Q4 2021 Elanco Animal Health Inc Earnings Call
As to sustainable affordable protein remains top of mind, we remain optimistic and confident in the importance of our industry and the valuable role of veterinarians and farmers and pet owners and carrying for animals.
Starting on slide four.
<unk> story is one of building delivering and strengthening we are building a global leader in the attractive animal health industry.
We are consistently delivering while taking actions to further strengthen our company and our value proposition.
<unk> thousand 21 marked our third full year as a public company.
Since the IPO, we have made strategic decisions, including the acquisitions of Bayer animal health and kindred bio that positioning <unk> for long term delivery and value creation.
We've instilled a relentless focus towards ongoing corporate simplification building.
Building a fit for purpose animal health company as we have completed the full separation from Lilly and continued our integration of Bayer.
With the fourth quarter of 2021, we are reporting our first full year as a combined company with Bayer.
Compared to when <unk> went public today, we are more diverse more global with more comprehensive product portfolios.
We have also improved our revenue mix balanced between pet health and farm animal and U S and international we're an omnichannel leader, providing for pet owners and veterinary clinic and in retail and E. Commerce. Ultimately we have built a diverse global business that we expect to deliver durable growth and significant.
<unk> margin expansion.
That level of transformation, particularly amidst a challenging environment is significant.
None of this would be possible without the dedication commitment and ownership mindset.
Globally Langkow team.
The resiliency they demonstrated their achievements and disciplined focus on execution must be commended.
The leadership team and I have deep appreciation and are truly grateful for all they have achieved.
The fourth quarter represents the fifth quarter of outperformance on our key metrics and.
In 2021, we recorded $4 $765 billion in revenue growing approximately 7% compared to our 2020 pro forma combined company revenue with pet health growing 10% and farm animal up 6%.
We launched new innovative products advanced our pipeline and our focused brand gala <unk> became a blockbuster.
We improved our adjusted gross margin to 56, 6%, making progress towards our target of 60% by 2023.
We delivered $226 million of adjusted EBITDA synergies.
All contributing to our 1.0, $5 7 billion and adjusted EBITDA, representing 22, 2% of sales and adjusted EPS of $1 <unk>.
We ended the year with $638 million in cash and equivalents and saw improvement in key operational metrics, including reduced days of sales outstanding.
We achieved our net leverage ratio target of five five times, while funding the kindred bio acquisition.
And finally.
We have been proactive and decisive taken strategic actions to strengthen our business and further solidify our trajectory to deliver expanded value.
We have optimized.
Our R&D manufacturing footprint, which is expected to reduce capex and improved working capital. We also have expanded our pipeline with kindred bio and concentrated our R&D resources on our late stage pet pet health assets, while also balancing for the future we increased both the value of the pipeline and the <unk>.
<unk> ability of success for our key programs.
And in November , we announced changes to streamline and simplify our organization.
<unk> shifting our marketing teams to be more integrated with commercial colleagues and closer to the customer to more efficiently drive our business in 2022 and beyond.
As you can see the <unk> team delivered this past year, we are confident that we have the right team and the right structure to drive our business forward in 2022, as we continue to advance our IPP strategy and make progress on our longer term commitments. Despite the expected challenges from inflation supply.
COVID-19 and competition.
Let's now move to slide five where I'll provide the highlights of our 2021 financial results.
For each of our key metrics revenue adjusted EBITDA and adjusted EPS, We outperformed our initial expectations set forth at our December 2020, Investor Day a.
Our results demonstrate progress towards our long term margin expansion targets with profitability and earnings delivery enabled by the continued implementation of productivity efforts and synergy realization in the year.
On the top line last year is representative.
<unk> durable diverse growth profile.
As I shared we grew 7% compared to 2020 pro forma combined company revenue.
Our growth came from multiple areas across species across geographies and from innovation.
In 2021, we grew.
And four out of five species with pet health growing 10% and farm animal growing 6% led by poultry and cattle compared to our 2020 pro forma combined company revenues.
We grew in all three commercial regions with our international business also delivering 7% on a pro forma basis contributing to that China represented over one percentage point of growth for the total company.
Our well positioned farm animal business also grew.
And grew market share nicely in 2021.
And globally, we launched new innovative products to kick off the next era of innovation for <unk>.
Our broad diverse portfolio provides <unk> with a wide range of pathways to deliver growth as evidenced in 2021.
In our December 2020, Investor Day, we introduced a growth formula to describe our revenue expectations and our long term growth algorithm.
Over time, we expect average annual top line growth of 3% to 4% with varying contributions from our categories of focus core defend and innovation brands.
On slide six I'll go deeper on our 2021 revenue performance through this lens.
First in our defense category <unk>.
The advantage family delivered $517 million in sales growing approximately 2% on a pro forma basis, driven by the growth of advocate in China.
<unk> grew last year as well bouncing back from the Covid related impacts in the U S. Beef production industry in 2020 and is continuing to exceed our expectations for maintaining market share. Despite generic competition for nearly two and a half years.
Our ability to differentiate <unk> attributes are value beyond product offerings and portfolio selling approach is resonating with customers and.
