Q3 2020 Elanco Animal Health Inc Earnings Call
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At this time all participants are in to listen only mode. After the speakers presentation, there will be a question and answer session.
Good question. During this time simply press Star then the number one on your telephone keypad. If you require any further assistance at all please press star Zero I would now like to attend the call over to your speaker today, Tiffany Kanaga head of Investor Relations. Please go ahead.
Good morning.
Thank you for joining us for Elanco animal health third quarter 2020 earnings call.
Tiffany Kanaga head of Investor Relations.
Joining me on today's call are Jeff Finnin, our president and Chief Executive Officer.
Todd Young our Chief Financial Officer, and Katie grid sometime in Investor Relations.
As always during this conference call, we anticipate making projections and forward looking statements based on our current expectations are.
Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
The information, we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions.
You can find our press release.
Slides referenced on this call and an investor workbook and the investors section of Elanco Dotcom the slides and press release also contains further information about the non-GAAP financial measures that we will discuss today during this call after.
After our prepared remarks, we will be happy to take your questions.
I will now turn the call over to Jeff to provide the highlights.
Thanks, Stephanie good morning, everyone.
In the third quarter, you ankle continued executing with discipline to deliver on our stated expectations for the quarter all while closing the industry's largest acquisition to date would be your animal health and announcing our initial restructuring.
Our underlying business continues to perform and is bolstered by our distribution strategy, which is generating important positive progress.
Finally, our independent stand up an integration are on track.
Specifically in the quarter, we achieved legacy land go revenue at the high end of our guidance.
We completed the Bayer acquisition and move with speed and decisiveness to announce the initial $100 million of value capture actions.
We posted our first term loan repayment and ended quarter was 660 million in cash on the balance sheet.
We drilled commercial competitiveness through our distribution strategy within proved receivables cash conversion pricing margin and market share gains for Credentialing Gallup ran in the us.
Became the retail channel leader in U.S., flea tick and heartworm and outgrew the market in the quarter.
We expanded gross margin.
Including ongoing benefits from our productivity agenda, and we received two new product approvals and now stand with four approvals out of at least five planned launches expected by the end of 2021.
And we're on track to finalize the separation from Lilly, whether ERP standup transition expected by the end of Q1.
Ultimately, our IP innovation portfolio and productivity strategy is working any landfill is competitively positioned to provide shareholder value.
On slide three let me summarize our execution in the quarter.
On the topline legacy land go delivered 694 million at the high end of our guidance has anticipated pressure from coal would lessen sequentially.
And was contained to our farm animal business.
Overall revenue increased 16% drop.
Driven by the addition of bear, which contributed 196 million or 25% growth from the seven weeks of invoicing reflected in the quarter.
Revenue and growth by category and legacy business are detailed on slide four.
Gross margin improved by 90 basis points underpinned by ongoing productivity improvements price discipline and the addition of the higher margin beer business.
Continued mixed headwinds represented a partial offset.
We are rigorously managing costs across the organization.
In the third quarter. It is important to note that the inclusion of Bayer animal health costs began on day, one while cut overs and reregistration impacted sales.
Rounding out the PNM all our adjusted EBITDA of $148 million was down 13% versus a year ago period, and our adjusted EPS was 13 cents.
And finally on the balance sheet and working capital in the third quarter. We began the debt deleveraging process. We achieved further sequential improvement in days of sales outstanding.
All of these highlights and underscores our focus and progress and I'm pleased with the execution of our global organization during the significant time in our history.
Moving to slide five let's discuss the commercial environment the underperformance bigger.
Beginning with Us Pat health.
We maintained overall dispensing share for legacy land go on a year to date basis versus last year and build share in key products.
This performance comes on top of a favorable industry backdrop as vet clinic traffic continued its vitiate global recovery.
The business outperformed our expectations in the third quarter and vaccines were particularly strong.
Our flea and tick product critically ill, let our growth up 85% in the third quarter with kinetic dispensing data showing continued market share gains at the vet clinic.
We are seeing further traction in the pairing opportunity with interceptor plus connect.
Genetic data shows that for the third quarter when interceptor plus is sold with a flea and tick solution, it's paired with crude elio 49% of the time.
Improving six percentage points from June and up more than 50% year over year.
Our offering the broadest overall parasite coverage is resonating with vets and pet owners. Meanwhile, we are actively managing our core loyal customer base for our legacy product try faxes, where share shifts are in line with expectations for this older but profitable part of our portfolio.
And therapeutics Gallup ran is performing well continue to outpace the branded market and dollar growth compared to last year. According to the kinetic data.
Overall us Pat help which represent sales from distributors into vet clinics and alternative channels was up mid single digits in the third quarter in line with our reported US pet health revenue trends after adjusting for last year's benefit from the initial stock in at a large retailer.
And this year's divestitures.
We continue to closely manage inventory in the distribution channel to stay at target levels, and we exited the third quarter with inventory levels consistent with the second quarter.
Moving to our farm animal business COVID-19 pressures are lessening in the us while the pandemic.
Was a greater factor in certain international animal health sub sectors in the quarter.
Globally, we estimate the coal that represented a $35 million headwind to legacy land go revenue in the quarter.
In line with our guidance.
About a quarter of that impact was felt domestically primarily in swine. These.
These challenges on the us protein supply chain and on our business east sequentially through the period.
We've been encouraged by the higher cattle on feed numbers and the diminishing port processing backlog, allowing for improved producer margins in both cattle and swine since the summer slows.
While the momentum is promising we do expect the timeline for industry normalization to still extend into 2021.
For Remington, we see sustained commercial strength despite generic disruption.
