Q1 2022 Elanco Animal Health Inc Earnings Call
Press release.
After our prepared remarks, we'll be happy to take your questions I'll now turn the call over to Jeff. Thanks, Katie Good morning, everyone.
<unk> is off to a strong start in 2022 as we continue building delivering in strengthening our company. The first quarter marked another consistent quarter of delivery with our key three metrics revenue adjusted EBITDA and adjusted earnings per share all exceeding the midpoint of our guidance.
We remain well positioned as a leader in the durable animal health industry and have taken important actions to streamline our organization for continued delivery even in an increasingly challenging environment since.
Since our last earnings call several macro dynamics have intensified from the strengthening U S. Dollar and continued cost inflation to emerging situations with the war in the Ukraine and Covid protective measures in China.
Today, we are updating our guidance for revenue adjusted EBITDA and adjusted EPS to reflect changes in foreign exchange rates. Since last February we remain confident in our constant currency revenue growth outlook of 2% to 3% for the year and we are encouraged by the foundation we are building.
<unk> next era of growth.
Reviewing our key financial metrics on slide four we delivered 2% constant currency revenue growth in the first quarter, despite the increasingly volatile macro environment.
Adjusted EBITDA margin was 27, 7% and we delivered adjusted EPS of <unk> 36.
Our portfolio delivered at the high end of our guidance with one point to two 5 billion of revenue, including pet health growth of 2% and farm animal growth of 1% at constant currency.
Several key factors drove this growth first our focus brands with growth led by poultry and Aqua as well as key pet health brands, So resto Codelco and Gallup ran.
These helped drive a 4% constant currency growth in our international business. Despite the expected challenges in the swine market in China.
Next price price improved 2% in the quarter and we expect it will accelerate in the second half of 2022.
And finally, our innovation products are tracking in line with our expectations for the year with positive results for <unk> shield and strong indicators for experience.
Before we cover our updated expectations for the year on slide five I believe it's important to remember why animal health is such a durable business and how the industry Andy link will remain well positioned for sustained value creation in today's macro environment.
First protein and pets have proven to be essential.
Role of pets is our constant companion has increased our expectation of care with respect of protein the availability and affordability of sustainable protein is no longer taken for granted and growing at historical levels.
This animal health business is also diverse spread across the global economy, five major species groups and multiple therapeutic classes, all providing numerous avenues to deliver growth and value to customers, while eliminate dependency on any one specific dimension and finally this re.
Remains almost entirely a cash pay business, where innovation and value added services are rewarded by customers.
I would specifically point to a few key trends we're watching this year.
First is the improving pet owner experience, which transformed during COVID-19, while vet visits are normalizing the transition to omnichannel and direct to door purchasing both through E Commerce and the veterinarian has improved convenience and compliance and is supporting higher pet owner spend.
A recent <unk> survey showed a third of pet owners expect to spend more on their pets. In 2022. This is especially true of younger generations with nearly half of Gen Z, indicating they expect to increase their spending on pet care.
Next with underlying pet ownership above pre pandemic levels. We believe this higher base along with improved expectations of care will continue to drive industry growth going forward.
And finally, the pet industry has historically demonstrated resiliency and inflationary times on.
On the farm animal side, we continue to see strong long term protein demand despite higher protein prices increasing.
Increasing global GDP and shifting diets are driving a significant increase in demand for animal protein this decade compared to last decade.
In the near term post pandemic stabilization of foodservice demand in most parts of the world is driving improvement, notably in poultry and salmon markets in.
<unk>, we continue to see producer profitability across most species, despite increasing input cost.
In times of elevated fee costs. The <unk> portfolio is highly valued by our customers as it supports improved feed conversion and efficiency.
While macro factors could have short term cross industry impact overall, the underlying fundamentals in animal health remains strong any langkow remains well positioned to deliver in today's environment and over the long term.
With this industry backdrop, we continue to expect 2% to 3% constant currency revenue growth for 2022.
On slide six while we have adjusted our guidance for continued strength in the U S. Dollar the underlying revenue assumptions, we shared in February remain largely intact.
Focus brands pricing International and innovation will continue to support growth for the year, while competitive in generic pressure primarily on our defend brands softness in China, swine and year over year step down in contract manufacturing were expected headwinds.
Merging macro pressures in the Ukraine in China, and certain stock outs in the U S. Retail are expected to negatively impact the business primarily in the second quarter.
For the full year, we expect to offset these incremental headwinds with strong performance in poultry and Aqua.
Incremental growth in pet health focused brands in Europe , and price growth above our initial expectations, especially in international markets.
Importantly, <unk> continues to be a key growth driver and is off to a strong start growing 6% year over year in the first quarter.
Our new consumer campaign for the brand is driving credibility and positive brand sentiment and is outperforming our kpis for impressions and engagement rates, we continue to invest in the robust activation plans for the brand optimizing the depth and the breadth of our direct to consumer exposure and Doug.
<unk> down on e-commerce with incremental spend in targeted areas to drive conversion.
Overall, we are pleased with our positioning and continue to see a nice runway of growth for <unk>.
On innovation, our launched products are gaining traction in the market and we continue to expect a contribution of $120 million to $160 million for the year.
For Xperia as we see the increased focus on the environmental sustainability and a growing validation of the product's value proposition all major Packers are now evaluating or fully accepting expire fed cattle.
As a result, we're seeing strong producer demand pivot from trial to full feed yard use including several of the country's largest cattle feeders.
