Acelyrin Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 13 speakers on the call.

Operator

Good morning.

Speaker 1

My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Elanco Animal Health Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you. Katie Grissom, Head of Investor Relations, you may begin your conference.

Operator

Good morning. Thank you for joining us 2023 Earnings Call. I'm Katie Grissom, Head of Investor Relations. Joining me on today's call are Jeff Simmons, our President and Chief Executive Treasurer Todd Young, our Chief Financial Officer and Scott Perucker from Investor Relations. The slides referenced during this call are available on the Investor Relations 2nd quarter 2016 of elanco.com.

Operator

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 our latest Form 10 ks and 10 Q filed with the SEC. We do not undertake any duty to update any forward looking statement. Call.

Operator

Our remarks today will focus on our non GAAP financial measures. Reconciliations of these non GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we'll be happy to take your questions. I'll now turn the call over to Jeff.

Speaker 2

Thanks, Katie. Good morning, everyone. Elanco delivered a strong second quarter with meaningful progress in our late stage pipeline, The successful completion of our ERP integration and exceeded the top end of our guidance range on revenue by 4,000,000 adjusted EBITDA by $61,000,000 and adjusted EPS by $0.13 We continue to expect this sequential improvement and the first half to continue with an anticipated return to revenue growth in the second half of twenty twenty three. 2nd quarter. We are updating our expectations for the year, raising guidance for revenue, adjusted EBITDA and adjusted EPS.

Speaker 2

Starting on Slide 4. Since our last call, we delivered improved operational performance and achieved key milestones advancing our strategy. 1st, in Q2, we delivered the 2nd consecutive quarter of sequential improvement in year over year revenue performance, excluding the ERP blackout impact, Additionally, we completed our ERP integration and announced resolution of the EPA Seresto review confirming the product's continued demonstration. On debt, we are completing the refinancing of our August 2023 notes today. 2nd quarter.

Speaker 2

Next, in the quarter, we saw strong adoption in several EU markets for ADTAB, our newly launched oral OTC flea and tick solution. And in July, we launched our canine parvovirus monoclonal antibody in the U. S. We made significant progress on our late stage blockbuster pipeline advancing key programs and gaining additional confidence on the differentiation and the launch plans. 2019.

Speaker 2

Finally, we issued our 2022 ESG report demonstrating progress on our healthy purpose sustainability efforts and our internal operations, customer collaborations and beyond. Focusing now on financial performance On Slide 5, we provide a view of year over year revenue for the first half of the year, excluding the impact of the ERP integration between the 1st 2 quarters. Elanco reported a 1% decline in constant currency, demonstrating a marked improvement from the 5% decline in the second half of twenty twenty two and surpassing our guidance expectations of a 2% to 4% decline. Looking now to the key drivers and our 4 business areas that drove this over achievement. 1st, U.

Speaker 2

S. Pet Health. U. S. Pet Health returned to growth in the first half of the year, delivering 1% growth year over year.

Speaker 2

2019. Our strategy to increase share voice, improve physical availability, leverage innovation and grow price dispensing growth in both units and total sales, while Elanco execution led to share gain in this market through the 1st 6 months of the year. 2nd quarter. Both Seresto and the Advantage family grew revenue high single digits exceeding expectations 2 as our new creative campaigns and increase in total distribution points began to pay off. On the vet clinic side, our investment in digital and enhanced sales force effectiveness drove a 36 percent increase in total touch points in the first half of the year.

Speaker 2

This deeper engagement with veterinarians and clinics contributed to penetration growth for Credelio, Interceptor Plus and Galliprant. While competition remains impactful in the U. S. Vet market, these increased touch points and penetration contributed to the stabilization of our business in this channel. Bobby Modi's team's strategic execution is improving outcomes and we expect continued positive momentum from this business in the second half as we prepare for an exciting innovation launch window in 2024 and beyond.

Speaker 2

Next in our International Pet Health Business. 2. This business declined 7% in constant currency in the first half. 6 percentage points of the decline was driven by the impact of ongoing demand pressure in the Spain retail parasiticide market. More broadly, we saw continued growth in our Credelio franchise, balanced by slower markets, primarily impacting retail and other key geographies like Italy, China and Japan.

Speaker 2

The European launch of AdTabs surpassed expectations, increasing its expected full year contribution. Our market penetration strategy and quick action has positioned us well in the emerging OTC oral parasiticide market in Europe. We expect improvement in our international pet health business in the second half as we leverage innovation and anticipate a better economic environment in Europe compared to the second half of twenty twenty two. Now moving to farm animal. Our international farm animal business, the largest of the 4 quadrants, grew 4% in constant currency in the first half, driven by strength in poultry, aqua and price.

Speaker 2

We expect these drivers to remain strong in the second half of the year. The U. S. Farm animal business declined 5% in the first half with 4 percentage points driven by supply disruption for cattle vaccines and the remaining driven by implant regulation changes and timing of poultry rotations. These were partially offset by increased adoption of Experior and contribution from NutriQuest.

Speaker 2

In the second half, we expect stronger performance from our U. S. Farm animal business, driven by improved vaccine supply, the continued ramp of new products and increased demand for our poultry portfolio. 2nd quarter. A few comments on Experior.