Our market share assumptions are tracking better than originally planned after 12 months of competitive entry has our team has successfully demonstrating the products meaningful therapeutic and quality differences to customers.
In our international business, let me start with pet.
Pet health where markets around the world appear to have broadly stabilized in the quarter with some variances by country.
Yeah, Leo was a growth driver in the quarter outside of the us driven by market expansion and uptake of credential for cats in Europe.
On the farm side, our international future protein in health portfolio was negatively affected by unfavorable macroeconomic conditions and reduce consumption trends.
As a result, the industry has seen pressured prices and producer profitability across species, most notably poultry and ocho markets.
And the global poultry market, we've seen acute production declines and reduced export opportunity in certain regions, particularly Central America, the middle East and India, which more than offset growth in markets like China and Vietnam.
Poultry prices have dropped to an outsized degree due to relatively high dependence on food service sales, including restaurants in wholesale markets.
Balancing local supply with volatile demand has proven challenging for global producers.
Production growth estimates this year very widely from up 15% in China compared to declines of eight and 10% in Thailand, and India, respectively.
We believe these near term industry headwinds have impacted elanco more acutely as a result of our unique portfolio composition, which is weighted towards premium priced feed additives has.
As poultry producers experienced greater economic pressure, we see trade out of performance food safety and premium products, while biologics indeed disease treatment products tend to remain more stable.
Transitioning to Aqua, we've seen severe macro related shocks to the industry with salmon prices down 40% since the start of the year. These.
These adverse economic conditions have impacted producers use of premium solutions like Kleiner. However.
However, we expect AUC what is still provide growth for 2020 in total and we see the potential for a return to robust sales growth and market share gains next year.
This volatile international backdrop, and future protein and health is likely to persist in 2021, but we continue to view both species as important growth drivers for Atlantic overtime.
Although our international Ruminant swine portfolio was pressured by macroeconomic conditions and decreased producer profitability, Our Asia swine business provided a partial offset this.
This business experienced healthy growth in the quarter as the recovery continues compared to last year's African swine fever headwinds both.
Both legacy Elanco and legacy Bear China swine sales were up robustly year over year and both also saw him more than 30% improvement compared to the third quarter of 2018.
Finally lets discuss Bayer animal health side of our newly combined organization.
For July bare reported animal health revenues of 166 million euros or approximately $191 million.
As I mentioned earlier legacy bear contributed 196 million and the remainder of the quarter free landfill.
Totaling about 387 million combined for Q3.
This represents approximately 3% growth for the quarter, excluding the impact of divestitures.
The Bayer business experienced robust growth in the first seven months of the year driven by retailer stock and to support higher demand as a result of coal bid and the blackout period ahead of the deal close.
And the third quarter, we observed some unwind of this inventory pull from retailers, but overall, we believe the Bayer business remains in line with the 4% to 5% underlying growth that we estimated in the first half.
The strength reflects the resto now our largest single product on a pro forma basis, which added nearly $20 million to link those revenues for the quarter.
Advantage family revenue was 55 million.
And performance for both in the quarter.
Was impacted by seasonality, the unwind of retailers stocking and system cut overs.
And just our first few short months together I'm encouraged by how well the integration is progressing.
Our team is managing the complexities of an acquisition of this size, while still completing our stand up.
To be fully independent from Lilly.
As I mentioned earlier, we are moving with speed as evidenced by our initial restructuring announcement, we remain on track for 275 to 300 million total synergies, including the first two thirds in the first 30 months.
Our combined team is focused on commercial competitiveness, delivering innovation and realizing synergies, especially as we continue to navigate a challenging macro environment.
We have the right plans in place right people to execute them with strong momentum into the balance of the year and beyond.
Moving to slide six we continue to see strong progress against our IP strategy.
Let's look at a few of the key milestones and achievements on this strategy during the quarter.
Starting with innovation, we received two new approvals since our last earnings call.
The first is the European Commission approval for an Cresta, a product for bovine and swine respiratory disease, which will be a valuable complement to our farm animal portfolio.
In October we also received Usftwo MAA approval for Laura a weight loss management treatment for cats with chronic kidney disease.
With these two products alongside Experian COSA body remain on track towards at least five launches by the end of 2021 and 25 by the end of 2024.
Bigger picture, we're taking a holistic approach to innovation many shots on goal, including differentiated efforts and large addressable markets.
Im excited about our pipeline potential which will fuel a part of our growth algorithm over the long term.
We look forward to sharing more at our Investor day on December 15.
On the portfolio front, we have a solid group of focus brands to drive our growth.
The 14 legacy Elanco products launched or acquired since 2015 grew 18% in the quarter.
Excluding divestitures and adjusting for last year's initial stock in at a new retailer as shown on slide 17.
To bear we have an enhanced portfolio and capabilities to serve customers across all channels globally.
Fair Triple the size of our international Pet health business, where sureste own advantage still have a long runway ahead, especially in markets like China.
On the US side. The combined Elanco is now a leader in the flea tick and heartworm retail market and outgrew the industry and these alternative channels in the quarter.
Finally on productivity, we remain relentless on operating expense and cash management in the quarter and layered on incremental savings from reduced travel and related expenses.
We also continue to drive manufacturing efficiencies and are on track to realize that $250 million in savings and cost avoidance as planned from 2018 through the end of the year.
We expect to share more on our next phase during our December investor meeting at.
Additionally, we maintained price discipline in the quarter up over 2% for legacy Elanco price.
Price and productivity contributed to our 54.2% gross margin performance, which Todd will detail in a moment.
As I look to next year and beyond our IP strategy has uniquely positioned elanco within the animal health sector.
