Q1 2020 Earnings Call
As for the benefit of the investment community, it's not intended to be promotional and is not sufficient for prescribing decisions. You can find our press release the slides referenced on this call and an investor workbook on Elanco dotcom the slides in the press release also contain further information about the non-GAAP financial measures that will discuss during today's call.
After our prepared remarks, we'll be happy to take your questions.
This morning, our introductory comments are longer than usual. So we are prepared to extend the call to ensure we speak to everyone who has a question.
With that let me turn the call over to Jeff to provide the highlights.
Thanks, Jim Good morning, everyone. These are truly unprecedented times and from everyone. At Elanco, Let me begin by offering our thoughts prayers and well wishes to all those impacted by cobot 19.
We also express our gratitude to those on the front lines battling this disease caring for the afflicted and providing essential needs of life for all of US. This includes the farmers and veterinarians working to maintain the availability of our food supply and keeping our pets healthy I'd like to personally. Thank all of my Linco colleagues are working diligently to ensure.
There are medicines remain available to pet owners farmers and veterinarians.
As you know we land goes a purpose driven company guided by our vision of food and companionship and routine life. This vision has never been more relevant than the last couple of months.
With the animal health industry designated as essential our manufacturing plants in research labs continue operating.
To serve our customers having implemented appropriate personal safety measures.
Employees and all other company functions are working remotely abiding by social distancing rules and maintaining virtual engagement with our customers investors regulators and other Soc stakeholders. We are beginning to put phase to return to site measures in place where appropriate.
Elanco in the Elanco Foundation formed in 2019 are also doing their part we're collaborating with leaders in their communities, where we operate providing financial support from the Elanco Foundation to help fight rising food and security challenges brought on by this outbreak Elanco in the foundation will continue to look for more ways.
Just to help.
The covert 19 virus and ensuing pandemic are impacting our lives and our industry from declining vet clinic visits and revenue to pressures and protein production and logistics our customers began to feel the impacts in the second half of March.
And the pressures have continued into April and May in both companion animal and food animal markets.
We are carefully watching the leading indicators and I'll discuss this in more detail at the end of the call.
The coal that 19 pandemic has impacted elanco in Q1, particularly the effect on our commercial distribution partners liquidity and thus actions that the pandemic has prompted us to take and working with them as shown on slide four.
The decline in our Q1 revenue is a direct result of these discrete commercial actions.
I will summarize first and then provide more details.
The covert pandemic created significant working capital and liquidity pressures and in certainty on near term and customer demand for distributors.
Tempting reductions in the amount of inventory they hole.
This unprecedented event also created a tipping point and the changes we were executing and our distribution approach.
Recall at the start of 2020, we consolidated our US companion animal distributors from eight to four and we instituted specific targets for them to generate end customer demand.
Also personally established a monthly review meeting with each of them.
Based on this evaluation of distributor performance across our business, we've seen a range of capabilities both across the promotional mix and across individual distributors distributors are valuable in servicing vet clinics accounts, providing logistics home delivery services and other support activities.
But a critical conclusion is that our distributors ability to generate demand is much less effective than our own, especially in generating new clinic placements for our products.
As the Elanco demand creation was increasing.
We were seeing less impact directly by distributors in today's environment.
Furthermore, the volume of product being held by distributors was not impacting their ability to create demand.
This is an insight and a change from our historical experience.
The covert pandemic also impacted the inventory shift from our distributor consolidation.
We expected the four remaining distributors would need to increase their inventory levels to handle the larger volume going through their operations offsetting the inventory drawdown in the eliminated distributors.
With the liquidity in working capital pressure from Colvin, the distributors are managing their inventory more tightly.
Consequently in Q1, we reduced the amount of product and distributor inventory by approximately 60 million.
Mainly in the US companion animal space and we expect to further reduce an additional 80 million to a 100 million mainly in the second quarter as we apply these new tactics across our business and geographies.
The evaluation of our distributors was the priority as I took primary responsibility for our US operations last December.
With the insights gained engine distributors capabilities and broader actions that drive demand as well as the upcoming close on the Bayer acquisition.
Im excited by the changes in the Lanka's commercial leadership and I'm confident we'll continue to create industry, leading execution and demand creation product launches and full utilization of the omni channel.
This is an important modification in our tactics.
And the Covance pandemic was a trigger that accelerated this change at the end of March in into Q2.
We have gained important insight where own capabilities are superior and we're adjusting our investments accordingly.
We are confident.
At this tactical change will improve our cash flow working capital level of control and commercial execution.
In the near term. However, this decision negatively impacts our reported sales.
With that summary, let me provide additional commentary on how we have worked with distributors in the past and how we're changing now.
Manufacturers have a variety of arrangements with distributors, we established our buy sell distribution structure. When we started our companion animal business in 2007.
And inventory has been an important part of the equation to do the following.
Maintaining elanco as a priority and their promotional efforts ensure strong positioning of our products in the face of new market entrants generics or other competitive dynamics facilitate flow through to only end vet clinic.
And ensure safety stock at multiple nodes of supply chain with steadily increasing demand and expanding portfolios.
This strategy had worked successfully over the years as we grew share we introduced new products, we created new clinic placements and built brand awareness with both the clinics and pet owners.
We have been evolving the structures, but the basic arrangements, including the assume the value of their promotional efforts and importance of inventory has been unchanged for 13 years.
However, as we have built our internal promotional capabilities and dug into the data with clear deliverables for distribution partners.
And dealt with our customers liquidity challenges that were triggered by coal bid. We concluded we needed to accelerate the change in inventory levels.
As I mentioned there are areas were distribution plays a valuable role and we're moving to hybrid approaches to focus scope and targeted value efforts.
The plan Bayer acquisition also enables us to do this now since we will have expanded portfolio across more channels.