Speaker 2

Experior remains an important innovation sales growth driver for this year. Beginning in March, we saw a positive trajectory change in the use of the product, which continued to accelerate through July, We continue to focus on expanding use with existing customers and expect to exit the year at an annualized run rate of approximately $60,000,000 to $70,000,000 Finally, we're encouraged by the recent announcement from Tyson Foods to reintroduce animal only antibiotics or ionophores into their poultry supply chain. Elanco leads The in feed poultry solutions area with a variety of tools from nutritionals to our differentiated Nerus and Ionophore products, Maxiband and Montyband, which we expect will be key products in these new programs. As the processor Of about 1 5th of all the U. S.

Speaker 2

Chickens, we believe Tyson's shift will result in a more sustainable production, improved animal welfare and a positive net impact on Elanco's business. Moving now to Slide 6, let's look at the strategic drivers of our innovation portfolio and productivity framework over the past few months. First, with productivity. 2. In April, we successfully completed our ERP integration, simplifying our internal and customer facing business processes and enabling synergies.

Speaker 2

2nd quarter. Among other things, the simplification offered the ability to engage in a commonly used accounts receivable asset securitization program. 2. This program will provide the majority of the funds to retire our 2023 notes, which we are completing today. Next, on to the portfolio.

Speaker 2

For Seresto, we're very pleased with the outcome of the EPA's comprehensive review and the confirmed continued registration of the product. We never wavered in our data driven confidence in the safety profile of Seresto, and we are encouraged by the robust science based approach taken by the agency. We view the stewardship plan as an opportunity to raise the bar across the collar category. We see the EPA outcome as a positive for the Seresto brand, pet retail, veterinarians and most importantly pet owners. We now shift our focus to maximizing the commercial opportunity for Seresto globally, with the product returning to high single digit growth in the U.

Speaker 2

S. And the first half of this year. Next, price continues to be strong, driven by the improved capabilities over the last year with 4% growth on a year to date basis. We now expect price growth of at least 3% for the full year. With the encouraging pipeline progression and our expectations regarding differentiation, we're increasing our investment in the U.

Speaker 2

S. Pet health business. The commercial organization led by Bobby Modi in partnership with Tim Bennington leading our market strategy efforts 2nd quarter. Our focus on building on our digital progress, adding experienced animal health marketing talent and accelerating our efforts to expand including our launches this year and the innovation we expect to launch in 2024 as we globalize the portfolio over time. Finally moving to Slide 7, I'll provide an update on our late stage pipeline.

Speaker 2

Overall, the pipeline is strengthening with important progress in key late stage programs and portfolio enhancing approvals in major markets across species. Ellen DeBrabander and her team are driving early stage advancements, moving exciting projects 2nd quarter. In the U. S, we launched our canine parvovirus monoclonal antibody, a highly anticipated treatment for one of the most contagious and deadly dog viruses. The supply chain is enabling responsiveness and the product is already saving dogs' lives, Driving Reorders.

Speaker 2

As expected, in 2023, demand is outpacing supply due to the anticipated capacity limitations in our facility at launch. We are on track to ramp up our capacity to 10x today's volume to support the expected increase in demand in the coming years. This year, we expect revenue contribution of $5,000,000 to $7,000,000 However, we see this product as an important growth driver to both the top and bottom line starting in 2024 and expect blockbuster contribution as we expand outside the U. S. Over time.

Speaker 2

As we've shared previously, we took a 2nd quarter. We are pleased with the progress we made in the quarter. We are pleased with the progress we made in the 2nd quarter. Today, 2nd quarter. We are proud to share that we believe the FDA has all the data necessary to approve our differentiated JAK inhibitor for canine dermatology.

Speaker 2

2nd quarter. We are encouraged by this product's progress and believe it will be highly valued by veterinarians and pet owners. 2nd quarter. Additionally, by the end of August, we expect the FDA will have all the data necessary to approve our broad spectrum parasiticide for dogs and for Bovair, our methane reducing product for cattle. Based on this, we continue to see a path towards FDA approval in the first half of twenty twenty four for all three of these potential blockbuster products.

Speaker 2

2nd quarter. With the developments in the parasiticide space over the last month, our confidence regarding the expected differentiation 2nd quarter. Our canine broad spectrum parasiticide has increased. Our product upon approval will be known as Credelio Quattro, 2nd quarter. A combination of Lidolanor and 3 other active ingredients, it will focus on fleas and ticks as well as broad coverage of internal parasites, including heartworm, roundworm and tapeworm.

Speaker 2

The product is seeking to demonstrate 100% heartworm prevention after 1 month. 2nd quarter. We expect the differentiated coverage of Credelio Quattro and the differentiation of our JAK inhibitor for dermatology. This will allow Elanco to provide a more comprehensive and valuable portfolio of canine products to veterinary clinics in 2024. Shifting to Boverre, our 1st in class innovation to enable methane reduction in cattle, where we will focus our initial efforts first on dairy.

