Q4 2020 Elanco Animal Health Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the Alanco Animal Health Q for 2020 earnings Conference call.
At this time all participants are in a listen only mode.
During the presentation, we will conduct a question and answer session.
Open to analysts only.
Instructions will be given at that time for you to queue up for questions.
If anyone has any difficulties hearing the conference. Please press star followed by zero for an operator assistance at any time.
Before turning the meeting over to management. Please be advised that this conference call will contain statements that are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
I would like to remind everyone that this conference call is being recorded February 20 for 2021.
I will now turn the conference over to Tiffany Carnegie. Please go ahead ma'am.
Good morning, Thank you for joining us for Alanco animal health fourth quarter 2020 earnings call I'm, Tiffany Katanga head of Investor Relations joining.
Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer.
Todd Young our Chief Financial Officer, and Katy Grissom from Investor Relations.
As always during this conference call, we anticipate making projections and forward looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on slide two and those outlined in our latest forms 10-K, and 10-Q filed with the six.
<unk> 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.
Sure for prescribing decisions.
You can find our press release, the slides referenced on this call and an investor Workbook and the index for our section of Alanco Dotcom.
Slides and the press release also contain further information about the non-GAAP financial measures that we will discuss today during this call.
After our prepared remarks, we'll be happy to take your questions I will now turn the call over to Jeff to provide the highlights.
Thanks, Stephanie good morning, everyone. Before a result for quick statement on the year 2020 was a historic year for the World and for your land go as the COVID-19 pandemic shuttered businesses around the world already Lanka with central workers in the labs and plants cover pipeline and product flowing are.
<unk> technical team shifted to serve customers in innovative ways for a virtual and curbside world supporting the surge in telemedicine and door step delivery.
Meanwhile, many of our functional experts doubled down on standing up bill ankle systems transitioning.
Services from Lilly.
To our own and delivering our industry's largest acquisition on time from their home offices, the Atlantic gold team not only weather the pandemic keeping our customers at the center, but they transformed our company along the way.
Listen we started on our journey to create a purpose driven company 15 years ago and one of my biggest learnings from this past year 2020 is that strong vision and purpose to make a difference create a level of loyalty and determination that I have never imagined.
Michael Executive team and I am deep gratitude.
For all that our team accomplished in 2020 and to our customers who made it all possible.
Now to our results.
Gil ankle enters 2021 with strong momentum.
Our fourth quarter revenue of 1.14 billion surpassed the high end of our guidance by $70 million ex U S. Pet Health U S farm animal and China swine outperformed their expectations are.
Our adjusted EPS of 12 fence came in at the high end of our guidance range.
Our revenue over achievement and gross margin leverage were offset by what we're largely one time in targeted investments driving opec's above our guidance.
Our sales momentum and operational execution as well as our pipeline launches year to date are reflected in our increased full year revenue.
Adjusted EBITDA and adjusted EPS guidance.
Let me provide the highlights highlights from the fourth quarter before.
Before progressing to a more detailed review of our performance.
Our fourth quarter revenue reflects market share gains in our U S pet health retail business ongoing improvement from COVID-19 headwinds in U S farm animal and a better than expected performance in China swine.
Importantly, we achieved further share gains in the U S for many of our key pet health products compared to last year, including crude Elio Gallo plant, so resto and the advantage family.
Our buy sell distributor strategy is working well and continues to improve our commercial competitiveness with our channel inventory levels remaining consistent with prior quarters.
At the same time, our strength in omni channel capabilities provide unparalleled access to pet owners wherever they prefer to purchase at the veterinarian from specialty and mass retail or e-commerce.
We are raising our 2021 revenue guidance to reflect in fact fundamentals and our focus on execution.
For the year, we continue to forecast, 3% to 4% underlying revenue growth from innovation and portfolio contributions building velocity as we move past the most challenging comparisons in the first quarter.
Increased revenue dollars are translating into higher than previously expected adjusted EBITDA and adjusted EPS as Todd will detail later.
We are on track for eight innovation launches in 2021.
<unk> already recorded our first sales for <unk>, plus in Japan, and <unk> in Europe with.
With approval received from <unk> in the U S.
We continue to expect innovation to contribute $80 million to $100 million and our 2021 revenue.
Overtime innovation will deliver consistent dependable revenue for the balance of blockbusters and complementary portfolio solutions.
Our fourth quarter adjusted gross margin of 52, 7% was driven by positive mix benefit from U S. Pet health revenue outperformance along with our continued progress on our <unk> in Q productivity agenda.
We achieved adjusted EBITDA of $176 million above the high end of guidance as well.
However, our operating expenditures also exceeded guidance due to investments pressuring EPS by approximately <unk> <unk>.
This outlay, which was largely one time in discretionary in nature backing important project Center people.
It can be divided into four categories that are roughly equal in size first brand building in the U S and China.
Second R&D acceleration and business partnering.
Third higher incentive comp from our sales outperformance and for legal and other it infrastructure and stabilization related costs.
We come into 2021, with our senior leadership aligned and accountable for delivering on our opex guidance by realizing synergies executing with discipline and making the necessary tradeoffs to keep driving growth.
We continue to make progress in integrating Bayer animal health and driving our operational efficiencies.
Our January 26 restructuring announcement marks Mark the next wave of value capture actions.
With this and our September actions, our head count reductions are expected to drive approximately half.
Of our total synergies.
We believe that our savings in procurement.
And the rationalization of smaller <unk> overlapping R&D projects will deliver $40 million to $50 million of our synergies in 2021.
In total, we expect $160 million to $175 million of cumulative synergies to be achieved in 2021.
Well on the way to the anticipated $300 million outlined by the end of 2023.
At our December 15th Investor Day, we provided a detailed explanation.
How our innovation portfolio and productivity strategy or IPP will underpin our long term growth algorithm that we believe.