And rounding out our defend category <unk> continues to experience competitive pressures in the U S market, but it remains a profitable blockbuster product delivering sales of $137 million in 2021.
Our core category, which represents dozens of key portfolio products delivered approximately one percentage point of growth that was offset by decreased contract manufacturing revenue as well growth was led by our pet health vaccines in the U S, where we have strong momentum and are excited to drive innovation in our <unk>.
Differentiated portfolio of highly purified low injection volume vaccines.
On our focus brands they delivered approximately three percentage points of growth.
Led by Chris <unk> Interceptor, plus Claro and our newest blockbuster Gallup ran <unk>.
<unk> delivered $394 million in 2021, a year over year decline.
After an exceptionally strong 2021.
Importantly, the two year stacked growth of <unk> was approximately 21% in 2021, compared with 2019 and for the fourth quarter. It was 19% over 2019.
This year, we have a robust activation plan for Sorrento, leveraging a breadth of pet owner engagement touch points, including direct to consumer advertising, while improving our digital shelf space and expanding into additional retail channels as well as growing our vet clinic penetration by adding soares.
<unk> to our distributor buy sell agreements in the U S.
We expect <unk> to return to growth in 2022.
Finally on innovation, our revenue from innovation related products launched in 2021 was $72 million, we saw strong uptake from our pet health launches led by <unk> plus while <unk> was a valuable addition to our cattle portfolio.
Also in Q4, both those shield and Xperia laid solid foundations for 2022.
Over the last year with the introduction of <unk> Shield in clinic Cox, we vastly expanded our presence in the poultry raised without antibiotics or <unk> market.
As a result of this.
And process optimization challenges limiting improvement for cost of sales, we have decided to discontinue the sales of <unk>.
Now moving to slide seven.
I'd like to introduce our expectations for 2022.
In line with our statements in early January we expect to grow revenue, 2% to 3% at constant currency.
We expect innovation related revenue to contribute approximately $120 million to $160 million in revenue this year.
Presenting an incremental 48% to $88 million over 2021, contributing 1% to two percentage points of growth for the total company.
We expect adjusted EBITDA to be 114 to one $1 8 billion.
Representing growth of 10% at the midpoint.
Or an expected 210 basis point improvement for adjusted EBITDA margin.
For adjusted EPS, We expect $1 18 to $1 24, or 15% growth at the midpoint and.
And finally, we expect to continue reducing our net leverage ratio to approximately 475 times adjusted EBITDA by year end.
On slide eight let's take a deeper look at some of the specific 2022 revenue drivers.
We expect price growth above our historical 2% level with disciplined analysis and execution critically important is the inflationary environment extends into our industry.
Overall, we expect continued growth in the global pet health market benefiting from Covid era increase in pet ownership.
And while growth from these trends is slowing we expect it to persist as a result of the increased expectation of care and awareness of our pets.
Our broad global Pet health portfolio is expected to deliver growth from key focus brands from vaccines and the addition of newly launched products and.
In parasiticide, we have a diverse portfolio globally.
The combination of Codelco and interceptor plus remains.
Broadest coverage available for the treatment and prevention of internal and external parasites for U S. Pet owners and <unk> plus provides important in ductile coverage for pet owners and several international markets.
We expect the competitive pressure and parasiticide to be mainly contained to the U S. Parasiticide market with an approximate $60 million headwind, while we expect to maintain our leadership in retail channels.
Broadway Gallo print remains one of our key focus brands and is expected to grow double digits again in 2022.
Also as we announced earlier this week, we're excited to welcome Bobby Modi as our executive Vice President of U S. Pet health on March 14th Bobby's leadership experience track record of building and growing consumer brands, including pet brands positions him well to lead and grow this business. Additionally, as <unk>.
<unk> and integrating and transforming businesses, leading sales teams and expertise across innovation digital and E. Commerce makes him a great addition to the <unk> executive team.
On the farm animal side, we expect continued stabilization of global poultry and Aqua markets. We also expect an outsized contribution from our newly launched U S farm animal products led by Xperia, Enzo Shield, which we believe will be key drivers of our innovation sales in 2022.
Importantly, <unk>.
Experian continued to gain traction in the field with continuously increasing packer acceptance and processing of experience fed cattle we've.
We have seen a growing demand from cattle producers with 100% return use and continued expansion of routine feeding.
With the number of cattle on Xperia doubling every month since November .
Given experience compelling proposition growing producer demand and assume continued packer acceptance, we expect a substantial step up and xperia us moving into the second quarter as we expect it to provide the most significant incremental contribution to our innovation related sales this year.
We continue to believe it will be our next farm animal blockbuster experienced.
Experience building, another new sizable growth market and animal health around sustainability.
We have taken critical actions over the last few months to drive producer value that will catalyze <unk> growth in this new space starting in 2022.
On that note earlier this month, we announced we're piloting a new tool called uplift that helps cattle feeders benchmark greenhouse gas emissions and identified key drivers of their operations carbon footprint, providing an important baseline for their current stewardship efforts. Additionally, we announced our investment.
