Elanco Animal Health Incorporated (ELAN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Elanco Animal Health 2020 Guidance Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Greffet, Head of Investor Relations. Please go ahead, sir. Thank you.

Thanks, Casey. Good morning. Thanks for joining us for Elanco Animal Health's conference call to discuss our 2020 financial guidance. I'm Jim Greffet, Head of Investor Relations. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Katy Grissom from Investor Relations. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and is not sufficient for prescribing decisions. You can find our press release and the slides referenced on this call on elanco.com. The slides and the press release also contain further information about the non-GAAP financial measures that we discuss today during the call. After our prepared remarks, we'll be happy to take your questions. Let me turn the call over to Jeff to provide the highlights.

Thanks, Jim, and thank you all for joining us this morning to share our outlook for 2020. With the many activities Elanco is pursuing this year, particularly standing up our company and preparing for the Bayer Animal Health acquisition, we want to provide our financial guidance early in the year. We may follow different timing in future years, but we believe it is helpful to provide context for this year as early as we can. I'll provide an update on our trajectory for 2019 as well as some important factors for 2020. Keep in mind that we've not completed the accounting close or our 2019 audit, so we do not yet have final results for the year. We will then have Todd discuss our overall financial expectations for this year. Before getting into details, let's turn to Slide 3, and I want to set the stage on 4 key dimensions. Starting first with the state of Elanco. Becoming a standalone company has liberated our people and our processes, allowing us to move with speed and agility like never before in our history. You've seen examples with our restructuring decisions and changing go-to-market models. We're also applying a new level of speed and urgency to our innovation engine, where we're advancing a robust, novel and valuable pipeline. No longer competing for capital against human pharma opportunities has enabled us to accelerate key areas of innovation. And we met our overall R&D expectations in 2019. You'll also see this focus in our profitability, which has improved 700 basis points between 2015 and 2018 with potentially another 1,000 basis points in the coming years. Our employees are highly engaged, transforming our organization into a more fit-for-purpose animal health company, and they're executing at a very high level. The second state is the state of growth in Elanco, something I'll talk more about in the future. Our growth is durable and resilient, driven by our new products that offer solutions to key health challenges and targeted growth categories. This is an attractive industry, as we know, with positive fundamentals, and we have a portfolio pipeline and now an expanding suite of capabilities to capitalize on them. Our core sales at constant exchange grew 8% in 2018. Our unaudited estimate of core growth in 2019 is 3% despite the environmental headwinds. And we are guiding to 1% to 3% core growth for 2020 at constant exchange rates, even with the known challenges. Most importantly, we are well positioned to sustain and build on this 2020 growth over the long term. In summary, on growth, there are 2 key messages I want you to hear. First, the drive for continued growth is at the forefront of everything we do and how I lead. Second, we are confident in our growth because of the fundamentals driving this growth. We operate, as you know, in segments that are attractive, where our products address important needs and we have winning portfolios as well as we have a flow of launching products and a pipeline that is and will deliver a constant flow of innovation. And we continue to expand our reach deeper in our core geographies and expanded channels. Thirdly, moving to the state of Bayer Animal Health. Holistically, and I want you to hear this, this transaction is developing even better than we originally expected back in August. The regulatory process is advancing with a clear view of divestitures. The divestiture demand is robust, and we're progressing rapidly. And the latest development, yesterday, we received antitrust clearance from the Chinese competition authority. We are pleased with Bayer's market positioning as their pipeline and performance across the channels as we do deeper integration planning. The transaction elements are coming together. And I think, importantly and lastly, the evolving channel dynamics that we've seen over the last year make this move to be an omnichannel leader even more compelling. I'll provide some additional details on Bayer Animal Health acquisition at the end of the call. Finally, to set the stage on our journey. Elanco has a history, we've been here before, of transforming, innovating and growing to create value. Recently here, we've completed a highly successful IPO, and we are delivering revenue growth, margin expansion and a flow of innovation, while we've done it. We are now standing up an independent, product-focused animal health company. And we're on the cusp of building an industry-leading combined company with Bayer Animal Health that is poised for long term, more significant value creation. So the stage is set. We're in a durable, attractive industry. Across all 4 of these dimensions, Elanco is in a position of strength. And in our view, Elanco stands as one of the companies with the most potential to create significant value for our customers, society and shareholders. With this context, let's turn to Slide 4. We're executing on our 3-pillar targeted value-generating strategy: innovation, portfolio and productivity. Elanco is delivering a sustainable flow of innovation that is addressing important unmet needs. We are driving the growth of our marketed portfolio of products and in attractive areas where we can lead. And we're executing on our productivity agenda to drive significant margin expansion and unlock value. This slide summarizes many achievements across all 3 pillars of our strategy throughout 2019. Let me call out 3 highlights. In innovation, our newly launched and acquired products are growing and represent an increasing portion of our total sales, now in the mid-teens. For the portfolio, our targeted growth categories are now more than 60% of our sales. And all of the productivity initiatives are now in-flight to deliver cost benefit through 2020. These are activities that drive our significant margin expansion agenda. We're very pleased with the progress. We have the right foundation, and we are in execution mode to deliver. Slide 5 provides an update on our expectations for 2019. Note, we have not completed the accounting close, so we do not yet have final results for the year. With the information we have at this point, our initial results are within our previously issued revenue and EPS guidance ranges, yet trending toward the low end of the ranges. We'll provide Q4 and full year 2019 results on February 19. 2019 was a challenging year, primarily with uncontrollable environmental forces. We faced over $100 million of revenue headwinds that arose in the course of the year. But despite these headwinds, we estimate core revenue growth of 3% at constant currency. Margins increased significantly and we strengthened our foundation for the long term through strategic business development. 2019 exemplifies the value of diversification and the importance of execution in this industry, and we've benefited from both. Slide 6 provides a reconciliation of expected 2019 GAAP to adjusted EPS as presented in our third quarter earnings release last November. Now let's turn our attention to 2020, which brings a number of events that we've been discussing since the time of our IPO. We've been preparing for these events, and we are confident in our strategy to navigate through them. Slide 7 summarizes the key challenges and opportunities, which we've incorporated into our financial expectations. On the competitive front, we'll have a full year of generic competition for Rumensin in the U.S. We anticipate a competitor to launch a new parasiticide for companion animals. We will continue to see the impact from changing antibiotic policies, particularly in Asia. And we'll see an impact from the changing producer use of Paylean as trade into China has become more attractive. Specifically for generic Rumensin, we're pleased with Rumensin's performance in the initial months since a generic has been available in the U.S. The strength of our cattle portfolio, customer relationships and value beyond product offerings are supporting Rumensin sales at a higher level than our original erosion assumptions. Consequently, we've assumed a lesser decline in 2020 than we previously estimated. Collectively, these competitive events represent approximately $60 million to $90 million of revenue headwind or 2% to 3% of growth. Meanwhile, we'll leverage a number of opportunities before us. First, our new products are performing well and bring momentum into this year. They are early in their life cycles, and we're investing in them, and they continue to be important drivers of growth. We also plan on launching new products in 2020 such as Experior, a new feed additive for cattle, and a novel anticoccidial that can be used in the no antibiotic ever chicken production approaches where there is significant unmet need. And we continue the geographic and label expansion of products like Galliprant and Credelio. Second, the demand for animal protein continues to grow. We're also seeing a shift in demand, especially to poultry. We have a leading poultry portfolio, and we are directing more investment to this space to capitalize on these demand shifts. Third, we have significantly increased production capacity for our aqua portfolio, and we'll expand capacity further in 2020 to satisfy continually increasing demand. Fourth, we'll have the full year benefit of the specialty vet expansion we began in 2019. And finally, the supply challenge with our sterile injectable CMO has been resolved, and we expect to have full supply for these products in 2020. These opportunities are significant, providing $90 million to $130 million of revenue growth or 3% to 4%. Let me also take a moment to discuss our views on African swine fever. The situation is fluid, but we're seeing some positive signals, especially with the corporate swine producers in China. Data suggests restocking of the sow herds started in the fall. If these operations are able to remain free from reinfection, we anticipate hog numbers could begin climbing in the second half of this year. With what we know today, we anticipate ASF to continue to be a headwind for our business in the first half of 2020 with improvement in the second half as comparisons to 2019 normalize and animal numbers begin to recover. While we expect a full recovery from African swine fever to take some time, we are modeling the impact of ASF for full year 2020 to be neutral to our growth. In summary, the competitive challenges are real. We've been planning for them and have the right strategy, products and team in place to maximize our performance through this transitional year. There are always unknowns that can be a surprise, but our plan is balanced and appropriately considers the factors before us, and we look to the future. The Bayer acquisition further strengthens our position in this industry as we have greater scale, a more attractive portfolio mix and greater channel reach to navigate this dynamic industry. With that background, I'll ask Todd now to walk us through the financial details for 2020.