We'll drive 3% to 4% average annual revenue growth double digit annual adjusted EBITDA growth and double digit annual adjusted EPS growth. Our updated 2021 guidance today is balanced demonstrating positive momentum in our underlying business that is in line with this algorithm.
On slides three and for let me summarize our execution in the fourth quarter.
On the topline legacy land go delivered $743 million, while bear contributed $396 million.
With each ahead of our expectations.
In pet health, our focused brand credential Yo, which has now achieved blockbuster status posted double digit growth.
In U S market share gains year over year.
We're also seeing further traction in the pairing opportunity with interceptor plus.
Used together these products provide pet owners with the broadest flea tick and warm coverage in the market today.
The increase in pairing also reflects the benefits of our partnership efforts, including our Dog Park study last year with IDEXX showing that one in five dogs visiting dog parts of major U S cities tested positive for intestinal parasites.
Kinetic dispensing data for the fourth quarter shows that went interceptor plus is sold with a flea and tick solution, it's paired with codelco over 50% of the time.
Sequentially, improving from September and up double digits year over year.
Meanwhile, we are actively optimizing the profitability of our defend brand <unk>.
In applying omni channel capabilities to grow in sales at retail during the quarter.
Partially offsetting declines in the clinic.
On the payer side, so resto global revenue was $64 million in the fourth quarter up 13% year over year and any family global revenue was $100 million up 5%.
Both at constant currency growth rates.
In the U S. So resto Anda family, both increased double digits, including approximately $10 million pulled into 2020 from 2021 from a large retail customer.
The underlying growth.
For global Bear of approximately 8% is an acceleration from the 4% to 5% that we estimated in the earlier portion of the year, reflecting pandemic related retail channel <unk> amidst rising COVID-19 case counts.
For the full year, including the period before the acquisition. So resto revenue was over $400 million with constant currency total growth above 20%.
And while the <unk> family was closer to $500 million up mid single digits year over year.
Turning to pet health Therapeutics.
Yellow print grew double digits in the fourth quarter.
Reflecting our positioning strategy as a first line treatment with a differentiated safety profile and its continued global expansion.
In the U S. <unk> again outpaced the branded marketing dollar growth compared to a year last year. According to the kinetic data.
Rounding out the category Pet health vaccines remains strong in the quarter and a favorable vet clinic backdrop.
Looking at our farm animal business in the fourth quarter pressure from Covid on U S cattle and swine continued to lessen sequentially Catalans feed numbers are on par year over year and processing backlog has largely dissipated.
Elevated feed cost with corn futures recently at seven year highs.
Are pressuring producer economics, but also improve our value proposition through performance products.
<unk> sales exceeded our forecast in the quarter against an incrementally better industry backdrop and.
And we continue to navigate generic competition within our expectations were.
We also benefited from approximately $10 million in incremental U S cattle vaccine and implant revenue due to competitor stock outs.
Outside the U S poultry and Aqua remains negatively impacted by unfavorable macroeconomic conditions and reduced consumption with trends largely unchanged from the third quarter.
International poultry challenges remain concentrated in mid size emerging markets, including Central America, the middle East and India more than offsetting growth in countries such as Brazil.
And Aqua salmon prices were down nearly 40% year over year at quarter end with reduced demand because of the pandemic with.
With salmon prices in some cases barely clearing production costs, we're seeing producers deterred from premium solutions like finance.
We still expect pandemic and economic related headwinds to negatively impact our international poultry and Aqua businesses into mid 2021.
However, both species remain important growth drivers for a land go overtime.
Moving to China swine.
The business continued to see strong recovery compared to last year's African swine fever headwinds.
Contributing to outperformance versus guidance.
Prices remained elevated for China swine during the quarter due to tight supply and increased further in early January ahead of the Chinese new year.
Despite the recent release of frozen pork from state reserves prices are still trending more than double the pre ASF levels.
In turn we're seeing further investment in pig health and demand for our premium products.
While ASF and other diseases remain problematic in China's still today, our key customer base of large modernized firms had invested in biosecurity and are having the most success in rebuilding efforts.
Moving to slide five we continue to execute against our strengthened and expanded IPP strategy. Let me touch on a few of the key points starting with innovation.
On slide six we provided a status update for each of the eight launches planned this year.
Let me now focus on three of those for.
First as crude oil plus in Japan in January.
We are pleased with the initial reception with strong launch sales as wholesalers in veterinary clinic stocked in the product, but it remains very early days still ahead of the season.
Last week, we received a positive opinion from the European Medicines agency paving the way for a second quarter launch of <unk> plus.
Our fleet tip and warm combination product across the EU.
And Australia remains on track for the third quarter in time for the parasiticide season in that geography.
Next is <unk>, a product for cattle and swine respiratory disease earlier, this year and <unk> launched in the competitive EU market.
In the U S. We've received approval for cattle and swine and expect to be in the first tranche of generic launches in the market.
We continue to see in <unk> is a valuable complement to our existing farm animal respiratory care portfolio that will support our overall competitiveness in.
This will also include our data analytics and our performance evaluation services offered to Atlantico knowledge solutions.
And finally, we have experience, which is indicated to reduce ammonia gas emissions from cattle.
This is the first of its kind product.
It provides feedlot managers with the freedom and flexibility to balance environmental stewardship, and sustainability, while delivering business results.
And animal performance beyond today's industry, leading technology.
Experience has been adopted by the first full production and processing system and.
And we expect to have cattle on xperia by the end of the first quarter.
Additionally, last week, we received Canadian approval for experience the second largest feedlot market, which will complement the U S launch.
Looking at the total pipeline, we're advancing key development programs that we expect to deliver a consistent two to three percentage point contribution to average annual growth.
Representing a reliable driver.
Of our long term growth algorithm.