And a startup company called ATM.
That focuses on creating and really aggregating, creating and monetizing producers sustainability efforts.
Finally, we continue to leverage the expertise of Dr. Sarah placed with customers She's the leader of our livestock sustainability efforts and one of the most respected thought leaders in this space Atlantica.
<unk> is building a differentiated portfolio with products tools and expertise that we expect will create the next new major market opportunity and the farm animal health market.
Called livestock sustainability.
And finally, we expect our business in China will again deliver.
At least one percentage point of growth for totally landfill with contributions across pet health and farm animal despite headwinds in the swine business expected in at least the first half of the year.
Overall for 2022, we are confident we have a balanced plan that is expected to deliver 2% to three percentage points of growth in constant currency.
Before we turn to Todd to go deeper on our fourth quarter results and 2022 guidance I'd like to welcome Dr. Alan <unk> Ellen is a highly accomplished R&D leader with a proven track record in animal health product development I have known and admired Alan's leadership over the years as she has delivered significant innovation.
And created a robust sustainable R&D capabilities and just under five months. She has quickly hit the ground running and I'm very impressed with her immediate progress. We're excited today to introduce her to the investment community Helen.
Thank you Jeff.
On slide nine I will cover our 2022 innovation expectations and sure of is you why I believe this organization is avail position to deliver on our existing pipeline fill our pipeline with early stage assets to ensure innovation remains a key growth driver for <unk> over time.
And while our 2021 launches were more beta toward far minimal do you expect that the approvals in 2022, it will be skewed more towards our pet health business spaces, such as pain, but it hit the sites parvovirus and vaccines.
In January we received FDA approval for absorb a long acting post operative transdermal pain product for cats.
This is expected to launch mid year.
Later this year, we expect approvals for an extended duration topical parasiticide for both dogs and cats coal advantage XD and the Arctic.
Excited to bring this legacy of lingual innovation to market under the legacy Baird advantage brand and to provide a new and innovative option for pet owners.
These OTC products fall into one of the benefits aside target innovation Adios described during the 2022 Investor day.
<unk> plus the broad spectrum Parasiticide, we launched last year outside the U S and advantage exiting this year.
<unk> committed to our intention to deliver long parasiticide innovation on average per year through 2025.
Okay.
Overall alliances the outlook provided at the 2020 Investor day, we expect to receive approval for a launch at least seven new products in major markets in 2022, and Additionally, I am further driving project and lifecycle management and geographic expansion to support the global durable growth.
<unk> of our current portfolio as Jessica evidenced already earlier.
Okay.
Looking deeper into the development pipeline, we expect 2022 to also be a productive year for regulatory submissions and progress of our late stage assets.
Overall, we expect to make five to 700 submissions to regulatory authorities in major markets across pet health and far minimal.
And of these.
We expect to make submissions for up to differentiate the penthouse potential blockbusters in the U S in dermatology and parasiticide.
For competitive reasons, we are not going to share further details on the specific assets. However, we are pleased with the progress we are making this these projects.
The last five months have been a pleasure getting to know the team digging in on the pipeline and building on the strong foundation within the organization.
The R&D regulatory leadership team has remained the same providing consistency and stability.
Our global organization grew substantially with the addition of both debate and Kindred bio businesses and then in 2021, we have successfully consolidated into run the length of R&D.
We are leveraging the diversity of expertise from all legacy companies and building upon the pillars of scientific and technical expertise and integrated project management.
We believe our new organizational structure and consolidated footprint allows us to work in more streamlined todays and be more resource the source efficient all while focusing on delivering a reselling the innovation pipeline.
We completed the robust prioritization exercise, resulting in a focused pipeline that is well aligned with <unk> long term strategic priorities.
We have concentrated resources on our late stage pet health products shifting our investment in pet health development from 57% to 73% of total project spend expected in 2022, while also appropriately allocating across our research and development phases.
Over the last year, a lingo R&D has increased both the value of the innovation portfolio as well as its capability to progress the projects towards regulatory approval in a resource efficiency.
And while we are focused on the key projects in the development phase we are not losing sight of refilling our pipeline by pursuing early stage innovation projects, both in pet health and farm animal.
Overall, I am confident my experience and highly capable team is well positioned to progress the pipeline and the labor do you expect that $600 million to $700 million of innovation related revenue by 2025.
And now let me hasn't ended two thoughts to speak more about our financial results and guidance.
Thanks Alan.
Slide 11 summarizes our financial performance highlights for the fourth quarter of 2021, including our reported net income and earnings per share. This is our first apples to apples comparison for a full quarter since closing the <unk> acquisition in the middle of the third quarter of 2020.
On slides 31 to 33 in the appendix you can find the summary of the adjustments made to the reported results to arrive at our adjusted presentation.
I'll focus my comments on our fourth quarter adjusted measures in order to provide insights on the underlying trends in 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 measures on Slide 12 revenue in the fourth quarter was 111 3 billion.
Our year over year decline of 2%.
When we guided for the fourth quarter last November we shared that revenue growth will be unfavorably impacted by approximately $60 million of unique items related to customer purchasing patterns and short term competitors stock outs in 2020.