We will also have the capabilities to use arrangements beyond the buy sell structure, we use now.
The majority of our efforts are in the companion animal categories, but we've made adjustments in the food animal space as well.
The Q1 decreases and the reported sales.
In our companion animal disease prevention and companion animal therapeutic categories are the direct result of these channel inventory adjustments.
We expect second quarter decreases in our food animal business as Cove. It began impacting this portion of our business more in Q2 as the processing plants across the us began closing.
These changes will strengthen our position.
Optimize our promotional approach and enable us to direct investment in the commercial activities that drive demand for our products over the long run.
These actions fit directly into our broader price and productivity priorities and our innovation portfolio and productivity strategy.
This change in tactics with our distribution partners and resulting in one time negative impact will largely occur in the first half of 2020.
But have immediate positive impact on our commercial competitiveness.
And very important to note.
I'm also willing to make this change in tactics, because I see positive trends in the underlying business already in 2020 that are the result of elanco capabilities in sales and purely commercial competitiveness.
As well as a targeted marketing approach and leveraging value beyond products throughout the organization.
Here are some material examples that highlight why elanco own demand creation will become the priority and distribution will play targeted enabling role.
First and foremost in the us the outbound sales of our companion animal products into vet clinics or alternative channels, where we call.
Sales have been growing in the mid single digits over the past year and that continued in the first quarter.
In the outside the vet channels Elanco is outgrowing, the overall market and gaining share in Q1.
A landfill Q1 growth in these alternative channels is nearly 35%.
This is a great example of a trend that we've been betting on especially with the Bayer acquisition.
We are seeing the market evolve even faster than we anticipated when assembling the Bayer transaction.
The same trend and positive execution was demonstrated with solid double digit growth with Bayer through Q1.
Our us food animal business has had flat to slightly negative VDI sales. Despite the trade challenges with pay lean the inconsistency of supply related to the contract sterile manufacturing partner and the launch of a generic Robinson.
And I can say that our strategy to maximize romance and sales in the us against the generic is working.
And for our productivity agenda, the areas that we directly control price and cost facing actions continue to be positive even in a challenging Q1.
External market data from kinetic a third party provider is also encouraging.
In Q1 credentials, 7% growth in market penetration exceeded all leather canine flea and tick brands.
Crude elio obtains nearly 10% of sales from new puppy starts nearly double the category average.
New patient acquisition is a critical part of our strategy in order to significantly capture the lifetime value of the path.
Relative to last year interceptor pluses increased penetration even in the face of new competition with over 22% growth.
In the number of pace continues to see strong growth through our marketing efforts highlighting the benefits of comprehensive coverage against the worms that pets can be exposed to in their current environment.
And in clinics, where the product.
Is on the shelf Gallup Pran is increasingly used as the first or second most recommended in said for osteoarthritis pain in dogs.
Finally, some invoked China, which was a significant showing signs of recovery and their swine herds. Among the large king ahead of our expectations in Q1.
Moreover, our international poultry vaccine.
Can you to lead our future protein and health care category.
I am.
Newsy and this year presents unique challenges, we do not expect when we started the year.
But beyond this behind this noise is a durable business was strong brands.
Innovation and execution.
Even through the current pandemic.
Strategy.
The reduction in channel inventory is a structural change with our distribution partners animal.
19, pandemic, but ultimately it strengthens our proven commercial capability, while increasing our country.
And our growth potential.
So let's now transition is.
On our IP strategy.
And the Bayer animal health acquisition progress on all of the key elements of our strategy.
We are continuing to geographic expansion.
Approvals for Gallup Brant and companion App.
Normal markets, Australia and Japan.
Social distance seen measures are driving increased.
Us.
This dynamic.
At USG with the Bayer acquisition.
Which will give us a much larger presence and the alternative channels.
As an illustration bare animal health posted.
17% growth in their Q1 earnings in April.
Resto grew 51% percent.
With both products showing the strongest sales gains in the us.
While these benefit benefited from pandemic and a favorable prior year comparison in the us the underlying demand growth is strong.
Additionally, we announced a collaboration with that now to provide veterinarians access to an industry, leading telemedicine platform.
Telemedicine as a part of a bigger agenda to enable the connection between pet owners and veterinarians across multiple mediums and platforms from our sales team tele sales target to use of distribution and Omnichannel leadership that will come from the combination of both Elanco and bear.
And our productivity agenda anchored in our cost facing activities throughout manufacturing is on track and delivering.
Our productivity efforts were a benefit to gross margin in the quarter Todd will discuss the overall margin in more detail later.
Finally, the independent companies stand up in ERP development remains on track, even with social distancing and remote working arrangements.
The Bayer acquisition continues to progress towards a mid year close we recently received antitrust clearances in Columbia, South Africa, and Vietnam. In addition to the previous approvals in China, Ukraine and Turkey.
After several months of constructive pre notification discussions on April 14th we submitted form CEO to the European Commission.
They now have until June eight to make a decision.
The UK competition in markets that already has accepted the merger filing from dextra.
Who is purchasing a cerny.
And commence their review this is another positive event towards close.
All of the financing elements for the acquisition are in place.
We're making progress in preparation for day, one integration activities.
And the bid.
Filled out of the SAP ERP system at despite the need to work remotely.
To bear any land Coty teams are making significant progress on all integration activities, including preparations to capture synergies.
And we announced the new executive team, including personnel from Elanco bear as well as external hires.
We have structured maximize the value of our combined portfolio channels and.
Capabilities in all the executive Committee to include new lease.
Heaters of US Pet health, we are also dividing our international commercial organization with leaders.
No focused on emerging markets.
And these changes become effective when the Bayer acquisition closes.
Finally, we're adding a chief marketing officer now to bring greater folk connection to pet owners veterinarians.
And producers.