Moving now to portfolio. The 14 legacy <unk> products launched or acquired since 2015 grew 5% in 2020 ex.
Excluding divestitures and despite COVID-19 related pressures.
Details are included in.
In the appendix on slide 22.
Many of these recent innovations have transitioned into a focused brands, which will drive our sales growth in 2021 and years to come.
We are a strategic global leader with a robust diverse durable portfolio with more access to the world's animals than any point in <unk> history.
Our balanced across brands species, and geographies will allow us to maximize value and deliver on our sales growth expectations.
The channel is our sweet spot.
And one of our key growth enablers and we're now the leader in retail and e-commerce outpacing the double digit industry growth in the U S market.
Finally on productivity, our manufacturing organization captured a $115 million cost savings and avoidance in 2020.
Since 2018, the team has delivered $250 million in cost savings and avoidance, surpassing the expected $215 million and contributing most recently to our fourth quarter gross margin expansion and our performance.
We have transitioned all of our historic <unk> legal entities onto our newly landfill ERP system.
With our new shared service centers in Poland, and Malaysia, executing our financial transactions. We've also moved all of our legacy alanco employees and facilities onto our own it.
Network infrastructure.
As a result of this global effort, we plan to have exited all material Lilly TSA on time and at the end of March.
Let me summarize.
Atlantica was entering 2021 with strong momentum our fourth quarter results were at the high end or exceeded guidance on both the top and bottom line.
We're gaining share in key pet health products and.
And our U S retail business was particularly strong in the fourth quarter.
U S farm animal has seen sequential improvement, while China swine is running ahead of expectations.
Our innovation pipeline is on track to yield eight launches this year with nine out of the 13 geographic approvals now received it.
And only two without a final approval day confirmed.
Our productivity agenda is intact, along with rapid action towards synergy capture.
We are focused on execution in 2021 against the full year guidance ranges that we have raised today.
With that I'll turn the call to Todd to provide more color on our results and outlook.
Thanks, Jeff Slide.
Slide seven summarizes our financial results, including our reported net income and earnings per share.
On slides 33 to 30 day in the appendix you can find the summary of the adjustments made to the reported results to arrive at our adjusted presentation.
I'll focus my comments on our fourth quarter adjusted measures in order to provide insights on the underlying trends of our business. So please refer to today's earnings press release for a detailed description of the year over year changes in our fourth quarter and full year reported results for you.
Sales from full year results are also included in the appendix of our earnings slides.
Looking at the adjusted measures on slide eight you'll see the total legal revenue increased 45 per cent of the quarter on a reported basis foreign exchange impact was neutral.
Breakdown the effect of bear on our revenue growth in a moment.
On slide nine there is a visual representation of our revenue performance versus the increased guidance range that we provided in mid December for.
The key drivers of the better than anticipated results in the order of magnitude where strength in our U S per health retail business improvement in U S farm animal and the ongoing recovery in China. This one.
In Q4 gross margin as a percentage of revenue was 53, 7% an increase of 480 basis points compared to the fourth quarter of last year to.
The improvement was driven by the inclusion of bears higher margin business positive price on a leg of legacy portfolio and continued productivity gains, partly offset by lower absorption driven by lower production volumes and fixed cost deleverage and negative product mix for legacy <unk>.
Total operating expense increased 92% in the fourth quarter, including the addition of the Bayer animal health business.
As a percentage of sales operating expenses increased from 32% the year ago period for 43 per cent and visit our guidance.
As Jeff explained this performance reflects the impact of four categories of expenditures that are roughly equal in size in terms of exceeding our expectations.
First brand building investments for the future revenue growth with a focus on supporting our good momentum in the U S pet health in China, and enhancing our digital capabilities.
Second R&D acceleration was discretionary investments in key development projects and business development transactions, such as our December agreement with Kindred bio to bring a first of its kind canine parvovirus therapy to market.
Third higher incentive compensation of our sales performance outperformed the high end of our guidance by $70 million.
And for legal and other IP related standup and stabilization costs.
On Slide 10, you will find the bridge depicting this walk between our expected actual operating expenses, we would characterize this incremental operating investments largely being either one time or discretionary in nature.
Operating income decreased 8% improving from a 22% decline in the third quarter, but still reflecting the elevated operating expenses that I just described.
The bottom line Q4, adjusted net income decreased 35% to $56 7 million.
For Q4 effective tax rate was 16, 4%, reflecting a return to provision true up.
Although our adjusted EBITDA of $176 million was $16 million above the high end of our guidance range from a revenue outperformance our adjusted EBITDA margin for Q4 was 15, 4%.
Now, let's discuss our revenue performance more closely on.
On Slide 12, you will see a breakdown of the contribution from legacy <unk> and legacy their portfolios by category.
Ladies who bear products contributed $396 million of revenue in the quarter.
On Slide 13, you can see the effect of price rate and volume on our revenue performance the benefit of the bear acquisition is reflected in volume.
For with acquisitions, we will continue to report. The addition of the bear business and volume for the third quarter of 2021, when we begin to lap the closing of the acquisition.
For the legacy <unk> business price was up 6% for the quarter demonstrating the value of our innovation and the ongoing discipline, we are applying despite competitive pressures.
Additionally, we experienced notable price for that and pet health disease prevention from U S. Pet health vaccines as we continue to tighten our promotional practices.
Slide 13 provides a breakdown of our overall performance between the U S and our international operations.
This quarter, we are further outlined our geographic performance by Pet health and farm animal as well as contract manufacturing all of which benefited from the addition of Bayer.
To assist with your modeling this quarter, we are providing additional reference lab for 'twenty and 'twenty revenue on a combined company basis Slide 14 depicts this combined revenue by species, representing an update to our Investor day disclosures, which were based on the midpoint for fourth quarter guidance and by major country.