<unk> products and reduced contract manufacturing impacting our 2021 results.
On slide 13, we have depicted our sales growth excluding these items and the FX impacts representing growth of approximately 4% in the quarter driven by innovation and portfolio growth in pet health poultry and Aqua, partially offset by pressure in our China swine business.
A breakdown of the region species and price rate volume results for the quarter can be found on slides 25 and 26.
As we look beyond revenue and our fourth quarter results, our productivity efforts drove improvement.
We increased our adjusted gross margin to 54% an increase of 130 basis points compared to the fourth quarter of last year.
Gross margin improvement came from our continued productivity efforts improved price and mix, partially offset by inflation.
In the quarter, we began to experience constrained supply of some raw materials and other important manufacturing inputs, we're working with our suppliers and contract manufacturers to minimize the impact of constraint inputs for 2022, but do expect some continued disruption.
Moving down the income statement, our operating expenses decreased $66 million or 14% in the fourth quarter.
The realization of synergies and continued cost discipline allowed us to more than offset inflation, while investing in our key strategic priorities.
Our gross margin and lower operating expense drove adjusted EBITDA to $212 million in the quarter growing 20%.
Adjusted EBITDA margin for the quarter was 19% up 360 basis points versus last year.
At the bottom line Q4, adjusted net income increased 84% to $105 million.
The effective tax rate of 14, 6% for the quarter.
The lower than expected Q4 tax rate was driven by certain favorable return to provision results.
Earnings per share was 21.
75% increase year over year in the quarter.
Beginning on slide 14, I'll provide a few highlights of our full year performance, we delivered revenue of $4 76 5 billion.
The EBITDA of 1.057 billion.
We're 22, 2% of sales.
Continued productivity improvement a disciplined approach to managing operating expenses and delivering on synergies all contributed to our performance.
Adjusted earnings per share for the year was $1 five.
On slide 15, we breakdown the revenue performance updating the bridge, we have shared with you over the last year.
While our reported growth was 46% pro forma growth was approximately 7%.
Underlying growth from innovation of the portfolio delivered approximately four percentage points of growth in constant currency.
Overall, our revenue remained fairly balanced between the U S and international and between Pet Health Environmental China remains our number two affiliate outgrowing the local market and pet health and getting the overall share in farm animal despite pressured producer profitability and the local swine market.
<unk> out of the region species and country specific results for the full year can be found on slides 28 and 29.
We expect to file our 10-K by the end of the month, but moving to slide 16, Let me offer a few words on cash debt and working capital.
Q4, we delivered operating cash flow of $223 million.
We ended the fourth quarter was $638 million in cash and equivalents on our balance sheet and net debt of 5.763 billion.
Year end, our net leverage ratio was just below five five times in line with our previous expectations.
Finally days sales outstanding decreased to 73 days at the end of the fourth quarter compared to 81 days at the third quarter, reflecting improved execution on collections globally.
Additionally, as we've regularly updated view our aggregate channel inventory levels at distribution remained consistent with prior quarters.
And across our global business.
Moving to slide 17, I'd like to provide an update our value capture efforts as Jeff mentioned in 2020 award we realized adjusted EBITDA synergies of $226 million driven by head count reductions procurement savings targeted R&D project rationalization and site optimization.
<unk>, our original expectation by about $60 million in 2020 , one as a result of our additional restructuring efforts and acceleration of planned 2022 savings.
We've captured synergies of our bottom line results, but also reinvest in our U S health and China businesses to drive growth, while also funding, our standalone infrastructure and higher than expected legal costs.
We expect progress to continue this year and to deliver approximately $345 million and adjusted EBITDA synergies by 2023 as we shared earlier this year.
Today, we are also sharing certain Thursday expectations for 2024.
By the third quarter 2023, we expect to a fully integrated the legacy Bayer business into our own ERP system and business processes, and thus expect to generate an additional $50 million to $60 million of adjusted EBITDA synergies in 2024 and beyond.
In 2022, we expect a onetime cost to achieve synergies to be approximately $260 million. This includes an incremental $100 million to $120 million this year as compared to our investor day expectations to enable delivery of the incremental synergies from the November 2020 , one restructuring actions and the system integrations.
Now, let's move to our 2020 through financial guidance, starting on slide 19.
We expect revenue to be between $4 745, and $4 8 billion with.
With reported growth at the midpoint and constant currency growth of 2% to 3%.
For adjusted EBITDA, We expect $1, one four to $1, one $8 billion or 24 to 24, 6% of revenue.
Finally, we anticipate adjusted EPS of $1 18 to $1 24 or growth of approximately 15% at the midpoint.
As we did last year Slide 37, and then Fedex provides a number of additional assumptions to help support your modeling efforts.
Now, let's discuss some of the underlying factors behind our 2022 expectations.
On slide 20, we provide a revenue bridge from our 2021 result towards 2022 guidance.
We expect the impact from foreign exchange rates to be a headwind of approximately $95 million or a two percentage point drag on growth year over year based on spot rates as of early February Adair.
