Q3 2022 Elanco Animal Health Inc Earnings Call
Any approval before year end with our U S pet health team preparing for an early 2023 launch.
Moving to our parvovirus treatments.
The linker and the USDA recently agreed to focus on conditional approval to expedite product availability in the market confirming the significant unmet customer needs to address this deadly disease and puppies and dogs.
Expect a conditional federal approval late this year or in early 2023.
The U S launch planned in the first half of next year. After state approvals are completed given the unmet needs the unique value proposition and opportunity for expansion into international markets. We believe this product could be a global blockbuster.
The puzzle virus treatment is elenchus first monoclonal antibody have there'll be internally manufactured.
This facility is also expected to manufacture our future monoclonal antibody products, including the IL 31 for dermatology.
Strongly believe in the significant potential for monoclonal antibodies in animal house, given their specificity and selectivity and we will continue to build out and enhance this platform across an ankle.
Turning now to our three key late stage development products in parasiticide and dermatology.
First he passed with the sites I am pleased to share that we have initiated the submission of our combination flea tick heartworm and other intestinal parasites prevention product to the FDA.
They expect a product will demonstrate positive differentiation compared to the combination in deco parasiticide products available already on the market today.
In dermatology we play.
And to initiate submission to the FDA for our JAK inhibitor before the end of this year, we expect the product to demonstrate positive differentiation compared to the current market incumbent. Additionally.
Additionally, we are pleased with the progression of our other dermatology asset IL 31 short acting our second monoclonal antibody and we expect to initiate its submission to the USDA and the first half of 2023.
We believe the parasiticide in both dermatology products, our blockbuster potential innovations theres a path towards approval in the U S. By the first half of 2024.
In addition to our focused development projects, we are advancing our innovation efforts in the over the counter use pet health market with investments in lifecycle management for our key brands.
Worked closely with our commercial colleagues to identify opportunities that leverage the strong advantage brand name and see many of the fresh opportunities to further drive value.
Advantage XD extended duration spot on product for cats launched in October .
We expect the approval for at least three additional OTC products across the rest of Europe in 2023, expanding our reach to new customer segments interested in convenience and value as we leverage our regulatory brand and channel strength in over the counter markets globally.
Innovative new treatments and differentiation in established bases are key to the value proposition, we deliver to veterinarians and pet owners, we have a strong pipeline and a capable focused team, which I believe will fuel language next era of growth in both <unk> and farm animal.
Look forward to sharing continued updates on the progress of our pipeline.
And with that I will hand, it over to Todd. Thank you Ellen and good morning, everyone.
Today I'll focus my comments on our third quarter adjusted measures. 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 we delivered $1.0 billion to $8 billion in revenue a 9% decline were 4% decline in constant currency with 3% growth in price foreign exchange rates represented a headwind of $61 million in the quarter were 5% in line with our expectations in August .
Guidance.
Slide 10 breaks down our revenue performance by species and slide 11 provides revenue by region in the quarter.
For pet health, we declined 7% in constant currency for the quarter with volume declines in our parasiticide portfolio, partially offset by 4% price growth and growth in our pain portfolio.
U S business declined 8% compared to last year, primarily due to competitive and overall retail channel pressure.
Our international business declined 5% in constant currency, primarily driven by the economic slowdown in Europe .
While the overall, 7% decline in constant currency was in line with our second quarter performance. It was significantly lower than our August expectations of approximately flat globally year over year for the quarter.
The underperformance to our guidance was driven by the accelerating global macro driven impacts from the economic slowdown in Europe , and the continuation of restrictions in China as well as macro pressures impacting the U S retail channel.
In the third quarter as Dan's family of products, and <unk> declined, 13% and 14% in constant currency, respectively, or $15 million and $8 million.
In the U S available market data shows the OTC retail market down to the parasiticide overall.
We believe there are three key trends driving this.
Economic driven consumer behavior, moving from prevention to treatment and to lower cost options retailer inventory management across categories and broader competition from prescription options.
Outside the U S. We believe the year over year decline is driven by the economic slowdown that has emerged primarily in Europe from higher energy cost and consumer inflation.
On a constant currency basis, we expect stabilization going into 2023 for both terrestrial and the advantage family driven by price improvement return of supply from the paper and packaging issues. We remediated earlier this year opportunities for expanded physical availability and introduction of the innovations like advance.
XD for Cats, we will continue to monitor and respond to the macro dynamics in these important markets.
While the pet retail market is experiencing pressure, we believe meeting customers, where they want to shop with effective products at multiple price points provides us opportunity for long term growth and profitability to complement our core business and vet clinics.
Our best estimates suggest the manufacturer sales into U S retail for OTC products. It was about a $1 billion market annually, which is approximately 25% of the total U S parasiticide market.
