Q2 2023 Elanco Animal Health Inc Earnings Call
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the along core animal Health second quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question during this.
<unk> simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Star one. Thank you Katy Grissom head of Investor Relations you May begin your conference.
Good morning, Thank you for joining us for our Lingo animal health second quarter 2023 earnings call I'm Kidding, Chris I'm 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.
The slides referenced during this call are available on the Investor Relations section of <unk> 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.
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 our 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.
<unk> delivered a strong second quarter with meaningful progress in our late stage pipeline. The successful completion of our ERP integration and exceeded the top end of our guidance range on revenue by $4 million adjusted EBITDA by $61 million and adjusted EPS by <unk> 13.
We continue to expect the sequential improvement in the first half to continue with an anticipated return to revenue growth in the second half of 2023.
We are updating our expectations for the year raising guidance for revenue adjusted EBITDA and adjusted EPS.
Starting on slide four since our last call, we delivered improved operational performance and achieved key milestones advancing our strategy first in Q2, we delivered the second consecutive quarter of sequential improvement and year over year revenue performed.
Excluding the ERP blackout impact driven by strong performance from the U S Pet health business International farm animal and contributions from new products.
Additionally, we completed our ERP integration and announced resolution of the Epa's arrest overview confirming a products continued registration.
On debt, we are completing the refinancing of our August 2023 notes today.
Next in the quarter, we saw strong adoption in several EU markets for AD tab, our newly launched oral OTC flea and tick solution and in July we launched our canine parvovirus monoclonal antibody in the U S.
We made significant progress on our late stage blockbuster pipeline advancing key programs and gaining additional confidence on the differentiation and the launch plans.
Finally, we issued our 2022 ESG report demonstrating progress on our healthy purpose sustainability efforts and our internal operations customer collaborations and beyond.
Focusing now on financial performance on slide five we provide a view of year over year revenue for the first half of the year, excluding the impact of the ERP integration between the first two quarters.
<unk> reported a 1% decline in constant currency, demonstrating a marked improvement from the 5% decline in the second half of 2022, and surpassing our guidance expectations of a 2% to 4% decline.
Looking now to the key drivers in our four business areas that drove this over achievement.
First U S pet health.
U S pet health returned to growth in the first half of the year delivering 1% growth year over year.
Our strategy to increase share of voice improved physical availability leverage innovation and grow price contributed to the improved performance. The strong parasiticide season contributed to the OTC retail market dispensing growth in both units and total sales.
While the land co execution led to share gain in this market through the first six months of the year.
Bolsa Resto and the advantage family grew revenue high single digits exceeding expectations as our new creative campaigns and increase in total distribution points began to pay off on the vet clinic side, our investment in digital and enhanced sales force.
Its effectiveness drove a 36% increase in total touch points in the first half of the year.
This deeper engagement with veterinarians and clinics contributed to penetration growth for Cardello interceptor, plus and Gallup brand while competition remains impactful in the U S debt market. These increased touch points and penetration contributed to the stabilization.
<unk> of our business in this channel.
Bobby Moody's team's strategic execution is improving outcomes and we expect continued positive momentum from this business in the second half as we prepare for an exciting innovation launch window in 2024 and beyond.
Next enter international Pet Health business. This business declined 7% in constant currency in the first half.
Six percentage points of the decline was driven by the impact of ongoing demand pressure in the Spain retail parasiticide market more broadly we saw continued growth in our crude elio franchised balanced by slower markets, primarily impacting retail and other key geographies like Italy, China.
In Japan.
The European launch of add tabs surpassed expectations, increasing its expected full year contribution our market penetration strategy and quick action has positioned us well in the emerging OTC oral parasiticide market in Europe , we expect improvement in our international Pet health busy.
<unk> in the second half as we leverage innovation and anticipate a better economic environment in Europe compared to the second half of 2022.
Now moving to farm animal our international farm animal business the largest of the four quadrants grew 4% in constant currency in the first half driven by strength in poultry Aqua and price. We expect these drivers to remain strong in the second half of the year.
The U S farm animal business declined 5% in the first half with four percentage points driven by supply disruption for cattle vaccines and the remaining driven by implant regulation changes and timing of poultry rotations. These were partially offset by increased adoption of experience and contribution from mutual quest.
In the second half, we expect stronger performance from our U S farm animal business driven by improved vaccine supply the continued ramp of new products and increased demand for our poultry portfolio.
A few comments on Xperia experience remains an important innovation sales growth driver for this year beginning in March we saw a positive trajectory change in the use of the product, which continued to accelerate through July resulting in second quarter sales at three times those of the firm.
First quarter.
Adoption in Canada is tracking on a similar trajectory as the U S. We continue to focus on expanding use with existing customers and expect to exit the year at an annualized run rate of approximately $60 million to $70 million.
