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

At this time, it is my pleasure to turn the program over to your host, Michael Ryskin.

Great. Thanks, everyone, for joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools, Diagnostics and Animal Health team. I'm excited to host our next session. We're joined by Elanco Animal Health, and we're pleased to have CFO, Todd Young with us. Todd, thanks for being here.

Thanks, Mike. Thanks for all of the coverage you provide, we certainly appreciate it.

Always there. So just to kick it off, sort of my standard question. I mean, you had an earnings call, I want to say maybe 48 hours ago. So still very fresh, but we're still sort of digesting some of the updates from that. So maybe you could spend a couple of minutes just running through key points from your 4Q or from 2024, key points about the guide, just sort of anything that stood out for you that's worth flagging as we kick things off.

Certainly. No, we did, we reported Tuesday morning early, so if you didn't get the chance to listen to replay or transcript, encourage everyone to do so or check out the slide deck at a minimum. Tiffany and the IR team do a great job laying out all the drivers and impacts to make sure we're clear with the results. Overall, a strong finish to 2024, 4% constant currency ex aqua. Growth for us in the quarter, sequential improvements, lots of strength across the broad portfolio. U.S. pet grew in Q4. International Pet and U.S. Farm Animal continue to do well. And international farm was flat, but that was a lot of that to due to different leements fo things we've exited. Overall, a really strong year on operating cash flow for us. We put up $541 million of operating cash flow in the year, 120% of adjusted net income, and we were able to reduce our debt from a net leverage standpoint, down to 4.3x by the end of the year, a real credit to the team across the enterprise. We're focusing on cash and being very disciplined in looking at all the different aspects of working capital and making improvements there. So we're very pleased with how Q4 played out. The one negative in the quarter was the stronger dollar. And that, relative to our November expectations, is for $10 million on the top line and a really heavy drop-through [ of sell-in to $8 ] in dollars. The EBITDA that pushes lower in the range than we otherwise would have been ex that, that headwind continues to '25. We've been talking about this for a couple of months. But nonetheless, it's here and something that we're subject to. But overall, the things we control, how it's playing out, we're very pleased with the business, how 2024 ended, and the momentum we have going into 2025, now that we have so many of these big products we've been waiting for from a regulatory perspective, getting approval last year and now into the marketplace with Bovaer, Zenrelia, Credelio Quattro, [ to build on ] AdTab, and Experior and [ Parvo ].

Great. Maybe on that [ press release ] as you pivot to the 2025 outlook, one thing I realize you guys always put in the slide is sort of tailwinds and headwinds going into next year. What's driving assumptions, where do you see upside, where you see downside? Could you just run through that really quick, as we look forward to the next year and we think about lower end of the guide, higher end of the guide, what are the big swing factors we should think about for either potential upside or downside risk?

Certainly, if you look at our sales growth, and again, we were 1% in '23, 3% in '24, now guiding to 4% to 6% for '25, that growth is being driven by the innovation portfolio. Those big products I just mentioned are getting deeper into the loss curve like an AdTab and Experior or just getting started with the Zenrelia, Quattro and Bovaer. So really focused on those being big contributors to our growth in '24, '25 and in the future years. Certainly, the base is something that we do focus on. And what we're seeing is strengthen our base where we add innovation to it. So in 2024, Rumensin, which is our largest farm animal product, grew 16%. That's a cattle product, dairy product that's been used for over 50 years by farmers, and it grew 60% in 2024. And that was really because of the combined use in feedlots with Experior and dairy farmers getting to the front of the line to get Bovaer by using more Rumensin on dairy. So as we look -- we're really looking at how does the innovation strengthen the base portfolios. That's an example on the Farm Animal side. We see it similarly in the vet clinics having more of these new big products to talk about with the veterinarians is great. All of our products are already in the vet clinics around the globe. So it's not like Elanco is new to a vet clinic, but it's great to be able to bring the innovation we brought to those clinics over the last few years, be it Bexacat for feline diabetes, ZORBIUM for postoperative pain, Parvovirus for the deadly disease in puppies, Zenrelia, Credelio Quattro, those things that we expanded our U.S. sales force by 25% in 2024 to have more time to go deeper with our products in the vet clinic. The products are here. We're excited for U.S. pets growth in Q4. We expect that to fully continue here in 2025. And then again, as we look at the ups and downs in our business, certainly, the innovation sell-through and the vets' ability to influence the base is the biggest thing we're focused on. I think we've demonstrated over the last few years our ability to control costs, to take head count out of our business. We've done a number of restructurings and we've reduced our footprint. We've taken out heads. We've gotten more efficient with where we do the work, and for that reason, right, we've got SG&A of -- in '25 that's less than it was in 2021 despite the inflationary environment we've all been living through, and that's really that discipline. So the growth driver for us, like all companies, is going to be the top line, it's going to come with innovation, helping for innovation sake but also as innovation helps the base portfolios.

