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

Hi. Good morning, everyone. I'm Erin Wright, Healthcare Services analyst at Morgan Stanley. Happy to have Elanco Animal Health with us here today at the Morgan Stanley Global Healthcare Conference. It's just 4 important disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. And with that, from Elanco Animal Health, we're happy to have CEO, Jeff Simmons, as well as the new CFO, Bob VanHimbergen, sorry. And yes, excited to have you both here. I'm going to hand it over to Jeff for some intro remarks, and then we'll get going on the fireside chat. Thank you.

Thanks, Erin. Thanks for Morgan Stanley and the opportunity. Good Animal Health conference here. And all the great work you do. So yes, thank you for the opportunity. We enjoyed yesterday and today with the engagement with different investors. Look, I think Elanco just simply -- we've been working to get to this state for a long time. We've emphasized to all of you as well as internally growth, innovation, cash has been our priority from really probably the last 3 to 4 years, and you've seen 8 consecutive quarters of growth from us. The growth we'll talk about in the discussion. I think the quality of that growth between our core and our innovation, our price, all 4 quadrants of our business. as demonstrated last quarter are showing good growth. Innovation, we're not about one innovation. We've got -- we've said about the big 7. 6 are in the market. Yesterday, we announced the second one reached blockbuster status in Quattro. So Experior Quattro and blockbuster status -- and the seventh of the big 7, we still expect for an approval, our IL-31 monoclonal antibody at the end of the year, and then we'll have Bob share a little bit more. But the whole area of cash and the balance sheet. We've taken 1.5 turn out of debt in the last 6 quarters, and that continues to be our priority. So growth innovation cash is the right value proposition for our employees and demonstrates value to customers, but also for you, and we're trying to keep that simple. I want to just also highlight Bob. I mean I was intentional myself. I drove this decision that after 7 years in our current CFO, stability, expertise and leadership matters a lot to me. I think we've got the most tenured executive team that 10 at my table and 100 kind of in the senior management as a whole. And of that 10, I really believe a deep expertise when I look at the commercial side, the manufacturing side and even the G&A functions, we've had a lot of stability. So I made a proactive decision to say, "Hey let's bring on somebody with a fresh perspective." They can really look at margins and cash, maybe even from a different industry, interviewed a lot of candidates over the course of 6 to 8 months and made a decision as the last couple of months. Bob has now been with us for 2 months and a great cultural fit and a great fresh perspective and maybe just to kick off, just maybe, Bob, a little bit what your agenda is, and then we'll dig into the Q&A, if that's okay, Erin.

Sounds good.

Yes. So thanks, Jeff, and good morning. So initial impressions of the company, Jeff, as Jeff mentioned, I've been with the company about 2 months. I'm extremely impressed with the talent level of Jeff's leadership team, the top 100 as well as the finance team and IT team that I support. As far as my agenda, I really have 2 priorities over the next several quarters and years. And the first one is going to be margin enhancement. We are going to have a natural benefit from the basket of innovation, the launches that we've had here this year naturally help our margin. But with Elanco Ascend that we've announced with our last earnings call, I'm going to be working with the team to provide some other opportunities to improve margins. And as Jeff mentioned, I do come from a manufacturing background, Tier 1 is very tight EBITDA margins like low to mid-single digits. And so what that forces us to do is be operationally excellent within the 4 walls of our manufacturing facilities as well as the G&A line item. And so that's the agenda I'm going to be focused on. I'm really impressed with the team being receptive to some of my ideas. But as I think about the gross margin line, again, I'm going to be supporting the team with opportunities, be more efficient than the 4 walls of our facilities as well as supply chain and procurement. I'm also going to be really focused on G&A. And I'm specific with G&A versus SG&A on the S side, I want to make sure we continue to make that team efficient and effective and supporting them. So they're spending more time in the field. But when I look at G&A, there's different set of tools that the team have been really receptive to what I've been bringing to identify opportunities to be more efficient there and make choices with the G&A spend, some of which I expect is going to drop to the bottom line. some of which we expect to reinvest in the business, whether it's in R&D or DTC, which I know we'll talk about later this morning. I am a cash flow person. It's extremely important to me. So I'm also going to focus on interest expense as well as taxes. It's great to have an effective tax rate that's low, but people forget often what the cash tax rate is, and that's something I'll be highly focused on. That really leads me to the second priority. So the first one is margin enhancement, both gross margins and EBITDA margins. The second priority is going to be cash. And with capital allocation, I have no recommendation to change where our priorities are. It's going to be paying down debt. We're at 4x levered now. We're going to continue to focus on the fundamentals around trade working capital. We've had a great team already in place for the last 18 months or so focused on DPO, DSO and inventory levels. I'm going to further support that team and what they're already doing. But that trade working capital efficiency, CapEx efficiency, I'll be supporting the team to ensure that we continue to pay down debt and really targeting getting leverage below 3x that's certainly going to provide us some more optionality when we get to that level. That won't be in 2026, but I would expect some time in 2027 at those levels. So really, those are the 2 priorities I have here.

