Q1 2021 Elanco Animal Health Inc Earnings Call
Cash.
Jim.
Yes.
Yeah.
Good day and thank you for standing by welcome to the Langkow Animal Health incorporated Q1, 2021 earnings conference call.
At this time all participants are in a listen only mode.
After the Speakers' presentation, there will be a question and answer session to ask the question. During the session you will need to press star one on your telephone please.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to you speak of today Tiffany Canaigre. Please go ahead.
Good morning. Thank.
Thank you for joining us for of Lingo of animal Health first quarter 2021 earnings call I'm, Tiffany can aegon head of Investor Relations.
Turning me on today's call are Jeff Simmons, our President and Chief Executive Officer Todd.
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 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 and the slides referenced on this call in the investors section of of Langkow Dot com.
The slides and 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.
Good morning, everyone.
Before moving to Q1 results I want to acknowledge our team.
And the challenges that they've overcome in the last two years through both the COVID-19 and the African swine fever Pandemics the cause.
<unk> of our separation and the independent system standup and the integration of Bayer animal health.
In what remains a difficult environment, they've stayed focused on accelerating sustainable long term value for customers for yourselves the shareholders and each other.
As you all know over the past two years <unk>, we have made several hard strategic decisions.
Four of these decisions stand out to me.
The Bayer animal health acquisition not long after the IPO.
Also transforming our distributor strategy.
As well as changing commercial leadership and accelerating our restructuring.
Today, we're seeing the payoff from those choices and from a disciplined execution that I believe truly sets. The land go on a path to be of global animal health leader.
The Lincoln started 2021 with the better than expected sales profit and EBITDA.
And on the strong momentum of our business has shown since we closed the Bayer acquisition in August of 2020.
Turning to Q1 results on slide three our first quarter revenue of 1.2 for $2 billion surpassed the midpoint of our guidance range by over $80 million with broad based outperformance across many categories and geographies are.
Our adjusted EBIT EPS of 37.
Landed 15 cents above the midpoint of guidance with expense leverage and synergy execution driving strong flow through to bring adjusted EBITDA to $343 million.
Our expectation for continued sales momentum and operational execution is reflected in our increased full year guidance for revenue adjusted EBITDA and adjusted EPS the.
This includes the eight innovation launches in 2021, which remain on track to contribute $80 million to $100 million in revenue this year.
Our raised outlook demonstrates execution against our strength and an expanded IPP strategy and continues to be in line with our long term growth algorithm.
I'd like to take a moment to address so rough scale on slides five and six before progressing to a more detailed review of our performance from the first quarter.
Today in a separate 8-K filing we released additional scientific data to correct. The misinformation spread through media reports regarding our celestial flea and tick collar.
The filing includes conclusions from a comprehensive review of adverse event data.
Which we have also provided directly to regulators and legislators.
First and foremost, let me emphasize the health and the well being of pets and their ability to enrich the lives of people through companionship is core to what we do and who we are Eddie landfill.
One of our greatest concerns from the stories as the pet owners stop using <unk> proven products to protect their pets from potentially harmful fleas, and ticks, which can transmit dangerous disease and impact quality of life the potential danger around nonuse presents a risk to peddle arms.
And their owners that's why our team has worked tirelessly to clarify the science and safety around the trusted brand.
So let me summarize and be clear answer resto.
First the product's strong safety profile as supported by registrations from more than 80 regulatory bodies around the world and our robust pharmacovigilance process.
Also there is no scientific evidence and clinical studies, our pharmacovigilance reporting to substantiate that so rest of those active ingredients cause Pat deaths.
We are providing additional products surveillance information on <unk> to the EPA and we've shared information with the house of Representatives Subcommittee on economic and consumer policy to set the record straight.
We continue to actively cooperate with both on any supplemental request for facts.
Our proprietary market research indicates high levels of confidence among consumers and veterinarians bolstered by our proactive efforts to share of the facts with pet owners retailers and veterinary clinics.
Importantly in terms of revenue in the first quarter, we saw no deviation in two year growth for global <unk> compared to historical trends.
April revenue in the U S is ahead of our original expectations from the start of 2021, and we are on track towards full year expectations for the <unk> brand.
I'd like to highlight a few details I think are particularly noteworthy.
Since the launch of <unk> in 2012 more than $28 5 million collars had been distributed across the U S.
Through our robust pharmacovigilance investigation process 12, Pat deaths have been classified as probably or possibly caused by.
By the <unk> caller using an internationally recognized classification system known as the Avon coding.
As a percentage of total Sorretto caller sold this results in an incident rate of 0.0000 of four 2%.
And very importantly, as of recently reinforced by an independent third Party review none of those 12 cases since 2012 were deemed on.
Causally linked to the active ingredients in Sorrento.
The cases reflect other highly unlikely, but unfortunate situations such as the caller getting caught on an object and resulting in harm.
We're deeply disappointed when any adverse event or reaction occurs associated with the product or.
Our entire <unk> team is dedicated to ensuring the quality safety and efficacy of our products.
In the light of day misinformation around the rest of over the last two months, we've taken proactive steps to ensure consumer understanding of the product's strong safety profile, we've offered educational materials across 20000 veterinary clinics through enhanced in store and online retailer advertising and directly.
The consumers to targeted social and online channels.
In turn our recently completed proprietary market research indicates the veterinarian and consumer confidence in Sorrento remains high.
Of the approximately 1500 U S pet owners surveyed the week of April 23rd 98% of terrestrial users intended to repurchase the product <unk>.
Aligning with the loyalty data cited with the Bayer acquisition.
A representative national sample of 246 veterinarians sound debt, while about half of those of veterinarians are familiar with the negative press coverage of <unk>.