In the U S and globally, we expect prescription products to remain the largest part of our overall pet health portfolio with <unk> over time from the products Ellen mentioned earlier.
On a year to date basis, the global Pet health business declined 4% in constant currency and while the parasiticide business remains challenged overall, the global <unk> franchise across dog cat and crude oil plus grew 16% our pain portfolio grew 11% year to date, driven by Gallup ran dispensing outgrowing the.
A market in the U S in combination with <unk> continued strong launch.
For the quarter, our farm animal business was flat at constant currency with 3% price growth increased demand for poultry products and strengthen the aqua portfolio was offset by supply constraints for certain cattle vaccines in the U S and the continued decline in swine in Asia.
Both our U S and international farm animal business was flat in the quarter.
Overall ruminants outperformed our expectations, primarily driven by <unk> and cattle and a continued strong season for sheep in Australia.
Poultry and Aqua also outperformed expectations on a constant currency basis, helping to offset continued challenges in swine in Asia.
On a year to date basis <unk> global fundamental business grew 1% in constant currency with growth in poultry Aqua in cattle and swine, partially offset by the double digit decline in international swine primarily in Asia.
Overall and farm animal globally, linker was holding or gaining market share in line with our expectations.
Our innovation sales continues to track towards our August expectations of between $100 million and $130 million for the full year.
<unk> sales more than doubled sequentially in the third quarter compared with the second and all leading metrics related to the commercial uptake reorder rates and customer negotiations remain positive.
Slide 12 further summarizes our financial performance third quarter.
In line with the decrease in reported sales gross margin declined 160 basis points to 54, 1%, primarily driven by inflation in input costs freight and conversion costs and unfavorable product mix. These were partially offset by productivity efforts across our manufacturing footprint and improved price.
Operating expenses for the quarter were $376 million, a reduction of 14% year over year were $60 million the impact of FX on expenses was approximately $20 million favorable in the third quarter or a 5% benefit year over year.
Our R&D spend continues to be in a reasonably tight range of about $80 million per quarter. This year.
With respect to SG&A, we are pleased with the productivity mindset demonstrated by our team of synergies integration and restructuring actions continued to deliver above expectations. Our execution on the integration of the legacy Bayer animal health business into a <unk>, one ERP system business processes and shared service centers is progressing well.
And we accelerated the timing of our go live too early in the second quarter of 2023 from the middle of the year.
Adjusted interest expense was $58 million in the quarter a year over year decline of $2 million. The sequential increase from the second quarter of this year was $8 million driven by higher interest rates on our floating rate debt I will provide more details on the debt portfolio in a few moments.
Yes.
The non-GAAP effective tax rate was 16, 7% for the quarter lower than our expectations, resulting from multiple discrete benefits in the quarter. We now expect our full year non-GAAP effective tax rate to be between 23 and 24%.
Adjusted net income was $96 million and adjusted EPS was <unk> 20 for the quarter.
$3 million increase in our adjusted net income was driven by the execution of our productivity agenda more than offsetting the negative impact of a lower top line and stronger dollar as you move down the income statement plus the lower tax rate as a reminder, approximately 25% of the $61 million in <unk>.
Topline foreign exchange headwinds in the quarter or approximately $15 million falls through to impact net income.
Adjusted EBITDA was $205 million in the quarter or about $10 million better than the midpoint of our guidance with margin expansion of 120 basis points.
In the third quarter, our productivity initiatives across Alanco helped our adjusted EBITDA declined just 3%. Despite a 9% decline in reported sales and a 12% decline in gross profit.
Gross profit declined more than sales as a result of the unfavorable revenue mix from the lower pet health sales and higher inflation that we faced over the last year on cost of goods sold.
We believe in place and has stabilized in the third quarter and we continue to expect it to be in line with the $140 million we shared in August .
Now, let's transition to our updated outlook for 2022 on slide 14.
As part of our guidance in August we expected the fourth quarter would represent a reversal of the constant currency sales declined from the last two quarters. However, because of the worsening macro environmental factors impacting Europe, and our U S. Pet health retail business continued COVID-19 lockdowns in China, and the strength of the U S. Dollar we are reducing our full year.
Our revenue guidance by approximately $100 million.
The bridge from the August guidance can be found on slide 15, but let me provide context on the pressures that have intensified.
In Europe , our business increased 1% in the first half of 2022, but declined 9% in the third quarter as a result of the economic slowdown in the region.
We have seen similar sellout data across the pet health market in several of our top countries in the region generally in line with a linker as results.
In August we expected China declined 1% for the full year.
However, despite a deceleration of the decline of the swine business in the third quarter compared to the first half of the year.
