ELAN - NYSE

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

Good morning. Thank you for joining us for Elanco Animal Health's Fourth 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 2025. 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. 2025 was a year of significant delivery for Elanco across all three of our priorities: growth, innovation and cash. As highlighted on Slide 4, Elanco delivered a strong fourth quarter with 9% organic constant currency revenue growth. We outperformed the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by U.S. farm animal up 17% and U.S. pet health, up 10%. This now marks 10 consecutive quarters of underlying total growth. Revenue from innovation exceeded expectations in 2025 at $892 million for the year as the fourth quarter was our largest quarter for innovation to date. We are raising our 2026 outlook for innovation to $1.15 billion, reflecting contributions across a broad set of geographies, species and products. Our continued focus on cash, combined with strong results, improved our net leverage ratio faster than planned to 3.6x at year-end. We now expect to finish 2026 at 3.1x to 3.3x. With our consistent execution, we are well positioned to introduce 2026 guidance in line with our longer-term algorithm. We expect full year organic constant currency revenue growth of 4% to 6%, adjusted EBITDA of $955 million to $985 million, representing growth of 8% at the midpoint and adjusted EPS of $1 to $1.06, representing growth of 10% at the midpoint. This guidance continues our prudent, balanced approach in a dynamic macro environment. On Slide 5, let me ground today's discussion and accountability and transparency by sharing a checklist for the year in review. Elanco delivered across our full set of 2025 commitments to our customers and our shareholders. We have entered our new era of growth with a track record of consistent execution. Innovation revenue cleared a bar that was raised each quarter in 2025. We brought the entire [ big six ] across the finish line with [ Befrena's ] December approval. This is a real testament to the optimized innovation engine that [ Ellen's ] team has built over the past few years. Organic constant currency revenue growth reached 7% for the full year. with balanced contributions across species and geographies as well as between volume and price. 2025 revenue, adjusted EBITDA and adjusted EPS all exceeded last February's expectations with steady outperformance throughout the year. And we delevered about 0.5 turn faster than expected, while also refinancing our Term Loan B ahead of schedule. Team Elanco, I want to extend my gratitude for an incredible year. Your level of engagement and execution has never been higher while you're unwavering dedication to transforming animal care has truly shown. Looking more closely at the fourth quarter revenue performance on Slide 6, and we break down the 9% underlying organic constant currency revenue growth. This chart demonstrates strength across our global business with all four quadrants growing nicely. U.S. Pet Health had a robust quarter, up 10%. Credelio Quattro and

Thank you, Jeff, and good morning, everyone. I will 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. Starting on Slide 11. We delivered $1.14 billion of revenue in the fourth quarter, representing an increase of 12% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume with price contributing. Slide 12 provides revenue by the four quadrants of our business. Globally, Pet Health revenue grew 9% in constant currency during the fourth quarter. U.S. performance delivered 10% growth, driven by demand for our key innovation products Credelio Quattro and

Thanks, Bob. Before we move to Q&A, I want to reiterate my deep confidence in Elanco's trajectory. We are not just a company delivering results with significant momentum for also a dedicated team. building a durable long-term foundation for the future of Animal Health. On Slide 22, you will see that this is more than a story about Elanco's compelling growth proposition. It's about the accelerating opportunity across the broader animal health industry and our ability to lead it. It's about having the best of pharma with science-based innovation, disciplined regulation and high barriers to entry. This, combined with strong customer relationships built on trusted brands and a cash market that responds to growing value propositions from winning portfolios. It's about generational shifts in both pet health and farm animal where pets and protein are increasingly central to culture, care and global demand. And together, it's about the animal health industry at an inflection point, projected to add $20 billion in value as we enter the next decade. With Elanco uniquely positioned to convert momentum across both pet and farm into sustainable, consistent growth. Simply, we will grow from both expanded market share and a growing industry. Let's take a closer look. In Pet Health on Slide 23, we're seeing a fundamental shift in pet care as owners take a more active role, choosing not only what products to use, but how and where they access care. While vet visit volumes remain a metric to track, the more powerful shift is in the global consumer behavior where access, convenience and willingness to spend are becoming more material and more meaningful. Today, subscription sales account for 40% of pet care dollars with omnichannel consumers spending 30% more annually than single channel shoppers. The pet owners behavior is changing. Our strategy is built around meeting the modern pet owners where, when and how they choose to engage. This unique omnichannel approach is core to our pet health strategy and is driving our industry-leading growth. Over on the farm animal side, on Slide 24, we're capitalizing on the accelerating global animal protein consumption, which is projected now to grow at 5% annually in the U.S. alone. There are several key factors driving the real food movement, fueled by consumer focus on health and wellness. First, 70% of U.S. consumers are actively increasing protein intake. Second, updated dietary guidelines now recommend nearly doubling current average protein use. Also, by 2035, 21% of Americans are projected to use GLP-1 therapies who will consume 40% to 50% more protein, and this trend is now globalizing. Increasing protein intake is a key also for mule retention with an aging population. The number of people over 60 is expected to expand by more than 25% globally by 2030. And finally, taste still drives 2/3 of protein choices, making animal protein the most accessible, cost-effective preference. Strong demand for high-quality protein presents significant opportunities for Elanco and our customers, both in the near and long term. To close on Slide 25, our strategic focus on growth, innovation and cash is clearly paying off, demonstrated by our strong performance in 2025 and the robust outlook for 2026 and beyond. Elanco is a different company today, more agile, more innovative, more capable than ever before. We are building on our 70-year legacy of delivering for our customers, and we come into 2026, entering our new era of growth, well positioned to continue transforming animal care and to create long-term value for our shareholders. Thank you. With that, I'm going to 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.

