Q2 2021 Elanco Animal Health Inc Earnings 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, Tiffany and good morning, everyone as I reflect on our progress in the nearly 8 months since our Investor day, we see evidence that our transformation is creating sustainable long term value for our customers our shareholders and our globally Lankan team our results demonstrate we are executing against.
The strategy, we laid out in December.
Second quarter revenue EBITDA and EPS on slide 4 were all above our expectations continuing to build on the strong momentum our business has shown since closing the Bayer acquisition a year ago Rev.
Revenue of $1.279 billion surpassed the midpoint of our guidance range by nearly $40 million without performance in both sides of our now relatively balanced business between pet health and farm animal.
Our adjusted EPS of <unk> 28 was <unk> <unk> above the midpoint of guidance, including an approximately <unk> <unk> headwind from discrete items in the quarter that pushed our tax rate to nearly 30% more than offset by 7 approximately 7 of operating improvement.
Adjusted EBITDA of $291 million was $29 million above the midpoint, demonstrating good flow through and showing significant headway toward our long term margin targets.
Today, we are raising our 2021 full year revenue guidance for the third time by $15 million at the midpoint to 4.68 to $4.73 billion.
The business is delivering beyond our long term growth algorithm, providing total revenue up 5% to 7%.
This includes approximately 4% to 5% for our underlying business.
With a reduced innovation range entirely due.
2 external challenges, Brazil, a shield, which I'll discuss later that is more than offset by portfolio gains and a good industry backdrop.
While we exit the second quarter with strong momentum, we're taking a balanced approach to the rest of the year factoring in many moving pieces, including seasonality moderation in pandemic driven health tail winds in the vet clinic and ongoing competitive dynamics.
During the second quarter, we made 2 strategic moves with.
Some near term implications and important medium and long term benefits from.
First we announced the bolt on acquisition of Kindred bio, which can contribute 3 potential blockbusters alongside our own dermatology assets and more quickly build a presence and this is a central part of the industry.
The transaction also provides attractive shots on goal and other therapeutic fields, including securing full ownership of the canine parvovirus therapy.
We've completed anti Trust review and expect the transaction to close this month.
Second we announced the exit of the 3 manufacturing sites.
And further streamlining our footprint, we're accelerating our gross margin efforts, reducing annual capex and improving working capital.
Todd will provide details on how these 2 decisions impact our revenue EBITDA and EPS in 2021.
Bold strategic moves are examples of <unk>, increasing position of strength from continued transformation.
Driving value creation.
We're taking the next steps in our journey to build a global independent fit for purpose animal health leader with consistent double digit adjusted EBITDA and adjusted EPS growth in a durable industry.
Moving now to overall pet health for the quarter on slide 5 global business drove approximately 2 thirds of the upside versus the midpoint of the guidance, reaching $685 million in revenue for the quarter with continued good execution in a competitive but favorable pet industry.
As you know pet spending.
Many structural tailwind, which were amplified during the pandemic industry research shows that the number of U S. Pet only household surged by nearly 6% in 2020 versus the slightly positive pre COVID-19 run rate.
This trend is not isolated to America with $3.2 million UK households, having acquired a Pat since the start of the pandemic and a 2020 survey by the Japan Pet Food Association.
<unk>, a 15% increase in dog and cat ownership.
This increased pet ownership also drove greater vet clinic traffic in the second quarter trends, where most robust in April up strong double digits against last year's quarantine impacts.
Our pet health vaccine business was a standout in the quarter and this beneficial vet clinic backdrop vaccines were a key driver of a link those 2% improvement in price reinforcing that our channel strategy is working and creating real demand.
Our aggregate channel inventory levels at distribution remained consistent with prior quarters in the U S and across the global business.
Turning to Parasiticide second quarter Global <unk> revenue was $129 million down 1% year over year.
And globally family revenue was $148 million down 3%.
Both faced similar dynamics with a tough comparison against last year's retailer driven stock in and so resto also lapping meaningful increase in points of distribution in certain major retailers.
Additionally, cooler and wetter weather in may across many parts of the U S impacted seasonal traffic and the broader OTC channel as seen in the Nielsen data.
So resto and a family trends rebounded in June alongside the industry with more favorable weather.
Moreover, both achieved gains outside the U S in the quarter, leading our overall performance in international Pet health.
We remain on track towards full year expectations for the rest of.
The brand's resilient performance demonstrates high levels of confidence among consumers and veterinarians.
Add that the EPA 60 day public comment period, which opened July 13th following an NGL petition as a standard and expected practice, we have full confidence in <unk> strong safety profile, which is supported by registrations from more than 80 regulatory bodies around the world and our robust pharmacovigilance.
We continue to see a long runway to grow this trusted brand.
