Q4 2023 Elanco Animal Health Inc Earnings Call

Operator: Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Elanco Animal Health fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise.

Good morning, My name is Krista and I'll be your conference operator today at this time I would like to welcome everyone to the land go animal Health fourth quarter 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 would like to ask a question.

Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Katy Grissom, head of investor relations. Katy, you may begin.

Jim during that time simply press star followed by the number one on your telephone keypad and if you'd like to withdraw your question I got and press Star. One. Thank you I would now like to turn the conference over to Katie Gerson head of Investor Relations Katy you may begin.

Katy Grissom: Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter and full year 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 Perucker from Investor Relations. The slides referenced during this call are available in the Investor Relations section of elanco.com. Today's 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 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 statements.

Katy Grissom: Good morning, Thank you for joining us Berlingo animal health fourth quarter and full year 2023 earnings call I'm Kitty Griffin 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.

Katie Gerson: The slides referenced during this call are available on the Investor Relations section of Alanco Dot com.

Katie Gerson: Today's 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 in today's earnings press release as well as our latest Form 10-K, and 10-Q filed with.

Katie Gerson: The SEC we.

Katie Gerson: We do not undertake any duty to update any forward looking statements.

Katy Grissom: Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we'll be happy to take your questions.

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.

Katie Gerson: Now I'll turn the call over to Jack.

Jack: Thanks, Katie and good morning, everyone today, <unk> reported fourth quarter and full year results for 2023, our strong performance last year gives us confidence that our innovation portfolio and productivity strategy is working and that our actions and investments to launch our new innovations and optimize our core pas.

Jeffrey N. Simmons: Today, Elanco reported fourth-quarter and full-year results for 2023. Our strong performance last year gives us confidence that our innovation portfolio and productivity strategy is working, and that our actions and investments to launch our new innovations and optimize our core portfolio are paying off. As we enter 2024, we are focused on advancing our strategy to deliver these three priorities, sustain revenue growth, innovation, and improve cash conversion. Starting on slide four, revenue growth. In the fourth quarter, we delivered 5% constant currency revenue growth in line with our performance in the third quarter. Fourth quarter growth was driven by innovation, strength across our farm animal business, improved conditions in the European pet health retail market, and increased prices. While we exceeded our sales expectations and demonstrated strong operating expense management for the quarter, adjusted EBITDA was adversely impacted by approximately $18 million of unexpected items, primarily related to the 54% devaluation of the Argentinian peso that occurred in December.

Jack: Folio are paying off as we enter 2024, we are focused on advancing our strategy to deliver these three priorities sustained revenue growth innovation and improved cash conversion.

Speaker Change: Starting on slide four with revenue growth in the fourth quarter, we delivered 5% constant currency revenue growth in line with our performance in the third quarter fourth quarter growth was driven by innovation strength across our farm animal business improved conditions in the European Pet health retail market.

Speaker Change: And increased price.

Speaker Change: While we exceeded our sales expectations and demonstrated strong operating expense management for the quarter. Adjusted EBITDA was adversely impacted by approximately $18 million of unexpected items, primarily related to the 54% devaluation of the Argentinian peso that occurred in December our fourth quarter.

Jeffrey N. Simmons: Our fourth-quarter sales growth drivers, along with the strength in our U.S. pet health retail business, led to a return to full-year constant currency sales growth at one percent. Importantly, we expect growth to continue in 2024 at one to three percent, even before the potential upside of our late stage pipeline. On innovation, we made significant progress in 2023 with the approval and launch of our canine parvovirus monoclonal antibody, or CPMA, and ABTAB, our new over-the-counter oral parasiticide in Europe, as well as the submissions for our three late-stage potential blockbuster products that have a path toward approval in the first half of 2024.

Speaker Change: Sales growth drivers along with the strength in our U S. Pet health retail business led to a return to full year constant currency sales growth of 1%.

Speaker Change: <unk>, we expect growth to continue in 2024 at 1% to 3% even before the potential upside of our late stage pipeline.

Speaker Change: On innovation, we made significant progress in 2023 with the approval and launch of our canine parvovirus monoclonal antibody or CPE MAA and add tab, our new over the counter oral parasiticide in Europe as well as the submissions to our three late stage potential blockbuster product.

Speaker Change: That have a path towards approval in the first half of 2024.

Jeffrey N. Simmons: We exceeded our expectations for innovation revenue in 2023, and our outlook for 2024 puts us on track to deliver our expected 600 to 700 million in contribution by 2025. We continue to prioritize free cash flow improvements, paying down debt, and reducing leverage and exceeded our debt paydown expectations from our November guidance. In 2024, we expect cash available for debt paydown to be approximately $300 million, four times that of 2023.

Speaker Change: We exceeded our expectations for innovation revenue in 2023, and our outlook for 2024 puts us on track to deliver our expected $600 million to $700 million of contribution by 2025.

Speaker Change: We continue to prioritize free cash flow improvements paying down debt and reducing leverage and exceeded our debt paydown expectations from our November guidance and 2024, we expect cash available for debt paydown to be approximately $300 million four times that of 2023.