Please keep in mind that all estimates of combined revenues are materially correct. However, due to certain data limitations, including FX. These numbers may have some non material differences to actuals. We are providing these combined numbers are good for summary to give better financial capex to investors as a reminder, going forward into 2020.
One we will report quarterly revenue by species, we intend to update revenue by country on an annual basis.
We plan to file our 10-K, shortly but moving to slide 15, Let me now offer a few words on working capital cash and our debt leverage.
In the U S consistent with Q2 and Q3, we hold all distributors are 60 day payment terms.
In the fourth quarter day sales outstanding continued to improve sequentially standing at 66 days versus the peak of 103 days in the first quarter of 2020.
We ended the fourth quarter with $495 million in cash and equivalents on our balance sheet.
With gross debt of $6 2 billion, our net debt was $5 7 billion.
We continue to anticipate gross debt repayments of $500 million in.
In 2021 with progress towards our net leverage goal of being below three times by the end of 2023.
As a result of system cutover related to our SAP implementation, we did draw $150 million on our revolver in early January Tomatoes, intra company related to liquidity.
Now the true transitioned to a full year and first quarter 2020 outlook starting on slide 17.
Today, we are updating our full year 2021 guidance reflect the good momentum entering the year by increasing the ranges for total revenue adjusted EBITDA and adjusted EPS.
We now anticipate 2020 revenue of $4 $5 five to 463 billion.
Adjusted gross margin of 56% to 57% and Opex of 173 to $1 75 billion leaves.
Moving to adjusted EBITDA of $980 million to $1 4 billion.
Our depreciation interest expense and tax rate assumptions are unchanged from the December.
Within our Q4 2020 GAAP results, we were required to assign a valuation allowance against $75 million of our deferred tax assets from U S operations.
Net flow through from our higher revenue guidance is driving our increased adjusted EPS outlook of 95 to $1 a share.
We also continue to anticipate the same capex and net cash outlays as discussed at the Investor day forecast taxes are lower by $5 million.
Slide 18 offers a refreshed view of the bridge from our 2020 combined revenue for our raised 2021 guidance importantly, we continue to expect innovation and portfolio to provide a combined 3% to 4% growth despite ongoing headwinds from competitive pressures.
Generic entrants and macroeconomic challenges in international poultry and Aqua.
We are not providing 2020 pro forma line items for the combined company below revenue today, given the data the limitations around that exercise.
Moving to slide 19, we are providing guidance for the first quarter of 2021, we expect revenue of 1.15.
For one $1 7 billion.
Adjusted EPS of 20 to 25 sets now I'll hand, it back to Jeff.
Thanks, Todd before moving to questions, we often like to share perspective on relevant industry trends that will become key in the years ahead as we pivot into this next decade, we believe it's key to do that today I will touch on three trains that will make a meaningful impact we believe on our industry.
In the first half of this decade, the first being the change in pet care landscape.
As climate policy and third is innovation. These are areas, where <unk> will continue to lead first pet care landscape more than two thirds of pet owners say their dog is even more of an emotional companion than before the pandemic changing with our relationship with pets for the long term.
This increase togetherness is translating into an increased expectation of care and driving growth in.
And spending clinic visits and auto shipments.
More specifically on omni channel presence from the veterinarian to E Commerce, it's never mattered more during Covid about one third of pet owners shifted their spending online and nearly all expect to continue that.
With about half of the world's 500 million pets still on Medicalized are increasing access to pets creates an opportunity to be the bridge to drive increased pet care over the long term.
The Bayer acquisition positions <unk> as the omni channel leader.
We will expand on this significant market trend as we head into this decade with our growing portfolio of VAT and OTC products did.
Digital omni channel partnerships and the next generation of value, creating innovation flight connected care.
The next trend to watch is climate policy.
Cattle are often named as the leading cooperating greenhouse gas emissions, but healthy animals are actually a critical part of the solution not the problem the solution to sustainability.
They up cycle, the grass forges and food byproducts humans can't use if we want to reduce greenhouse gas emissions from protein production, we must invest in farm animal innovation, where the ability to lower emissions dwarfs any impact from alternative proteins that could be achieved.
<unk> is committed to be the livestock producers leading partner on the journey to net zero and our healthy purpose sustainability pledges today animal agriculture is responsible for about 4% of U S greenhouse gas emissions.
<unk> portfolio portfolio already helps farmers and ranchers and prove the sustainability of livestock production for example, we reduced beef footprint by about 9%.
We know livestock production can reach net zero by 2050, many farms, we will do it this decade.
Which leads me to my last point innovation for.
The third trend innovation matters and ex rewarded in this industry.
As a global pet and livestock leader <unk> is well positioned to source develop partner fund and globalize to create the next era of innovation and this flow in both pets and farm animals.
As we close let me review a few key points since closing the Bayer acquisition, our business is growing in line with or beyond our expectations.
Creating momentum in driving increased 2021 guidance our pipeline is progressing with nine of the 13 approvals needed to support our eight key 2021 launches.
For streamlining processes, optimizing our footprint and delivering increased operational efficiency regarding neill ankle bore the increased engagement governance expertise in finance innovation and animal health as well as having a shareholder perspective.
From our expanded and strength in board is bringing immediate value with.
With that I'll turn it over to Tiffany to moderate the Q&A.
Thanks, Jeff we'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow up Inc.
Please provide the instructions for the Q&A session and then we will take the first time.
At this time, if you would like to ask an audio question. Please press star one on your Touchtone phone once again that is star one to ask an audio question.
Your first question comes from the line of Nathan Rich with Goldman Sachs.
Good morning. Thanks.
Thanks for taking the questions.
Jeff maybe starting with the pet health disease prevention.
Price drove a 14% you called out kind of tightening promotional practices I guess could you just maybe go into more detail on what changes were made and and how sustainable this dynamic might be as we think about 2021, and then I think if I'm looking at the slides correctly that would imply.