[Operator Instructions] Your first question today comes from the line of John Block from Stifel.

Is that really an international share gains really stood out to me and implies switching to

Yes. Thank you, John. Thanks for opening with maybe one of the most exciting things in the quarter.

Yes. And John, maybe I just maybe add on. Our guidance assumes the label as is right now.

Okay. That's helpful, Bob. And maybe I'll zoom out for the second question. Your the first industry leader to maybe be teed up for an earnings call post some of the news on the distributor side. So would love your thoughts on the [ Covetrus ] and [ MWI ] merger and what that may mean for manufacturers. And more specifically, Elanco as I believe you guys have a solid, broad relationship with [ Covetrus ], but it's certainly a lot of share going into the hands of [indiscernible]. So any thoughts would be great.

Yes. Thanks for the question. I have to start with the '25 momentum and '26 early fast start. We've got a great relationship with distributors. We're adding them a lot of value, and they're adding us a lot of value right now. The major distributors. You know they're very good at launching new products. And we're the only one -- today we have competitive advantage, I believe, strongly, and you probably picked us up at [ VMX ], Western last week, there's a lot of momentum in those distributors with the Credelio Quattro, the

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

As on the results. I want to ask first on price. You guys called out accelerating price a number of times looking forward to 2026. I was wondering if you could quantify that a little bit more specifically. Just more broadly. In 2025, I think you had, we'd call it, introductory pricing or sort of initial go-to-market pricing for some of your products. For '26, is this just a matter of that being lifted and going more to a normal price? Are you taking the price more aggressively? Maybe you can just comment on how much of that is coming from the [ big six ] or the new products versus the rest of the portfolio? Then I've got a follow-up.

Sure, Michael. Thanks for the question. So a couple of points. One, I'll point you to Investor Day, right, where we did highlight we expect mid-single-digit growth, which does include price. As we think about 2026, we do expect price to accelerate from where we were in 2025. 2025 as a reminder, was at 2% and really, that's reflecting the enhanced value we're bringing with innovation and our comprehensive portfolio that we're bringing to customers. Jeff highlighted in his prepared remarks that in our U.S. Pet Health business here in the U.S., we took the highest price increase to vets in the last 5 years, all right? So we'll continue to price based on the value we're bringing to customers. I mean, the last thing I would highlight is you think about pricing in 2025, we had a lot of launches -- and those launches were not a contributor to price. We'll start lapping those in 2026. And so the

Okay. And you had some relate comments when you were talking about Quattro in terms of not just the strong results you've seen with that product itself, but sort of the uplift for the rest of the portfolio, the ability to use that to gain share for other products as you bring a more complete portfolio to your customers. Just wondering how you think about that continuing in '26 as

