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

All right, guys. Good morning. Jon 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, 4 physician panels, so a lot to talk about. I'm going to open up our conference and welcome Elanco Animal Health and their CFO, Todd Young. Thanks, Todd, for your participation again in Jaws & Paws. Good to have you and good to have you at the dinner last night. Guys, I'm going to 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 going to start Pet Health trends and go there. 1Q '24 results have to be adjusted for last year's ERP implementation. After the adjustment, you arrived at pretty solid numbers. I've got low single-digit growth for U.S. Pet Health in the first quarter of '24. Maybe let's start there. Just from your perspective, can you talk about what you're seeing in the U.S. Pet Health market?

Sure, Jon. Thank you for hosting Jaws & 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. 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's 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 swap of the overall grouping. But 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 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 and Pet Health portfolio for vaccines. From a general, overarching perspective, vet visits are down a little bit year-over-year, while average tickets are up. Price increases were taken generally by most of the industry, and that seems to have held. I think we were up 3% on price through Q1 for our pet business. Overall, 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 that's a competitive advantage where we're leaning into our leadership on that topic. So overall, U.S. pet 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. And then let's just shift over to international Pet Health. It's just been choppy. I mean sort of choppy going back to 2023, but maybe talk to us about that particular market and any hot spots to call out from around the globe.

Very pleased with international Pet Health. Obviously, a big Q1. Some of that was a bounce-back in Spain, reflecting on an ugly Q1 of 2023. But again, really good progress there with Seresto. The big innovation we've brought in international 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 and 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 Pet Health in Europe. Also pleased with Brazil. Brazil, both on the pet and farm side, has had a really strong '23. It continues to start here in '24. The biggest softness in pet is certainly in China. There's -- we talked about expanding physical availability in the U.S., 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, very pleased with how international Pet Health is going, especially in Europe, but a decent amount of softness in China.

And so that hot spot that you 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 to Pet Health per your commentary because 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. As we've seen the shift in a lot more local producers on the swine side, we've put more resources buying poultry, and that's paid off for us.

Okay. Maybe let's just touch on Farm Animal. It sounds like things are going well in 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 ERP?

U.S. is performing really well. It had a great Q4. It continues to go really strong in Q1. Some of that is resupply of vaccines. We've had some vaccine supply challenges, 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 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 back 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, again, 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. There's no religious connotations with poultry, and it's a very cost-effective protein. So across most of the world, we continue to see strong growth in poultry with the Monteban and 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 current trends in 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 is executing. It seems like there's a couple of things that might be going your way. You mentioned ionophore is the [ bottom ] for Rumensin, and that seems to be still taking hold so far in 2Q. Is that fair?

Yes, we feel very good about where the business is sitting. The downside in Q1 was Kexxtone, which is a product in Europe that is going under a recall. And so that's a pretty big impact on both the top line and our EBITDA for the year as we called out in our 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 the strong dollar continues to put pressure on our business. But overall, the team is executing well, excited for the launches and excited the base business continuing to stabilize.

Okay. Great. I want to continue to plow forward. 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 want to run by notably the CFO. So next year in '25 specific to Farm Animal constant currency growth, we have an acceleration on the top line. We've got you around 1% this year, go to roughly 3% in '25 or 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 within that answer, just talk to how we should think about Bovaer year 1 contribution, please?