Rounding out parasiticide that <unk> franchise drove healthy growth.
Profit combined platform of U S vet clinics retail and international along with the launches of both <unk> plus and <unk> pad.
In the U S market <unk> maintained robust double digit ADR growth in the second quarter, representing outbound sales into the vet clinics or alternative channels and trends remained especially strong at retail.
This focused brand is performing well in light of industry innovation, which is driving greater than anticipated share erosion from our older defend brand <unk>, we will continue to maximize profitability with targeted investments across our portfolio and grow revenue through new innovation as we compete for great.
<unk> share of the expanding growing global parasiticide market.
Our combined international portfolio is highly competitive in both parasiticide and therapeutics bolstered by our outperformance from new innovation like <unk> plus.
Finally in Therapeutics Gallup, France.
<unk>.
Its global expansion and also posted double digit DDA growth in the second quarter with year to date share gains in the branded U S. Instead market. According to the kinetic data.
While we exceeded second quarter guidance and exit the quarter with good momentum, we head into the remainder of the year with a number of variables to consider.
We believe pet health is recalibrating back towards normalcy against tougher comparisons and with a natural moderation of tailwind from the puppy boom.
We're watching vet clinic trends in light of the limited practice capacity and labor constraints.
<unk> pet ownership trends as the economy opens up offset by potential impacts from the delta and other billions. Additionally, we recognize the increasing competitive nature of the industry, especially in the U S injectable parasiticide.
And balance our pet health strategy is tracking to overall expectations.
Innovation is performing ahead of plan driving growth alongside focused brand contributions we have established omni channel leadership and digital initiatives to generate long term growth with expansion in new regions like China, all supporting our full year outlook and more consistent and competitive levels of pet.
Health growth overtime.
Turning now to our farm animal business.
In the second quarter, we saw a demand driven improvement in our U S cattle and swine businesses with protein benefiting from a return to foodservice.
The first half of 2021 also benefited from higher numbers of cattle on feed.
Elevated and volatile feed costs continue to pressure producer economics.
Likely extending through the back half of the year.
However, they enhance the value proposition for our efficiency products like Sky's this off the flex and momentum, which all outperformed our forecast in the quarter.
And China swine we experience.
Impacts from the reemergence of African swine fever, hog prices ended the quarter down about 65% since the start of the year severely pressuring profitability for Chinese producers.
<unk> heard reduction is likely to also impact the third quarter, but overall, we still expect our China business to deliver at least a percentage point of growth to totally linked revenue in 2021.
Finally international poultry and Aqua will remain negatively affected by unfavorable macroeconomic conditions and reduced consumption as expected, but are exhibiting green shoots of industry improvement.
We are seeing easing pressure on client <unk> is salmon prices improve averaging up double digits year over year. During the quarter client is also beginning to benefit from our recently published phase 4 study demonstrating superior ROI versus alternatives.
Q2 also saw a very robust lift from the timing of Aqua orders shifting into the period from the third quarter.
While we do remain cautious around these businesses, we anticipate overall improvement ahead against a soft COVID-19 driven comparison.
As you will see on slide 6 our second quarter outperformance is driven by disciplined execution against our strengthened and expanded IPP strategy.
I'd like to share more on our innovation progress on slide 7 with details around the 8 launches planned this year.
Pet health innovation is running above expectations and I'm pleased with the global teams commercial execution around each of these 3 launches.
<unk> plus is exceeding plan in Japan, and Europe and is on track to launch in Australia in Q3 in time for the local parasiticide season.
While different thresholds around heartworm protection prevented us from bringing this product to the U S. <unk> plus is proving to be very competitive and the $1.5 billion international market.
Meanwhile, <unk> cat and allure, our growing our fee line portfolio.
And farm animal and Cressa is faring well in a competitive and unprecedented market dynamic.
It remains early days for Xperia, but we're making important strides towards achieving packer ecosystem integration with continued potential for blockbuster status.
Experience value proposition has been validated in the field and Packer acceptance is growing now reaching 7 Packers versus 1 at the end of Q1.
The first experience customers have now reorder product and expanded use.
Finally, as always shield, which we sourced externally to build our portfolio and the raised without antibiotics space.
There's always shield is currently facing greater than anticipated market supply of the leading competitive product.
As a result, we're taking a prudent approach to total pipeline forecast in 2021, reducing our innovation revenue outlook by $15 million to 65% to $85 million. However, we remain confident in the value contribution that zillow shield to our poultry portfolio.
It is important to understand that this year's reduction does not impact 2025, total innovation potential of 6% to $700 million, which we raised in mid June with the announcement few words on the regulatory items on July 1.
