Q1 2023 Elanco Animal Health Inc Earnings Call
Good morning, and welcome to your ankle animal health first quarter 2023 earnings call.
All participants are in a listen only mode.
After the Speakers' presentation, we will conduct a question and answer session.
To ask a question you will need to press star followed a number one on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the call over to Katy Grissom head of Investor Relations. Thank you. Please go ahead.
Good morning, Thank you for joining us for our Lingo animal Health's first quarter 2023 earnings call I'm, Katy Grissom head of Investor Relations. Joining me on today's call are Jeff Simmons, Our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Scott Parker from Investor Relations.
So I just referenced during this call are available on the Investor Relations section of Blanco Dot Com todays discussion will include forward looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast for more information see the risk factors discussed in today's.
Earnings press release, as well as our latest Form 10-K, and 10-Q filed with the SEC, we do not undertake any duty to update any forward looking statement.
Our remarks today will focus on non-GAAP financial measures reconciliations of these non-GAAP measures are included in the appendix of todays slides and in the earnings 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 and good morning, everyone. As we opened 2023, we're encouraged by our improving business results. This quarter, we saw sequential improvement in many leading indicators of underlying demand and easing environmental factors that pressured our business in 2022, while we expect macro factors to persist the Lancashire is making the necessary.
<unk> disciplined decisions to stabilize the business and progress our innovation pipeline, while focusing on improving our cash flow generation and returning to constant currency sales growth in the second half of this year.
Beginning on slide four this year is off to an encouraging start.
Improvement in our underlying business, notably in pet health increases our confidence in the outlook for the first half and full year of 2023, allowing us to raise the bottom end of the guidance range for our key metrics, we progressed important operational and pipeline milestones and reduced uncertainty in key areas, including the completion.
<unk> of the Bayer ERP system integration and the positive collaboration and progress with the EPA answer resto.
Pipeline continues to advance with conditional approval of our parvovirus product and initial submission of our IL 31 monoclonal antibody for dermatology overall, our pipeline is an even better position than it was just two months ago.
Additionally, we remain confident in our liquidity and the business's ability to generate cash throughout the year.
While our operating cash flow was seasonally lower in the first quarter. We continued to expect improvement throughout the year, leading to approximately $100 million of cash available for debt Paydown. This year.
We remain confident in our position relative to our financial debt covenants, and our ability to reduce debt and leverage over time.
Finally, while our executive leadership and global team remain committed to near term delivery. We're also actively planning for the expected launches of our potential blockbuster innovation.
At the end of the call I will share some considerations for our encouraging yet balanced outlook as we expect to see an inflection point in 2024, as we receive approvals and begin launching our potential blockbusters moves.
Moving to slide five in the first quarter <unk> delivered revenue of one point to $5 7 billion, a reported growth of 3% and constant currency growth of 6% in April we completed our global systems integration, bringing the legacy global Bayer animal health business into the Alanco ERP environment as <unk>.
Part of our system cutover preparation, we proactively communicated to our customers our expectations of a two to four week shipping blackout periods for legacy Bayer animal health products that would occur in April our February guidance assume that customers would likely shift purchases of legacy Bayer products from this.
Second quarter ended the first quarter to ensure continuity of supply in the market.
Our best estimate based on our results analysis of individual markets and customer conversations results in a benefit from the ERP blackout in the range of $90 million to $110 million or a 7% to nine percentage point benefit to growth.
Excluding the ERP blackout revenue performance in the first quarter was largely in line with our expectations and represents a sequential improvement for both pet health and farm animal compared to our fourth quarter 2022.
And Pat helped the U S market remains strong overall, despite the continued low single digit declines in U S. Vet clinic visits excluding the benefit from the ERP blackout, our pet health business was approximately flat representing an improvement from the high single digit and low double digit.
<unk>, we reported over the last several quarters Bobby.
Bobby Modi, our executive Vice President of U S Pet health and his team have refined the strategy and improved execution in our largest and highest margin business area, leading to improved performance in four key areas share of voice physical availability pricing and innovation.
We have increased our share of voice in three ways, we are driving more efficient and targeted conversations with clinics through digital tools, leveraging innovation to gain more mind share from vets and adding inside sales reps to provide broader and more frequent engagement with <unk> as an example of our expanding digital.
Efforts total touch points with vet care professionals was up 15% year over year in the first quarter, resulting in greater and faster clinic lead generation.
Next we're expanding physical availability of our products more total distribution points across retailers and clinic shelves more meaningful locations in stores in new channels contributing to improved dispensing across our portfolio in the first quarter, we expanded total distribution points for our retail portfolio by 17%.
<unk>, which contributed to the U S. So resto and advantaged family growth in the quarter.
Regarding price, we significantly upgraded our capabilities in this space, we're taking a disciplined approach to maximizing revenue via list price increases and trade promotion optimization U S. Pet health grew price more in the first quarter than any quarter in the last year, which contributed to the global pet health price.
Both are 5%.
Finally, we're capturing additional sales from innovation and product refreshes with six products approved or launched in U S. Pet helped the last six months as we are building a launch excellence muscle through improved capabilities, our retail category management efforts on the advantaged family are driving higher velocity and lower cannibalization.
We expected for our value oriented relaunch of canine advantage.