Okay. That's really helpful. I'm going to parse out a lot of that one by one, but maybe I'll start with a high-level question. A lot of focus on innovation in your answer. One of the updates you gave us on the call 2 days ago was you raised your innovation targets for 2025. You've had those innovation targets out for years and years. I don't remember when you first initiated them, 3 years ago? 4 years ago?

Back when Tiffany was running IR before. It's been a while.

Yes, it's been a while. So we've been -- 2025 has been the target for a while. Now you raised it to $640 million to $720 million versus prior $600 million, $700 million. You also beat your 2024 innovation target for the year, came in ahead there as well. So can you go into that a little bit, sort of like any specifics on what's driving that strength in 4Q? What's making you more confident in 2025? Is it just kind of broad across the portfolio or sort of what sticks out to you the most? And then we'll go through all those products one by one.

Sure. Yes. I appreciate the reminder of an increase in the targets and overdelivering Q4 on innovation. It certainly is broad-base strength in the portfolio. I will certainly call out Experior. We thought it would become a blockbuster globally, and it's only sold in 2 countries, the U.S. and Canada. And then it made blockbuster status, more than $100 million, in the U.S. alone. We received the heifer clearance in November expanding the market opportunity for Experior and because so many feedlots are already on the product, it was able to ramp in heifers even quicker than we were expecting. That was one reason for the Q4 beat. AdTab, out of season, frankly, when you think about sort of the parasiticides in Europe, did better to end the year, showing continued strength there. So those are the 2 that I call out of the big blockbuster potential products that were strong, but we did see strength as we've gotten into more markets in general. We did -- bought a [ Nutri-plus ] portfolio a couple of years back for swine that swine had a better quarter in Q4 than it had in previous quarters, which was nice to see globally. So overall, just that continued strength we saw in Q4 is what caused us to raise the guidance for the full year up to the $640 million to $720 million.

Okay. You touched on Experior there. You talked about a little bit before as well. So maybe we'll start there. That's a product -- that Experior and Bovaer are 2 products where we've had a lot of debate about with investors in terms of what's priced in, what's in the stock and I mean that from a couple of directions. First, I'll say that, certainly, we found that there's a lot more investor attention on companion animal products versus livestock products just because if you think about the blockbusters in the industry over the last decade, most of the innovation comes in companion, but also because these are sort of new markets. This is a little bit of an unproven, like what could the uptake be. You said yourself, it seems like you were surprised to the upside in how quickly you hit blockbuster. So give it -- just walk us through that. Like what is the opportunity? How is that developing? Any award instruments there from Experior that you can apply to Bovaer as it ramps?