Sort of like 10% decline for the legacy <unk> business.
You talked about some of the key products.
The growth in volume and market share gains. So can you maybe just talk about what might have offset this and then just quickly as a follow up question for Todd.
I don't think I saw the Inc.
The EBITDA guidance for the first quarter I think consensus is around $240 million I'd just be curious as you kind of give us.
Some some color on how youre thinking about first quarter EBITDA. Thank you.
Let me jump in first before we get the job I mean, we didn't give the EBITDA guidance, but we do feel good about the improving.
Opex trends with the sequential decline relative to Q4 that seven cents per share to Jeff talked about the big driver of the improvement from the 12 sales in Q for up to the 20% to 25% 25, we've guided to in Q1 and with that you would expect to see the EBITDA growth go from a $1 76.
Substantially higher as well, so while not giving specific guidance today, we do feel good about the continued EBITDA growth as shown by the raise of the full year expectations for that.
I would say maybe two just on the price and the volume questions on Pet health I mean first of all there is there is no question our change in our distribution strategy is working we're optimizing our partnerships as you know we've limited the number of partners that we have.
We move to clear old product from Bayer over and then when you just look at the overall underlying demand what you're seeing here as demand is increasing we're taking share the gross to net and actually the efficiencies within the financial relationship has been a driver behind this on.
The price as Todd mentioned in his comments was really driven by strong demand, especially in vaccines or immune is resonating very well with bats, right now from a brand perspective.
Pet owners are paying more attention to their dogs wellness visits are up all of this is driving an underpinning that but I think the most important message is that tightness in.
Our.
Our channel and our partnerships its working we are optimized and its optimizing not just the financials and overall gross to net which is helping price, but it's also helping us from a share of voice and competitiveness in the marketplace.
The other thing to add made is with the divestitures, we had last year, that's obviously negatively impacting our growth rate.
The companion animal business.
The other thing to note is.
We did lose sales <unk>, which is part of the decline we're seeing that is pulling down the overarching growth rate.
Well move to the next caller please.
Your next question comes from the line of Aaron right with Credit Suisse.
Great. Thanks can you speak to some other stocking destocking dynamics at the barracks.
What you're lacking here in the first half as it relates to that thank you. Thank you.
Quantify how much lift for them.
Into 2020 from 2021 in terms of that purchased from a large retail customer.
Visibility our control you have on the inventory for.
On the retail perspective.
And then my second question is how we should think about the quarterly progression on the livestock business, particularly in the U S. Can you break down some of the impact of the continuing COVID-19 headwinds Pittsburgh lapping from Covid headwinds and then also we're mincing competition.
On top of that new product market, how do we think about those factors impacting that quarterly progression Inc.
Aaron Let me tackle a couple of those with respect to the retail as we mentioned there was a $10 million.
All forward for one of our bigger players in that space.
Did get pulled in overall as we've talked previously there was an increase in total inventory at retailers as driven by the growth in the dispensing.
Faction across 2020.
Big pickup in retail.
Online OTC product growth that caused the retailers to continue to expand we also saw more of our products being on the sales and more retail locations. So all of that is good news because there is a higher demand by customers.
For those products with respect to the retail players versus our distribution network.
We've got expectations from those retailers to deliver on time full shipments when they make orders and so they do control of more of what they want to own on their shelves.
In that case versus our general negotiations and work with our distribution side on the bed side overall, we feel very good going into the parasiticide season with the levels of inventory that those retailers are holding they are prepared for customers to continue to demand so resto and <unk>.
Family as we go through the season.
Aaron a question on farm animal. So if you look at the market overall, our predictions are that the market as a whole will grow as the market around low single digit.
We expect to outgrow that market low single to mid single digit let me highlight kind of the list of things that will actually be the contributors to growth for us in farm animal because we do expect to increase our farm animal market share in 2021 globally. So the first is we have a cold.
Compare as you know as we came out of a tough year on a farm animal business with Covid.
Two is we have for performance products and as you look at higher.
Ingredient costs as we've said when you look at the futures on corn at $7 or per our products actually with our value based customers actually in with our <unk> solutions actually provide more value.
So that's going to be a driver five of our eight new products or farm animal products and they will contribute to our growth.
The other note that we haven't mentioned is our Bayer farm animal portfolio. When you look at assai depth in our batesville, adding and expanding to our portfolio in a significant way and adding to our access in the international markets.
And then to your other question on generic for mentioned, we continue to differentiate in the field. We continue to work for portfolio cattle and beef. It is meeting and in the fourth quarter exceeded our expectations and then the last of course is China, China overall, especially pigs, but also poultry as we've said China will contribute to one.
Percentage of our total global growth in Orlando, and we're off to a very strong start.
That's all offset by again, the continued first half Aqua and poultry and international So again farm animal business.
Really differentiated in a good position and new innovation and planning to be low single to mid single digit growth and take market share in 2021.
Is that the Covid question.
<unk> Q1, we did have a pull forward in the international markets of about $20 million on the part of animal side.
Q1 is just the concerns on disruption going into the Covid time.
Offset in our.
U S business, where we did reduce the channel by $60 million as a result of COVID-19 impact on our expectations of future demand.
Offset with the bear business that grew on their pet health business, 22% in the first quarter of 2020 versus 19 so.
There are different factors there we know this creates greater clarity needs going into the year and Thats. The reason, we provided the Q1 revenue guidance, but we.
We feel gives a good view of where we're headed here in Q1.
Thanks for taking the next caller.
Your next question comes from the line of Michael Riskin with Bank of America.
Hey, Thanks for taking my question Congrats on the quarter I wanted to go back to your comments on cash side, a little bit you had a lot of time from the prepared remarks, you sort of reiterated.
Meaningful share gains and Codell.