Finally, we are encouraged by the recent announcement from Tyson foods to reintroduce animal only antibiotics or ion a force into their poultry supply chain a linker leads the in feed poultry solutions area with a variety of tools from Nutritionals to our differentiated nearest and ionophore products Max <unk>.
Any band, which we expect will be key products in these new programs.
As the processor of about one fifth of all the U S. Chickens, we believe Tyson shift will result in a more sustainable production improved animal welfare and a positive net impact on <unk> business.
Moving now to slide six let's look at the strategic drivers of our innovation portfolio and productivity framework over the past few months.
First with productivity.
In April we successfully completed our ERP integration, simplifying our internal and customer facing business processes and enabling synergies among other things the simplification offered the ability to engage in a commonly used accounts receivable asset securitization program. This program.
We will provide the majority of the funds to retire our 2023 notes, which we are completing today.
Next on to the portfolio for <unk>, we're very pleased with the outcome of the Epa's comprehensive review and the confirmed continued registration of the product, we never wavered and our data driven confidence in the safety profile of <unk> and we are encouraged by the robust science based approach taken by the agency we.
View, the stewardship plan as an opportunity to raise the bar across the color category. We see the EPA outcome is a positive for the <unk> brand pet retail veterinarians and most importantly, pet owners, we now shift our focus to maximizing the commercial opportunity for <unk> globally with the <unk>.
Returning to high single digit growth in the U S. In the first half of this year.
Next price continues to be strong driven by the improved capabilities over the last year with 4% growth on a year to date basis, we now expect price growth of at least 3% for the full year.
With the encouraging pipeline progression and our expectations regarding differentiation, we're increasing our investment in the U S pet health business the.
The commercial organization led by Bobby Modi in partnership with Tim Beddington, leading our market strategy efforts are focused on building on our digital progress, adding experienced animal health marketing talent and accelerating our efforts to expand our field force. This investment is focused on maximizing.
<unk> the potential of our total pet health portfolio, including our launches this year and the innovation, we expect to launch in 2024, as we globalize the portfolio over time.
Finally, moving to slide seven I'll provide an update on our late stage pipeline overall.
Overall, the pipeline is strengthening with important progress in key late stage programs and portfolio enhancing approvals in major markets across species Ellen <unk> and her team are driving early stage advancements moving exciting projects from research into clinical development.
As we continue to build the components needed to deliver consistent high impact innovation.
In the U S. We launched our canine parvovirus monoclonal antibody a highly anticipated treatment for one of the most contagious and deadly dog viruses to supply chain is enabling responsiveness and the product is already saving dogs lives driving reorders as expected in 2002.
93 demand is outpacing supply due to the anticipated capacity limitations in our facility at launch.
We are on track to ramp up our capacity to Tenex today's volume to support the expected increase in demand in the coming years.
This year, we expect revenue contribution of $5 million to $7 million. However, we see this product as an important growth driver to both the top and bottom line starting in 2024 and expect blockbuster contribution as we expand outside the U S over time.
As we've shared previously we took a phased approach to filing our late stage potential blockbusters with three products in late stage of review. We appreciate the predictable nature of the FDA process driven by <unk> the animal drug user fee Act our views about our.
<unk> are based on the data we've generated and of course are subject to the approval process.
Today, we are proud to share that we believe the FDA has all the data necessary to approve our differentiated JAK inhibitor for canine dermatology. We are encouraged by this products progress and believe it will be highly valued by veterinarians and pet owners. Additionally by the end of August we expect the FDA will have on.
All the data necessary to approve our broad spectrum parasiticide for dogs and for ball there are methane reducing product for cattle.
Based on this we continue to see a path towards FDA approval in the first half of 2024 for all three of these potential blockbuster products.
With the developments in the parasiticide space over the last month, our confidence regarding the expected differentiation for our canine broad spectrum Parasiticide has increased.
Our product upon approval will be known as crude Elio Cuatro a.
A combination of lot of Atlanta, and three other active ingredients. It will focus on fleas and ticks as well as broad coverage of internal parasites, including heartworm roundworm.
And taper.
The product is seeking to demonstrate 100% heartworm prevention. After one month, we expect that differentiated coverage of Kurt Leo Cuatro and the differentiation of our JAK inhibitor for dermatology. This will allow <unk> to provide a more comprehensive and valuable portfolio of Cana.
<unk> products to veterinary clinics in 2024 shifting.
Shifting to <unk>, our first in class innovation to enable methane reduction in cattle, where we will focus our initial efforts first on dairy base.
Based on the wide body of research supporting the product's approval in many countries around the world and our discussions with the FDA, we're highly confident in the path to approval for this product in the first half of 2024.
Importantly, we believe we have secured necessary launch supply with a contract manufacturer a key component of the 2024 growth contribution.