These very deep expertise.
Established since the IPO.
It also gives us a flatter more agile structure that is closer to.
Animal health and consumer packaged goods.
Deeper expertise on commercial execution and animal health.
Diversity of Elanco bear an ex journal tenure.
On the executive team.
And.
A dedicated focus on for market areas that operate substantially different than the competitive landscape go to mark.
That each of these executives.
We will have their lead teams named and in place by day, one and create a more positive initial transition.
All right.
Is to grow across channels and businesses as we enter the next era of launching multiple products.
From our combined leadership team during.
Within an appropriate time.
Closes.
Let me sum.
Our sales in the quarter impacted by cold it and its triggering effect to accelerate.
As I look beyond this event I'm positive on the value of our.
Products, our commercial strategy and the moves we are making to ppas.
Disneyland code for the future.
To ensure that our execution remains.
Density sustains as we.
Move to a mid year projected close call over to Todd to provide more color on our results and outlook.
Thanks, Joe.
Slide six summarizes our approach.
Listen to some of GAAP results, while slide seven describes the items considered a new adjusted financials slide 17 to 20 in the appendix provides a summary of the adjustments made to the GAAP results to arrive at our adjusted presentation.
I'll focus my comments on our adjusted measures to provide insights into the please refer to todays earnings press release.
Year on year changes in our first quarter GAAP results.
Looking at the adjusted measures on slide rules.
You will see total ankle revenue decreased 10% in the quarter, our Thompson currency basis, both total annual revenue and corollary dual revenue decreased 9%.
Gross margin as a percent of revenue was 50.1% they declined compared to the first quarter of last year, driven by geographic and category product mix with a larger portion of sales coming from lower margin international markets and food animal products as well as a negative impact from foreign exchange. This headwind was partially.
Offset by continued productivity gains and positive price.
Our productivity efforts, including a reduction in compensation and benefit cost of our manufacturing and quality era remain on track and are ahead of expectations in certain areas.
Operating expense increased 1% in the first quarter marketing selling and administrative expense was flat at 182 million, reflecting incremental investments and standalone capabilities offset by strong expense management throughout the organization as illustrated by the $4 million sequential decline from Q4 2019.
R&D expense increased 4% to $66.8 billion or 10% of revenue, reflecting additional costs from acquired businesses, including errata Probetec.
Operating income declined 43%, reflecting the impact from sales gross margin and operating expenses I just described.
But the bottom line Q1, adjusted net income decreased 42% to $53.6 million with an effective tax rate of 15.9%.
Adjusted EBITDA margin of 16.2%.
Moving to slide slide nine, let's take a look at the effective price rate and volume while revenue growth.
The effective foreign exchange rates on core revenue was a 1% head with overall price grew 1% while volume declined 10%.
All the slide you can see the breakdown of revenue across our four categories I will focus on constant currency growth.
These into the impact of this solution decisions, Jeff described particularly in our two to payment animal categories will decline the disease prevention of 24%, 27% from volume offset by 3% increase in pros and cons decline in therapeutics of 18% all from volume.
As noted the underlying demand BV either revenue us for companion animal products continued to grow at mid single digit rates to see quite the slowdown in the last two weeks of the quarter I.
I mean, you US we also outgrew the market as an alternative channels outside the but office.
Turning to our food animal portfolio of future Protium health revenue grew 10% mcwhorter, 6% from volume and 4% for price growth. In this category was driven primarily by poultry vaccine that also reflecting both continued strong underlying demand as well as a small amount of anticipatory buying for sub direct cost.
Immersed in international export markets to ensure continuity of supply ahead of potential cobot dive team pandemic disruptions.
We will moves in swine revenue decreased 7% in the quarter driven by 6% decrease in volume and a 1% decrease in price requires from known headwinds for months and then failing the continued re supplies sterile injectables from our contract manufacturer and some reductions and channel inventory.
These declines were offset by encouraging demand, we see coming from the child swine market and some anticipatory buying from customers and international export markets as in poultry.
Earlier recovery from African swine fever in China is particularly encouraging.
Revenue from strategic actions decreased 13% in the quarter recall that the only two activities in this category or the vaccine contract manufacturing for B.
Reduction of human growth hormone facility. This decrease is exposed expected and consistent with the continued wind out of these activities.
On slide 10, you can see detail our overall performance in the us and internationally.
Our international business grew core revenue, 6% in the quarter, while us business declined 22%.
While there national business was aided by the anticipatory by our food animal business in the quarter, we're encouraged by the stabilization and growth in this business.
This quarter, we have added additional cash flow and balance sheet buzzard shown on slide 11.
We ended Q1 with 1.2 billion of cash and equivalents on or about.
Algae after paying down $371 million of debt financing of 4.27 billion for the bare acquisition.
As a form of a term loan b, but we'll followed up the closing.
Between the cash on our balance sheet of a term loan b commitment, we have sufficient capital to finalize the bare acquisition.
After close of the transaction, we will also have a 750 million dollar reborrow.
Now moving to our outlook.
With uncertainty surrounding cobot 19, we're not providing financial guidance for the remainder of 2020.
So the performance of both our companion animal and food animal business will be a functional social distancing restrictions developments in protein markets and our continued tightening of parameters with our distribution partners as Jeff mentioned, we estimated additional channel inventory Destocking of 80 million to 100 million second quarter, which will bring us to design.
Third levels for our new model going forward also as a reminder, bare care.
Approach.
We're also actively managing our operating expenses and cash flow, including delays and maintenance capital where appropriate critical evaluation of external spend careful assessment sort of open positions and savings for reduced travel we will continue to invest in stand up and then.
Figuration efforts as well as innovation as these are fundamental to our long term success.
Let's move to slide 12, and turn things back to just to summarize thanks, Todd Let me start by addressing a leading indicators were watching as we navigate the impact of Covance 19 pandemic on our industry and on our business.
