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

Good morning, and welcome to the 2020 Annual Shareholders Meeting of Elanco Animal Health Incorporated -- Annual Meeting of Shareholders. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to David Hoover, Chairman of the Board of Directors of Elanco Animal Health Incorporated. You may go ahead, please.

Thank you very much. Good morning, everyone, and welcome to the 2020 Annual Shareholders Meeting of Elanco Animal Health Incorporated. My name is Dave Hoover, and I'm the Chairman of the Board of Directors. It's my pleasure to welcome you to today's virtual meeting. We have shareholders attending via the web portal and the dial-in number provided. It's now shortly after 8:00 a.m. Eastern Daylight Time on May 21, 2020, and this meeting is officially called to order. With us today are members of Elanco's Board of Directors and Executive Committee as well as the company's auditors, Ernst & Young. With that, I'll turn the meeting over to Jeff Simmons, the President and Chief Executive Officer of Elanco, who will lead the formal portion of today's meeting. Jeff?

Thank you, Dave, and good morning, shareholders. First, I'd like to introduce the members of our Board of Directors and Executive Committee. In addition to Dave and myself, Board Members include Kapila Kapur Anand, Art Garcia, Lawrence Kurzius, Michael Harrington, John Bilbrey, Deborah Kochevar, Kirk McDonald and Denise Scots-Knight. I would also like to introduce the members of our Executive Committee: Ramiro Cabral, Elanco International; Michael-Bryant Hicks, General Counsel and Corporate Secretary; Dave Kinard, Human Resources, Corporate Affairs and Administration; Sarena Lin, Transformation and Technology; Racquel Harris Mason, Chief Marketing Officer; Jose Simas, U.S. Farm Animal; Aaron Schacht, Innovation, Regulatory and Business Development; David Urbanek, Manufacturing and Quality; and Todd Young, Chief Financial Officer, Corporate Governance and Strategy. We're also joined today by Ernst & Young, our independent auditors. And additionally, the company has appointed Broadridge Financial Services to act as an inspector of election. [ Peter Hedberg ] from Broadridge is with us today and has taken the oath of inspector of election. Please note, this meeting is being recorded, and the recording will be available after the meeting. However, no one attending via webcast or telephone is permitted to use any audio recording device. The Board of Directors fixed March 16, 2020, as the record date for determining shareholders entitled to vote at this meeting. An affidavit has been delivered attesting to the fact that Notice of the Meeting on April 8, 2020. Access to the proxy statement and the 2020 Annual Report were given to all shareholders as of the record date, and will be incorporated into the minutes of this meeting. The shareholder list shows that as of record date, there were 398,799,023 shares of common stock outstanding and entitled to vote at this meeting. We are informed by the inspector of election that they are represented, in person or by proxy, shares of a common stock representing 370,350,745 votes or approximately 92.86% of voting power on the record date. Since this represents more than a majority of the voting power of all issued and outstanding stock entitled to vote on the record date, a quorum is present for purposes of transacting business. Now I will present the matters to be voted upon. Proposal 1 is the election of directors. The current Board has nominated Michael J. Harrington, Kirk P. McDonald, Deborah T. Kochevar for the election as directors to each hold office for a 3-year term. Proposal 2 is the ratification of the appointment of Ernst & Young LLP as the company's principal independent auditor for 2020. And Proposal 3 is the advisory vote to approve the compensation of our named executive officers as described in the proxy statement. It is a nonbinding vote, although the Compensation Committee and the Board will certainly take the results of the vote into account when making future compensation decisions. If any shareholder would like to make a comment regarding any of the proposals, please submit your comment through the web portal. It is now 8:05 a.m. Eastern Time on May 21, 2020, and the polls are now open. Any shareholder who hasn't yet voted or wishes to change a vote may do so by clicking on the voting button on the web portal and following the instructions. Shareholders who have sent in proxies or voted via telephone or Internet and do not want to change their vote, do not need to take any further action. [Voting]