Thanks, Jeff. Let's turn to Slide 8, which shows our guidance elements for 2020. Keep in mind this guidance is for standalone Elanco. It does not include any revenues or expenses from Bayer Animal Health. It includes full year revenues for all Elanco products, including those that may be divested, and it does not consider any of the financing elements of the Bayer transaction such as additional shares issued or interest expense from additional debt. It does include costs associated with the standup of Elanco and the integration work for Bayer, consistent with our 2019 results. We will provide updated 2020 guidance for the combined company after our deal closes. For 2020, we expect total revenue between $3.05 billion and $3.11 billion. Excluding strategic exits, we project core revenue of $3 billion to $3.06 billion. We expect strategic exit revenue to continue to decline year-on-year. GAAP earnings per share are projected to be $0.04 to $0.16, while adjusted EPS are expected to be $1.09 to $1.16. Slide 8 also shows the foreign exchange rates used for our top 5 international currencies. These rates constitute approximately $25 million of revenue headwind compared to 2019. This guidance reflects the continued execution of our productivity and margin improvement strategy throughout our operations with constant currency adjusted EPS growing at a faster rate than sales. Slide 9 shows the items removed from GAAP EPS to arrive at our adjusted EPS guidance. We are on track for a solid performance in 2019. To summarize on Slide 10, our sales growth in 2020 will be driven by the continued performance of our portfolio of new products, investments in key growth areas such as aqua, poultry and the specialty vet clinic space and the continued positive fundamentals of this industry. We are prepared to mitigate known competitive events. Our margin expansion is on track, enabling us to grow earnings well above sales. Finally, in building our plan in this guidance, we had balanced the strength of our fundamentals with the known external factors. Before we go to questions, Jeff will provide some comments on the Bayer Animal Health acquisition and our preparations for close.