Yes. I think it's a very current question because as we called out, the Experior is the first Farm Animal blockbuster across the industry in a decade. And so understandable that Farm Animal hasn't received the attention that Pet Health has over the last few years. But [ developmentally ], Experior has replaced the old beta-agonist or Optaflexx [ or a lot of this is out of the gate ]. So this isn't a new market, it's just a product that's been a better mousetrap, frankly, for the feedlot owners, and it doesn't have the competition of having 3 companies selling similar product into the feedlot. So we've been able to get that ramp of both taking share from those other competitors as well as just growing our overall presence. Now one thing to note is the cattle cycle was lower. And so we still are at -- I think we probably got to a trough in the cattle side, in cattle numbers of cattle on feed to '24, and that should provide a tailwind to Experior as we go. Adding heifers, that's about 40% of feedlot of animals, and so that expands the overall market in '25 that we only had for a short period in '24. And then the value proposition for partners is such that we were at to raise price as much on Experior as anything in our portfolio in 2025. And so that all is part of just providing the right solution for the farmer that allows them to be more prosperous is good for us being more prosperous. As we think about Bovaer, it's not going to be dissimilar. It's a little more complicated. It is the creation of a new market dynamic because as you're aware, in Farm Animal, it's all about healthy animals converting in high-cost feed. The feed is 80% of the cost of raising an animal across all 3 species. So you really need to help the animal that converts that feed efficiently into protein, the thing to be sold. And so that is the whole thing. In the case of Bovaer, it's an environmental impact. It will reduce the amount of methane coming into the atmosphere. And farmers are huge on the environment, they're stewards of the land, that's what they do. But if they can't make more money, they can't just buy a product because it helps the environment. So a lot of time has been spent to develop a platform to both measure the reduced emissions on the farm, create a marketplace where that could be sold and then to have CPG companies that have consumers that are looking for them to have less environmental impact while still wanting high-quality protein like dairy to have that. And so this really came together in 2024 with the approval of Bovaer, but also the proof of dairy farmers getting paid nearly $10 million for selling carbon credits from using Rumensin. And so as we go into Bovaer, we have to get into all the farms, you've got to get it through feed mills. Every state has a different regulatory body that we have to manage through. So it is a complex ecosystem, but one that we think is just about unlocked and that's where Bovaer will go in. The dairy farmer will make more money through reselling the carbon credits from the reduced methane. We will obviously make money selling the product itself, and the funding is really CPG-driven as you think about the big dairy companies wanting that positive benefit for their consumers. So we're excited for Bovaer. It's much like Experior, it will take a while to get it through the complexity but it will be sticky once it's on the farm and going. And so again, the downside of Bovaer if there is one is it's a lower gross margin product for us. It's lower than the quarterly gross margin average. And so it won't be as profitable until it gets moved to a different manufacturing plan with lower cost of goods sold. But right now, we're really looking forward to impact the dairy farmer and have a portfolio have with Rumensin with those same dairies.

Okay. Two quick follow-up questions I want to hit on that, and then we'll move to companion. One is just something you just touched on right now is Bovaer gross margin. Any thoughts on its timing of when you can shift that manufacturing process? And also if you could comment on the gross margin and profitability of the EBIT line for both Bovaer and Experior?

Yes. With Experior, it's a very strong gross margin product on the Farm Animal side of -- so that. With Bovaer, [indiscernible] is in the process of building a plan, we probably will start sourcing product from that plan sometime in '26, early '27 depending on their bill and regulatory time lines and the like. So it's still a little ways away, but it's not a decade. It's, call it, 18 to 24 months.

Okay, okay. And then the other question I had was just on that carbon credit angle with Bovaer. I mean a lot of that has been in place for -- previously, but as we think about the new administration in Washington and sort of their positioning on environmental effects and policies, any chance some of those credits get revoked or removed or any change to how that's approached? What do you think [ things there ]?

Certainly something we're paying attention to. Our incentive is, I think, what we're trying to focus our efforts on is it's incentives for dairy farmers. I mean it really is money flowing to the dairy farmer to have a positive impact, to meet a need the customers, the big CPG companies want. But this is an economic benefit for our dairy farmers, and we view that as the positive part, and hopefully, that's what carries the day in Washington. Longer term, we are building a market that needs incentives, and certainly a helpful part here is the market gets moving.

Okay. All right. Let's go to companion. Zenrelia, maybe we'll start with that. 2024 was a busy year when it comes to Zenrelia news, '25 as well. So obviously, I think it's fair to say that the label is not what you guys were hoping for, but it's sort of where you are now. So putting all that behind you, talk about the feedback you've had from vets in the last couple of months, talk about you provided some stats in terms of clinic penetration, reorder rates? Just sort of help us frame where you are with Zenrelia a couple of months post launch.