Our strategic actions since the IPO have set the stage for meaningful value creation for all of our stakeholders moving forward.
With that I will turn the call over to Todd to provide more color on our results and outlook.
Thanks, Jeff Slide seven summarizes our presentation of GAAP results will slide describes the items considered in the adjusted financials.
Slide 18 to 21 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 in order to provide insights on the underlying trends in our business. So please refer to today's earnings press release for a detailed description of the year over year changes in our third quarter. GAAP results also remind you that our third quarter 2020 results include two months with bear animal health.
Looking at the adjusted measures on slide five you will see the total ankle revenue increased 15% in the quarter on a reported basis.
Foreign exchange had a 1% negative impact.
While breakdown the effect to bear on a revenue growth of further detail in a moment.
Gross margin as a percent of revenue was 34.2% increase of 90 basis points compared to the third quarter of last year.
Prove it was driven by the inclusion of bears higher margin business positive price and alike of legacy portfolio continued productivity gains and absorption EBITDA. The variants of our go live on our new independent Elanco ERP system in the first quarter of 2021.
Partly offset by legacy Alanco mix headwinds as well as the cost of our fixed manufacturing footprint spread over low to lower total sales at our legacy business.
Total operating expense increased 40% over third quarter, including the addition of the bear animal health business in August and September.
A percent of sales operating expense increased from 34% a year ago period to 41% in this period, reflecting the impact of cut overs in August as bears costs at our peers. All day, one while sales experienced a blackout period of about two weeks.
Our legacy Linco operating expense continues to reflect cost management as many parts of our business are still operating virtually.
Operating income decreased 22%.
At the bottom line Q3, adjusted net income decreased 46% to $60.3 million for.
For Q3 effective tax rate was 9.7%, reflecting the decrease in international income that was subject to the guilty tax which was introduced to us tax reform in 2017.
Our adjusted EBITDA margin was 16.6%.
On Slide 10, you can see the effect of price rate and volume on our revenue performance.
The benefit of a bear acquisition is reflected in volume.
As is typical with acquisitions, we will continue to report that this will bear business and volume for the next four quarters.
For the legacy Elanco business price was up 2% for the quarter demonstrating the value of our innovation and the ongoing disciplined we are applying despite competitive pressures.
Slide 11 provides more detail on our overall performance in the us and internationally both of which were impacted by covert but also benefited from the addition of bear.
New US total revenue increased 9% of international revenues grew 23%.
We expect to file our 10-Q, shortly but moving to slide 12, Let me now provide an update on working capital cash and are that they will leverage including our recent term loan paid off.
As we have discussed working capital was an area of focus for us in the EU us consistent with Q2, we hold all distributors at 60 day payment terms in the third quarter days sales outstanding continued to improve sequentially standing at 67 days versus the peak of 103 days in the first quarter of 2020.
We ended the third quarter was $660 million in cash equivalents on our balance sheet.
No one else within the quarter, we repaid $100 million our term loan the Thunder the bear animal health acquisition.
We will continue to repay debt from our operating cash flow of 2021 will focus on our $500 million note, which is due in August of 2021.
Our net debt leverage ratio stood at 6.4 times at the end of Q3.
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During October we borrowed $250 million, our revolver to fund local country asset purchases as part of the Bayer acquisition what's.
What's the purchases are complete their agee, we'll pay length of the $250 million purchase price back, which we will use to repay the revolver. The circular transactions should be completed this year.
2020 remains uniquely cash every year, given the stand up a bit in the pivotal genco ERP system at IP infrastructure that execution of the acquisition and the build of the requisite ERP infrastructure for the bare business.
We now estimate total cash cost for the independent company stand up to be in the range of $280 million to $340 million that have certain offsets the increase versus the prior raise of $240 million to $290 million, primarily reflects higher cost to execute local country infrastructure deployed.
And transitions as a result of the COVID-19 pandemic related travel restrictions and protocols as well as increased site cutover as additional scope costs.
The vast majority of our global team are now operator of the Elanco infrastructure environment, and we remain confident in completing the stand up a bit and the like go with Elanco ERP cutover in Q1 of 2021.
The completion of the ERP transition will drive the culmination of the remaining will be transitional services agreements.
Additionally, as we shared in the pro forma financials and the October 15th 8-K filing I want to note that the Linco cap was approximately $72 million for the ERP infrastructure supporting the Bayer business.
Now I will transition to our outlook on slide 13.
For the fourth quarter of 2000, Teus, we expect the Linco total revenue to be between $1.02 billion and $1.06 billion.
Our fourth quarter guidance includes an estimate of approximately $20 million to $30 million of Covidien related headwinds primarily of our farm animal business. We are also monitoring the potential impact of another phase abroad shutdowns, including actions currently being taken in Europe.
However, our guidance does not reflect a broad view us or international shutdown as we saw earlier this year.
On the better side of our global personal business. The fourth quarter will reflect the estimated $10 million of continued reversal of revenue pull forward due to covert and IP cut overs.
For the full year, we believe that retailers are holding an additional $25 million of inventory compared to 2019 and that this incremental balances appropriate to batch bears larger sales base of strong underlying trends in recent periods.
As well as the larger trends across consumer package goods with retail is reacting to the ongoing covance backdrop and rising case counts.
Additionally, fourth quarter revenue guidance incorporates a number of other this grief headwinds to growth, including divestitures as part of executing the bare term acquisition lapping sales of Pavlak inventory awaiting regulatory clearance in India and the impact of deferring. The typical January onest price increases at bear.
Through our February timeframe.
The treatment of certain trade above us today under IR for us versus the sales reduction under our US GAAP accounting also reduces legacy bear sales compared to all prior periods.