Thanks, Todd. As I mentioned earlier, as we look at this transaction in total, we're even more positive now than we were at the time we announced the deal. Slide 11 provides additional details. Bayer's business is performing in line with our expectations from diligence. We're pleased to see the return to growth through the first 9 months of 2019. Meanwhile, they have a dedicated and experienced team preparing for integration and a successful day 1 as a combined company. Our synergy expectations are intact. The antitrust process is proceeding. As I mentioned, we're very pleased to have received the regulatory clearance in China yesterday. We're also working through the second request received last December from the FTC. And we announced earlier this week we've agreed to divest Osurnia and expect the full set of divested revenue across both companies to be between $120 million and $140 million. This is in line with or better than our assumptions, and we're very pleased with the pace and the scope of the antitrust process. And the key events for the transaction are proceeding. We secured a bridge commitment at the inception of the deal. We're on track to access the debt and equity capital markets, and we intend to optimize our financing mix in light of market dynamics. 2020 will be a seminal year for Elanco and Bayer Animal Health. As I mentioned at the start of the call, the state of our business is strong. We have a clear, balanced plans for this transitional year, and we're thrilled with the company that we're building and the value we can generate. This concludes our prepared remarks. Now I'll turn it over to Jim to moderate the Q&A session.

Thanks, Jeff. We'd like to take questions from as many callers as possible, so please limit your question to 1 or 2 or a single question with 2 parts. Casey, we're ready to take questions, if you can open up the line.

[Operator Instructions] And your first question here comes from the line of Chris Schott with JPMorgan.

The first one was on gross margins. It seems like you're targeting another year of margin expansion, but any additional color you can provide in terms of the range of gross margins we could be thinking about this year and the key initiatives we need to think about to be completed to hit those numbers? My second question was then on divestitures. You're talking about this $120 million to $140 million divestiture expectation. Just a little bit more color of how much clarity you have at this point from the antitrust regulators in terms of what needs to get done to get the deal closed. I guess, I was trying to ask is, is there any chance to surprise us with this number or do you think you've got pretty good line of sight on that specific range?

Great, Chris. Todd, do you want to talk about margin and, Jeff, divestitures.

Chris, obviously, we're not getting into all the details by line on the P&L for 2020. We do feel good about our continued margin expansion agenda. As we've said, this is a 1,000 point march. It's going to be generally linear, but not exactly linear. We're very happy with the performance in 2019. And as we look at 2020, obviously, there are some mix considerations on products, including Rumensin, which, as we said, is above the corporate average for gross margin. So overall, we're continuing to deliver on the productivity initiatives and feel very good about where we stand, but not getting into exact details at this time.

Chris, relative to the antitrust process, again, the process continues. We feel very good about the news we got on China. As you know, that was one of the key countries. Of course, EU and the FTC are -- the dialogue is continuing. It's going very well, as expected, and we'll continue to work with them in a very collaborative way. What we've done, though, here is from the back and forth dialogue is, at this stage, we do have good framework relative to what we believe are the overlap areas. That's where we've come with the $120 million to $140 million. Osurnia is the first product. You'll continue to see us move forward with other products going forward here that we have put forward in the discussions with those 2 key regulatory authorities. But of course, there always can be unknowns right to the end, but we're feeling very good about the dialogue, the framework and the view that is being taken on the marketplace.

Your next question comes from the line of Umer Raffat with Evercore ISI.

My first couple ones were just on my bad math, if you could help me improve it a little, and the third one is a relatively straightforward one. So first, by my math, I think the high end of the guidance is assuming something like 55% gross margin. Am I generally on the right track? And the reason I ask is because investors are so focused on the underlying execution and whether the Bayer acquisition has distracted from that or not. So that was the first. Secondly, this is also quickly on math. I think when you say $60 million to $90 million growth headwind, my sense is, given some of the prior commentary on Rumensin erosion, I think there's about a $20 million or so worth of impact baked in from parasiticides. And my question really is, how should we think about that? How was -- how did you guys think about that sort of sub-10% impact on the broader parasiticide franchise? What are the pushes and pulls that go into thinking about that, just so we understand as well? And then, finally, I recall on the last earnings call you had mentioned the chicken NAE launch could be a "major launch for you this year." Could you sort of quantify for us what's your expectation from that? And if there's any other competitors in the works for that?

Great set of detailed questions, Umer. Todd, do you want to talk about gross margin and then maybe, Jeff, you talk about the parasiticides, the headwinds and any [ side ].