Overall in the first quarter. We believe these actions helped the U S pet health business to outpace the overall category and OTC dispensing and drive year over year growth any langkow Rx product sales from distributors out to the veterinary clinic. Despite continued pressure from competitive innovation.
Italy, we likely benefited from the macro factors, including improved consumer conditions and a potentially earlier parasiticide season. We are pleased with the positive outcomes from the actions we've taken to strengthen our position in U S pet health market, but acknowledge there is still a lot to play out this year with uncertainty around the <unk>.
<unk> retailer pricing and competitive actions, we look forward to continued progression to improve this business now.
Now a few comments about our pet health business internationally in Europe , the economic environment has been better than expected, but our performance was pressured in the quarter compared to the very strong start in the first quarter of 2022, while the pet health market any langkow sellout data for available countries in Europe is improving some.
<unk>, we still expect continued environmental pressure on the business in the second quarter.
And farm animal the underlying business benefited from the strength in Europe , and Asia led by poultry offset by decline in the U S related to vaccine supply and competition in select product categories. Despite this we remain encouraged by the growth opportunity for expiring this year six of the law.
<unk> U S cattle feeding organizations have moved to commercial adoption of experience with broad acceptance by the beef processors expiring adoption continues to strengthen the value of our overall cattle portfolio offering including <unk>.
Finally in China, while poultry is improving swine prices were pressured to start the year, we're cautiously monitoring progress in this market and assume gradual improvement throughout the year.
Across our pet and farm animal businesses, we continue to expect year over year, environmental and competitive pressure. However, the successful completion of our ERP system integration, our innovation progress and positive indicators in our business, notably in U S Pet health and international poultry support our decision to raise the bottom end up.
Guidance on our key metrics for both the first half and the full year.
Next moving to slide six and the IPP milestones, we achieved over the last few months starting with productivity. We are pleased with the completion of the ERP integration. The last major milestone associated with the Bayer animal health transaction I am proud of the team's preparation their leadership and the execution to advance us.
Into this new phase, we look forward to the flexibility the simplicity and the Optionality of operating this business now on one consolidated system.
Moving to portfolio, we continue to collaborate with the EPA as they near completion of their review of <unk>.
<unk> included expert counsel from the FDA in the process.
We appreciate the Epa's approach and diligence during a science based review process, a langkow continues to align with the EPA and their recommended stewardship actions supporting the continued registration of the product. We expect the formal results to be communicated by the EPA as they are finalized in the coming weeks as.
A leader in animal health, we are committed to the well being of pets and welcome the opportunity to work with the EPA on these stewardship actions that we believe will raise the bar and support the continued safety of <unk> protect pets from fleas and ticks and the deadly diseases. They can carry.
Slide seven details our progress towards unlocking <unk> next era of growth and value through innovation. The pipeline continues to strengthen with advances in all key programs in line with our expectations. Since February we launched four new products.
<unk> three approvals in major markets and initiated the submission of our six new potential blockbuster product.
Andy organization is executing with excellence, while driving partnership across manufacturing and commercial.
In mid March we began shipping <unk>, our once daily oral <unk> inhibitor diabetes product for cats in the U S. Earlier. This month, we received FDA conditional approval for <unk> and CA, one a daily oral treatment for the control of anemia associated with chronic kidney disease in cats these portfolio enhancing.
Products are both first in class feline innovations and we view them as market creation opportunities.
Next the USDA approved our Elwood, Kansas monoclonal antibody manufacturing site and granted conditional approval for our canine parvovirus treatment.
As our first monoclonal antibody this approval represents a significant milestone in our journey to advance this important platform.
With a total addressable market in the U S of approximately 330000 canine parvovirus cases per year, the conditional approval highlights the value and need for this unique treatment. We already have a strong interest from the veterinary community for this potential blockbuster product, we expect to begin shipping in the coming weeks as we finalize state approvals.
It's important to understand the conditional approvals for our parvovirus treatment and <unk> are a reflection of agreed upon approval pathways with the regulatory agencies to allow for accelerated market access given both these products address significant unmet needs for both we plan to continue their progress.
Towards full approval and do not expect the current status to be commercially eliminate.
On the pet health OTC side, we've expanded our OTC R&D capability to enhance our efforts here since our last call. We launched canine advance Hicks, a flea and tick preventative for dogs and advantage a fleet preventative for cats at a small subset of U S retailers these value offer.
Wings are a cornerstone of our good better and best approach to flea and tick retail category management. Additionally, we are pleased to announce the approval and launch of AD tab and several EU markets. Our third OTC introduction. This year leveraging the advantage brand name add tab is an oral monthly flea and tick product for both.
With dogs and Cats. This addition establishes he langkow in the emerging OTC oral parasiticide market in Europe .
Finally in March we completed the initial technical submission to the USDA for our IL 31 monoclonal antibody for canine dermatology each of our potential blockbusters is progressing as planned with a path towards approval by the first half of 2024 experienced <unk> and our <unk> product our novel.
First in class products, while our broad spectrum parasiticide and JAK inhibitor dermatology asset are expected to be differentiated from the current products in these large and growing markets.
Now I'll pass it to Todd to provide more on the first quarter results and financial guidance.
Thank you, Jeff and good morning, everyone.
I will focus my comments on our first 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 in the first quarter, we delivered 135 $7 billion of revenue reported growth of 3% or growth of 6% in constant currency price contributed 5% in the quarter.