Importantly, however, our outlook is grounded in underlying growth trends on both sides of the business that are in line with our fundamentals year to date, including continued 4% to 5% underlying growth for bears global portfolio.
We are not introducing.
This guidance at this time, given the volatile macroeconomic backdrop and the unpredictability of potential future effects from COVID-19, we expect to provide more details on the fourth quarter at our Investor Day. In addition to 2021 guidance in the Meanwhile, let me offer some commentary on operating metrics.
We anticipate a sequential deceleration in gross margin for the third quarter's result, reflecting our normal seasonality step down as a result of plant maintenance and shutdowns sales seasonality for us doing the advanced family and the reversal of the absorption benefit in advance of the Waco ERP cut overs in January.
As well as ongoing mix headwinds and fixed cost de leverage.
We expect to continue to capture productivity efficiencies and remain disciplined on price. Furthermore, the quarter will include three months of bears higher margin business.
With respect to operating expenses, we anticipate year over year declines for both legacy Elanco and legacy bear relative to the pro forma expenses provided in our October 15th 8-K filing.
Our outlook reflects the benefit from the continued cost management initiatives and ongoing reductions in travel expenses value capture actions are on track, but we remain very early on the curb to realizing benefits.
I'll hand, it back to Jeff for closing comments. Thanks, Todd Let me summarize we closed the third quarter as a stronger enterprise seen positive progress from key strategic decisions with the inclusion of bear and the distribution model shift we.
We are executing with discipline and urgency to deliver on our stated expectations for the quarter achieving results at the high end of our guidance, we are gaining share with key pet health products and entering the balance of the year with momentum.
We are moving quickly on the integration and making the tough decisions necessary to capture value.
The final phase of our independent stand up is underway and on track for completion in early 2021.
Our IP strategy is working with a combined stronger portfolio greater access to the world's animals and through a pipeline that is progressing and with our productivity agenda that continues to enhance margin growth.
I want to end today on slide 14, highlighting the 2030 Lane go healthy purpose sustainability commitments, we unveiled last week.
His decade long commitment to support the United Nations Sustainable development goals and are a first of its kind in the animal health industry. Our protein planted in pad pledges aim to provide improved access to nutritious protein reduce the companys and our customers' footprint on the planet and increase the health of the Pat to support.
Apple's wellbeing.
We outlined these pledges in detail on our website at Elanco dotcom.
But it all starts with a healthy and strong enterprise driven by the growth innovation and margin expansion agenda against which we are executing through.
Through these efforts the Elanco is focused on creating value for our customers employees shareholders and society as a whole with that I will turn it over to Tiffany to moderate the QNX.
Thanks, Jeff.
I'd like to take questions from as many callers as possible.
So we ask that you limit yourself to one question and one follow up.
Michelle please provide the instructions for the Q and a session and then we'll take the first comment.
So at this time, if anybody would like to ask a question. Please press star one on your telephone keypad again.
One on your telephone keypad. Your first question comes from Michael Miskin from Bank of America. Your line is open.
Thanks.
I just want to make sure long enough time I want to focus on the on the lifestyle business in the quarter I mean.
Some of your comments in the prepared remarks, Jeff, but if we just look at what some of the peers were able to accomplish Merck animal health livestock was up 8%. The lighter livestock was up nine fiber livestock was up five and it looks like the legacy Onco business declined pretty meaningfully in the quarter, we try to back out they have contribution I'm getting something like a double digit decline.
So can you go into that in a little more detail, what's the discrepancy or is it anything by sbcs by geography sort of work style and then how do we think about that in Fourq you know despite all the headwinds it seems like other businesses are able to work through them and benefit from timing impacts and cattle.
When can we expect that the special enough for longer.
Yes, Thanks, Michael I think first of all the differences in portfolio in places where the businesses I think first of all we feel very good about the fundamentals in the improvement is I've said in cattle and swine in the markets I mean, the markets are improving posted a coded plant.
Plant capacity diminishing backlog as I mentioned in pigs.
And I see that being a positive I think I think overall I would stay on some of the positives again strong swine recovery from from African swine fever. So these are just some of the key I would say pushes and then I'll share some of the differences that you outline I think on the positive side, we see.
Strong swine growth even relative to 2018 as I said, both on the better side, Andy landfill side in the in the Asian area on that as a positive we continue to see.
What we would say is strong positive fundamentals in our overall business when you look at the us.
What I think are some of the differences is one we've got the finishing one year in relative to generic Robinson and that that that is they were doing well relative to our expectations, but there. There was a decline there and then the highlight to me is really poultry and Aqua we continue they've been major growth drivers for us.
Future protein and how they will continue to be but what we've seen is one the salmon industry, which is a big part of our growth and day part of our plans. This year that has been impacted by industry dynamics not by market share not by where our product set but just actually by the economics of the industry.
Its impact on pulling away from use of animal health products second is international poultry.
Again, a pretty significant 75% to 80% of our future future protein and held on is is poultry and a big international poultry business and thats been impacted as well by again the impact of kind of the lingering effects of covance and the pulling back of usage on certain animal health products.
Again, as we look going into 21 and there is no question. Some of these trends will persist a little bit Nicole that impact, but as I look even into 21.
One introduction of new products to the fundamentals of where share our and poultry and awkward recovery. We continue to see them as key growth drivers in the future protein health BDNA at key a key growth contributor starting in 2021.
So so I would say it in as a whole we feel very good relative to our expectations. There's just been a set back a little bit relative to international poultry and Aqua.
I will take the next caller please.
And your next question will come from Nathan Rich from Goldman Sachs. Your line is open.