And the efficacy continues to be what we hear the most about is that positive efficacy. The product really works and works certainly well, it works on the hardest cases. And so that is the compelling recent vets use the product. As you noted, the label is the challenge. It continues to be the challenge. We continue to have a lot of KOL, vets using it, conversations with other vets to continue that process with them and been hearing about how they're managing and the results they're seeing. That is a big driver of getting vets to give it a try, to see it in their own hands. That's why we are excited to be in about 1/3 of the vet clinics in the U.S., 8,000, that continues to grow, and we're trying to get deeper with each of those. The other element is we're trying to make sure we get as much education into as many clinics for when the season really begins. The December through February has about 25% less prescriptions than July through September. It's just -- it's off-season for [ derm ] for just the nature of the dogs. And so we're really trying to get as many vets to experience, learn about the product and get ready for when the season really picks up because we do think that we can be really a good value for the consumer to get in and play in dog back to clinical remission stage using the product. And that's really what Bobby and his team are focused on as they continue to educate, continue to get vets in front of other vets, understanding that we are having to come out of label, and some vets just aren't going to be interested because of that. But this could be a great product for us in the U.S. even if we don't have every vet using it. And then we're really excited about the international expansion. Ellen and her regulatory team have done a nice job of bringing it so fast, we actually got approval in Brazil before in the U.S. So we're having really nice starts in Brazil, Japan, just got going in Canada in January and then expecting to add the EU and U.K. and Australia later in 2025. And as you know, covering animal health, Michael, the international markets are great, but you need all the markets to get to the size of the U.S. And so us getting there so quickly with Zenrelia is a really big positive. As the derm market outside of the U.S. is around $800 million, getting to all of those markets with an improved product and one that so far has had a less-restrictive label than the U.S., but the same grade efficacy means we've got a real chance to grow Zenrelia globally really fast just because of the timing of when we're getting to market with the product. So overall, we're still excited about how much Zenrelia is helping itchy dogs and believe efficacy is such a big component of what people need that that's the win with Zenrelia.

Okay. Interesting comment there I wanted to follow up on, the less-restrictive label than the U.S. We've had a lot of discussions about the label. There's some really interesting new data presented at VMX about a month ago in terms of why the label is what it is in the U.S. So just remind us, you have ongoing conversations with the regulators. Obviously, the label is what the label is, but there is always a possibility of amendments or tweaks or changes. How are those conversations going? What are the timelines for that? What are the possible scenarios we could be looking at down the road?

Yes. So we're pleased with the engagement with the FDA. We have submitted data that has already been produced. It wasn't needed to fo run clinical trials to them. So we've started a supplemental label amendment process. We don't expect that to eliminate the black box, but we do think it could be a positive change in some of the wording, which would be positive for the product and something that we hope this process will lead to. We're also beginning the work to be able to do clinical trials to really address the concern the FDA had on their interpretation of the study versus what the other international markets are doing on their interpretation of the study, which is more in line with what we thought the FDA would do. That's a longer time process because of needing to do the clinical work. But given how well this product works, that's a good investment for us even if it takes a longer time before we get the better label, but that's where it stands. Engagement is good. We'll continue to progress those discussions.

And on the back of that longer process, where you're redoing the trials, is there a possibility of getting the black box removed, again, down on the road?

I think so. Again, as you can see in the data from our [ booster ] study, these products work really well. Vaccinated dogs more than 1 year of age, that's what the market is to begin with. Our [ booster ] data showed there's no impact on the titer levels from the vaccines. And so this is a very safe product and FDA approved it because it's a safe product. We think that booster data shows there's not a concern with vaccines. And so we do think that the ability to remove the box is there. It's just going to take time and good new data in order to get the FDA to come to that conclusion.

Yes. Yes, I thought the data you presented, I think it was October, November in the Vancouver conference on the booster was very interesting, and again, the data from VMX. To me, it seemed relatively compelling that it is safer than how the FDA interpreted it is just about sort of going through that process. I want to ask you a little bit on you flagged efficacy a number of times as sort of like a leading -- the [indiscernible] is what you're leading with. Can we discuss what the use cases are? How the vets that are prescribing this, where are they going with this? Is this to directly replace Apoquel? Is this places where Apoquel will just, for whatever reason, didn't penetrate? Is this for vets that are just not as familiar with it? Sort of like where is your initial beachhead of use cases?

Certainly, the easiest place is where dogs are not getting to relief from Apoquel with Cytopoint. You can see that out there where a lot off-label use of using Apoquel with Cytopoint or keeping the dogs on Apoquel for the 2 doses that is required to get efficacy, having Apoquel longer than the 14-day induction period that's on the label. So that's the one spot. Clearly, there's obviously a bell curve for vets, some are using it for all cases. Others are only using it on those failure cases. Our goal is to get them experienced, get them comfortable so that they do use it for all of their cases. But certainly, we view the seasonal dogs where vaccines have been administered already and come in with a flare up, you can -- there's no issues there of using the best product. And so again, we're [ getting ] that experience. We're having good conversations. Clearly, we've got our reps out there spending a lot of time in vet clinics with both Zenrelia and Credelio Quattro and again, just continuing to work on it every day.

