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

Good morning, and welcome to Elanco Animal Health Incorporated's 2021 Annual Meeting of Shareholders. [Operator Instructions] Please note, 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 now go ahead, sir.

Thank you, Jennifer. Good morning, and welcome to the 2021 Annual Shareholders Meeting of Elanco Animal Health Incorporated. This is David Hoover, and I'm the Chairman of the Board of Directors. It is my pleasure to welcome you to today's virtual meeting. We have shareholders attending via the web and the dial-in number provided. It is now shortly after 8:00 a.m. Eastern Daylight Time on May 19, 2021, and this meeting is officially called in 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 will turn the meeting over to Jeff Simmons, the President and Chief Executive Officer, who will lead the formal portion of today's meeting. Jeff?

Thank you, Dave. Good morning, and welcome to Elanco's third annual meeting. 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, JP Bilbrey, William Doyle, Scott Ferguson, Art Garcia, Michael Harrington, Paul Herendeen, Deborah Kochevar, Lawrence Kurzius, Kirk McDonald and Denise Scots-Knight. I also would like to introduce the members of our Executive Committee: Ramiro Cabral, Elanco International; Dirk Ehle, Elanco Europe; Dave Kinard, Human Resources and Corporate Affairs; Joyce Lee, U.S. Pet Health; Racquel Harris Mason, Chief Marketing Officer; Aaron Schacht, Innovation, Regulatory and Business Development; José Correia de Simas, U.S. Farm Animal; David Urbanek, Manufacturing and Quality; and Todd Young, Chief Financial Officer. We're also joined by Ernst & Young, our independent auditors. Additionally, the company has appointed Broadridge Financial Services to act as an inspector of election. Peder Hagberg 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 the webcast or telephone is permitted to use any audio recording device. The Board of Directors fixed March 15, 2021, 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, 2021, access to the proxy statements 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 the record date, there were 472,799,742 shares of common stock outstanding and entitled to vote at this meeting. We're informed by the inspector of election that they are represented in person or by proxy shares of common stock, representing 418,250,914 votes or approximately 88.5% of the voting power on the record date. Since this represents more than the 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'll present the matters to be voted on. Proposal 1 is the election of directors. The current Board has nominated William F. Doyle, Art A. Garcia, Denise Scots-Knight and Jeffrey N. Simmons 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 2021. 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. And Proposal 4 is the approval of the amended and restated 2018 Elanco Stock Plan, including an amendment to increase the number of shares authorized for issuance thereunder by 9 million. 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 19, 2021, 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. While the voting is completed, I'd like to share a few words about Elanco's progress in 2020. I'll make forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those outlined in our latest Forms 10-K and 10-Q. As I begin, I will say, in Elanco, it is safe to say that unequivocally, our second full year in Elanco as a public company was a year unlike any other. Elanco is now 2 years into our journey to build an independent, fully dedicated animal health company. 2020 saw Elanco weather 2 pandemics, the COVID-19 crisis and African swine fever, across Asia. Also continue the separation from Lilly and standup of independent systems that are now complete, and complete the acquisition of Bayer Animal Health, bringing together 2 of the longest-standing animal health brands. We acted swiftly and decisively to make tough decisions, but necessary decisions, to position the company for the long term. The 4 most critical include: transforming our distribution strategy, acquiring Bayer Animal Health, changing commercial leadership and accelerating our restructuring. We're seeing these decisions pay off, outperforming our expectations every month since closing the Bayer transaction back last August. We continue to deliver on our innovation, portfolio and productivity strategy, the bedrock of our growth plans. On innovation, the 14 products launched or acquired since 2015 delivered $441 million in 2020 revenue, up 5% year-over-year, excluding divestitures. And our pipeline is on track. Innovation is a key part of our long-term growth algorithm, contributing 2 to 3 points of growth on average annually. We expect to launch at least 25 new products by 2025, including 8 this year. Moving to the second strategic pillar of our portfolio. The Bayer acquisition created a more durable, diverse portfolio, bringing us nearly evenly split between Pets and Farm Animal and U.S. versus international. The combined company is now the Pet Health omnichannel leader, better positioned to access the world's pets where and when pet owners want to shop. And in Farm Animal, we have extensive leading portfolios in aqua, poultry and cattle globally. The combination of Elanco and Bayer increased our international pet business by 1/3 and strengthened our footprint in the important Chinese market. And in productivity, the third pillar of our strategy, we continued our margin expansion efforts, capturing $115 million in cost savings and avoidance in our manufacturing operations in 2020. Combining 2 former divisions uncoupled from human pharma will drive our margin expansion journey, unlocking approximately 1,000 points of adjusted EBITDA margin between 2019 and 2024. We ended 2020 with strong momentum, driven by the right strategy and disciplined execution. We're now at an inflection point for growth, which we believe is the most significant value proposition in the animal health industry, even more material and more durable than when we rang the bell back in September of 2018. As we move forward, our value proposition will be further bolstered by 4 key external forces driving our business: convenient access to animal care, sustainability and livestock's role in climate change, the importance of innovation and corporations' role in strengthening communities internally and externally. I'll touch on 2 of these now, but you can reference these in greater detail in our 2020 annual report. The first force is more convenient access to animal care. As we all know, COVID has forever changed our relationships with our pets, particularly their role as emotional companions. This increased togetherness has translated into increased expectation of care for their pet, driving growth in everything from clinic visits for both clinic wellness and sick visits to spending to auto shipments. 1/3 of pet owners shifted to online purchasing during COVID and expect to continue this practice, creating the fastest-growing segment in Animal Health. And more than half of the world's 500 million pets don't have that care today. Our vision to be the bridge, the conduit from the online or retail purchaser to the veterinarian, Elanco is well positioned to create convenient access to animal care to the vet clinic from curbside to the couch and from Chicago to China. The second force, sustainability and livestock's role on climate change. If we're to achieve the UN Sustainable Development Goals like zero hunger and temperature neutrality, we must do more with less. At Elanco, our goal is to be our customers' leading partner on the path to net zero emissions. Healthy animals are a critical part of the solution to improve sustainability, in addition to the important role protein plays in human nutrition and health. Livestock upcycle, the food byproducts, grass and forages that humans cannot use on the land that has limited alternative use, creating 2.5x more nutrient-rich protein in meat and milk they consume. Through our Healthy Purpose pledges, we at Elanco are committed to remove 21 million tons of emissions from our customers' farms and improve the efficiency and sustainability of every farmer we work with. Elanco's products, partnerships, robust industry data and expertise are the 4 key ingredients that help position us as our customers' lead partner on the path to net zero. What we do at Elanco has never been more relevant. We're well positioned to capitalize on the IPP strategy and these 4 external forces, accelerating sustainable, long-term value for our customers, shareholders and employees while turning these trends into a force for good for society as a whole. I'd like to thank the pet owners, farmers and veterinarians we serve. Farmers and veterinarians, as you all know, were truly at the front lines of the COVID pandemic. And we are humbled by their ability to innovate and transform to this time of help -- to help keep animals healthy. Thank you to all of our shareholders for your continued support for our company and for our purpose, and most importantly, to the Elanco team, our executive team and the Board, for their dedication and focus delivering through this challenging year to continue building Elanco into a purpose-driven, independent global animal health leader poised for the next era of growth. It's now 8:12 a.m. Eastern Daylight Time on May 19, 2021. Observing that everyone has had the opportunity to vote, I declare the polls for the Elanco's 2021 Annual Shareholder Meeting closed. I will now turn the meeting to Jinee Majors, Senior Assistant General Counsel and Assistant Corporate Secretary, to report the preliminary results of the voting.