Yes. Thank you, Michael. Great question. Yes, Quattro had a great quarter, definitely acting like best medicine, only major animal health company gaining U.S. Rx para share, which I think is a real representation and our share continues to climb, as we not only come to the fourth quarter, but even here in the beginning of the year, and we're still seeing more than 75% being new starts. But I would point to a couple of things, specific number. We've got -- if you think about we're near 1/3 of the clinic, so 10,000-plus clinics, we got 2,600 that have actually by purchasing Quattro are now adding on additional products. So we're seeing that additive portfolio effect, I think, is definitely obvious. And we're seeing that confidence with the puppy index, as I mentioned, is it's climbing. It's the highest of all the major products, and it grew from Q3, and we're in the #1 position on that puppy index. So we see that. I would also point to corporates. As I mentioned, it's on the slide, but I didn't get into it in my commentary, that we actually saw corporates really move in on this portfolio effect. So 90% of our corporates, which grew significantly in number, all of them grew only 13% grew in 2024. And the European team has done a masterful job. We've got all the corporates on the

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

So can you speak to any stock destocking dynamics in the quarter or as we head into some of the seasonal purchasing from some of the distributors that typically happens in the first quarter. And one of your competitors, a very significant player in parasiticides historically is further deemphasizing, I think you alluded to this earlier, further deemphasizing distribution in 2026. I guess how much does that help your positioning in parasiticides, especially just continuing the conversion to combination parasiticide.

Thanks, Erin. Yes, and I know you've been engaged in some of the major industry shows. I'll just take the second question first, and that is that we see our relationship as good as it's ever been with distribution. They're adding a lot of value. and all the way down to the field force. They're working very much in collaboration with the largest sales force we've ever had in U.S. Pet Health ourselves. So our share of voice has never been stronger on Elanco with our team and with distribution as well and then the investment we're making in the media. Look, on stocking, it's real clear to us no change. We've got distributors ordering multiple times per quarter. There's a strong dispensing and you can see it, dispensing demand coming out of the clinics, the multiple orders going in, we don't see stocking having really any effect at all as we head into this spring.

And then can you give us an update specifically on the time line for the label update for

Yes. Thank you. Look, first of all, on the label, I just want to say, we are in a constructive dialogue with the FDA. They've made one adjustment to the labels. We mentioned we picked up 2,500 new users since then. I step back, Erin, as I just mentioned earlier, you've got 1 million dogs, 1.5 years of use, 40 countries with clean labels, strong pharmacovigilance data. We've submitted the PCR data before to get the first label change. And then this was a request from the [ CVM ] at the FDA on the booster data and the package that we submitted in the fall. We've not given a date, but we are confident with everything that I just mentioned that we believe with this data, it allows us to get a label that looks a lot more aligned with the other 40 countries, and we do look forward to an FDA response and we'll update you when that happens. Look, I think the story in Europe is it actually probably has profiled

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

Congrats on a strong end of the year here. I wanted to start for some of the guidance, maybe just push a little bit, just to understand if there's conservatism baked in here, if there's something we're missing because if I think of a price of 2 points in a volume of 5 points that gets you 7% growth in '25. We're talking about meaningfully more price coming through in 2026. And I don't think there's any reason that volume should meaningfully decelerate. So that algorithm already puts you above your initial 2026 guidance, the high end of that range. So again, like the question is, one, am I -- are we simply baking in some conservatism here? I want to make sure that we're not missing any big moving pieces that would meaningfully change that algorithm in the '26 guide.

So thanks for the question, Brandon. So listen, we feel great about the momentum that we've seen exiting 2025. And listen, our guidance is right in line with the framework we gave at Investor Day, so mid-single-digit top line growth, high single-digit EBITDA growth and low double-digit EPS growth. And again, we're going to be focusing on deleveraging and getting to that low 3s by the end of the year. But listen, we feel great about the basket of innovation. We feel great about Elanco Ascend coming in. But listen, there's -- we're also in an environment where we see higher than normal inflation. We're being responsive and cognizant of competitive response. And as we mentioned at Investor Day, we're going to take a wide range of potential headwinds and tailwinds and be transparent on that. But listen, we feel good about the 2026 guide we gave is also the long-term algorithm we gave as well. And then the last thing I would maybe just highlight when you're looking at just growth trends. Keep in mind, we are lapping some significant growth within that basket of innovation. Our basket of innovation grew $400 million in 2025, and we've -- we're growing that $250 million here with the recent uplift additional $50 million that Jeff highlighted.