As we pioneer new ground with products to reduce environmental impact we are working across the value chain to validate aggregate and create value for reducing livestock environmental impact and we are encouraged by the interest from the food chain.
Regarding our IL 31 short acting monoclonal antibody for canine dermatology, we now expect a differentiated product profile relative to the current technology.
Our expectation for U S approval has shifted to 2025 as a result of the Usda's increased data requirements across monoclonal antibody platforms, we remain confident in the product and its value in our overall portfolio.
Our innovation sales for 2023 continue to track to our guidance of $210 million to $250 million and we still expect to have incremental innovation revenue of $600 million to $700 million by 2025.
The shift of IL 31 is balanced by increased expectations for our other late stage potential blockbuster products as well as confidence in our views on Xperia parvo and add tab.
Over the last several months our launch revenue expectations for our late stage potential blockbusters have increased as a result of higher confidence in our differentiation enhanced launch plans and the evolving competitive landscape, we understand delivering on our opportunities in our pipeline go well.
Beyond getting the product over the regulatory finish line and we are investing in talent and capabilities to fully capture the value of our portfolio in 2023 and beyond.
Now I will pass it to Todd to provide more on the second quarter results and financial guidance.
Thank you, Jeff and good morning, everyone.
Today I'll focus my comments on our second 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 second quarter, we delivered $1.057 billion of revenue a decline of 10% or 9% in constant currency price contributed 4% in the quarter and.
In April we completed our global systems integration, bringing the legacy Bayer animal health business into the linker ERP environment, we remain confident of our my estimate which included a revenue shift between quarters from the ERP blackout estimated in the range of $90 million to $110 million, representing an eight to nine percentage points.
Month to growth in the second quarter outside of this the base business performed above our expectations in the second quarter with an estimated flat to 1% revenue decline in constant currency compared to prior year as shown on slide 10.
This represents a trajectory change for mid single digit constant currency decline, we reported in the last few quarters.
Consistent with last quarter on slide 11, we provide our revenue results by business area on a reported and constant currency basis.
For pet health constant currency decline was 14% with an estimated headwind of 11 to 13 percentage points from the ERP blackout.
In the U S pet health revenue declined 9%, including an estimated 11 percentage point headwind from the ERP blackout the.
The estimated 2% growth in the underlying business was driven by OTC retail as our strategic efforts drove improved dispensing, while also benefiting from price innovation and supply disruption in the second quarter of 2022.
This year, we increased our participation in retailer promotional events with key E Commerce partners, resulting in increased purchasing in the second quarter relative to our guidance in May we estimate approximately $10 million of OTC products were sold to retailers in the second quarter versus our expectation for the third quarter.
Recently, we saw growth of our pain portfolio in vaccines. Despite supply disruptions on certain vaccines growth was partially offset by continued pressure on our legacy prescription parasiticide portfolio. However share loss has slowed over the last several quarters.
International Pet health declined 23% in constant currency with an estimated headwind of 14 percentage points from the ERP blackout excluding.
Excluding the blackout impact.
<unk> business decline was driven primarily by our Spain retail business.
Exceptionally strong demand expectations and purchasing from distributors and retailers in the first half of 2022 was followed by pressure economic conditions. As a result demand did not materialize in the second half of 2022 and remained below expectations in the first half of 2023, resulting in a year.
Year over year decline in both periods for our business.
<unk> 23, this impacted our business in the first quarter, but was more significant in the second quarter. We believe continued improvement in consumer demand will drive sales improvements in the second half of 2023 and the first half of 2024.
Moving farm animal our global business declined 3% with an estimated 5% headwind from the ERP blackout, excluding that the underlying business growth was driven by strength across international poultry and Aqua, partially offset by expected declines in U S cattle related the vaccine supply disruption and regulatory changes for implants.
Supply disruption for cattle vaccines is expected to be remediated in the third quarter, providing a tailwind in the second half, but to a lesser extent than we expected in our call in may.
Continuing down the income statement on slide 12, gross margin increased 10 basis points to 58, 9% gross.
Gross margin included a 150 to 180 basis points of unfavorable <unk> from the ERP blackout.
The improvement was driven by price group.
Productivity and the favorable impact of FX on cost of sales offset by higher inflation.
Operating expense increased 2% year over year in the quarter with R&D expenses down 1% to $81 million and SG&A expenses up 3% driven by increased marketing investment and employee related expenses, partially offset by the favorable impact of foreign exchange rates.
Interest expense was $74 million compared to $50 million last year slightly better than our expectations.
Adjusted EBITDA was $222 million in the quarter or a decline of 27% with an estimated $70 million to $90 million headwind from the ERP blackout.