Additionally, we expect another year of step down in contract manufacturing revenue from the sale of our facility in <unk>, Kansas. While this represents of approximately $40 million headwind at the topline. These sales were lower margin and that should be accretive to overall gross margin.
Next we expect our innovation and broader portfolio to deliver underlying growth of 3% to 4% this year and constant currency building.
Building off the $72 million delivered in 2021 renovation sales, Jeff Nolan described should contribute an incremental 48 $88 million in 2022, and the rest of the portfolio is expected to contribute about two percentage points of growth.
Our portfolio outlook includes price improvement in volume growth in many key areas, partially offset by expected declines in the third and core brands.
On slide 21, we've provided a bridge to begin our expected adjusted EBITDA improvement in 2022 of 10% at the midpoint.
Revenue flow through to gross profit enabled by productivity and partially offset by inflation will be the largest drivers of improvement. Additionally, we expect contribution from decreased operating expense as a result of synergy realizations and cost discipline that will offset inflation and allow us to continue making strategic investments are two.
And 'twenty two expectations are in line with our long term algorithm and we remain committed to our expected 31% adjusted EBITDA margin by 2024.
Finally, we are introducing guidance for the first quarter of 2022 on slide 22, we expect revenue of $1 2 billion to $1 two 3 billion.
Adjusted EBITDA of $310 million to $340 million and adjusted EPS of <unk> 33 to 38 cents.
Given the timing of our step down in contract manufacturing in the second half of 2021 and expected continued headwinds our China swine business, we have a more difficult compare on the topline in the first quarter of 2022. Additionally, I will also take the opportunity to remind you that last year, we shifted approximately $30 million of operating.
From Q1 to later quarters in the year, we don't expect that shift in 2022, which will create a headwind in the quarter and make it difficult for our synergy capture efforts to shine through despite.
Despite these factors the business has entered the year with momentum and we are confident in the guidance. We've shared today now I'll hand, it back to Jeff for closing comments. Thanks, Scott summarize <unk> delivered a strong 2021.
Financially, we exceeded the expectations and our long term growth algorithm with five quarters of delivery since closing the Bayer acquisition.
We simplified our global sales and marketing operations and optimized our manufacturing and R&D site footprints. We went live on our own independent technology infrastructure and shared service Center network.
<unk> progressed, our internal pipeline and added additional pet blockbuster candidates with the acquisition of Kindred bio and finally, we issued our first ESG summary in June of last year and earlier. This year, we shared that we expect to introduce an Eva like performance metric into our short term compensation to drive capital optimization and further align employee.
And shareholder interest.
It's working.
Our IPP strategy is delivering the results of our productivity are showing through.
<unk> is a stronger company. These actions along with the addition of Ellen and Bobby to our experienced leadership team have set <unk> up for another strong year in 2022, as we continue to build strengthen and deliver on our value proposition in this durable animal health industry, and we look forward to engaging with you all throughout the year.
With that I'll turn it over to Katie to moderate the Q&A.
Thanks, Jeff we will have Jeff Todd and Ellen available for the Q&A today, we'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow up operator, please provide the instructions for the Q&A session and then we will take the first caller.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Erin Wright from Morgan Stanley . Your line is open.
Great. Thanks, and you start to double digit EBITDA growth in early January but the lower half of the range today doesn't quite hit that mark.
I get the midpoint, that's about what are some of the swing factors that get you to the high versus low end of that range and is there some conservatism there or has anything changed relative to your expectations in early January .
The two blockbuster submissions in pet health and Parasiticide and Darren can you speak to the geographies of focus for those products and what the parasiticide product via free tick and heartworm Triple combination product in the U S.
Will these be before the all important flea and tick season in 2023.
Alright.
If you want to take the first question on EBITDA and then and then we'll go to Allen.
Thanks, Eric for your question our referenced earlier.
Earlier in the year was to our expected midpoint, so no change on our EBITDA expectations.
Right now we do have some FX headwinds, we'd be 12 point, 12% at the midpoint constant currency is provided in the bridge, we've got about $20 million to $25 million of opex headwinds to that opex or to the EBITDA numbers from those respect to what could drive us higher or lower.
Clearly theres a lot of moving pieces globally right now as we all know it's very dynamic.
We feel confident in this plan and our ability to deliver it over time with that I'll hand, it to <unk> to address your R&D question.
Thanks, Todd and thanks for the question on the <unk>.
Pipeline assets in D. C are quite excited not only Vista pipeline, but also with the progress we are making this the key projects in the pipeline.
We plan indeed food due to the submissions of up to two.
A.
New potential innovations VSAT.
<unk> blockbuster.
Potential data this year.
Especially it's aside field that indeed, the field for now we can actually not give more specifics on the individual assets.
The only thing I can share is that in the Fiat excited with the progress we are seeing so far of these differentiated potential blockbusters and Aaron I'll pick up I mean, no question, our focus will be on the U S market.
Followed by the other major.
Markets, Western Europe , and Japan, Australia, but U S is our primary focus.
Great we'll take the next caller.
Your next question comes from the line of Michael Riskin with Bank of America. Your line is open.