<unk> COVID-19, Lockdowns and protein producer profitability pressures are impacting our China business more than our August expectations in the second half.
He has to update our outlook for China to be a 16% to 18% decline for the full year.
Finally in the U S flea and tick over the counter retail channels available data shows the market overall has experienced an accelerated decline year over year in the third quarter as consumers have reduced basket sizes and shifted to lower cost treatment options.
The rest of our assumptions from our August guidance update remain largely intact for the full year. We now expect revenue to be between $4 385, and $4 43 billion.
Reflecting an expected 3% constant currency decline year over year at the midpoint.
The bridge to 2021 can be found on slide 23.
As you can see from the bridge on Slide 16, we now expect adjusted EBITDA to be between 1.01 billion and 1.0, $4 5 billion for 2022 or approximately a $53 million reduction from the midpoint of the range from our August guidance.
The stronger U S dollar drives approximately $6 million of the reduction while the rest of the reduction is the net of our third quarter over achievement offset with the gross margin drop through from lower expected fourth quarter revenue and operating expense favorability.
We now expect adjusted diluted EPS of $1 <unk>.
$2 seven for 2022, which is a 6% reduction compared to the midpoint of the range from our August guidance the.
The stronger U S. Dollar is driving approximately one third of the reduction while the other five.
Driven by the sales reduction, partially offset by a small amount of productivity and the operational over achievement in the third quarter.
Our fourth quarter guidance as detailed on slide 17.
Finally, we expect to file our 10-Q in the coming days, but let's move to the cash flow and balance sheet metrics on slide 19.
In the third quarter, our operating cash flow was $189 million, reflecting the lower reported net loss in the quarter year over year and the benefit of the net $73 million from a cash interest rate swap settlement.
Swap settlement provides a cash benefit in the third quarter that will create a headwind in operating cash flow over the next four years as this cash acceleration reverses.
The volatility in interest rates in both the second and third quarters allowed us to take advantage of our floating to fixed interest rates swaps being in the money to restructure the swaps and accelerate the cash benefit of the financial position, which allowed for greater debt pay down in the third quarter.
Excluding the swap benefit operating cash increased $27 million over the third quarter of 2021.
We ended the quarter with $5 five $1 billion of net debt a reduction of $121 million compared to the second quarter of 2022, our net debt to adjusted EBITDA ratio at the end of the third quarter was five two times.
On slide 20, you can find detail on our current debt profile and interest rate swap positions on debt paydown, reducing debt is expected to remain our primary capital allocation priority. This year, we expect to repay approximately $500 million to $525 million in gross debt and improve our net debt position by approximately 350 million.
Our net leverage is expected to be five two to five three times at the end of this year down from five five times adjusted EBITDA at the end of 2021.
The impact of the stronger dollar has reduced our net cash balance by $49 million compared to the year end 2021.
In 2023, we have roughly $400 million in debt maturities with limited additional obligations until 2027, we remain confident in the durability and cash generation of the business and our ability to continue to reduce debt and meet our obligations with that I'll hand, it back to Jeff.
Thanks, Todd <unk> relentless focus on the key controllable aspects of our business is evident in our productivity improved contribution from pricing and operating expense control, allowing us to guide to expanding EBITDA margins and additional debt pay down for the full year.
We are advancing our pipeline accelerating our systems integration and holding market share in line with our expectations.
All of these <unk> up for the next era of innovation and growth.
As we look to 2023 I want to provide our early considerations on slide 21.
The macro environment across the world continues to be uncertain.
With likely continued pressure in Europe , and U S. Pat retail markets, a competitive marketplace, increasing interest rates and volatile foreign currency markets.
Offsetting these headwinds <unk> ability to reach the world's animals and competitive portfolio are well positioned we are holding share in line with our expectations and expect to see improvement align with global macro conditions.
Second we see stabilization as we continue to capture value from pricing actions tailwind from more consistent supply and our market position in China sets us up well for when Covid related pressures subside.
Third as you heard from Alan we are making great strides in advancing our pipeline. We expect to continue to ramp the launch of innovative products like Xperia Z erbium and advantage XD for cats, while expecting to introduce Baxter cat, our parvovirus treatment and several other over the counter and prescription portfolio.
Enhancing innovations.
We believe there is a path as well to have five potential blockbuster products approved between now and the first half of 2024 experience, our parvovirus product globally broad spectrum, parasiticide, and JAK inhibitor and IL 31 dermatology products.
Fourth our continued productivity efforts and the expected decrease in inflationary pressures on our manufacturing costs as well as our systems integration will be important for our continued margin expansion efforts.