Okay. I want to start with innovation, if I can. I mean, that's just a key theme for you right now and you're really executing against the pipeline. You recently raised your 2025 innovation guide I guess, can you help us try to understand kind of the cadence of some of these key drivers and the impetus of the raise growth versus net expectations? And then can you remind us of the contributions that we should anticipate both this year and into next year? And what products are you kind of most excited about in terms of innovation contributions?

Maybe share a little bit on innovation and maybe the investment behind it because we're taking the no-regrets approach. So I think the biggest message is, yes, we've raised guide for the last 3 quarters on innovation. It really started. It was kind of our 1 external metric back in December of 2020 when it was a $500 million to $600 million with this basket of innovation. We raised it $100 million when we bought Kindred. So it was $600 million to $700 million. We did $420 million in the first half. Again, it's all about a portfolio. I'd say the lead products are Experior and cattle continuing to do well, a product that has been growing significantly in a market that we see at about $350 million. That hit blockbuster last year, and it's growing really nicely and with the shortage of cattle, cattlemen are making a lot of money right now and Experior's contributing to that. So that's -- and we'll continue to globally expand that product. I think as you look across, there's no question, Quattro, we announced yesterday in a press release that has reached blockbuster status, and we'll get into that in more detail, but it's a lot around efficacy. And then I leave here and head to Spain to the global derm conference. We're leaning in heavily on Zenrelia also in the release yesterday as we are shipping product into the second largest derm market in Europe, and that's often going really well and looking forward to being with the launch team tomorrow. So that's, I would say, across all 4 quadrants we've got innovation. I think also Erin as will talk that's making our core business and our core portfolio stronger as a whole. Now maybe just to pivot, we are leaning in a little bit even on our guide in the second half. We're taking a no-regrets approach. These big 7 innovations are in big markets that are accretive to us, that are accretive to margins and we want to make them as big as possible and get to that peak and make that peak and that ramp as steep as possible. So there's going to be a pretty heavy investment, and that continues either in the second half. I don't know, Bob, your thoughts on that is we spend a lot of time looking at those metrics.

Yes. A couple of things I would add. One, it's another reason why Elanco Ascend is so important to be efficient on the G&A aspect because we are going to continue to invest in R&D and in DTC and continue to support the top line growth of these products. Jeff and I spent a lot of time with our commercial teams. As Jeff highlighted, we did add $10 million to our OpEx for the second half of the year, really to continue to support that top line growth, a little of which would be R&D related, which will continue to be longer term investment and support, but a lot of it, of which is DTC specifically to continue to accelerate what we've already seen tremendous success on Quattro but continue to accelerate that. And it's a data-driven decision. And so Jeff and I will continue to meet with the commercial teams on a monthly basis, and we'll continue to lean in on this no-regrets approach. So to get to the point where we don't see the ROI on that investment, then we'll start scaling it back. But right now, we're going to continue to lean in, and we'll continue to be operationally effective in the other areas to fund that top line support.