Jeff referenced we believe our ERP system integration led to a shift in sales from the second quarter to the first in February we assume this shift will benefit first quarter revenue by $40 million to $80 million. However, we now estimate to be approximately $90 million to $110 million a.
A few factors drove the revised estimate of the customer initiated dementia.
First we believe our customers demonstrated a higher level of sensitivity than we anticipated related to the potential for extended disruption from our system cutover and general supply chain concerns.
Additionally, we believe sequentially stronger dispensing at our retail partners contributed to the magnitude of purchases in the U S. Pet health business, we believe estimating the benefit of the assisted sale resolving the ERP blackout provides important context to better understand the trends in our underlying business performance.
Therefore on slide 10, we provide a revenue results by business area on a reported and a constant currency basis as well as our estimate for the benefit in the quarter from the ERP blackout.
For pet health constant currency growth was 8% with an estimated benefit of 10% to 12 percentage points from the ERP blackout in.
In the U S health revenue grew 12%, including an estimated 12 percentage point benefit from the ERP blackout.
The approximately flat underlying business performance was driven by innovation and growth in our OTC parasiticide portfolio offset by supply disruption for certain vaccines and continued pressure on legacy parasiticide products.
Recent retail dispensing data indicates improving dynamics in the OTC flea and tick market with a linker and maintaining our market leadership position.
<unk>, an advanced family both grew in the quarter in the U S benefiting from an improving macro environment and the commercial efforts Jeff described.
In the first quarter, we temporarily suspended our minimum advertised price or map policy to avoid potential extended interruptions in product availability in the retail channel before where after ERP blackout period.
During the map suspension, a number of retailers offered lower prices to consumers primarily answer resto.
<unk> did not materially change our trade promotion strategy with customers in the quarter, helping to drive the 5% price increase in global Pet health. We believe some of this rest of dispensing strength in the first quarter may be a result of this dynamic and anticipate potential softening in dispensing trends throughout the remainder of the season as prices move higher.
As a result of the re implementation of our map policy at the end of April we believe maintaining map pricing is an important component of protecting the value of our brands long term.
Outside the U S last year's robust start to the year creates a difficult comparison in the first quarter.
National Pet health grew 5% in constant currency with an estimated benefit of 11 percentage points from the ERP blackout.
China was negatively impacted by the post lockdown Covid outbreaks in the first quarter. However, we are encouraged by the latest data in these markets pointing to improving end market demand starting as early as March.
Globally, our farm animal business grew 5% in constant currency with an estimated benefit of four to five percentage points from the ERP blackout in.
In the U S. Our farm business declined 6% with an estimated benefit of approximately two percentage points familiar ERP blackout those.
The decline in the underlying business was driven by vaccine supply disruptions poultry customers rotating off of our <unk> products and lower demand for our cattle implants.
These headwinds were partially offset by the continued ramp of our innovation portfolio, mainly expire and our new nutritional health products.
Outside the U S constant currency growth was 10% with an estimated benefit of approximately six percentage points from the ERP blackout the growth in the underlying business was driven by strength in Europe , and Asia led by poultry and price, partially offset by timing of purchases and the Aqua business.
Continuing down the income statement on slide 11, gross margin increased 230 basis points to 68% gross margin benefited from the ERP blackout by an estimated 130 to 170 basis points as more sales of higher margin legacy Bayer animal health products were realized in the first quarter.
Additionally, the improvement was driven by price growth and continued productivity gains across our manufacturing network, partially offset by inflation.
Operating expenses increased 1% year over year in the quarter with R&D expenses flat at $81 million in SG&A expense was up 1%, primarily driven by employee related expenses, partially offset by the favorable impact of foreign exchange rates.
<unk> expense was $64 million compared to $52 million last year in line with our expectations.
Adjusted EBITDA was $379 million or growth of 12% with an estimated $70 million to $90 million of benefit from the ERP blackout.
Adjusted EBITDA margin was 32% an increase of 260 basis points with an estimated 370 to 460 basis point benefit from the ERP blackout.
Adjusted EPS was <unk> 45 cents in the quarter with an estimated benefit of approximately 11 to 14 from the ERP blackout, assuming our corporate consolidated tax rate of 21, 9%.
Before moving to our guidance, let me offer a few words on our cash debt and working capital on slide 12 cash.
Cash used for operations was $145 million in the quarter.
The year over year decline in the first quarter operating cash flow reflects higher cash interest and a lower reported net income excluding the impact from the ERP integration.
Historically, the first quarter is our lowest cash generating quarter with accounts receivable, increasing due to the sequential increase in sales for the fourth quarter to the first quarter and the timing of our corporate bonus payout in March.
Additionally, inventory increased in the quarter with inventory declining slightly and farm animal inventory growing largely driven by the pressured sales volume over the last several quarters.
We have established a cross functional team focused on improving our net working capital performance, especially as it relates to inventory on our balance sheet.
We have begun implementing plans to reduce throughput and certain manufacturing facilities to help manage our balance sheet inventory levels down with.
With the post Covid stabilization of global supply chains, and our ERP integration complete we believe we can start to improve this area of our business.
We ended the quarter with net debt of $5 8 billion as we drew $200 million on our revolver to offset the typical seasonality of cash flow in line with our expectations at the end of March our net leverage ratio was five four times slightly lower than the five five times at the end of 2022 with our <unk>.
