Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Elanco Animal Health Q4 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

[Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.

I would like to remind everyone that this conference call is being recorded, February 24, 2021. I will now turn the conference over to Tiffany Kanaga. Please go ahead, ma'am..

Good morning. Thank you for joining us for Elanco Animal Health fourth quarter 2020 earnings call. I'm Tiffany Kanaga, Head of Investor Relations. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Katy Grissom from Investor Relations.

As always, during this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions.

You can find our release, the slides referenced on this call and an investor workbook in the Investors section of elanco.com The slides and the press release also contain further information about the non-GAAP financial measures that we will discuss today during this call. After our prepared remarks, we will be happy to take your questions.

I will now turn the call over to Jeff to provide the highlights..

Thank you, Tiffany. Good morning, everyone. Before our results a quick statement on the year. 2020 was a historic year for the world and for Elanco as the COVID-19 pandemic shuttered businesses around the world, our Elanco essential workers in the labs and plants coupled pipeline and product flowing.

Our sales and technical team shifted to serve customers in innovative ways for a virtual and curbside world, supporting the surge in telemedicine and doorstep delivery.

Meanwhile, many of our functional experts doubled down on standing up Elanco systems, transitioning IT services from Lilly to our own and delivering our industry's largest acquisition on-time from their home offices. The Elanco team not only weathered the pandemic keeping our customers at the center, but they transformed our company along the way.

Listen, we started on our journey to create a purpose-driven company 15 years ago. And one of my biggest learnings from this past year 2020 is that strong vision and purpose to make a difference create a level of loyalty and determination that have never imagined.

The Elanco executive team and I have deep gratitude for all that our team accomplished in 2020 and to our customers who made it all possible. Now to our results, Elanco enters 2021 with strong momentum. Our fourth quarter revenue of $1.14 billion surpassed the high end of our guidance by $70 million.

as US pet health, US Farm Animal and China swine outperformed our expectations. Our adjusted EPS of $0.12 came in at the high end of our guidance range. Our revenue overachievement and gross margin leverage were offset by what were largely one-time in targeted investments driving OpEx above our guidance.

Our sales momentum and operational execution, as well as our pipeline launches year-to-date are reflected in our increased full year revenue, adjusted EBITDA and adjusted EPS guidance. Let me provide the highlights from the fourth quarter, before progressing to a more detailed review of our performance.

Our fourth quarter revenue reflects market share gains in our US Pet Health retail business, ongoing improvement from COVID-19 headwinds in US Farm Animal and a better-than-expected performance in China swine.

Importantly, we achieved further share gains in the US for many of our key Pet Health products compared to last year, including Credelio, Galliprant, Seresto, and the Advantage family.

Our buy-sell distributor strategy is working well, and continues to improve our commercial competitiveness with our channel inventory levels remaining consistent with prior quarters.

At the same time, our strengthened omni-channel capabilities provide unparalleled access to pet owners wherever they prefer purchase; at the veterinarian, through specialty, and mass retail or e-commerce. We are raising our 2021 revenue guidance to reflect intact fundamentals and our focus on execution.

For the year, we continue to forecast 3% to 4% underlying revenue growth from innovation and portfolio contributions. Building velocity, as we move past the most challenging comparisons in the first quarter. Increased revenue dollars are translating into higher than previously expected adjusted EBITDA and adjusted EPS as Todd will detail later.

We are on track for eight innovation launches in 2021 and have already recorded our first sales for Credelio Plus in Japan and Increxxa in Europe, with approval received for Increxxa in the US. We continue to expect innovation to contribute $80 million to $100 million in our 2021 revenue.

Over time, innovation will deliver consistent, dependable revenue with a balance of blockbusters and complementary portfolio solutions. Our fourth quarter adjusted gross margin of 52.7% was driven by positive mix benefit from US Pet Health revenue outperformance along with our continued progress on our M&Q productivity agenda.

We achieved adjusted EBITDA of $176 million above the high-end of guidance as well. However, our operating expenditures also exceeded guidance due to investments pressuring EPS by approximately $0.07.

This outlay, which was largely one-time and discretionary in nature backing important projects and our people, it can be divided into four categories that are roughly equal in size.

First brand building in the US and China, second R&D acceleration and business partnering, third higher incentive comp from our sales outperformance and fourth legal and other IT infrastructure and stabilization related costs.

We come into 2021 with our senior leadership aligned in accountable for delivering on our OpEx guidance by realizing synergies, executing with discipline and making the necessary trade-offs to keep driving growth. We continue to make progress in integrating Bayer Animal Health and driving our operational efficiencies.

Our January 26 restructuring announcement mark the next wave of value capture actions. With this and our September actions, our headcount reductions are expected to drive approximately half of our total synergies.

We believe that our savings in procurement and the rationalization of smaller and/or overlapping R&D projects will deliver $40 million to $50 million of our synergies in 2021. In total, we expect a $160 million to $175 million of cumulative synergies to be achieved in 2021 well on the way to the anticipated $300 million outlined by the end of 2023.

At our December 15th Investor Day, we provided a detailed explanation of how our innovation Portfolio and Productivity strategy, or IPP will underpin our long-term growth algorithm that we believe will drive 3% to 4% average annual revenue growth, double-digit annual adjusted EBITDA growth and double-digit annual adjusted EPS growth.

Our updated 2021 guidance today is balanced, demonstrating positive momentum in our underlying business that is in line with this algorithm. On Slide 3, and 4, let me summarize our execution in the fourth quarter. On the top line Legacy Elanco delivered $743 million while Bayer contributed $396 million with each ahead of our expectations.