<unk> reported use of the product and intent to recommend has not changed.
Slide six shows first quarter, so rest of our global revenue of $152 million.
Recall that in Q1 2020, the brand achieved the very robust 49% growth with the strongest sales gains in the U S benefiting from the retailer driven stock in due to increase consumer debt demand related to the pandemic.
Last year also saw a meaningful increase in points of distribution in certain major retailers.
In the first quarter of 2021, Sorretto declined 9% versus tough comparisons and with colder February in the U S. Resulting in what are still very healthy and consistent multiyear trends.
Looking at two year global <unk> growth.
First quarter 2021 revenue was up 35% versus the first quarter of 2019.
U S retail and veterinary dispensing data from Qinetiq Nielsen and 10 10 data represents our closest view of pet owner of purchasing.
Two year growth trends in March were well above a weather impact in February and closer to January.
While we do not intend to report dispensing data on a regular basis. We believe it provides important context in this case.
Additionally, let me share that we have not seen any material increases and so rest of the returns.
Looking forward, we continue to see a long runway for this trusted brand to fuel that growth, we're investing in omni channel efforts and digital engagement to deepen our relationship with current customers and reach new pet owners, including additional investments in the U S. In the second quarter continued to expand.
And in market building in key emerging markets, including China as well as the lifecycle management plan and connected care initiatives creates ample opportunity over time for this unique platform and trusted brand.
Moving now to overall pet health for the quarter.
On slide seven.
The global business drove approximately half of the upside versus the midpoint of guidance, reaching $646 million for the quarter.
With good execution, and a competitive of favorable industry backdrop.
The advantage family performed well in the quarter posting global revenue of $143 million up 14%.
Growth reflected our targeted consumer retention efforts in the U S and particular strength in international markets, including China Pat.
Pet health vaccines also remained strong in the quarter and a beneficial vet clinic backdrop, and reflecting operational discipline under new leadership installed last August.
U S pet health, including vaccines was a key driver of the 2% increase in price achieved for totally langkow.
It reinforces that our channel strategy is working and creating real demand.
In the U S on across the global business, our aggregate channel inventory levels of distribution remained consistent with prior quarters.
And parasiticide Cornelio saw robust double digit revenue growth.
The accelerated from the fourth quarter and trends were especially strong at retail.
Our omni channel leadership is one of our five key growth enablers positions us well as the retail channel outgrew the industry in the first quarter.
Despite the beginning to cycle difficult comparisons from the consumer driven demand.
Chris <unk> and interceptor, plus revenue were in line with our expectations for the quarter as the pairing opportunity continues to resonate with veterinarians and pet owners offering comprehensive flea tick and warm coverage.
Meanwhile, our defend brand <unk> continues to see share erosion by industry innovation, we're managing declines in optimizing profitability for this older brand through targeted omni channel efforts.
The <unk> growth at retail once again acting as a partial offset.
Two decreases in the clinic.
And therapeutics <unk> had robust double digit growth in the first quarter with share gains in the U S and said market. According to the kinetic data scale of <unk> is also running a bit ahead of our expectations in Europe.
We're working to grow the brand to be our 10th blockbuster through our positioning strategy as first line treatment with easy at home dosing and true it's continued global expansion.
Overall I'm encouraged by our commercial execution pet health in the first quarter exceeding our expectations from our last earnings call in February.
We head into the remainder of the year with them.
Optimistic the balanced view for the pet health business, our increased full year guidance incorporates growth from upcoming and recent innovation Omni channel leadership, leveraging our digital ecosystem optimizing our selected channel partners and expanding in new geographies, including the fast growing Chinese <unk>.
<unk>.
While recognizing the highly competitive nature of the pet health industry.
Turning now to the farm animal business.
In the first quarter, we saw stabilization in our U S cattle and swine businesses as the backdrop has normalized from the COVID-19 pressure we saw in 2020.
Elevated fee costs continue to pressure producer economics, however, they enhance the value proposition for our efficiency products like off the flex and Robinson, which outperformed our forecast in the quarter.
With the <unk> and we continue to navigate generic competition in our share assumptions remain in line with our expectations.
Finally, we benefited from competitor stock outs in the U S cattle vaccines on implants, a tailwind we do not anticipate extending into the second quarter.
Outside the U S poultry and Aqua continue to be negatively impacted by unfavorable macroeconomic conditions and reduced consumption.
As we've shared previously international poultry challenges are concentrated in mid sized emerging markets, while the outlook for global poultry industry is gradually improving.
Significant differences remain between countries and the global poultry trade is still very competitive.
And Aqua, we were encouraged to see salmon prices inflect positive year over year to end the first quarter.
We continue to look for trends in our international poultry and Aqua businesses to improve midyear with reduce pandemic and economic related headwinds.
Both species again remain important growth drivers for Atlantic overtime.
And then finally in China swine, we saw another quarter of strong recovery from African swine fever headwinds, while remaining vigilant around the potential impact of new outbreaks.
Chinese producers are under pressure with high prices down 40% over the course of the quarter driven by salary reduction from new ASF spikes as well as higher ASF related costs of more expensive fee.
The sow herd reduction is likely to impact the second quarter and third quarter.
We continue to expect China across swine poultry and pet health to contribute a full percentage point of growth to totally langkow revenue in 2021.
Our first quarter results reflect progress on several key areas, including the Bayer acquisition changing our revenue mix from 30% Pet health and 70% farm animal to a 50 50 split the.
The commercial execution that our new leadership is bringing across the U S. Pet health U S farm animal Europe, and international our accelerated pace of synergy capture and finally, the underlying demand that our teams are generating as part of changing our distribution strategy in 2020.
As Youll see on slide eight our outperformance in the first quarter comes as we continue to execute against our strength and an expanded innovation portfolio and productivity strategy or IPP.