Speaker 3

2nd quarter. Based on the wide body of research supporting the product's approval

Speaker 2

in many countries around the world and our discussions with the FDA, We're highly confident in the path to approval for this product in the first half of twenty twenty four. Importantly, we believe We have secured necessary launch supply with a contract manufacturer, a key component of the 2024 growth contribution. As we pioneer new ground with products to reduce environmental impact, we are working across the value chain to validate, Aggregate and create value for reducing livestock's environmental impact, and we are encouraged by the interest from the food chain. Regarding our IL-thirty one short acting monoclonal antibody for canine dermatology, we now expect 2018. We are pleased to announce that we are well positioned to be a differentiated product profile relative to the current technology.

Speaker 2

However, our expectation for U. S. Approval has shifted to 2020 5 as a result of the USDA's increased data requirements across monoclonal antibody platforms. 2nd quarter. We remain confident in the product and its value in our overall portfolio.

Speaker 2

Our innovation sales for 2023 continue to track to our guidance of $210,000,000 to $250,000,000 and we still expect to have incremental innovation revenue of $600,000,000 to $700,000,000 by 2025. The shift of IL-thirty one is balanced by increased expectations for other late stage potential blockbuster products as well as confidence in our views on Xperior, Parvo and AdTab. Over the last several months, our launch revenue expectations for our late stage potential blockbusters have increased as a result of higher confidence in our differentiation, enhanced launch plans and the evolving competitive landscape. We understand delivering on our opportunities in our pipeline go well beyond getting the product over the regulatory finish line, and we are investing in talent and capabilities to fully capture the value of our portfolio in 2023 and beyond. 2019.

Speaker 2

Now I'll pass it to Todd to provide more on the 2nd quarter results and financial guidance.

Speaker 4

Thank you, Jeff, and good morning, everyone. Today, I'll focus my comments on our 2nd quarter adjusted measures. So please refer to today's earnings press release $0.057,000,000 of revenue, a decline of 10% or 9% in constant currency. Price contributed 4% in the quarter. In April, we completed our global systems integration, bringing the legacy Bear Animal Health business into the Elanco ERP environment.

Speaker 4

We remain confident in our May estimate, which includes a revenue shift between quarters from the ERP blackout estimated in the range of $90,000,000 to $110,000,000 Representing an 8 to 9 percentage point detriment to growth in the 2nd quarter. Outside of this, the base business performed above our expectations in the Q2 with an estimated flat to 1% revenue decline in constant currency compared to prior year as shown on Slide 10. Consistent with last quarter, on Slide 11, we provide our revenue results by business area on a reported and constant currency basis. For Pet Health, constant currency decline was 14% with an estimated headwind of 11 to 13 percentage points from the ERP blackout. In the U.

Speaker 4

S, Pet Health revenue declined 9%, including an estimated 11 percentage point 2nd quarter. The estimated 2% growth in the underlying business was driven by OTC Retail as our strategic efforts drove improved dispensing, While also benefiting from price, innovation and supply disruption in the Q2 of 2022. This year, We increased our participation in retailer promotion events with key e commerce partners, resulting in increased purchasing in the 2nd quarter. Relative to our guidance in May, we estimate approximately $10,000,000 of OTC products were sold to retailers in the 2nd quarter versus our expectation for the Q3. Additionally, we saw growth in our pain portfolio in vaccines despite supply disruption on certain vaccines.

Speaker 4

Growth was partially offset by continued pressure on our legacy prescription parasiticide portfolio. However, share loss has slowed over the last several quarters. International Pet Health declined 23% in constant currency with an estimated headwind of 14 percentage points from the ERP blackout. Excluding the blackout impact, the underlying business decline was driven primarily by our Spain retail business. Exceptionally strong demand expectations and purchasing from distributors and retailers in the first half of twenty twenty two 2019 was followed by pressure on economic conditions.

Speaker 4

As a result, demand did not materialize in the second half of twenty twenty two and remained below expectations in the first half of twenty twenty three, resulting in a year over year decline in both periods for our business. 2020. In 2023, this impacted our business in the Q1, but was more significant in the Q2. We believe continued improvement in consumer demand will drive sales improvements in the second half of twenty twenty three and the first half of twenty twenty four. Moving to farm animal, Our global business declined 3% with an estimated 5% headwind from the ERP blackout.

Speaker 4

Excluding that, The underlying business growth was driven by strength across international poultry and aqua, partially offset by expected declines in U. S. Cattle related to vaccine supply disruption and regulatory changes for implants. Supply disruption for cattle vaccines is expected to be remediated in the 3rd quarter, providing a tailwind in the second half, but to a lesser extent than we expected in our call in May. Continuing down the income statement on Slide 12, Gross margin increased 10 basis points to 58.9%.

Speaker 4

Gross margin includes 150 basis points to 180 basis 2nd quarter. Points of unfavorability from the ERP blackout. The underlying improvement was driven by price growth, productivity and the favorable impact of FX on cost of sales, offset by higher inflation. Operating expense increased 2% year over year in the quarter, With R and D expenses down 1% to $81,000,000 and SG and A expenses up 3%, driven by increased marketing investment and employee related expenses partially offset by the favorable impact of foreign exchange rates. Interest expense was $74,000,000 compared to $50,000,000 last year, 2019.

