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Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now hand the call over to Tiffany Kanaga, Vice President of Investor Relations and ESG. You may begin the conference.

Good morning. Thank you for joining us for Elanco Animal Health's Third Quarter 2025 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; Bob VanHimbergen, 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 discussed 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 statements. 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. References to organic performance exclude the estimated impact of the aqua business which was divested July 9, 2024, and certain royalty and milestone rights that were sold to a third party in May [Technical Difficulty]. 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's strong third quarter results build on our consistent priorities of growth, innovation and cash. As highlighted on Slide 4, Elanco continues to deliver, growing 9% organic constant currency in the quarter and outperforming the high end of our guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by U.S. Farm up 20% and U.S. pet health up 9%. This marks 9 consecutive quarters of underlying total growth and our highest quality of growth in the 9 quarters. Innovation continues to exceed expectations, achieving $655 million in year-to-date revenue. We are further raising our full year expectations by an additional $100 million at the midpoint to $840 million to $880 million. The consistent outperformance reflects broad-based momentum from our diverse basket of innovation across geographies, species, and products large and small. The portfolio benefits of our newer products are also driving more stability in our base business. Our strong focus on cash and operational execution improved our net leverage ratio faster than planned to 3.7x at quarter-end. We now expect to end the year at 3.7x to 3.8x. Additionally, we refinanced our $2.1 billion Term Loan B facility, extending the maturities through 2032. We expect our balance sheet to be in a strong position as we exit 2025. On tariffs, our intervention actions, FX tailwinds and year-to-date execution are mitigating potential impacts and risks. We continue to expect a 2025 net impact of $10 million to $14 million and believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent outperformance, we are well positioned to raise our top and bottom-line outlook. For the full year, we now expect organic constant currency growth of 6% to 6.5%, adjusted EBITDA of $880 million to $900 million and adjusted EPS of $0.91 to $0.94. This guidance raise considers the dynamic macro environment and our confidence in the underlying momentum, agility and strength of our business. We are turning strategy into results providing a long runway for shareholder value creation. Looking at the third quarter revenue performance on Slide 5, we break down the 9% underlying organic constant currency revenue growth. This chart demonstrates strength across our global business with all 4 quadrants growing nicely. U.S. pet health had another solid quarter, up 9%. We saw growth in the vet clinic driven by Credelio Quattro and

Thank you, Jeff, and good morning, everyone. I will focus my comments on adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in reported results. Starting on Slide 10, we delivered $1.137 billion of revenue, representing an increase of 10% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume. As anticipated and as Jeff noted, price was flat in the quarter. On Slide 11, you'll see revenue by the 4 quadrants of our business. Globally, pet health revenue increased 8% in constant currency in the third quarter. In the U.S., pet health delivered 9% growth, driven by demand for our key innovation products, Credelio Quattro and

Thanks, Bob. Elanco knows our charge, consistent, reliable delivery to our customers and shareholders. and I'd like to thank our teams for the disciplined execution and the delivery this quarter. Employee engagement is at a high in Elanco, which I believe is a strong leading indicator, demonstrating confidence in our future. We know the hard work continues in this competitive fast-growing animal health industry and we are committed to continue to deliver for our customers. I see a durable path forward. our IPP strategy is driving results, positioning us well to raise our 2025 guidance even in a dynamic global backdrop. Elanco is clearly in a new era of growth and innovation, with significant opportunity for continued shareholder value creation. We look forward to sharing more on our strategy, our financial outlook and our innovation pipeline at our December 9 Investor Day. 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. [Operator Instructions] Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

[Operator Instructions] Our first question comes from the line of Umer Raffat from Evercore.

Congrats on the quarter. I wanted to clarify something, Jeff, you mentioned, unless I heard it wrong, did you say Quattro did $100 million in 3Q? And if so, what does that mean for innovation basket ex Quattro on a year-over-year basis? And then secondly, to the extent Quattro is annualizing in that $300 million to $400 million range right now, what do you see as a realistic peak sales potential? I guess, thinking out loud, why can or can't it be $1 billion at peak?