While the voting is being completed, I'd like to share a few words about Elanco's results in 2019. But before I provide a review of 2019, I want to take a moment to recognize the resilience and the commitment everyone at Elanco has shown as we continue to navigate the COVID-19 pandemic. Elanco employees have responded in remarkable fashion, adapting quickly to a new normal and remaining grounded in our commitments to customers. Critical products continue to get to farmers, veterinarians and pet owners. Our efforts to complete our separation from Lilly and the close on our acquisition of Bayer Animal Health continue unabated. We will continue to do our part to support public health while meeting the health needs of animals around the world. Thank you to the Elanco team and to our customers for your unwavering commitment and resilience. Now I want to talk about 3 things that put the hard work and growth efforts of our global organization into context during 2019. First, our efforts to build a fit-for-purpose Elanco and how innovation, portfolio and productivity, or IPP, strategy continues to be the engine that drives us. Second, our vision for a combined Elanco-Bayer Animal Health company. And finally, I'll share why Elanco is different. What separates us from others and the bigger role that we play in society? To the first point, in 2019, we completed our first full calendar year as an independent company and made significant progress on our journey to create a fit-for-purpose Elanco positioned for long-term success. Our targeted value-generating IPP strategy continued to deliver consistent results. In 2019, our core revenue, excluding strategic exits, grew 3% at constant currency to $3 billion. We also continued to make progress on our margin agenda, growing adjusted gross margin by 220 basis points to 52.1%, up from 49.7% when we began our journey in 2017. You can find additional information about these non-GAAP financial measures and related GAAP measures in our Q4 earnings details on elanco.com. Innovation. Innovation continues to be a key driver to our success. Revenue from innovation increased 60% year-over-year to $439.2 million. These new products are performing well and bring momentum with significant runway for growth. Additionally, we acquired Aratana and Prevtec and integrated these assets into our pipeline. At the end of 2019, Elanco had 20 expected launch equivalents in the pipeline before the Bayer pipeline contribution, with 5 of these new products anticipated to launch by the end of 2021. As we look at our portfolio, our targeted growth categories grew 7%. We progressed our omnichannel approach with the launch of a specialty sales force and an alternative channel revenue more than doubling in the past 2 years. Finally, our comprehensive productivity agenda continues to unlock significant value. We are on track to deliver a total benefit of $215 million from 2018 to 2020, as projected, and we expect another $100 million from 2021 to 2023. Our results continue to show that the Elanco IPP strategy, it is clear, it is proven and it is working. As we look to the balance of 2020 and beyond, we do so in the context of a combined Elanco and Bayer Animal Health company. This acquisition further strengthens and it further accelerates our IPP strategy, adding scale and capabilities to position Elanco for long term, while improving our ability to deliver for farmers, veterinarians and pet owners. This acquisition will enable us to make a major leap forward in our intentional portfolio mix transformation. It will bring our pet business to nearly 50% of global Elanco revenues. The transaction will also create an industry leadership position in retail and e-commerce channels, enabling us to meet pet owners where they want to shop. Even in the midst of this pandemic, we continue to progress towards an anticipated midyear closing. And now to my third point, which I believe is never more important than it is today, that is a 6-decade deep company and cultural belief in Elanco, that a company must provide value and make difference to society. In 2019, we launched our Elanco Healthy Purpose ESG framework. It embodies our long-term strategy for addressing global challenges, contributing to the success and sustainability of our shared ecosystem for today and future generations. In 2019, we surpassed our 5-year goal of breaking the cycle of hunger in more than 100 communities globally, providing access to affordable quality nutrition for more than 1.4 million households and almost 300 communities around the world. We have also improved the health and well-being of millions of poultry and livestock by increasing training and access to products for smallholder farmers, ultimately improving lives and livelihoods. This work has been a part of a groundbreaking project to create sustainable food systems in East African countries, made possible through a partnership with the Bill & Melinda Gates Foundation. We also launched the Elanco Foundation in 2019, amplifying our impact through philanthropy and partnerships. The Elanco Foundation is collaborating with food banks and communities where we live and work to help fight rising food insecurity caused by the COVID pandemic. These are just a few examples of the impact we're committed to producing in the years to come to society. Ultimately, in Elanco, we are building to lead. This is the idea that energizes us. It propels us and moves our IPP strategy forward. And reflecting, it's amazing to think all we've accomplished in just our first full year as an independent company, 1 year. We completed an aggressive agenda and delivered strong outcomes despite the challenging environment. In 2019, Elanco grew sales. We increased our margins. We grew our pipeline. We launched new products. We acquired and integrated 2 companies while planning for the -- a third in Bayer that will create significant transformation and global leadership. We've stood up independent capabilities while building a culture of ownership, and we built on our foundation for long-term growth and value creation. In 2020, we will solidify our role as a global leader and position Elanco for the next era of growth in 2021 and beyond. Every day, Elanco employees around the world are working to build a leading animal health company that will make a tangible difference in advancing the health of animals, people and the planet. It is now 8:14 a.m. Eastern Daylight Time on May 21, 2020. Observing that everyone has had the opportunity to vote, I declare the polls for the Elanco's 2020 Annual Shareholder Meeting closed. I will now turn the meeting to Michael-Bryant Hicks, Elanco General Counsel and Corporate Secretary, to report the preliminary results of the voting.

