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Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's Fourth Quarter 2024 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Tiffany Kanaga, Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter 2024 earnings call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.com. Today's discussion will include forward-looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statement. The information we provide about our products and pipeline is for the benefit of the investment community, it's not intended to be promotional and is not sufficient for prescribing decisions. Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco enters 2025 with momentum. Fourth quarter revenue, adjusted EBITDA, adjusted EPS, and net leverage were all in line with our expectations. We're pleased to report our sixth straight quarter of revenue growth, up 4% on an organic constant currency basis with growth across both our Pet Health and Farm Animal businesses. I want to open by highlighting several accomplishments from the full year, which position us well for accelerating growth into 2025. 2024 organic constant currency revenue growth of 3% represents a meaningful step up from 2022 and 2023, driven by our innovation, a stabilizing base, pricing, and importantly, the durability of our diverse portfolio and balanced geographic presence, that 3% reflects growth in both Pet Health and Farm Animal and market share gains in global pet retail and U.S. farm animal where we hold leadership positions. Additionally, we experienced broad based organic constant currency top line growth across our top five product franchises and in nine of our top 10 countries. We have launched our diverse portfolio of innovation with six potential blockbusters now in the market. Through focused commercial execution across global markets, we exceeded our innovation revenue target for 2024. We have also raised the range for 2025, reflecting our confidence in the continued contributions from these new products. Additionally, in 2024, we concentrated our strategic focus on the highest impact opportunities, successfully divesting our aqua business. The sale proceeds combined with more than $0.5 billion in operating cash flow allowed us to pay down approximately 25% of our debt and support increased investments in our strategic product launches. When we started 2024, we highlighted the three value drivers for Elanco: growth, innovation, and cash. We have made strong progress on each front. We accelerated growth, launched all six key products, exceeded our innovation plan while delivering our biggest year yet of operating cash flow. Looking to 2025, growth, innovation and cash remain the priorities to expand our value proposition. We continue to anticipate an acceleration in organic constant currency revenue growth of 4% to 6%. Excluding the anticipated impacts of FX and the aqua divestiture, we expect adjusted EBITDA to grow 1% to 5%. With the increasing contribution from innovation and stabilization of our base business, we expect sustained growth over time, while our optimized infrastructure and product mix should enable margin expansion in 2026 and beyond. Notably, like many other global corporations, we are negatively impacted by the stronger dollar. On Slide 5, to highlight the strength of our core business, we broke out the impact of foreign exchange on our fourth quarter results and 2025 guidance. Our global team is focused on commercial execution and full year underlying expectations are essentially unchanged. Overall, we are pleased with our fourth quarter performance against this dynamic macroeconomic backdrop and remain confident in accelerating fundamentals in 2025. Turning to the fourth quarter. On Slide 6, we break down the 4% underlying organic constant currency revenue growth, which excludes the impact of the aqua divestiture in prior periods. All four areas delivered growth or were stable in the quarter, marking our best broad based performance in more than three years. U.S. farm animal was up 6% led by cattle. Experior reached blockbuster status from the U.S. sales alone, benefiting from the use in heifers that began in November after we received FDA Combo clearance. This growth supported demand for Rumensin, demonstrating the increasing value of our comprehensive portfolio. International farm animal was flat despite challenging swine economics in Asia. The sequential improvement from the 3% decline in the third quarter was driven by stronger global poultry demand and less impact from our do different commercial model changes in certain geographies. International pet health delivered robust growth of 11%, driven by continued strength of AdTab and Seresto. We now expect AdTab peak sales to exceed $100 million, reflecting successful DTC efforts in Europe. By geography, International pet health achieved growth across a very diverse range of markets with contributions from Europe, the Middle East, Latin America, Asia Pacific, and Canada. Finally, the U.S. pet health revenue grew 2%, including early contributions from

Thank you, Jeff, and good morning, everyone. I'll focus my comments on our adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results. Our fourth quarter results demonstrated good execution in the face of FX headwinds with revenue, adjusted EBITDA, and adjusted EPS, all in line with our expectations and net leverage also reaching our year-end target. Starting on Slide 11, we delivered $1.02 billion in revenue, representing a 1% reported decline. Excluding the impact of foreign exchange rates and the divestiture of our aqua business, we achieved organic constant currency growth of 4%. Price contributed 3%, while volume increased 1%. Changes to FX rates since we provided our guidance in November caused a $10 million reduction to our Q4 reported revenue. Slide 12 shows revenue by the four quadrants of our business in the quarter. Total Pet Health revenue increased 6% in constant currency in the fourth quarter with price growth of 3%. Our U.S. business increased 2%, driven by contributions from key innovation products, including