And the other question on Zenrelia is a couple of weeks ago, you had that flag -- a week ago you had a flag on sort of some of the marketing or promotional activities. Just remind us what the impact of that is? What went wrong? How you're addressing it? Just any ramifications of that?

No. I mean we don't think there's a commercial impact from it. We're addressing the FDA's concerns on certain of the way we describe marketing materials. Again, this as well as where we had said, if you have vaccines, check with your vet, right? And then using the product, they wanted us to say modified live-virus vaccine. Okay. So again, we thought we were being more helpful by being generic with the vaccine versus being specific for a customer who has no idea what sort of vaccine they're getting. So again, we're doing a follow-up. We don't think it has a commercial impact.

Okay. That's great. That's what happens when you mess with the regulators, I guess. Okay. All right. So that's Zenrelia. Let's maybe move on to Credelio Quattro just in the interest of time. Launched very recently. Obviously, it's a market that's really well established, really well known in companion animal. Initial feedback, initial thoughts and same thing, just a very competitive market. How are you positioned? What's the strategy? And sort of where are you attacking with that?

Yes. And [ it's really simple ]. We're in all the vet clinics. Elanco is a well-known entity. We know we're bringing in a great product, a product that has the broadest coverage as we picked up the tapeworms and we did an IDEXX dog park study with them a few years ago, that showed that tapeworm was in about 5%, okay? Is 5% a big number? Well, if It's your dog, it's a big number. So again, why not have the best coverage when it's available to you. We're also selling on the differentiation on speed of tick kill, right? Like there's a lot of concerns on [indiscernible] transfer, lyme disease, other human impacts from ticks. Lotilaner, the active ingredient in ours kills it twice as fast as what is in NexGard and in [indiscernible]. So again, if you can cover your tapeworms, if you can kill the ticks faster, this is just a product that's got a lot of differentiated benefits. That's what we're selling on. It also is very palatable. And so that's been a positive from dogs' willingness to take the product easily. So again, we're looking at certainly clinics where they love Interceptor Plus because of the worm coverage. Often it'd be an Interceptor Plus paired with a Bravecto for flea and tick. All right, well, hey, get your worm coverage, use Credelio Quattro because that's what you're after and an opportunity for us to get into vet clinics where we might not even be in with Credelio is we're in more vet clinics with Interceptor Plus than we are with Credelio because of that worm coverage. And then clearly, we'll go after the clinics where Credelio and Interceptor Plus are there. And then, again, we're talking to every vet clinic with our reps. And so we would kick out those products that don't have as broad of coverage so we can get pet owners greater protection and that's what Quattro does. So again, we've been on the market a month. We're happy with the first month, but there's a lot of months yet to go.

Anything we should keep in mind as we're modeling the rest of the year, I mean, now that we have a specific number, but anything we should even mind in terms of inventory stocking base into the year? Whenever you have a new product launch, there can always be some weird dynamics. I just want to make sure we're not caught off guard.

Yes. I think because we launched in January, you've got a lot of pull out to the vet clinics. If we launched in March, I would have said, you got to be careful on the stocking numbers. But right now, we're -- we just gave a lot of detail on Tuesday for everyone's modeling efforts by then. So hopefully, that's understood and everyone's got built it pretty well off what our expectations are right now across our portfolio.

Okay. And given -- I've always thought of Elanco as having, especially once you combine the Elanco and the Bovaer portfolio a couple of years ago, will you and broad parasiticide coverage, probably the broadest parasiticides, just in terms of number of products not even thinking about total revenues, but the number of products, probably the broadest menu of options for parasiticide. As you wear in Credelio Quattro on that, just you mentioned Interceptor Plus a couple of minutes ago. Concerns on cannibalization, what's built into your expectations on that and sort of like what are you seeing so far?

Yes. I think we've got $300 million of revenue last year in our -- in that parasiticides. Those products have been in decline because we didn't have the combo product. So again, we've assumed continued declines for [indiscernible] and Advantage Multi, Interceptor Plus. We grew Credelio in 2024. So it's continued because of that strong efficacy on tick kill and it's a great product for cats to have growth, and then outside of the U.S. Credelio Plus being our only one that's growing. But we do expect that other products to continue to decline. They're getting to be smaller. So the rate slows down. And then we get into this really fast-growing all-in-one market in the U.S. with Credelio Quattro, and that certainly something the team is really excited about. And so far, great feedback, you were at VMX, you saw the dominant presence we had getting best in show, really having the excitement, you could feel it from our team there. We're at [ Western Vet ] in Las Vegas this coming week, I expect a similar excitement just given all the innovation we're bringing right now relative to the competition.