<unk> received a subpoena from the SEC relating to our channel inventory and sales practices. Prior to mid 2020, we cooperated in providing documents and information to the SEC and we will continue to do so we believe strongly that our actions where appropriate.
Finally, I'd like to stop and think are.
Our entire global team for continued diligent execution and focus during these unprecedented times from our South Africa colleagues determining how does.
How to reach customers amid riots to those in Vietnam sleeping in our plant to ensure supply amid another COVID-19 lockdown their commitment to our purpose is unwavering and inspiring.
With that I'll hand, it over to Todd to provide more color on our results and our outlook and earnings per share.
Slide 31% to Fortinet index, 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 second quarter adjusted measures in order to provide insight 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 reported results.
Looking at the adjusted.
Most of the measures on slide 9 you'll see the total annual revenue increased 118% in the quarter on a reported basis with volume.
Approximately 10% assuming that the bear acquisition have happened at the start of the year.
I think that the impact of strategic distribution changes.
On slide 10 is a visual representation of our revenue outperformance versus the guidance range. We provided in may the key drivers in order of magnitude where commercial execution in our international breast health business continued improvement.
Currency tailwind in order phasing of Aqua.
Adjusted gross margin as a percentage of revenue was 57% an increase of 750.
Quarter of last year.
The euro.
From a year improvement reflects the bear acquisition the dramatically increased our exposure with a rapidly growing pet health side of animal health.
Oh.
We're also but this higher margin portfolio is first half weighted due to the northern hemispheres flea and tick season. Additionally.
Additionally, we saw the benefit of a positive price and volume on a lack of legacy portfolio and continued product at 220 basis points versus the first quarter includes the impact from a temporary plant shutdowns due to a weather induced power outage logistics costs and the shift from expenses into the second quarter with the layfield.
Total operating expense increased from 116% from the second quarter driven by the addition of the Bayer animal health business.
$75 million the amount was $42 million above the first quarter and includes the previously identified approximately $30 million shift of investments into the second quarter.
Terrific and effective phasing for direct to consumer and digital advertising.
Operating.
Reflecting the bear animal health assets.
Expense leverage and disciplined and centers execution, the sequential step down from $47 million from the first quarter is attributable to the sequential gross margin shifting investment impacts I just described.
Our adjusted EBITDA was $291 million.
For the quarter was 22, 8%.
At the bottom from line Q2, adjusted net income.
So to $135 million, reflecting our effective tax rate of 29, 6%.
2 discrete items, primarily drove our rate above our prior full year forecast of 21% to 23%.
<unk> tax rate changes in several jurisdictions.
Assets and liabilities with the net impact of nearly $5 million to our Q2 taxes.
In the U K from the tax rate increased from 19% to 25%, resulting in $3 million in additional tax expense.
This impact will not repeat.
We finalized a number of international tax return to provision and transfer price adjustments that increased our expense by nearly $4 million from.
So the back half of the year, we anticipate an effective tax rate in the 22.
The 23% range.
Now, let's discuss our revenue performance more closely on slide 11, you will see a breakdown of the contribution from where you feel like <unk> and legacy <unk> portfolios by category legacy bear products.
In the quarter, but health.
Health drove $685 million of revenue or 54% of total <unk>.
Capital contributed $231 million or 18% of total ankle.
Quarter.
Altria was $179 million representing 14%.
<unk> $113 million or 9% at aqua $44 million or 3%.
On slide 12, you can see the effect of price rate.
In volume on a relative.
So the bear acquisition is reflected in volume we will continue to report both the addition of the bear business in volume for the third quarter of 2021, when we lap the transaction close from.
The legacy <unk> business with price was up 2% for the quarter was by puzzle vaccines and demonstrating the value of our innovation. The discipline. We are applying despite competitive pressures and enhanced commercial execution. All continue to evident third channel strategy is working.
From an oil price was flat in the quarter, reflecting competitive dynamics in U S cattle and swine.
A 2% increase from the total business in 2021 with revenue management and focus as we are observing some inflationary pressures in areas such as transportation costs.
Slide 13 provides a breakdown of our overall performance between the U S and our international operations. 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 bear.
We expect to file our 10-Q, shortly but moving to slide 14, let me offer a few words on working capital operating cash.
Hello and debt Paydown.
<unk> consistent with the prior 4 quarters, we held all distributors at 60 day payment terms in the second quarter day sales outstanding stood at 75 days up from 69 in the first quarter as our average accounts receivable throughout Q2 was higher as a result of Q1 revenue being significantly higher than Q4.
Revenue.
We ended the second quarter with $580 million in cash and equivalents on our balance sheet.
Secured a commitment for additional pre payable floating rate bank debt of $500 million.
Refinance our $500 million of senior notes that come due on August 27th.
We will use cash for balance sheet, a draw on our revolving credit facility from the.