In the companion animal space, the easing of social distancing restrictions in the resumption of elective vet visits are key variables.
As well as the ability of our sales reps to return to in person interaction with our customers.
Products like Critelli, Ocala, Prandial Cdone entice our early in their life cycles. So sales promotion and new patient starts are important for continued growth. Likewise vaccines are delivered exclusively in the vet clinic.
In the meantime, the growth of alternative channel sales as a positive offset for many products.
And a confirmation of our Omnichannel strategy.
As a leading indicator we're encouraged by improvements in fed clinic visits primarily in the us where the latter half of April has shown a rebound after sharp declines in the prior weeks.
From Elanco, we are encouraged by April sales into the vet clinics and alternative channels at show year on year April growth for Curt Elio Interceptor, plus Galliprant and ENTYCE.
Vaccine show year on year decline due to the reduction in wellness visits, but we're optimistic for a rebound in vaccines as pet owners return to the clinics.
The food animal business is more difficult to project and May ultimately have a longer tail to return to normal.
On the positive front, although we may see trade down or shift in consumption and consumer demand for animal protein persists supporting the long term durability of this industry.
In the near term we are monitoring three main factors impacting our food animal customers across species first two shifts in demand from foodservice to retail in across species second the impact cobot 19 is having on reduced capacity absenteeism plant shutdowns.
At the processing plants and broader supply chain and third the economic impact to our customers from these supply and demand variables.
These factors impact all three of our main spcs cattle swine and poultry in general cattle and swine producers face headwinds with less foodservice and consumer trade down to lower cost proteins and cuts.
But our challenges with significant processing capacity offline with the return unpredictable.
Across species the flexibility in production practices will likely determine the severity of the impact of the industry.
Dairy producers or perhaps the most challenged given the inability to shift outputs from foodservice to retail.
Swine producers have a little flexibility in their production timelines and are having to make difficult decisions as animals backup in the supply chain.
Beef players are able to use past year as a buffer while capacity issues create uncertainty and finally poultry is in the most flexible situation given shorter life spans and more integrated supply chains that can pivot output more easily for all species the impact to Elanco pro.
Products depends on several variables, but in general reductions in animal numbers or compressed producer profitability is a headwind to our business.
It will be difficult to talk about the level of impact and recovery timelines until there is predictability.
Until processing plant capacity returns. So the producers can make informed decisions. We anticipate continued uncertainty for our customers. We will monitor these variables over the coming weeks and work with our customers to support a safe reliable and affordable food supply healthy and productive animals are even more important.
When consumers face sets unique markets and Elanco plays a critical role.
So in summary, let me close these are challenging circumstances for the animal health industry and per society overall.
But we continue to have confidence in the medium and long term durability of this industry and our strategy.
And we're even more confident.
About the acquisition and value of Bayer animal health later this year.
We will endure these challenges and we are taking actions to make a stronger for the medium and long term. We are analyzing a range of scenarios with senior management, our board external advisors and stress testing the impact on our business, we have contingency plans and degrees of freedom to navigate various possibilities, but we're not.
Quantifying the headwinds to demand at this time, we will continue to monitor the depth in the duration of the cold at 19 pandemic on both the companion and food animal sides of our business.
And as we move throughout the year, we anticipate these factors along with the reductions in channel inventory will provide headwinds to our full year results. Despite this we are confident that we have the foundation to emerge from this time as a stronger company.
And it did cold it was a catalyst to this and let me a highlight what cath what cobin did.
Was it really created two challenges tour distributor partners first liquidity issues are working capital issues that did not unable to continue to existing strategy that we've had for 13 years to continue and it also you know they had a concern about the near term end user demand and working capital with their customers so that that.
Was the catalyst I want to emphasize again, Michael as I mentioned, we always start and end these discussions and looking constantly at or overall business and underline organic demand like 80, I as I mentioned and again, we see that tracking to our original plans through the first quarter and even through April.
So that that I want to emphasize to your second question as you look going forward. Let me highlight there there [noise] are a few things as we go forward first of all you know, we we see very importantly that.
With this change we're gonna be closer to the end user demand.
We'll have less partners says you've seen and over time, what we have really done here as we move from eight to four distributors. Each one of them brings different expertise, we have tightened terms and and now what we're doing is we're tightening and lowering inventory things that will look at his.
Of course will be closer to end user demand will have less partners, they're more efficient and we'll be looking at month to month month to month matching of demand.
And that will be be much more tighter and more efficient as we mentioned and then we will evolve and moved to omni channel approach with bear and bear again as Todd mentioned really keeps much less inventory given their go to market strategy, especially with alternative channels.
<unk> well the the you know how can we get through with us to to Destocked <unk>, Yeah, we'll be more than 10% lower than we were at the end of 2006 teams. We do think we will have those structurally setup going forward.
Lord and we take the next question.
Our next question is termination rich.
Of Goldman Sachs.
Great. Thank you good morning, I'm just just following up on that you know how you kind of ensure that your product like that's or on a position favorably relative to competitor you know within your for distribution partners and you know do you see any investment the the organization need to to make any kind of you know decrease.
Lion bond the traditional distribution channel.
Yeah. So great Great question, Nathan So let me, let me highlight and we spent a lot of time and as I've highlighted I've been very actively involved in this from the beginning and what I would say as there's there's no question that we see you know distributors, playing a key role and what we see them doing very well as logistics I mean, a nine.
The nine per cent of our customers can get product overnight has an example, they can continue as we look at the way. They you know collections and and the ability to collect the convenience of one stop shopping distributors received 30% to 70% of their income to on line platforms and then we've continued to.