Speaker 4

Slightly better than our expectations. Adjusted EBITDA was $222,000,000 in the quarter or a decline of 27% with an estimated $70,000,000 to $90,000,000 headwind from the ERP blackout. Adjusted EBITDA margin was 21%, a decline 4.90 basis points with an estimated 450 basis point to 5.40 basis point reduction from the blackout. Adjusted EPS was $0.18 in the quarter With an estimated $0.11 to $0.14 headwind from the ERP blackout, assuming a corporate consolidated tax rate in line with the Q1 of 21.9%. On Slide 13, we provide a walk from our 2nd quarter guidance to actuals.

Speaker 4

The over performance compared to guidance for adjusted EBITDA and adjusted EPS in the quarter was driven by higher than expected sales in our higher margin U. S. Pet Health business. Additionally, the adjusted EBITDA benefit of $61,000,000 compared to the top end of the guidance range included favorable impacts on COGS and lower operating expense. The adjusted EPS benefit of $0.13 was also impacted by $0.03 of favorability from interest and tax.

Speaker 4

Before moving to guidance, let me offer a few words on our cash, working capital and debt on Slide 14. Cash provided by operations was $61,000,000 in the quarter. The year over year decline in the Q2 operating cash flow reflects the impact of last year's interest rate swap settlement, higher cash interest and the increase in net working capital, specifically from inventory. Inventory was a use of cash again this quarter, driven primarily by increased farm animal inventory, largely as a result of pressure in sales volumes over the last several quarters. We are very focused on actions to improve working capital.

Speaker 4

The system integration enables opportunities to streamline collections across our entire business, improving accounts receivable and we are improving inventory management by reducing distribution centers. We are taking further actions to manage our inventory, including renegotiating the timing of delivery on API and raw material contracts, assessing safety stock levels by product and ongoing reduction of throughput at certain manufacturing facilities. These efforts are expected to deliver benefits to the balance sheet gradually over time We ended the quarter with net debt of $5,750,000,000 with $250,000,000 drawn on our $750,000,000 revolver. Today, we will retire the $344,000,000 of notes due in 2023 as we reported in our Form 8 ks from early July. We will fund the retirement with a $250,000,000 asset securitization facility on accounts receivable and approximately $100,000,000 from the revolving credit facility.

Speaker 4

As Jeff mentioned, the consolidation of our ERP system provided us the flexibility to enter into this securitization agreement. At the end of June, our net leverage ratio was 5.9x, up from 5.4x at the end of the Q1, but below our expectations due to our adjusted EBITDA outperformance in the Q2. Given the increased use of cash for inventory above our expectations in the second quarter, we now expect to pay down $50,000,000 of debt in 2023. We anticipate our year end net leverage ratio will be between 5.5x and 5.8x. Importantly, we continue to expect durable cash flows from our business over time with debt pay down as the primary capital allocation priority.

Speaker 4

To the retirement of the 2023 notes. In May, we fixed an additional $750,000,000 of variable rate debt with interest rate swaps that mature in 2028. As a result of these two financing transactions, our fixed rate debt will remain approximately 75% of total debt through the end of this year. After including the late July rate hike by the Federal Reserve, if we assume flat interest rates throughout 2024, no more Fed rate adjustments, We expect next year to have income statement interest expense of approximately $305,000,000 to $315,000,000 and cash interest between $340,000,000 $355,000,000 or a $40,000,000 to $55,000,000 improvement compared to this year on cash interest. Finally, we have also included Slide 24 in the appendix, which points to our expected meaningful reduction in project cash costs beginning in 2024.

Speaker 4

Now let's move to our financial guidance starting on Slide 16. As Jeff said, we are raising our full year guidance for revenue, adjusted EBITDA and adjusted EPS. For the full year, we now expect revenue to be between $4,350,000,000 $4,410,000,000 Approximately 1% growth to 1% decline in constant currency. For adjusted EBITDA, we now expect 950,000,000 to $1,010,000,000 Adjusted EBITDA reflects the improved sales outlook and the 2nd quarter over performance. It also factors in gross margin headwinds we expect from reducing manufacturing throughput to reduce inventory and improve cash and the investment in our Pet Health business that Jeff described.

Speaker 4

For adjusted EPS, we are raising our guidance to $0.80 to $0.89 Reflecting the adjusted EBITDA impacts and improved assumptions for interest expense and tax. On Slide 17, we are introducing financial guidance for the 3rd quarter. We expect revenue of $1,025,000,000 to $1,060,000,000 representing a constant currency growth range of 1% decline to 2% growth. We expect adjusted EBITDA between $170,000,000 $200,000,000 adjusted EPS of $0.08 to $0.13 Finally, moving to Slide 18. Our implied second half revenue guidance represents flat to 3% constant currency growth.

Speaker 4

We remain confident in the second half return to growth led by contributions from price, new product ramps, improved supply for vaccines and continued growth in poultry and aqua offsetting continued pockets of competition. Now I'll hand it back to Jeff for closing comments.

Speaker 2

Thanks, Todd. As we close, I want to thank the global Elanco team. This team around the world is laser focused on delivering value for our customers and shareholders, and our results this quarter reflect significant progress. We delivered a strong second quarter, demonstrating operational improvement, exceeding our expectations and contributing to our raised full year guidance. The continued sequential improvement in year over year underlying revenue performance was driven by a return to growth in the U.