<unk> bio acquisition.
Consequently, we expect net leverage of 5.5 times at the end of 2021 in line with our original projections from December 2020.
Before I discuss our guidance I'd like to remind everyone of the 2020, 1 financial impacts from streamlining our manufacturing footprint announced June 9.
We closed the sale of the Xiaomi camera side.
On August 1, we're moving $10 million to $20 million of associated contract manufacturing revenue in the last 5 months of this year. This Jim.
<unk> was reflected in the guidance, we confirmed when we announced the kindred bio acquisition on June 16th we do not expect an impact to adjusted EPS from the sale, but we do anticipate a $5 million to $10 million EBITDA headwinds in 2021, including a effect on depreciation.
Please refer to our press release this morning from a GAAP impact from our second quarter results from this divestment.
2021 of approximately $10 million impact to net loss net of approximately $10 million.
Impact to EBITDA as we continue to execute against Kindred bio those R&D programs.
Now I will transition to a full year from third quarter 2021 outlook starting on slide 16.
We are raising our full year 2021 guidance for total revenue and updating EBITDA and EPS for a number of factors, including our second quarter outperformance.
We now anticipate 2021 revenue of $4.68 to $4.73 billion.
Included in the loss of $10 million to $20 million of contract manufacturing revenue from the Xiaomi facility exit.
To walk from our last update in June on Slide 17, our increased outlook flows through the approximately $40 million outperformance in the second quarter, partly offset by a reduced outlook. This year, Brazil shield and the impact of Aqua order phasing.
Slide 18 offers a refreshed view of the bridge from our 2020 combined company revenue for 2021 guidance in comparison to our EMEA update we now expect innovation to contribute $65 million to $85 million in new revenue. This reduced range is offset by growth from our base portfolio.
As a result, we anticipate approximately 4% to 5% underlying growth for the year and 5% to 7% total growth.
Moving to slide 19, we expect adjusted EBITDA of $1.83 to $1.75 billion.
Based on adjusted gross margin of $56.75 to <unk>, 57% and Opex of $1.78 to $1.8 billion.
Our gross margin rate is being negatively impacted by increased logistics expense and inflationary pressures on our supply chain.
$20 million reduction to the adjusted EBITDA range also reflects the changed our depreciation assumption, including the impact of our manufacturing assets and expenses associated with kindred bio, mostly offset by our Q2 outperformance of nearly $30 million.
Our full year spend continues to incorporate strategic investments and commercial growth opportunities.
Slide 20 provides the moving pieces in forming our updated adjusted and reported EPS guidance range, our adjusted EPS outlook, which is <unk> <unk> lower than the range discussed in bay doctors to sensor dilution from kindred bio <unk> <unk> of impact from the zone sales of the Aqua phasing.
<unk> from logistics of inflation at <unk> from the discrete tax items affecting Q2.
We are flowing through the <unk> of operational execution and outperformance from Q2 to arrive at our revised 2021 guidance of 97 to $1.3 zones, our outlook demonstrates the underlying fundamentals of our business remains strong and the balance of the year.
The reported EPS bridge like was close to the second quarter outperformance and the aforementioned items as well as the 46% write down finalized from the manufacturing streamlining announcements.
The impact to reported earnings from integration and standup are sequentially decreasing in magnitude from approximately $80 million in the first quarter of 2021 to approximately $20 million this quarter.
Moving to slide 21, we are providing guidance from the third quarter of 2021, we expect revenue of 1 point of those 75 to $1.1 billion.
Justice EBITDA of $195 million to $240 million and adjusted EPS of <unk> 15 to 19.
Our outlook, which is a sequential step down from the first half of the year reflects the seasonality of our combined company and the resolving quarterly cadence as detailed in our call in May.
Remember just over 70% of <unk> revenue and just under 60% of the advantage family revenue occurs in the first half of the year on average.
Given the relative scale of these products and their margin contribution the revenue timing translates to the outsized first half contribution to EPS as well.
Now I'll hand, it back to Jeff for closing comments.
Thanks, Todd to summarize the lingo is moving through 2021 with strong results extending our track record of execution since acquiring Bayer animal health and driving long term strategic actions with the expected acquisition of kindred bio further streamlining our manufacturing footprint and delivering on our vision.
Food and companion chip and routine life, we head into the back half of the year with confidence in our ability to drive sustainable double digit adjusted EBITDA and adjusted EPS growth anchored by steady growth on the top line. Our fundamentals are healthy with our core R&D pipeline tracking to plan and robust port.
Folio growth, resulting in above algorithm revenue velocity in 2021, our productivity agenda continues to deliver with rapid action towards synergy capture.