In Pet Health our focus brand Credelio which has now achieved blockbuster status posted double-digit growth and US market share gains year-over-year. We're also seeing further traction in the pairing opportunity with Interceptor Plus, used together these products provide pet owners with the broadest flea tick heartworm coverage in the market today.

The increase in pairing also reflects the benefits of our partnership efforts including our dog park study last year with IDEXX showing a one in five dogs visiting dog parks in major US cities tested positive for intestinal parasites.

Kynetic dispensing data for the fourth quarter shows that when Interceptor Plus is sold with a flea and tick solution, it's paired with Credelio over 50% of the time. Sequentially improving from September and up double digits year-over-year.

Meanwhile, we're actively optimizing the profitability of our defend brand Trifexis and applying omni channel capabilities to grow in sales at retail during the quarter, partially offsetting its declines in the clinic.

On the Bayer side Seresto global revenue was $64 million in the fourth quarter, up 13% year-over-year and A family global revenue was a $100 million, up 5% both at constant currency growth rates.

In the US Seresto and the A family both increased double digits, including approximately $10 million pulled into 2020 from 2021 from a large retail customer.

The underlying growth for global Bayer of approximately 8% is an acceleration from the 4% to 5% that we estimated in the earlier portion of the year, reflecting pandemic related retail channel tailwinds amidst rising COVID case counts.

For the full year, including the period before the acquisition Seresto revenue was over $400 million with constant currency total growth above 20% and while the A family was closer to $500 million up mid-single digits year-over-year.

Turning to Pet Health Therapeutics, Galliprant grew double-digits in the fourth quarter, reflecting our positioning strategy as a first-line treatment with a differentiated safety profile and its continued global expansion. In the US, Galliprant again outpaced the branded market in dollar growth compared to last year, according to the Kynetic data.

Rounding out the category, Pet Health vaccines remained strong in the quarter in a favorable vet clinic backdrop. Looking at our Farm Animal business in the fourth quarter, pressure from COVID on US cattle and swine continued to lessen sequentially. Cattle on feed numbers are on par year-over-year and processing backlog has largely dissipated.

Elevated feed costs with corn features recently at seven-year highs are pressuring producer economics, but also improve our value proposition through performance products.

Rumensin and Optaflexx sales exceeded our forecast in the quarter against, an incrementally better industry backdrop and we continue to navigate generic competition within our expectations. We also benefited from approximately $10 million in incremental US cattle vaccine and implant revenue due to competitors stock-outs.

Outside the US poultry and aqua remain negatively impacted by unfavorable macroeconomic conditions and reduced consumption with trends largely unchanged from the third quarter.

International poultry challenges remain concentrated in mid-size emerging markets including Central America, the Middle East and India more than offsetting growth in countries such as Brazil.

[Indiscernible] salmon prices were down nearly 40% year-over-year at quarter end, with reduced demand because of the pandemic with salmon prices in some cases barely clearing production costs, we're seeing producers deterred from premium solutions like Clynav.

We still expect pandemic and economic related headwinds to negatively impact our international poultry and aqua businesses into mid-2021. However, both species remain important growth drivers for Elanco over time.

Moving to China swine, the business continued to see strong recovery compared to last year's African swine Fever headwinds contributing to outperformance versus guidance. Prices remained elevated for China swine during the quarter due to tight supply and increased further in early January, ahead of the Chinese New Year.

Despite the recent release of frozen pork from state reserves prices are still trending more than double the pre-ASF levels. In turn, we are seeing further investment in pig health and demand for our premium products.

While ASF and other diseases remain problematic in China still today, our key customer base of large modernized farms had invested in biosecurity and are having the most success in rebuilding their herbs. Moving to Slide 5; we continue to execute against our strengthened and expanded IPP strategy.

Let me touch on a few of the key points, starting with innovation. On slide 6, we provided a status update for each of the eight launches planned this year. Let me now focus on three of those. The first is Credelio plus in Japan in January.

We are pleased with the initial reception with strong loan sales is wholesalers in veterinary clinic stocked in the product, but it remains very early days still ahead of the season.

Last week we received a positive opinion from the European Medicines Agency paving the way for a second quarter launch of Credelio plus our flea tick heartworm combination product across the EU and Australia remains on track for the third quarter in time for the parasiticide season in that geography.

Next is Increxxa a product for cattle and swine respiratory disease, earlier this year Increxxa launched in the competitive EU market. In the US, we've received approval for cattle and swine and expect to be in the first tranche of generic launches in the market.

We continue to see Increxxa as a valuable complement to our existing Farm Animal respiratory care portfolio that will support our overall competitiveness. This will also include our data analytics and our performance evaluation services offered to Elanco Knowledge solutions.

And finally we have Experior which is indicated to reduce ammonia gas emissions from cattle. This is the first of its kind product it provides feedlot managers with the freedom and flexibility to balance environmental stewardship and sustainability while delivering business results and Animal performance beyond today's industry-leading technology.

Experior has been adopted by the first full production and processing system and we expect to have cattle on Experior by the end of the first quarter. Additionally, last week we received Canadian approval for Experior, the second largest feedlot market, which will complement the US launch.

Looking at the total pipeline we are advancing key development programs that we expect to deliver a consistent 2 to 3 percentage point contribution to average annual growth, representing a reliable driver of our long-term growth algorithm. Moving now to portfolio; the 14 Legacy Elanco products launched or acquired since 2015 grew 5% in 2020.

Excluding divestitures and despite COVID related pressure. Details are included in the appendix on slide 22 many of these recent innovations have transitioned into our focused brands, which will drive our sales growth in 2021 and years to come.