Rest of advantage. So I'm just wondering if it's a little bit deeper on on where the share gains are coming from particularly in light of the triple combo launched by launch for one of your competitors and a strong uptick in year one so.
Any details on whether it's some of that or.
In the retail channel is it more driven by volume for price.
For the category, maybe you could comment on some of the legacy products the older products. Besides the <unk>.
Mr. West open for that and then follow up question.
<unk> now raised for 'twenty 'twenty, one outlook a few times in a row.
Relatively short amount of time since you initially provided in mid December I was just wondering if it's meant to signal.
The improvement in the markets better execution on your part.
Or perhaps more than the initial outlook just had more room for upside and do you feel like you still have enough for them in the updated guide.
If you go through the year to essentially raise it further or just sort of where we are on that trajectory.
Yes, Michael Thank you for the question. So parasiticide that just always start from the broadest perspective of $5 billion market with lots of dynamics.
What I would share with you is that.
As I mentioned, we continue to do well in the omni channel and retail fastest growing segment animal health right now is Pat retail OTC and scripted product shipped to the door that was why I highlighted that trend, we are outgrowing that market and taking share in double digit.
One, yes, that's led by <unk> and the <unk> family, but other products as well second is credit Elio. The codelco performance continues to grow significantly we continue to see.
If youre going to get full coverage to a pet today youre going to need to products.
No matter, what you want to use and the two that are the most significant with the broadest coverage and being paired the most as interceptor plus and <unk>. So that combination and Credentialing alone are also gaining share and we will continue to work with <unk> as we look at this globally, we would say also that.
Pet business in China, and some of the other aspects we talked about with the Bayer acquisition are also areas that contributed significantly in Q4 offset by <unk> I will say <unk> retail grew and that is going to be a key factor for us.
Partially offsetting the declines that Todd mentioned.
And in the vet clinics with <unk>. So we feel very good about that and as we enter this year, the one and a half billion dollar market of the market I. Just mentioned is all U S. We now can match any portfolio today or even.
Surpass it in the international markets with <unk>, plus and then as Aaron highlighted 11 candidates in our pipeline one a year that we will continue to innovate aggressively into this big marketplace. So well position those are the drivers in Q4.
Baidu.
Respect for your question on guidance.
First update in January was it related to restructuring those are something that we worked very hard to get right. It's always tough to impact.
Team members that have been delivering for us, but it was necessary to continue to drive operational efficiencies and once our board approved that we reflected that in updating our guidance from the savings that comes from that.
The update today is continued execution.
In December 15th at our Investor day, with the preparation for that happening from mid November on and our new commercial leadership really getting the complete portfolios underneath their feet and really understanding the business. We are now.
No.
Two plus months later in a much better position to see the value they're driving the commercial execution. Our sales teams are doing the impact the global marketing is having driving underlying demand and with that we're pleased to be able to increase the top line as well as EPS.
Guidance for the full year today. So again overall, we feel the balanced for good understanding of our business. The innovation portfolio is getting launched as we've talked about the acceleration of that from a top line impact was really back half of the year.
We'll move to the next caller please.
Next question comes from the line of <unk> Prasad with Barclays.
Hi, good morning, guys.
Congratulations for results.
I appreciate the very comprehensive color on the earnings day, a couple of questions from me firstly on the battleship Besides market following up on what Peter discussed earlier can.
Can you help us quantify what abroad.
Fleet the car from coverage means in terms of for.
Portion of the market very been exclusive access to with limited competition, obviously, feeling the right way to look at it.
Secondly, okay. Thank you.
For blockbuster can you clarify if the credit level only or if it's function of kind of non kind of deal flow.
And.
And on China, swine can help us understand the pace of recovery that we need to factor in during the course of the year and also there have been recent developments of news flows of ASF fragrance as a function of illegal vaccines confronting factor is that there seems to be the fourth largest commercial parties are in China. So any update on that for me.
Lastly, 2020 guidance key swing factors that you see.
Looking out from here. Thank you.
Yes. Thanks. Thank you for the question. So I'll handle the first one that's I think pretty straightforward Codell Leo.
We know over $100 million is a blockbuster was <unk> alone plus did not really enter the market in Japan until until January. So that's a straightforward and then look as we know and we've talked about as you think through.
Worm coverage and think about heartworm roundworm hookworm lung.
And tape.
All of those are the factors of coverage so when we look at.
The series of those worms in the intestinal worms, especially in what we saw with the IDEXX study is that the prevalence is there it's not something you want to take a risk with and a flea and tick.
Product that this is this is why the pairing study with IDEXX and our initiatives and campaign had become very key will continue to play that out I will also just.
<unk> plus is a product, we're not bringing to the U S. Given that theres different regulatory constraints on heartworm. So that's how we see this market again, a little shy of about a $5 billion market 1 billion and a half internationally and again the split between the.
The retail channel in the vet channel.
And then yes, China swine, yes, there are youre exactly right. There are continued cases of African swine fever in China, and we have not surpassed that that that pandemic continues what though has happened very clearly we're seeing the new cases, primarily in backyard.
Herds that are still very common in still a high percentage of pigs in China. What has happened, though is the shift in where our business comes from the industrialized larger companies that have really advance their biosecurity.
And are advancing actually their share of the marketplace and that's where our business primarily is.
A question on guidance.
My follow up can you remind us.
Yeah.
On the guidance I was asking what are the key swing factors for 2021 guidance considering the variation we saw in Q4 guidance versus actual and also on China I had a follow up because the outbreak, causing the fourth largest commercial pretty.
<unk>.
And not just the backyard, so I wonder if <unk> got any take on that thanks, Jim Let me add that and then Todd can end on guidance. Yes. There was some some limited cases again the supply chains for some of the larger producers continue to use for.
Fragmented, but what I would say is what's most important here is the actual processing supply chain and picking up in the pigs in the processing, that's where that.