Adjusted EBITDA margin was 21% a decline of 490 basis points with an estimated 450 to 540 basis point reduction from the blackout.
Just the EPS was 18 cents in the quarter with an estimated 11% to 14, some headwind from the ERP blackout, assuming a corporate consolidated tax rate in line with the first quarter of 21, 9%.
On slide 13, we provide a walk from our second quarter guidance to actuals the over performance compared to guidance for adjusted EBITDA and adjusted EPS in the quarter was driven by higher than expected sales of our higher margin U S. Breast health business. Additionally, the adjusted EBITDA benefit of $61 million compared to the top end of the guidance.
<unk> included favorable impacts on Cogs and lower operating expense the adjusted EPS benefit of <unk> 13 cents was also impacted by <unk> <unk> of favorability for interest and tax.
Before moving to guidance, let me offer a few words on our cash working capital and debt on slide 14 cash.
Cash provided by operations was $61 million in the quarter the year over year decline in the second quarter operating cash flow reflects the impact of last year's interest rate swap settlement higher cash interest and an increase in net working capital specifically from inventory.
Inventory was a use of cash again this quarter driven primarily by increased farm animal inventory largely as a result of pressure sales volumes over the last several quarters. We are very focused on actions to improve working capital the system integration enables opportunities to streamline collections across our entire business improving accounts receivable.
And we are improving inventory management by reducing distribution centers. We are taking further actions to manage our inventory, including renegotiating the timing of delivery on API and raw material contracts assessing safety stock levels byproduct and ongoing reduction of throughput at certain manufacturing facilities.
These efforts are expected to deliver benefits to the balance sheet gradually over time as we implement changes while also prioritizing new product launch supply needs.
We ended the quarter with net debt of $5 75 billion with $250 million draw on our $750 million revolver.
Today, we will retire the $344 million of notes due in 2023 as we reported in our form 8-K from early July we will fund the retirement with a $250 million asset securitization facility on accounts receivable of approximately $100 million from our revolving credit facility as Jeff mentioned the <unk>.
Solid base and of our ERP system provides us the flexibility to enter into the securitization agreement at the end of June our net leverage ratio was five nine times up from five four times at the end of the first quarter, but below our expectations due to our adjusted EBITDA outperformance in the second quarter, given the increased use of cash for inventory above our <unk>.
Expectations for the second quarter, we now expect to pay down $50 million of debt in 2023.
We anticipate our year end net leverage ratio will be between five 5% and five eight times importantly, we continue to expect durable cash flows from our business overtime with debt Paydown is the primary capital allocation priority. The next significant debt obligation is due in 2027, we've updated slide 23.
To reflect our key data information after the retirement of the 2023 notes in May we fixed an additional $750 million of variable rate debt with interest rate swaps that mature in 2028 as a result of these two financing transactions our fixed rate debt will remain at approximately 75% of total debt through the end of this year.
After including the late July rate hike by the Federal Reserve, if we assume flat interest rates throughout 2024, no more fed rate adjustments. We expect next year to have income statement interest expense of approximately $305 million to $315 million in cash interest between 340 and $355 million or.
A $40 million to $55 million improvement compared to this year on cash interest.
Finally, we have also included slide 24 in the appendix, which points to our expected meaningful reduction and project cash costs beginning in 2024.
Now, let's move to our financial guidance, starting on slide 16, as Jeff said, we are raising our full year guidance for revenue adjusted EBITDA and adjusted EPS.
For the full year, we now expect revenue to be between 435 billion and $4 four 1 billion or approximately 1% growth to 1% decline in constant currency.
For adjusted EBITDA, We now expect $950 million to 1.01 billion adjusted.
Adjusted EBITDA reflects the improved sales outlook and the second quarter over performance. It also factors in gross margin headwinds, we expect from reducing manufacturing throughput to reduce inventory and improve cash.
And the investment of our pet health business that Jeff described.
For adjusted EPS, we are raising our guidance to 80 to 89, reflecting.
Reflecting the adjusted EBITDA impact and improved assumptions for interest expense and tax.
On slide 17, we are introducing financial guidance for the third quarter, we expect revenue of $1.0 billion to $5 billion to 1.06 billion Rep.
Representing constant currency growth range of 1% decline to 2% growth, we expect adjusted EBITDA between $170 million and $200 million and adjusted EPS of eight to 13 subs.
Finally, moving to slide 18, our implied second half revenue guidance represents flat to 3% constant currency growth. We remain confident in the second half returned to growth led by contributions from price new product ramps improved supply for vaccines and continued growth in poultry and Aqua offsetting continued pockets of <unk>.
Petition now I'll hand, it back to Jeff for closing comments.
Thanks, Todd as we close I want to thank the globally Langkow team. This team around the world is laser focused on delivering value for our customers and shareholders and our results. This quarter reflects significant progress we delivered a strong second quarter, demonstrating operational improvement exceeding our expectations.