Speaker 2

S. Pet health business, Strong International Farm Animal performance and contribution from the new products. We expect this momentum to continue with an anticipated turn to revenue growth for the company in the second half of twenty twenty three. Importantly, we've reached the pivot point With our stand up and integration now behind us and an optimized infrastructure to build our next era of innovation and growth, Our team is making strong progress on our efforts to transform animal care, bringing new solutions to some of our customers' greatest challenges from diabetes in cats to deadly parvovirus in puppies to environmental solutions in cattle. This quarter, we made significant pipeline progress on our late Change pipeline, enhancing our confidence in our differentiation and launch revenue expectations.

Speaker 2

We are very encouraged by this advancement and are investing to maximize the potential of our full portfolio and the expected launches. Our focus With that, I'll turn it over to Katie to moderate the Q and A.

Operator

Thanks, Jeff. We'd like to take questions from as many callers as possible.

Speaker 1

Your first question comes from the line of Mike Ryskin from Bank of America. Your line is open.

Speaker 5

Great. Thanks for taking the question guys. My first one is going to focus on the innovation side of things. There were a number of times you flagged that you have all necessary data for approval with the FDA. So That's the case for the JAK inhibitor now.

Speaker 5

And then you expect that to be the case for Credelio, Clotrut and Vovaer by the end of August. Could you just walk us through what comes after that? What are the additional steps? Obviously, that's in the hands of the FDA at that point. But it's a 4 to 6 month window from all data with the FDA to approval, assuming Things go correctly and there's no secondary data request.

Speaker 5

Is 4 to 6 months the right way to think about that timeframe?

Speaker 2

Yes, Mike. Thank you. Thanks for the question. That is correct. So what we were doing here is to just be very clear is Whether it's dialogue with the FDA or the submissions itself, we're confident that they have The information they need, as you know, with the ADUFA process, these products are subject to approval, but that is correct.

Speaker 2

And I think we Disclosed some additional information today that really reiterates and builds our confidence more than even a quarter ago relative to that $600,000,000 to $700,000,000 commitment that we have. And I just really want to emphasize that the $210,000,000 to $250,000,000 of innovation led by ADTAB, The Experior success, the Parvo success, that will be our base. And then the additional information that we shared on Credelio Quatro, our broad spectrum parasiticide, the Bover, as well as those two submissions as well as the JAK1 inhibitor. So that is correct. When you follow the ADUFA process, which is predictable, you are going to see that that's in that window of 4 to 6 months, which put us on the path for the first half of twenty twenty four.

Speaker 6

Great. Thanks. And kind

Speaker 5

of related to that one for Todd. As you called out, you beat the 2Q EBITDA by a little over $60,000,000 but you're raising the full year by almost So you talked about the moving pieces in the second half, a little bit on gross margin, but you also flagged additional investments in Pet Health. Could you talk through what that what those investments are? And is that the biggest part of the incremental spend in the second half? Just Clarify that second half EBITDA bridge for us a little bit.

Speaker 5

Thanks.

Speaker 7

Sure, Mike. Thank you for the question. Yes, we're very pleased with how the team executed Across the Q2, we always take a balanced approach in looking at our business and have a lot of things breaking our way this past quarter to deliver that significant EBITDA beat. As we then look to the second half, we're focused on continuing to build, create value for the long term. 2019.

Speaker 7

As Jeff just mentioned, the innovation that's coming is critical to that long term success and the continued increased EBITDA growth we expect to have. To that end, we're investing about $10,000,000 incrementally on sales force expansion for our U. S. Pet health team to drive both the complete portfolio, but also the new innovation embedded in that is also increasing global marketing expertise with Tim Bennington and his team that we're building underneath Tim to be ready to globalize these products to build them out in international markets over time as well. So that's one part of the EBITDA bridge for the 2nd quarter.

Speaker 7

The other element is about $20,000,000 relates to slowing down our manufacturing plants. Q2 was a really good quarter across the board except for one thing and that was increasing inventory more than we expected on our own balance sheet. A lot of that relates to API purchases for products, especially on the farm animal business that Yes, we have to make decisions on kind of 18 to 24 months in advance given the disruption to the supply chain from COVID. So a lot of that product still coming in the door, but we're addressing it. We're slowing down plant output.

Speaker 7

That's putting pressure on gross margin as well to about $20,000,000 And then there's some other timing elements and mix shifts, that are always going on our business that are also impacting that bridge. But net debt strong quarter, really strong quarter by U. S. OTC business. And as a reminder, the seasonality of our business makes that predominantly a first half business.

Speaker 7

And so that also affects 2nd quarter where our beat could come from. So again, very pleased with the execution by the team across the year, which is allowing us to raise full year guidance on sales, adjusted EBITDA and adjusted EPS.

Speaker 8

Thanks, Mike. We'll take the next caller.

Speaker 9

2nd quarter.

Speaker 1

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

Speaker 6

Great. Thanks so much for the questions and the color on the pipeline updates here. I guess first question for me is maybe just extending that discussion on SG and A and now looking for formal guidance here. But just as we think about next year, how much incremental investment do we need to think about now that you have additional clarity on Some of these assets and the profiles in the market. I guess, on one hand, it's, I guess, the balance between investing properly behind these and then similarly kind of managing kind of earnings progression.