The disease spread so youre going to have certain cases, but as we assess it and we spent a lot of time on this we believe that.
Again, our business is sound, we still hold our guidance overall with our China assumptions other contributing up to 1% of our total growth.
And we'll continue to monitor this and update you as we go forward.
With respect to the guidance I think the three big swing factors.
First would be the innovation launches while confident in that anytime you are launching new products and changing customer behavior.
It requires a big effort and we feel good but it is something we need to execute against.
Second would be the season for flea and tick now with a much bigger over the counter product base.
Other than the seasonality of flea and tick has a bigger impact than on the.
Business with oral <unk> and so that's one we're very very very close attention to it.
Finally, the Covid impact.
It has pluses and minuses as we've talked about in this past year with the over the counter in the retail operations, but then also the foodservice impact or farm animal business, especially with the salmon and international poultry.
Thank you for color.
Your next question comes from the line of David Risinger with Morgan Stanley.
Uh huh.
Hi.
It's Andrew on for Dave.
Could you. Please discuss your 2021 pipeline revenue contribution in more detail maybe in particular, the cadence that sales ramp over the course of the year and then also the outlook for these products beyond 2021.
Yes.
Yes, as we've talked we expect these to be $80 million to $100 million in total they're going to be generally back half loaded as we're launching a lot of them here late in Q1 slash early into Q2 from the natural ramp that would come with the timing and then over time, we expect certain of the.
Products to grow more servings of them to have a pretty substantial amount of expected growth here in the first year.
Overall, we've talked that innovation will be for 2% to 3% annual growth contributor for us as we go forward.
We'll take the next caller thanks.
Your next question comes from the line of <unk> with Evercore.
Hi, Thanks, so much for taking my questions I had two if I may 1st.
Back in December you showed a revenue bridge from 2020 to 2021, which mentioned a bear retail stocking of $25 million and I saw a similar revenue bridge today, but the amount for that Berry Hill stocking is now $45 25 can you explain to us exactly what that is and what led to that Chi.
<unk> because that number was for 2020 and you kind of gave that number in mid 'twenty, if I'm trying to understand if something changed in the last couple of weeks of December.
Separately.
And I should have asked this back at the analyst day in December which is when.
Bayer acquisition was announced you had mentioned the target of reaching less than three times net leverage by 2022, and I know you changed that to 2023 as of the analyst day.
Our sense is it's the obvious its the inventory plus COVID-19, but if there's any other meaningful driver would love to hear from you. Thank you very much.
Sure.
The question regarding the retail.
Correct. They did go from 25% to 45, two things in play there one the outperformance we had from underlying demand in dispensing into for led to retailers continuing to need more of our product to meet the underlying demand that we're seeing at both brick and mortar locations as well as online and then the.
The other is the $10 million pull forward that we discussed earlier in the call regarding a big retail buyer as part of negotiations going into 2021. So all good news that there is a continued underlying demand for these OTC products and that we're getting onto more sales and more locations.
Across the U S.
And then with respect to the net leverage just as we know we've underperformed in 2020 relative to what our expectations were at the time, we announced the Bayer transaction in August of 2019. The result of that is going to take us longer to be able to pay down our debt and deliver on that three.
<unk> net leverage is now 2023.
Thank you we'll take the next caller please.
Your next question comes from the line of Elliot Wilbur with Raymond James.
Thanks, Good morning, just.
Quick question for Todd with respect to operating cash flow metrics can you just provide what cash flow from operations was.
In the quarter and given the ongoing restructuring program, how is that going to impact operating cash flow over the course of 2021, just any color you can provide on cash conversion metrics would be helpful. And then for Jeff just going back to your.
Commentary earlier in the Q&A regarding the positive price impact.
On the U S health business, just want to make sure I understand your commentary so that is primarily a reflection of favorable changes in GTS trends.
Given the change in distribution strategy not reflective of actual list price increases but.
So how would that look over the course of the year as you begin to lap those changes is it still a favorable impact in <unk> sort of an outsized one and then just becomes a neutral or you would revert back to sort of low positive increments or could it actually become more of a of a negative dynamic.
And the second part of the other.
The year thanks.
Yes, let me take the first one thank you for the question Elliot So.
As we said.
A couple of dynamics, where.
In the pet health preventative segment, driven by vaccines driven by <unk> that was for one of the big factors here on price.
And then also the compare to a year ago. So those are those are factors in here, but yes, the distribution change and.
The ability to.
Good price there has been it has been a big factor and just creating efficiency by giving away less and being able to create more demand with a bigger team bigger portfolio and have targeted distributors doing what they are best at that we knew would be a factor in this positively and it has been as you look going forward.
And we pressure tested this a lot we continue to hold to our guidance of a 2% price over the long term on our total portfolio.
Thanks for the question on cash flow, we lost about $90 million and operating cash flow in Q4. As you noted we've got a lot of the <unk>.
Ongoing challenges with our restructuring and the cost of taking from that as we look forward into 'twenty 'twenty. One we've called out that we will pay down $500 million of growth debt.
From the EBITDA, we're going to generate that will require an improvement in working capital and some other items given the calls on cash youre going to soak up a large portion of that or about all.
All but.
$150 million so.
This is going to continue to be a reasonably large cash year as we've mentioned and let me just call out the big items, there is $250 million for the restructuring and other one off items, there was about $150 million and normal Capex, you've got about $225 million in cash interest and then the improvement of 5 million.
There's about $25 million to $30 million in cash taxes, so with that we feel confident in our ability to pay down the 500 million of gross debt.
Got programs already initiated to improve the amount of inventory, we're holding on our balance sheet to do that.
Thanks, I'll take a few more color next caller please.
Your next question comes from the line of David Westenburg with Guggenheim.
Hi, This is John on for Dave Thanks for taking my questions for.
How should we think about veterinarian macro in terms of economic reopening and back to work environment.