And contributing to our raised full year guidance.
The continued sequential improvement in year over year underlying revenue performance was driven by a return to growth in the U S. Pet health business strong International farm animal performance and contribution from the new products.
We expect this momentum to continue with an anticipated return to revenue growth for the company in the second half of 2023.
Importantly, we have reached the pivot point with our standup and integration now behind us and an optimized infrastructure to build our next era of innovation and growth. Our team is making strong progress on our efforts to transform animal care, bringing new solutions to some of our customers' greatest challenges from diabetes.
<unk> in cats to deadly parvovirus, and puppies to environmental solutions and cattle.
This quarter, we made significant pipeline progress on our late stage pipeline enhancing our confidence and our differentiation and launch revenue expectations. We are very encouraged by this advancement and are investing to maximize the potential of our full portfolio and the expected launches.
Our focus is on consistent delivery and sustained innovation with a balanced outlook for future growth improved cash flow and long term value generation.
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 Riskin from Bank of America. Your line is open.
Right.
Thanks for taking the question guys.
My first one is going to focus on the innovation side of things there were a number of times you flagged that you have all necessary data for approval with the FDA.
The case for the JAK inhibitor now and then you expect that to be the case record Elliot Clos Charlottesville there.
By the end of August .
Could you just walk us through what comes after that what are the additional steps obviously, that's in the hands of the FDA at that point, but it is a four to six month window from all data with the FDA to approval.
Approval, assuming things go correctly and there is no secondary data requests.
The right way to think about that timeframe.
Yes, Mike. Thank you thanks for the question.
That is correct. So what we were doing here. So just to be very clear is whether it's <unk>.
Dialogue with.
The FDA or the submission itself, we were confident that they have the information they need as you know when you do if a process. These products are subject to approval but.
That is correct and I think we disclosed some additional information today that really reiterates and builds our confidence more than even a quarter ago relative to that $600 million to $700 million commitment that we have and I'm. Just I, just really want to emphasize that the $210 million to $250 million of innovation led by Ed tab.
Spirit success Parvo success that will be our base and then.
The additional information that we shared on codelco cuatro, a broad spectrum parasiticide that both there as well.
Well as said.
Those two submissions as well as the JAK one inhibitor. So if that is correct.
When you follow the newfield process, which is predictable.
You are going to see that thats in that window.
Four to six months, which put us on the path for the first half of 2024.
Great, Thanks, and kind of related to that one for Todd.
You called out to be.
EBITDA.
Over $60 million, but you are raising the full year by $10 million, So you're talking about the moving pieces in the second half.
A little bit on gross margin, but you're also flat additional investments.
Could you talk through what that is.
What those investments are.
Is that the biggest part of the incremental spend in the second half just quantify that.
That bridge for us a little bit.
Sure Mike. Thank you for the question, Yes, we're very pleased with how the team executed across the second quarter, we always take a balanced approach and looking at our business and have a lot of things break our way this past quarter to deliver that significant EBITDA beat as we then look to the second half we're focused on continuing to build.
Create value for the long term as Jeff just mentioned the innovation that's coming is critical to that long term success and then.
<unk> increased EBITDA growth, we expect to have to that and we're investing about $10 million incrementally on sales force expansion for our U S Pet health team to drive both the complete portfolio, but also the new innovation embedded in that is also increasing global marketing expertise.
With Tim Beddington and his team that we're building underneath Tim to be ready to globalize these products to build them out.
National markets over time as well so that's one part of the EBITDA bridge for the second quarter the other element of it.
About $20 million relates to slowing down our manufacturing plants.
Q2 was a really good quarter across the board, except for one thing and that was increasing inventory more than we expected on our own balance sheet a lot of that relates to API purchases for products, especially on the farm animal business that we have to make decisions on kind of 18 to 24 months.
Given the disruption to the supply chain from Covid. So a lot of that product is still coming in the door.
We're addressing it were slowing down plant output, that's putting pressure on gross margin as well to about $20 million and then there's some other timing elements and mix shift.
That are always going on our business that are also impacting that bridge, but yes.
Strong quarter really strong quarter by U S OTC business and as a reminder, the seasonality of our business makes that predominantly a first half business and so that also impacts where our b could come from so again very pleased with the execution by the team across the year.
<unk>, which is allowing us to raise full year guidance on sales adjusted EBITDA and adjusted EPS.
Thanks, Mike we'll take the next we will take the next caller.
Your next question comes from the line of Chris Schott from Jpmorgan. Your line is open.
Great. Thanks, so much for the questions and the color on the pipeline updates here I guess first question for me is maybe just extending that discussion on SG&A and not looking for formal guidance here, but just as we think about next year, how much incremental investment do we need to think about now that you have additional clarity on some of these assets and the profiles and.