Great value with them on a home delivery platforms, there's varying differences as you know and services in value that these four distributors can do and I'm talking more more specifically about U.S. companion animals. So they will continue to enable us and help us, but what we found very clearly and I think this is really important eight and as well.
We drove.
The demand creation, the primary demand creation, especially when it came to new clinic penetration. So what we're doing is we have just as we have with the interceptor plus worm movement and campaign with Cordelia with gala plan on pain or C.N. significant growth in these products by targeted campaigns led to.
By our team so we can direct our investment and to do what we do best which is demand creation in customer relationships and really.
Create value and pay only for what we feel is appropriate to these distributor partners. So I I feel very good that after 13 years moving to this new approach to really having or inventory was a key factor in driving demand and brand awareness, we see this being much less of a f.
Actor and our demand creation as much more in our control.
Florida next question.
Our next question is from <unk> facade of Barclays.
Yeah.
<unk> <unk> just a couple of quick question. So appealing, but you had mentioned that you had seen a summary going April 10, new an outbreak more on that and a d. speak about you or you know to them along with them.
For a hobby see volumes trending I'm just going on.
Comments on.
<unk> what does it mean planes, we long dumb.
And maybe just pick one on on any medicine, then you'll collaboration with but no. One does mean well known with them. When you go dynamics too. Thanks.
Yeah. Thank you for for the questions. So as we look specifically at the covert impact on on the complaining animal business again, what we're watching in in the metrics that we're looking at of course is a vet visit traffic that office revenue. We also are keeping an eye on the alternative channel shift that's.
Corinne outside of the clinic and and then ultimately as as we navigate this change, especially looking at E.D.I. sales or demand pulled through the clinics.
As as mentioned, while we have seen and has been a highlighted in other forums from from multiple sources.
As you know prior to the last two weeks of March both traffic in revenue, we're we're showing growth and what we've seen is actually a pickup of actual traffic and that's continued here and the last two weeks at a quarter and into April as social this unseen restrictions.
Were implemented across the country I think trailing behind though are wellness visits I mean, they are recovering, but again they bend them most heavily impacted.
So when we look at our portfolio, we see alternative channels as we mentioned growing over 30%, we see our sticky brands around our <unk> prepare set aside and pain franchise, Gallup <unk> interceptor, plus growing very nicely, but what's been impacted the most has been our vaccine and our surgical business.
Which is around wellness, that's about 20% of our portfolio.
And then as you look at that now just briefly again a collaboration.
Much more a part of a bigger strategy that was even linked to bear as we're working to enable veterinarians to connect to more pet owners as we know more than a third of the pet owners and that may even change and expand over time are not visiting to vet clinic and what we see.
He is again a high moved to to the use of Tele medicine. We it's too early right now to say how that will impact well. We do know is a key part of our strategy is being able to enable veterinarians tab portfolios and tools to be able to reach that pad on or more.
Easily and allow that pet owner to shop, where they want to shop.
<unk> or can we take the next question.
My next question is from errand right if credit Suisse.
One moment please.
Right.
[noise] hi.
Innovation.
On the innovation bright Guy sound like you continue to be dedicated the R. and D. efforts here with five revenue generating product next year.
He had these beep blockbusters for you and I did want to follow I think Everything's question do you anticipate stepped up investments required in your own internal sail capabilities that you'd <unk> de emphasize.
Third party distributors here and how can we think about the net profit dynamic that you cut out distribution. Thanks.
Yes, It look air and at the pipeline again, I just want to check kind of give the evolution of what we have done here very clearly as we talked about coming out as an I.P.O. of late stage development projects. During this window of time, we've moved those late stage development projects, which actually launch equivalent so as we've talked.
These are probably lies launched products and we have about 20 at this point in time from Elanco that will launch between now and 2024 and then we're adding from the view that we have so far and we'll have more view as we get closer but five more from Beyer said 25.
Products between now and 2024 and what we've highlighted today as we see five of them coming between now and the end of 2021. So we do see a constant flow of innovation and really the next stare of innovation starting here soon.
Relative to the size and the blockbuster we do believe that first of all the criteria coming out is first in class or some differentiated best in class they will be a mix between food animal and companion animals, and we do believe that given the threshold that we now have have <unk>.
Traded yes, we do believe that some of these to have the merits to be blockbusters. Thank you.
We do expect to see better.
Value from the distributors as you know, we've been reducing margin with them over a number.
<unk> again this change, we'll certainly put a sort of better position on that front with them.
With respect to capabilities are we certainly been seeing changes as a result would go over the impact she'd be ourselves or outside the home and do to end up good reach and frequency with that clinics.
As we look at the best way to continue the driver old turtle demand there will be some adjustments on where those investments or made and then we throw him. Obviously the bare acquisition those walls or knew you us commercial leadership and that'll be evaluation as we move forward, but you know we're cough that our team has been driving good.
<unk> all of our growth portfolio and look forward to continuing to augment that going forward.
[noise] or okay.
Yes, Sir and next question is from junk figure if William Blair.
Good morning.
<unk> I know, you're not providing 2020 guide, but you know some clarity in terms of how you're thinking about the whole year. So you know you exclude the inventory the ducks in a corner.
How do you think the rest of the airplane you think your business will follow the trajectory of the broader market or are there other factors that we need.
You know job as we've noted there's a lot of moving pieces with respect to the time wise with respect to covert and everyone is trying to evaluate the bus fuel for that I think is jumps in the prepared remarks, the food animal is definitely one which we're keeping our eyes automatic.
<unk> feels was opening up a new swine or not I knew oh be able to swipe facility into fall. This morning, but then expected to be back full capacity until the end of the <unk> we continue to.
Spend time with or food and <unk> processing teams to understand how they're suing the business, but certainly there's a lot of uncertainties, there, especially on producer economics as well as headcount. So yeah, we do expect that to be negative about our business relative to expectations pre cove it as we've called out.