In addition to our revenue expectations, we're updating our guidance for adjusted EBITDA and adjusted EPS to reflect the strengthening U S dollar, but remain committed to our year end net leverage target.
Our consistent delivery against our companywide productivity initiatives and the decisive actions, we took to simplify the organization provide confidence in our ability to mitigate the impact of increasing cost inflation on our global business.
Finally on slide seven I'd like to highlight progress and actions, we're taking to build the foundation for the next era of growth at <unk>.
Our near term innovation, we've already received five of at least seven expected portfolio enhancing approvals in major markets for the year, primarily in pet health.
Dr. Allen to broad manner and are highly capable team are very encouraged by the pipeline progress we made in the first quarter, including achieving two major milestones that advance our late stage dermatology in parasiticide development programs. We continue to expect to make five to seven regulatory submissions in major.
In 2022 with up to two being differentiated pet health potential blockbusters in the U S in dermatology in parasiticide.
Additionally, we added another potential blockbuster to our longer term pipeline with our recent strategic alliance with DSM to develop manufacture and commercialize <unk> in the U S. Based on dozens of published studies DSM has proven well there to be a revolutionary methane reducing product for beef.
In dairy cattle already approved in several international markets, including Europe .
Once approved in the U S. We expect <unk> to have blockbuster revenue potential in excess of $200 million annually with initial contribution by mid decade.
We believe livestock sustainability is the next frontier of innovation and the next new material farm animal market. The alliance with DSM further strengthens our leadership position in transforming the space and we expect it will be foundational to a land goes next era of growth and.
And finally, we completed the carve out of our microbiome platform and pipeline by launching biomet it under the direction of Aaron Schott. This was a great outcome for all parties and we wish Eric and the team at Biomet a great success.
Now I'll hand, it over to Todd to provide more color on our first quarter results and outlook Todd. Thank you, Jeff and good morning, everyone.
Today I'll focus my comments on our first quarter adjusted measures in order to provide insights on the underlying trends of our business. So please refer to today's earnings press release for a detailed description of the year over year changes in our reported results.
Starting on slide nine as Jeff mentioned, we had a strong start the year with revenue of one point to two 5 billion delivering 2% constant currency growth drove and by a 2% increase from price primarily in pet health Foreign exchange rates provided a headwind of $36 million in the quarter or 3% slightly above our.
Patients slide.
Slide 10 breaks down our revenue performance by species and slide 11 provides revenue by region in the quarter.
For Pet health, we grew 2% at constant currency for the quarter led by our international business, which grew 8% at constant currency.
Globally, <unk> contributed $161 million in revenue growing 6% on a reported basis and Cardona <unk> grew double digits, while earlier generation parasiticide declines in the U S.
<unk> family contributed $137 million in the quarter, an overall decline of 5% with growth in several international markets more than offset by a decline in the U S.
Multiple dynamics impacted the performance in the U S, including the <unk>.
But sales of prescription product advantage, multi and supply chain input challenges for items like paper and packaging impacting our ability to supply retailers in some cases.
Cause stock outs at retail we expect this to be resolved late in the second quarter as we are already seeing improvements in the paper supply situation.
On the farm animal side, the business grew 1% constant currency, driven by improving and market prices and innovation in poultry and robust growth for Aqua, which included some phasing from Q2.
Partially offset by the continued unexpected pressure in the China swine market in the quarter. Additionally, after growing mid single digits on a pro forma basis in 2020, one our global cattle business declined 3% in constant currency in the first quarter of 2022, primarily driven by generic competition impacting price on several key brands.
Slide 12 further summarizes our financial performance highlights for the first quarter.
Aligned with the decrease in reported sales adjusted gross margin was 58, 4% a decline of 80 basis points compared to the first quarter of 2021.
Price and mix largely offset each other the unfavorable impact of approximately $30 million of year over year inflation was partially offset by approximately $25 million and manufacturing productivity improvements.
Given the structural nature of our price and productivity improvements, we expect the benefits to sustain over time.
We continue to experience constrained supply of certain raw materials and other important manufacturing inputs as well as labor shortages at several of our contract manufacturers. This created disruption in our ability to efficiently run our manufacturing operations from an absorption perspective, providing a headwind to our gross margin expansion in <unk>.
<unk> supply for a few select products in our U S retail channel, including certain advantage family of Skus.
Our commercial manufacturing and supply chain teams are working closer than ever to prioritize skus in key markets.
<unk>, our head of manufacturing quality and his organization have been working tirelessly for nearly two years to mitigate supply challenges for <unk> and our customers. We are deeply appreciative of this team's relentless focus to maintain supply while continuously improving manufacturing efficiency, reducing overhead costs and drive.
Procurement savings.
Operating expenses for the quarter were $401 million, a reduction of 8% year over year, and 5% sequentially compared to the fourth quarter of 2021.
Impact of FX was approximately $10 million favorable in the first quarter or a 2% benefit year over year.
This improvement highlights our disciplined execution of last november's restructuring and demonstrates our abilities to sustain synergies, while more than offsetting inflation and continuing to invest in key strategic priorities.
Our R&D spend was in line with expectations as we concentrated investments going into this year and prioritize our pet health blockbuster development pipeline.
Interest expense was $52 million in the quarter a year over year decline of 15% driven by the repayment of our 2021 senior notes last August .
The non-GAAP effective tax rate was 30% for the quarter compared to our initial expectations of 23% to 24% for the year, which reduced our EPS by approximately <unk> <unk> versus those expectations the higher than expected first quarter tax rate was driven by the 2017 U S tax law change that became effective in 2022.