And finally next year the organization will prepare for the expected launches of our late stage pet health blockbusters in the industry's largest markets U S. Parasiticide and dermatology, we will achieve this by making the right investments in R&D manufacturing and our systems and in our launch capabilities.
<unk>.
The <unk> team is focused on controlling the controllable advair.
Advancing our capabilities in manufacturing marketing and sales execution, while delivering new products from our pipeline.
This team is embracing the opportunities in front of us and looking forward to this next era of growth.
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 to 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.
Your first question comes from the line of Mike Harrison from Bank of America. Your line is open.
Great. Thanks.
Thanks, Jeff.
For my first question I want to talk about just the core portfolio in the third quarter and for the year specifically.
Commenting that you are holding share and youre not seeing any significant share losses. The majority of the fiscal year guide reduction is tied to macro conditions are all over the country at the macro environment and yet we're just we're not seeing the same magnitude of those economic impact on some of your peers that reported both private and public.
So is there possibility here that you're just seeing a pretty significant share shift from OTC to prescription into the vet clinic, given thats, where some of the competing products are launching because in that case, that's not necessarily going to reverse as the economy gets better just more about what's going on in the parasiticide space.
Like your comments on maintaining share versus where you could be seeing share losses, but appreciate the color there.
Yes, Thanks, Mike It's the right. That's the right question and we spent a lot of time analyzing this and what what we would emphasize is share in line with.
Our expectation, let me, let me share a little bit at a high level again, we see the worsening environmental or economic conditions in the EU and pet retail contributing to this as well as the worsening conditions relative to our expectations in China and the Lockdowns. So when you break those down that's where we're seeing.
The lost sales.
We're not seeing a lot sales as you look at markets like U S farm animal when you look at pad pain.
When you look at even just the overall biological pet vaccine market.
We are holding or growing share there on a relative.
Sales basis.
Just a couple of metrics that we're looking at first of all in the EU.
When we look at actually sell out data, which has all industry data in it we see the declines were very consistent with the industry declines country by country across from Europe , and so when we look at that there is no question.
We see the consistency of us versus our competition in that category and then as you look at retail the same thing as we analyze both the data on in store as well as E. Commerce. Those declines are very consistent competitors versus ourselves. So when you look at that.
The dollar decline that we're noting in this guide and the worsening it's in those categories and China. The Lockdowns, we expected to lessen and improve and they actually we had 60 plus cities in China in that August September window actually continue they worsened so the improvement we were expecting.
Did not come.
Again, we're going to watch share closely but as a whole we continue as we compare to our competitors continue to see ourselves.
Holding share in the other markets relative to our expectations.
Thanks, Mike did you have a follow up.
Yes, yes, sorry.
Wanted to go on at a time.
Thank you appreciate that sort of a follow up on the approval timing for the parasiticide great to see that you have that regulatory submission, but you keep talking about 12 months to 18 months for the approval process and kind of give some more comments can you talk about early 'twenty four approval multiple other companies in recent months and quarters have had delays in terms of approvals. So we're just.
Wondering as you think through that 12 to 18 month timeframe, how much confidence does that what's the confidence that it will be within 12 to 18 months versus 18 to 20 or 18 to 24.
Will you be able to provide updates on that as that progresses, how much visibility we have into that and also your comments on these products being differentiated you've continued to emphasize that again.
Again any color you can give on how they'll be differentiated this is jack.
Jack and the broad spectrum that'd be appreciated thanks.
Yes good.
With Alan on the timeline and kind of how we think about differentiation.
Thanks for your question.
I'm excited to share with you.
We have seen.
The broader R&D organization.
Okay, Great pipeline, we are building a great organization.
And as you have seen from the results yet in the call.
We also are making great progress in one of the project.
Indeed.
We expect that.
We are excited about the data.
Yeah, so far.
On the first submission.
And the FDA.
And as you know.
So in general.
For 18 months before we have any final.
From the FDA for innovation.
Based on our experience and based on the data we have generated three R&D confidence.
Paul wants to get vehicles over the first half of 2020 for dish.
Yes.
Okay.
And then maybe on differentiation and how we think about that here we go.
Yeah, that's all really important question so thanks for that.
You heard me talk about differentiation.
Hi.
Ken I was wrong.
Yes.
So overall.
It's actually treat the disease.
The second is the safety board.
Yes.
Convenient.
Okay.
Okay.
So those are all elements you can differentiate and bring something new that is not yet available.
Exactly.
Focusing our innovation and more.
Our focus on best in class or first in class and we are quite excited that all of us in the garage.
In the JAK inhibitor.
And also the differentiation versus products already in the market.
Thanks, Alan will take a question from the next caller.
Your next question comes from the line of Erin Wright from Morgan Stanley . Your line is open.