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 2021 has been ratified. The compensation of the named executive officers has been approved by advisory vote. And the amended and restated 2018 Elanco Stock Plan has been approved, including an amendment to increase the number of shares authorized for issuance thereunder by 9 million. We will be reporting the final vote results in a Form 8-K to be filed within 4 business days.

Thank you, Jinee. There being no further business to come before the meeting, the 2021 Annual Meeting of Shareholders of Elanco Animal Health Incorporated is now adjourned. We will now hold a question-and-answer session led by Jeff Simmons.

We have one question on the line. It's regarding Elanco's plan for return to work, return to office and vaccine requirements.

Yes. Thank you for the question. Yes, we will -- and we have a team that we have tasked to focus on how Elanco will return to work. This is made up of key employee groups, led by our Head of HR, Dave Kinard. And we are -- we've made no final decisions. But we are planning to, number one, keep the priority of our employees' safety at the forefront of this decision, monitoring the changes. And again, looking at this globally, every country is different and has different aspects of this, so we'll look at that as well. And then, of course, we will keep the company's priorities and the employees' safety converging together as our top priorities as we do that. We'll inform employees as we move forward. We will give them plenty of time to adapt their personal schedules and their families as we make those changes. And again, that will be different by country as we go forward. More to come on that. Again, we'd like to thank all of the Elanco shareholders and management, employees for participating in today's annual meeting. Have a great day.