know, the product we're going to bring, and that's gonna be the opportunity to really penetrate the market. When you combine that with Credelio Quattro, that'll come shortly on the heels, you know, we're gonna have a very broad portfolio for the U.S. vet market. We'll be the only company other than Zoetis that pet health vaccines in the U.S., complete parasiticide portfolio, a dermatology portfolio, as well as the therapeutics. So that's gonna give us a differentiation versus BI and Merck that we think will have value to us as we continue to, you know, penetrate through the U.S. vet clinic market. But we're very excited for Zenrelia, and we think it can be a very big product for us.
You know, certainly, you know, more than $100 million as it gets over the peak sales, and, we're very much focused on ramping it quickly. You know, the one item to note, right, next year, as you try to deconstruct EBITDA, we're gonna make big investments behind this product to make sure, you know, we're launching it as effectively as we can to drive penetration.
Okay. And maybe I'll jump forward to that, it's funny I have that further down. But, you know, whatever the class of 2025 is, and again, I'll throw out the $150, so you cross the $600 million threshold for innovation next year. Clearly, it's EBITDA dollar accretive in 2025, but do we think about it as modestly margin dilutive? So it's got a healthy gross margin profile, you know, $150, 60% GMs, $90 million gross profit dollars, but then you're throwing a lot of sales and marketing, you know, launching with no regrets, that we think about as maybe like modestly gross margin dilutive, sorry, EBITDA dilutive-
Mm-hmm
... when we get there.
Yeah, so we haven't given out the specifics, but what I'll note, right, Bovaer is a lower gross margin, the corporate group's margin average. So depending on which part of the percentage is Bovaer versus pet health products will affect that EBITDA contribution. Zenrelia and Credelio Quattro, yes, high gross margins in U.S. pet, that's generally our highest gross margin products. You're absolutely right. We're going to invest behind them from a marketing standpoint. This year, we've added, you know, 25% to our sales force, about $20 million incremental investment in pet health sales to be ready for and to drive that portfolio. Good news is that doesn't, you know, repeat as an incremental lift from a sales force standpoint as it's in the base.
But certainly, you know, TV ads are the big drivers of the marketing spend, and so that would be, you know, where we hit on the EBITDA. So not gonna address EBITDA accretive or dilutive, but just wanna call out, you know, we will invest behind these brands. As we know, over the next three-10 years, these will be the big drivers of sales growth and profitability growth for us. We're doing that with AdTab now. We announced a restructuring back in February, and we eliminated a number of farm animal sales roles across the international markets, where we thought we could get a better return on our capital by taking those savings and investing it behind AdTab. So, you know, that we've done.
We're seeing the traction on the top line from that, and that becomes, you know, part of the roadmap of launching these products in the U.S. as well.
Okay. Just taking a quick look if any questions. Maybe one or two more on Zenrelia. You know, we've done some checks and done some work, and one of the things that we came across was this no induction period, the dosing twice a day for 14 days. I feel like there's been some comments about greater efficacy. If those are true, the no induction period, the better efficacy, just your conviction in this back and forth with the agency, that that's the way it ultimately plays out on the label.
I'm not gonna comment on the negotiations with the FDA or the label. You know, we're excited by the product, we're excited about the differentiation it'll have, and, again, we expect the technical sections to be completed by the end of June, and for full approval by the FDA in Q3.
And then you can have the capability of launching shortly thereafter?
Yeah. We've got the product. We'll be ready to launch in Q3 as well.
Okay. One more in innovation, at least for now, just Quattro. It just seems like that's the biggest wild card. There was just massive numbers from Trio, and even you can back into some math on NexGard Plus. But even if that number is sort of big headline, we've gotta be cognizant that's got the greatest cannibalization, right? In the portfolio. So maybe don't be lured by the headline number, it's gonna... something's gonna be incremental, clearly-
Yeah
... but it's gonna come out of the other side a little bit.
For sure. You know, we're really excited to have Quattro. We're doing really well with Credelio Plus outside the U.S. In the U.S., we need that broad-spectrum parasiticide, and we're gonna have the broadest coverage. And we think, you know, the consumer will want to protect their dogs against all parasites, not just the ones that our competitors have in their products. So, you know, that we view as a positive. But yes, there will be cannibalization of both the Mono and the Credelio and the Interceptor Plus, as well as Trifexis, which is just a flea and heartworm oral that's on decline and will continue to decline next year. So yes, headline sales. At the end of the day, you know, we need, as a company, to stabilize net sales and get that growth.
With that net sales growth and stabilization, we'll continue to leverage our expense base. You know, we've taken out a lot of heads across the world. We're using our shared service centers in, you know, Warsaw, Kuala Lumpur, India, and Guadalajara to be as efficient as we can, while making sure we are freeing up cash to make investments behind brands that we think have the most opportunity to grow.
Okay. Please.
... Yeah, maybe just a general question just on general trends. Industries generally lean on price certainly more than human health, I'd argue. But in the current environment, light traffic, inflationary environment, seems like industry is really leaning on price. In some of the survey work, we're starting to hear a little pushback from events. So anything you could add color, like just on sustainability of price, at least getting us through sort of volume trend?
I guess I've been gone from human health a while. I used to jack price a ton. So, again, price is something that, that is stuck. We've not seen issues, you know, as we saw in pet health in Q1 was about 3%. You know, we, we don't think the 4%-5% price is something we'll be recognizing, and certainly farm animal with generic competition has greater price challenges. You know, overall in the vet, you know, the, the price at the, you know, that has been up, even with visits down, the net ticket's been up. We think that's, you know, primarily price. Is it something we're concerned about? Yeah, it's something we're always talking about, is what can the consumer afford to spend when it goes into the vet clinic?