And as we think about other upcoming blockbuster launches, you mentioned, for instance, IL-31 approval this year. Can you talk a little bit more about what else is in the pipeline and we're always going to ask about what's next.

Yes, absolutely. I have 7 innovations you still want -- do you want to know what that will -- yes. So I think it's a great opportunity to segue. I mean we do expect the IL-31 monoclonal antibody to be differentiated. It will be our second derm product. I think we're one of the few companies that has monoclonal antibodies. We've made investment CapEx in our Elwood facility. We expect everything is tracking and feel confident on and approval by the end of the year. We don't have an ADUFA process to USDA. So there's always that dynamic, but we're hopeful that we have an approval and we'll commercialize in the first half. So -- and it will be a differentiated asset, and I think it will help Zenrelia as well as we look at building out a derm. But I would just take a couple of moments here real quick. I think Ellen came on to the team. She has created a matrix versus a team structure, been very intentional. She's had, over 3 decades of leading global R&D teams and I think her track record is shown with 4 or 5 approvals last year, and we continue to get approvals. We got a 4-month collar. We got our flu vaccine for canine, good progress on labels. So what we've done is we've really established a team that we believe is very experienced on the clinical side. And over the last 3 years, she's been really focused in 3 areas to tell your question, refilling the pipeline the center, the next big 7 or so products, and we'll talk more about those as we go forward. really, really prioritizing on the big markets. We're saying, hey, we're going to go after the opportunistic markets, but at payer at $6 billion, a derm at $2 billion, growing double digit, pain and next-generation pain, our farm animal franchise is continuing to do really, really well. And how do we get that productivity help and sustainability in a portfolio, and that's really working well in food safety. So those are her targets. And I would say she's built out a team. She's brought in a lot of talent even from some of the competition She's built out the internal monoclonal antibody capability. I'll be -- after Spain, we'll head to India. She's built out shared service centers. So our capacity has gone up, while our cost has really remained flat and that's really given us an opportunity. So I'm excited about the center of the pipeline progressing and her mantra is very clear to our entire team, a consistent flow of high-impact innovation in major markets, differentiated. We can't afford small little products. So Erin, to answer your question, look, for para, derm, pain, farm animal really all in our core spaces, big products and our goal is to drive this peak as high as we can. We've got 7 great innovations. And on the other side of that, we'll be talking more about the flow of innovation that will come afterwards. But Ellen is creating, I think, a capability to create that consistent flow.

Okay. That's great. And let's talk a little bit about underlying kind of base business trends. You talked a little bit. I thought it was interesting what you said earlier in terms of all of this is to help support kind of also and leverage kind of there can be bundling capabilities there can be corporate relationships that you can establish all that kind of stuff in terms of bundling the broader offering. Can you talk a little bit about that but also what you're seeing in base business fundamentals from a vet office visit standpoint? And then also on the farm animal side, I think we're at maybe an inflection point in terms of the cattle cycle. So hopefully, that's something that you can play into as well.

Yes, maybe some base, and then I'll give you a little bit of your inflection and idea or first reflection. Look, I think our base business, we've said all along, hey, this is a value-based market. And it's not a payer market. It's a cash market, you got to add value. So on the farm, the pet side, we've been very intentional to say, "Hey, or in value has to grow. On IPP, we just talked about innovations a consistent flow on portfolio. It's a consistent increase of value. So when we go buy or 4 quadrants that really matter when you think ruminants in cattle, poultry, pets, especially each portfolio, international, U.S., how do we expand it? I think we're the only animal health company that in the U.S. we have reporting to me, pet and farm animal. They're very different businesses with very different portfolios. So we focus heavy on the value beyond product. We have more sophisticated pricing relative to the value. Pricing is really critical. And then, hey, how do we offer portfolios and an Experior's helping Rumensin. And Adtab helping Seresto in Europe. We can go one by one. Even when we look at preface in our vaccine and swine is helping the overall swine portfolio. So our core business is stabilized, and we don't see any big air pockets of challenge. It's always going to be up and down, but as a whole. Maybe just a moment on farm animal this turn -- Bob came into my office about a weekend of the job and said, "Hey, I got a question." Maybe you can share that because I think it was an interesting reflection that we missed sometimes the obvious.