Speaker 6

So, yourself a little bit about just how do we think about those? And then the second question I had was just on the pipeline. I think you talked about Credelio Quattro and the profile there. Is there anything you can provide on the JAK inhibitor? I see in the slides it mentions differentiation, but just any color on what that profile could Look like and how that fits in the market.

Speaker 6

Thanks so much.

Speaker 7

Sure, Chris. With respect to next year's investment, certainly we're starting to ramp that up this year 2nd quarter. As we expand the sales force and add to the marketing, overall, we're continuing to make sure that we launch These products really well. They will be the growth driver for Elanco in the years to come. And so we're going to make sure to not short those.

Speaker 7

We've got a broad business. We've got a lot of things in motion. As we've talked, the ERP completion does provide incremental synergies next year across our portfolio We continue to capture in the about $20,000,000 range in addition then to investments we'll need to make for these products to launch them well. So Not giving guidance today, but certainly understand the importance of driving a launch as these products come to market. And then Jeff on the

Speaker 2

Yes, yes, Chris, thank you for the question. I would just say and emphasize, I think Ellen and her team this quarter represented the level of discipline. I think the level of quality, the quality of these submissions, the engagement with the regulatory bodies, and I would say the engagement, the capacity Has probably never been higher in any time I've seen in Elanco R and D. As you look specifically to Jeff, again, going into this $1,000,000,000 plus derm market, We have not put any more light on the differentiation. As I've said in the past, safety, efficacy, convenience will be important.

Speaker 2

I think the noted Significant differentiation we see is on the para side having this differentiated coverage. It really allows us as we start to think about approaching vet clinics being able to have a very broad pain portfolio, A differentiated para and very broad para and now coming with this Jack that will be another factor to Todd's point on our level of confidence, The increasing of that confidence in the last quarter, the level of differentiation, candidly, the level of current innovation with even parvo Has led us to say we're going to lean in and make some of these investments. So but no more additional color at this time on the JAK other than to say it is differentiated. We believe the FDA already has what they need and we're tracking nicely for our first half a path to a first half approval for 2024.

Speaker 9

2nd quarter. Thank you.

Speaker 8

Great. Thanks. We'll take the next caller please.

Speaker 1

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

Speaker 3

Hi, guys. Thanks for taking my questions. Maybe a couple, if I may. First, I saw you raised overall guidance, But the low end of your net leverage expectations is now 5.5 versus 5.3 previously, and I was trying to understand why that would be. And I'm talking about the year end net leverage expectation.

Speaker 3

Secondly, on the securitization facility, I noticed your collateral for that includes cash and investments and inventory and it also proceeds to say all other personal fixture property or assets of the borrower. And I'm trying to understand is that typical?

Speaker 7

Yes. Umer, with respect to the leverage, we did increase, but as we called out, we're expecting to pay down less gross debt this year than we previously had. But again, feel confident that the management of the inventory that we're getting into as well as the continued underlying growth in the business as we return to revenue growth in the second half. We'll make that improve over time. And then the AR facility is a very standard secured facility.

Speaker 7

This was really enabled by Our ERP integration with having all of the receivables in one system that allows us to execute this typical Facility that's got a lowest cost of variable rate financing for us at SOFR plus 125 basis

Speaker 2

Thank you.

Speaker 8

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

Speaker 1

Your next question comes from the line of Jon Block from Stifel. Your line is

Speaker 10

open. Thanks, guys. Good morning. I'll ask both upfront. Todd, the 1x to 2x 23 EBITDA cadence seems Largely in line with the 2022 cadence, but I believe the revenue seems a little bit more back end weighted in 2023 relative to 2022.

Speaker 9

So maybe if you

Speaker 10

could just Explain the confidence in that slightly greater percent of sales for 2H23 relative to what you experienced last year. A quick sidebar question to that is the $21,000,000 add back in EBITDA this quarter, do I

Speaker 2

have that right that that aided EBITDA,

Speaker 10

it seems like 20,000,000 of that might have been unwinding in accrual on Seresto. And if there was a natural segue there, the second part of the question would just be, Jeff, Seresto resolution is finally there. That's great. Just would love you taking a step back and getting your thoughts about the long term growth rate of that product going forward. Thanks guys.

Speaker 7

Thanks, John, for your question. I would say there's nothing different on the revenue cadence other than second half of last year It was not a strong second half for Elanco and that factors in. With respect to the Seresto settlement on the multi district litigation we had. We're in process of finalizing that, but enough there to do the accrual. That is not in our adjusted EBITDA results.

Speaker 7

That's in the OID part of The adjustments that you can see in the back of our press release as we walk from GAAP to our adjusted results. That'll Jeff?

Speaker 2

Yes. Thanks, John, for the question. We had a really great first quarter and second quarter, first half on pet retail and I think it links to the Seresto 2nd quarter. We're very happy with the outcome. We, as I mentioned, believe that it's a science based decision.

Speaker 2

It reaffirms the long term registration product and raising the bar on the overall category of collars. As we look at retail, we you saw the return to growth high single digits for 2nd quarter. I think as you look forward, here's some of the things that we mentioned on the last quarter that really played out. The increased physical availability, the bringing in innovation with it. So the advantage brands that we've launched inside of those, price and share of voice.