Finally, I would like to express our heartfelt. Thank you to Katy Grissom as she transitions to a new role and global marketing Finance Kandi has been an instrumental part of the IR team during our journey since the IPO and I look forward to the impact of her contributions and our commercial organization with that I'll turn it over to Tiffany to moderate the Q&A.
Cash we'd like to take questions from as many callers as possible. So we ask that you limit yourself to 1 question and 1 follow up.
Please provide the instructions for the Q&A session and then we will take the first caller.
Again, we would like to ask a question. Please press Star then the number 1 on your telephone keypad.
And your first question is from Michael <unk> with Bank of America.
Hi, Thanks for taking the question. This morning, I want to I wanted to start on sort of the guide methodology and the rationale from earlier in the year and I think slide 16 in your deck summarizes it really well.
You raised the guide a number of times earlier this year. Most recently in May and now we're in a situation where youre lowering it on adjusted EBITDA and adjusted EPS. Despite the solid second quarter.
And obviously, that's a little disappointing so I'm just wondering if given all the moving pieces in the Bayer deal the moving pieces in the underlying market it.
It'd be more prudent to take a more conservative approach, we've more wiggle room for things like the real issue an update on that.
Some of the.
The logistics cost and inflationary pressures.
Mike I appreciate the question, we've been trying to give the.
I guess, most consistent and best information, we have at the time when providing guidance.
When we did the kindred deal as well as the streamlining of our manufacturing those did have impact on EPS as well as EBITDA.
<unk> provided the bridges in the slides to try to clearly show that.
Those are the key items, we've had the over performance from Q2 that we factored in and plus this tax rate impact Inc.
Q2 that Youll spite, the tax rate and cost us about 3 tenths of EPS.
As a result of the law changes in the U K as well as some return to provision adjustments. So overall, we've been very pleased with the underlying growth in our business as noted the portfolio contribution from our products is growing faster now than we had previously communicated which we view as a very big positive but 1.
Off with the <unk> yield on supply again, that's something that we thought would play out differently at the start of the year, we're still confident in our raised without antibiotics portfolio going forward.
So overall, we're trying to be.
As clear on the moving pieces and again second half is very much inline or slightly better on our total <unk> portfolio than we expected back in may offset by some of the inflationary jumps on the logistics side of the team's managing.
Okay.
We'll take the next caller.
Your next question is from <unk> <unk> with Evercore ISI.
Hi, guys. Thanks, so much for taking my question, Jeff in your prepared remarks, you mentioned.
The SEC is looking into the inventory practices could you.
And on that a bit more are they what specifically are the alleging and.
And do you expect this to be a multiyear.
Process before any sort of resolution comes at least that's what's been the observation with <unk>.
Similar investigations I said down other companies in the past.
Yes, Thank you Jim or for the question. Let me just reiterate yes on July 1 of this year our company received a subpoena from the U S SEC, Inc.
Was it relating to our channel inventory and sales practices prior to the mid 2020 period and the company has cooperated in providing the documents and information to the SEC at this stage and we will continue to do so and as I stated management, starting with myself believe strongly that our actions where appropriate and warmer.
Maybe to put this in proper context that I think is important and what youre asking for first.
To continue to keep with the theme of transparency to ensure continued transparency that is very important to us and that's why we chose to voluntarily disclose the subpoena we received from the SEC last month.
I think secondly, as I discussed today, the scope and the subpoena as it related to our channel inventory and sales practices prior to the middle of last year. After we.
Reduced channel inventory and changed our distribution strategy.
And you can appreciate this that I'm not able to provide more detail since we don't comment on litigation and regulatory investigations, but I can say, we're cooperating with the SEC and we believe our actions where appropriate we remain confident in our business strategy and also the decision to make a change in our distribution.
Panel strategy.
And our teams will continue to be highly focused on executing.
Against our outlook in 2021, and driving long term shareholder value, which I think we've demonstrated with consistent business performance at or above expectations over the past year and as much as I. Appreciate the desire for more details that comes with this transparency at this current time, we do not intend.
To provide further comment.
Except when in compliance with security laws.
We'll take the next caller.
Your next question is from Nathan Rich with Goldman Sachs.
Hi, good morning, Thanks for the questions.
Just 2 on the revenue outlook for the back half of the year.
The change in expectations for Zoe Zhao of shield led to a pretty large reduction in the guidance from new products that $15 million of reduction that you called out, especially with pet health running ahead of your expectations with the new launches. There. So could you just maybe talk about your updated assumptions for zone shield and maybe how we should think about.
Variability in the back half of the year and then if I could also just ask on the.
The competition in Parasiticide, Jeff that you called out with some of the changing dynamics you've seen.
Are you still expecting that $50 million revenue headwind from competition. This year. Thank you.