A market I.
I guess on one hand, it's bad.
Balanced between investing properly behind these and then similarly kind of managing kind of earnings progression. So yourself a little bit about how do we think about those.
The second question I had was just on the pipeline you.
You talked about <unk> and the profile. There is there anything you can provide on the JAK inhibitor I see in the slides mentioned is differentiation, but just any color on what that profile could look like and how that fits in the market. Thanks. So much.
Sure Chris with respect to next year's investment certainly we are starting to ramp that up this year as we expand the sales force and add to the marketing.
Overall, we're continuing to make sure that we launch these products really well they will be the growth driver for alanco in the years to come and so we're going to make sure. It's not short those we've got a broad business. We've got a lot of things in motion as we talk the ERP.
Felicia does provide incremental synergies next year across our portfolio that we continue to capture in the about $20 million range. In addition, then to investments will need to make for these products to launch them well, so not giving guidance today, but certainly understand the importance of driving the launch.
These products come to market and then Jeff on the yeah.
Yes, Chris. Thank you for the question I would just say and emphasize I think Ellen and her team. This quarter represents a level of discipline I think that level of quality the quality of the submission the engagement with the regulatory bodies.
And I would say the engagement the capacity.
<unk> has probably never been higher than anytime I've seen in the length of R&D as you look specifically at the Jack again going into this $1 billion plus term market, we have not put any more light on the differentiation as I've said in the past safety efficacy convenience and will be important I think the noted.
Significant differentiation, we see is on the payer side, having this differentiated coverage.
It really allows us as we start to think about approaching that clinics being able to have.
Very broad pain portfolio of differentiated para in very broad payer and now coming with us Jack that will be another factor to Todd's point on our level of confidence the increasing of that confidence in the last quarter the level of differentiation candidly the level of current innovation with even parvo.
Has led us to say, we're going to lean in and make some of these investments so but no no more additional color at this time on the Jack other than to say it is differentiated we believe the FDA already has what they need and we're tracking nicely for a first half a path to a first half approval for 24.
Thank you.
Great. Thanks, we'll take the next caller please.
Your next question comes from the line of <unk> from Evercore ISI. Your line is open.
Hi, guys. Thanks for taking my questions, maybe a couple if I may 1st I saw you raised overall guidance, but the low end of your net leverage expectations is now five five versus five three previously and I was trying to understand why that would be and I'm talking about the year end net leverage expectation secondly on the securitization facility I noticed your collateral.
For that includes cash and investments in inventory and it also proceed to say all other personal fix your property or assets of the borrower and I'm trying to understand is that typical.
Yes over with respect to the leverage we did increase but as we called out were expecting to pay down less.
Gross debt net debt this year than we previously had but again feel confident that the.
Management of the inventory that we're getting into as well as the continued underlying growth in the business as we returned to revenue growth in the second half we will make that improve over time and then they are facilities are very standard secured facility. This was really.
Enabled by our ERP integration with having all of the receivables and one system that allows us to execute this typical facility. That's got a lowest cost of variable rate financing for us. So.
So for plus 125 basis points, so inside of our credit revolver. So something we've been looking at for years, but just couldn't execute until we had the implementation done but very standard facility.
Thank you thank.
Thanks, we'll take the next caller please.
Your next question comes from the line of Jon Block from Stifel. Your line is open.
Thanks, guys good morning.
I'll ask both upfront wanting situation 23, EBITDA cadence seems.
Largely in line with the 22 cadence, but I believe the revenue seemed a little bit more back end weighted in 'twenty three relative to 'twenty. Two so maybe if you could just.
Explain the confidence in that slightly greater percent of sales for <unk> 23.
Relative to what you experienced last year, a quick sidebar question to that is the $21 million add back in EBITDA This quarter.
Right that that aided EBITDA, it seems like $15 million that might've been unwinding, an accrual and so resto and that there was a natural segue there. The second part of the question would just be Jeff.
The rest of resolutions finally, there that's great just would love you are taking a step back and getting your thoughts about the long term growth rate of that product going forward. Thanks, guys.
Thanks, John for your question No I would say, there's nothing different on the revenue cadence other than the second half of last year was not a strong second half for Alanco and that factors in with respect to the surface.
On the multi district litigation we had.
Office of finalizing that buttoned up there to do the accrual that is not in our adjusted EBITDA results.
I'd.
Part of the adjustments that you can see in the back of our press releases, we walk from GAAP to our adjusted results.
Jeff Yes, Thanks, John for the question, we had a really great first quarter and second quarter first half on.
At retail and I think it links to this arrest question, we're very happy with the outcome, we as I mentioned believe that it's a <unk>.
Science based decision it reaffirms that long term registration of the product and raising the bar on the overall category of collars as we look at retail.