Okay. And then at VMX, you talked about -- you gave us some additional thoughts on pricing for both Zenrelia and Quattro in a launch pricing, a little bit more on longer-term pricing. Provide us what that is relative to Apoquel, relative to [indiscernible], maybe NexGard Plus?

Yes. In the U.S. Zenrelia is at a discount, as we said, it was about 20% of launch. They took some price. So it's a little bigger than that right now. For Credelio and Quattro, we price, list price in line with Simparica Trio. We've got some introductory offers for the vets. But if you go out on Chewy right now, you'll see you've got Credelio Quattro for about $31 a month, really economical price point to protect your dog against fleas, ticks and worms and the like in the retail channel, right? We went to an everyday low price in last year. So we're not getting any price on our retail products. We think it's really set up well. We are a little cautious. Everyone saw the Walmart numbers, the consumer. We are a spot there where that also can be impacted by foot traffic, but at the end of the day, right, you're going to buy your collar. The question is when do you buy your Seresto collar. You're going to buy one for the season. So again, all things that we're looking at. But overall, we'll always be looking at our pricing strategies across our portfolio. We told about expected 2% price in 2025. For the complete portfolio, as something we take more Experior, some of the [ in-net ] products, some were taking nothing as noted in U.S. retail.

Okay. Great. real briefly, I want to touch on parvo monoclonal antibody. You flagged this past call again, 48 hours ago, that the maybe initial uptick wasn't quite as strong as you'd have liked -- can you dive into that a little bit more because that was really something that we were very excited about over the course of '24. What's changed there?

We continue to need more of that education of data, I think is one thing. It works really well. It's a lot of these just don't see parvo cases, they're not set up for a -- to even take a parvo case because they don't have isolation areas. And so they just say no. Others are really strong adopters because they see a lot of cases and are buying it. So I think our initial expectation was it was going to be really broad based for all vet clinics. I think the size of that market is a little smaller from that aspect. We're still trying to figure out how to unlock the shelter business, there is money in shelters, but it's a little different dynamic. And so that's a place where, unfortunately, they see more parvo cases. But again, the treatment -- if you don't use our monoclonal, is isolation, 3 or 4 days, lots of IVs, lots of impact on the vet clinic. So we're really trying to educate the vets on how this saves them time and money from a resource utilization standpoint. But also, it's also just continued education. So yes, the rate of [indiscernible] has been as quick as we had originally thought. It still does work so well from an application standpoint that we're continuing to believe they'll keep growing. And we got conditional approval in Canada, so the first international market, which is a positive, and we'll continue to put time and energy by saving puppies' lives with our parvo monoclonal therapy.

Okay. just following up on that. So is this more of a timing ramp perspective? Do you think you can to overcome these issues? Or has this changed your thinking about long-term opportunity 5, 10 years out?

No, we still think, long term, it will be big. It's a function of getting vet education, different timing. In order to be a blockbuster, we've always said we'll have to get to international markets. So that's still a longer term. So again, it's part of our innovation portfolio, it provided a lot of growth for us in 2024, and we expect it to provide growth in 2025, but we didn't want to call out that it isn't before we hit the same level we thought it might be just for transparency with investors.

Okay. Okay. Fair enough. We got about 5 minutes left. Still have a lot of questions. So I'm going to go real rapid fire. One is future pipeline. I mean especially, you called out IL-31, you talked about later this year, approval, launch essentially early '26. Just sort of what's the confidence there given there's still a number of months to go and you've seen other regulatory timings move around a lot?

We gave you our best estimate based on all the facts in front of us and what we know. Could it be earlier, could be later. I mean that's the nature of the regulatory bodies and some of that uncertainty. USDA doesn't have the same ADUFA time lines as FDA. Often that could mean they are faster approval, but it doesn't have to be. So again, we're excited for IL-31 long-acting. We're making our CapEx has elevated in '25 as we do expand production for monoclonals, expanding production for vaccines in Fort Dodge, Iowa, expanding production for the Credelio franchise and brands. So again, all those things that are in play here as we go forward.