And Ethan let me just anchor back.
Some important points first time zone shield, it's an externally sourced product and to build out our raised without antibiotic portfolio as Todd highlighted.
We believe strongly that this portfolio is well positioned to be competitive in the medium and long term.
So this is an alternative coccidiostat.
<unk> fits nicely as a portfolio play.
It's currently I mean, let me just speak very very directly on what has happened is currently facing greater than anticipated market supply of a leading competitive product or set another way. There is currently more supply from this competitive product than we anticipated as we go into these health program rotations with poultry integrators.
So this dynamic is.
Discrete being a little bit more short term in nature, it's leading to a reduced innovation outlook for this product we remain confident in our overall value contributions, we see from Zoa shield and our poultry portfolio and more so I want to reiterate and no change to our 2025 innovation revenue target that 6% to $700 million.
Range that we updated in June with the Kindred bio.
And more to come and I would pivot to to the 2 critical.
Platforms of new products in that portfolio of 8 the matter. The most our credential platform again, credential, plus <unk> cat exceeding expectations and xperia tracking very nicely on that track to be a blockbuster that we've talked about relative Nathan to the parasiticide competition.
It's playing out as expected and as we've even talked about it new innovation is impacting some of the older brands across the industry ours and others.
Innovation is driving and expanding the parasiticide market it is growing.
Nicely as an overall segment. So the impact has come to our <unk>, a little bit more but when I step back Nathan and I look at the pushes and pulls of our global Parasiticide strategy. The proof points are pretty evident that things are tracking and we're in a very strong position we see it.
The Codell Cornelio franchise here in the U S and globally growing driven by a vet clinic traffic and a good industry backdrop as well as growth in Adi sales Critelli O plus <unk> cat as I mentioned new products.
Retail continuing to do well and then when I brought it out even a little further we're seeing nice growth in international markets advantage is doing well in Asia as we've mentioned again exceeding expectations and <unk> is on track to meet our 2021 expectations, So pushes and pulls pipeline progressing we're in a good place overall.
Global Parasiticide.
We'll move to the next caller please.
Your next question is from Chris Schott with J P. Morgan.
Great. Thanks, so much for the question. So I just had 2 here.
I think you mentioned in the opening remarks that there was some moderation in pet.
Pet health trends reflected in our second half guidance average.
Hoping you could elaborate a little bit on is that something that you're seeing already there or expecting I'm trying get a sense of what what's kind of leading to that expectation and then second question was was on.
I think you mentioned weather impacting the OTC business in May can you just help us quantify a little bit of what you saw there I'm just trying to get a sense of when you think about the <unk> results overall.
How much of an impact that is which I think about more of a normalized results from the quarter. Thanks, So much yes, Chris I would say overall.
I want to highlight a few things in these trends I think that it's.
A little early to say, what's going to stick post post the pandemic, but as we highlighted and I think other companies have highlighted the trends or significant debt numbers of Pat's had gone up globally pet visits have gone up globally U S and international we do believe I mean, our simple headline here is we do believe that the <unk>.
2020 growth that came from Covid will lessen.
But the direction of the trends in the market changes will not reverse they will stick we've seen a rising of the overall level of the marketplace, which is which is positive.
We though when we look at what's really driving the ultimate growth vet clinic traffic. We believe we will start to go more to that 2 year average versus where we are today as we move through the second half so moving from double digit growth in vet clinic traffic to seen seen it.
Move to maybe more low single digit.
That is what we're predicting and assuming we're seeing that from the standpoint of.
Just just the ability to sustain this we think is a challenge.
Retail purchasing as well has had as you know a significant growth, especially ecommerce fastest growing segment and we see that lessening a little bit as well Joe Theres 2 things happened 1 activity goes backup in their household.
And 2 is <unk>.
Asian in the vet market has also driven I think some some move to the vet market I think <unk> is well positioned with omni channel portfolio and Geo expansion relative to your second question. Yes, we saw a cooler may we saw a rebound in June.
I don't know if were going to quantify that at this time, but again, what we believe is the message we would say is.
Relative to the tough compares advantage and <unk> are tracking to our overall expectations for the year.
We'll take the next question.
Your next question is from Jon block with Stifel financial.
Great. Thanks, Good morning, guys, Todd maybe for the first 1 is the innovation bucket.
It seems like the 15 million zone. It appears as maybe more of a push than law. So when we think about the ramp of the innovation bucket into next year is it fair to say that the year to contribution.
Greater than the year, 1 just when we tried to isolate.
Innovation bucket revenue contribution to the growth going forward.
And then Jeff just circle back on some restaurants.
My figures I think trust was up 35% from <unk> 21 to <unk> maintain some of the color you gave last quarter and then it looks like <unk> was up 5%.