You saw that return to growth high single digits for <unk> and <unk>.
Quarter I think as you look forward here some of the things that we mentioned on the last quarter that really played out.
The increased physical availability, bringing bringing an innovative innovation with it so the advantaged brands that we've launched inside of those price and share of voice I'll just call out a couple of things and I think just because our retail capability grows our share has grown its been a very strong market with really.
Less trade down and actually strong strong market a couple of things we've put a very aggressive and probably most comprehensive campaign, we've ever done with <unk>, we've seen 50% increase in our kind of click rate on that campaign and then the total distribution points back of physical availability were up.
14% for the first half. So these are the factors I believe our team is.
Just kind of as experienced as anyone in the industry. Our share is growing so when I look at so rest of the long term, we're well positioned but it's going to be these four factors that matter price innovation physical availability and share of voice, we're not giving guidance today, but we see the stability and return to growth is a positive thing and a long term or not.
Just in the U S but globally.
Great we'll take the next question please.
Our next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Great. Good morning, Thanks for the questions.
Tom I guess first I wanted to go back to the commentary on gross margin in the $20 million impact from reduced throughput in the manufacturing facilities can you talk about how that plays through to 2024 and do you see kind of that.
Normalizing next year, so that there wouldn't be the type of gross margin drag in and does it have any implications for your free cash flow expectations next year.
Then.
I wanted to.
The second question.
Alpha on the IL 31.
I think you added the commentary around its now kind of a differentiated product versus what's on the market are.
Are there any details you can give us there in terms of the timing of approval.
Maybe talk about what additional data requirements.
You got from the USDA that led to the shift in approval.
Okay. Thanks with respect to your first question is the way the team sees it today, we've got a number of different items.
Items across our manufacturing footprint that we continue to work on to improve gross margins you would've seen it here in the second quarter that we had a very strong gross margin quarter, well north of 60% once you add back the impact from the ERP.
Integration. So you get into improved price that continues to be a big driver of gross margin improvement, we've got productivity continuing inflation in certain areas is starting to stabilize especially on the shipping side.
Then with respect to plant, yes. It does have an impact second half of this year. It will have an impact into next year, but overall.
Continue to feel good about the momentum, especially with U S pet health doing better as that is our highest margin areas of the company.
Relative to the IL 31, yes.
We're excited to announce that.
Research has confirmed differentiation of the products. So this now confirms that all of our late stage pad assets are differentiated and that leads to the investment and our belief that we have an opportunity to take more share as we go into the market, which leads to the investments relative to the change and I am not going to get into the.
Jason at this time, but it would fall into categories that I've mentioned before I think the shift in expectations again, I won't get into great detail, but again. This is a USDA not an FDA product I think that's important so it doesn't fall under <unk>, which is maybe.
Our process is very well defined on the FDA side, but this is a shift of expectation that was really driven by the usda's increased data requirements across the monoclonal antibody platforms here in the U S and again won't won't get into great detail. Those increased requirements I will say, though are related to more of the magnitude.
Due to the data.
And it doesn't really we believe pose any technical risk only a timeline shift.
Great 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 kind of focus a little bit on the progression of margins in sales, especially as we're kind of updating our models for 'twenty four and maybe ask a slightly different question, but maybe you can talk a little bit about when you have some of these new product launches in the first half of 'twenty four what are your expectations, maybe around controlled launch periods.
Is that should we be factoring in a little bit of a period, where you ramp sales more so than normal and then on the other side of that how does how does the manufacturing side look.
When can they start to be margin accretive.
Thanks, Brian .
Well, we're not going to give guidance today, but we will.
Again talked about same information, we've provided last quarter with respect to approval to launch usually it's about two to four months post approval before we get the losses labels get finalized and those sorts of elements with respect to margin. So again, we feel very good about the margin prospects on all of these products.
Over time, but clearly as you ramp sales and get to higher levels, we get better economies of scale on those with respect to crude oil quadro as well as the JAK inhibitor, we expect those to be higher margins at the start with respect to both there given that.
Significant pull forward of approval versus when we acquired it means we're going to have third party contract manufacturing supply that will be at a higher margin and thus less accretive to our overall portfolio then.
At health products, but overall, we're looking forward to getting these approved getting the wallets there'll be the big drivers over the next few years to increase margins increased free cash flow and drive EBITDA higher.
Great. Thank you and then one other one other question just on the international side I think you mentioned some some pockets of international weakness in some countries can you just give an update on the macro backdrop internationally and where there might be any pockets of weakness or strength.
Yes, I think on the strength side, our global poultry and Aqua franchise has continued to do well China. As we've said is meeting our expectation, but more of a U shaped recovery not a V. So we're keeping our eyes on consumer confidence on the pet side swine prices still remain just a little below breakeven.