We are a strategic global leader with a robust diverse durable portfolio with more access to the world's animals at any point in Elanco history our balance across brands species and geographies will allow us to maximize value and deliver on our sales growth expectations.

Omnichannel is our sweet spot and one of our key growth enablers and we're now the leader in retail and e-commerce outpacing the double-digit industry growth in the US market. Finally on productivity, our manufacturing organization captured a $115 million cost savings and avoidance in 2020.

Since 2018 the team has delivered $215 million in cost savings in avoidance surpassing the expected $215 million, and contributing most recently to our fourth quarter gross margin expansion and out performance.

We have transitioned all of our historic Elanco legal entities onto our newly Elanco ERP system, with our new shared service centers in Poland and Malaysia executing our financial transactions. We've also moved all of our Legacy Elanco employees and facilities onto our own IT network infrastructure.

As a result of this global effort we plan to have exited all material Lilly TSAs on time and at the end of March. Let me summarize, Elanco is entering 2021 with strong momentum. Our fourth quarter results were at the high end or exceeded guidance on both the top and bottom line.

We're gaining share in key Pet Health products and our US retail business was particularly strong in the fourth quarter. US farm Animal has seen sequential improvement while China swine is running ahead of expectations. Our innovation pipeline is on track to yield eight launches this year with nine out of the 13 geographic approvals now received.

And only two without a final approval date confirmed. Our productivity agenda is intact along with rapid action towards synergy capture. We are focused on execution in 2021 against the full-year guidance ranges that we have raised today. With that, I'll turn the call to Todd to provide more color on our results and outlook..

Thanks, Jeff. Slide 7 summarizes our financial results including our reported net income and earnings per share. On slide 33 to 38 in the appendix, you can find a summary of the adjustments made to the reported results to arrive at our adjusted presentation.

I'll focus my comments on our fourth quarter adjusted measures in order to provide insights on the underlying trends in our business. So please refer to today's earnings press release for a detailed description of the year-over-year changes in our fourth quarter and full year reported results.

Details on full-year results are also included in the appendix of our earnings slides. Looking at the adjusted measures on slide 8, you will see the total Elanco revenue increased 45% in the quarter on a reported basis, foreign exchange impact was neutral. I'll breakdown the effect of Bayer on a revenue growth in a moment.

On Slide 9 there is a digital representation of our revenue performance versus the increased guidance range that we provided in the December. The key drivers of the better than anticipated results in order of magnitude we strengthen our US pet Health retail business improvement in US Farm Animal and the ongoing recovery in China swine.

In Q4 gross margin as a percent of revenue was 52.7%, an increase of 480 basis points compared to the fourth quarter of last year.

The improvement was driven by the inclusion of Bayer's higher margin business positive price on a Elanco's legacy portfolio and continued productivity gains, partly offset by lower absorption driven by lower production volumes fixed cost deleverage and negative product mix for legacy Elanco.

Total operating expense increased 92% in the fourth quarter, including the addition of the Bayer Animal Health business. As a percent of sales, operating expenses increased from 32% in the year-ago period to 43% in this period and exceeded our guidance.

As Jeff explained, this performance reflects the impact of four categories of expenditures that are roughly equal in size in terms of exceeding our expectations. First, brand-building investment in support of future revenue growth with a focus on supporting our good momentum in the US Pet Health in China and enhancing our digital capabilities.

Second, R&D acceleration with discretionary investment in key development projects and business development transactions, such as our December agreement with Kindred Bio to bring first of its kind canine herbal virus therapy to market.

Third, higher incentive compensation as our sales performance outperformed the high end of our guidance by $70 million. And fourth, legal and other IT related stand-up and stabilization costs. On Slide 10, you will find the bridge depicting this walk between our expected and actual operating expenses.

We would characterize this incremental operating investment largely being either one-time or discretionary in nature. Operating income decreased 8%, improving from the 22% decline in the third quarter, but still reflecting the elevated operating expenses that I just described. At the bottom line, Q4 adjusted net income decreased 35% to $56.7 million.

The Q4 effective tax rate was 16.4%, reflecting a return provision true-up. With our adjusted EBITDA at $176 million or $16 million above the high end of our guidance range from our revenue outperformance our adjusted EBITDA margin for Q4 was 15.4%. Now, let's discuss our revenue performance more closely.

On Slide 12, you will see a breakdown of the contribution from legacy Elanco and legacy Bayer portfolios by category. Legacy Bayer products contributed $396 million of revenue in the quarter. On Slide 13, you can see the effect of price, rate and volume on our revenue performance. The benefit of the Bayer acquisition is reflected in volume.

As is typical with acquisitions, we will continue to report the addition of the Bayer business in volume for the third quarter of 2021 when we begin to lap the closing of the acquisition.

For the legacy Elanco business, price was up 6% for the quarter demonstrating the value of our innovation and the ongoing discipline we are applying despite competitive pressures. Additionally, we experienced notable price benefits in pet health disease prevention from US Pet Health vaccines as we continue to tighten our promotional practices.

Slide 13 provides a breakdown of our overall performance between the US and our international operations. This quarter we have further outlined our geographic performance by Pet Health and Farm Animal, as well as contract manufacturing, all of which benefited from the addition of Bayer.

To assist with remodeling this quarter we are providing additional reference slide with 2020 revenue on a combined company basis. Slide 14 depicts this combined revenue by species, representing an update to our Investor Day disclosures, which were based on the midpoint of fourth quarter guidance and by major country.

Please keep in mind that all estimates of combined revenues are materially correct. However, due to certain data limitations including FX these numbers may have some non-material differences to actuals. We are providing these combined numbers as a good faith summary to give better financial context to investors.