I know you said it got better in June, but maybe if you can just talk about that disparity. While you have the confidence that it's still on track for your 2021 expectations and just more broadly speaking why do you think it's more weather related than been market share. Thanks, guys.
Sure John Thanks for the question, we're not going into 2022 guidance, but as we've noted previously.
The innovation portfolio, we have expected it to be growing faster in the second half from a contribution in 'twenty 1.
Is that what it would do in the first half of 'twenty..1 you can then assume that that ramp would continue.
In the course of 2022.
Experience something will continue to weigh the groundwork on getting the Packer integration and the like but then once that becomes standard beating protocol in the feed yards that becomes just standard course that continues to grow. So I think it is a reasonable assumption to assume that back half contribution would have been a better rate.
Into 2022.
John Great question on the rest of it let me just highlight I think at the highest level youre exactly right on that on the trends.
Reiterate that that where we're tracking overall with the expectations. We have we did know that the ramp it came from Covid was unusual and higher than normal here's the things. We're looking at first of all that.
Probably no work no more work has been done in <unk>.
A 4.5 month period than last 4 or 5 months on <unk> and what we would tell you is 1 we stand behind the safety of the product to proprietary research that we've done shows the belief in the product from pet owners and veterinarians.
We've increased the advocacy by the veterinarian as well to this product, it's serving a niche in a need when you look at duration and cost and economics. That's important we've increased our capabilities on digital and then I think most importantly is the global kind of focus, especially in international with our increased.
<unk> investments and capabilities like digital and omni channel. So with these as we look at overall good strong IP protection stronger capabilities as an independent <unk>, maybe versus Bayer again, we see this as a product with a long runway of value that can help drive overall growth is a key focus brand for our company.
Next caller please.
Your next question is from Steve Scala Cowen.
From the higher tax rate is due in part to higher corporate tax rates in the UK, but doesn't the UK tax rate increase from 19% to 25% as of April of 2023.
If yes, then why is the impact occurring now.
And the second question is just.
Just curiosity.
<unk> delivers full year earnings at the midpoint of the range then 65% of earnings will be delivered in the first half.
In 2018, and 19 about 50% of our earnings were delivered in the first half also true of 2020.
That was an unusual year.
We noted a handful of temporary factors, but im wondering if theres any.
Permanent factors that will drive this trend into the future. Thank you.
Sure. Thanks for the question the re measurement of the UK is really driven by the deferred tax assets and liabilities on the balance sheet that are longer term in nature and so we've got to take that entire accumulated balance into effect at 1 time when the tax law changes enacted in so that's the reason that it's happening now.
Now versus later as on those longer term assets.
Then with respect to.
The EPS.
Yes. This is the fundamental change that has happened with the Bayer acquisition with so resto historically has been about 70% of its sales in the first half of the year a family's close to 60% in the first half of the year, so that doug's into about.
$250 million difference in the first half of the year versus the second half of the year from those 2 products and with that you get a substantially larger EPS impact.
Just from the timing of those revenue numbers, we expect that will persist clearly as we get growth in different aspects of our business over time.
That can affect the mix, but here in 'twenty, 1 that was expected thats why when we've given guidance both for Q1 and Q2, we called it out always a little bit of timing shifts between quarters. So if we look at the first half.
Aspect of 65 cents of EPS, that's about the right.
Percentage as you know for the dollar of the midpoint for the full year and then as we go into 2022, we'd expect a similar seasonality to occur as I mentioned, we called out some phasing of expenses or Aqua sales. There are those things are always going to happen in a broad based global business like we have.
This seasonality will certainly continue and in line with how we've been guiding.
Since December of last year, and then I think the normalization, Steve you know as you look at kindred portfolio coming on we moved to non parasiticide growth in pet health as well as an experienced and a farm animal business cattle and poultry and we see this over time with innovation normalizing, but at this point in time, yes, the seasonality as Todd said this is.
But overall beneficial to the landfill.
Moving on to the next caller.
Your next question is from the large lifestyle with Barclays.
Hi, good morning.
2 follow up questions from me Firstly on ASF. So just wanted to call out some recent developments.
Especially the outbreak of ASF in the Dominican Republic.
Client, whether this could pose a risk just wines are low for the industry and do.
Some specific commentary around deposit <unk> zone <unk> entering the U S from this region.
Secondly, you called out re imaging gas F pressure with falling oil prices.
I'm not sure I got to flow connection there could you comment on that from your expectations on the strength. Thanks.
Yes, great great question by disease. So just at a high level as we noted in our comments African swine fever did did have an impact as we've talked about in the first half just overall to the Chinese industry.
Pig industry slaughter rates were.
And unexpectedly high in Q2 that pushed.