Requiring the capitalization of certain R&D expenses.
This impacted our tax rate by approximately 10 percentage points for.
For the full year, we now expect our tax rate to be approximately 25% to 26% to reflect this change in U S tax law.
Adjusted net income was $177 million and adjusted EPS was <unk> 36 for the quarter, both declining 3% largely driven by the U S tax law change.
Adjusted EBITDA was $339 million in the quarter or 27, 7% of revenue representing a modest expansion of 10 basis points. Despite the headwinds of inflation. Both on both the gross profit and operating expense lines and the revenue headwind from foreign exchange rates.
Additionally, I will take the opportunity to highlight our positive GAAP net income and EPS performance in the quarter as we continue building and strengthening the <unk> business, we are reducing the GAAP expenses associated with the restructuring integration and our independent company standup as we shared in February we are in the process of integrating the legacy bear business processes.
And the linker ERP system and operating network. This is the last significant integration activity that remains on track to be completed by the third quarter of 2023.
We expect to file our 10-Q in the coming days, but let's move to the balance sheet and cash flow metrics on slide 13, we ended the quarter with $5 $87 billion in net debt slightly higher than at the end of the fourth quarter of 2021 as the first quarter has heavier cash outlays due to the timing of annual compensation payments.
We expect to end the year with a net leverage ratio of less than 475 times.
In the first quarter, our operating cash flow was negative $62 million, while we continued to reduce dsos globally, we had a significant year over year reduction in accounts payables and other liabilities as our back office vendor processes continue to gain efficiency.
Additionally, in the first quarter of this year, we had higher compensation payments, partially due to having a full year of bonus payments for legacy bear employees at higher severance payments as compared to the first quarter of 2021.
Finally in April we tendered $406 million of the $750 million of outstanding Senior notes due in August of 2023, a significant portion of this step was refinanced by increasing our term loan a with farm credit by $250 million.
Now, let's transition to our updated outlook for 2022 on slide 15 today, we are updating our full year guidance for revenue adjusted EBITDA and adjusted EPS to reflect foreign exchange rate assumptions as of early may.
For the full year, we now expect revenue to be between four seven and $4 $75 billion with constant currency growth still expected to be 2% to 3%.
The impact from foreign exchange rates is not expected to be a headwind of approximately $140 million for the full year incrementally 45 million above our February projections or now a three percentage point drag on our reported growth year over year.
While our first quarter results were not materially impacted by the war in Ukraine, or COVID-19 protective measures in China, We do expect some impact primarily in the second quarter in China, but acknowledge there is a significant uncertainty given the volatile and evolving nature of the situations.
In 2021, Russia, and Ukraine collectively represented less than 2% of our global business. We continue to operate in the region, providing essential health care products for animals, Despite an increasingly challenging environment and our decision to stop promotional spend.
With respect to China. They increased protective measures around COVID-19 are impacting consumer access to goods and services in the first quarter, our pet health business in the country grew double digits, but momentum has slowed across the industry through April and into May.
We foresee some headwinds in the second quarter as a result, we believe it will be temporary in nature, and our pet health business in China will still grow meaningfully for the year.
On the farm animal side restrictions in major population centers in China are limiting social gatherings, and foodservice consumption exacerbating the already imbalanced supply and demand for pork.
<unk> prices continue to be the leading indicator we are watching and producers are expected to remain unprofitable through the first half of the year, we remain cautiously optimistic about improvements in the second half, but now expect a more gradual slope of recovery.
Jeff shared our confidence about several areas expected to counterbalance the potential headwinds I, just described including improved price expectations, especially in the international markets performance in poultry and Aqua and contribution from our key focus brands primarily in international Parasiticide.
Moving down the income statement. We are also updating adjusted EBITDA and adjusted EPS for FX. We now expect adjusted EBITDA of $1 125 to $1 165 billion and adjusted EPS of $1 15 to $1.21.
This guidance reflects continued execution of our manufacturing productivity agenda, which is delivering real improvements to our cost structure, allowing us to absorb the increased impact of inflation.
On the operating expense side, we are leveraging our reset cost base as evidenced by our year over year and sequential decline in expenses in the first quarter.
The higher tax rate expectations for the full year are offset by lower share count expectations was allow us to maintain our full year EPS expectations outside of the impact from FX.
Finally, we are introducing guidance for the second quarter of 2022 on slide 16, we expect revenue of $1, one six to $1 two zero billion dollars adjusted.
EBITDA between $245 million and $275 million and adjusted EPS between <unk> 22 and 28.
On slide 17, we've provided further detail on the top line expectations for the second quarter at the midpoint of our revenue guidance for the second quarter. We are projecting a four percentage point decline at constant currency. Our initial guidance in February expected, a one percentage point of growth at constant currency with <unk>.
Portfolio of innovation growth of 3% offset by a two percentage point decline as a result of known headwinds primarily from the step down in contract manufacturing known competitive in generic pressures and the weakness in the China swine business year over year.
Since February the emerging macro pressures impacting our business in China, Ukraine, and Russia, along with the stock outs on our U S retail channel and quarter to quarter phasing in Aqua are expected to provide an incremental five percentage points of headwind in the quarter.
Additionally, as a reminder, the second quarter is our highest sales and marketing investment quarter as we ramp up our promotional spend for parasiticide business in the U S and Europe .