Turning to slide nine I'd like to provide a status for the eight launches planned this year with 11 of the 13 geographic approvals received and the focus now turning towards launch execution and excellence.
On the farm animal side, and Cressa is meeting our expectations and the competitive EU market and is performing well as part of the first tranche of launches in the U S.
Xperia, a first of its kind product indicated to reduce the ammonia gas emissions per pound of carcass weight cattle shipped to its first feedlot customers in the first quarter and is being fed the cattle today.
We're introducing two products to support the raised without antibiotics or our WMA market clinical.
<unk>, which launched in the first quarter, and though of shield, which we sourced externally to build our portfolio in this key space.
These two products joined Kosta body in the nutritional supplement which has now achieved the necessary heat stable formulation.
Moving to pet health as we shared in February of <unk>, plus launched in Japan at the beginning of the year.
We have now received the marketing authorization in the EU and EU clearing the way for a second quarter launch while on.
Australia remains on track for the third quarter in time for the local parasiticide season.
And finally credential of cat and of Lora have launched in the U S, adding to our growing fee line portfolio.
With that I'll turn the call the Todd to provide more color on our results. The rapid progress being made on Bayer animal health integration and our independent stand up as well as our outlook.
Thanks, Jeff.
Slide 10 summarizes our financial performance highlights, including our reported net income of earnings per share of.
On slides, 27% of 34 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 first 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 on our reported results.
Looking at the adjusted measures on Slide 11, you'll see the total ankle revenue increased 18, 9% of in the quarter on a reported basis with a neutral impact from foreign exchange for legacy of like of.
A breakdown on the effect of bear on our revenue growth on a moment.
On slide 12, Theres, a visual representation of our revenue outperformance versus the guidance range that we provided in February the.
Key drivers of the better the anticipated results the order of magnitude where commercial execution in our international breast health business stabilization of U S cattle and swine.
Coverage in China, swine execution of a favorable backdrop in U S pet health vaccines as well as currency total loans.
Adjusted gross margins of the percentage of revenue was 59, 2% an increase of 920 basis points compared to the first quarter of last year.
As Jeff mentioned earlier, the bear acquisition dramatically increased our exposure to the rapidly growing pet health side of the industry.
Those higher margin portfolio, driven by Serrato VA family on the first half seasonality of the northern hemispheres, flea and tick season or the very positive impact on our gross margin.
In addition, we saw the benefit of positive price on the the length of those legacy portfolio from shift of expenses into the second quarter with the legacy of Lego ERP cutover and continued productivity gains.
Total operating expense increased 75% of of the first quarter, including the addition of the Bayer animal health business compared to our guidance from February we experienced an approximate $30 million shift of investments from the first quarter into the second quarter or approximately <unk> <unk> per share of earnings for.
The delay of expenses include more opportunistic.
The phasing for direct to consumer of digital advertising with the cooler weather delaying the early parasiticide season, and with the timing of R&D projects.
Operating income increased to 271%, reflecting the Bayer animal health acquisition the shifted the operating expenses I. Just described the broad based outperformance in revenue and gross margin expense leverage and synergy execution.
At the bottom line Q1, adjusted net income increased 239% to $182 million.
The Q1 effective tax rate was 21, 3% on with our adjusted EBITDA of $343 million, our adjusted EBITDA margin for the quarter was 27, 6%.
Now, let's discuss our revenue performance more closely on slide 13, you will see a breakdown of the contribution from legacy of Lingo and legacy bear portfolios by category legs.
The legacy bear products contributed $559 million on the quarter as previously discussed with the first quarter results, we have transitioned to reporting revenue by species provide greater transparency Todd.
Health had $645 million of revenue or 52% of total winco, marking our first quarter ever with more than half of our business attributed the pups cash.
<unk> contributed $267 million or 20%, 21% of total annual revenue in the quarter poultry, either the $166 million representing 13% <unk>.
One of $123 million or 10% at aqua $22 million or 2%.
On Slide 14, you can see the effect of price rate and volume on revenue performance the bit.
The sort of the bear acquisition is reflected in volume as is typical with acquisitions. We will continue to report. The addition of the bear business and volume through the third quarter of 2021, when we begin to lap the closing of the acquisition.
For the legacy of Waco business price was up 2% per the quarter demonstrating the value of our innovation. The ongoing discipline. We are applying despite competitive pressures improved commercial execution and evidence of our channel strategy is working.
On slide 15 provides the breakdown of our overall performance between the U S. On our international operations. We are further outline of our geographic performance by Pet health and farm animal as well as contract manufacturing all of which benefit from the addition of bear.
We expect to file the 10-Q, shortly but moving to slide 16, let me offer a few words on working capital cash and our debt leverage.
And the new us consistent with the prior three quarters, we held all distributors of 60 day payment terms in the first quarter day sales.
All of the outstanding stood at 69 days of slightly from 66 in the fourth quarter of well below the peak of 103 in the first quarter of 2020.
The three day increase in Q1 reflect the $102 million of additional sales compared to Q4 2020, including $75 million more in our international business, where we generally have slightly longer terms than in the U S.
We ended the first quarter with $515 million in cash and equivalents on our balance sheet.
With gross debt of $6 25 billion, our net debt was $5 74 billion.
As a result of system cutover, we exited the quarter with $50 million drawn on our revolver. The manage intra company related liquidity. This drawdown was already been repaid in full.
We continue to anticipate gross debt pay down of $500 million in 2021, and we now expect in 2021 with net leverage of approximately five times compared with our prior year end target of approximately five five times, reflecting our increased adjusted EBITDA outlook.
Now I will transition to our full year and second quarter 2021 outlook starting on slide 18.