Thanks, Todd. Elanco delivered a strong finish to 2024, achieving our sixth consecutive quarter of organic constant currency revenue growth and building momentum as we head into 2025. This performance with both Pet Health and Farm Animal contributing to this growth in the fourth quarter underscores the effectiveness of our innovation driven strategy. The collective portfolio led by our six potential blockbuster products is exceeding expectations with 2024 innovation revenue surpassing our targets and setting the stage for an even stronger performance in 2025. We are reaffirming our outlook for accelerating organic constant currency revenue growth of 4% to 6%, driven by innovation and focused commercial execution. This is a much awaited period for Elanco in our strategic trajectory. The energy and enthusiasm within our organization can be felt at every level, evidenced by a four year high for employee engagement as we build on our 70 year legacy of going beyond to transform animal care. Thank you to our global teams for your focus and discipline in delivering a successful 2024, positioning us well to create long term value in 2025 and beyond. With that, I'll turn it over to Tiffany to moderate the Q&A.

Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow-up. Operator, please provide the instructions for the Q&A session and then we'll take the first caller.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jon Block from Stifel. Your line is open.

Great. Thanks. Good morning. Jeff,

Thanks, Jon for the question. Yeah. We're excited about

And Jon, to your question on revenue growth, clearly 2% to 4% constant currency in Q1, but then getting to 4% to 6% for the full year. I'd start with a few one-time items or headwinds from Q1 of last year that we called out at the time. We put products from Bayer into distribution that increased sales in Q1 of last year in U.S. pet. We were still working through the Argentinian exit as well as Kexxtone and some of the do different opportunities in international farm that became headwind yet here in Q1, but then we don't have that same headwind in Q2 through Q4. I would also then address the innovation ramp. As Jeff mentioned, we're really penetrating

Your next question comes from the line of Michael Ryskin from Bank of America. Your line is open.

Great. Thanks for taking the question, guys. First, maybe this is a follow-up to Jon's question just now on

Yeah, Michael. I'll start here. Todd, anything that I may miss. I think the momentum at the end of the year, no question our U.S. Farm Animal business that led by Experior, the Heifer clearance definitely accelerated use. And with that Heifer clearance, it just enabled more feed yards to be able to feed it to steers. And as we see kind of the decline in the herd level off, that's going to be positive as well. So the value of Experior has done well in the U.S. and Canada, and it gives us a lot of confidence and a lot of growth opportunity in 2025. And AdTab, probably our best launch I've experienced in the last five years, what our U.S. retail team has done, it's even contributed to nice growth in Seresto across the European affiliates as well. Those two products are definitely driving growth. And then look, we got -- when you step back and say,

Okay. And then maybe for the follow-up, I think in the prepared remarks, you called out your IL monoclonal antibody. I think you said 4Q '25 approval, but it's not in your guidance on [Technical Difficulty]. Just given what we've seen with regulatory clearances, a lot of things have taken a little bit longer frankly and there's a lot of uncertainty in the regulatory environment overall. Just what gives you confidence in that this far out? Any color you can provide on how those conversations are going? Thanks.

Yeah. Thank you, Michael. As we look at IL-31, again, we see it as a differentiated asset going into the derm market, going to play very nicely with

Your next question comes from the line of Daniel Clark from Leerink Partners. Your line is open.

Great. Thank you for taking the question. I was just curious when you talked about the successes of sampling in

Yeah. Thank you, Daniel. Again, I would step back and say, we feel good about Bobby and the team, really a lot of expertise and a lot of work in preparing -- prepping for this launch and Quattro helping it too is, we've got a multifaceted approach. We got multimedia kicking in, the vet tech-to-tech approach, and now we know the sampling. And even the right down to the sales rep incentives and distributor incentives all aligned to say, hey, we know that we get a vet clinic to experience

Got it. And then just on the point of becoming a first line treatment, can you share some of the feedback you've been getting from vets, like, can you give some color on how many are using it as a first line treatment today? Thank you.

Yeah. Every segment is a little different, but what we would say is, experience is what is needed, the demonstration of efficacy, how the product can be used into different vet clinics, and how vets are looking at it is essential. These tech-to-tech meetings really matter. Being able to bring KOLs in, which we've got really good support from KOLs. We're seeing a nice uptake on the strategic side. Bobby and the team have done a lot with the strategics but it really allows vet-to-vet exchange, KOL exchange to be able to give those that maybe have less comfort or want to know more about how to manage the label on that, that what's I think helps bring more vets into their willingness to script, which we're seeing in the surveys that are being done, so continued progress. And I think as the season ramps up and the challenge, and as I mentioned, the acute and seasonal cases ramp up, this opens a nice door for

Your next question comes from the line of Andrea Alfonso from UBS. Your line is open.