That being said, you know, we think access, you know, one of the things we look at is Saturday hours in the vet clinic are substantially lower today than they were in 2019 pre-pandemic. And a lot of, you know, roll-ups by private equity, and earn-outs have made vets, you know, less willing to work the long hours. So we do think it continues to be, you know, a labor issue there on some of the vet visit numbers. But, you know, we think overall, you know, we're looking to grow net sales, volume, price, both, but understanding that, you know, price is not gonna be a magic lever in the current environment.
I've got a couple last-minute questions. I'll start with gross margin. The midpoint of the guidance is 55.8 this year. It's down roughly 50 basis points year-over-year, but, you know, you're doing a lot at the plant, right? Normalizing the manufacturing and the inventory. So you've called that out as a 150 basis point headwind, roughly. Just when I think about things going forward, you're not gonna get that back per se, but the underlying gross margin expansion this year is arguably 100 basis points, right?
Yeah.
Just through the math. So is that the right way to think about things, just as we look forward, you know, that, that GM, the underlying this year is 100 basis points, and maybe to some extent, we can extrapolate that going forward?
Yeah, overall, yes, we're slowing down the plants. You saw the, you know, improvement in cash flow, Q1 of this year versus Q1 of last year was nearly $150 million. That really is from just making sure we're being better managers of our working capital, including that plant slowdown. As we look forward, you know, we expect sales growth to leverage our manufacturing facilities and then continue to increase gross margin. Certainly, price is a positive on gross margin, and we continue to expect we'll be able to get 2%-3% price. At the same time, inflationary effects are hitting our manufacturing plants on input costs. You know, active pharmaceutical ingredient manufacturers are continuing to be squeezed. A lot of transition out of China into other markets.
So all of those things are in play, but, you know, overall, you know, we're focused on continuing to grow the top line and leverage the expense base to grow gross margin.
Okay. And maybe I'll just end with a couple of bridges, right? Because you guys do a great job with bridges in your investor-
Thank you
... presentations every quarter.
Katy and Scott try to make it easy.
That's a shout-out to Katy and Scott. And I'll start just. Mine are much more basic, just to begin with. I'll start on the top line. Innovation revenue of $600 million-$700 million. Let's take the low band, $600 million. $400 million this year, that's arguably the high band. It's $200 million incremental on a base of biz of $4 billion and change, and a lot of the chatter this morning has been like, that base business is doing pretty well, right? Seresto stabilized, Rumensin's got some bundling, Ionophore is going back the other way, which would benefit the base. What's wrong with that build to get to mid-single digits next year?
Again, we don't disagree with anything you just said, John. So I mean, we are pleased with the stabilizing base. At the same time, you know, we have products that are, you know, in decline, and we'd expect to continue to decline. We mentioned them with, you know, Trifexis, Advocate inside the vet clinic, Seresto inside the vet clinic. Those are under pressure, the impacts of China. So again, there's a number of things that still have challenges, and then some of innovation will cannibalize the base. As we get Heifers for Experior, Optaflexx for Heifers, you know, will go away.
So, you know, there's elements there that, that help offset, but, you know, we do, you know, expect positive sales growth next year that lets us, you know, leverage profitability to, you know, expand from where we are this year at, you know, $980 million of EBITDA at the midpoint. Obviously, got to remind that, you know, EBITDA will be negatively impacted by,
Okay.
... the Aqua business coming out, EPS, significantly less so given the debt paydown. But, you know, overall, we do feel good about the stabilizing base, and that innovation will be the driver of sales growth and enhanced profitability for the next three to five years for us.
Great, and the last one for me is just a little bit more of a complicated bridge, but going to EBITDA. I was saying earlier, sometimes you put together these questions, and you're looking at things, and you're like: Ooh, that's a pretty big jump. So, you know, this year EBITDA is flat year over year, per the guidance. And I know there's an FX headwind, but the 2024 EBITDA is still lower than 2022 and 2021. So 2021, 2022, 2023, 2024, relatively unchanged. You know, the street's up about $90 million next year. I'm not too dissimilar. And maybe just to think about some of the moving parts, you've got the class of 2025, my number, $150 million. Even if that's EBITDA margin dilutive, that could be $25 million incremental.
We talked about underlying gross margin expansion of 100 basis points on $4 billion is $40 million, and then you've got the restructuring. It starts this year, but there's a stub that goes into next year. So when you total maybe those three variables, $75-$80 million of the $90 million bridge, and then there's the underlying business. Again, just high level, is that construct effective and, and makes sense to you when we think it through?
Yeah. The construct is not off from the standpoint of how we think about it. Now, again, it gets back to how big are the investments we're gonna make behind the innovation pet health ? how much cannibalization and challenges are we gonna have on the top line for these other products? You know, Aqua not being there as a growth driver of EBITDA. But, you know, overall, you know, we do believe we're gonna grow EBITDA next year. It's gonna be driven by the very things you just spoke about. Cost pressures are there from inflation, wages, all of those things. But, overall, you know, we do feel the expanding top line will drive, you know, increased EBITDA dollars in 2025 as we continue to build on the momentum we have here in 2024.
Fair enough.
Guys, I think we're out of time, but Todd, thanks very much for your time and being here this morning.
Thank you, sir.