As a reminder, going forward into 2021, we will report quarterly revenue by species [ph], we intend to update revenue by country on an annual basis. We plan to file our 10-K shortly, but moving to Slide 15. Let me now offer a few words on working capital, cash and our debt leverage.

In the US consistent with Q2 and Q3 we held all distributors at 60 day payment terms in the fourth quarter, days sales outstanding, continued to improve sequentially, standing at 66 days versus the peak of 103 days in the first quarter of 2020. We ended the fourth quarter with $495 million in cash and equivalents on our balance sheet.

With gross debt of $6.2 billion, our net debt is $5.7 billion. We continue to anticipate gross debt repayment of $500 million in 2021 with progress towards our net leverage goal of being below 3 times by the end of 2023.

As a result of system cutover is related to our SAP implementation, we did draw $150 million on our revolver in early January to manage intercompany related liquidity. Now, I will transition to our full year and first quarter 2021 outlook, starting on slide 17.

Today we are updating our full-year 2021 guidance to reflect the good momentum entering the year by increasing the ranges for total revenue, adjusted EBITDA and adjusted EPS.

We now anticipate 2020 revenue $4.55 billion to $4.63 billion, adjusted gross margin of 56% to 57% and OpEx of $1.73 billion to $1.75 billion leading to adjusted EBITDA of $980 million to $1.04 billion. Our depreciation, interest expense and tax rate assumptions are unchanged from mid-December.

Within our Q4 2020 GAAP results, we were required to assign a valuation allowance against $75 million of our deferred tax assets from US operations. The flow through from our higher revenue guidance is driving our increased adjusted EPS outlook of $0.90 to $1 a share.

We also continue to anticipate the same CapEx and net cash outlays, as discussed at the Investor Day while cash taxes are lower by $5 million. Slide 18 offers a refreshed view of the bridge from our 2020 combined revenue to our raised 2021 guidance.

Importantly, we continue to expect innovation and portfolio to provide a combined 3% to 4% growth, despite ongoing headwinds from competitive pressures generic entrants and macroeconomic challenges in international poultry and -- we are not providing 2020 pro forma line items for the combined company below revenue today, given the data limitations around that exercise.

Moving to Slide 19; we are providing guidance for the first quarter of 2021. We expect revenue of $1.15 billion to $1.7 billion and adjusted EPS of $0.20 to $0.25. Now, I'll hand it back to Jeff..

Thanks, Todd. Before moving to questions, we often like to share perspective on relevant industry trends that will become key in the years ahead. And as we pivot into this next decade, we believe it's key to do that.

Today, I'll touch on three trends that will make a meaningful impact we believe on our industry in the first half of this decade; the first being the changing pet care landscape; second is climate policy, and third is innovation. These are areas where Elanco will continue to lead. First, to pet care landscape.

More than two-thirds of pet owners say their dog is even more of an emotional companion than before the pandemic; changing our relationship with pets for the long term. This increased togetherness is translating into an increased expectation of care and driving growth in spending, clinic visits and auto shipments.

More specifically, an omni-channel presence; from the veterinarian to e-commerce, it's never mattered more. During COVID about one-third of pet owners shifted their spending online and nearly all expect to continue that.

With about half of the world's 500 million pets still unmedicalized, our increasing access to tariffs creates an opportunity to be the bridge to drive increased pet care over the long-term. The Bayer acquisition positions Elanco as the omni-channel leader.

We will expand on this significant market trend as we head into this decade with our growing portfolio of vet and OTC products, digital, omni-channel partnerships and the next generation of value-creating innovation like connected care. The next trend to watch is climate policy.

Cattle are often named as the leading culprit in greenhouse gas emissions. But healthy animals are actually a critical part of the solution, not the problem. The solution is sustainability. They upcycle the grass, forges and food byproducts humans can't use.

If we want to reduce greenhouse gas emission from protein production, we must invest in Farm Animal innovation, where the ability to lower emissions towards any impact of alternative proteins it could achieve. Elanco is committed to be the livestock producers' leading partner on the journey to net zero and our healthy purpose sustainability pledges.

Today animal agriculture is responsible for about 4% of US greenhouse gas emissions. Elanco's portfolio already helps farmers and rangers improve the sustainability of livestock production. For example, we reduced this footprint by about 9%. We know livestock production can reach net zero by 2050.

Many farms will do it this decade, which leads me to my last point innovation the third trend. Innovation matters and it's rewarded in this industry. As a global pet and livestock leader, Elanco is well-positioned to source, develop, partner, fund and globalize to create the next era of innovation and this flow in both pets and farm animals.

As we close, let me review a few key points, in closing the Bayer acquisition, our business is growing in line with or beyond our expectations, creating momentum and driving increased 2021 guidance. Our pipeline is progressing with nine of the 13 approvals needed to support our eight key 2021 launches.

Our streamlining processes optimizing our footprint and delivering increased operational efficiency. Regarding the Elanco Board, the increased engagement governance expertise in finance, innovation and animal health as well as having a shareholder perspective from our expanded and strengthened Board is bringing immediate value.

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 each. Please provide the instructions for the Q&A session and then we'll take the first caller..

[Operator Instructions] Your first question comes from the line of Nathan Rich with Goldman Sachs..

Good morning. Thanks for taking the questions. Jeff, maybe starting with the pet health, disease prevention price the 14% you call out kind of tightening promotional practices. I guess could you just maybe go into more detail on what changes were made and how sustainable this dynamic might be as we think about 2021.

And then I think if I'm looking at the slides correctly, that would imply a sort of like 10% decline for the Legacy Elanco business you talked about some of the key products growth in volume and market share gain.