We are updating full year 'twenty, one guidance by the increasing and tightening the ranges for total revenue adjusted EBITDA and adjusted EPS to reflect the good momentum to start the year.
We now anticipate 2021 revenue of $4 six to $4 $73 billion.
Adjusted gross margin of 60, $56 75 to <unk> 50, 725% and Opex of $1 78 to $1 8 billion, leading to adjusted EBITDA of one of five five to one of <unk> 5 billion, our full year spend as a percentage of revenue.
The expected modestly higher than previously forecasted as we lean into the strategic commercial opportunities and with increased legal expenditures and the impact of foreign exchange.
Our interest expense and tax rate assumptions are unchanged, while we now expect the appreciation of approximately $195 million.
And weighted average diluted shares of $488 7 million.
Net the flow through from our higher revenue guidance is driving our increased adjusted EPS outlook of $1 to $1 <unk>.
We also continue to anticipate approximately the same capex net cash outlays and cash taxes as discussed in February.
Slide 19 offers of refresh view of the bridge from our 2020 combined revenue total <unk> 2021 guidance in comparison to our February update the anticipated currency headwinds the shifted to a $20 million to $30 million tailwind.
COVID-19 recovery is occurring at a faster than expected pace and we are reflecting the strength we saw on our portfolio growth on the first quarter.
Importantly, we continue to expect innovation to contribute $80 million to $100 million.
The new revenue, which combines with our base portfolio to deliver approximately 4% of 5% underlying growth for the year.
Our guidance remains balanced and grounded in the reality of ongoing headwinds from competitive pressures generic entrants as of <unk>.
Outbreaks in China, and macroeconomic challenges in the international poultry and Aqua.
Moving to slide 20, we are providing guidance from the second quarter of 2021, we expect revenue of one point to two five to one to $5 5 billion.
Adjusted EBITDA of $250 million to $275 million.
And adjusted EPS of 22% to 27 of our outlook reflects the sequential increase in Opex in terms of dollars and as a percentage of revenue with the delayed timing of investments from the first quarter. We are also increasing investments to drive so resto.
I want to spend a moment on the seasonality of our combined company of the resolve on quarterly cadence as detailed on slide 21.
Our full year guidance currently anticipates on the first half of the year will represent approximately 53% of full year revenue of approximately 60% of full year adjusted EPS in 2021.
This dynamic is reflected of typical seasonality in our higher margin parasiticide products more than offsetting innovation gaining traction in the second half of 2021.
For reference on slide 2020 on slide 22, historically, just over 70% of <unk>. The revenue of just under 60% of advantage family of revenue occurs in the first half of the year on average.
Bind so rest of in the family had $578 million of revenue from the first half of 2020 compared to $320 million in the second half equating to a 250 million more of this higher margin revenue in the first half.
Given the relative scale of these products and their margin contribution the revenue timing translates to an outsized first half contribution to EPS as well.
Additionally, this year, we have discussed the shift of $30 million or five pennies of earnings from the first quarter and the second impacting the cadence of EPS. This pushback of operating expense creates a pull forward of $30 million and adjusted EBITDA.
While seasonality may create shifts in any given year like this <unk> push of expenses in 2021, we would expect EPS between Q1 and Q2 to be more similarly.
<unk>, assuming normal weather conditions.
Before I conclude let.
Let me provide an update on the Bayer animal health integration and are independent of the line. It go standup.
We are progressing towards the synergy capture targets that we accelerated with the December investor day, contributing to our margin expansion in the quarter.
We continue to expect $160 million to $175 million on synergies this year all of the path towards $300 million by 2023.
Meanwhile, our cost to achieve in 2021 has come down by 30% of $35 million.
Resulting in the forecast of 125 to 130 million of cash cost for the year compared to $160 million that we anticipated on our December investor day, our team of bears the complexities of an acquisition of the size, while completing our separation from Lilly on time in the first quarter.
While we are saving 30% of $35 million on the cost to achieve the bare synergies with separating the standup from wood is projected the cost 15% to $25 million more than we forecast of last year as continued hyper care is needed to manage through the transition to our new ERP system business process changes and the startup of.
Our new shared service centers in Poland and Malaysia.
To close I would like the Echo Jeff's comments at the beginning of the call and thank our global team for their dedication resilience of execution as we went live on a standalone Lanka ERP system during the quarter.
The efforts to establish new legal entities across the world transitioned significant IP infrastructure applications and data open two regional shared service centers and exit the nearly 1300 Lilly TSA was the significant effort on grateful to all of those who contributed the make this achievement possible.
While we are not finished in making these changes of efficient and the execution. Our team continues to work through the hyper care support model to ensure we are taking care of our customers vendors and team members.
Now I'll hand, it back to Jeff Thanks, Todd before questions. Let me just briefly summarize the link will.
Start of 2021 was strong results building on the good momentum to end last year. Our team is now executing and we're clearly beginning to see the payoff from those hard decisions I discussed that we've made since our IPO.
We expect momentum to continue in the second quarter on the balance of the year as evidenced by our raised guidance ranges today.
We're demonstrating commercial competitiveness and pet health with the benefit of of favorable industry backdrop, and we're successfully mitigating the misinformation around <unk> with both April and full year revenue on track.
For our original expectations for 2021 was the rest of our U S farm animal fundamentals have stabilized while China swine was ahead of our expectations, although ASF outbreaks in animal numbers must be watched closely.
Our forecasts are balanced as Todd said as we recognize a highly competitive pet health environment as well as the headwinds from generics, particularly on the farm animal side.
Overall, we are confident that our strengthened and expanded IPP strategy will continue to drive long term value creation for our shareholders and society.