And why we pulled guidance back in March on the vet clinic side as jobs, we do have about 40% of our portfolio, but could only be used in the vet clinic that has an impact obviously as you said, we didn't see some bad traffic pick back up here in April, but it's certainly not back to the <unk>.
Levels, given silver employees is slowly changing in the number of states, but in other places clearly more issues. There and then the other bit we brought out all the marks.
I suppose you'll at originals options, we had about $70 million back on <unk>. You know dollar stirring continues we're sub waterway. It on the euros morning, So that continues to be that level desolate and so we do expect the items into this to the inventory, but continue to be significant.
Wins door overall business in 2020.
But I would say John is to pick up on on when you look at relative competitiveness has the market moves we feel well positioned even with this change and distribution. It you know it enables immediate competiveness and that's why I wanted to highlight the even through April data in terms of holding share growing the key products that we.
Need to grow and you saw that in the international results. So just to reiterate companion animal U.S. mid single digit. The O.U.S. you know, we've seen a nice growth and that 2% to 4% and the food animal and the U.S. doing well with our Romans and and again flat to declining driven more by pay lean in are in or Mike until.
<unk> so our eyes are on our competitiveness in the marketplace and we feel very good about that.
Or can we proceed.
Next question is from each <unk> J.P. Morgan.
[laughter]. This is a tad arena on for Chris Oh, Thank you for taking our questions. So one more actually on the distributor changes or <unk> distributors are unusually high level two white cue and then you've highlighted how this kind of you know <unk> strengthens your position going forward. So just wondering <unk> why now why was.
Why not twosome structure kind of earlier.
Yeah, Great Great question. So, let let me be clear that you know over time over the 13 years since starting are complaining animal business. We've been in this very similar by cell, where we actually bought you know the the distributors by the product and represent the product and let me just really highlight it's varied over time, we look at three.
Things are have looked at three things consistently on every quarter with with our distributors 90 day on trailing demands. So very disciplined process campaigns that are in place and the upcoming season. That's ahead and that's been our criteria over the years and again, we built over a billion dollar franchise.
Companion animals with this approach where their distribution partners. So so that's been important now you know factors that I would say have changed over time is one or distribution network has become more concentrated there's the varying differences between them. So we started to move towards tightening terms and.
Tightening the number of distributors and this was an evolution and as we mentioned this was not something we expected to do in the beginning of the year, but cold dead really drove this working capital and concern about vet clinic working capital in our distributors. So they're unable to continue to do this.
Inventory has helped us as I mentioned build his share of mine shelf space brand launching and as you've seen we it's been very effective to eat and build the brands of Cordelia <unk> intercepted plus over the years, but as we see now and we've been assessing we've been building our capabilities and continue to do so.
And we'll even more so with bear and we believe this allows us to optimize we do what we do best and this is to optimize and create demand creation and new placements new clinic placements, while letting today's distributor that are fewer actually enable and help us and build.
That value added service drop shipping et cetera. So to me we feel the timings right we've been assessing ness, but the tipping point was was the covert pandemic.
They dad got around on them and or the the tactical assumption. We've made that the four remaining comparing the animal distributors would be to own the same amount of inventory is the eight before.
Yeah, but just didn't play out as we have the so obviously some of that just efficiency of the districts distribution partners, we'd cap, but there's also the element, but <unk>, they tightening down and the expectations of future demand. Obviously, we're really on certain in more to the <unk> traffic of dropped.
You know, 20% to 30% based on depending on what data you were looking at so bad timing L., but then you know that was about as <unk> that turned out to be even worse with the over the impact getting triggered.
Florida next question.
Next question is from Elliot well framing James.
Hi, Thanks. This this Lucas Lee on for Elliot.
I'm not sure. If you guys. This close this already post what what's the operating cash flow for the core and how do you see this trend thing throughout the remainder of 20 corny.
And as a follow up I'm not sure how much you could comment on buyers animal business, but the first quarter result was one of their best quarter, and sometimes [noise], which appeared to be boosted by advantage product family, especially in the U.S. region is it possible for these guys to provide some color on there are all performance and how much of the increase was.
<unk>.
Covert 19 related stockpiling and how much of that growth do you think is a sustainable thank you.
Sure, let me address the operating cash, but we will be finally, our tend to you know it today early tomorrow in that you'll see operating cash flow for the quarter was a positive for a million. This is you know.
[noise] robust as we would like would give him a the back on the piano moving towards these docking the positive as it was really a function of timing of when we do our collections you will see working capital improvement that would certainly something that didn't go well for us and 2019, Oh, so off to a better start here in 22.
<unk> the other item that's impacting the operating cash flow is the investments were making both on the stand up as well as all the integration of bear as you would see in our gap results when restructuring.
Charge impact of about $77 million, a would to get a lot of that was cash out the door. So again overall positive operating cash flow into one despite the challenges two two will be under this little challenges is given the the timing of the sales decline in June.
One, but again, we're very focused our cash from liquidity going into the bare transaction. We are so to close that in mid year with the buttons available as well that commitments, we have but overall you know again. This is a challenging times, but we're very much on top of the looking two spying task.
Appropriate, although Jeff handle the the bare result.
S. Elliot so again I will start by saying that we remain competitors until the deal closes, but given the color and then you know the linkage to our diligence I would say first of all overall revenue, yes. It grows 17% compared to first quarter last year Sureste show up 51 advantage up 10 and a half.
You know while these results did benefit from some pandemic related purchasing and favorable prior year comparison. The underlined demand continues to to be very strong and continues to outgrow. The overall market I do think also there's a direct linkage to some of our diligence findings that we communicate.
It in the past they had over a 10 year headstart and moving down this alternative channel there the leaders in the alternative channel and they have the three key capabilities that we've learned in our three years in this business you need to products to be able to flow the partnerships with the key alternative chain all player players and people in the expertise and we think fees.