Yes. Umer, as said on the last answer to Chris, we're not getting into the details on the gross margin. We feel very good about the productivity initiatives and that 1,000 basis journey being generally linear. Obviously, at the high end, you just mentioned the 55%. That would be above a linear track. We continue to work diligently to deliver and fully expect to deliver on this productivity agenda over the 5 years we've been talking about since the IPO.

And when you do the math, I think you can discern, and we even talked about this on the call. There is an implicit expansion of the margin in the guidance we're giving. So it's in there. Jeff?

Yes. Umer, first on the parasiticide. First, I would say that the year has started. The market has started. The preparation for spring has started. We have momentum coming out of 2019 with a winning portfolio. We've continued to strengthen our approach to the channel with the current Elanco portfolio that we have. So when we look at our targeted around segments, promotions, distribution, I start with our starting assumption, just like we did with generic Rumensin is grow the demand to the highest peak. We're doing the same with parasiticides. So this new parasiticide assumption is not here yet. So I start with that. And then I think the way we looked at modeling this is what we've talked about. Legacy products are the ones that become a little bit more vulnerable first. Second is you got to look at the seasonality relative to this and then some of the product differentiation. So we've modeled heavily off our history of other new [ inhibitions ] that come in and assumptions that we've made relative to, of course, label, price, et cetera. So feel good about those assumptions. We'll give you more color quarter-to-quarter as we go forward. On the [ Cosabody ] IL-10 technology, it's early. We disclosed this just to show that a lot of work that we're doing in this nutritional health, antibiotic alternative space, our antibiotic stewardship plan was to put 24, 25 new products into the pipeline. We're achieving that objective. This is one of those. We've got a tremendous amount of expertise. We're taking 50 years of feed additive fermentation expertise and turning into now this new kind of looking at immune stimulation and many other areas in nutritional health, probiotics, to be able to move, and we see this as a big opportunity. This technology, just to be clear, as we got really good data on this, it's now in liquid form. It's being used in poultry operations. We need to get it moved to a feed form that can actually be worked through feed mills in a heat-treated way. So there's one more step that we're working through. We believe that will be achieved, and we'll be able to launch a product that is more acceptable and easier to use by poultry producers in the U.S. Again, 50% or so of U.S. poultry today is running operations with no antibiotic ever, meaning ionophores, anticoccidials, all products out, this could be a lead option in this space. We'll keep you more updated, be more second-half loaded, we believe. But again, work is being done out in the field today with the liquid forms.

Your next question comes from the line of Michael Ryskin with Bank of America.

Congrats on the guide. I got a couple questions. One, appreciate all the color on the Bayer deal and progressing as well as the China news. If -- I mean, the way I'm interpreting it is China, you've got Osurnia, you've got that target set of $120 million to $140 million. It seems like you're saying everything is progressing well, and you've got good line of sight and yet you haven't really updated the timing. I just want to get a better sense of what else needs to happen besides some of the antitrust and sort of squaring that away between here and summer? And is there any wiggle room there where the deal could close a little bit earlier?

Yes. Thank you, Michael. We'll continue to emphasize a mid-year close, I think, being ready day 1. Remember that we've got the standup and the preparation of Bayer as well as we've talked about that we will move the IT systems and others to Tata and to another operation. So that's another work stream that's critical for a seamless day 1. But again, on antitrust, as we've said, dialogue continues, timeline is tracking very nicely and our assumptions relative to overlap and how we're seeing the market in the deal is lining up very nicely to the way we see it. Again, I'll always give the outstanding statement. We're not complete yet, and we'll, of course, have to continue to create that dialogue, but we feel good enough to where we've given the estimate of the $120 million to $140 million. And that also, I think, you can then kind of triangulate relative to key strategic products, we believe, continue to be core to us, will continue to stay.

All right. And then for the follow-up, talking about the moving pieces in 2020 and some of the opportunities, some of the uplift you're getting. Besides Experior, which you talked about a little bit in the prepared remarks, is there anything else that you can comment on that you've made some incremental progress over the last couple months or that you anticipate in 2020 either from your pipeline or as you've got a better sense from the Bayer pipeline? Just you've given us all that color in the past about Credelio and Galliprant and the existing product launches that are contributing. I want to get a sense for sort of what's in the pipeline and what else we could look forward to over the next 6 to 12 months.

Yes. Great question, Michael. So I think Slide 7, we tried to highlight a few that are the material ones. But I would say the whole new product area, when you look at that basket of new products and that trajectory, it continues to do extremely well. And something we're doing different than we would do in Lilly is we did restructuring as we're doing moving money. We're moving money from certain areas to the growth areas much more rapidly. So we're investing more heavily behind products like Galliprant, Interceptor Plus, our salmon portfolio. So I would start there to say we come into the year with a lot of momentum on our new products. Look at the Aratana products, Entyce, Nocita. Our salmon portfolio is number one. Number two, and I want to really highlight is, we see a tremendous amount of momentum in this segment and in the economics, highlight -- some highlights yesterday even in the market about Tyson Foods is just in the poultry area globally. We got a winning portfolio. We got winning capabilities, some of the best data analytics out there today and probably some of the best NPS, Net Promoter Scores, if you had to say, in any industry, it's poultry. So poultry would be another one that we would say a step-up. And then on the aqua side and the capacity, we are increasing capacity, specifically on a product in salmon to meet an underlying growing demand. So -- and then a couple issues that are being resolved around the CMO. We feel we've turned the corner and have that resolved so that supply will return in the injectable products. And then our vet specialty business that we picked up with Aratana will be a nice step-up. So I would say those, if you look at, would be the key step-ups relative to the growth. And what I like about those is they're here. Yes, we've got new products, but these are known areas that we're investing in that will be step-ups that we believe strongly in.