Our EBITDA guidance in our continued expectations of $100 million of free cash flow available for debt Paydown, we balances paid our year end net leverage ratio to be between $5 three and five eight times.
Given the recent volatility in the banking sector and increased investor focus on liquidity Slide 19 in the appendix provides the latest view of our debt position.
In March we took advantage of volatility in the sofa forward curve to lock in interest rates through the second quarter of 2025 for the $1 billion of swaps that were set to roll off in October of this year. This will keep our fixed rate debt of between 65 and 70% of total debt through 2023 and 2024.
Accordingly, we continue to expect durable cash flows from our business and are confident of our ability to service our debt with our current liquidity position.
Now, let's move to our financial guidance, starting on slide 14, as Jeff said, we are raising the bottom end of our guidance range across all key metrics driven by the successful completion of the ERP system integration, our innovation progress and the positive indicators in our base business, notably in U S Pet health and international poultry for the full year, we are raising the bottom.
<unk> of our guidance by $30 million and now expect revenue to be between $4, three 1 billion and $4 4 billion or approximately flat to a 2% constant currency decline.
For adjusted EBITDA, we are raising the bottom end of our guidance by $20 million and now expect $940 million to $1 billion. Finally, we anticipate adjusted EPS of <unk> 76 to 83.
An increase of two cents on the bottom compared to our February guidance Slide 21 in the appendix provides updates to several of our additional assumptions.
On slide 15, we provide our updated financial guidance for the first half of the year and the second quarter, we reflected the raise bottom end of the full year guidance in the first half guidance. While we are encouraged by the positive leading indicators. We continue to expect a decline in the top line for the first half of 2023 of approximately 2% to 4%.
Driven primarily by environmental and competitive factors and supply constraints in our U S bar business.
As shown on slide 16, we expect the $90 million to $110 million of estimated benefit from the ERP blackout in the first quarter will unwind negatively impacting revenue growth by approximately eight to nine percentage points in the second quarter exclude.
Excluding the estimated impact of the ERP blackout, we expect the decline in the base businesses will be largely in line with the first quarter.
<unk> is also expected to negatively impact adjusted EBITDA and adjusted EPS in the second quarter as shown on slides 22 and 'twenty three.
In line with our initial guidance in February adjusted EPS is also impacted by year over year headwinds from higher interest taxes, and favorable FX rates and additional operating expense investments.
Finally, moving to slide 17 for the full year consistent with our initial outlook from February our implied second half guidance for this year represents flat to 2% constant currency growth our guidance reflects sequential improvement in growth in both the first and second half of this year.
We are confident in the second half of 2023 expected return to growth for several reasons first we expect our innovation portfolio will continue to ramp as existing innovation products grow and new products are launched second we assume an improvement in vaccine supply will occur starting in the third quarter price was off to a.
A strong start and we continue to expect contribution of more than 2% for the full year.
Finally, we see improving macro conditions in China, Europe , and the U S compared to the significant pressure we experienced in the second half of 2022.
Now I'll hand, it back to Jeff for closing comments.
Thanks, Todd while our team is focused on delivering in 2023, we acknowledged the desire to better understand the opportunity for <unk> in 2024 and beyond we're not giving guidance beyond 2023 today, but I want to provide you with some context on how we're thinking about the future.
First our portfolio outlook is balanced we expect continued competitive and generic pressure, but also anticipate improved supply and stabilization in our base pet health business.
Regarding innovation, we expect our parvovirus treatment experience, our new OTC products and others will continue to ramp delivering incremental innovation revenue in 2024 on the path towards $600 million to $700 million by 2025.
For our four other late stage assets with blockbuster potential we're confident in our path towards first half 2024 approvals. However, as we know regulatory timelines are subject to many factors and the competitive landscape is uncertain. We are focused on progressing what is in our control timely quality.
<unk> and comprehensive submissions with that said we are actively reviewing our launch plans and are focused on speed to market post approval base.
Based on recent experience with <unk> Cat Parvovirus, we expect launches to be around two to four months post approval.
We have not finalized our launch investment plans. However, we expect more limited incremental spending ahead of launches with consideration for more significant investment post launch. The team is working closely to optimize these U S launches and we will take a thoughtful approach to staging investment.
Finally, with the completion of our ERP integration, we continue to expect to drive additional synergies and reduce project cash needs to less than $20 million next year contributing to expected improved operating cash flow.
We hope this additional context is helpful. As you consider the opportunity for <unk> in 2024 and beyond we are encouraged by the milestones achieved reduced uncertainty and positive leading indicators and have a balanced outlook for expected progress in the medium term 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.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Chris Schott from J P. Morgan. Please go ahead. Your line is open.
Hi, This is a catarina on for Chris. Thank you so much for taking our questions. So first on <unk> I think you mentioned the magnitude of the ERP dynamic with greater than you're expecting in the quarter can you just elaborate a bit more on how even if that was all ERP and maybe not strong underlying kind of demand than you were expecting how are you approaching I guess separating.
The ERP piece from just like demand.
And then the second question is on channel inventory levels in the quarter. So some of your competitors had mentioned distributors lowering inventory levels in Q1. So if you take out all the tapping with the ERP piece for the Bayer product is that something that you're also software the electrical business.
And then maybe how did that impact Q1. Thank you so much.