Thanks, Umer. I appreciate the question. Yes, let me clarify. We announced in September that it had reached $100 million in the year up till September. So it wasn't in the third quarter. Let me clarify that. But let me put a little color though, to the question. There's no question, we believe that this is our fastest blockbuster to date. It's only in one country and to reach that in 8 months. I think it shows a lot about the value of the differentiation of the product. A little bit more color just on the product itself. I think the differentiation is playing out in the field as well as we're not only taking share, but the broad spectrum endecto market continues to grow. It's a $1.4 billion market Umer. It's growing at 40%. So we've got the rise of the market combined with the share that we're taking. And we're only in 1/3 of the clinics at this point in time. So we're adding business inside the clinics we have with a return rate of over 80% of reorder rate. And at the same time, we're seeing really positive indicators. And the one I'd point to is actually the Kynetec data on the puppy index. I mean, today, we've got the highest puppy share overall. And when you look at that, that means that puppies are a higher percentage of our total Quattro patients compared to any competition. And this is a lead indicator of the vets confidence in this product and that this product, I've said, has been best medicine. I now believe it has the potential. And in my eyes, it is the best-in-class product and the fastest-growing animal health market. So it's set up well. There's a lot more room to grow. We'll be globalizing this product with international approvals next year. And we see really, really nice upward opportunity.

Our next question comes from the line of Jon Block from Stifel.

Jeff, I'm going to start with maybe just asking for a little bit more color on the U.S.

Yes, Jon. I'll point to the 3 markets that we introduced this product into first outside of the U.S., Japan, Canada and Brazil, I highlight kind of new data here showing that we're a double-digit market share in those markets. In my 36 years in animal health, I've never seen a product with the efficacy profile and the testimonials that we've seen over the last year with

Yes. No, that was great color. And then maybe for the follow-up, and Bob, this might be for you. But the 2025 EBITDA guidance, the midpoint is now $890 million, it's up from the initial. I think I got this right, of $850 million. But importantly, that's with a good amount of incremental OpEx investments all throughout 2025 along the way. So I'm curious where you guys are with those incremental OpEx investments. How do we think about that going into '26? In other words, does that continue to occur? Because maybe this is just a moving target. In other words, as you continue to see favorable returns do you just sort of keep your foot on the gas. So just maybe asking for some context in that regard.

Sure. Yes, Jon, thanks for the question. Yes. So you're absolutely right. Our previous guidance had a range on EBITDA of $850 million to $890 million. And so we did range -- or did provide an updated range of $880 million to $900 million. So we did raise the guide at the midpoint, fueled by the $28 million beat in Q3. And again, I want to highlight it was in my prepared remarks, but that did include $8 million of foreign exchange with the other $7 million of FX coming in Q4. But then the 2 offsets, one is $10 million of incremental OpEx. And it's continuing down this no-regrets approach to launches. We've been extremely pleased with the innovation basket, raising that bar by another $100 million. And we're going to continue to use a data-driven approach with DTC and continue to drive that top line. And I have the opportunity to meet with the team again here recently and the data suggesting our marketing is working, and we're seeing that top line growth. So as I think about 2026, Jon, listen, we're still going to use data to drive the right behaviors and again, continue that no regrets approach. But with that being said, I do -- we do see 2026 to show top line growth, EBITDA growth and EPS growing and it's because of the strong market fundamentals we have, and our products are performing extremely well.

Our next question comes from the line of Andrea Alfonso from UBS.

Congrats on a nice quarter. Just a quick question on the slide outlining the early considerations for '26. We did notice that there was a call out on consumer macro pressure and U.S. debt visit declines. It seems to be a bit of a newer call out versus when you outlined considerations for 2025 a year ago. So just curious if anything has changed structurally in 3Q versus 2Q, thoughts on the makeup of the non-wellness visits and whether there's been some consumer reticence around the use of therapies. And it also does seem that third-party data is showing some improvement, at least on the non-wellness side. So curious if that mirrors exactly what you're seeing thus far.