So can you maybe just talk about what might have offset this? And then just quickly as a follow-up question for Todd, I don't think I saw the any sort of EBITDA guidance for the first quarter. I think, consensus is around $240 million.

I'd just be curious this new kind of give us some color on how you're thinking about first quarter EBITDA? Thank you..

Now, let me jump in first before we get to Jeff. I mean, we didn't give the EBITDA guidance, but we do feel good about the improving OpEx trend with the sequential decline relative to Q4 that $0.07 that Jeff talked about, the big driver of the improvement from $0.12 in Q4, up to the $0.25 we've guided to in Q1..

And with that, you would expect to see the EBITDA growth go from the 176 substantially higher as well. So while not giving specific guidance today, we do feel good about the continued EBITDA growth as shown by the raise of the full year expectations for that..

I would say, Nate, too just on the price and the volume questions on Pet Health, I mean, first of all, there is no question our change in our distribution strategy is working.

We're optimizing our partnerships as you know we've limited the number of partners that we have we moved Qliro product from Bayer over and then when you just look at the overall underlying demand. What you're seeing here is demand is increasing.

We're taking share the gross to net and actually the efficiencies within the financial relationship has been a driver behind this.

The price as Todd mentioned in his comments was really driven by strong demand, especially in vaccines door immune is resonating very well with vets right now from a brand perspective and pet owners are paying more attention their dogs wellness visits are up all of this is driving and underpinning that.

But I think the most important message is the tightness in our channel and our partnerships it's working we're optimized and it's optimizing, not just the financials and overall gross to net which is helping price, but it's also helping us from a share of voice and competitiveness in the marketplace..

The other thing to add, Nate, is with the divestitures we had last year, that's obviously negatively impacting our growth rate in the companion animal business. The other thing to note is we did lose sales in Trifexis [ph], which is part of the decline we are seeing that is pulling down the overarching growth rate..

We'll move to the next caller, please?..

Your next question comes from the line of Erin Wright with Credit Suisse..

Great. Thanks.

Can you speak to them at the stocking destocking dynamics at the Bayer business and what you're lacking here in the first half as it relate to that this business? And can you quantify how much was pulled into 2020 from 2021 in terms of that purchase from a large retail customer in what sort of visibility or control you have on the inventory, and from a retail perspective.

And then my second question is, how we should think about the quarterly progression on the livestock business, particularly in the US. Can you break down some of the impact of the continuing cost headwinds, as well as that in some of those call headwinds and also competition. And then on top of that new product launches.

How do you think about those factors impacting that quarterly progression? Thanks..

Erin, let me tackle a couple of those. With respect to the retail, as we mentioned, there was a $10 million pull-forward from one of our bigger players in that space, that did get pulled in.

Overall, as we've talked previously, there was an increase in total inventory at retailers as driven by the growth in the dispensing faction across 2020 a big up in retail and online OTC product growth that caused the retail is to continue to expand. We also saw more of our products being on the cells in more retail locations.

So all of that is a good news bit as there is a higher demand by customers for those products. With respect to the retail players versus our distribution network. We've got expectations from those retailers to deliver on time full shipments when they make orders. And so they do control of more of what they want to own on their shelves.

In that case versus our general negotiations and work with our distribution side, on the debt side. Overall, we feel very good going into the parasiticide season with the levels of inventory that those retailers are holding as they are prepared for customers to continue to demand Seresto and A family as we go through the season..

Erin, question on Farm Animal. So if you look at the market overall our predictions are that the market as a whole will grow as the market around low-single digit. We expect to outgrow that market, low-single to mid-single digit.

Let me highlight kind of the list of things that will actually be the contributors to growth for us in Farm Animal, because we do expect to increase our Farm Animal market share in 2021. So, the first is we have a COVID compare. As you know, as we came out of a tough year in our Farm Animal business with COVID two is, we have performance products.

And as you look at higher ingredient cost as we've said, when you look at the futures on corn at $7 our products actually with our value-based customers actually and with our Elanco Knowledge solutions actually provide more value. So that's going to be a driver.; Five of our eight new products.

Our Farm Animal products and they will contribute to our growth. I think the other note that we haven't mentioned is our beer Farm Animal portfolio when you look at a depth -- adding and expanding to our portfolio in a significant way and adding to our access in the international markets.

And then to your other question on generic we mentioned, we continue to differentiate in the field. We continue to work the portfolio cattle and beef, it is meeting and in the fourth quarter exceeded our expectations.

And then the last, of course, is China, China overall especially but also poultry, as we've said China will contribute to 1% of our total global growth in Elanco and we're off to a very strong start. That's all offset by again the continued first half aqua and poultry and international.

So again Farm Animal business really differentiated in a good position and new innovation and planning to be low-single to mid-single digit growth and take market share in 2021..

On the COVID question, last Q1 we did have a pull-forward in the international markets of about $20 million on the Farm Animal side in Q1 just the concerns on disruption going into the COVID time offset in our US pet business, where we did reduce the channel by $60 million as a result of COVID impact on our expectations of future demand offset with the Bayer business the grew on their pet Health business 22% in the first quarter of 2020 versus 19.

So a number of different factors there, we know this creates greater clarity needs going into the year and that's the reason we provided the Q1 revenue guidance but we deal gives a good view of where we're headed here in Q1..

Thanks for taking....

Next caller..

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

Hey, thanks for taking the questions. Congrats, Jeff, on the quarter. I want to go back to your comments on pesticides a little bit. You had a lot of comments in the prepared remarks and you sort of reiterated meaningful share gains in Credelio Seresto advantage.

So I was just wondering a little bit deeper on where the share gains, are coming from, particularly in light of the triple combo launched by one of your competitors and a strong uptick in year one.