Great. And then one maybe follow-up is a little bit of a bigger picture question on the commercial side. I think in the past, we've talked about trying to more meaningfully get into the corporate accounts, you need a broader portfolio of innovation. You certainly had a lot of good products coming out. You have more coming, where are you guys today in terms of maybe what inning are you in getting into those big corporate accounts to draw some of that big volume? Is there are any kind of like portfolio gas left that you need. I think in the past, we've maybe talked about vaccines as being one of those areas. What is the last that you may need to do for the corporates and what's the time lines to start making -- moving that forward a little more?

Yes. Thank you, Brandon. So yes, a great finish to the year, our best corporate year, and I know more than 5 years, we've got a dedicated team. We brought in some additional expertise from industry competitors, and it has been a very big focus point for Bobby and the team and [ Chris ], and so a real credit to them, probably some of the best metrics as we look at lead indicators. So we're seeing growth we're in most all the clinics here in the U.S. Befrena will be a big addition because you start to now say, "Hey, we've got everything that everyone else has and we believe they're differentiated". When you look at Befrena, having efficacy value and convenience differentiation, it last a minimum of 6 weeks. All of that's going to resonate really well. But I think our offers in our portfolio show that. And again, we see that in the results. Europe has been tremendous. I mean, to see I'm really surprised by how quickly we got

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

Just wanted to, I guess, first start with Quattro. The further gains via the kinetic index that you saw in the quarter, was that sort of in line with your expectations from a couple of months ago? Or was that incremental upside.

Well, I think it's, as we said, to see the jump we had in third quarter and then exceeded again in the fourth quarter. and being the leader in the puppy index, I always have looked with my many years in this industry, the Puppy Index is definitely where people are leaning in and saying, "Hey, this is this is the opportunity". And if I'm going to put you on a product, I'd like you to start on the best that's available today. And I think that's a real statement about Quattro, four active ingredients, four dimensions of differentiation. We've added palatability, which has really come out as a , we think that the fourth -- now dimension of differentiation. As I mentioned in my trends earlier, Daniel, I think the to comment around 70% of new puppies are in international markets, getting the Australia approval last week and starting the global approvals of Quattro will also be advantageous. So yes, good trends and a nice opportunity here with Quattro. And hey, this space grew 30% last year.

Great. Just a follow-up. I wanted to ask on your no-regrets policy and sort of leaning into launches that are going well think if they say a lot of your launches are going well at this point. So as we think about the ongoing duration of investing against those, how should we think about that kind of going forward here? Should we think continued launch support throughout 2026 and into '27 to keep the momentum up? Or like what are the different puts and takes you're thinking about on that front?

Yes, Daniel. So I would consider us applying the same no regrets approach in 2026 that we had in 2025, and that's not only Befrena, but also the launches we had in '25, right? And we're using data to determine, hey, are we getting the ROI on those investments. And so you do see OpEx, we did guide 7% OpEx growth in '26, and that's particularly associated with the no regrets approach to launches as well as funding R&D for the longer-term benefit of the company. But again, Elanco Ascend is extremely important, right? This is where Elanco Ascend coming in and ensuring that we are operationally excellent across our entire P&L that allows us to get to that high single-digit EBITDA commitment we've made while also funding R&D as well as the no regrets approach that we're taking with our products.

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

I have two, if I may. Perhaps, first, on gross margin, I thought I should dig into it a little more because if I step back and think about the $400 million plus in innovation growth in '25, I would have thought there would be a gross margin expansion. And the fact that it was flat almost suggests that the underlying business outside innovation deteriorated in gross margin. How do you think about that, especially because your guidance for '26 assumes about flattish on gross margin, best I can tell, even though the top line is akin to your first half '25 annualized, and we know first half '25 was almost 200-plus bps higher on gross margin.