Finally on slide 18, I'd like to provide some additional context, our expectations for the second half of the year I wanted to comment our expected performance in the first six months of 2022 compared with the second six months, our implied second half guidance includes accelerating sales growth and accelerating profitability. We are confident in the second half.
Acceleration for several reasons the improvement of year over year unfavorable comparisons across many parts of our business including contract manufacturing.
The benefit of our pricing actions earlier in the year that will accelerate in the second half as.
As well as the increasing contribution from innovation.
And finally, the accelerated growth in China from the easing of Covid restrictions.
Additionally, supporting the profitability acceleration, we expect to continue capturing lower operating expenses year over year in the back half.
With that I'll hand, it back to Jeff for closing comments.
Thanks, Todd as we finish up and consider the pushes and pulls in our market I encourage us all to step back and put the world into perspective, the economic ripple effects in the personal toll of the war in Ukraine is significant we condemn the war and are working daily to support our colleagues customers and the health and the well being of animals.
Despite today's dynamic macro environment, the animal health industry, any link or well positioned for sustained value creation with continued positive industry trends.
We are off to a strong start in 2022 with another consistent quarter of delivery. We are confident in our outlook for the year as the <unk> team is executing with excellence on the factors in our control we are committed to delivering for our customers building on our improved operational efficiency and diligently.
Managing expenses, while investing in the future growth of the landfill I want to personally thank our <unk> colleagues for their extraordinary efforts and delivery. Thus far in 2022 with that I'll turn it over to Katie to moderate the Q&A. Thanks, Jeff we'd like to take questions from as many callers as possible. So we ask that you limit yourself.
One question and one follow up operator, please provide the instructions for the Q&A session and then we'll 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.
Our first question comes from the line of Erin Wright from Morgan Stanley . Your line is open.
Thank you so much for taking the questions just first on guidance. It does imply a meaningful ramp here in the second half.
What does it assume in terms of the supply chain headwinds, China, the broader geopolitical headwinds in the second half do you think even that its sufficient buffers in there and your expectations at this point and what is the high versus the low end of the range imply in terms of the.
Some of these headwinds persisting or are potentially getting better and then in terms of the long term targets and excluding D. S and have you changed your long term innovation contribution that you are thinking about here.
Do you continue to view that your long term gross margin and EBITDA margin targets are still intact at this point. Thanks.
Yes, sure Thanks, Erin Jonathan.
Chuck maybe you'll open with a little bit about about Q2 and setting the stage and then long term targets.
One was about CSM to and how that impacts the innovation, yes, maybe Todd I'll, let you take the latter part of that thanks, Eric for the question I'll start just.
Just given the kind.
Kind of summary of coming out of Q1 into Q2, Aaron I think another quarter of consistent delivery. This strategy is working we are committed to full year guidance in constant currency as we noted in our comments, 2% to 3% sales and then the EBITDA EPS. We're also committed to the 475 leverage and 120.
$160 million of innovation, I think whats coming out of Q1 and the drivers of growth. The fundamentals, we highlighted will prevail through the year. So we start there the focus brands.
Aqua and poultry are recovering and theyre kind of create acceleration as we go into even into the second quarter, but especially in the second half. The rest are all performing well, Chris <unk> and gala <unk> double digit growth internationally, you'll see the 6% growth. We continue to see a lot of affiliate's growing and that diversity durability is playing out a lot.
International.
As mentioned by Todd the 2% price, we put a lot of the price increases in play in Q1 that will accelerate especially as we go into the second half of the year and then innovation with experience always shield and <unk> franchise. So those are the fundamentals here and that we see as we go forward combined with margin you see.
The streamlined simpler organization, we've had one of the best quarters of execution you see it in the sequential Opex decline overall, what I want to just do is highlight and then we can go maybe a little bit to the detail with Todd is yes. In Q2 are in what we already had in width.
Contract manufacturing or $60 million of parasiticide competition.
China, China swine, while we've added here is the Aqua phasing a little bit of Q2 came into Q1, great strong salmon market a lot of demand for our product that was actually because theyre trying to take advantage of those prices.
And good profitability and drove a little demand from Q2 into Q1, Ukraine has added now for the rest of the year starting in the second quarter, China Lockdowns are impacting both pork and pat's, we're putting that into Q2, but we see it lessening in the second half and then the U S pet.
Pet held stock outs, primarily with products like advantage. It was paper and packaging. These issues impacted us in Q1, continuing a little bit in Q2, but we expect that we see we have this resolved it's not a supply chain active ingredient. This is more a sourcing and supply of packaging and we're <unk>.
Solving that and expect to have that resolved in Q2. So that will also be an accelerator. So when you point to the second half, it's the focus brands and international led by poultry and Aqua Some EU pet health improved comparisons as Todd said.
Rice increases that are already in play and continuing.
Our innovation and China Lockdowns lessening, so very clear we're committed our confident in this and I would end by saying, we're taking the same planning approach Erin that we've taken since our Investor day, our balanced approach. That's how we're looking at a Q2, but it's also how we're looking at the second half and that's what gives us the commitment what's given us really the delivery of the last <unk>.
Six quarters, so with that I don't know Todd if there is any any other specific thing that I've touched on.
Erin just to add.
Add on your one question of high versus low on that second half guide. We have made an assumption that China does reopen that pulls our pet health business, that's going to be more challenged in Q2 from the lockdowns that that improves in the second half again, we've all been watching COVID-19 across the globe over the last couple of years, we know there is high.
Spikes.