Yes. So what really stood out to me, Erin. And Jeff mentioned these conferences, investor meetings. 98% of the discussion is on pet. And then if we have a minute left, there's a question on farm. And I couldn't understand that...

You did better than that.

You did great. When you look at the fundamentals of the business, the farm business, yes, it has lower gross margins. And I think people are just hyper focused on that. But there's only 10% of OpEx to run that business. So when you look at EBITDA margins of the Farm business, it's very, very effective. And the cash flow is great. I had the opportunity to spend some time with some farmers to get a little tour, and I underappreciated the science behind making the farm successful. So I do think the barrier to entry to do -- to get into that business is pretty high. And so it's an unappreciated asset, and it's something that we're going to continue to invest in. We've got some R&D that we'll continue to fund, but really excited about that business. It just doesn't get a lot of visibility.

And you mentioned, I think right now, when you look poultry globally, it's probably the global species. We see a durable market doing well. Actually, high beef prices bode well for poultry. People have traded down a little bit, beef producers because there's a shortage of cattle the rebuilding of the herd is probably going to still take 2 more years. So you're going to see producer profits up, packers aren't quite as happy as producers right now, but it really does well. And look, the quiet species out there that's doing really well and investing a lot is dairy. If you think about this protein movement and the MAHA movement, but globally, I mean, animal protein is just really, really going well, who's innovating the most products is probably dairy. When you think about cottage cheese to yogurt to all the different products, they're going to invest over $10 billion just here in the U.S. in that industry. We've got Bovaer, Rumensin, vaccines, and we're really looking at dairy as a real opportunity for us. Remember, ruminants globally is bigger than pets to the point. And we really see a nice opportunity with dairy beef and sheep.

Yes, we have some other industry constituents coming later today to talk about it as well. And so we're looking forward to that. But going back to what you just said. So what is the delta between kind of farm animal long-term steady state kind of margin from an operational standpoint and then pet.

Yes. So on EBITDA margins, it's much closer. I do see the Farm Animal business being very, very durable and stable and I do think we're going to grow at a rate above the market in that business.

Okay. So okay. So then let's talk about pets. So Credelio Quattro, and you came out with the press release that speaks saying blockbuster status for you. So congrats on that front. You've noted that it's 14% of dollar share. I think that was as of the most recent quarter. But if you had the latest data points there, that would be great. But you've been gaining share in noting that 70% of the share capture is coming from competitive broad-spectrum products as well. Can you give us an update on some of these adoption metrics that you've given in the share metrics as well in terms of Quattro and success revenue?

Yes. I would just start by the market overall. I mean, when you look at what is the fastest-growing segment in all of animal health globally, it is oral broad spectrum and [ Decco ] products, and it just keeps growing. I think the trailing 12 months has got to be 35% to 45% depending on when you pick it up. But I mean it's -- it continues over 70% of puppies are starting on these oral broad-spectrum pills and they're working and they really provide the value. So we're jumping into a market that is actually growing. And so that's why maybe all of us are growing because of the size of that. But I would say, overall, our strategy is value and we're hearing it loud and clear that the points of differentiation matter. As you've heard me say, we believe that we've got best medicine in the fastest-growing largest market in animal health with Credelio Quattro. It's the only product approved by the FDA with 4 active ingredients. The [ PiCanto ] difference on the broad spectrum is different, probably the most underappreciated research that we've ever published maybe is the speed of Tick kill that we have over others. 1-month heartworm control and then everyone had a question about palatability, and that's really been a little bit of an unsolicited benefit. So we're leaning in, Erin, right there to say, "Hey, I have to see Ellen, again, the machine she's created Zenrelia was going to be our fastest global approval set. We're in over 40 countries with Zenrelia. We've now made all the submissions in the major markets on Quattro. So we'll see that benefit next year as we start to globalize this. We see Credelio as a franchise as probably the largest franchise potential we have in our 7-year history as a company that we're going to invest accordingly. I think the challenge going ahead will be, it's a competitive space. So we've got to keep our eyes on that. And look, we have to activate pet owners. It's an uninvolved category. You don't say, "I'm going to the vet to change my parasiticide." And so there's 2 drivers on uninvolved is one is you got to drive them into the clinic and encourage them to change; and two, and we're having good success at that. And I think that's important. And the other one is just compliance and being able to say, "Hey, we need them taking their pill every month. So that's where 2 areas that we've really got to invest. And I don't know it ties a little bit to our guide, too, that we're going to -- we're not letting up in the second half. Some people -- after the summer, they back off, we're not backing off on our investment here.