Speaker 2

I'll just call out a couple of things and I think just because our retail capability grows, our share has grown, 2. It's been a very strong market with really less trade down and actually strong market. A couple of things. We put a very aggressive and probably most comprehensive campaign we've ever done with Seresto. We've seen 50% increase in a kind of click rate on that campaign.

Speaker 2

And then the total distribution points back to physical availability We're up 14% for the first half. So these are the factors. I believe our team is kind of as experienced as anyone in the industry. Our share is growing. So when I look at Seresto long term, we're well positioned, but it's going to be these four factors that matter:

Speaker 3

2nd quarter. Price innovation, physical availability and share

Speaker 2

of voice. We're not giving guidance today, but we see the stability and return to growth as a positive thing long term, not just in the U. S, but globally.

Speaker 8

Great. We'll take the next question, please.

Speaker 1

Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.

Speaker 11

Great. Good morning. Thanks for the questions. Todd, I guess first I wanted to go back to the commentary on gross margin and the $20,000,000 impact from reduced throughput in the manufacturing facilities. Can you talk about how that plays through to 2024?

Speaker 11

And do you see kind of that normalizing next So that there wouldn't be the type of gross margin drag. And does it have any implications for your free cash flow expectations next year? And then I wanted to as a second question, ask on the IL-thirty one. I think You know added the commentary around it's now kind of a differentiated product versus what's on the market. Are there any details that you can give us there.

Speaker 11

And in terms of the timing of approval, can you maybe talk about what additional data requirements

Speaker 7

Back to your first question, as the way the team sees it today, we've got a number of different items across our manufacturing footprint that we continue to work on To improve gross margins, you would have seen it here in the second quarter that we had a very strong gross margin quarter, well north of 60%. Once you Add back the impact from the ERP integration. So you get into improved price. That continues to be a big driver Of gross margin improvement. We've got productivity continuing.

Speaker 7

Inflation in certain areas is starting to stabilize, especially on the shipping side. Then with respect to plants, yes, it does have an impact the second half of this year. It will have an impact into next year. But overall, we Continue to feel good about the momentum, especially with U. S.

Speaker 7

Pet health doing better as that is our highest margin area of the company.

Speaker 2

May relative to the IL-thirty one, yes, we're excited to announce that research has confirmed differentiation to the product. So this now Confirms that all of our late stage pet assets are differentiated and that leads to the investment and our belief that we have an opportunity to take more share as we go into the market, which leads to the investments. Relative to the change in and I'm not going to get into the differentiation at this time, but it would fall in the categories that I've mentioned before. I think the shift in expectations, again, I won't get into the great detail, but again, this is a USDA, not an FDA product. I think that's important.

Speaker 2

So it doesn't fall under an ADUFA, which is maybe a process that's very well defined on the FDA side. But this is a shift of expectation that was really driven by the USDA's increased data requirements across the monoclonal antibody platforms here in the U. S. And again, won't get into great detail. Those increased requirements, I will say though are related to more of the magnitude of the data.

Speaker 2

And it doesn't really, we believe, oppose any technical risk, only a timeline shift.

Speaker 8

Great. We'll take the next question.

Speaker 1

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

Speaker 8

Hi, everyone. Thanks for taking the question. I wanted to kind of focus a

Speaker 9

little bit on the progression of margins and sales, especially as we're kind of updating our models '24 and maybe ask a slightly different question. But maybe you can talk a little bit about when you have some of these new product launches in the first half of twenty twenty four, What are your expectations maybe around controlled launch periods? Is that should we be factoring in a little bit of a period where you ramp sales more so than normal? And then On the other side of that, how does the manufacturing side look? When can they start to be kind of margin accretive?

Speaker 7

Thanks, Brandon. As you well, we're not going to give guidance today, but we'll again talk about same information we provided last 2nd quarter with respect to approval to launch. Usually, it's about 2 to 4 months post approval before we get the launch as labels get finalized and those sorts of Elements. With respect to margin, again, we feel very good about the margin prospects and all these products overtime, but clearly as you ramp sales and get to higher levels, we get better economies of scale on those. With respect to Credelio Quattro as well as the JAK inhibitor, we expect those to be higher margins at the start.

Speaker 7

With respect to Bovair, given that significant pull forward of approval versus when we acquired it, it means we're going to have 3rd party contract manufacturing supply that will be at a higher margin and thus less accretive to our overall portfolio than the pet health products. But overall, we're looking forward to getting these approved, getting them launched and they'll be the big drivers over the next few years to increase margins, increase free cash flow and drive EBITDA higher.

Speaker 8

Great. Thank you. And then one other question just on

Speaker 9

the international side. I think you mentioned some pockets of international weakness in some countries. Can you just Give an update on the macro backdrop internationally and where there might be any pockets of weakness or strength? Thanks.

Speaker 2

Yes. I think on the strength side, our global Poultry and Aqua franchises continue to do well. China, as we've said, is meeting our expectation, but more of a U shaped recovery, not a V. So We're keeping our eyes on consumer confidence on the pet side and swine prices still remain just a little below breakeven. We're seeing mid single digit growth in China tracking to our expectations.