Yes. Maybe I can answer a few of those questions. Andrea, and I'll let Jeff pipe in. But really, nothing's changed quarter-over-quarter with our considerations. We are taking a grounded and disciplined approach to guidance, and so we'll be consistent in how we guide. And so just being consistent with prior years, we're showing early considerations. And obviously, competition is something that we have our eyes on and feel very good about where we are for 2025, but we're taking a balanced approach. And obviously reflecting on not only competition, but the macro environment as we think about next year.

And let me pick up, Andrea, I think it's important to just give our lens on vet visits. They're important. They are stabilizing. But I want to let you -- let me explain a little bit of, we believe, through our lens, vet visits are maybe a little bit over-indexed. And so -- and we are, we believe, insulated from them even more so going forward. And let me just explain. I think it's the strength of the markets that we play in and the strength of our strategy. First, we're in strong growing markets. I think these are very important points. We're in strong growing markets, endecto is up 40%, derm is up 13%. Second, we've got differentiated innovation, best medicine in these. So we're taking share with

Our next question comes from the line of Michael Ryskin from Bank of America.

Great. Congrats on the quarter and the update. I want to go back to something I think that Jon touched on in an earlier question on the margins and just sort of the investments needed to sustain it, especially around the innovation component. I think you've seen really good traction with Credelio Quattro, obviously, so far,

Yes, Michael, let me just share a few comments here relative to this and then I'll maybe have Bob share a little bit from an investment perspective. But yes, the no regrets approach, we've been working on this for multiple years and preparing the capability, hiring the expertise from around the industry, making sure we've got good lead indicator data for the legs in the industry, and now we're globalizing faster than we ever have. So I start with the differentiation is significant. And even as we start to enter a derm market in Europe that's very competitive, the early signs are that we've got a differentiated product. We've got launch capabilities that are, we think, close to best in industry and all of that's going to allow us to say, "Hey, we globalize the innovation. We really, really doubled down on showing the differentiation. We are in growing markets." I think that's the other thing. As you look at derm continues to expand, as we pointed to, just we've got 18% of

Yes. So thanks, Jeff. So listen, I would highlight that this basket of innovation already has margins above our corporate gross margins, all right? So that's the reason we continue to lean in. And again, using data to support the effectiveness of our DTC. But as I think maybe just holistically about margins, we're going to continue to see growth. And so by leveraging our existing cost base, we're going to see natural margins come through just the volume as well as the natural mix. And then I want to again rehighlight what we talked about last quarter is launching Elanco Ascend. And that's going to help us go beyond just the natural mix benefits of the innovation as well as the volumes. But really helping us be proactive in accelerating efficiencies across the organization, and that's going to be not only within our 4 walls and manufacturing facilities. It's going to include G&A, but also our procurement team is doing a fantastic job already leaning in and finding cost savings across the organization. So with that being said, like listen on Investor Day here in a month, really looking forward to sharing more about the direction of the company and sharing a lot more on Elanco Ascend.

All right. And can I squeeze in a quick follow-up. Really strong growth in livestock, not just this quarter in farm animal, but a couple of quarters in a row. You've also seen really strong results from

Yes, Michael, I think as you and I've talked in the past, it's probably one of the more underappreciated things about Elanco and even our industry, farm animal is still bigger than pet health. It is a very global industry. I would just point to a few things on the industry and then on Elanco. We continue to see the demand for protein growing. I mean it has rebounded. I say lead indicators, the U.S. dairy industry is now well over $10 billion of investment just because of this trend of where things are, and we're looking for a new dietary guideline coming out here in the U.S. that I think is going to increase saturated fats, dairy and animal protein. So there is a resurgence. I was on the phone yesterday with one of the largest CEOs and he -- and they're seeing it globally, and they're expanding globally. So I think overall, that is part of it. And look, when it comes to whether it's [ biles ] and prevention of disease to food safety, to productivity, to a small cattle herd of 50 years in history, producers are making money, but producers are willing to spend because every pound of protein matters more today than ever it has. So I think that's important. And we point to ruminates, dairy and beef, and we point to poultry is where we think we can take competitive advantage. And our strategy has been clear, and we will have José Manuel de Simas and Ramiro, 2 of the best, I think, in the industry highlight this 4-pronged strategy. It's innovation, it's winning portfolios. It is value beyond product and that it is competitive kind of customer interface, that farm gate access and that strategy is playing out well. It isn't just about Experior. That's been a key driver. It's been about building winning portfolios, especially in ruminants and in poultry, and we'll share more about that on -- in December.