Yes, Umer for the question. So as we think about just Q4 and I'll pivot into 2026 as well. So in Q4, we did see basis points of improvement in margins, and that was driven from price as well as sales volumes and mix benefits. But that's partially offset by inflationary pressures that we're seeing as well as the flow-through of higher cost of inventory that we've built up throughout the year. And so you'll see that, we saw some of that come out in Q4, and you'll see that come out in the first half of 2026. So as I look at 2026, first off, we're going to make the right decisions for the long-term success of the business, but we do expect gross margin expansion of 40 basis points year-over-year. Price is going to be a component of that. And again, we expect that price to accelerate from 2025. The basket of innovation, as you've highlighted, we do expect that to grow $250 million. That does carry higher margins than our corporate average. And then Elanco Ascend, we're seeing good benefits coming through that's just the progress that the global team is making on that. Now the one thing -- the one or two things I would look at is, one, we do have inflation that's above historical levels, and two, as I mentioned, we have this higher cost inventory flushing through in the first half of the year. And so you'll see our margins enhancing and accelerating throughout 2026. So the second half will be stronger than the first half. But long term, we feel confident in improving margins with the basket innovation, the volume leverage and then again, Elanco Ascend and proactively enhancing margins over the next 3 to 5 years.

Got it. And then also on the innovation guidance of about $250 million plus growth in considering Credelio franchise alone grew almost $137 million in '25. Is it reasonable to assume that half of '26 growth is Credelio franchise alone?

I think you're definitely seeing that, that was a major contributor, and I know some of the way you're thinking about Credelio Quattro I would build on Umer and say, we definitely are seeing that kind of a trajectory. We're not going to get into guiding by product, but no question, Quattro ends '25 with more momentum than we expected. International

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

Maybe first, if you could discuss your assumptions behind a stabilizing base business in 2026? And my second question is on the livestock business that also drove the Q4 beat. Can you discuss your outlook by species? And in particular, how long do you expect favorable cattle producer economics to last.

Yes. So on the base business, Navann, really right in line with what we committed back at Investor Day. So we're seeing low single digit to high single digit trend really since the last 3 quarters. We expect that as we move forward. It's going to -- it will pivot a bit quarter-by-quarter, but the basket of innovation is working and bringing in some of our base products. So we see this as a stable base as we look in 2026 as well as beyond that time frame.

And Navann, just real quick. I mean, great protein markets, as I mentioned, I think you're seeing U.S. projection 5%. These protein trends are real. Farm Animal is going to be a big contributor, I think, to the animal health growth we see in the next decade. If I break it down, cattle and beef, the low-supply, high-demand profitable markets. There is starting to make that turn on the rebuilding of the herd, but it's going to take some time. But that's advantageous for our portfolio. And then I'd just call out dairy. Dairy ended at 4.2% growth as an industry in Q4. We're excited about this [ AHV ] acquisition, leaning in. It's going to expand our portfolio and our share of voice. Dairy is the protein to watch. And poultries had 3 years at 3% growth, and they're projecting the same for the fourth year in a row.

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

I just want to come back to the derm market, maybe particularly on the international side. Can you just elaborate a little bit more on what you're seeing on market growth prior to your entry in the market? I'm just trying to get my hands around, are we seeing new competition accelerating the overall derm market beyond the share gains? Or is this really, again, more about share. So just any directional color there would be helpful. And then just my second question was on the 4% to 6% guide for 2026. Just is that -- should we think about that kind of evenly balanced between pet and farm? Or is it skewed one way or the other? I'm just trying to get any directional color there.

Yes, Chris, at a high level, yes, we saw coming into the data for fourth quarter is not in yet, but double-digit growth. what we're seeing in Europe, where there's just a lot more promotion, new starts continue to be anywhere in the 10% to 20%. So -- and then you've got in the international markets, as I just mentioned, 70% of the new puppies globally are in international. So I see a lot of trends and all this increased noise about, hey, solutions to a itching dog. It's a great market backdrop, and it's great for us as well as we come with

And then on your second one, Chris, generally speaking, I would assume it's balanced across the 4 quarters and generally balanced across Pat and farm throughout 2026. And again, at an Investor Day, we highlighted that farm business is generally mid-single-digit growth and then the pets probably mid-single digit plus.

And we have reached the end of our question-and-answer session. I will now turn the call back over to Jeff Simmons for closing remarks.

Yes. Thank you, everybody, for your interest in Elanco, historical year in 2025, but I want everyone to be assured that Elanco is -- the engagement and the execution has never been higher in the company. We take a balanced and prudent and very disciplined approach serving our customers as we head into 2026, and we're excited to engage with you going forward. Our priorities remain the same, and that's growth, innovation and cash, and we'll be assured that the continued delivery is our top priority for you as shareholders. Thank you for your interest in Elanco and your investment in Elanco. Look forward to working with you throughout 2026. Have a great day.