Great. Thanks for taking my question, so given the varying progress we've seen with certain product launches what the reasonable timeframe.
Get hit blockbuster status here for your upcoming Parasiticide, it's about the time line changing and have you ramped up from a manufacturing perspective.
What are incremental investments that you need to make on that front and just on the on the JAK inhibitor. Erik do you anticipate you'll be second or third to market in that space.
And then just lastly on the retail side you guys had house.
How is the new retail strategy working out relative to your internal expectations, you gave us global numbers for advantage interactive, but presumably the U S and prepared differently and how much of that is macro versus supply chain versus any retail strategy. Thanks.
Good Alright, Jeff, let's start with you here progress on.
The ramp for as we're thinking about for the potential blockbusters, and then and then the Jac timing.
Yeah. Thanks, Erinn great questions excited about.
<unk> launch as.
As well as the broad spectrum parasiticide.
Jeremy as you know this is a growing big market. It will be primarily all accretive to <unk>. We do have positive differentiation and we will have a portfolio coming both in.
The IL 31 short acting and the Jack as well as <unk>.
Future pipeline to follow so we're excited about that listen you can you can be assured that we will be and expect to be launch ready by the end of 2023, and we're looking at that in a multitude of dimensions first on manufacturing.
Got the manufacturing plan in place and that is working.
And coming together supply chain and marketing and selling as you know in the U S. We really even as we look at launching <unk> right. Now we are using digital we're making sure share of voice is right, we're going to follow that with <unk> and now the first <unk> inhibitor. So those same capabilities are really starting to build a must.
So we'll be ramping those capabilities to be ready by the end of the year in 2023, so that we can we believe.
Take it take significant share and it'll be tied to those capabilities it'll be tied to the differentiation.
And of course.
The investment as we as we entered the market so thats our expectation.
And again on the timing.
<unk>.
Ed the FDA 12 to 18 months, the USDA shorter than that so.
We see again both of these compounds a path to the first half of 2024, and we will stay there at this point in time look on at retail what I.
I would share is that we come back to some of the messages, we conveyed early and Bayer, reaching pet owners, where they want to shop and data like it's today or in our U S. Pet health business about a third of it is retail so theres a balance this is an and not an or.
We've got still a third of pet owners not going to the veterinarian and we have that convenience factor is higher post COVID-19 than ever. So we see what we're doing in pet retail air and very importantly, and I would say significantly more today than when we bought it from bear as we brought in more expertise.
We are working our value and our pricing at another level. We are as Bobby Modi has come in physical availability more stores more shelves more channels, that's increasing significantly and now what's introduced on this call as proof points that Alan has brought another dimension in and we did.
<unk> now in OTC outside of that innovation engine, we're bringing advantage XD and <unk> product with a bare brand and then we're combining it bringing three additional OTC products. This this next year between Europe and the U S. So between innovation marketing channel expertise, yes were hit.
Right now in the short term by a cycle, but we see in the medium and long term this plane nicely with all of our vet launches that we're expecting.
Alright, Thanks, we'll take the next caller.
Yeah.
Our next question comes from the line of Chris Scott from JP Morgan Your line is open.
Hi, This is a catarina on for Chris. Thank you so much for taking our questions. So the first is on the macroeconomic environment can you elaborate a bit on any notable differences when it comes to pet owner demand across geographies, how different are the dynamics that youre seeing in Europe , which you've highlighted are a little bit difficult comparing to what youre seeing in Latam and Asia.
In other regions, how does that compare to the U S.
And then my other question is on supply chain. It seems like this is a topic that has come into greater focus this quarter for the industry can you just elaborate a little bit of what youre seeing and what are the product lines that are seeing the most impact and kind of where we are towards the resolution of this and how quickly. Some of these issues that can be worked through thank you. So much.
Great. Thanks, Jeff why don't you take the first one just kind of on what we're seeing from our pet on our perspective across regions of the World and then we'll go to Todd I'll start. Thanks Katrina I mean, theres a lot there what I would want to emphasize a few things just start really in the U S patent that market again.
A lot of discussion on this we've seen vet visits normalizing.
Covid.
But spend continues to grow this is an important factor, it's indicating we believe the willingness of consumers still are.
Willing to spend on their past, even under economic challenge and we're seeing that in the U S debt market or adjustment in guidance is more around the pet retail side, it's not anything different than our current assumptions that we see on the vet side. So I want to I want to emphasize that point.
I think a few things that I would highlight that there is a little bit more price sensitivity that were seen in both the European and U S retail markets and what's driving that or a few things we're seeing a switch really from as the economic pressures increase we're seeing I want to switch a little bit from prevention to treatment, some trade down or <unk>.