Thanks for the question Caterina with respect to the $90 million to $110 million estimate we provided for the bridging stock ordered by our customers.
We've done a lot of analysis with respect to both specific orders from our customers in conversations with them.
Standing what sales have been in historic periods, and then also just looking at underlying demand trends for dispensing data and inventory levels.
Number is our best estimate.
So you got the benefit of having already seen April sales. So we feel very good about this 90 to 110. It is a timing issue. This is why we made the decision in February to guide to the first half understanding that this would be.
A little noisier than we'd ideally like.
We feel very good about that but we are pleased with underlying demand. We think it was higher than what our original estimate was our customers probably we're more concerned that the auto product longer but our confidence in the execution. We would have great news for us execution was on the money and we had the us up on it.
Running by April <unk>.
The rest of the country is staged over the course of April we're up we're running we're shipping product. We're building we're collecting so really pleased with how the team executed this ERP cutover.
Quick question on channel inventory.
First part to note.
Most of the U S sales for the Bayer legacy products go directly to our retail customers. So there is not much impact on that distributor levels or in the farm channel overall those levels have been consistent with what we have had since the end of Q2 of 2020, but.
Our distributors with higher cost of capital focusing on inventory levels and so we've factored that into our forward guidance as well.
Our next question comes from Erin Wright from Morgan Stanley . Please go ahead. Your line is open.
As you think about that companion animal blockbuster products in 2024 to the parasiticide and midterm Karen launches.
This is the timeline still on track has there been any changes there is there any possibility of expediting those branches and how are you thinking about your conversations with the FDA just given delays across certain competitor products.
With the FDA, specifically and what investment then you kind of touched on this I think at the very end and just what kind of investments do you need to make from a commercial perspective to roll these out how.
How should we think about that incremental commercial investment that you need to make in 2024 and can you talk about the strategy around distribution pricing and cross parasiticide and Darren Thanks.
Thanks Darren.
It's the right question to ask relative to the timing what I would say is kind of as we step back and look at the pipeline position I would say the following things and as I mentioned, we're controlling what we can control first I think quality of the team what Alan has done.
With her and her team the quality of our regulatory team.
Second is the quality of the packages, which we're very confident in the dialogue with the regulators I can point to proof points three approvals here recently and parvo USDA add tabby you in <unk> and FDA I think the track record and recent success is an example of this team and what they are what they are capable of.
I think we're going into some new spaces Aaron.
Maybe for us, but not new spaces for regulatory so derm with Jack or an IL 31 short acting <unk>. These are new areas delays are typically come like we saw with Pargo and new areas. So I would say our confidence level is on that.
Size of pipeline and the size of shots on goal in major markets to us we sit in a very strong position relative to the number that we do have relatively investment. That's why we wanted to highlight a little bit to give you a perspective on 24 is count on as well.
We've seen with these recent approvals for us launching two to four months after approval.
And we believe today, we've got an youre seen at all the things we're doing to drive today's demand are going to help so the physical availability of share of voice the launch capabilities with digital we believe ahead of the launches we don't see a major step up Aaron we'll see that major step up coming after the approvals.
And we will model that accordingly, so that's.
Thats the update again, a lot of progress on the pipeline in a much stronger position than even two months ago, but everything that happened this quarter.
Thanks, we'll take the next caller.
Our next question comes from velocity <unk> Prasad from Barclays. Please go ahead. Your line is open.
Hi, good morning, everyone.
So a couple of questions.
If you could maybe elaborate on more with what your discussions with the EPA entail.
Have you been able to reconcile your safety methodology with that of the EPA.
On the same topic could you also speak about the covenant is and.
And both on the interest rate on the interest coverage on the net leverage ratio and see if there's any kind of situation where <unk> withdrawal. If it comes through it what impact these covenants. Thank you.
Thanks, Paul Aussie answer Resto, yes.
We've made nice progress from our last update.
February and we will share that as I mentioned, we are very pleased with this progress we align with the EPA on.
The EPA has recommendations which linked to stewardship actions.
Supporting the continued registration of <unk>. So we do expect largely formal results to be communicated by the EPA in the coming weeks again, we're confident in the safety profile of the product. We're also appreciative of the raising of the bar for the category overall and I'll just highlight a little bit on the rest of it because it's so important to us.
We saw sequential improvement in the quarter, we saw the U S. After you calculate out for the cut over the U S returned to growth some of that may be attributed to an earlier season people coming back to retail, but I also think this increased physical availability.
It was a factor.
It was down a little bit it was a strong quarter a year ago as well as some of the inventory management.
Step back and say, we sold more than half of our 2022 <unk> in the first three months. So we like what we see again there is a lot of the season remaining the engagement with the EPA as positive progress and we'll wait for the formal results here in the coming weeks.
With respect to the debt covenants, we feel very comfortable with our liquidity position, our overall cash flow and how we see the business progressing over the next eight quarters with that we don't think theres any covenant risk whatsoever, we've laid out all the debt related metrics on slide nine in the appendix of attacks.
If anyone has questions you can find all the information there on towers and the like so feel very good about where we stand.
Thanks.
Thanks, we'll take the next caller.
Our next question comes from Omar <unk> from Evercore ISI. Please go ahead. Your line is open.
Hi, guys. It looks like the base businesses is tracking better, but then I'm just really confused around some of the free cash flow and inventory stuff. So let me let me be more specific.