Okay. So on that topic, I want to talk about -- you're talking about expanding capacity. You've got new products ramping. I want to shift to margins. When you think about what the portfolio looked like a year or 2 ago versus what the portfolio looks like today versus what it would look like a year or 2 years from now, that innovation contribution is obviously significantly bigger. A lot of these newer products, Credelio Quattro, IL-31, Zenrelia, we expect them to be meaningfully accretive to margins, but it takes time to ramp that. So how do you think about the contribution to margin from that revenue mix? And is it like sort of what's the break point on a new product where it goes from being, on day 1, probably margin-dilutive, but when does it become breakeven? When does it start getting really accretive?

I think obviously, the size of an Experior breaking the $100 million mark, it continues to be a really nice flow-through product, very synergistic with the total portfolio and our feedlot team and a very good gross margin. Bovaer, we talked, it's going to be lower gross margin for 2 years. That's all right. There's a lot of work to yet do there. The Pet Health products, right, the declines we've seen in U.S. Pet Health over the last few years has been a drag on margins. That is the highest gross margin parts of the portfolio. And unfortunately, those have been a sales decline because of logistic competition. We think that rights itself when we start growing. You saw good performance in Q4 when you get U.S. Pet Health growing. So again, all of those things in play, the biggest negative to gross margin for '25 is us buying our U.K. CMO. And that -- we called that in November, $25 million and $35 million margin headwind that keeps us for growing EBITDA faster than sales. That's a onetime impact in the sense of its growth. It will be a continuation of the base, but we won't have a drag like we have this year of a new headwind. So again, we do expect to increase profitability and the like going forward. We're looking at how tariffs. It'll be uncertainty for everyone and something that, given regulatory time lines to move production, you don't move production of our products. It will be where we are today for a few years. So it's not as if there's an immediate, oh, we'll just ship production to a different geographic location. It's just not a way of works on the regulatory side. But independent of that, innovation is a higher gross margin on average. It's going to grow faster than the base. That's going to be positive for our gross margin. We're continuing to be very efficient on our base spend to free up money to really invest behind these high-growth opportunities, if that helps.

Maybe -- I mean, you mentioned the U.K. CMO being a headwind. I think FX is also a headwind. You've got the [ auto ] divestment. Any way you could sort of strip those out and kind of give us what underlying margins would have been, excluding some of these headwinds? I think you seem like much better [ volumes ] this year. Yes.

I mean, they would have been better, Michael. They -- we have them, they're in our base. We're having to pipe this. So again, we've given out our views for '25 with what we have today. But certainly, those are factors. Now, we also -- we don't have our plants slowed down in '25 like we had in '24. So that's a benefit to margin, right? So we always had a big portfolio with our global products. I think if I point to one of the things that excites us most about '24, our 9 biggest [indiscernible] affiliates, 8 of those 9 grew. China was the only place that didn't grow, right? If you look at our 5 big product families, they all grew. That broad-based geographic diversity of Animal Health played really well for us in '24. We expect the same thing in '25.

Okay. We're one minute over time, but I got to squeeze in one more. On the -- I want to ask about balance sheet leverage. Obviously, it's been an issue. I think that's -- I mean, a big part of why the Aqua divestment took place. Give us an update on sort of your ability to manage that. And how you see yourself positioned as you exit the year?

Yes. We exited 2024 really well. We were 4.3x debt leverage. The FX rate, I think, took $76 million, $71 million of our U.S. dollar cash in Q4. So that, again, is due to the impact of the stronger dollar. We're guiding to low 4s to mid 4s debt leverage in 2025. The $45 million FX headwind we called out here for 2025 is about 0.3 turns on leverage. And so unfortunately, that's just the reality of having a dollar-denominated debt. But I feel very good about our relative position. Interest expense is down in '21 versus -- '25 versus '24 as a result of paying off a lot of debt last year on the Aqua deal. We're going to pay down more of that from '25. As we -- the other big thing to call out, the Aqua deal is about $150 million of cash taxes we have to pay in 2025. So that will be something that is free cash in 2026, that will go to debt pay down and continue on this journey. We certainly know, we've heard from our investors, they want us to get to a 2 handle on leverage. We fully expect we'll be able to do that over time. But we got to get from 4 down to 3 before we get to 2.

Yes. Yes. Fair point. Okay. Todd, thanks so much. It's a great. Covered a lot of ground. Really appreciate it, and thanks again for your participation.

Thank you.

All right. Thanks, everyone.