Yes. I'm not sure there's much ad other than that. We're jumping in with both feet

On the promotional activity that you're doing there? And should we anticipate any sort of stocking dynamics quarter-to-quarter from a Credelio perspective? I know you don't break it out quarter-to-quarter, but your expectations on that quarterly progression? I know one of your competitors was talking about step up promotional activity and activity from a competitive standpoint that was -- that they were facing, presumably may be a part of that. Can you talk a little bit about the nature of your relationship with distribution on that front and some of the promotional activity?

Yes, great relationship with distribution. And I think right now, we have -- they get a lot of value out of us, and they're getting a lot of value out of us year-to-date. And I think we've got that 800-plus reps between the major distributors, really, I think all where we've got a front row seat there, I think, relative to the value that they can make and getting good share of voice out of them. And let me be very clear on inventories. So I was clear on the earnings call, when you look at into the clinic and out of the clinic, that's matching nicely. So nothing out of the ordinary in terms of stocking or anything like that. .

Are you seeing any changes in terms of further cannibalization across our legacy business from Paris, how is that playing out relative to your expectations? .

We've been -- our IR team has done a really nice job, really clear, hey, we've got $300 million of legacy business in that $4 billion market in the U.S. So we've got a smaller denominator. We've seen that erosion over the last 3 to 4 years. We've got pretty good loyal use, but today, with Quattro, about 70% is coming from new -- taking from competitors or new puppy starts, and only about 30% is cannibalization. So that's exceeding our expectations from our original plans.

How are you making inroads at this point in terms of the larger consolidators with this product? And how -- I think last time I was on the phone with you, you were on the phone previously with the large consolidator. So how are those contracts progressing?

Yes. I think the large -- especially the large clinics, they want the portfolio. Elanco is the second company with the 4 pillars. So therapy, vaccines, para and derm. So Zenrelia is helping us there. So we're definitely leveraging that. I think the IL-31 short-acting will be a differentiator to us to be able to give us 2 derm products in that pillar. And so it's -- we've said all along, we're under-indexed over the last 5 years. That is changing. It's changing nicely, but we do believe that in '26, that's going to be a really key objective for us as well.

Okay. I want to switch gears to derm, if we can. So you said you're going to an international derm meeting in Spain. For instance, can you talk about the global opportunity for Zenrelia relative to what you're seeing in the U.S. how the U.S. market is playing out relative to your original expectations when you kind of sell the black box warning and understand how that's -- how the adoption rate or how that's impacting the adoption rate.

Yes. Again, like the Para market, I think Animal Health had a great first half as an industry. I mean we saw double digit on derm. I think it just continues to resonate that there is an undervalued I think, element of the market growth, but also on derm, it's a dissatisfied market. I mean there's -- I see this market growing nicely, and there's been a lot of projections on how this market could even double as it globalizes and I see that. I mean, when you have the number of dissatisfied users out there. So look, I think the story on Zenrelia globally is we're now in 40 countries. We're globalizing this product. We've got 39 of the countries or so with a less restricted or really an ideal label. The U.S. label is getting better. And as you look globally, our goal is to really play off from what we've seen. We've got 0.5 million dogs, 1 year of use. And the 1 simple headline is this product has an efficacy profile that is really compelling. And so we're leaning heavily in. We've got head-to-head data. We've got information. Now we've got key KOLs that have had real life experience. And whether we like it or not, we got thrown into all the trouble cases in the first year, and we got really good pharmacovigilance information to show this product is safe and it's effective and man it works. And so that's why we've got over 10,000 clinics in the U.S. that are saying, "Hey, we're moving this thing to first-line treatment. That's a really nice market out of the 30,000 clinics, and we're going to lean in on that. And then globally, we're going to lean off from our experience of -- with less restrictive labels -- we're going to launch with no regrets and probably be our second market to Quattro in the U.S. in terms of our investment.