Comes back down and Thats, the one assumption to just call out there the other bit FX rates were of early may.
Roughly a 105 euro given that the big number.
Making a call on future of dollar strength or weakness, but rather just using those rates and so there's always volatility that will come on that and yes, and Todd maybe finish on.
The DSM announcement, and how thats impacting our innovation are not impacting our innovation assumption going forward.
Yes, Thanks for that reminder.
Sam we've assumed mid decade on that so no impact on our revenue expectations out to 2025.
The $600 million to $700 million of innovations sales still holds as part of that guidance.
Thanks Erin.
Next caller please.
Your next question comes from the line of Michael Riskin from Bank of America. Your line is open.
Great. Thanks for taking my question.
For the first one I wanted to touch on the rest of those specifically you had 6% growth.
So it's nice to see a return to positive growth in the quarter, but that is on a negative 10% comp from last year. So I think we'd hope to see a slightly bigger result.
Are you still seeing sort of some of the wind down from the really robust.
Numbers, you're putting up during COVID-19 or are you essentially seen any impact from customer demand as a result of the continued news flow around the restaurant.
The health concerns there.
What are your goals for the rest of this year and longer term and then for the follow up question on price just falling up on the previous point.
<unk>.
Price accounted for essentially all of the growth from the first quarter.
Youre planning on taking more are you assuming any volume growth in the second half and are you at all worried that the continued price increases could have a negative impact on volume demands from customers. Thanks.
Jeff you want to start with the Resto and then we'll go to price it Todd.
Yes, Michael Thank you great question no.
So resto it did return to growth in both the U S and international it's been balanced growth across the board. The lead indicators are giving us a lot of confidence on the lag indicators and I would say that it's meeting our expectations at this point in time.
And that would be globally as well a couple of comments I would make is we are investing heavily Michael and media advertising as I mentioned in my comments.
It's all about really more awareness more channels. It's now in the U S that channel for the first time and with our distributors and more geography and I think also I would note. This eight month caller. When you look at economics. This actually provides increasing value, which is even allowed us to take some price as well so one.
We look going forward, where this product is in a good place relative to awareness. It's growing I would also call out Bobby Modi has joined and leading as you know our U S. Pet health. He's brought a lot of experience in retail brand awareness really building on our current retail team omni channel and pricing so.
At this point in time, we see some resto.
Meeting, our expectations and a key driver for the rest of this year and longer term as we've said with more channels more awareness more geography, and lifecycle management, we see so resto with quite a long runway of growth maybe Todd do you want to pick up on the second question sure. Mike It's great to hear from you one thing to add on to Resto six person.
Rent growth is that reported dollars and so Q1 is the biggest quarter for <unk> in Europe , and so as you saw in the slides International Pet health grew 8% on a constant currency basis. So while we don't break it out at the product level for us but would have been.
Much faster on a constant currency basis with respect to your year over year comparable.
With respect to the question on volume as we look at our.
Yes price is going to continue to accelerate total sales are going to accelerate at constant currency in the back half.
A waterfall that we walked through there and with that there will be additional volume growth, China swine that had a big negative impact on volume as we would've expected and then as we look at the overall parasiticide competition in the U S. On those legacy brands advantaged, multi which is prescription product in the vet clinic.
<unk> can afford us all of those had volume challenge is offset by the pricing across the entire portfolio.
Thanks, we'll take the next caller.
Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Hi, good morning, Thanks for the questions.
On China, I think China was expected to contribute about 100 basis points to constant currency growth. This year I was just curious to get your updated expectations now I guess, maybe specifically how the headwind in the swine market has played out relative to your expectations and then on the pet health side are you expecting any recapture in.
In sales as those lockdowns ease and how should we think about that and what's assumed in the back half of the year and then if I could just a quick follow up on one of your earlier comments on the pet health stock outs. It sounds like they're primarily in advantage.
I guess is there a restocking impact that you're assuming.
Going forward as those as that support.
Hi constraints start to ease and do you feel like you can still have sufficient product on the market for the flea and tick season. This year. Thank you.
Thanks, Nate I'll, let Todd start off here with China, and then followed pet health.
Mike. Thank you for the question and give you how we're thinking about it today as we start.
The 1% growth in China overall is going to be a little lighter than that this year in constant currency because of the timing on things as we think about China swine. We originally planned for a quicker bounce back in the second half we've got a more gradual slope to that.
Now assumed and Thats part of the reason for the slightly slower growth in China overall with respect to the pet health business. We do expect that as the second half improves from a COVID-19 restriction base that will pull in catch up some of the phasing of pet health from Q2 out into the back half of the year, which is.
Driving some of the back half acceleration as we think about stock outs in the U S. Overall, we are going to have some impact there that's been baked in especially in Q2. The challenges we get product back and we certainly are there is there was a paper strike with workers in Finland, that's been <unk>.
All that's helping all of our supply chain constraints.
Timing issue. So we are going to have a little impact that's why we've got the Q2 down.
Again, as we look at full year, when you say well I view accelerate then Todd it's really about that poultry and aqua growth that continues to be very strong continued price.
Then those China restrictions.
So again overall.
Yes, some impact here in Q2, we've tried to be very transparent on how much that is but confidence that the back out recovers and get stronger to deliver on those second half constant currency numbers.
Thanks, we'll take the next caller.
Your next question comes from the line of Chris Scott from Jpmorgan. Your line is open.