Hi. Good morning, everyone. Thank you so much for taking my question. I did want to switch gears a little bit to sort of asking about how the early launch of Credelio Quattro is going so far. In the prepared remarks, you identified that legacy products were sourcing low cannibalization within the portfolio. So curious about just the color of the initial momentum. If you can frame maybe the commercialization strategy, what might be different this time around, as well as appetite for partnering with retailers. And I did have a follow-up question after that.

Yeah. Thank you, Andrea. Great question. Yeah. It’s really early days with Quattro, but we're excited. We've got the product in the market, we're shipping, there's orders. Nice launch at VMX. We'll be at Western Vet next week and things are moving nicely. I think a few things resonated early. There's no question. I think three dimensions of differentiation and they all resonate differently with different vets. I think the first is, I would just say, speed to tick kill is what we're seeing. If you look at the Credelio franchise growth last year overall, globally, I mean, this technical data and speed to tick kill has really had a nice impact with veterinarians. We've got a lot of uptake on an interest on the tapeworm and the broad coverage and then the heartworm coverage on month one. So three dimensions of differentiation. I think that we plan to take an aggressive approach on DTC. We see this as a little less involved pet owner category. So you need to get the pet owner involved. And so we spent a lot of time on our multimedia DTC approach. We brought in a lot of expertise to ensure that we can really resonate with pet owners going into this year. And yes, we will take an omni-channel approach as we have with others. And I think we're as best equipped with our Bayer capabilities to be able to do that. And I also think that the energy around

Great. Thanks. And just a separate question on -- just probing a little bit more into the Galliprant call out. Maybe if you can just discuss the dynamics of the surge there in the quarter. Is that entirely driven by switchers from another therapy versus those who are newer to therapy? And if you could just sort of speak to the durability of that 4Q trend persisting into 2025. Thanks so much, everyone.

Andrea, thanks for the question on Galliprant. It's always been a really strong product as it directly impacts the inflammation claim for osteoarthritis. The trend here in Q4 was positive for us as best quarter in a few for us on Galliprant and we're really leaning in just given the strong safety profile it has to address pain for the patients similar to what we saw from just the improvements in Europe. It's similar here in the U.S. as well. And again, we're looking forward to Galliprant delivering in 2025 for pet parents across the U.S.

Your next question comes from the line of Erin Wright from Morgan Stanley. Your line is open.

Great. Thanks. A follow-up on derm. As you think about the competitive environment in derm, do you anticipate new competitors in 2025? Is that embedded in your guidance at this point? And just how can you better leverage that, I guess expanding portfolio with the injectable product as well? Can you also remind us how differentiated the injectable IL-31 product will be? Thanks.

Yeah. We're not seeing anything, Erin, different on the competitive front than I think what everyone else sees and it is assumed in our guidance. So competition is a headwind assumed in the guidance. We continue to see though the robustness of the growing market is exciting for us in the U.S. and globally. The unmet need, the number of untreated dogs that are out there and the opportunity that we see with

Okay. Thanks. And then can you speak to the sequential progression for margins here and the cadence of some of those investments that you're making around the commercialization of new products and kind of how to think about sort of those stepped up investments, I guess in the first half? Thanks.

Certainly, Erin, we appreciate the question. As we called out in the prepared remarks, we do expect to have less EBITDA on a percentage basis in the first half of '25 than we've had the last couple of years, that's driven by two things primarily. The first is the investment we're making to really drive this adoption and launch curve for both Credelio Quattro, as well as

Your next question comes from the line of Balaji Prasad from Barclays. Your line is open.

Hi. Good morning, and two questions from me. Firstly, a follow through on IL-31. So is 2025 -- are we going to only see an approval or if I read through your lines in January where you said that it's coming in 2025, should we also expect a launch or is there a meaningful gap between approval to launch? That's one. Two, poultry, a pretty important segment, organic growth rate declined here. Could you maybe then comment on the broader poultry market, the drivers and the wins that we see here and any major innovations or changes that we can expect to see in the segment in the near future? Thank you.