Its base business track, well and there was another $100 million in revenues pulled forward, then why free cash flow minus $145 million because it should have driven EBITDA as well and then secondly on inventory.
I'm, just it's something about the disclosures. It makes me uncomfortable Todd you said bear go straight to retail partners. So no inventory, but the 10-K says ahead of their ERP blackout. There wasn't additional inventory build as of December 31st and it was further increase in <unk>. So I guess I don't understand what the magnitude of this inventory is and to what extent is.
Driving the performance, we're seeing right now.
Hey, gentlemen, thanks for the question with respect to the free cash flow, you'll see that the.
Accounts receivable balance has increased significantly driven most of the $90 million to $110 million of sales would have happened in the last couple of weeks of the quarter and so there wouldn't have been cut.
Cash flow coming in from those collections, but there is the EBITDA that comes from that revenue being recognized in the quarter. So that's the main driver and then let's talk about the demonstration inventory on our balance sheet and inventory when you tell partners again, as we communicated inventory of retail partners.
Was low at the end of last year, that's something that was a headwind for our business are certainly more inventory there because of our ERP blackout in the purchases made in the U S on that.
Then, let's talk about the inventory on our balance sheet. So again, we had volumes down on farm, we got 5% price so with the underlying base business.
Still in decline, but having more price that's lower volume when you think about the split on inventory between pet health and farm animal Pet health generally higher margin, which means its inventory of balance on the balance sheet is lower because the cost of goods sold are lower.
On the farm side again, the flip flop occurs lower gross margin higher top side. So we've got <unk>.
Struggles and over foreign available volumes.
That's driving.
Increase in inventory on the balance sheet.
And you'll see we had inventory I think.
That's in line with expectations of greater sales of the bear product in the first quarter that happened foreign animal inventories are up the other item to note.
Foreign exchange rates, we have a lot of inventory that sits outside of the U S and Europe with our manufacturing footprint there as the dollar weakened in the quarter the balance sheet value of that inventory increase because in Europe . So again, hopefully we have separated inventory on our balance sheet inventory at <unk>.
Retailers.
The numbers and again operating cash flow generally in line with where we expected to be in Q1, we still expect $100 million of free cash flow this year to pay down debt.
Thanks, we'll take the next question.
Our next question comes from Michael Risking from Bank of America. Please go ahead. Your line is open.
Okay.
Okay.
Great.
Thanks for taking the question guys.
First I wanted to ask about your comments on price I think you indicated.
5% in the first quarter balance.
Between companion and livestock, but I think you said for the year, only 2% or more than 2% running plays very little price for.
For the rest of the year I'm, just wondering what's driving that is that.
Up on comps is that the negative impact in Q2 because of the ERP.
The map suspension and then I've got a follow up thanks.
Sure Mike you're right, we've said, we'll get more than 2% price for the full year.
Good first quarter.
<unk>, 5%.
Didn't get any benefit from those bear.
Legacy products, where we've taken more price this year.
Coming more in the first quarter. So there would be an expectation would be less in the second quarter.
Sure.
And your follow up.
Okay, and then the follow up.
It goes back to the blockbuster product launches for next year.
Jeff I appreciate your comments towards the end of the prepared remarks that was really helpful. But I wanted to dig a bit deeper.
You talk about first half 'twenty four obviously January 1st half June is also the first half so given that we're still early 'twenty, so really don't have that clarity.
Just wondering your point on anticipating launching coming two to four months post approval, if you've got a scenario where you've got a June approval two to four months puts you much later in the year does that.
Does that change a little bit in terms of your thoughts on a ramping especially for something like the broad spectrum Parasiticide would you expect pretty major seasonality in the market you want to be on the margin in the first half of the year. So is there any consideration of doing sort of like an at risk ramp in volumes in manufacturing to be ready to launch.
The day after approval is that a possibility or if there's just a limited wiggle room there. Thanks.
So great question, Michael we are putting a lot of time as you know.
<unk> invested in talent capabilities in this area, we're using each one of these launches Saar being in the Mexican cat know parvo.
To really test all of these capabilities, we brought in Tim Bennington. So theres a lot of concentrated effort on all of these scenarios. What I would say is I'll just highlight a couple of things that are key I think as you look at 'twenty for the ramping of all of these approvals. We just mentioned all point to Parvo Xperia experience ramping those are first two of the six blockbusters we've.
About that will be critical out of the gate, even point to add tab, which is a $50 million to $100 million oral OTC space. That's what we see as potential over time with this product. So ramping first will be the most important critical thing as we go into 'twenty four and then look we're trying to be balanced and pragmatic.
Here, because theres a lot of dynamics. The good news is we've got four shots on goal all kind of going in a different major markets with Bo there. The two derm products and pair up I wouldn't say specific.
Typically the para seasonality has become less of a factor when you start looking at drop shipping increased compliance there is less of a spring pop as much as if you can get this into a program. It becomes a lot more less seasonal we will launch we will launch better and with more excellence than we ever have in the company history with the right <unk>.
Sources, given the market potential what I tried to do today, though is to say most of that investment will come after that two to four months after an approval.
The setup.
Sure and we've got a lot of interest and focus on this and we'll keep you updated as we progress.
Thanks, we'll take the next question.
Our next question comes from Nathan Rich from Goldman Sachs. Please go ahead. Your line is open.