Great. Thanks for taking my question and congrats on the quarter and guide.
I want to start on the innovation side of things I think you called out the <unk>.
<unk> portfolio contributed $41 million in the fourth quarter and Thats because the products you launched in 2021, and yet youre guiding to 120 to $116 22, So maybe there's some strong seasonality there but.
Just given how we see new products launched if you had 41 in the last quarter should that be sort of a steady run rate going forward and then particularly given the incremental launches on top of that this coming year. So why isn't that why wouldn't that number came in a little bit higher and then for the follow up maybe one for Todd.
The gross margin guide.
Your comments on 50, 758, this year and yet you're still reiterating 60% Nick.
Following year, so 200 to 300 bps gross margin expansion next year could you just talk through the moving pieces. What makes this year a little bit of less in terms of margin expansion next year that much more.
Thanks.
Great. Thanks, Michael I'll, let Todd address.
Sure Mike No. Appreciate the question there is some seasonality with respect to the pull through season and how that plays in Q4 the incremental growth.
In next year at the 48 $88 million a lot of that will be on the uptake of exterior. We're really excited by the foundation thats laid in the continued growth of our cattle portfolio as we become more and more important door.
Customers in our.
Products beyond just the novel solutions, we provide including the new uplink up look calculator, all very big So that's a big part of the innovation.
Clearly excited for <unk> plus outside the U S, where we have all the broad triple combination product there in Australia, Japan, and EU with respect to the margin again, we've all called out the inflation. That's certainly something that has impacted us more than what was expected when we gave out our initial guidance at all.
2020, Investor day, we've been able to overcome that with better than planned performance in 2021, and we're still tracking to continued uptake in 2022, despite those inflationary pressures as we focus on taking incremental price versus historical expectations as well as continuing to drive synergy and value.
<unk> initiatives. So overall, we feel good on how we're tracking as well as the procurement and manufacturing quality savings the team is driving.
And the next caller.
Your next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open.
Hi, good morning, Thanks for the questions maybe.
And maybe following on on Mike's questions on margins.
Looking at just the long term EBITDA margin target of 31% by 'twenty for the guidance for this year is for a margin rate in the low 24% range.
The synergy walk that you provided was helpful. I think kind of a $100 million incremental in 'twenty three 'twenty four I think that adds about 200 basis points to margin. So it seems like there is still kind of meaningful underlying improvement implied in that 31% guidance. So could you maybe just help us think about what drives that.
And then my follow up.
Jeff is on Gallup ran I think you had said you expect it to grow double digits in 'twenty two.
And you also alluded to the competitive launch in OE in the EU as a headwind I guess, maybe what have you seen so far around that and are you still expecting <unk> to grow in the EU. This year despite that competitive entry. Thank you great.
Thanks, Nate Todd you I'll take the first question on margin and then we'll go to Jeff sure. Yes, the EBITDA range of the sales range at 24% to $24 six would be <unk>.
Step up from what we've done here in 2021.
There are some inflation headwinds that we would expect to come out by the time, we get to 2024 that would provide incremental we've also run higher legal fees than historical but also it could come out and then just the natural continued growth in sales, while we hold our cost of manufacturing supply will drive that incremental grow.
This margin that will also then flow through to the EBITDA margin. So we feel great about the year. We had in 2021 ahead of that early expectations and still feel like we're very much tracking to the 31% commitment we have for 2024 and.
And Nate relative to Gallup branch it did become our latest blockbuster in 2021 meeting our expectations. We do expect as you said it will grow double digit in 2022, a couple of things that I would note is we do see pain.
One of the largest <unk>.
Pet health market is probably behind parasiticide and derm to be one of the faster growing markets <unk> comes into that with the largest portfolio overall, and we see <unk> being very competitive with <unk>.
Value from home treatment to the safety profile and the unique offering I think what happens is you look at the EU market I think the interesting data has the market expanded over 30% in the fourth quarter. So new innovation is going to expand the pain market. We continue to focus on differentiation firstly.
<unk> treatment and also portfolio selling overall that should show the veterinarians not just in Europe , but across the globe. So again expect double digit coming into this year and expect some nice growth, including our new product <unk> as we bring that into the pain portfolio as well.
Great we'll take the next question.
Your next question comes from the line of Chris Schott from Jpmorgan. Your line is open.
Alright, great. Thanks, so much just for me just could you elaborate a little bit more on the defend brands. It seems like this outperformed in 2021 and I was trying get a sense of what enabled that outperformance and how sustainable could that be as we look out to 2022 and then on the two blockbusters I know youre not going to go into full details, but can you comment if there.
Or I guess clinically derisked at this point and you're moving forward of the filing or is there still key clinical or Registrational data that we're waiting on just trying get a sense of you may have.
Again, the profile, but are these largely products that will be at some point filing and moving forward. Thanks. So much.
Let's start with Jeff on the deferred brands and then we'll go to Ellen.
Chris Great question, and as we said during our Investor day with this growth algorithm, we're concentrating different strategies against these different categories and with defend.