Good morning, Thanks for the questions, Jeff I wanted to ask on the on the pipeline.
Obviously, bringing new drugs to market and having that flow of innovation is kind of a key piece of the revenue outlook.
No. This is an industry, obviously aware visibility on the pipeline has been pretty limited.
You talked about sharing more details at the analyst day, but can you talk about the type of disclosures were maybe you're likely to get there and what you kind of see at a high level as the most attractive market opportunities and as it just a quick follow up.
You talked about the four recent approvals.
Any details you can provide on the timing of those launches as well as the potential market opportunity would also be helpful. Thank you.
Yes. Thank you Nathan So real quick I would just say in a very very high level, we feel very good about where our pipeline is that shared at a high level and we'll get into some of the detail.
We had 25 new products five from Bayer 20 from Elanco, we see that as.
Our starting point, that's what we will highlight and talk about at the Investor Conference.
At least as I mentioned five between now and the end of 2021 with four approvals.
Look for pet health to contribute beyond.
In the remainder of the approvals here for this next year.
I think what we are seeing this year, you're going to see going forward one a mix of.
Bigger more significant products in bigger more material markets as well as strong innovations that can play a added contribution in our overall portfolio sell a constant flow of innovation. We see this constant over this next five year period.
A contributing factor what we're going to do with the investor conferences to highlight the markets the market spaces, we're going into Parasiticides pain.
Therapy aging dog and cat therapy on the pet side antibiotic replacements and continued therapy on the livestock side, we're going to talk about what we see in those markets and how our innovations will contribute into those all while balancing.
The competitive exposure to today, but I, what I would say to use I feel very good about the portfolio. We have I feel very good about bayer's contribution that they bring relative to pipeline and capability and size and scale and a constant flow of innovation that will be the lead growth driver in our algorithm of growth that we'll talk about at the investor.
Your conference.
Next question please.
And your next question comes from Erinn rights from Credit Suisse. Your line is open.
Great.
I wanted to clarify Wendy fourth quarter guidance, mainly through the underlying growth or is there a line separately excluding divestiture.
Anthony what sort of meet or de stocking destocking dynamic.
Whereas in the fourth quarter and and even into 2021 at this EBITDA to be ramp there I think you mentioned the $25 million in inventory in the channel is that completely new loan production animal and and then follow up question on me.
Can you give us an update on the long term assumption for that business in the past.
Competitive standpoint, claiming that alternative kino as well.
Thanks.
And Todd. Thank you for the question overall for Q4, we've got separated out bear versus a Lego as part of the guidance.
We have pointed out a number of the one year over year items that are in play in.
Including.
Yeah.
Registration in India hasn't happened, yet so we get the economic benefits, but we don't get the sales. We do think retailers are still holding a little more.
Bayer product in the U.S pet health retail chain that thats about $10 million unwind in Q4.
With respect to the 25 million you mentioned Weve. That's also us to retail we think Thats is growth that happened this year because of the underlying growth in the beer business in those channels as the demand for the service through color for a family all have gone very well that's contributing to what we think is a strong underlying.
4% to 5% growth for the total Berry business, but the double digit growth they experienced in the first half of the year definitely had those effects. So we're.
Expecting again to get there, we think inventory in the channels will be appropriate across our entire portfolio farm animal and pet health by the end of this year and that's all playing out well for US as we are excited to have this higher growth bare business with respect to the family again, it's been.
Very good this.
This year, they've had a very nice run, especially in China, and we're pleased as people continue to use those products than they do well in the retail or the online shales with it.
Originally when we did the deal we were expecting a low single digit decline on a family going forward and we will be talking more about at investor conferences, we refreshed our total growth portfolio at that point.
Next question please.
Your next question will come from Chris Schott from Jpmorgan. Your line is open.
Great. Thanks, so much for the questions.
Just two from me I guess first I want to talk about for Q sales levels give us about $100 million below consensus. So I guess ex the cobot headwinds ex that Bayer inventory related laid out do you consider for Q kind of a normalized sales number and I know you're going to have some first half seasonality of the new mix, but I'm sure. Your sense is we're trying to kind of build the baseline sales level.
Normalized we should think about Fourq you being that.
Got it my second question was just an updated longer term margin targets you laid out with the deal I guess, what's your confidence in hitting those estimates and particular the timelines Hutch how quickly can we think about this being achieved thanks so much.
Chris Thanks for the question with respect to the second question, we're still confident in our ability to get to 60% plus gross margin an over 30% EBITDA margins.
As weve spoken before on calls those have been pushed out we are seeing more competitive pressure than we were in August of 2019 on the legacy Elanco portfolio and we've been seeing that in some of our fundamental organic growth at the same time to over this having these different impacts that are.
Affecting us that being said there were confident in the overall portfolio for the long term and our ability to deliver on the list.
60% gross margin of 30 plus percent EBITDA margin with respect to Q4.
There are a number of discrete items that we have tried to call out here today on the call the.
The price increase on on Behr products being pushed out to February versus happening in January.
Does impact sales in the quarter.
On a year over year comp basis.
This adjustment for accounting where trade funds.
Previously had been down invest gionee those are moving up under GAAP reporting and those were in our numbers in Q3, it will be in Q4 and going forward.
The decline in sales relative the store guidance for bear, but no change that the EBITDA is it's just the movement amongst the PML. The other bit. The mentioned is we think divestiture impact is about 40 million on the legacy Alanco portfolio and just around 10 million on the legacy bear portfolio.
So those are all items that are affecting the absolute quantity of sales in Q4 relative to what a pro forma without those items would have been a year ago.
I would emphasize to Chris I think the underlying demand again for the Bayer business and Neil the Elanco, especially UES pet health business. We continue to grow share. We continue to see is that high.