So any details on whether it's in the vet or via the retail channel, was it more driven by volume were price to the category, maybe you could comment on some of the legacy products, the older products besides the Credelio and the Seresto and things of that? And then follow-up question, you've now raised the 2021 outlook a few times in a relatively short amount of time since you initially provided late in the December.

I'm just wondering if it's signal a particular improvement in the markets better execution on your part or perhaps more than the initial will just had over more room for upside.

And do you feel like you still have enough room on the updated guide and as we go through the year to potentially raise further or just sort of where we are on that trajectory..

Yes, Michael, thank you for the question.

So parasiticide I just only start from the broadest perspective, of $5 billion market with lots of dynamics, what I would share with you is that, as I mentioned, we continue to do well in the omnichannel and retail fastest growing segment Animal Health right now is pet retail OTC and scripted products shipped to the door that was why I highlighted that trend, we are outgrowing that market and taking share in double digit, that's one.

Yes, that's led by Seresto and the A family, but other products as well. Second is Credelio, the Credelio performance continues to grow significantly.

We continue to see if you're going to get full coverage to a PET today, you're going to need two products, no matter what you want to use and the two that are the most significant with the broadest coverage and being paired the most is Interceptor Plus and Credelio.

So that combination and Credelio alone are also gaining share and we'll continue to work with Seresto as we look at this globally, we would say also the pet business in China and some of the other aspects we talked about with the Bayer acquisition are also areas that contributed significantly in Q4.

Offset by Trifexis; I will say Trifexis retail grew and that is going to be a key factor for us partially offsetting the declines that Todd mentioned in the vet clinics with Trifexis.

So we feel very good about that, then as we enter this year, the $1.5 billion market of the market I just mentioned is all US we now can match any portfolio today or even surpass it and the international markets with Credelio plus.

And then as Erin highlighted 11 candidates in our pipeline one a year that we will continue to innovate aggressively into this big marketplace. So well positioned those are the drivers in Q4..

Michael, with respect to your question on guidance, the first update in January was related to restructuring, those are something that we worked very hard to get right.

It's always tough to impact team members that have been delivering for us, but it was necessary to continue to drive operational efficiencies and once our Board approved it we reflected that in updating our guidance from the savings that comes from that. The update today is continued execution.

I'd say in December 15th at our Investor Day, with the preparation for that happening from mid-November on and our new commercial leadership really getting the complete portfolios underneath their feet and really understanding the business, we are now 2 plus months later in a much better position to see the value they are driving, the commercial execution our sales teams are doing the impact of global marketing is having and driving underlying demand.

And with that, we're pleased to be able to increase the top line as well as EPS guidance for the full year today. So again, overall, we feel the balanced and good understanding of our business. The innovation portfolio is getting launched as we talk but the acceleration of that from a top line impact is really back half of the year..

We'll move to the next caller, please?..

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

Hi, good morning and congratulations on the results. Appreciate the very comprehensive color in the earnings deck. Couple of questions from me. Firstly on the parasiticides market, following up on what you discussed earlier.

Can you help us quantify what broad of flea tick Heartworm coverage means in terms of portion of the market, very good exclusive access store with limited competition or we see on the right way to look at it? Secondly, Credelio blockbuster, can you clarify if this Credelio only or if it's a function of Credelio and Credelio Plus? And on China swine, can you help us understand the pace of recovery that we need to factor in during the course of the year and also there have been recent developments of news flows of ASF recurrence as a function of illegal vaccines concerning factor is that this seems to be in the 4th largest commercial producer in China.

So anything up from here? Thank you..

Yes. Thank you for the question. So, I'll handle the first one that's I think pretty straightforward. Credelio we know over $100 million is the blockbuster it was Credelio alone, Credelio Plus did not really entered the market in Japan until January so that's straightforward.

And then, looking at -- as we know, and we've talked about, as you think through worm coverage and think about Heartworm, round worm, hook, whip, long and antique all of those are the factors of coverage.

So when we look at the series of those worms and intestinal worms especially and what we saw with the IDEXX study, is that the prevalence is there, it's not something you want to take a risk with and a flea and a tick product that this is, this is why we pairing study with IDEXX and R&D is in campaign have become very key.

We will continue to play that out. I will also just speak that Credelio plus is a product, we're not bringing into the US given that there's different regulatory constraints on heartworm.

So that's how we see this market, again a little a little shy of about a $5 billion market $1.5 billion internationally and again, the split between the retail channel and the vet channels. And then, yes, China swine yes there are you're exactly right.

There are continued cases of African swine Fever in China and we have not surpass that pandemic continues what though has happened very clearly we're seeing the new cases primarily in backyard herds that are still very common and still a high percentage of pigs in China.

What has happened, though, is the shift and where our business comes is from the industrialized larger companies that have really advanced our biosecurity and are advancing actually their share of the marketplace and that's where our business primarily is..

Balaji, you had a question on guidance. Can you follow-up -- can you remind us....

On the guidance was asking what are the key swing factors for year 2021 guidance. Considering the variation we saw in Q4 was a guidance versus actual and also on China. I had a follow-up because the outbreak was in the fourth largest commercial producer and now, and not just the backyard. So I want to see if you had any take on that. Thanks..

Let me add that and then Todd can in our guidance. Yes, there was some limited cases again the supply chains for some of the larger producers continue to use and fragmented, but what I would say is what's most important here is the actual processing supply chain and the picking up in the pigs and the processing, that's where the disease spreads.

So you're going to have certain cases. But as we assess it and we spend a lot of time on this, we believe that, again, our business is sound. We still hold to our guidance overall with our China assumptions of the contributing up to 1% of our total growth and we'll continue to monitor this and update you as we go forward..