Our next question comes from the line of Erin Wright from Morgan Stanley.

This is Linda Bolduc on for Erin Wright. So given some recent competitive launches in [indiscernible] and parasiticides, any thoughts on how it has evolved for the company in third quarter and into fourth quarter to date? Also, any thoughts on how much competition has been embedded in the latest guide? And will that amount ramp significantly in 2026?

Yes. We have the competition in our guidance ranges for 2025, and we've got a good view on it for 2026. And specific to the para market, as I've highlighted, we've not seen any impact on competitive entries and especially the broad-spectrum endecto market that's grown 40%. We've really observed also no real material impact on new para competitors, even in the international markets. So I think in the lane that we are competing in, we see a very strong marketplace. And then again, our differentiated portfolio is allowing us to take share.

That's great. And any additional color for the topics covered in the upcoming Investor Day in addition to Elanco Ascend?

Yes. We have -- thank you for the question. We've actually reached out to our investors when -- and really, what we're planning to do is really the content will reflect the investor feedback. So we heard your desire to get more clarity, as Bob just highlighted on our growth trajectory. Also on the margin improvement and Elanco Ascend opportunity, you'll see aspects of our pipeline and also our leverage reduction plan. So we'll really double down on our IPP strategy. And most importantly to me is you'll be able to have a chance to meet and hear that directly from the executive team. So again, December 9 in New York City and looking forward to a real efficient high-value 3 hours between 9 and 12.

Our next question comes from the line of Daniel Clark from Leerink Partners.

I wanted to ask on the innovation sales, obviously, target up a fair amount once again here. Can you just help break out maybe what the drivers or main products of that guide increase were? And how should we think about growth of the innovation basket as we look ahead to next year?

Yes. So thanks for the question. So again, we're really pleased with what we've seen already on the basket of innovation. We did raise the guide as $100 million, as Jeff has highlighted. I do want to highlight a bit on timing, right? So as you think about the first half of the year. We are more weighted just due to the seasonality of the business with parasiticides more weighted in the first half. And AdTab specifically in Europe is a first half-weighted product we have. But we think about this as a basket. Now, that being said, I'd tell you, in the year, we're seeing great progress with Experior, AdTab, Credelio and

Our next question comes from the line of Chris Schott from JPMorgan.

This is Ekaterina on for Chris. Congrats on the quarter. So first question is just on

Yes. Thank you. Yes, we have launched in Europe and Great Britain, and its still early days. But what I would say is we are ahead of our launch expectations. We're off to a very fast start. And I think the headline is the head-to-head non-inferiority study that we actually did compared to the incumbent is playing out in the marketplace. I mean, we're using that data with customers, and we're seeing that in the testimonials early on that this is a product that we believe, has really strong efficacy profile as well as the convenience and value overall. But that's the early days playing out. And as I said, the earlier markets, I would point to Japan, Brazil and Canada, we've seen us move now into double-digit market share. So -- and again, those trends are continuing. We'll keep you updated. Relative to Quattro, as I highlighted earlier, on Quattro, you've got a really growing market in the U.S. We've seen, as I just highlighted, a move to get to $100 million in less than 8 months in one country is the fastest blockbuster we've seen with a whole lot more runway. We're adding close to 2,000 clinics per quarter. And I would just say that when we look at the -- where it's coming from, we're getting about 75% of our growth from switches from competition, new starts and repeat patients, and I'll point again to that puppy index to really highlight that is a great lead indicator for us to say we've got a nice runway of growth. And then we will see this profile, we think, play very nicely in the international markets. Yes, we have Credelio Plus. But now when we put Quattro into these markets, we believe that international will be a nice move also for 2026 growth in para with Quattro as well.