Great. Thanks, very much just two from me on the pricing front, you've mentioned this 2% price increase in <unk> and that's going to accelerate in the second half can you just help quantify what we should be thinking about here. So is that to going to 345, I'm trying get a sense of just how much prices enabling.
The offset of some of these headwinds, particularly in it.
And the second is on the pipeline front I think in the slides you referenced two major milestones for late stage pipeline is that should we assume that means that you've got kind of a registration enabling data for those targeted 2022 blockbuster filings or just maybe just a little color on specifically, what those milestones where I guess, thanks very much.
Yeah, Thanks, Chris will start with Todd on on pricing and then go to Jeff on pipeline.
Chris we feel very good about the execution across the globe on price increases from our U S health business at retail in the vet clinic, where we still think we took a little less price in some of our competitors early on and so I think back to <unk> question I didn't answer yes, we're not expecting the price.
To negatively impact volume at all for those reasons on our relative value proposition second half again, we do expect that to accelerate we're not going from 2% to 5%, Chris but it is going to be a stepped up improvement from the 2%. We saw in Q1, and then I'll turn it back to Jeff for the pipeline, yes, Chris. Thank you.
Just a few comments on innovation to put things in context of what I think is most important for you to understand.
One a very productive Q1 in R&D overall, Ellen and her team.
Five of the seven key approvals already and yes, we did want to note that two major milestones for competitive reasons, we won't get into specific details, but one on the derm asset one on the para all of this driving as you look at it driving ourselves closer to approvals in the marketplace whether that's.
A mix of timing as when speed as well as probability so key key milestones.
It kind of step back also in just emphasize we're building. This next era of growth and innovation and this progress gives us excitement about that.
These are differentiated assets, we do have a late stage pipeline as you know Chris that's heavier based on pet health blockbusters that are differentiated and these milestones are just closer steps to move US there I would also emphasize that bringing both there and it's just another contribution.
That will be probably more mid decade, but it will be another product thats going to have potential in excess of $200 million and be something that's been a very differentiated position really starting a new marketplace. So that's the update and again overall the innovation team is operating at an extremely high level right now.
Thanks, we'll take the next question please.
Our next question comes from the line of <unk> <unk> from Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question.
So to your point, if price goes from 2% to let's say sub 5% call it 3% to 4% and stock outs are no longer an issue.
<unk> paper and packaging and supply disruptions over <unk>.
<unk> in a position to make to meet full year guidance of China Lockdowns do drag on in Russia, Ukraine challenges do continue and also if you could remind us where is the channel inventory in <unk> versus where it was in <unk> and how do you expect that to change for the balance of the year.
Sure.
As we start with that question thinking about the China, Yes, we feel like we are.
Hit our numbers now again, where we fall within our range is really what is driven by the China expectations as we've called out right. We are assuming that picks up if it doesn't pick up alright, then there are going to be some sales maybe who is one of the things that offset because it's a very dynamic world at the moment and things do.
Change, but we feel good about our overall guidance would understand that assumption on China. So again, hopefully that addressed is kind of where are you asking on with respect to the range channel inventory was consistent coming out of Q4, we've been consistent on our inventory with our distribution partners around the world.
At the end of Q2 of 2020 that Hasnt changed and we don't expect a change on that going forward either.
I'd just build on <unk> point, I think youre looking at the right way Theres, an aggregate of pushes and pulls.
Some that I would note on the push as well positive is the poultry and Aqua markets as we've been noting are rebounding and definitely driving growth and we see them persisting that that will be another underlying fundamental and as we mentioned in our comments.
<unk> pet health is doing extremely well <unk> at the advantage family. So I think when we look at the aggregate we feel very good about it no question the lessening of Lockdowns as an assumption, but it is something that we could weather within the range if.
With some of these other fundamentals in aggregate. So again commitment to this overall full year guidance because of the mix that we have going into the second half.
But one thing you'd also asked about Uber, we have assumed that the Ukraine, and Russia situation negatively impacts us for the rest of 2022, so that isn't something that we expect it to affect the range on guidance.
Thanks, we'll take the next question.
Your next question comes from the line of Elliot Wilbur from Raymond James Your line is open.
Hi, guys. This is actually Michael corollary umbrella, thanks for taking my questions.
So first one I guess.
Might have mentioned this apologies if I missed it but just with the headwinds on the legacy parasiticide for the quarter.
If you could just talk about how these stacked up against full year expectations or are they relatively in line with.
With how you guys were previously looking at those and then second one for me.
The DSM deal.
Just any details on regulatory submission approval timelines.
Anything that we could look forward there on the regulatory pipeline front just to kind of the.
The progression and how things are done thank you.
Great. Thanks, I'll turn it to Jeff for both of those yes, Michael. Thank you for the question on the Parasiticide front, let me be very clear we still expect.
The full year impact to be roughly $60 million is introduced in our initial guidance. That's what's in our guidance, we're staying to that expectation being being the brands being impacted <unk> can afford us little bit of advantage Malta as well I think those are the key drivers balanced by as we've said holistically.
We're seeing nice growth in international <unk>, plus advocate, China, So resto in several international markets and look in the U S against the resto.
<unk> and interceptor, plus our combined we have a very competitive portfolio with those two and some nice growth actually in <unk>. So <unk> is actually the fastest growing and if you look at that first generation <unk> class. It's the fastest growing brand inside that class right now so our parasiticide.
<unk> strategy overall U S and globally is tracking with our expectations.