With respect to the guidance, I mean the three big swing factors. First would be the innovation launches, while confident in that anytime you're launching new products and changing customer behavior, it requires a big effort and we don't do it, but it is something we need to execute against.

Second would be the season for flea and tick now with a much bigger over the counter product base, the weather and the seasonality of flea and tick is a bigger impact.

But on the Vet business with orals and so that's one We're very paying very close attention to, and finally the COVID impact it has pluses and minuses, as we've talked about in this past year with the over-the-counter the retail operations, but then also the foodservice impact on our Farm Animal business, especially with the salmon and international poultry..

We'll take the next caller. Thanks..

Your next question comes from the line of David Risinger with Morgan Stanley..

Hi. This is Melina Santoro on for Dave.

Could you please discuss your 2021 pipeline revenue contribution in more detail, maybe in particular the cadence of sales ramp over the course of the year; and then also the outlook for these products beyond 2021 thank you?.

Yes. As we've talked, we expect these to be $80 million to $100 million in total. They're going to be generally back half loaded as we're launching a lot of them here late in Q1/early in the Q2, so the natural ramp that would come with the timing.

And then, over time, we expect certain of the products to grow more, certain of them to have a pretty substantial amount of expected growth here in the first year. But overall, we've talked that innovation will be 2% to 3% annual growth contributor for us as we go forward..

We'll take the next caller. Thanks..

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

Hi, thanks so much for taking my questions. I had two if I may. First, back in December, you showed a revenue bridge from 2020 to 2021, which mentioned a Bayer retail stock in of $25 million. And I saw a similar revenue bridge today, but the amount for that Bayer retail stock is now 45, not 25.

Can you explain to us exactly what that is and what led to that change because that number was for 2020 and you kind of gave that number in mid '20s. So, I'm trying to understand if something changed in the last couple of weeks of December.

Separately, and I should have asked this back at the Analyst Day in December, which is, when Bayer acquisition was announced you had mentioned the target of reaching less than 3 times net leverage by 2022 and I know you changed that to 2023 as of the Analyst Day.

Our sense is -- it's the obvious, it's the inventory plus COVID, but if there is any other meaningful driver, I would love to hear from you. Thank you very much..

Sure, Umer. On the question regarding the retail, the correct that it did go from 25 to 45, two things in play there.

One, the outperformance we had from underlying demand in dispensing in Q4 led to retailers continuing to need more of our product to meet the underlying demand that we're seeing in both brick-and-mortar locations as well as online and then the other is the $10 million pull-forward that we discussed earlier in the call regarding a big retail buyer as part of negotiations going into 2021.

So, all good news that there is a continued underlying demand for these OTC products and that we're getting on the more cells in more locations across the US.

And then, with respect to the net leverage; yes, as we know we've underperformed in 2020 relative to what our expectations were at the time we announced the Bayer transaction in August of 2019, the result of that, it's going to take us longer to be able to pay down our debt and deliver on that 3 times net leverage. It's now 2023..

We'll take the next caller, please?.

Your next question comes from the line of Elliot Wilbur with Raymond James..

Thanks. Good morning. Just a quick first question for Todd with respect to operating cash flow metrics.

Could you just provide what cash flow from operations was in the quarter? And given the ongoing restructuring program, how is that going to impact operating cash flow over the course of 2021? Just any color you could provide on cash conversion metrics would be helpful.

And then for Jeff, just going back to your commentary early in the Q&A regarding the positive price impact on the US Health business, just want to make sure I understand your commentary.

So that is primarily a reflection of favorable changes in GTN trends given the change in distribution strategy not reflective of actual list price increases, but if that's so, how would that look over the course of the year as you begin to lap those changes, did it still a favorable impact in 2Q sort of an outsized one.

And then just becomes a neutral or you've revert back to sort of low positive incremental could it actually become more of a negative dynamic in the second part of the year. Thanks..

Yes, let me take the first one. Thank you for the question, Elliot. So, yes, as we said, the couple of dynamics were in Pet Health preventative segment driven by vaccines, driven by -- that was for one of the big factors here on price. And then also the compared to a year ago.

So those are factors in here, but yes, the distribution change and the ability to get price there has been a big factor and just creating efficiency by giving away less and being able to create more demand with a bigger team, bigger portfolio and have targeted distributors doing what they're best at.

That we knew would be a factor in this positively and it has been. As you look going forward and we pressure test this a lot, we continue to hold to our guidance of a 2% price over the long term on our total portfolio..

Elliot, thanks for the question on cash flow. We lost about $90 million and operating cash flow in Q4. As you noted, we've got a lot of the ongoing challenges with our restructurings in the cost of taking from that.

As we look forward into 2021 we've called out that will pay down $500 million of gross debt from the EBITDA, we're going to generate that will require an improvement in working capital and some other items given the on cash going to soak up a large portion of that or about all about $150 million.

So this is going to continue to be a reasonably large cash year as we've mentioned. Let me just call out the big items. There is $250 million for the restructuring and other one-off items.

There is about $150 million in normal CapEx, you've got about $225 million in cash interest and then the improvement of $5 million to about $25 million to $30 million in cash taxes.

So with that, we feel confident in our ability to pay down the $500 million of gross debt and we've got programs already initiated to improve the amount of inventory we're holding on our balance sheet to do that..

Thanks. We'll take a few more callers next caller, please..

Your next question comes from the line of David Westenberg with Guggenheim..

Hi, this is John [ph] for Dave, thanks for taking my questions. Firstly, how should we think about veterinarian macro in terms of economic reopening and a back to work environment.