We're seeing mid single digit growth in China tracking to our expectations.
There is a little bit of a slower pet market in Japan, and Australia, I mean, those would be a little bit of a few pockets of softness, but again I've traveled to Asia Latin America. This year or this past quarter and I would say again, the resiliency of that that market continues to hold the strength of global poultry and Aqua continue to hold very well.
Our portfolio is faring, very well, which has driven 4% growth in and farm animal international.
Okay, we'll take the next question.
Your next question comes from the line of <unk> Prasad from Barclays. Your line is open.
Good morning, everyone. This is <unk>, thanks for taking our questions.
Could you provide a bit more detail around how youre thinking about your cuatro compares.
Our next card plus can you just really any further details on how it is going to be a differentiator.
Yes. Thank you for the question, yes, very much. So so look I think a lot has happened over the last few months in the parasiticide business again, the largest market globally over $5 billion and I would just say look at Codelco Quadro is the next evolution in our <unk> franchise with <unk> offering <unk> dog <unk> cat.
<unk>, plus which is really our broad spectrum outside of the U S doing very well and very competitive.
I believe the first product in canine with four active ingredients and a differentiated coverage I just would want to emphasize fleas and ticks, but also heartworm roundworm and tapeworm. Additionally in that that would be new information here on this call and then I think.
If approved we are focused on 100% heartworm prevention. After one month I think thats important.
And active during that first month, and I think that would be additional again all of these this is relative to products, it's still under subject to approval, but again, we believe differentiated coverage will be key it will play with a broad parasiticide portfolio that we have and it will be also kind of in sequence with the derm portfolio.
So that will be coming as well, which we believe will be will be a factor in our adoption rates and our competitiveness as we enter into the market.
In 2024.
Great. Thanks, we'll take the next caller.
And your next question comes from the line of David Westenburg from Piper Sandler Your line is open.
Hi, Thank you for taking my question and great job executing this quarter.
Can you talk about some of the assumptions on the pretty fast growth assumptions for parvo, whether it'd be maybe a prophylactic indication maybe what outside of the U S might look like in that indication just any kind of color on what you said why do you think that could be a blockbuster.
Assumptions needed and then on just.
The second question upfront I think you highlighted if I misunderstood some new marketing strategies with <unk>, an advantage just give a little bit more color onto what that what those are alright. Thank you very much.
Yes. Thank you for the questions powerboat were off to a great start as we mentioned launching the product in July early reports of some amazing stories again.
<unk> is working extremely well the supply chain is solidified being able to move a frozen product and thats going well. So again, our first monoclonal antibody I would focus first and foremost on our U S. Market. So 330000 cases were seeing on an annual basis that doesn't include shelters.
We're building a market here, while we're doing this and early efficacy is really important and we're seeing that we're seeing quicker treatment. So if you think about the value proposition of this product what youre seeing is.
Weaker response rates of recovery and a higher rate at this point in time every dog that's been treated to our knowledge. The puppies had survived but what may take four to five days in a vet clinic and a very burdens.
Treatment regime. This can be 24 to 48 hours in a much higher success rate I think the other thing for US is we're seeing a carryover with parvo more access to more clinics, because all clinics want to talk about and have the ability to have this product. So thats also fared well so our focus right now is on the U S.
Our focus is on increasing manufacturing capacity 10 X, we're expecting 5% to $7 million of sales this year, but a very big step up in manufacturing capacity as we go into 2024 and that will help us as we as we head forward and then yes global approvals gives us a path to a blockbuster product back on the retail side.
Again I come back to just these four pillars were focused on led by physical availability is just where we're in more stores on more shelves.
So resto advantaged leveraging those brands.
And also at more price points. So when we introduced the new advantaged brands and more price points. So prices another factor increasing share of voice more campaigns more targeted digital windows campaigns.
Another factor and then bringing innovation, we've got Ellen and Bobby they've got an awful arm of innovation of links to that so.
As a whole where we've increased our share.
This quarter on retail and we continue to see this as a significant driver and as we launch add tab over in Europe . The same thing.
<unk>.
Applies as well to the international markets. So excited about that.
Great I believe that was our last caller questions. So Jeff would you like to close this gap.
Thank you for your interest again, another quarter, we believe proof and progress on our strategy.
Delivering above our expectations.
Raising the guidance for the full year, we see our company returning to growth in the second half of this year and heading into the next era of significant innovation and growth starting with the innovation. That's approved that is ramping as we as we move forward today again, we are more capable.
Hey than we've ever been with our ERP standup complete so rest will behind us and now our focus is on delivering today, while preparing also for these historical innovations that are coming in.
And as we head into 2024, thanks for your interest and look forward to engaging with you throughout the quarter.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
Okay.
Okay.