Yes. And exactly. And with Quattro, right, we're leaning into DTC, and we'll take a similar approach rely as we look overseas. Yes.

And as you think about the safety or the label and the potential for changes in the U.S. market, I guess what are the prospects for changes? What is -- when will we hear more on that front?

So just to highlight what we shared at the earnings call, we had a great constructive dialogue with the CVM center veterinary medicine at the FDA, and they First of all, really good dialogue, very science-based. We shared information and data we had as well as all the data we had from being in the marketplace and that move them to an agreement and a response to the data we shared to take fatally induced the disease off the label. And so we are in the middle of that 60-day window administrative review where we will have that done. So we're close to having that removed from the label. And then we will continue more dialogue on language change as well as research, if necessary has already started for the bigger label change. So with what we've seen with Zenrelia, our goal is make the U.S. label like the other international labels and continue to build a derm portfolio. We see us adding to our derm portfolio significantly, but Zenrelia will always be a key part of it.

And it would be more language change as opposed to elimination of the black box? .

We're taking all fronts. It's a multifaceted strategy. .

And then how are you thinking about the competitive landscape, so in atopic dermatitis and more broadly kind of how are you thinking about, for instance, a new competitor coming in, especially in the international market .

Yes. What we see, Derm is a long-term play. It is an ideal market. It is a big market, $2 billion. And as we said, it's not showing any slowing of growth. The globalization, the international market, $600 million to $700 million, growing faster than the U.S. We're going to take a portfolio global approach -- and when you put that with our Para and our next-gen derm and where we're headed, we see lots of room for Elanco to grow. And we'll do what we always do, and that's focused on differentiated value-based approach to the market. .

Okay. And IL-31, where can you be differentiated there as the formulation, duration, dosing, safety, scope of the label?

We can be in any and all of those and we'll share more when we get closer.

Okay, but still on track and sometime in 2026 is when it will be more material from a financial perspective for you in terms of the launch.

Expect for tracking and more confident now than we were 3 months ago on the approval by the end of the year. Manufacturing is tracking as well, and we'll commercialize in the first half of 2026.

Okay. Okay. Great. And then, Bob, you talked a lot about your operational focus across the company. And can you talk a little bit about some of the key drivers and what do you see as kind of the most low-hanging fruit? Where do you see margins going over time over the longer term across this business based on an evolving mix of the...

Yes, as we think about margins longer term and let's say, maybe the rest of the decade, we're going to have some natural opportunities just with natural mix with our basket of innovation, which generally comes at higher margins than our base business. But again, Elanco Ascend is going to be attacking and enabling opportunities across the manufacturing facilities across procurement. And then again, really in G&A. And so what I would expect is over the rest of the decade, you'll see gross margin improvements, but you'll actually see EBITDA margin enhancements growing at a quicker pace and at a higher level.

Okay. And you called for kind of constant currency organic top line growth of 5% to 6% this year, and you recently raised that guidance. I guess -- how do we think about the quarterly gain in from here? What gets you to -- what are some of those key drivers and headwinds and tailwinds that we should also be thinking about as we head into 2026.