Great. Good morning, Thanks for the questions, Jeff maybe coming back to Soares, though could you elaborate on what you meant by steward ship actions from the EPA and as well I think it sounds like you expect continued registration for Srs or would there be any changes in how you are able to market the product going forward and then a quick.
Follow up if I could.
On the map holiday how are you thinking about the impact that that had on the pet health sales in the quarter and is that impact contemplated in the $90 million to $110 million range when thinking about the <unk> shift.
Yes. Thanks for the question Nate we won't elaborate much further other than to say as I mentioned on <unk> and EPA, great productive dialogue a lot that's happened here recently.
<unk> results were common in coming weeks.
A lot of.
I would say sequential improvement demand and interest in <unk>, we see no no change if anything a sequential step up as I mentioned, it's nice to see the U S come back to growth and that's driven and Thats why it took a little time on U S. Pet health, what Bobby has done with increasing retail expertise and capability.
When we look at.
Our overall physical availability gone up 17%, we're taking price and we're seeing a lot of loyalty from both the E comm sector as well as the brick and mortar so.
Look for more to come but again I'll reemphasize. The most important point, we're pleased with the Epa's recommended stewardship actions, we won't get into those details now, but we believe they're the right thing for the category for our product and others and collars to support the continued registration of <unk> and raise the bar in the category that is.
Key as you look at map pricing I kind of want to step back a little bit. This is minimized advertised pricing. This is used commonly in CPG and retail and been in animal health for a long time it protects the long term value of the brand.
We extended a map holiday or held off on map to avoid extended disruptions in supply during the cutover, Yes, we did see retailers compete on price like products like <unk>.
And even despite that.
<unk> will still achieved a 5% price and pet health really important I would say so yes, I do think it was a factor, but we reinstated our map policy at the end of April I can highlight that we are back up to normal operating environment.
And we will continue to.
Stay on a map policy as we go through the rest of this year.
Okay.
And then with respect to the 90 to 110 again, we think there may have been a little more underlying dispensing in Q1, that's why we had our.
Well more than our 40 to AAV with estimated in February we do expect it reverses as you saw in Q2 laps back in play and we're continuing to execute the underlying fundamentals that will drive this category.
Thank you.
Okay.
Our next question comes from Jon Block from Stifel. Please go ahead. Your line is open.
Thanks, guys.
Morning.
Jeff just on the innovation sales as the $2 10 to $2 50, sorry $210 million is still the right number.
For this year I might have just missed that and is there a number for the quarter and adjust so rest of it I think it was down not down 9% normalized for the quarter.
Do you still expect that to grow this year and just maybe just a quick tack on Todd.
Maybe the expectations of price more than two so that we can if it's 3% just throw out a number sort of implies volumes came down very modestly since the initial guide because the bottom end of the range came up 30 mill. The top that was left unchanged is that a fair way to frame and if so was that more of a pet health thing or a farm animal thing from Europe .
Perspective, thanks, guys.
Thanks, John No change to our innovation sales as we highlight the drivers to that will be pet therapeutics experience the OTC products.
Now we will have parvo coming in here will be shipping that product in the next couple of weeks. So everything stays the course and again those will all be drivers as we ramp going forward.
Yes, the rest of it was down.
Still not globally, where we want it to be and in.
And full recovery here with <unk> as I highlighted in international a couple of factors a big a 11% growth quarter first quarter last year. So there is a challenging compare and we saw internationally again the retailer inventory oversight management they have lower inventory. So those were factors. So again all the things.
We highlighted we are leaning in with a pretty significant campaign on Sorrento here that kicked off in April in the second quarter and some of the increased operating expense is as an investment.
To build on the demand that we've seen pickup answer resto.
Tier one so we will keep you updated as we go forward.
And then John with respect to your question on price overall, we captured price pretty well across our business, but one area, where there was softness was U S far more generic competition continues to be a.
Place, where price is more challenging to capture.
We felt like we retired a lot of risk in Q1.
ERP system up and running and executed with no glitches continued improvement sequentially in the pet health business and just environment stabilization. So that was the big drivers of raising the bottom end of our guidance, yes, if we get more price that would be obviously, a positive and we'd be happy to have it.
Lot of different factors between volumes and price across our global business that are embedded in our guidance, we feel good about where we sit and we'll start to the year.
Thanks, we'll take the next question.
Our next question comes from David Westenburg from Piper Sandler. Please go ahead. Your line is open.
Hi, Thank you for taking the question and congrats on ERP or hard so ill just put that out there right away can you talk about the methodology in terms of calculating the benefit in ERP and can you kind of get into details on what exactly is happening for us on wall Street Idiots that really don't know what's going on in the industry.
From like a nuts and bolts level like it is going to distributors Thats go into like the main warehouses. The VAT. So I mean, just kind of.
Help us bridge, what exactly is happening to get to that 90 to 110 calculation.
And then I just have a quick question in terms of the guidance are you factoring anything competitively with library now that they got an approval or.
Triple I think.
Actually now maybe a little bit behind schedule, so any of the pushes and pulls in the guidance with the competitive factors. Thank you very much.
Yes with respect to them.
Ted This is an estimate based on talking to our customers looking at historic sales data and looking at underlying trends with inventory levels and pull out when you think about it in terms of we have our customers that order product every week and so we went out and told you.