Thanks, Balaji. Yeah, on the IL-31, we expect again a Q4 '25 approval. We don't have sales or launch planned. We will continue to have a nice efficient from launch to -- or approval to launch timing. But again, that is not in our '25 plans at this time. On the poultry market continues to be durable, global, probably the protein that is the most durable. We've seen nice low-single digit growth last year in the marketplace. We've continued to have -- we've got no question some poultry rotations that happen market-to-market, that may change. But when we step back and look at our market share, look at our portfolios and our growth, it continues to be a very strong market for Elanco that we have a leadership position in. We now are number one in the U.S. poultry market as well. And we see that market -- the current prediction is about 3%, continues to be one of the best economical, environmental and even from a religious standpoint, freer market for the overall protein. So we like our position and like our portfolio going forward.

Your next question comes from the line of Umer Raffat from Evercore ISI. Your line is open.

Hey, guys. This is Mike DiFiore in for Umer. Thanks so much for taking my question. Two for me. I just want to dig in more on Quattro and the whole concept of cannibalization. I think you touched on this slightly before, but in terms of the omni-channel strategy here, any specific strategy here in terms of your channel approach that could be done to mitigate cannibalization? And my second question in regards to tariffs, just -- and I may have missed this, but any effect on input costs and overall supply chain dynamics expected due to potential tariff wars? Thank you.

Yeah, Mike. I'll anchor back just to the notional difference. When you look at this $3.9 billion market, we've got about $300 million of parasiticides in the U.S. in this marketplace, so we notionally are smaller. And we've seen as we're tracking the early uptake of Quattro, less cannibalization relative to other broad spectrum products that have come into the marketplace. I think the differentiation is driving that. I'm not sure from an omni-channel standpoint, this is definitely going to be focused initially on the vet clinic and activating pet owners to get into the vet clinic to leverage that. It's already online on the key kind of omni-channel options like our competitors. So access will not be a problem. But if I had to point to one thing I think now is we're not as concerned about cannibalization. We haven't seen any trend early to be concerned about that. It's all about activating pet owners to move and have an interest in Quattro. And that's where our focus is and that's where our investment is and why it's quite sizable that Todd mentioned. Todd?

Yeah. And then, Mike, on the tariffs, we're very focused on the global dynamics that are out there today. The only tariffs that are currently impacted are the 10% additional in China. We factored that into our guidance for 2025. It's about a $3 million to $4 million impact on our cost of goods sold in 2025 based on just the timing of when those products would hit into the products that we sell and recognize revenue on. We're continuing to look and make sure we're aware of the future tariffs that may come into play. Mexico and Canada are not big players for us from a manufacturing standpoint. So if those are reintroduced later this month, that will have less of an impact. So again, we're very focused on the global macro and the tariff impact on the dollar seems to be the place where we've had the bigger headwinds as we called out today relative to November.

Your next question comes from the line of Chris Scott from JPMorgan. Your line is open.

Hi. Great. Thanks so much. Just a couple of questions for me. Maybe just on the margin dynamics over time. Can you just talk a little bit about as we look beyond '25, how we should think about the cadence of gross margin and operating margin improvement for the business? I guess some of the kind of the headwinds from this year on the gross margin side, you kind of fade away and you leverage some of this OpEx investment. Just trying to get a sense of like how quickly should we think about those margins stepping up over time? And then my second question was just on Bovaer and just a little bit more color about -- how to think about that launch curve, and maybe compare and contrast a little bit of what -- how you're thinking about that relative to what we saw with Experior? Thank you.

Sure, Chris. On the margin side, we do expect to have better margins going forward from an improvement standpoint. The big headwind we've got this year is the reacquisition of the Speke manufacturing facility in the UK. As we called out in November that's a $25 million to $35 million headwind on gross margin. We bought that because of the $160 million to $180 million Farm Animal revenue that comes with it. And from the standpoint of the cost to maintain that revenue, it's a very good return on our capital, but it does have a percentage impact on gross margin. With respect to the operating margins, again, that's where we are investing behind these launches. The innovation portfolio is accretive to our overall corporate gross margins and we expect that to play out over the next two to three years as we make these initial investments to get higher peak revenues in later years. So we do expect subject to no surprises on tariffs to increase EBITDA faster than revenue in '26 and beyond. But again, we continue to be focused on delivering the 2025 and setting ourselves up for the longer term margin expansion opportunities. I'll let Jeff address Bovaer.