Highlighted the 14 focused five so the landfill up 18% and we'll be adding five more to that going forward, but.
I would emphasize again, we feel very good about.
No change in the underlying demand sequentially coming from Q3 into Q4, a lot of this is the adjustments to Todd highlighted.
Thank you.
We'll take the next question please.
Your next question comes from David Risinger from Morgan Stanley. Your line is open.
Yes.
Thanks, very much and congrats.
Congrats on the corporate progress.
So.
I have.
I guess a couple of questions here first.
You know clearly various moving parts are precluding aramco from providing earnings guidance for the fourth quarter, but given that uncertainty.
How is the company going to be able to provide earnings guidance for the full year of 2021 on December 15th.
Second.
With respect to the launches.
So five launches by the end of 2021.
And 25 by 2024 could you just please quantify how many of those on assuming none of the five would have blockbuster or greater than $100 million revenue potential in terms of the five that are launching by the end of 2021, but for the 25 that are launching by the 2000.
24 period, how many of those would have blockbuster or greater than 100 million revenue potential thanks very much.
Let me take the first question, David I will let Jeff answer the second one with respect to.
The earnings it's a great question, a very fair one we do expect to provide greater detail of <unk> in the Investor Day on December 15th with respect to how we project Q4 to come out clearly with two rigs during the quarter you'd expect us to be able to do that and I will do that to help provide that baseline that to give a 2021 guidance.
Jeff.
Yes real quick David on the pipeline first of all I think I want to reiterate nice mix between pet health and farm animal.
A constant flow of approvals throughout that entire five year period.
We will get into more of the specifics in terms of spaces.
And what areas that we will be launching in we have been very clear area.
Areas like broad spectrum parasiticide will be in their term will be in there more pets therapy antibiotic replacements in farm animal and some additional kind of first in class best in class like products like experience or for instance, so what I would say when you ask about numbers were looking through a different lens with a higher bar, where they been able.
Larger company when he larger faster kind of adoption rates on new products. So I would say that these products are looking through that lens of any linco plus Bayer.
Needing more materiality and we've got a a significant number of those that we believe with the right market creation launch in competitive commercial ness commercial ability that that will be blockbusters. So I would say that there will be a series of them in there and again a linear line in a nice blend between pet health and pharma.
Animal so feeling very good about our pipeline feeling very good about the ability with Bayer plus elanco capability size and bayer's contributions were stronger with innovation than we were before before the Bayer transaction and are looking forward to.
Starting out with these launches and I keep reiterating to a lot of runway with the 14 products that we have there are focused products were going to add into that so resto unclear ROE as as other products with a lot more growth potential.
And then you add on five this year and then the series of launches beyond so we like our algorithm of growth, we like our pipeline and there will be some nice nice blockbusters within that.
Okay.
Next question please.
Your next question will come from John Kreger from William Blair. Your line is open.
Hi, Thanks, I just wanted to clarify your comments about stocking unwinding for bear in the fourth quarter that $10 million do you think thats finishes the necessary unwind or should we expect more needed in 21, and then the follow up Todd I think you rattled off a number of puts and takes on gross margin can you just kind of expand on that a little.
What more can we think about gross margin as having kind of a normalized improvement trajectory and 21 or will that take a little bit longer given those items. Thanks.
Sure John Yes, we think that.
The retailer inventory levels for new us out on the store bare business will be at the appropriate level given the growth we have seen our dispensing data for those products in 2020.
And that we won't have that to the extent there was an inventory growth in 2020, that's something that will be a headwind to growth in 2021 for us the fundamental underlying growth of us that product in bear we're really pleased with the dispensing growth continues to track very nicely on those products for the last.
Bill 15 months on the margin side Thats something that just as a reminder, we have a step down legacy Elanco business. It was stepped down more than 500 basis points in Q4 of 2019 versus Q3 of 2019. So.
Thats, a part of how our mix plays out and something we wanted to highlight.
The higher margin bear business, certainly helps our overall gross margin, but as you know the seasonality of the U.S. Parasiticide business makes Q4, a lower level than what it looks like in Q1 and Q2 so.
So overall, we're very pleased with our initiatives on the gross margin.
Side from a productivity the team continues to take costs out and take cost out of the absolute basis with respect to reducing.
Compensation and benefit costs, reducing the cost of apiay through our initiatives on sourcing.
Those are on track the mix headwinds we've seen.
It was called out earlier with the legacy of Linco business in ruminant swine.
Does impact our gross margin. So we will continue to provide greater guidance on it but we wanted to clarify that we do expect the margin step down in Q4 versus the one we just had here in Q3.
Great. Thank you.
Next question.
Your next question comes from the Lashing for Shaw from Barclays. Your line is open.
Hi, Thanks for taking the questions just wanted to call income and on the on the sustainability goals into deals.
Most Ivy I would like to get your thoughts on the past site market.
Spoke a 6% gain passive side youre, commenting on price gold in one building the market too. So are there some dynamics, which has name which we are not probably figuring out is the market growing faster than what should we be anticipating as they've still one of the factors.
Secondly is it fair to assume that your share of this market will stay intact or any increase with the new launches, which are expected to come out over the next one to two years. Thanks.
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Yes, So let me let me start first on.
The first question and that is we asked we feel very good about city overall, I think pet health market I'll start there I think we know that to coal bid has increased the attention to the past the compliance on we've seen a V shaped recovery, we've seen both growth nicely in the vet clinic market.
We also are seeing very strong growth as you know in the in the retail market as well, yes on parasiticides as you've seen we've seen nice growth across all sectors price.