Customers both on the Florida side are all focused on that because it's the bigger notional number. So we went and told a big online retailer, we will be not selling new product for the next 10 days, but youll be back up and running and ordering product on April .
Ted.
The retailer has to make a decision do I Trust I'll hop out.
I think to make myself I need to make my cash flows in the quarter and so theyre evaluating do they buy the product for 10 days because they trust us.
For 15 days because of their concern so that's sort of a valuation that is happening and think about.
A distributor.
Let's say in Mexico, and we went to them and said you're going to be the earliest.
Our country to come up on our ERP implementation and Youre going to be blacked out with no byproduct for the next bill.
Six days.
The question there is do they buy.
A month's worth of product they buy six weeks those sorts of things so.
Get into we were confident in our execution. That's why we reported 80, we think they probably took us a little more conservative approach. That's how you get to the 90 to 110.
Again, we gave first half guidance back in February because we knew this would be complicated and warrant increased the bottom end of that first half guidance because it's a good start we're after end of the year.
Yes guidance.
Guidance.
Bill David on your second question, Yes, we have in our assumptions.
<unk> from February that guidance Hasnt changed and nothing has changed relative to even the recent news not new approvals coming in.
We'll take the next question.
Our next question comes from Brandon Vazquez from William Blair. Please go ahead. Your line is open.
Hi, everyone. Thanks for taking the question a lot of.
Product specific questions already been asked so I guess one that construct.
My attention was if I heard you correctly I think you said you.
Macro trends are kind of improving globally and as you look through the back half of the year, you kind of expect them to continue improving.
Just kind of curious if you could talk a little bit about that because I think there's a lot of concern from investors not just in health, but in general that macro can kind of deteriorate in the back half. So what are you guys seeing there and then maybe the follow up to that is what's your confidence in being able to kind of keep the pricing benefits you're talking about now if there is a worsening.
Macro environment. Thanks.
Sure. Thanks, Brian recall, the back half of last year for us was really ugly.
Environment was really tough we saw lots of pressure across Europe, yet, but COVID-19 lockdowns in China really negatively impacted our business in 2022, so when we talk about the improving conditions.
Our question going into this year was wasn't going to be the sequential in front of me where are we going to see new customers coming back to the OTC channels or pet health product. We've seen that we feel good about that and thats, what we speak to with respect to <unk>.
Proving macro environment again, we've got challenges here on our underlying business as we guide that to down to two four in Q2. So we're clearly not calling a massive recovery, but rather just greater stabilization than we had last year with respect to the question on pricing again the team.
<unk> done a very good job of executing price increases to start the year. That's demonstrated in the 5%. We received in Q1, there continues to be a lot of competition in the marketplace and a lot of underlying dynamics. We're focused on that's why we've said more than 2% for the full year and the team is continuing to do well the insurer.
Sure, they're capturing as much of that as they can.
Thanks, we'll take the next question.
Our next question comes from Steve Scala from TD Cowen. Please go ahead. Your line is open.
Hi, This is Chris on for Steve I had two questions both on <unk>.
So first do you expect any capacity constraints on the U S launch and then second what is the timeline for ex U S market and how should we think that the U S versus ex U S split behind your $100 million guide on that product. Thank you.
Yeah, Chris. Thank you we're excited about the power of our launch will be shipping product in the next couple of weeks, we expect about 70% we need state approvals now that will follow this federal conditional approval, we expect about 70% of the states to be in the first month, so that will be shipping in the next couple of weeks as states come on yes excited about having a.
First monoclonal antibody plant in Iowa, Kansas approved.
I would emphasize that we will plan to.
To be ramping but as we move from a smaller leader to hire a leader of capacity that will happen throughout the second half of the year. So the launch will be limited initially by capacity does that interest is high I also wanted to just take this moment to highlight this is a conditional approval.
We will not be at all commercial limiting to us it really comes as a regulatory body like the FCA. In this case, a 330000 cases, a year, our parvovirus or the 90% plus mortality from this virus and zero dogs dine in or <unk>.
Let's accelerate this product in the market, we will continue with full approval, but theres really no restrictions here with the conditional approval other than there's a high need there is a high bet interest we will ramp throughout the second half and be in a really strong supply situation as we end this year.
Okay.
With that I will just make a couple of quick closing comments. Thank you for great questions today and continued investor interest.
<unk> looked at this quarter and saying we're doing this one quarter at a time.
We're not where we want to be yet, but I think this quarter show a necessary actions disciplined decisions a lot of progress and proof points as we look at the overall business and whats critical overall engagement in <unk> is growing on the inside our focus is high and I would say the headline here is we're tracking.
Our expectation, we're seeing nice sequential improvement coming out of Q4 areas that are stabilizing some areas returning to growth.
Specifically.
The retiring of risk that we saw not only in the first three months, but the first four months around the standup of our it system around <unk> and the overall management of the business as well as the market that matters. Most to US is U S. Pet health the lead indicators are driving the lag indicators thats going to.
Set this business up for long term success as well as then ellen's area and innovation launching four products, having three approvals two of our six blockbusters now in the marketplace and our last major blockbuster initial submission made so we still have a challenge here in Q2, we expect to return to growth in the <unk>.
Can have and be assured we're focused right now on what we can control and that is execution across the company. We look forward to fielding questions throughout the quarter from all of you. Thank you for your continued interest and have a great day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Yeah.