And one -- can I tie up one loose end on the Bayer deal? You also had some comments on optimizing the financing mix in terms of -- in the light of market dynamics. Could you just give a little bit more color there because there's a lot of questions, obviously?

Yes. Mike, it's Jim. I can probably provide some color, and I've gotten some other e-mail dialogue on this. So remember, we have debt, equity, divestitures are the big moving parts here, and we have degrees of freedom. I think if the root of the question is, if you go back to the original deal announcement and the way we talked about leverage ratios and the like, our thinking on those sorts of things remains the same as they were at the time of the deal. We're not trying to signal a different view of the company than we described originally.

Your next question comes from the line of David Risinger with Morgan Stanley.

Jim, how many questions am I allowed to ask?

Yes. I think Mike exceeded the limit. I'll try to be kind to everybody. Go ahead and ask what you need to.

Okay. All right. No, I -- I'll just ask, I guess, 2 for now. So at a high level, it would be great to hear management's perspective on innovation visibility. When should investors expect inspiring new products to be launched by Elanco? Should we expect Elanco and/or Bayer to launch compelling new products in 2021 or not until 2022? I guess that's the specific questions. And then could you comment on cash flow prospects for 2020 in the wake of weak operating cash flow in 2019?

Yes. Thanks, David. I know we've had this conversation before. I'll stay at a very high level. I think from an industry perspective, this is evolving, probably not as fast as you and others would like relative to transparency of pipeline. We're always balancing at a high level of disclosure and competitiveness. But let me just anchor to what we've said. And that is when we launched the IPO we've used the 2023 window of time, and we've shared these development projects that would play in here or soon after. I want to really emphasize again that, and we've been pretty transparent about this. Inside of those now Elanco, Aratana, Bayer, 50 development projects, there is compelling significant innovation that is in late-stage development in the areas that we've talked about. And I want to highlight that we, with all intention -- and when I highlight that we had a very good innovation year, that means that the pipeline is progressing, and it is moving closer to those approval dates. So I'm going to leave at this stage to say within that window, 2021 to 2023, '24, we're not going to be specific at this time. We may as we get real close. But at this time, that's where we are. And we'll talk more about that as we get closer to Bayer as well on how we'll communicate more or differently on our pipeline. It is something that we're looking at.

Todd, do you want to talk about cash flow?

Cash flow, we do expect better cash flow results in 2020, Dave. We know our net working capital has not performed at the level we would have liked in 2019. We did extend term to our distribution partners in the year. We brought those back down from the highs of Q3 in Q4. And so we do expect better cash flow in 2020 than we had this year.

Your next question here comes from the line of Nathan Rich with Goldman Sachs.

I'll stick to a short list as well. Jeff, I just wanted to go back to your comments on the transaction kind of developing better than you expected back in August. I understand you're not updating guidance around the deal at this point, but does that mean you're kind of feeling better about visibility on getting the deal closed or are you more confident in that accretion that you guided to for year 1? That's the first question. And just for the second question, I'll ask it upfront. Could you just maybe talk a little bit more about what changed in 4Q that led you to kind of point to revenue and EPS at the lower end of the range? And then as we look out into 2020, maybe can you just talk more about your assumptions around the ruminants and swine segments, given what we're seeing in the beef and dairy markets at this point, just to get your view on market growth for next year?