Our next question comes from the line of Brandon Vazquez from William Blair.

I'll ask 2 upfront, a little bit related in terms of run rates into next year into 2026. So you were talking earlier about OpEx growth and no regrets kind of investment, which clearly has been coming to fruition within the sales growth. and even, frankly, within profitability growth. The question being, I think you said expectations are now for 10% OpEx growth for the year. As we go into 2026. Is there a tail on some of these investments? Or should we be basing around kind of a double-digit OpEx growth into next year as well? Basically asking, can you modulate those back? And then similarly, for '26 on the top line, the follow-up that I'll just ask now is you give a helpful slide on the tailwinds and the headwinds going into next year. I think encouragingly, this is the first year in a while that there's a lot more tailwinds than there are headwinds. So is it safe to assume that we should be modeling, I think like the Street has an acceleration of the business into 2026.

Yes. So maybe I'll give you just a couple of points for consideration there. So the 10% is really for the quarter, not for the year. But again, we'll be focusing on data to drive decisions on investments. But -- the thing I would highlight again is the Elanco Ascend. We are going to be operationally excellent in G&A. And you could actually look at our 10-Q, you can see the effectiveness we've had on G&A, it's actually down year-over-year, but we've been leaning into R&D and DTC and marketing spend. And so I would expect that trend to continue and us continue to be operationally excellent with Ascend coming in. But again, on your point on 2026 tailwinds and headwinds, listen, we have a strong -- we're operating in a strong market. Our products are performing extremely well. We have momentum going into 2026. And so again, as we sit here today, we believe we're going to have top line growth, EBITDA growth and EPS growing.

Our next question comes from the line of Navann Ty from BNP Paribas.

Can you discuss the pricing and promotional strategy of

Yes. Thank you, Navann. Yes, our -- in the U.S. with

Our last question comes from the line of Andrew Dusing from Cleveland Research.

Just want to ask 2 quick, I'll ask them upfront. On pricing, I thought that was called out for a driver for '26, and I don't want to get too far ahead of the guide. But maybe I wanted to dig in specifically on your thoughts on the pet side of things. I think the industry the last couple of years has seen pet pricing up in the 3% to 4% range. I think you look at this year with Elanco, it's probably closer to 1.5%, if my math is right, strategically. I guess as we think about Elanco for FY '26. Can you guys get into that like normal range? Or should we even think there's potential to be above it when you throw in the innovation, lapping some of the launch promos. Any commentary on pushes and pulls or directionally, what we should think about pet health pricing would be helpful. And then on

Yes. So I'll take that first one here. Just a couple of tidbits on price. And so our strategy is to continue to align price with customer value. But what's an important factor to remember, Andrew, is that our launches are excluded from our pricing calculation. So Quattro and

Yes. And Andrew, on

Thank you. I will now turn the call over back to our CEO, Jeff Simmons for closing remarks.

Yes. Thank you, everybody, for your time. As you see, we've entered Elanco into a new era of growth and innovation, built on 9 quarters, more than 2 years of consistent reliable delivery. Our basket of innovation is performing and beginning to globalize driving renewed opportunity in the full portfolio, while our R&D team is laser focused on delivering a consistent flow of high-impact innovation, so this will continue. Most importantly, our Elanco team is highly engaged and driven by creating value for our customers, and our vision to make life better. And I would just say we're turning strategy into results, and I want you to be assured that we're staying very disciplined and balanced as a company. We welcome being an execution and show me story and it is our intent to create long-term value for you as investors, not just this quarter but going forward into the rest of the decade. We look forward to seeing you all at our Investor Day on December 9. Thanks for your time today.