Definite contributors as we move to this made your clothes and again validating our our assumption and how critical and omni channel approaches.
For an X. question.
My next question is from David Westenberg.
You can hime security.
Hi, Thanks for taking the question so I'm gonna take a look at past covert here maybe in like 2023. When you talk about your your pipeline innovation last year was a tad under 15% of revenue what do you think that optimal number looks like in terms of per cent of your revenue being.
Part of the innovation portfolio and then a second one on on kind of the out your outlook it'd be a you bleed covert 19, it's going to pick up a practice consolidation trends just given the the higher leverage that better practices have and do you think you have the right consolidation sales per approach and I'm talking there.
Companion animal.
Just consolidation like.
David One clarifying question are you talking about a percentage of sales in our Andy.
<unk> well vice versa.
Yeah, So what I'm talking about is you I mean, you when you lay out you have a slide I think it was $440 million was your innovate innovation portfolio in 2019, and you know you do the mask. That's you know I think that's 14% of your your total revenue you know what is the what is the optimal number as we look in.
Maybe say 22023 as you're bringing this new innovation to to the market I mean, what would you hope that number could be.
Thanks for clarification, Yeah. So I think just at a high level. I mean, you can look out US is 2020 train, but I would even saying just start to look into heading into 2021 as I kind of look at R.I.P.P. strategy on innovation first thing is the launched products continue to perform very well across the <unk>.
Money and our key portfolios like Salmonella, an awkward et cetera. So we got over a dozen products that are in girls mode that are launching we will bring products like Clara ones to resto in from fare as well. So I start there that a lot of room and a lot of head room is just see with these launched <unk> <unk>.
Redux that are that are already approved then we've got these 25 products I just want to emphasize again more of a linear approach as we look at again five here coming out per next era of innovation and then we we continue to see that transition being pretty strong I was a constant flow and that investment we see at this point in time.
With the size and scale of being able to put he land Colin Bay or together, it's going to give us a lot of optionality a lot more capability and we'll be able to optimize to the integration process, but the expectation is we would not see that growing as a percentage Todd can elaborate and then I just would emphasize too that we are not.
Letting up on everything that we see cost facing price wise the margin expansion story and the agenda continues to remain guess, we had a one time event, we've got some aspects challenges, but as a whole we still feel very good overall about our margin expansion story and probably what excites me.
The most is looking at what the combination at this company can do with the expansion with the size, but the scale with the diversity and most importantly, where the Ami channel leadership than we can provide so I see it starting as early as 2021 and and and moving forward here over over this next Tara Freelandville.
[laughter]. Our next question is <unk>, Lord I'm sorry.
One other p. environment, you know I think I think the question on the consolidation of that clinics, you know that that the trend that's been occurring as we know and what I would say is there's there's been consolidation and I think there's also been distinct segmentation says we talked about there are some that are not trying to get better a bigger buttons.
Find a really specialized and a again that's another thing we've done with our air town acquisition is surely focus on no specially that clinics and they continue to grow and and are very sustainable. Yes. There are corporate clinics, but I I think in between there is still a lot of room and a lot of of growth for for that to independent clinic.
That continues to adapt to innovate bring on the services that costs in other industries can provide them. So yes, there'll be consolidation will accelerate it I think it's too early but you know there there may be some even maybe outside of the U.S., even more so but I think more importantly is you're going to see more sophistication.
Which brings more opportunity for the multinational animal health companies.
Great for ready now horror thanks.
Thank you. Your next question asked from Kathy minor of counseling company.
Great. Thank you I have two questions. Please on the first one when you commented on 35% growth in the <unk> channel sales is all of that on prevention sales are <unk>, he's starting to see some therapeutics another products go to deal with that site channel.
Second question on food animal can you quantify how much of the U.S. Q1 sales were the anticipatory buying or stocking and also maybe pointers to any kind of key Oh U.S. dynamics in food animal I think he talked about some of things you're watching it one more U.S., we they hit but any particular O.U.S. comments would be helpful.
<unk>.
Yes, so just just on a the alternative channel when we saw it across the all segments there, but on on on both sides, so and I and all categories and I'll just reemphasized. It represents about 10% our total companimal sales.
Mostly all in the U.S., so again smaller part of our overall base, but again <unk> across all categories and really against all key of our partners really wanting to highlight though e. commerce as as well that would be the leader of growth.
Mmm cat food animals or are we actually did have a small amount of inventory d. starting in the U.S. food animal business and there was no anticipatory by their Oh, you are sort of our export markets and those are ones, where we don't actually have a lake go into the on the ground or rather.
Distributors, they had concerns on product availability and shipping they bought a small amount of both old tree at a little bit all the room and in some swipe inside but overall Oh you US we really seeing you know does we mix of <unk> with us being still issue across China.
Love, so with or big corporate accounts is bad expand and so we're a little bit on or so hills on the chide us why those those the waited until the start of the year is progress there with the corporate account those still continuing concerns or they have a smaller backyard.
Farms with respect to the roster food animal you, there's been a little bit of processing plant closures in Brazil, and we're staying very attuned to that the actually the the evaluation of the reality has been really impactful forest. There I was just you know our products does give more expensive.
As some of them from a dollar <unk> third stray dog attacks, Oh, Dear old tree across Europe has been able to maintain through through would cove and times well see if that continues and at our teams are very much on top of it overall, so again seem less of the <unk>.
Hosting size and the backup of animals internationally than than the U.S. <unk>, we're staying very close.
Mm.
Oh, what you please.
The next question instruments Napping Jacob.
[noise] I. Thank you so much for taking my question [noise].
Totally understand the challenge is <unk> environment.