Absolutely, Nathan. Thank you. So look, I think on Bayer, I want to really gravitate to the 4 kind of areas that I touched on, I think it's Slide 11 or whatever, but at a very high level I want to highlight holistically. When I look at, and doing many transactions over the years, you've got to look at all the different levers of value and risk. And when we look at them holistically, they're trending positive holistically. There's always a few that are up and down, and there's always unknowns, and it's always changing. But at this point in time, if I anchor back to August, let me note a few. We've noted antitrust. It's advancing. The hell or high water clause created some risk. I believe that we're transitioning through that. The integration team is not only 2 big objectives, be ready day 1. It's all about winning in that first 100 days and being ready on day 1 and the pro forma income statement. Again, I'm not going to get into specifics other than to say, holistically, we feel pretty good about that. Bayer's business relative to what we assumed in diligence. There were some assumptions in that diligence and they're tracking. And then I think the overall transaction pieces, the demand for not only the divested assets, but the interest and the understanding of this transaction. I think the one I noted at the end is also one that I would say that I feel probably even as strong about as any one single. And that is what we see in the marketplace today, what we were seeing in our strategic plan a year ago on this dynamic channel, vet visits down, international emerging markets growing, the importance of e-commerce and not only diligence we've done and what we see in the marketplace, but the discussions we're having within that channel, we see this as more opportune maybe than even a year ago. So I'll just -- I say that -- I want to emphasize the word holistically. And it can change and adjust. But that's what I want to convey is I do feel better about this than I did in August. Q4, all I would say here, Nathan, is really clear is nothing new. Why are we having this call now? We believe transparency, openness, clarity is key, especially in a year like 2020. So that's why we're doing this. We don't have audited books at this point on 2019, and a new standup company can have lots of moving parts, and Todd can emphasize that. But what we do see is some of the same things we talked about relative to those environmental forces, whether it's African swine fever, the contract manufacturer, the things that I listed throughout the year, it's the prevalence of them continuing through the end of the year, nothing new. You can be assured there's nothing new. And now we've given you the color of what we think the pushes and pulls are of 2020, so the clarity should be pretty key. Things change as they did in 2020. We'll let you know when they can. But at this point in time, I feel real good about the headwinds and opportunities highlighted on Slide 7. On ruminant and swine, some good news here. I think the underlying global economics of beef, dairy and swine are getting stronger. I don't think that African swine fever -- we have to be careful. We don't jump over it and say it's done. There's still some new cases that are prevailing and popping up around the world. But I do think that the economics, the industrialization, the sophistication of meat supply is going to increase significantly and the economics. Take out the generic Rumensin assumption and when we look at our innovation, when we look at global overall, we look at dairy being stronger in Bayer and what they had to offer, we feel ruminant and swine will continue to be fundamental to our business and will strengthen and progress over the next couple years.

Your next question comes from the line of John Kreger with William Blair.

Jeff, you mentioned a number of things on Slide 17. Can you just elaborate a little bit more on the changing antibiotic use in Asia? Just give us a little bit more color on what that is. And then maybe, Todd, the -- can you just elaborate on the standup activities? I think you talked about a $0.72 to $0.79 per share burden in '20. Should we be thinking about that as sort of wrapping up a lot of the standup activities? Or to what degree does that need to sort of carry forward into '21 and beyond?

Thanks, John. I think that what we'll highlight, I think there's -- it's kind of an overlapping dynamic with African swine fever and pig numbers and also the changing assumptions that we've talked about with antibiotics, specifically in China. They are in our plan, as we've talked about. We have alternatives. We have products with therapeutic claims. Our business, when we look at our portfolio of antibiotics with therapeutic claims, we have those. We do have a product that had a growth hormone claim that will be removed. That is out. [indiscernible] that is coming out. But again, there will be a transition of like-to-like comparisons year-to-year. That will be one of the drivers here. And we can give you more details on that if necessary going forward.

John, on standup, feeling very good about our efforts on the standup. We went live on our Workday, on our own HR system at the end of the year, right on time. We have locked the scope and the details for our SAP 4HANA implementation. The IT and finance team and the total team has just done a great job in getting us ready and prepared. We're doing site cutovers in a number of locations every month to move off the willy infrastructure on the IT side. So with that, it is a bigger spend year to get all of this done, but something that we do expect to ramp down considerably after the completion of all these efforts in 2020. There's also some additional integration expenses in that number for the Bayer Animal Health acquisition as we've got a team focused on that and getting it set up with the Tata business consulting part, as Jeff mentioned, so that we're ready to go when we close here midyear. So it is a big year this year, but expect to ramp down after that in '21, '22.

Your next question comes from the line of Erin Wright with Crédit Suisse.

Are you assuming that there will be more than one competitor in terms of the new competition in parasiticide over the next 12 months? And how are you thinking about the timeline if your potential new combination products launch in that category? And then how should we be thinking about your strategy heading into VMX from a promotional standpoint with your existing parasiticide portfolio ahead of that competitor launch? And then my second question is more on Rumensin. I guess can you quantify what is in your expectations in that $60 million to $90 million in terms of the competition for Rumensin? Do you still anticipate that similar share loss trajectory is what you saw with Optaflexx?

Thanks, Erin. Listen, on parasiticides and going into VMX I want to just emphasize. We feel very good. We're going to bring some momentum out of '19 into '20 relative to our portfolio. I want to emphasize Interceptor Plus and Credelio, when you look at coverage there, as well as even our broader portfolio and segments that are offered and treated and done really well actually last year in products like Trifexis. So it's going to be, I would say, the biggest change going into 2020 is our holistic approach, looking at channels, both in the clinic and retail. Again, we have a retail group looking at how we're going to utilize distribution in a more targeted way, value-based way, certain portfolio against certain segments. We also, of course, have got continued work on compliance, so we -- and being able to increase use. And then we're looking at this globally. Look, we've got global expansions at Credelio. Cats has done very well in Europe. We continue to expand our use there. So I want to look at this year holistically in parasiticides and globally as well. So I feel very good about our offer. I feel very good about the urgency, speed and focus that we have. Going into the marketplace, there is a lot of decisions are made early in the year relative to that. And then adding value beyond product with some of our services in the clinics. That's one. On Rumensin, what I would say to you, as I mentioned in my comments is, one, we started before the generic came at a very high level. We have been prepared for a long time. We know the competition. We believe strongly that it starts with the portfolio. We'll continue to innovate against Rumensin value beyond product and then serving not just the beef market but the dairy market as well. So we've had a chance. You say why our assumptions may be a little different, and they are. They're a little lesser, as we've said. I won't get into the details at this stage. But what I would say is that comes from what we've learned in '19 and also things that we've put in place for 2020.