He'll ankles healthy purpose or our 2030 sustainability pledges continue to fold into our business objectives, and we are focused on the opportunity to partner on across the industry players as we strive to create a better future for society.
As a part of our separation from Lilly and the integration with Bayer Animal Health. We are building a fit for purpose organization with the governance controls and initiatives in place to create a global animal health leader.
We look forward to sharing our first environmental social and governance or ESG report in the coming weeks as further reflection of our commitment to a healthy enterprise with that I'll turn it over and of Tiffany to moderate the Q&A.
I'd like to take questions from as many callers as possible.
Ask that you limit yourself to one question and one follow up the camera. Please provide the instructions for the Q&A session and then we'll take the first caller.
Thank you as a reminder to asking the question you will need to price the star one.
<unk> on your telephone.
Withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
The first response is from Nathan Rich with Goldman Sachs. Please go ahead.
Good morning, Thanks for the questions and Jeff Thanks for all of the additional details on the rest of though.
On a few questions on that and maybe I'll throw them out to you all upfront.
On the survey of if Thats. The you referenced it sounds like there is no one.
The change and intend to recommend the products I was just wondering if theres any additional feedback or color that you can share from.
From vets on how they view the efficacy and the safety of the product.
And then in terms of the conversations you've had of the house Subcommittee can you maybe talk about the nature of those discussions and are there any timelines that we should be watching here and then lastly can you share your expectations for global thrust of the revenue this year.
The kind of two year growth of 35%, maybe without putting too fine a point on it is that how we should be thinking about growth for the full year for threats. So thanks a lot.
Yes, let me let me cover the first couple of question of Todd do you can you can add on the so thank you Nathan for the questions. Yes, a lot of effort again on <unk> on my comment upfront I think is very important is the smiths information its very important to clarify that's why we've worked tirelessly against this that's why we filed the 8-K.
Because we believe that non user of the removal of of a collar with non us presents significant risks so with that said just to answer.
We saw in the surveys very much what we saw when we did the diligence on Bayer relative to loyalty loyalty by pet owners as well as the veterinary community. We've engaged very closely with the veterinary community of course on the science on the Pharmacovigilance data and all I can say Nathan is that there is there is no change in there.
Intent to recommend the product and again, it's being used.
Differently around the country in the U S.
With vets and with retail, but again overall support has been reinforced in the significant way on the veterinary community has been outspoken and supported and we're very appreciative of them on relative to the regulatory process of the EPA has pharmacovigilance process and the science.
So thats and Thats important and then.
When we look at the subcommittee what I would say as we've engaged with them. We have presented them information and we will continue to engage with them. Nathan there is no timeline on next steps that I can report here other than to say that we're being collaborative and the information that was in the 8-K was of representative.
Sample of what we've shared with them and we'll continue to engage with them as well as the EPA as we go forward.
With respect to guidance for the rest of it we're not guiding on any specific brand or product on a full year basis. We will say that we're pleased with alpha resto of household in the face of this misinformation campaign.
The dedicated loyal users of this trusted brand and why we've sold over $75 million since its launch on a global basis.
That being said we've talked about the tough compare from COVID-19 as you can see on slide 19 in the revenue bridge, because we do expect of $40 million to $50 million headwind. This year on the bear OTC products from the COVID-19 lift they've got a year ago.
The offset generally tracking with our expectations for our full year. So rest of it in 2021, and we will continue to invest in the second quarter as we mentioned on digital and omni channel efforts to to sustain the momentum Nate as well.
Take the next question.
Yes.
Thank you. Your next response is from Michael with skin with Bank of America. Please go ahead.
Hey, thanks for taking the questions.
Just one one per unit start you had a couple of comments on your prepared remarks on China and obviously good growth in the quarter, but then also there was some concern.
Thoughts on plastic surgeons and heard reduction I was wondering if you could quantify that a little bit more of it.
How much of that are you seeing already how much of a risk because of the China revenue for the year of Ascension.
All of contribution of 1% of full year growth, but just wanted to go a bit more on the ASF way up there. So how do you. How are you thinking of that could play out and then for Todd.
On the gross margin line really great result, this quarter, that's not the simple out of.
From the patient and it seems like for the full year guide Thats, where most of the EBITDA margin gains have come from I was just wondering if you could clarify where you're seeing the gross margin improvements over the last couple of quarters.
Is it on product mix, if it's at the op.
Operational initiatives of the Bayer integration sort of where you're seeing the gains.
Is that the continued going forward.
Yes, Michael relative to ASF. Thank you for noting that again, a really strong first quarter for China. Overall I will note that we continue to reiterate that that represents still believe a full percentage point of growth free Langkow IC, all three dimensions of the business doing really well with the.
Perhaps in poultry complementing a very big business.
And even our warm water fish business that we got from Bayer. So China is doing extremely well, but we do note a few things that have happened here during the quarter.
We've seen a new wave of ASF resurgence, it's impacted prices as I mentioned in animal numbers, we've seen Michael.
Largely fell in the northern provinces.
The reports showing 20% to 30% of the sales loss. So that's going to impact <unk> numbers as we go forward in the second and third quarter price is also pressured so they've seen really three impacts on their P&L they've seen.
The impact of.
Prices of the economics of the pigs coming out increased feed costs, and then ASF costs. So so theres some economic pressure, but I think as we look at our customer base again, the industrialized customers are getting hit by some of this but are more prepared to weather. This change they've got strong.
Our bio security and are probably being impacted much less than the other parts of the industry is still experiencing high profitability. So again, we feel.
<unk> debt Chi.
Swine will be a major contributor for us for the year, but we're noting of watch out as we go into the second and third quarter relative to these resurgence will give you more updates as we as we go forward.