Ah, but given that given the deal can you remind that where you can leverage will be once the deal closes.
As well as your do leveraging climbs over the next one to two years. When do you think you will get to less than three times really appreciate though.
Obviously with the the dog drop in our own business here into war than the expectations of impacting June to offset by favorability all on the bare side coming off their strong core we do expect or leverage to be higher at close that we'd originally anticipated as a result of these results.
At the same time, we're toppling the cash flow generating ability of the combined business. Throughout this time, we've been very focused on the integration and setting up our teams for value capture and the like that we feel it was very much on track and so our ability to get to below three times, yeah, we're not going to.
Dress that given cove is keeping us from giving guidance for 2020. It makes it difficult to project going forward that being said you know we had anticipated that by the end of 2041, you know I don't think this is going to make you know three years shift or anything like that but it certainly within the question of how many quarters Delta.
Will there be they'll probably be a little bit of delay just because of the the Joe them back here in 2020 that being so we're very focused as we get cash in the door to be paying down that debt and to get our leverage down as quickly as we can given the challenges of having hide.
And the current environment.
Bar I think we have one more question and the queue.
[noise] Yeah, sorry next question is from a fat evercore.
[noise] Hi, this is my security incur omer. Thanks, so much for taking my question too quick ones.
Any color on the I guess I did in cases of 80 included popped up in in South Carolina and how.
So lanco might be too that in the follow up is I I know, it's early days, but <unk> have just started become available in the <unk> around mid April for a couple of weeks now any early feedback that you're hearing from customers in terms of.
Their preference over your <unk>.
[noise], Thanks, Mike real quick on Ah Ah.
On the first question, we see it contained primarily in turkeys and a and turkeys and we feel it's pretty well contain will continue to monitor that don't don't see that as anything at this stage of of significance and then you know my my comment would be our assumptions really haven't changed on that.
Competitive scenarios and companion animals, our campaigns are in full execution mode I want to be clear that we we feel very good about our competitiveness both on the sales side and the marketing side everything is in full motion I'm, even with the changes that have occurred in the <unk>.
Place you know, we've made alterations and adjustments, but as a whole again, we continue to execute very well and will continue to monitor it but again everything is on track has we had planned and again really want to emphasize when you look at 22% growth and new placements for interceptor and.
You know <unk> one of the fastest growing new placements in the area of <unk> products. We we we like what we see from a lead indicator perspective in our teams are doing a great job at a enabling that.
Or I think we had one follow up into cue that we're happy to take.
Next question is how blind she our side of our eyes.
Hi, Thanks.
I just wanted to get some more color on the five launches already mentioned because see but I know plenty plenty on.
Would either biologics Oh, you don't triple it'd be a bottom. This 2020 on lunch basket and those are the least five guarding and then he spoke of exclude any better contribution limits second lead just won't those check on the lifestyle dynamics and.
<unk> said, we need to drag is that he's done <unk> the most important metric.
We need to say thank you.
Yeah.
Yeah. So you know tend to get in a little color and again as we move towards the master a meeting that will hold at the appropriate time. After the combination of company. It's our intention with the air and shot or head of R. and D. to give a lot more color, but what we wanted to do today was to highlight that this.
Next era of innovation is is in final stages in in preparation I won't comment on any one specific I will say no. It does not include anything or products. There's time. So you know that could be an additive effect on top of the five that we have and will know a lot more upon that day one at the deal.
I'm too, but we do like their pipeline and again see a robust pipeline that is scattered throughout that now to 2024 period. So that that's important there will be a mix between food animal and companion animal and it will cover most all the geography, so and I would continue to say our threshold is getting higher relative to the size.
The significance of products coming out and you know meeting R.I.P.P. strategy. So when it comes to margin or Foleo mix and the ability to compete either and first or investing class. So more to calm, but again, we feel very good about the overall portfolio of innovation and these next five and then finally, just some livestock metrics.
Well, Yeah, I think you're exactly right predictability is what our customers want to spend a lot of time on the phone and then forums with these C.E.O.'s or the major meat processing companies and we've been engaged both in Washington as well as in the coalition's to continue to keep these plans operating to keep their employees.
Safe is the absolute priority, but to Todd's point earlier, we need to be looking at the best predictability for our producers is the opening of these plants number one like the Smithfield plant. This morning to to more capacity and I would say the one to watch the most who is probably pigs cattle has the flexibility to go to.
Past year poultry has the flexibility of cots and moving more to to a retail and grocery wow and and have shorter life cycle, where where pigs are caught in between not having that optionality. So pig plants and opening to back to full capacity is probably that that lead lead indicator.
And we're watching the most.
Almost a quarter past, Jeff do you want to offer some calls and thought yes, I I appreciate and we look forward to engage in a properly with with all of you and addressing any more specific questions that you have I just want to emphasize again like I said at my comments, we've never seen more of the importance of this industry and the durability and the need of this industry as you.
Look at pet shelters, AMTI meeting pets, and companionship too of course, the protein animal protein shortages around the world. So we're in a grain industry. That's durable we're building a leading company in this industry.
We have all the key milestones that we can control on track across that high P.P. from our pipeline to the new growth products to our margin expansion and the additive effect of standing up Elanco is on track as as well as the bay or acquisition and again, we feel more and more excited about that.
Value under the leadership of the combination of these two companies as we move to mid year, which is soon and I would emphasize that this was a one time event that we did not have planned with our distribution partners. When we started the year, but Kobe it was a catalyst and making it happen but also.
It's the right decision to write time, it makes a stronger more competitive and a and we're going to get immediate results from that and will continue to partner with their distributors and play to their strengths as well. Thanks for your time today, we look forward to continue in our dialog with you going forward.
[noise], ladies and gentlemen that concludes today's conference call. Thank you for participating you may now disconnect.
[laughter].
[laughter].