Yeah. Thanks, Chris. The question on Bovaer. First of all, I want to just highlight that this is very much of an economic-driven initiative from Elanco. We believe it's critical for Bovaer. And if we look at the milestones in '24 that matter, that will drive this question you have on-ramp is one, we had to create a carbon market. We proved that in the fourth quarter with CPG companies actually contributing $10 million that went through for the Rumensin use to actually dairy farmers. And then the two nodes that need to have the demand we see. One is farmers getting that additive money from really a carbon check from the CPG companies. That demand -- we have farmer demand very high with now 1 million cows with the UpLook system and we've signed numerous CPG contracts that want to buy the carbon. So the two nodes of value are locked in. So now what's going to drive the ramping is going to be in-field implementation. In between a CPG company and the farm is a co-op, a dairy processor, and feed mills and every state is a little different. So we're doing what we do best in farm animal, which is kind of in-field implementation in between and that's what will drive the ramp. I believe it will be similar to Experior in terms of as operations come on, it will become sticky once you get something into a feeding program like we've seen with Experior, it's positive. People will be demonstrated the value by our teams with our systems that will make it sticky as well. And then more use by the big high profile dairies will start to create an increased demand that will speed that adoption. But again, I think it will be a little bit more second half, and as we said, positive but measured ramp through 2025, but I do believe a resilient one and a sticky one once we get there. And again, we're creating this market. It is a new market, which is a real opportunity for us here.

Your next question comes from the line of David Westenberg from Piper Sandler. Your line is open.

Hi. Thanks for taking the question. We're up on the hour, so I'll ask both my questions upfront. So just in 2023 during the launch of NexGard PLUS, we did see multiple competitors discounting in anticipation of launch. Are you seeing anything like that now? And if so, why is the dynamic here different? Is it maybe because the one NexGard used to be like the -- still was like kind of more leading product whereas you're playing, not necessarily from a same market share standpoint? And then just the same thing on Galliprant. If you look at Rimadyl, you've had some starts and softs in the incoming of competition. Is this here really an acceleration point in Tylan[ph] maybe the next competitive launch? Just looking at that in history. And then my second question here is on the biologics manufacturing. You called out 225, 250. I'm not asking for specifics on the pipeline here, but do you think you can have some first-to-market products in biologics in say 2027, 2030 kind of timeframe because that is a lot of investment into biologics manufacturing? Sorry, that's a lot of questions.

Yeah, David. Just on Quattro, we see, again, I think the whole market dynamic of this is the fastest-growing market. It's growing between 40% and 50%, the broad spectrum. I think that growth is maybe we are not seeing the price dynamic that you mentioned. We are pricing to parity to that marketplace, offering incentives to get into the market to drive first time use, but so we're not seeing that. And I think a lot of that is just because of the actual market growth and the size dynamic. And we, again, I think to Todd's point on Galliprant, we continue to see this as an in home safe option that creates -- I think our differentiation has grown over the last year and that's what is representative and we'll continue to stand behind that brand and really push because pain is going to be a long-term play for us.

Yeah. And David, with respect to the manufacturing, as we called out previously, the investment for the monoclonal facility in Kansas is $130 million spread over both of 2024, 2025 and a little bit into 2026. We're also expanding in France for our oral solid dose. That's really for the Credelio franchise as we see the nice opportunity with Credelio Quattro while continuing to have good growth with Credelio Cat, Credelio Plus as well as the maintenance of Interceptor Plus. And then we're also needing to expand our vaccine capacity in Iowa. Our Prevacent vaccine for PRRS in swine continues to be a growth driver for us both in the U.S. and internationally. And so there's a number of different facilities we're expanding right now, all driven by continued revenue growth and demand for these products across the globe. So it's not just biologics, but certainly, we are excited by the next wave of biologics that Ellen and her team are working on inside the R&D investments.

And that concludes our question-and-answer session. I will now turn the call back over to Jeff Simmons for closing remarks.

Yes. Thank you, everybody. And I want to thank our customers around the world, just the vets, farmers, and pet owners. It's an honor to be able to do business and add value to animal health that continues to be more relevant to society than ever. Thanks to the Elanco team for the loyalty, the engagement, but most importantly, just the determination to execute. Elanco enters 2025 with a lot of momentum as I opened up with. We've kept it real simple and we're going to continue to this year like we did last year. It's all about growth, innovation, and cash, that's what's going to drive an increased value proposition that we already see happening, growth accelerating. We're guiding 4% to 6% on the top line on a constant currency basis, 1% to 5% on the bottom line. The six blockbusters, our confidence is rising and has grown since November as we've raised the guidance. And on cash, it's as Todd mentioned, it's really become cultural in our company and we're all incented to continue to drive free cash flow conversion and debt paydown. Yes. There is a volatile environment, but we've got a durable company. We're controlling the controllables and we're going to continue to keep this company growing. Our value proposition is increasing to our customers and we believe that will drive an increasing value proposition and investment thesis to you and your investments. And thank you for your investments in our company, and we look forward to working with you in 2025.