Michael Thanks for mentioning of the 59 plus percent gross margin here in Q1, very pleased on the productivity initiatives, Dave Urbanek and as manufacturing quality team continue to execute on a broad based productivity initiatives of an order.
The hold costs flat as we grow revenue.
Buying that with the mix that we see with the high margin parasiticide from the first half of the season and we get this dramatic increase in Q1 of in gross margin.
Notice that sequentially, we actually increase margin in Q1 more the we increased sales and thats purely that product mix that happens is why we called out today of the seasonality and provided the slides as part of the earnings presentation. This change that we now have of the lingo with the.
The 50 plus percent that's here in the first half and that high margin that comes with it we continue to take price as we called out.
I apologize for not be able to provide greater price transparency on the bear business, but thats the nature of of the acquisition and the.
Next year and this time, we'll be providing price on the total business versus just on the legacy of Langkow side. So again, just great effort by the team along with great sales execution and the.
The mix benefit that comes from that.
The next caller please.
Thank you. Your next response is from Erin Wright with Credit Suisse. Please go ahead.
Great. Thanks for taking my question first one on the floor.
Out of the white boxes.
Give us the breakdown of the rest of international performance that vacancy on.
Long term legacy Darren anecdotally, how maybe Bloomington competition of cleanup.
Your expectation of how would you be thinking about the quarterly progression of the livestock.
Bachmann and then.
Danny.
Two the strength of cross that advantage portfolio in the corner were there any stocking dynamics, we should be aware of for that product line or did you see any sort of shift to athene is from Toronto, Brian Thanks, Eric or how should we be thinking about the quarterly progression. There you did mention obviously the seasonality of the bumpy alright. Thanks.
Thanks, Aaron Let me, let me take let me start with the.
Just briefly on advantage and then I'll I'll jump too far.
<unk> animal and Todd if you want to share anything on the breakdown of a real quick yes. The advantage of families performed very well in the quarter as we mentioned on <unk>.
<unk>, 14% growth, even with challenging weather in February Aaron of this this really it plays back to is what we shared a little bit on our diligence with the with the Bayer acquisition first of all we're benefiting from that shift out of the vet clinic and into retail.
We also have put a very increased effort on.
Acquired with Bayer.
That really is targeted around customer retention coming from last year's COVID-19 that people have moved to advantage maybe for the first time or have come back to the brand so with digital marketing efforts in the U S, particularly where we're increasing that and then I think the third contributor is its doing extremely well in China.
It is a well known brand of multinational brands do well there we have a large team focused on this and advantage is exceeding our expectations in China. At this time and then again, it's the defend brand will continue to look at it in a balanced way, but we do have some some new opportunity here that we see between.
Colby, China International markets, and then we will put lifecycle management the behind that on the farm animal side I'll say at a high level, then Todd if you'd like to elaborate anymore on the breakdown, but look we have.
<unk> seen.
<unk> seen of stabilization coming through COVID-19, we've seen increased feed cost, which means our value products continue to do very well.
We've seen particularly the U S swine.
Industry looking at growing 6% cattle beef.
The yards are as full as they've been that's continued from fourth quarter of last year into this quarter. So on cattle on feed is up as well and so what we see as an a maybe low single digit marketplace. We're looking to grow low to mid single digit.
With the combination of these dynamics with the performance products with our remittance in generic strategy working very well with the broadest portfolio of the Bayer addition that was in the cattle industry traveling last week are enhanced and expanded cattle portfolio with products like <unk> and Batesville have health.
Our offer total offer and then we're introducing as you know five new products on the farm animal side. So we do expect to take market share. This year on the farm animal side and.
Have a balanced approach as we've put that into the guidance.
Aaron just to add on of the first part of Jeff's answer on stocking no stocking issues at all of advantage the benefit from.
On that in the Q1 results with respect to legacy of length of part of animal growth.
Reported it was down 7% in the quarter that did include last year, we had a pretty significant.
The buying on COVID-19.
Net.
Todd as well as of few of the divestitures from the bare deals that gets us closer to flat in Q1 from a growth standpoint.
With the China swine being the big driver, while Aqua of international poultry continued to pressure things on the legacy bare side as we've mentioned in Q4 results. There was the timing of the price increase year over year. We had moved that from January one out into February to be <unk>.
Line with when we do the prices of the middle of the quarter. So there is no timing elements on pull forwards of push outs of revenue of that changed the drive of.
Increase in sales for the bear portfolio on a year over year basis here in Q1, but we've reflected on our guidance given we'd expected the lower amount in Q4 of last year.
We'll take the next caller please.
Thank you. The next response is from Jon Block with Stifel. Please go ahead.
Thanks, guys. Good morning, first question's just on so resto.
The spend and you can talk to just what the plan is with the outreach in other words.
Jim is there further increased overall awareness of the collar or actually do you want to proactively highlight the.
Perceived safety issues, because I think there is actually a good number of consumers that aren't even in the weeds and aware of the details of NIM just to shift gears Todd the innovation of the 80 to 100 million I believe thats unchanged, there's no way to sort of wait the.
The one each versus two each contribution just as we sort of think about and try to frame the year over year growth.
The rates of the of the innovation bucket. Thanks, guys.
Yes, John Great question. So the first thing we did right out of the Gate was an addition to the market research to understand the status then.
And the impact of.
Of the misinformation.
We looked at that first immediately as well as working with our pet retailers again.
The good share of use also is with these major retailers so that was.
The first thing we did was we looked at this and as I noted and as you even comment the awareness was very low so we balanced really three segments.
Users.
Pet retailers in the veterinary community.
What we did was we've increased our share of voice, we have moved safety up as you look at staging messages no question efficacy and the benefits of the overall product still remain as message one, but we moved with our new expertise in marketing and digital capabilities, we moved on.