Your next question comes from the line of David Westenberg with Guggenheim Securities.

So just a clarity question. You mentioned that doesn't include potential divestitures. I would assume though Osurnia is in that -- is in the guidance or the divestiture is in guidance. It's just a clarity question. And then I love the color in terms of the impacts in 2020. You gave a ton of color around the headwinds and the timing in ASF, but can you maybe talk about the opportunities in ASF. I mean maybe the more pigs, probably need to close that market faster. Is that an opportunity in feed? And then longer term, is there maybe an ASF vaccine opportunity? So if you can maybe talk about some of those 2021, '22, '23 kind of opportunities in ASF, that would also be helpful for us.

David, the Osurnia revenues are in the guidance we've provided. We did not -- despite the fact that we have a contract with that, we still included it just to try to give an apples-to-apples view of our business year-over-year.

Jeff, do you want to talk about African swine fever?

Yes. So on the positive side, there's a significant shortage of animal protein in the marketplace. So economics vary for a lot of different reasons. But I would say is, one, when economics rise, what I've learned in 31 years on protein economics, multinational products, pig health, poultry health, animal health becomes very important. Also, multinational products become very important when you get into a situation that we've seen. And biosecurity becomes very, very critical. What caused this was bad biosecurity, and we need better biosecurity globally. I've spoke and written on this. This is absolutely critical for the betterment of animal health. I would say to you that we see pig economics outside of China and trade being a positive, as we mentioned. Yes, Paylean is a negative, but it's less material. We've got a replacement there with Skycis as well as just better economics create better opportunity for our products, products like Prevacent, a new vaccine that we've got for PRRS as an example, and then across Asia as well. I think poultry, too. Now poultry consumption as we study it hasn't necessarily gone up as much as people predicted inside of China. They haven't shifted that protein. Actually, beef has a little bit more, but poultry globally will benefit from some of the shortage as well as even trade moves pork into China that will open up more opportunity for poultry. We really like the poultry business overall. And then as you go longer term, we like the new makeup of what China looks like, 15 to 20 industrialized companies. They have a lot of small farms but they have good process, good policy on biosecurity. They want multinational products. We can offer better services, our veterinarians, our data analytics, into those. We've had long relationships, I have even personally, with most of these larger companies. This is a better thing than the backyard farm industry that they had. And then I think the openness to new technology. Yes, vaccines is one area. And yes, we are collaborating and working as other companies are in a very aggressive way to come up with a vaccine in this space. But secondly is just things like bioprotection, the importance of the facilities and treating the facilities and preparing the facilities for animals that something Bayer does well. We have some -- it's going to open up some other opportunities in biosecurity and preparing the animal with better immune system going into this broader than ASF. So I see a nice opportunity, and I start with what -- I end with what I started with. 300 million less pigs will change the trade and economic dynamic over the next 2 years. Beyond 2 years, it's an innovation, revolution as well as an industrialization of the industry.

Your next question comes from the line of Kathy Miner with Cowen & Co.

Three quick questions. One, Jeff, I think in the beginning, you talked about core growth of the business of about 1% to 3% in 2020. Where do you see that on a more secular basis? Second question back on African swine fever. You talked about a headwind in the first half of 2020 before potentially reversing itself. Are your assumptions of a quarterly magnitude similar to what we've seen in the quarters of 2019 for swine fever? And lastly, once again, sorry, back to the slide on Page 7 with the headwinds and opportunities. As we look at the headwinds, particularly on the left, are those ranked in order of magnitude? And are there at least 1 or 2 that would be much more influential than the others?

Kathy, before you mute, can you clarify your first question on what you mean by secular growth?

Just something beyond 2020 and as we look out to 2024, '25 and beyond, do you still look at core growth in the low single digits?

Thanks. Okay.

Yes. We're not going to -- as I've said, we're going to build on this transitional time and this growth. We've said very openly that mid-single digits is where we want to have our eyes on. There's always going to be pushes and pulls. We want to be a company that is balanced, realistic and delivers what we say. We've done that since day 1, and we want to continue to do that. That's a little bit of the spirit of this call being done before a big investor conference next week, et cetera. So what I will say is our eyes are on a balanced, high-quality, mid-single digit top line over the period and building a double-digit as we bring Bayer in on the bottom line and this 1,000 basis points of margin expansion that we're marching through and have clarity on. We're going to start there, and it's all fueled by a pipeline and winning in channels and going deeper in our core geographies. I think that’s where I would tell you. And I feel very good about that, and we're updating our strategic plan annually. And as I mentioned, I think Bayer just catalyzes and more enables that as a whole. The next question is around ASF. What I would say to you is we -- again this continues to be fluid, but it's really a like-to-like comparison. We're seeing some stability in our business relative to where we are. I'm not speaking as a whole to all the industry and the pig industry. But again, remember, a year ago, this was just emerging as a question mark, what is it and, of course, we saw some erosions. So you're going to see some like-to-like comparisons in H1 that will continue to be detrimental to us, and then they actually better in the second half. So for us, we don't see more -- maybe net erosion in any material way, but it is more of a comparison year-to-year. Jim can correct me there.