Speaker 2

I think there's a little bit of a slower pet market in Japan and Australia. I mean those would be a little bit of a few pockets of softness. But again, I've traveled to Asia, Latin America this year or this past quarter. And I would say again, the resiliency of the pet market continues to hold. The strength of global poultry and aqua continue to hold very well.

Speaker 2

So Our portfolio is faring very well, which has driven the 4% growth in Farm Animal International.

Speaker 8

2. Great. We'll take the next question.

Speaker 1

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

Speaker 8

Good morning, everyone. This is Mikaela on for Balaji. Thanks for taking our questions. Just could you provide a bit more detail around how you're thinking about the Oclatro in comparison like Treo and NexGard Plus and just really any further details on how it's just going to be a differentiator? Thanks.

Speaker 2

Yes. Thank you for the question. Yes, very much so. So look, I think a lot's happened over the last few months in the parasiticide business, again, the largest market globally over $5,000,000,000 And I would just say look at Credelio Quattro as the next evolution in our Credelio franchise with billing off from Credelio Dog, Credelio Plus, which is really our broad spectrum outside of the U. S.

Speaker 2

Doing very well and very competitive. This will be, I believe, the first product in canine with 4 Ingredients and the differentiated coverage I just would want to emphasize is fleas and ticks, but also heartworm, roundworm and tapeworm. Additionally, and that would be new information here on this call. And then I think, if approved, we are focused on 100% heartworm prevention after 1 month. I think that's important and active during that 1st month.

Speaker 2

And I think that would be additional. Again, all of these, this is relative to products. It's still under subject to approval. But again, we believe differentiated coverage will be key. It will play with a broad parasiticide portfolio that we have and it will be also kind of in sequence with a derm portfolio that will be coming as well, which we believe Will be a factor in our adoption rates and our competitiveness as we enter into the market in 2024.

Speaker 8

Great. Thanks. We'll take the next caller.

Speaker 1

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

Speaker 12

Hi. Thank you for taking the question and great job executing this quarter. Can you talk about some of the assumptions on the pretty fast growth assumptions for parvo, Whether it be maybe a prophylactic indication, maybe what outside the U. S. Might look like in that indication.

Speaker 12

Just Any kind of color on what you why you think that could be a blockbuster or the assumptions needed? And then just to ask The second question upfront. I think you highlighted, if I misunderstood, some new marketing strategies with Seresto and Advantage. Just give a little bit more color on to what Thank you very much.

Speaker 2

Yes. Thank you for the questions. Parvo, we're off to a great start. As we mentioned, launching the product in July, early reports. There's some amazing stories.

Speaker 2

Again, the product is working extremely well. The supply chain is solidified being able to move a frozen product and that's going well. So again, our first monoclonal antibody, I would focus first and foremost on our U. S. Market.

Speaker 2

So 330,000 cases we are seeing on an annual basis. That doesn't include shelters. We're building a market here while we're doing this. And early efficacy is really important, and we're seeing that. We're seeing quicker treatment.

Speaker 2

So if you think about the value proposition of this product, what you're seeing is a quicker response rate to recovery And a higher rate. We at this point in time, every dog that's been treated to our knowledge, the puppies have survived. But what may take 4 to 5 days in a vet clinic in a very burdensome treatment regime, This can be 24 to 48 hours and a much higher success rate. I think the other thing for us is we're seeing a carryover with parvo, More access to more clinics because all clinics want to talk about and have the ability to have this product. So that's also fared well.

Speaker 2

So our focus right now is on the U. S. Our focus is on increasing manufacturing capacity 10x. We're expecting $5,000,000 to $7,000,000 of sales this year, But a very big step up in manufacturing capacity as we go into 2024 and that will help us as we head forward. And then yes, global approvals Give us a path to a blockbuster product.

Speaker 2

Back on the retail side, again, I come back to just these four pillars we're focused on led by Fiscal availability is just we're in more stores on more shelves, both Seresto Advantage, leveraging those brands and also at more price points. So when we introduced the new Advantage Brands at more price points, so price is another factor, Increasing share of voice, more campaigns, more targeted digital with those campaigns as another factor. And then bringing innovation. We've got Ellen and Bobby. They've got a whole arm of innovation that links to that.

Speaker 2

So, as a whole, we've increased Our share, this quarter on retail and we continue to see this as a significant driver. And as we launch ad tab over in Europe, The same thing applies as well to the international markets. So excited about that.

Operator

Great. I believe that was our last caller question. So Jeff, would you like to close us?

Speaker 2

Yes. So thank you for your interest. Again, another quarter. We believe proof and progress on our strategy, delivering above our expectations, Raising the guidance for the full year, we see our company returning to growth in the second half of this year and heading into the next era Significant innovation and growth, starting with the innovation that's approved that is ramping as we move forward today. Again, we are more capable today than we've ever been with our ERP stand up complete, Seresto behind us.

Speaker 2

And now our focus is on delivering today while preparing also for these historical innovations That are coming in as we head into 2024. Thanks for your interest. We look forward to engaging with you throughout the quarter.

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Earnings Conference Call
Acelyrin Q2 2023
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