Safety up as just the key message as part of our messaging, while we're planning to do as we go into Q2 as the build on the momentum similar to what we have with advantage and to reach more pet owners as well as continue to ensure that we get the the loyal users that we've had in the past going into the new season. So.
Those are the things that we're doing then I would also say, we're continuing to be very aggressive in international markets as well, it's still a very strong brand in Europe, and it's meeting our expectations in Europe, and and again being launched and still on the early stages.
And China as well.
John the thanks.
Thanks for the question of our innovation portfolio as we have called out we still expect the $80 billion to $100 billion of revenue for the full year.
I would tell you on a first half second half basis, it was closer to 70% of ways of the second half.
Net policy.
Thank you. Your next response is from Chris Schott with Jpmorgan. Please go ahead.
Alright, great. Thanks, so much for the questions just kind of like <unk> I guess, just bigger picture do you feel you are kind of out of the woods I guess from a commercial standpoint. So if they were going to be some impact from the headlines you saw on <unk> you would have already seen it and now it's more about going on offense and I'm trying to get a sense of are you still kind of worried about this lingering issue playing out or.
Is that more on the rearview mirror at this point and then I know you touched on some of the individual products, but just bigger picture on I guess on international Pet Health dynamics you highlighted the is your biggest upside driver versus the <unk> guide.
I guess just how much of this is execution versus just the broader market as being a bit the healthier than expected and are there any particular products or markets that are I guess, the standouts relative to the broader business. Thanks, so much thanks, Chris.
Look we're going to be diligent and execute with.
Excellence here on the <unk> as Todd highlighted it is the seasonal product. We are in the May we highlighted that April was the strong April so what I would say is we are feeling.
Very good where we stand today, but again, we want to take anything for granted the other is we will continue to work very closely with EPA and the legislators to the answer there information but.
But we are not letting up on this brand. This brand has a significant it is the fifth largest brand of all time, Inc.
The animal health it has a loyal customer base. It has a much bigger platform for us globally as well as with connected care. So what I would tell you is it's probably created another level of intensity, Chris in our organization to lean in.
We're not going to make.
Noise wrong noise to other people on on this one we're going to do is just continue to build what we saw when we when we acquired bear so look for us to be vigilant balanced execute with excellence and we've got again a couple of more months here that this brand has still of a big seasonal aspect to it that will execute more.
More to report probably after the second quarter on that answer.
And then I think on international yes, So our international business and pads as you know went up.
Three times in size I think this is the first quarter ever in the land goes history, where we had more pet sales in a quarter than farm animal sales International contributed a big part of this so what I would say is a couple of things to look at one is.
Yeah.
A international marketplaces, we divided Europe and international International a lot more growth a lot more capabilities of the combining of the <unk> portfolio with bayer's portfolio and markets like China and Brazil.
So international.
We've got a great team that's focused on a lot of growth initiatives.
But that's on a smaller base than I think on on Europe look for Europe to really take advantage of a crib deleo plus plus on Gallup brand.
The <unk> cats, so some some launches to expand that portfolio, Chris that I think will be also a big driver and then again continued innovation as we have mentioned one new parasiticide of year going forward and.
And new products that we continue to rollout so.
So we're in a good position internationally with the pet business.
Take the next caller.
Thank you. The next response is from David Risinger with Morgan Stanley. Please go ahead.
Yes.
Excuse me, thanks, very much and congrats on the.
Phenomenal performance here. So could you. Please provide more color on the next the rest of the steps to be taken with both the congressional committee and with the.
Yeah.
And also are there any ex U S inquiries, which had been initiated since the USA today article was.
Busch earlier, this year and kicked off.
The misinformation the bar.
Michael Thank you.
Yes.
Chris just real quick like to answer your second question No. We are unaware of any others, we're monitoring and managing the Republic of fare side of this again engaging with.
Both the the sub committee as well as with the EPA.
And nothing new to report here on next steps, we're continuing to work closely with the EPA, there's normal re registration processes and providing the pharmacovigilance and scientific data.
Which we have and will continue to engage with them but.
From a legislative next step perspective, we again have provided the information and we will continue to stay engaged with them. So.
That's the.
That's really it and again I think it's a heavily around the pharmacovigilance process. The science and the recent actions. We've taken Chris said I think to be noted are the independent reviews that we've had done on the data as well to provide further substantiation.
And then outside look at the way, we're looking at it as well so nothing new to report on next steps and we'll continue to keep you updated and nothing new beyond the USA today's story that was noted.
Moving to the next health.
Thank you. Your next response is from John Kreger with William Blair. Please go ahead.
Thanks.
A couple of questions, Jeff I am curious so about a year ago companion animal spend seemed to really jump with the pandemic and now that we're lapping that in the second quarter of the interesting to hear if you think those trends are sustainable or would you expect on kind of the ease with the tougher.
That's the first and the second is with the eight launches that you've laid out for this year.
Would you consider those to be sort of normal given the pandemic or.
Well your access to customers be somewhat constrained and should we think about the launches a little bit more gradual over the next few years. Thanks.
Yeah, Great question. So look as we look at the pet health trends I think theirs.
Three or four things that are happening in a real positive way and I do believe there'll be some lessening, but there'll be a lot of persisting as well so Pat.
Pat numbers are up about 5% visits are up well.
Wellness with inside those visits wellness visits compared to past wellness visits are up 15%, which is driving things like the surgery vaccines and other things and then I think the globalization is the other trend that to.
The pets are becoming more important to families internationally than ever before and that's a real growth market remember half of the pets globally are on medical lives are on the reached so when I step back I think that the trend is kind of matter. The most of us access non adoptions from shelters of these but I think getting to.