Relative to both they're just at the highest level again excited about this alliance coming together with DSM think two companies that see livestock sustainability globally in a big way so theres a lot with the partnership and it aligns with our strategy. We are working diligently with the regulatory bodies again. This is an <unk>.
<unk> already in Europe , and Brazil, and Chile, and Australia. So every major continent with cattle has already approved this product and we will be working diligently already started with the FDA looking at.
The most appropriate and fastest path to market as this with reducing methane, 30% in dairy and 50% and beef. This can be one of the biggest contributors. This decade to cooling the climate. We're excited about that so more to come as we work with the regulatory body on until there.
Thanks, we'll take the next question.
Our next question comes from the line of Jon Block from Stifel. Your line is open.
Great. Thanks, guys good morning.
So the first one might be for you. The 2022 gross margin guidance to 57% to 50% from last quarter I think I've got that correct is that still intact or.
Anything on the cadence throughout the year that you want to talk about and then what about the thoughts of 60% in 2023 is that still intact start thinking about next year and then maybe the follow up Jeff One for you just on Gallup, we'd love to get your thoughts about that franchise not necessarily today, but just over the next 12 months to 24 months, obviously there is a.
Kenai Mad competitor and I know they've done a really good job of expanding the market, but are you seeing any sort of slowdown in the rate of Gallo Gallo growth call. It in Europe without competing product is currently more readily available. Thanks for your time guys.
Great, Yes, let's start with Todd on gross margin and then Jeff on Calpine.
Thanks, John as we look at gross margin. This year, you were not changing our full year guidance on that front. The team is really doing a nice job of continuing to drive productivity across the footprint and we're seeing pickups from a lot of the API procurement initiatives we've done.
Three years ago that now flow through the P&L today, I think you'll see a bigger pick up in the back half of the year just based on continued improvements on that plus accelerating price is a positive on the gross margin front with respect to the guidance.
<unk> is a 60% next year, we feel great about the execution, we're doing in the face of significant inflation were up well over $100 million relative to when we set that initial target for our gross margin and if not for that we'd be.
Up against that door to 60% here in 2022, so a lot of time you have to play as we view it but.
Really excited by the work our team is doing on this front on a global basis to continue to drive productivity.
And deal with lots of procurement challenges supply chain challenges, but overall, we feel good about where we are in the execution front and look forward to continuing to March forward from here.
John relative to Gallup ran thanks for the question here is how we're looking at Gallup Grant first AIT grew globally in the quarter led by strength in the U S. So and it is expected to grow double digit in 2022.
It is meeting our expectations, we see a medium long term runway here for continued growth just like our <unk> brand.
There are some differences between the U S and EU with Gallup, France, we have a more expansive label in the U S and a larger pain portfolio in the U S and it's been in the U S longer so we're doing some things.
Catching up and doing some things in.
EU to actually build off from our U S learnings.
Do think as you step back and look at US we're seeing Gallup ran as a focused brand now with strong double digit growth going forward.
But also building a pain portfolio, we think pain is the third largest market and Pat and if you look at innovation that's come in EU grew.
Market, 36% in 2021, so I think an example of more solutions will grow. This just like we've seen in parasiticide and derm. So we're introducing <unk> with no seta answer or to really look at OE and surgical pain leadership.
Something that we as we go forward. So again <unk> meeting our expectations continued growth some differences between.
Europe and the U S and we think it's a differentiated offer even compared to the innovation thats coming into the market.
Thanks, we'll take the next question.
Our next question comes from the line of <unk> Prasad from Barclays. Your line is open.
Hi, good morning, and thanks for questions.
Two from my side Firstly.
Firstly, it's been awhile since you acquired can drag can you give an update on some of the pipeline from their side, which is in late stage.
Especially looking at the bottom of last mob on the IL 30, Admob and what the update from you on what change anyway.
Secondly.
Getting to the companion animal side in Paterson size, clearly seeing some pressure there.
One of the reasons for you to acquire better measure there was the only kind of positioning and I thought that should have helped you will be relatively more recently, Ed don't seem to see that in the numbers. So could you give an update on how the channel positioning.
Helps you or not with you haven't had it as.
The trends that you're seeing thanks.
Yes, Jeff do you want to start on kindred, yeah. So I think blahsy. Thank you for the question first of all the assets are.
Progressing nicely, we've integrated them into <unk> R&D organization, bringing in the expertise also the monoclonal antibody manufacturing that also came with the assets. So overall, it's it's doing very well, we're expecting on parvo again complexities with.
Everything from regulatory manufacturing and commercializing, but again currently right now it's our expectation, we'll be bringing the power of <unk> to the market.
Later this year and then the three Durham assets, we're continuing to integrate progress.
As rapidly as possible as well as even be looking at the synergies with assets that we have in our current pipeline. So again tracking to our value propositions that we have differentiated assets and really bringing a monoclonal antibody capability and Dewey langkow at another level.
And then on the <unk>.
I'll start with just the channel and OTC I'm sorry.
The Omnichannel and OTC.
So honestly I think we always want to look at this market as a $5 billion plus market globally, and we are reviewing actually and have reviewed with our board just Bayer overall would tell you we're seeing a lot of synergy on the sales side. We're looking at a lot of capability synergy overall and examples of that that I would point to to say if you look at China.
We've significantly increased across Asia, our pet health capabilities because of our brand like advocate we have the next era of growth coming with terrestrial so international doing very well at large affiliates in Europe from <unk> combined with the portfolio and affiliates from Bayer have.