Price growth in Parasiticides, we also we believe that.
There is continued offering and when we look at marketing all the way to the pet owner, you know understanding things more clearly by reaching that direct pet odor and pulling them into the vet clinic and I would note.
Our pairing of crude Elio plus interceptor plus is an example that pairing is increasing growth is significant and a lot of that can be attributed by a marketing approach that reaches pet owners taken emended. The vet clinic and there is that our knowledge and an awareness that that message that is a big driver in this and then.
Yes, we but we believe attention and compliance helps drive volume, but it also helps drive price as well.
But one thing to note our velocity, we are seeing a decline in trust, Texas, Our historic product and so I think as Jeff mentioned youre managing that within our expectations, but that is a decline in the parasiticide market.
Thanks don't have anything that to thanks, just to follow up on our lifestyle side with Dohmen sand. So you said that it's feeling.
Being better than what you anticipated or to one of the current market share on what is the impact of the general inclusion and you called out poultry under pressure could identify the factors, what's driving this and lat am and India. Thanks.
Yes. There is no question that there is a lot of moving parts from the earlier question on ruminants with.
We feel good about the increased number of days cattle on feed there has been a talk about yes. There was a cattle run in Q3, a little premature a little sooner than normal and puts more cattle on feed as you go into Q4. That's that's positive when you look at actually the generic we see our ability to differentiate and a whole.
So although there's there was a market size change from coal they had from earlier this year. So when we back up and look at our assumptions of holding in year, 120% of total value loss or less we are we're feeling good relative to that and ill in relative terms to a market that has actually changed.
In size, so again doing very well competitively and I attribute a lot of this to portfolio and product differentiation.
And then.
Thank you for the question about that.
Back what's really the factors driving lower lower mocking gogan poultry in Latin America, and India, Yes, I mean, it's very clear that the coal that impact has been a little bit linger a little bit later and has lingered a little bit longer relative to this and a lot of this distributed attributed international poultry markets are more debt.
Pendant on foodservice in restaurants, and we know the impact of that and now we're starting to see that that impact we see it returning quickly.
And and but this will persist as we go into 2021.
Thank you.
Thanks, we'll take the next question.
Our next question will come from Kathy Miner from Cowen Your line is open.
Thank you good morning, and just the first one quick follow up on your guidance or your expectation for $20 million to $30 million co that headwind in Q4 is that mostly on the us or is that an outside of the U.S. on expectation Secondly, could you comment on your swine business in China, and if thats returning to growth and how.
You see that developing going forward and if you could just at least a brief comment on the channel trends in the third quarter, that's certainly a big part of the.
The Bayer transition just curious how that was continuing to grow through great. Thank you.
Sure.
So with respect to the swine business in China.
I think your first question was sort of a quick Oh go ahead I'm sorry go ahead.
Primarily continuing international farm animal markets, the poultry impact Middle East Latin America.
We do see those continuing.
Will be some impact in the us boot.
That's not a bigger quantity that's why we're seeing it come down quarter over quarter of what Jeff jump in on the swine side, yes. So weve seen very good growth both in the landfill and bear and I'll, even go back to using a comparison of 2018, so before the the African swine fever effect. So.
We're seeing stronger prices, we're seeing more industrial farms those are two really positive trends and and.
Then I think multi national product use so when you put those things together were seen over a 30% growth in both the Elanco business.
Back to pre Colvin comparisons in 2018, both on the landfill and Bayer side and again I would put those three factors is the big drivers strong economics, so we see that.
That tailwind benefiting as we go into 2021 and I will talk some about that at the Investor Conference let.
Let me just highlight on distribution very clearly just to make sure. It's real clear that you know on on our legacy Elanco business the overall business.
Our inventory levels are the same and Q3 is there in Q2, there at the right levels were at 60 day terms.
That strategy is working our relationships are very strong with the four remaining distributors that we have and it's paid off as that as I've shared.
Relative to demand creation work or growing market share, we've got better improved receivables and cash conversion and pricing within that and the distribution strategy. We think is working extremely well.
And I would highlight that that is Uh huh.
Heavy focus in addition, there is the retail business that Todd has talked about and we would really highlight what drove that retail Bayer business was much more retailers distributors are not involved in that so theres no inventory issues there at all and as that buy ahead, a little bit was driven by both the cutover and the coal.
They'd concerns, but again underline business remains very strong on both retail and the vet clinic business for our for our pet business.
Next question please.
Our next question comes from David question Burke from Guggenheim. Your line is open.
Hi, Thanks for taking my question. So I can you talk about cap around and in cats, we seen a lot of off label usage of ENTYCE for a number of years now a DC the cat market is larger than the dog market just given the health consequences for.
We in cats is much worse and this is a smaller market, but its opportunity to pioneer in to maybe a 50 million dollar product is that fair to say and then.
Secondly, and can you talk about retail channel mix, we've seen just.
Just the Otcs had dramatic acceleration in the shift to online from pet specialty and box retailers do you think thats to your advantage there in terms, particularly around our the bear animal health products. Thank you.
Yes, let me just highlight again, a Laura we believe first.
And best in class relative to what we have here relative to an oral treatment.
And again the motive action will you are exactly right. We believe this is a market creation archetype for us it's an opportunity as you know chronic kidney disease.
It may affect right now the numbers are 1% to 3%, we think that can be higher but at a much higher incidence and older Cats intensified, where we're seeing you know at a attack that NVNO 12, 15 years old it can be estimated at 30% to 50% of the cats are affected so we like this segment, we like the market creation opportunity.
I'd, which gets back to a big part of our innovation strategy, bringing first best in class unique mode of action here with a liquid oral solution.