Yes. So I think about 2026. We've had 8 great quarters already of consistent constant currency growth. We are heavily focused on the next 8. Obviously, we've got the acceleration of the basket of innovation that's going to certainly enable that. We have the IL-31 that Jeff just mentioned that, again, we should have approval here this year with commercialization next year. And so really, what we're going to see from that is we should see some top line growth. We should see some natural margin enhancement coming from those innovative products accelerating Elanco Ascend coming in again with some investment in AI and automation, but certainly some cost opportunities. But as you look out over the next several years, I'd expect good solid growth, margin enhancement and then cash. I don't want us to forget about the importance of cash and delivering cash and delevering. But I just see us being a consistent durable growth company with a pretty attractive profile.

And the polls are -- I don't think are changing. I think you've got I think we've got a good vision on what the competitive innovation is and the competitive set of innovation, but that's always -- it's not like pharma, you don't have the transparency. So that's always a factor. I think the second is competitive response. You don't come in with as much innovation in the major markets and not create a response. So we'll have that dynamic. That's more quarter-to-quarter than our worry over, as Bob said, 2 to 4 years, but I think that we got to keep our eyes on. we've got a good handle on a good strategy on tariffs. But you've got -- when you have 7, 8 species of animals in over 40 countries, you have a dynamic as Romero and the team always does in terms of just the dynamics our cut retail business, I would also highlight because that has strength 1 quarter and then maybe economic, it's probably a little bit more recession sensitive, but we keep adding to our portfolio. So we've added supplements. We've added a short collar and we've added a lot more distribution points, and that's helpful. So those are -- I think those are things -- the pulls and the headwinds are -- what I like is they're consistently the same, and we have a strategy for those.

And can you remind us in terms of the key products that are subject to tariffs at this point, where is the level of visibility on that front? And how much is manufactured in Europe that's sold into the U.S. and otherwise.

Yes, nothing's changed. So we've minimized our active ingredient out of China. That's very small. We do have a European manufacturing footprint with the acquisitions we've made, but that's all been put into our guide. And really, we don't see anything other than annualizing some of the numbers we've talked about, and we'll be approaching that with supply chain continues to adjust, continuing to negotiate and work different areas. We're looking at targeted pricing. So we have a very good strategy, and I think we've got it in our '25 guidance and our eyes are all on it in '26 planning. And again, I think as an industry, we've done a really nice job, I think, as an animal health industry to keep the 232, we believe we are out of scope, and we're having good dialogue on that.

And yes, I know we only have 2 minutes left, and this is a big question, and Bob, I hate to push on this so much, but I do think it's an important part of the story. I remember in terms of the operational improvement across the business and just back at the IPO and the spinout from Lilly, it was the 1,000 basis points of margin expansion that you were going to see. And like, obviously, there were things that happened, whether it was the per transaction or otherwise, I mean where do you see that latent synergy opportunity relative to like cost cutting at the Bayer asset at other areas? Is it manufacturing footprint? Like where do you actually -- or is it some of those like CMO relationships that you have or otherwise?

Yes. So I think there's already been a lot of work done, nice work done by the team prior to me joining, but there's not a silver bullet. I think I'm just refining a lot of opportunities here that I see again kind of throughout the P&L. But there's just different tools that I'm bringing to my -- from my past into the organization, and I'm seeing a great receptivity to the ideas on bringing from the team. And so again, I think EBITDA margins are going to enhance at a quicker pace than gross margins, but we'll see gross margins and EBITDA margins improve over the rest of the decade.

And then are we going to hear more about this at some sort of Investor Day in terms of long-term prospects across the business? And yes, could you give us an idea?

Yes. I think what investors want out of us is quarter-to-quarter, our heads are down. We need to do what we say, we'll continue to guide quarterly, and we don't want to create any surprise. So we know we're an execution story. So that's growth, innovation, cash and execution story. And yes, we just put our Elanco 2030 plans in front of the Board and got those approved, and we'll continue to share and expose our investors to that as we go forward when we think it's the right time. So.

Yes. Yes. I think the last thing was 2020. So hopefully, we'll hear from you soon. Thank you so much. I appreciate the time today. Always a great discussion.

Thank you.

Thank you for what you do for our industry. Thank you.