<unk> pet owners, where they want of shop, allowing to build and as they go back to work and reenter into the workplace us to be able to sustain that relationship and most importantly bridge the veterinarian into it I believe this is going to allow the overall market to rise.
Lesson, maybe from the peaks that we've seen in COVID-19, yes, but I think what we're seeing here in Q1 is theyre not theyre not lessening to maybe what some of the past expectations were and I think some of the persisting is we have enabled capabilities as an industry to reach pet owners and influence them and make actually purchasing even.
<unk> for them in their relationship with the veterinarian. So that's what I see as you look at the launches I don't think that access has been restricted to any material way. That's why we're not backing off from our $80 million to $100 million.
I do think that if it will it would probably impact of our pet business more than our farm animal business and but we don't we don't see that at this stage again, we believe that this is we've moved from a regulatory challenge coming out of the gate to know all of the major products being approved our focus now is on launch excellence.
We will keep you updated the it'll be a big quarter here in the second quarter on launch and then the sales will start to deliver on the second half. Thank.
Thank you.
Okay.
She sponsors from Elliot Wilbur with Raymond James.
Hi, guys. This is actually Michael <unk> on for Elliot. Thanks for taking my question.
Two quick modeling questions for you first of all.
Obviously understand that gross margin positive impact in the first half of the year due to product mix and shipped into the health Pet health.
But.
If you could just speak to the cadence over the the rest of the year, obviously expecting of stepped down in the second half of the year, but just.
Any specific details as to how we can think about that and then.
Timing of debt towards your longer term target of 60%.
The strong margin quarter is expected to move up that timing on.
And then.
You have it on hand, if you could provide us with our cash flow from operations number and Inc. Kind of talk to the cadence around that for the rest of the year that would be helpful. Thanks.
Sure Michael as we guided for the full year, we're expecting gross margin of $56 75 to $57 two 5% the seasonality of the first half the second half as we talked of its pretty somewhere between Q1 and Q2 on the gross margin side, we are filing our 10-Q here.
Shortly it'll show.
Operating cash flow of of positive $22 million for the quarter.
The two continue to improve over the course of the year as we continue to expect to pay down $500 million of gross debt.
By the end of the year will move to the next question.
Thank you. Your next response is from <unk> <unk> with Evercore ISI.
Hi, Thanks, so much for taking my question.
So on the house letter they said the rest of the with critical associated with 1700 pet debt then I thought that was very interesting because you're right. The CAGR you're pointing out the rest of the was mentioned chronicled alongside cut death, and I guess Im still confused the did not look to establish causality, perhaps on the media reports on the house letter.
Because that's.
That's a material misinterpretation of the way it reads.
Based on your causality analysis, and secondly, I did want on also touch up on your pharmacovigilance evaluation.
And perhaps extend beyond that so I know the 8-K today focuses specifically on the 12 cases that were probable or possible that's what.
What about the cases of tumors.
Is it safe for us to assume there's no causality with any other serious adverse events. Thank you.
Yes, <unk> I think what's really important to note and it's even highlighted in the independent review that we.
We know in the in the 8-K is debt.
And I think this is really important where the 1700 comes as case does not equal cause. So what we've done is we've actually articulated and gone through and reviewed each one of those so if somebody calls in with a so rest of the problem and there is an affiliation with the desk and <unk> mentioned and that's part of the <unk> hundred when you.
Pull out probably or possibly again in the system that I noted the internationally known pharmacovigilance system. There were 12 dogs further review of those 12 dogs, where there was a direct linkage it was typically.
An accident that was caused but there has been and I think what's really important is there is no linkage to the ingredients. The two active ingredients in sorrento with bad debt. So that to me is a very important articulation. That's the biggest point of misinformation and again Thats why.
<unk> regulatory body overseeing this is so important as well as the pharmacovigilance process.
Thanks, Amy we'll move to the next question.
Thank you. The next response is from Kathy miner with Cowen <unk> Company. Please go ahead.
Great. Thank you just again one more question on the rest of it but it's been such a tremendous product there.
The resilient can you just remind us why customers are so loyal.
Two the caller and would you expect this to continue are there Mike.
The market dynamics that mean encourage people to use different formulation.
And my second question also on Parasiticide did you talk about the success of the combination of <unk> and interceptor plus.
Can you give us any percentage of any sense of how much of the sales in the first quarter, whereas our combined entities the well. Thank you.
Thanks, Kathy yes, so resto.
<unk> continues to grow every year and I think part of this is the unique offering of this provides so eight months of coverage of strong price point, great efficacy great safety.
Have all been contributions to this and then as we've globalized it.
This continues to hit of demographic from the standpoint of both price convenience and safety and efficacy.
It provides something unique when you look at eight months of coverage.
And then again I believe that what the Bayer has done and now we're doing together is building the brand with this and.
The loyalty that the pet owner has with the brand and look for us to continue to expand and build on this as we go forward with lifecycle management as well we won't note any specifics here on the pairing, but what I would say Cathy <unk>, Let me, let me say one last thing on <unk>.
On April revenue in the U S is ahead of our original expectations and I want to just solidify with all of these questions on <unk> debt as we collaborate with the EPA and the legislative bodies, we feel strongly that the product is on track for our full year expectations has the total brand globally.
As we look at the at the broader parasiticide market if.
If you want full coverage out there today youre going to need two products, no matter, which product youre using either new innovation or others, <unk> plus excuse me <unk> on interceptor, plus provide that broadest coverage and we continue to see that that pairing.
As something that's occurring in the marketplace and we saw again very strong growth, especially with the <unk> as we go forward.
So that's that's the.
That's the strategy, we'll continue to execute against that.
Thanks, everyone for the questions today, the camera will end the call here.
This concludes today's conference call. Thank you for participating you may now disconnect.
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