We put a concentrated focus on three brands and there are some some commonalities there but one is we are we are looking at them. We are defending them in the appropriate markets, where we believe it's the right thing to do to defend so I'll start with advantage the advantage family a concentration a real focused effort on that whole brand family.
And that is still we believe a very valuable brand in pet owners. It was led with an increased investment reps in promotion in China with the advocate product and that was one of the fastest growing products in the overall, China market overall all competitors.
<unk>.
I think we will continue to expand and use that as Alan mentioned, we're going to continue to leverage that advantage brand as we bring a new product to market actually in a Lincoln compound with now a Bayer brand advantage and leveraging that with advantage XD remains and it's very simple it is differentiated and is selling value beyond product.
And really leveraging our total portfolio and we saw Romans and grow against our Colgate compare but we continue to see that that product is going to be a very strong product for us, especially as corn prices increase and the importance of performance products and then try to Texas again, we're containing it we're leveraging into the market.
<unk>, we know we said, it's a little over $130 million in size, we do see that erosion will come to that brand as well as can afford us from the competition that we noted a $60 million.
Total total total erosion, but again overall defend brand strategy is working.
And Alan on the.
Blockbusters, yes. Thanks.
Yes.
We plan, we expect to make submissions for up to two differentiate that potential pitfalls blockbuster later this year.
All I can tell you. These are complex projects a lot of work is happening in parallel both studies are still in flight some of them might have going into the final stages and the RP patting. The dossiers. So they are not fully derisked.
The asset we are expecting submissions later this year for up to two of these potential differentiated penthouse blockbusters.
So it will take the next caller.
Your next question comes from the line of Umar <unk> from Evercore ISI. Your line is open.
Hi, guys. Thanks for taking my question two here if I may.
First I.
I know youre guiding to $80 million to $120 million EBITDA growth into 2022.
Of that 80 to 120, it looks like about $60 million is coming from the restructuring announcement in November 2021, where I think you guys eliminated 20% of the leadership team. So I guess the question is this as we think about the growth the margin growth beyond 2020 to what substantial additional actions have to happen to deliver such growth.
Margin growth in 'twenty, three and beyond our wood, a more tempered inflation plus your existing efforts be sufficient to drive that EBITDA growth in 2023, and beyond and then secondly, and this ties into the EBITDA growth as well.
Should we be expecting revenue acceleration, perhaps 5% plus into 2023 as you potentially launch your JAK inhibitor plus.
Key blockbuster would that not really impact the numbers of 2024. Thank you.
Todd do you want to start on the EBITA sure. Thanks for the question <unk>, Yes, we have a lot of benefits flowing from the restructuring those are helping to offset inflation, while we continue to drive our sales growth and productivity across the entire gross margin platform. So that is in play.
From the standpoint of improving EBITDA Youll most of the actions have been taken as we annualize a lot of our benefits. The one thing to note is we called out we are integrating.
Their ERP system. That's currently run with our partner toddler business consulting and doors that will provide incremental synergies that drive that forward and then we do expect some mitigation from the inflationary side to also drive that but a lot of this is really the underlying efforts we have.
We're not expecting another significant restructuring, although there will be some impacts once we finalize that integration of the systems and business processes in the middle of 2023. So overall, we feel good about how the business is looking and certainly growth of innovation products like experience.
Have a very above average corporate average margin profile will also help drive that increasing EBITDA profitability.
And whom are I'll just pick up on that I mean, no question. In addition to all of that continued growth of innovation brands and focus brands will be and price will continue to be contributors to that margin expansion. What I would just say is we.
We outlined in December 2022, this growth algorithm.
Boom or relative to the different categories of products and it is working we saw and on a pro forma basis, 7% constant currency five and what we're seeing here is we're off to a good start in year one we.
We believe that no question innovation will be a key driver more than doubling innovation. This year the focus brands had strength.
Last year's innovation will be the biggest contributors all of these things are the aspects. We believe we think price and our digital enablement will help China in Geo expansion will also be a big driver so not going to give future forecast, but we do believe strongly in the growth algorithm and the durable diverse sustainable growth there.
We're getting from our business that was represented in 'twenty. One all of that leads to sustained our commitments that we highlighted in December last year.
Well get ready to take the next caller I'll just mentioned will probably go a couple of minutes over I know, we still have several in the queue. So we spoke a bit long and we started a few minutes late so we can go ahead to the next caller trial.
Your next question comes from the line of Jon Block with Stifel. Your line is open.
Great. Thanks, Good morning, guys, maybe just a couple for price I believe it was 2% in 2021, but.
I don't think Thats, a pro forma numbers for Todd as your pro forma number to think about for price and more importantly, how do we think about price in 'twenty two.
I know you guys said hire is a 3%.
Is it 6% maybe just some some way to think about it for the year and then Jeff the plans for Reacceleration as for restaurant sales in 'twenty two that you called out.
The primary driver for that is it opening up to the bets I think you also mentioned some advertising into new markets.
Maybe a clarity question, if the product's going to the distributors to sell into the vet practices is there any sort of an inventory build that has or will take place that we should be aware of thanks guys.
Yeah.