And so we see this being a an opportunity to create a really nice product I wont get into exactly how much but we will say that our intention is to lean in heavily here and and again, we continue to to increase our portfolio and we'll talk some about that in the seat fee line market, which is a really strong market.
Highlighted even by our success with Codelco and cats in Europe. So we feel very good and yes. There is some pairing and some opportunity with ENTYCE and that has a similar product in dogs and.
Then yes on retail look I would highlight we are a retail leader, where we are the retail leader great now with the combination of Bayer plus elanco.
In.
Flea tick heartworm. There is no question, you need that capability and a portfolio, both a scripted and unscripted.
TC portfolio likes to rest on advantage to to win and we feel very good about the Bayer capabilities in this space.
Our leadership position and our innovation and our ability to grow in this space. So yes, we see these trends persisting that that came on came to Kobe.
Next question please.
Your next question comes from Elliot Wilbur from Raymond James Your line is open.
Thanks, maybe just real quickly for Jeff give us.
Perspective or color on sort of the emerging.
Jeff cases that we're seeing in Europe, obviously negative for some markets and positive for others, but maybe just.
How that impacts.
Like goes business, if at all and then for Todd with respect to.
I would take bigger lot of focus on cash flow and leverage position anything you could say at this point that could help us in terms of thinking about longer term framework with respect to.
Cash conversion metrics.
Yes, So let me start with Asaph, we again Theres still is spotted cases that have popped up and industrialize operations in in Asia.
For instance has some noted here in South Korea, but again I want to emphasize no material effect on.
On on assets that we see really anywhere in the world, but especially in Asia and you're seeing again, the positive fundamentals of the recovery in China that again will be a tailwind for us as we go into 2021 are the cases in Europe again, mostly in Germany and Eastern Europe.
We do not see at this point in time, a risk to any commercial pink productions, mostly been in the wild boar market and so we have not seen anything and no material effect that we're assuming at this point in time for our European PICC business.
Okay with respect to cash conversion, we feel good about the working capital discipline, we've instilled over the last few months, bringing dsos down considerably since.
The Q1 timeframe, we are continuing to look at working capital needs across the industry. Our business I would say one of the things about operating two different systems as we need multiple bank accounts in countries in order to achieve this.
Additionally process of the payments on both sides of the business that does chew up a little bit more of cash on the balance sheet, but something that we're working through and trying to manage we're also focused on inventory levels. We did grow inventory on our own balance sheet here in Q3, as a result of the ice cold.
So we will have to go onto our separate ERP system. In Q1, So do expect that better inventory numbers in 2021, as we get past a lot of these IP related.
So again, we'll get into more on EBITDA growth expectations on Investor Day in December.
Next question please.
Next question will come from Omar graphic from Evercore. Your line is open.
Hi, guys. Thanks for squeezing me in.
I wanted to focus on the distribution strategy ex us and could you remind us what exactly is the distribution strategy for international livestock and how many months of products that these international distributors have as of end of June versus end of September and I'm trying to understand if that had anything to do with the tightening of days sales outstanding.
Its drove the livestock issues actually with thank you.
Yes, most of that is directly with the.
Large protein producers are mostly our customers internationally.
No factor at all again as I shared debt.
International and us and globally Elanco inventory and distribution was at the levels. We wanted coming out of Q2 remained the same in Q3 and was was not a factor at all and in our results.
Jeff do they buy additional ahead of quarter close if there are incentives that exists. These large protein makers very very little to none.
Once in a while when a price increase program is in place sometimes theres an allowance of some buy ahead.
But again that is and we've moved those out mostly across the globe from Q Q4 into Q1 to prevent any of that any change, but know that that is not the case and again I want to reemphasize inventory levels same in Q3 as they were in Q2 were at the right levels and feel very good about those changes.
Not a factor yes, thank you very much.
Next question.
And your next question will come from David.
Except for me ask your line is open.
Yes, thanks to the Jacob you guys appreciate you getting there.
So.
Want to expand on on on this question around inventory.
If you could provide very simply how many.
Days on hand or weeks on hand or months on hand, you have four for companion animal in the U.S.
And for livestock.
As well as for for not just your portfolio, but for the buyer portfolio because it seems you called out the reduction in buyer inventory.
Just wanted to try to understand so we don't have anymore.
No surprises quote unquote around inventory and quarters forward, where exactly your inventory levels stand both in the companion side of things livestock side of things.
Elanco Standalone buyer Standalone. Please thank you very much.
The as we said, we'd do inventory issue, we put behind US at the end of Q2 inventories are consistent in Q3 versus Q2. If there is a material change in inventories that drives an impact on revenue, we will disclose that we will be upfront about it with respect to the bare side.
As we've talked and tried to be very clear on the retailer side, which is not distribution revenue, we were not talking about but covestor as an industry wise and those that aren't our cyber rather.
Amazon and Walmart the given co viewed as well as continued uptake in the southwest or new those products.
They did hold more inventory as we said, we think thats about a $25 million increase in 2020 compared to 29 team that after another 10 million comes out of that here in Q4, and so going into 2021, we feel very good about inventory.
Levels across our business across the various business and that they are set up to grow as we keep it we changed the strategy.
So the earlier part of this year and talked about extensively all the Q2 call and feel very good about both our relationships.
With our distributors in the EU us the international business now, it's operating as well as the retail relationships. All the got we had before but now you have enhanced with the broader odisi product portfolio that bear brings.
That's very clear thank you very much.
With that we'll wrap it up today.
Thank you for joining us for Linco animal health third quarter Conference call.
Thank you everyone. This concludes today's conference call you may now disconnect.
Okay.
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