No, it's good.

And then the third question is...

The headwind slide, can we provide any color there?

I want to be careful of, again, wanting to quantify. A lot of you've [ hurt ] us on each one of these issues. I would say that they can all adjust and change. But no, I wouldn't carry. I would say the Paylean in the U.S., as we've said, is the least material is smaller. But otherwise, I'll leave it as there's pushes and pulls within those and pretty balanced.

Your next question comes from the line of Navin Jacob with UBS.

This is Prakhar Agrawal on behalf of Navin. My first question is on SG&A and R&D expenses for 2020. In 2019, SG&A has seen a mid-single-digit growth and R&D increased 10% year-to-date. So for 2020, should we expect similar growth for these line items or there could be some moderation? Any color would be appreciated. My second question is on the restructuring initiatives. I think previously you've said that you're aiming for $100 million and more savings after 2020. So could you give more color if you have identified those initiatives or are you set in terms of all the restructuring initiatives in the near term? And lastly on tax rate. How should we think about the tax rate in 2020? You had a benefit from Brazil in 2019, but is low 20s still a good way to think about the 2020 tax rate?

Great. Good luck, Todd.

Yes. We're not looking to give line item by line item guidance here as done. Obviously, we've got sales, EPS, and there's a number of moving parts there. We feel good about how we're running operations on R&D and SG&A and do expect some growth there, but very low growth, as we've previously communicated. Tax rate, yes, there was the odd settlement we had in Q3. So the tax rate would go up into that 22% range that we've talked about previously. And from a standpoint of delivering on the restructuring initiatives and the standup, a lot of that does come off this ERP implementation. As I mentioned earlier, we're on track for the Q1 of 2021 and that will drive savings in the out years as we get onto our own standup systems.

To add a little bit of color on that one as well. I think you -- the $100 million you quoted, Prakhar, is thinking about mainly in manufacturing we had talked about $215 million that we expected to achieve between 2018 and the end of this year 2020. We're on track to do that. And then another $100 million of similar things after 2020 out through 2023. We haven't given the laundry list of exactly what those things are. But I think thematically it will be consistent with what we've been doing so far, infrastructure, lean manufacturing, procurement agenda, sourcing strategies and the like. As we get through this year, we'll give more color as we formulate the specifics there, but we feel good about. There's a substrate that we'll be able to yield that savings.

Your next question comes from the line of Balaji Prasad with Barclays.

Couple of questions. Firstly on guidance, I just wanted to be sure that 2020 revenue guidance exclude Osurnia or have you included the entire 140 -- $120 million to $140 million divestitures that you've guided to? Secondly, on product-specific questions, I wanted to understand if you expect Credelio to deliver positive growth in 2020 in light of the competition and if the global expansion opportunity is enough to offset that? On Rumensin, could you give an update on what you're seeing on the ground with distributors post the generic combination therapy approval?

Yes. As mentioned earlier, Osurnia's sales are included in this guidance. We did not exclude those in the goal of giving apples-to-apples results year-over-year just from a baselining perspective. Again, we're not giving any product level guidance. As Jeff said, we're very excited about Credelio. It's great coverage. It's early for puppies. Credelio cat in Europe continues to gain share. So overall, we feel good on Credelio. But we're not giving that specific level of guidance. And again, on the ground with Rumensin, we feel great about how things are progressing, as we said, that value beyond product that our teams deliver, the total portfolio we give to our customers, both on the cattle and dairy side. So again, part of the reason we've updated numbers and expectations from Rumensin is how we've been seeing operations on the ground since that generic launch. So overall, again, we feel like we've got a balanced plan here acknowledging both the risks and the opportunities within our business as we go into delivering 2020.

We are right at the top of the hour. Jeff, do you want to close for us? And if anyone had questions, of course, Katy and I are always available the rest of the day and in the future. So we're happy to follow-up if you had a question that wasn't answered. Jeff?

Yes. I think, very importantly, to close, I want to be very clear that I hope this provides great transparency. More will come, of course, on our February 19 earnings call when we have audited books on 2019. And we look forward to meeting all of you -- many of you at the investor conferences that are upcoming here in the first quarter. And this -- the goal is to put out clear, transparent view of our business given all the things that we have going on in Q1 with a standup in Bayer. But I want to emphasize what's most important right now. When you look at Elanco, when you look at the Bayer Animal Health acquisition, as I mentioned at the end, the state of the Elanco business is strong. We have a clear, balanced plan, we believe, for 2020, and we're excited about the company that we are building and will be building this year for long-term value for all of you. Thank you for the time today.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.