Thanks, Jeff. We have been informed by the inspector of election that the preliminary vote report shows that the nominees for election to the Board have been duly elected. The appointment of Ernst & Young LLP as our principal independent auditor for 2020 has been ratified. And the compensation of the named executive officers has been approved by advisory vote. We will be reporting the final results in a Form 8-K to be filed within 4 business days.

Thank you, Hicks. There being no further business to come before the meeting, the 2020 Annual Meeting of Shareholders of Elanco Animal Health Incorporated is now adjourned. And we'll now hold a question-and-answer session led by Jeff Simmons. Jeff?

Thanks, Dave. Before we take questions from the audience, I thought it would be helpful to share with you the 3 most common questions we've been receiving from shareholders lately. After that, we'll take shareholder questions being entered today on the web portal. The first question we receive often is: Tell us what excites you about Bayer Animal Health's acquisition? The acquisition of Bayer Animal Health. We are even more confident right now in the importance of our pending acquisition of Bayer Animal Health. Our combination with Bayer will balance our portfolio and our mix. It will enhance our international business, it will create new opportunities for margin expansion. It expands innovation, scale and capabilities while adding an anticipated 5 launch equivalents through 2024 from Bayer, bringing Elanco's total new products we'll launch to 25 new products by 2024. It increases Elanco's presence across all customer channels, positioning Elanco to capitalize on the trends that are shaping this industry. We're encouraged by Bayer's underlying market positioning and recent performance. Ultimately, the transaction furthers our efforts to build a leading global animal health company, and it positions us for the next era of growth. Another common question we get are, what are the key factors that we're tracking that drive our business? And I want to start first by saying that we remain very confident that the fundamentals of our underlying business remain strong. The relevance of pets and protein have never been more clear than in the past few months. As animal shelters in the United States have run out of adoptable pets and the news headlines focus on the importance of animal protein, meat, milk, eggs, fish on store shelves. As we focus specifically on our business, there are several important leading measures, or particularly, we're tracking the sales out of distribution into vet clinics and other key customers. Our Companion Animal end-user demand grew mid-single digits over the last year, and it continued in Q1 of this year. In the alternative channels, alternative to the vet clinic, we outpaced the overall market, growing 35% in Q1, underscoring the importance of the Bayer Animal Health transaction. Reaching consumers through alternative channels is more important now than ever. In our international business, poultry and aqua continue to drive growth. While in China, we're beginning to see signs of recovery from the devastation of African swine fever in 2019, with swine herd repopulation and producer economic slightly ahead of our expectation. While the COVID-19 pandemic has created unique challenge for all companies and all industries, the fundamentals and that of the animal health industry remain strong. And then finally, another common question is how does Elanco remain focused and executing as we stand up the independent company and we work to deliver on an aggressive margin improvement agenda and look to integrate Bayer? I really think the answer to this question is actually quite simple. It lies in the strength of our people. Our experience in managing change and integrations, which is quite common in Elanco, and the progress that we've made on our stand-up efforts and our culture of ownership. Our executive leaders, we track weekly the progress against our 3 streams, we call it: running the company, standing up the company and integrating the new business. Our key agendas are on track from standing up our independent systems, executing a significant margin expansion agenda and working towards the closing and integration of Bayer Animal Health. We're building an agile fit-for-purpose company, as I've said. We're on track to exit the last TSAs with Lilly as planned in early 2021, and we're investing in the areas that will allow us to operate more efficiently like our new ERP system. The Elanco team is moving swiftly on our integration planning efforts for Bayer Animal Health, finalizing all details for a successful day 1. Our financing is secured, and our conversations with the remaining regulatory agencies continue to yield progress. We continue on path for a mid-2020 close of the acquisition of Bayer Animal Health. Now I'll turn to any additional questions that we've received from the audience.

There are no questions from the web portal.

Okay. With no questions on the web portal, I would like to thank everyone for joining Elanco Animal Health's 2020 Annual Meeting of Shareholders. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.