Sure. So overall, we're not looking to give guidance today on '25 as we continue to execute here in Q2 of '24. But we're excited where the base portfolio is going. And I think that's where we look at Experior and continue to ramp. As we noted on the call, we are put in to get a combination clearance for Experior along with MGA, which is a product for heifers, and so that's going to expand Experior to heifers in the feedlots, which represents about 40% of the cattle in the feedlot. So as that comes, it's generally an 180-day timing with the FDA, so late Q4, but that's something that help -- adds to the growth rate for Experior next year. And as we've seen, as Experior grows, we get good traction with Rumensin. That overall portfolio in U.S. farm continues to have leadership, and Bovaer is going to enhance that. Very pleased with the FDA approval of Bovaer. Press release, we dropped yesterday. And that product will go into dairy where Rumensin is our biggest product in dairy, and we think Bovaer just adds to that portfolio effect in dairy. As I mentioned, 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, it's just something we feel very good about. I will add, we've announced the sale of our aqua business. We're expecting that to close midyear to Merck. So that will be exiting. It's a pretty substantial reduction in EBITDAs. EBITDA last year in aqua was over $90 million. At the same time, we're going to be able to pay down over $1 billion of debt. And so the EPS drag will be far smaller than the EBITDA hit from the aqua business leaving 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 that Experior year 1 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 1 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, we're 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 benefit of Experior adding weight to each of the carcass really has value to the feedlot operators. And 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 2 years in preparation for this is creating an ecosystem that will deliver value to the dairy farmer. Right now, Bovaer is a great product. It will reduce the methane produced by a dairy cow by about 30%. So if you use for the full time of a lactating dairy cow, it will be like 1.2 metric tons of carbon reduced, which will be a big environmental benefit. As we noted in the press release, feeding Bovaer to 1 million cows, and there's about 9 million cows in the U.S., a little over 8 million lactating dairy cows, it's 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 are very much part of looking for that environmental sustainability as all farmers are, what we've created with the carbon market, the incentives coming from the U.S., 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 than what we saw with Experior. That being said, the incentives have to flow, the carbon credits have to be created, all of that. So the ecosystem is complicated, but we feel good about its ability to ramp a little quicker than Experior did in year 1, understanding that we've got some limitations on supply. We're going to 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 are currently building in Scotland to source product from them, which will drop the cost of goods sold and increase profitability. But from the start, very much will help our top line, less impact at the bottom line.

Okay. Very helpful. I'm going to shift over to innovation. And obviously, there's a lot to talk about there. And I'll start with 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, 1Q is 1/4 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 '25? 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 '25?

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 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, we'll add to that growth. Parvovirus, we launched late last year. We now -- so we've 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 just leads to them wanting to have it just because it's been so effective in treating the animals. So excited where Parvo goes. 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. At the same time, ionophore 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 as it comes out of the innovation. So my numbers, 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 million from the new class, the 2025. That's just sort of the math and the construct. Maybe we can deconstruct that 2025 class and just start with Zenrelia. $150 million is a big number. So you got to have some confidence that Zenrelia will ramp and ramp effectively. How do we think about the uptake for new dogs versus switchers? And we were fortunate to have you at the dinner last time. Maybe we should throw in nonresponders as well if you want to talk to that.

Yes. Overall, we're very excited to bring Zenrelia to the market. It's a JAK-inhibitor product. As we 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 #1 reason a pet owner goes into the vet is to address the itching dog. We're going to be the second company to bring a JAK to the market, and we're excited about positive differentiation that we think will allow us to penetrate the market in a reasonable way. Overall, is that going to be new dogs? Is it going to be switchers? Is it going to be nonresponders? I think -- we think all of those will be in play with the product we're going to bring, and that's going to be the opportunity to really penetrate the market. When you combine that with Credelio Quattro that will come shortly on the teals, we're going to have a very broad portfolio for the U.S. vet market. We'll be the only company other than Zoetis that has had all vaccines in the U.S., complete parasiticide portfolio, a dermatology portfolio as well as the therapeutics. So that's going to give us a differentiation versus BI and Merck that we think will have value to us as we continue to penetrate through the U.S. vet clinic market. But we're very excited for Zenrelia. We think it can be a very big product for us. Certainly more than $100 million as it gets over to the peak sales. And we're very much focused on ramping it quickly. And the one item to note, right, next year as you try to deconstruct EBITDA, we're going to make big investments behind this product to make sure we're launching it as effectively as we can to drive penetration.

Okay. And maybe I'll jump forward to that. I just want to add that further down. But whatever the class of 2025 is, and again, I'll throw out the $150 million, so you crossed the $600 million threshold for innovation next year. Clearly, it's EBITDA dollar accretive in '25. But do we think about it as modestly margin dilutive? So it's got a healthy gross margin profile, $150 million, 60% GMs, $90 million gross profit dollars. But then you're throwing a lot of sales and marketing, launching with no regrets that we think about is maybe like modestly gross margin dilutive -- sorry, EBITDA dilutive when we get there.