We will look for lower cost options and some of the retailers in both geographies manage down inventories like other industries and then some movement to broader Rx competition. So those are the factors that we've seen we look at the rest of the world outside of the Covid Lockdowns in China and.
That impact everything else is really for us seem pretty resilient overall spend continues to be pretty strong Latin America, Eastern Europe , and the Asia markets, Australia and markets. So again overall the robust.
Marketplace retail is the area, we're highlighting we see this as a cyclical this will recover as the economy recovers and those are the factors driving it.
On supply chain.
Certainly thanks for the question Caterina overall, our supply chain has stabilized in the last couple of months as we called out on the last earnings call in August we did expect some second.
Headwinds from supply mainly on third party sourced products that.
Has continued as expected, but overall, our internal production is doing better than the first half of the year all the paper of product supply issues. We had in the first half have been resolved and now we have multiple suppliers for those products, which we believe it will.
Hence our ability to effectively.
Provide product next year, but also being a spot to improve our procurement savings going forward. So overall supply chain has stabilized as we noted on the slide we expect that to be a positive.
Next year given the problems we had this year what either was some far available vaccines in Q3 with a little pressure on that in Q4 as well our U S farm business, but overall as you saw the U S pharma business its portfolio had a great quarter in Q3, especially across swine poultry and cattle.
The better than expected so that team's really deliberate right now.
Thanks, we'll take a question from the next caller.
Our next question comes from the line of <unk> from Evercore ISI. Your line is open.
Hi, guys. Thanks for taking my question I have two.
Today, if I may 1st I was just trying to think through supply challenges led us.
And then on the flip side Merck reported a really strong animal health and a lot of tailwind in their parasiticide business. So I would've thought you're experiencing some tailwind in parasiticide as well could you speak to those dynamics and were there any changes in any distribution model or inventory in Europe et cetera, and then secondly, and this is a minor I'm probably reading into this.
You might recall when you show the pipeline slide at your Investor Day, a couple of years ago and for your trio product.
You had a very similar legend of those dark blue Arrow, but there were three arrows, meaning several hundred million dollars implied for the trio.
First there's only one arrow today am I am I reading into it or is it fair to assume your view of commercial opportunity is unchanged and you still do expect it to be a multi $100 million of product. Thank you.
Yes, let me let me take the last question first just to be very clear.
There is no no change you are reading into that there is maybe a change in graphics over the course of three years, we continue to see blockbuster potential we see positive differentiation from <unk>.
All broad spectrums that are out there today, we're well positioned and today compare to even during that Investor conference our capabilities in parasiticide for launch are much stronger and.
We are a stronger company today and those capabilities. So we expect to have a very strong launch as well. So I'll start there to be very clear and excited that the submission initial submission has been made.
Relative to just the differences I think there's differences in portfolios. There is differences in geographies. While we would say is we're in line in parasiticide in the vet clinic with our expectations, we guided $70 million to $80 million down from competitive pressures and we're still aligned with those expectations No change we continue to see.
See nice growth from crude Leo globally, <unk>, plus is doing well internationally could elio and our portfolio is doing well relative to expectations. We saw nice growth with <unk> in the quarter complemented candidly by extremely nice growth in pain, we're taking share in the pain market here in the <unk>.
<unk> got about just shy of 50% of our paint as non Gallup Brandt. So.
<unk>, that's doing well and our vaccines that held well. So it is about pet retail we see at cyclical we see were declining with the market and the data are very similar to the market and we are doing what we should be doing price channel expansion in that pet retail.
And more importantly, adding innovations that will bring value and convenience, which will fit the trends that we're coming after.
Good. Thanks, let me also emphasize.
The last question no change in distribution no change inventory remains.
It's very similar to all other quarters, so theres been no change in that at all and again as Todd just emphasize our supply our supply chain is.
As stable and working.
Good. Thanks, we will take a question from 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.
Numbers ones and then one high level.
As you think about 23 should we think about the $80 million incremental revenue headwind that was put into guidance for the back half of this year related to Europe , China and U S. Retail is kind of having to annualize into next year as we think about the right baseline for revenue, obviously, assuming no major changes in the macro environment and can you quantify that.
Impacts from higher R&D investments FX and interest expense on 2023, and then at a high level. If I could just follow up on one of <unk>. Prior comments. She mentioned the rolling submission process could you maybe just elaborate on what's needed for those future submissions and are any preapproval inspections required by the FDA for <unk>.
Any of these products. Thank you.
Sure Todd lets start with some of the numbers 23.
Next I should say.
We appreciate the question to understand everyone's already looking forward to 2023, we will provide our guidance for 2023.
Fury.
Today, we didn't want to provide some context on the.