And my second question if there's time is, do you think that there might be any one-time benefits, same product areas, like for example, you have a strong anti-anxiety franchise with colonic come well, and are there any other areas [indiscernible]. Thank you..

Yes. Great, great questions. The vet clinic market has risen with the tide of COVID and has benefited from this.

I also believe the vet clinic market and veterinarians around the world have moved in a transformative way faster than they normally would have from curbside service to telemedicine to participating in the retail and omni -channel starts and ends.

We believe our industry with the veterinarian one of the key things that we will do is partner with the veterinarian and bring them into this omnichannel in this pet owner that wants to shop in different places.

So as I look at the vet clinic, there is no question we continue to see some consolidation with corporates, but we also see the other segment more value add more transformation, looking at revenue from multiple streams and becoming a lot more virtual and playing into the omnichannel that I would say is not just in the US, but we're seeing that as well globally.

We don't really see any -- I think to Todd's point, if we look at product segments, new products, three on the pet side, five on the Farm Animal side, all are going to add significant value whether it's raised without antibiotics in poultry and that trend to Experior and linked to sustainability net zero to Credelio Plus broad spectrum differentiation packaged into our portfolio internationally, these are all key markets that actually can play.

But otherwise, the environment link to our business -- the only other one I would point to is we do have a performance-driven Farm Animal portfolio and that plays well as feed costs go up. Our value if measured and it's a value-based customer goes up as well.

So that would be another one I would note, primarily it's new products in the adoption and the building of our new products..

All right. We'll move to the next caller..

Your next question comes from the line of Kathy Miner with Cowen & Company..

Thank you for taking my question. Just two short ones. First, just a clarification please. When you talked about the, your outlook for the farm Animal to grow low single digit as a market, does that assume that all species grow within that or some are more pressured and is that also true for a long. Second question is on business partnering.

You commented that the virus was one of them in this quarter, were there any others? And should we anticipate more of these going forward and are those in your guidance? Thank you..

Great questions. Kathy.

So Farm Animal as we look forward, we would say that if you look at species I think as a whole globally poultry is probably got the most challenge coming into the year with continued some disruption, as we've talked about some economic challenge in some of the mid-size markets that we see is important in poultry but still expected to be as you look at the market 1% to 2% growth across all regions in aggregates.

As you look at swine, we are cautiously optimistic around global swine markets in 2021 production expected to grow around 6% driven by China as we just mentioned, but also some nice balance and really less of a COVID compare on the US side in some of the other markets as well.

So China US keeping swine up and then beef maybe the most optimistic, we've seen in a while placements in marketing are expected to be ahead of 2020 levels as the industry fully stabilizes and we'll continue to watch that dairy continues to have its challenges. But again less material to us.

So we see that market growing as an industry low single digit our again goal is to outgrow that market and take market share and then business partnering.

Yes, we had to candidly deal, we don't disclose all deals relative to our pipeline, but as Aaron highlighted on Investor Day, inside his P&L he will continue to have acquisition dollars within his R&D budget to continue to partner to acquire to share technology platforms as they come further into development will be including them and adding them to our 45 plus candidates to become our 25 launch equivalents, Kathy.

So we'll talk more about those again as they enter and become closer to the marketplace..

We'll take the next caller, please?..

Your next question comes from the line of Navin Jacob with UBS..

Hi, thanks for taking the questions. I just want to get a little bit more granularity on the China swine improvement. When exactly do you expect the China swine market to normalize and what do you expect them revenue impact be on line as China spot prices start to normalize.

And then just a quick follow-up on inventory., specifically, what was the inventory move for Bayer products in 4Q and are they at normal levels at this point. And then on ELAN legacy products, was there any buildup of inventory in Q4 thanks very much..

Yes. Great questions. I'll start with China and, Todd, you can maybe take the second one, but we would believe that the market will continue to have ASF challenges throughout the entire year. We see nothing that doesn't change that anticipation.

Without question, the government is supporting this with high pig prices and wanting to have domestic production and less dependency on imports. There is an acceleration to sophisticate the larger companies, the industrialized companies backyard farm in both in pigs and poultry back even in the Avian flu times that's where it comes from.

And it makes their supply chain and food chain much more vulnerable. So as an animal health industry, we fully support much more sophisticated biosecurity and larger companies that can afford these capabilities.

So I see continued acceleration of an industrialized pig starting to match what is already in the poultry industry in the US, on transport of animals is another big factor coming from the smaller farms and I would see that to lessen overtime as industrialized companies have more pigs.

Ultimately what I want you to hear is Elanco China will contribute 1 percentage point of growth led by pigs but also poultry and pets will also be a factor there..

With respect to the Bayer side on US pets, really retailers expanding the amount of product they're selling and thus holding more product in more stores online. while we thought that was about a $25 million kind of a growth headwind in 21 back in December with the increase we saw the 10 million pull forward plus just continued growth in that.

It's about a $35 million headwind from that aspect and then the $10 million that we have taken out of our expectations for Q1 and that was just a timing between quarters.

So, overall about an increase in the amount of inventory being held because of the increasing demand for the products and the dispensing that we've seen it does create a growth headwind unless dispensing would grow faster in 21 than what we currently expect right now. On the Elanco side, our inventory with distribution.

So different than retailers both our distribution partners that serve vet clinics and farms those inventory levels are consistent with the end of Q2 as well as consistent with the end of Q3 here at the end of Q4..

Thanks. We'll end the call here operator..

Thank you. And turning the call back over to management for closing remarks..

Yes. Thank you for the opportunity to share the results, and we look forward to engaging with all of you as we enter into 2021..

Thank you. This concludes today's conference call. You may now disconnect..