This will be a growth accelerator in the second half as pet health in Europe . As an example, so especially on the retail side, we're actually leveraging the brands. So advantage XD is often the landfill assets. So that's another area of synergy overall, so we are right now actually exceeding our expectations relative to our business case and a lot of.
That is in the pet health international retail and brand side.
We anticipated the competition $75 million last year $60 million. This year on para that's mostly against the legacy land co brands with maybe one exception and that's advantaged multi which played out a little bit this quarter.
Thanks, we'll take the next question.
Your next question comes from the line of Steve Scala from Cowen Your line is open.
The Q1, SG&A and R&D numbers were the lowest in five quarters I. Appreciate there are many moving parts, which you've very nicely reviewed.
And that <unk> has aggressive cost control initiatives underway as well, but are those number sustainable in absolute terms and if not.
SG&A or R&D more sustainable at the Q1 level than the other for instance.
And then secondly, if I might ask the company has been consistent in saying it is differentiation and it's determined parasiticide pipeline opportunities with <unk>.
The efficiencies do you see in the currently marketed products, where there could be opportunities to improve thank you.
How do you want to start on the Opex numbers, and then well go to Jeff.
Sure. Thanks for the question Steve.
As we look at overall execution across Alanco. The team is very focused on continuing to deliver and think about how to take costs down while doing that and you see that in even just a 5% sequential improvement from Q4 of this past year to Q1 of this year it will be a step.
Up in Q2 tried to call that out in my prepared remarks, but just a reminder, it is the time when we run the more TV ads and really publicize our parasiticide business during the season in both the U S and Europe . So on a sequential basis. It will be a step up in Q2 versus Q1, but then dropping back down.
In Q3 and Q4.
We're also getting a little tailwind the strong dollar negatively impacts our top line, but it does provide a benefit on the SG&A as we called out two percentage point pick up in Q1. So overall, we do feel this is sustainable the R&D team is very focused and across the board. We're looking at different ways to continue to drive value.
From an Opex standpoint, and then I'll flip it over to Jeff.
Yes, Steve relative to the differentiation you know when you look at these big classes. It usually falls into three categories. One is the efficacy and the second is just the whole ease of use of administration and then let last is the label and safety I mean, I would say everything can kind of fall into those three categories that leads to a value proposition than the commercial.
You'll approach could be another way to differentiate relative to to channel marketing.
Overall, our overall approach to different segments of the marketplace.
I think we've got one more question in the queue. So we'll take that now.
Your final question comes from the line of Christine range from William Blair. Your line is open.
And then we'll start taking my questions My first one.
Your product approvals.
So you mentioned it.
A lot of those received five product approvals since the beginning of the year local.
And then.
We expect at least seven.
2022.
So can you kind of talk about the higher generic approvals.
Ladies and approval or the upside of that potential.
Besides blockbuster.
And my second question is just on your sustainability product.
Stock, specifically and initiatives there you have it.
Experian.
On the line, obviously that ammonia and methane, but kind of what happened.
Hi.
And in terms of sustainability.
Thanks.
Yes. Thanks.
Jeff you want to take the first question on approvals and then sustainability I think portfolio as well, yes. Christine. So these are portfolio enhancing approvals I would note that.
The one that we're working on the most of the field right now that I would note is <unk>, which is a pain product.
And that will go into our feline pain portfolio.
Vantage XD is also another product that will be coming that it's got an approval and again take state approvals with EPA side note those and Theres a couple of others that we consider approvals in major markets that have bigger opportunities.
<unk> franchise continues to get approvals around the world as well.
My comment on livestock sustainability is a.
A few things here that I think are absolutely critical as you start to think about livestock sustainability as we see today this being the number one challenge that our livestock producers have especially in major markets with ESG growing as well as even consumers one of the top reasons that can.
<unk> today.
We'll continue to consume or be challenged to continue to consume is the impact that animals have on the environment. We're finding one out of three.
If consumers approximately today that are backing off are not eating beef, it's because of the impact on the environment not necessarily the diet. So this is going right into a space of need as you know we have got the first FDA product approved experience. That's been received very well as people look at that sustainability value proposition.
And the second is we're really looking at how we can help the producer track that's going to be the most important thing is the producers benchmark of data and that's the launching of up look a database that can help producers understand their footprint in the levers to reduce it and then lastly, as people ask about value the carbon market will be key.
And Thats some of the investment we made in a company called APN company, we've spun out that will actually help sophisticate the carbon market in aggregate certify and monetize carbon credits. So the excitement we're seeing in the movement, we've seen with experience with the value added tools one of the reasons DSM came to the U S.
The largest cattle market and selected a landfill or these capabilities was the connection we have we see this market globally, one to 2 billion methane reduction and again, we see the entire value chain from the retailers back to the Packers and the producers all engaging at another level and bowl there will.
Be transformational in this space and we see Washington very interested of course is this is a big part of the Biden administration's agenda and look forward to working with them closely so thank you.
Alright, thanks for all the questions today ill, let Jeff close here.
Thank you everybody. Thanks for a great a great dialog here and the great questions.
<unk> delivered another consistent quarter at the top end of our guidance range, we're off to a great start for the year, we're confident in our guidance for the year updating our key metrics to reflect the current foreign exchange rate environment, and importantly, maintaining our constant currency.
Revenue growth of 2% to 3% our innovation very importantly is progressing and we remain diligently focused on executing our plans and these increasingly volatile times. Thank you for your interest in <unk> and your time have a great day to day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yeah.
Yeah.