My second question at this time is do you think that there might be any onetime benefits net product areas. Like for example, you have a strong anti anxiety franchise with colonic com.
Two well and are there any other areas that got it. Thank you.
Yes, great great questions.
Does that clinic market.
Has risen with the tide of Covid and has benefited from this I also believe the vet clinic market.
And veterinarians around the World has moved in a transformative way faster than they normally would have from curbside service to telemedicine to participating in the retail on omni channel starts and ends we believe our industry with the veterinarian one other key things that we will do is is.
Partner with the veterinarian and bring them into this omni channel and this pet owner that wants to shop in different places. So as I look at the vet clinic. There is no question, we continue to see some consolidation with corporates.
But we also see the other segment more value add more transformation looking at revenue from multiple streams and becoming a lot more virtual and playing into the omni channel.
I would say, it's not just in the U S for we're seeing that as well globally. We don't really see any I think to Todd's point, if we look at product segments, new products three on the pet side five on the farm animal side, all are going to add significant value, whether it's raised without antibiotics in poultry and that trend.
<unk> experience and linked to sustainability net zero to crude Elio plus broad spectrum differentiation packaged into our portfolio internationally. These are all key markets that actually can play, but otherwise the environment linked.
So our business said the only other one I would point to is we do have a performance driven farm animal portfolio.
And that plays well as feed costs go up our value, it's measured and it's a value based customer goes up as well so that would be another one I would note primarily its new products and the adoption and the building of our new products.
Alright, Thanks Todd.
Your next question comes from the line of Kathy Miner with Cowen <unk> Company.
Thank you for taking my question just two short ones for just a clarification. Please when you talked about the your outlook for the farm animal to grow low single digit as the market does that assume that all species growth within that or some.
But more pressured and is that also true for ivanka.
Second question is on business partnering you commented that the parvovirus was one of them in this quarter were there any others and should we anticipate more of these going forward and are those in your guidance. Thank you.
Great questions, Kathy So farm animal.
As we look forward, we would say that as you look at species I think as a whole.
Globally poultry is probably got the most challenge coming into the year with continued did some some disruption as we've talked about some economic challenge in some of the mid sized markets that we see as important in poultry, but still expected to be as you look at the market 1% to 2%.
Growth across all regions in aggregate as you look at swine.
We are cautiously optimistic around global swine market from 2021 production expected to grow around 6% driven by China. As we just mentioned, but also some nice balance and really less of a COVID-19 compare.
On the U S side, and some of the other markets as well, so China and us keeping a swine up and then b.
Maybe the most optimistic we've seen in a while placements and marketing are expected to be ahead of 2020 levels.
As the industry fully stabilizes.
And we'll continue to watch that dairy continues to have its challenges, but again less material to us. So we see that market growing as an industry low single digit.
Again goal is to outgrow that market and take market share.
And then and then business partner and yes, we had to Kimberly deal, we don't disclose all deals relative to our pipeline, but as Aaron highlighted on Investor day inside his P&L. He will continue to have acquisition dollars within his R&D budget.
To continue to partner to acquire to share technology platforms as they come further into development, we'll be including them in and adding them to our 45 plus candidates to become our 25 launch equivalents Kathy. So we'll talk more about those again as they as they enter and become closer to the marketplace.
Well, we'll take the next caller. Please your next question comes from the line of Navin Jacob with UBS.
Hi, Thanks for taking the questions just shrinking other Graham on for Nadeem.
I just wanted to get a little bit more granularity on the China swine improvement.
When exactly do you expect the churn swine market to normalize and what do you expect the revenue impact would be on Elan as China's.
Start to normalize.
And then just a quick follow up on on inventory.
Specifically what was the inventory move for bear product for you and are they back to normal levels at this point and then on Iran legacy product.
Was there any buildup of inventory in Q4.
Thanks very much.
Yes, great questions I'll start with China, and then Todd you can maybe take the second one better.
We would believe that the market will continue to have ASF challenges throughout the entire year, we see nothing that doesn't change that anticipation.
Without question. The government is supporting that with high peak prices in wanting to have domestic production and less dependency on imports. There is an acceleration to sophisticate the larger companies the industrialized companies backyard farming, both in pigs, and poultry back even in the avian flu.
Times.
That's where it comes from and it makes their supply chain and food chain much more vulnerable so as an animal health industry, we fully support much more sophisticated bio security and larger companies that can afford these capabilities. So I see continued acceleration of an industrialized pig.
Starting to match what is already in the poultry industry in the U S. On transport of animals is another big factor coming from the farm for smaller farms and I would see that to lessen over time as industrialized companies have more pigs, ultimately what I want you to hear is a langkow, China will contribute one full percentage point of.
Growth led by pigs, but also poultry and pads will also be a factor there.
With respect to the bear side on U S.
Really retailers.
Expanding the amount of product they are selling and thus holding more product in more stores and online.
While we thought that was about a $25 million kind of growth headwind in 'twenty one back in December with.
The increase we saw the $10 million pull forward plus just continued growth in that it's about a $35 million headwind from that aspect and then the 10 million that we have taken out of our expectations for Q1.
Just a timing between quarters. So overall about an increase in the amount of inventory being held because of the increasing demand for the products in the dispensing that we've seen it does create a growth headwind unless dispensing would grow faster in 'twenty one than what we currently expect right now.
On the <unk> side, our inventory with district distribution, so different than retailers, but with our distribution partners that serve vet clinics and farms those inventory levels are consistent with the end of Q2 as well as consistent with the end of Q3 here at the end of Q4.
Thanks, well end the call here operator.
Thank you and minutes turning the call back over to management for closing remarks.
Yes, thank you for the opportunity to share the results and we look forward to engaging with all of you as we enter into 2021.
Thank you. This concludes today's conference call you may now disconnect.
Okay.
Yes.
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