Pushes and pulls we see going forward with respect to your question on retail we just to remind everyone. We're out of season.
OTC products.
This is a time when we have about 75% of <unk> sales in the first half of the year. So much smaller base and so we do want to caveat that.
<unk>, where given the economic pressures easier to see someone making the choice to treat versus the buy the prevention versus in the springtime when everyone's out with their dogs going through the forest and heightened year round. So we wouldnt necessarily say roll that into the base and just assume it and then with respect to China, we do.
Expect that to get better we all know and are following the China situation very closely we feel very good about our competitive position on parasiticide as well as where we sit with the large swine producers and our team on the ground continues to diligently work through the challenges that come with the current.
Environment, so that we're not going to get into it on FX again, we've given our FX rate assumptions throughout so those are pretty easy to look at it as a headwind right now.
In the first half of the year I would say euro was about 105, just to provide context versus the 97%.
Parity that we've been seeing over the last couple of months.
Interest expense will be higher on the P&L.
Just from a floating rate.
That going up and then from an R&D standpoint, we've been running at about $80 million quarter, Ellen and her team have taken full advantage of the productivity of the reshaping and integrated three legacy organizations from bear Kindred Alanco into one and we don't see a significant incur.
<unk> and that investment in order to drive the pipeline going forward, but we will say to the extent, we see items that will drive greater value from R&D will certainly put money behind that.
So thanks for the question.
The second question kind of on the admissions and preapproval.
We probably wont get into too much there, but Alan just some maybe some context on how you're thinking about it.
Yes, Thanks for your question indeed.
In order to get the approval, we need to do a number of submissions have EDI protocol is all in submission because we don't have to do the submissions all at once.
And we have started initial submission for <unk>.
Next the sites.
One for Jackie.
<unk> inhibitor later this year.
Do you expect to be the first of all from our long short equity.
Next year or the first half of next year.
Entering that submission phase.
For each of those to the project and part of the approval is indeed all hall.
The agency involved will do an inspection of manufacturing sites.
We are confident that yes, we are able to manufacture the product.
Sure.
Sure.
Thanks, We'll take next question please.
Your next question comes from the line of biologic facade from Barclays. Your line is open.
Hi, good morning, everyone and thanks for the questions.
Firstly, it's great to see the progress on the pipeline front, but could you call out the opportunity size that you see in the market both on the buy side and the atopic downside with really the broader market size for these indications.
Probably a bit more fiscally adobe dump that is going to be a function of market share gain or would you be tapping into the nearly 40 50 plus market you can fill out an address so what could be the lowering in fluid for you. Thanks.
Good Yeah, Yeah, Great question, and we've spent a lot of time analyzing this and looking at some historical.
Market archetypes, two and no question. The first thing is when innovation comes into animal health into a market like term increased awareness will go up because share of voice will go up marketing will go up and so that an addressable market will expand we're seeing that right now and pain is an example paint in Europe as one of the faster growing markets as an example.
So we see that happening in atopic dermatitis.
Two is there's limited choices and a very large market. So we're going to be able to provide veterinarians and pet owners increased choice and then third is differentiation how we differentiate in the marketplace will be important and then bringing it to the market.
Equal or better than any launch we've ever had and what addressing a new approaches to the veterinarian and pet owners.
And the ways that they want to launch so those are all the factors that we see coming in and very similar to parasiticide as well there is still a global market that still has a lot of opportunity and again differentiation and our strength in multiple channels on parasiticide will also be be very effective relative to launch.
This differentiated new broad spectrum parasiticide.
Okay.
Great. Thanks, we'll take the next question.
Your next question comes from the line of Jonathan Block from Stifel. Your line is open.
Great. Thanks, guys good morning.
Maybe just a couple and I'll ask them all upfront to begin I think Todd I've got the 2022 revenue guidance down about 100 million.
EBITDA down $45 million to $50 million of decremental for close to 50% and I think when I go back and I look at when you lowered 'twenty two guidance last call on the <unk>.
The decremental I think it was closer to 30% so why the big step up in the Decrementals, maybe you could talk to that bigger hit is it just a case of fewer levers to pull and maybe a follow up I think the prior 2022 gross margin was 57, 5% for this year.
This despite a good couple of hundred basis points is there a new 2022 gross margin.
Okay.
And then.
Jeff maybe just for you to end with I know you called out global growth and gala problem, but my specific question was it up year over year in Europe , because clearly that's where you are facing competition and just think it's an important data point as we think about competition eventually coming to the U S. Thanks guys.
So if you want to start with France, and then we'll come back on the on the guidance yes.
Yes, good question overall Gallup Brandt <unk>.
Nice growth globally in the quarter driven by the U S without question.