Thanks for the question John the 2% for the full year, that's pretty solid.
The difficulty is on a pro forma basis gets harder as you know as we included the most bear in volume for most of the year, but generally speaking the twos in line with respect to other price increases we have increased price in both the vet channel as well as at retail and then also on our farm animal products already with Lyft.
Price increases to start the year.
Those will be.
<unk> tended to be higher than that historical 2%.
Number we've had but we're not getting into the specifics as it varies by product line clearly there are some OTC products, where we've got a little bit more pricing power than in the farm animal side, it can be pretty competitive.
At that point, our value beyond product really helps drive our overall portfolio as we continue to take market share in U S farm.
And Jeff on Presto, Yes, so resto, just again and met our expectations John as I highlighted in 2021.
With a with a challenging compare in 2020, and we have activated a lot of efforts probably some of the maybe highest activity against <unk> and <unk>.
Long time for the brand going into 2022, and again I'll just hit its ultimately about putting the product in more geography, and more channels with more access to the pet owners, we continue to see tremendously high loyalty and return us to this product and we will continue.
To support that with DTC increased digital shelf space.
And then yes, more more consumer channels and more geography relative to the U S move.
Yes, there'll be a very small incremental increase I think our vet clinics will take on maybe less retail product OTC product inventories compared to scripted products, but our goal here is veterinarians and pet owners come in with that loyalty to <unk>.
In the segment that it serves for the first time, putting this into our distributors' hands and putting it into clinics as just another channel to allow more access in a buy sell arrangement versus a different arrangement. So we believe that that's also going to be a key driver to <unk> expanded use and again growth in 2022.
Thanks, we'll take the next question.
Your next question comes from the line of Elliot Wilbur Your line is open.
Thanks, Good morning, a question for Jeff and or Todd I guess, just with respect to your overall top line outlook for the year anything you can say specifically.
In terms of anticipated relative performance of the various segments.
And.
Individual species within the farm animal segment in terms of.
Anticipated year on year growth, how are those individual segments expected form versus your overall top line outlook of 2% to 3% and and where we see.
The strongest growth kind of within the farm animal segment, and then follow up question for Todd relatively strong cash flow conversion for the full year I think the number is 94% 95% in terms of adjusted net income cash flow conversion is that sort of the new norm.
Norm for the company outside of just maybe some seasonal swings in working capital around year end.
Real quick I would say overall our growth as we look at it at a high level innovation brands as we mentioned will be a key driver price our focus brands.
Especially as we as we think about <unk> interceptor, plus Gallup brand.
And then China those would be some of the major material drivers offset by the CMO some FX in the parasiticide concentrated.
Competitive <unk> in the U S.
As you look at the species overall again pet health, we see strong even though the numbers are flattening a persistence. There is positive we think wellness and visits being up spend being up. The overall experience has improved we see a strong fundamental pet market in 2022, we see poultry and Aqua recovering from the Covid situation.
<unk> better economics and countries internationally have helped both of those markets as well as returned to restaurant purchasing for the salmon market.
And then I would say on the cattle market. The market has tightened supplies tightened exports are strong, especially coming out of the U S. That's going to drive price up and we believe our performance driven portfolio supports that nicely and then swine really is one of the overall a pretty stable market with headwinds probably still.
In the first half more from an economic perspective, not a African swine fever perspective in China. So contain challenges in the first half we see recovery in the second half of China's swine.
Thank you for the question on the operating cash flow, we are thrilled with the $223 million. We did in Q4 that 94% conversion of net income to operating cash for the full year fuels.
And the range that we expect to continue to deliver I think as we look out over the next couple of years the acceleration of the operating cash flow is a very key component of our strategy as we continue to de lever.
And we only expect it to get better as we get beyond 2022, where it will be the last big year of one off cash expenditures with the consolidation of the system as well as paying out the cash on severance is from our latest restructuring. So overall feeling very good about the cash flow generation that our debt level.
<unk> improvements.
Great. Thanks, we'll take the last caller.
Your last question comes from the line of Nevada tie with Citi. Your line is open.
Hi, good morning.
I have a follow up on your cash generation.
Can you comment on the cash.
Some costs to integrate.
Thank you Kristen.
Will the step down in 2022 remains significant then.
The guidance.
Comments on free cash flow expectations for this year.
Sure. Thank you, yes, we're going to have about the same one off cash needs for the integration and the.
Severance costs as we had in 2021, we've got it at our assumptions on slide 37 at about $260 million.
This all gets built into our operating cash flow, which we talked about on a GAAP basis. So with that we do expect to have in the range of $450 to $500 million of free cash to allow us to continue to reduce debt and get our net leverage to the 475 times, we guided to today.
Alright, Thanks, I will hand, it back to Jeff to close yes. Thank you for the time and we appreciate your interest in the land co again, a strong historical 2021.
The integrations IPP and our overall strategy is working as I referenced back to the Investor day. In 2020, we are on the trajectory, we're exceeding some of those expectations and staying to our commitments as we go forward. Thanks for your interest we look forward to engaging with you throughout the year.
This concludes today's conference call you may now disconnect.
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