Pork production.
The sudden supply increase.
Packaging some supply demand and we saw again about decline of about 65% since the start of the year as I mentioned.
We're going to monitor this going forward. Our overall business continues to be very strong in China, but.
This surge we saw in the first quarter will lessen as we go into the second half if I look at African swine fever, specifically, even in the Dominican I believe that and the risks of that.
I believe all the right measures are being taken in place by the U S and Mexican industries bio securities at a different place than it was in China when the when the virus hit said, China and.
I'm confident that at this point in time first it doesn't have any impact on our material impact on our business in Latin America, and I do believe that the industry has the right things in place as we go forward.
Thank you.
Thanks from it to the next question.
Okay.
<unk> with Raymond James.
Thanks, Good morning.
Just wanted to ask a question around synergy target progression and cash cost spending against the I presume.
Your 2021 synergy targets are in fact intact, but specifically wanted to focus more on the cash cost associated with realizing those synergies I think it was previously $160 million just in light of some of the inflationary pressures that we're seeing sort of across.
Across markets and then follow up question for Todd can you just talk a little bit about operating cash flow in the quarter, just what that number was and I know, it's still sort of early days in the integration here is lots of moving parts on the working capital side, but if theres anything that you could.
Yeah.
Give us at this point to sort of help us think about.
Conversion.
Operating cash flow conversion relative to adjusted net or adjusted adjusted EBITDA.
<unk>.
Any help there and sort of trying to model operating cash flow going forward. Thanks.
Sure Elliot Thanks for the question centers, you're tracking is doing very well the team has delivered on our productivity initiatives. Our manufacturing team continues to over deliver in this area are finding opportunities to reduce the number of heads needed to drive our manufacturing facilities and continuing to capture that.
A large part of the cash cost to capture those synergies related to the layoffs that we did with the restructuring analysis from September of last year and then in January from an inflationary pressure that has less of an impact.
And then we're also doing a lot of combination of purchasing especially with media spend and other agency related costs.
We are.
Fighting against some inflationary pressure there, but we have better buying power now as a combined company with there. So overall feel good about how that is tracking as we look at the cost to both integrate bear as well as the setup are separate.
<unk> system. Please that we went from an 80 million of cash spend in Q1 to only $20 million in Q2, and Thats worth us going live on the ERP system in Q1, most of the integration from bear being completed that is giving lower now.
Total work to be done a lot of great work by our global team to use the new system transitioning to new processes and the like.
We are continuing to stabilize the system and then we'll be looking towards alright, how do we integrate the tcs system that.
We had with.
The bears business is being run on versus our SVP for hottest system, where we're operating our business to integrate those in to drive additional savings in the back half of 2025 timeframe. We've talked about so all of those things in play with respect to operating cash flow we will.
Filing the 10-Q shortly as a reminder, in Q1, we had $22 million of operating cash flow in Q2 operating cash flow jumped to $149 million and again, that's a continued execution on these items of integration popping up and then just continued cash conversion.
Our working capital goals and the like so overall tracking very well on all of those items.
As we move through 2021.
We will take our last question.
Your last question is from day 1.
D.
Hi, good morning.
Can you comment on the Hong Kong I think you mentioned higher transportation costs.
Thank you.
Otherwise.
Just wanted to work from home.
I will also comment on the supply and also the demand dynamics.
Thank you.
Health differed from your expectations. Thank you.
Yes. Thanks for the question I think overall, the logistics costs and just the global freight and the mechanisms to get product moved.
Around the world continues to be more disrupted by the Covid and the bounce back from labor issues.
We expected and then we're seeing some inflation playing in there as well teams opening up different trade routes. We're dealing with this in a very proactive manner, but we are seeing those costs come through and wanted to highlighted from a pricing standpoint, we continue to think we will get a 2% price improvement across our.
Portfolio in 2021, and we look for opportunities and gross to net or other ways to continue to be sure. We're not missing out on opportunities on that and from our own level with respect from question on <unk>.
As we've mentioned this was a dynamic of <unk>.
Supply in the market already as poultry producers in the non antibiotics space look at how they want to operate this is something that we are focused on again overall 15 million or 4.6.
680 to $4.73 billion revenue is small.
We're looking across I'm very pleased that our other innovations is tracking ahead of expectations and we'll continue to do that as we look at the business going forward. So.
That's where we land at the moment and we'll continue to update over the course of 2021.
I'll close by.
We closed out the first half thanking all of you for your interest and questions today and look forward to working and engaging with you in the second half again, good strong fundamentals in the marketplace.
The strategy is working execution is extremely strong any langkow good good momentum as highlighted in exceeding our expectations and and raising guidance for the third time and look forward again and engaging with you as we go forward. Thank you for your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.