And we've seen continued double digit growth overall on this brand and 22 in the U S offset by yes, we saw a slight decline in Europe I would really.
Besides a couple of things we've got.
A different.
Organization, and we're preparing a little bit more in the pain market in Europe and two there is a different label, we don't have the inflammation.
Claim in Europe that we do in the U S. So different labels different approaches, but again overall, expanding our pain portfolio and <unk>.
Expanding capabilities in Europe over time, we continue to see nice growth ahead, both for Gallup ran in the U S as well as <unk>.
As for the pain sector overall.
John Thanks for the questions on the margin profile the EBITDA flow through.
Two items first yes, less levers less predicted savings late in the year. So that is one of the items and then the other is just the mix of products with retail being a big driver of the incremental change that's one of our highest gross margin areas and so when that hits.
There is a greater flow through to the EBITDA side of things and then on the gross margin, yes, we would expect from a full year to be.
About 100 basis points behind the previous guidance. We gave in August as a result of both the Q3 being a little lighter than expected plus the incremental sales decline deleveraging the fixed manufacturing cost base with the product mix.
Thanks, we'll take the next question.
Your next question comes from the line of Brandon Vazquez from William Blair. Your line is open.
Hi, everyone. Thanks for taking the question I wanted to focus on the macro conditions, a little bit and maybe.
Just get a little granular on kind of like the progression of macro headwinds you've seen over the past couple of months and as we go into the fourth quarter.
I guess the question is kind of like our macro conditions worsening are they kind of stabilized as we go into the fourth quarter trying to get a read of how things go into the end of the year and then how those macro headwinds progressed through 2023.
Okay Todd.
Thanks, Brian .
And thanks for joining us for the new coverage universe from William Blair Happy to have you on the side of us on respect to the conditions. We did call out these items from a global macro slowdown in August we just under called the impact.
As we look across Europe . It is getting more challenged and we've seen that come through as Jeff mentioned, we had a retailer in Europe shut down the type of impact as a result of their retail space as well as in China. So those are certainly ones that impacting as we look at our Q4.
Sure Guy versus our Q3 guide, we do have Q4 down slightly more than Q3.
But overall again, we've guided focused in the areas we called out in August we just under call them. Then we feel good about the guidance. We provided today and then as we look to 2023, we're excited about a lot of the innovation, we're bringing to the retail channels, especially in the U S.
The beds XD for Caspian are long duration spot on treatment that we launched in October and as the season comes in next year excited about what that product can do so a lot yet to play out over the next few months as we get into 2023.
Alright, 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 <unk> on for Elliot. Thanks for taking my question.
Quick one from me just on the debt.
Cvs slide 20 that.
Cost of debt was three 9% in the quarter and you guys got about 70% of a fixed just wondering if you could.
Tell us if you have it on hand, the effective rate between the fixed and the variable portion.
And then how to think about that going forward. Thank you.
I don't have off top my head, Michael the relative fixed rate versus floating as you know our fixed rate coupons are reasonably high given the coupon step ups, we have versus the face of those so I believe we did the tender earlier this year, which helped reduce interest expense.
Overall in the year, so from that aspect it's slower.
I think we've got a LIBOR rate.
The end of this year at projected to be about 4.77% are fixed rate is generally LIBOR plus 175. So that gives you a feel for the floating rate debt, but if I step back big picture and look at our overarching debt profile, we've got $400 million. Due next year, then nothing until <unk>.
2007 to speak of which continue to generate cash we are continuing to pay down debt. We expect that will continue next year as well. So overall, we feel very comfortable servicing that we have and will continue to look for ways to optimize our capital market strategy much like we did buy into.
Rate swap transactions to accelerate cash in the door to pay down debt versus waiting for that to play out over time. So again appreciate the question and feel good that we can manage through the higher level of debt that we expected when we started this year.
Thanks, I think that's all my questions I'll turn it back to Jeff to close it out I think the third quarter without question a worsening.
Economic situation in China, Lockdowns, and a stronger dollar, but it really provided some significant proof points.
Inside the Alanco on where we're going as a company the pipeline progress we know will be the biggest value driver and to say that we have five potential path to five blockbusters from now through the first half of 2024 is one of the most significant things our company has seen in its in front of us and we're in execution mode against that but is <unk>.
Well as market share and price being a focal point and improving supply situation. Our overall productivity that came through in opec's and in the middle of the income statement, which led to cash and paying down debt and I think what I'd like to also highlight a lot of the organization focused on standing up our systems to have one system and to be told.
They all integrated a quarter earlier by by early Q2, all of this driving expanding EBITDA and EPS. So we're controlling the controllable and a challenging environment. Thank you for your interest in <unk>, we look forward to continuing to engage with you in the future.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.