Jeffrey N. Simmons: Earlier this month, we announced the sale of our aqua business to Merck Animal Health, allowing us to prioritize our investments going forward in larger markets with greater earnings potential and meaningfully improve our leverage profile. We expect net debt to adjusted EBITDA to be in the mid four times range by the end of this year and the high three times to low four times range by the end of 2025. Importantly, we are making disciplined decisions and taking actions to reallocate capital within our operations and invest for the future. Today, we announced a strategic restructuring that will allow us to do three things. First, shift resources from farm animal to pet health across the international business as we drive adoption of innovative products and prepare to globalize our late-stage pipeline. It also allows us to capitalize on efficiencies resulting from the completion of our ERP system integration and concentrate roles into strategic locations.

Speaker Change: Earlier this month, we announced the sale of our Aqua business to Merck animal health, allowing us to prioritize our investments going forward in larger markets with greater earnings potential and meaningfully improve our leverage profile, we expect net debt to adjusted EBITDA to be in the mid four times range by the end.

Speaker Change: Of this year and the high three times to low four times range by the end of 2025.

Speaker Change: Importantly, we are making disciplined decisions and taking actions to reallocate capital within our operations and invest for the future today, we announced a strategic restructuring that will allow us to do three things first shift of resources from farm animal to pet health across the international business as we.

Speaker Change: We drive adoption of innovation products and prepare to globalize. Our late stage pipeline. It also allows us to capitalize on efficiencies, resulting from the completion of our ERP system integration and concentrate rolls into strategic locations and lastly, it allows us to transition our business model.

Jeffrey N. Simmons: And lastly, it allows us to transition our business model to distribution or other third-party models in certain markets, notably Argentina. The restructuring will impact approximately 420 employees, or about 4% of the global workforce, and is expected to deliver net savings of $20 to $25 million in 2024, annualizing to $30 to $35 million of savings in 2025 and beyond. The savings will be reinvested in areas with more significant value creation opportunities, specifically in pet health globally and livestock sustainability. While we expect a limited amount of top-line headwind from the shift to distribution markets, we do not expect our restructuring efforts to have a meaningful downside to sales otherwise, notably in international farm animal markets, where we expect to realize savings. We have a strong track record of delivering productivity and will continue to look for additional opportunities to more efficiently allocate capital. I credit our senior leadership with these proactive actions that we believe will set Elanco up for its next era of growth.

Speaker Change: Two distribution or other third party models in certain markets, notably Argentina.

Speaker Change: The restructuring will impact approximately 420 personnel or about 4% of the global workforce and is expected to deliver net savings of $20 million to $25 million in 2024 annualized into 30% to $35 million of savings in 2025 and beyond the savings will be reinvested in.

Speaker Change: Areas with more significant value creation opportunity, specifically in pet health globally and livestock sustainability.

Speaker Change: While we expect a limited amount of top line headwind from the shift to distribution markets. We do not expect our restructuring efforts to have a meaningful downside to sales otherwise, notably in international farm animal markets, where we expect to realize savings we have a strong track record of delivering productivity and will.

Speaker Change: <unk> to look for additional opportunities to more efficiently allocate capital I credit our senior leadership with these proactive actions that we believe will set <unk> up to deliver our next era of growth move.

Jeffrey N. Simmons: Moving to slide five, our full-year content currency revenue growth of one percent was led by Farm Animal, but we saw marked improvement in our pet health business as well. Starting with Farm Animal, 4% constant currency revenue growth for the full year for Farm Animal represented accelerated growth rates for poultry, cattle, and swine compared to 2022. The team executed across the business, but especially in places where we have strong market positions, notably international poultry and U.S. cattle. International Farm Animal, the largest revenue contributor of our four quadrants, delivered four percent constant currency revenue growth, primarily driven by increased price and strength in poultry, a result of robust underlying demand and share growth in key markets like the U.K., Brazil, and China.

Speaker Change: Moving to slide five our full year constant currency revenue growth of 1% was led by farm animal, but we saw marked improvement in our pet health business as well starting to farm animal 4% constant currency revenue growth for the full year for farm animal represented accelerated growth rates for poultry.

Speaker Change: Cattle and swine compared to 2022, the team executed across the business, but especially in places, where we have strong market positions, notably international poultry and U S cattle.

Speaker Change: International Farm animal the largest revenue contributor of our four quadrants delivered 4% constant currency revenue growth, primarily driven by increased price and strengthened poultry a result of robust underlying demand and share growth in key markets like the U K, Brazil and China.

Jeffrey N. Simmons: Our U.S. farm animal business also delivered 4% growth for 2023, driven by increased prices and strengthened cattle and swine, with poultry improving in the fourth quarter. Xperia delivered $18 million in the fourth quarter, above the expected annualized run rate of $70 million that we shared in November. We remain encouraged by Xperia's progress and expect continued growth for the product globally in 2024. Moving to pet health,

Speaker Change: Our U S farm animal business also delivered 4% growth for 2023, driven by increased price and strength in cattle and swine with poultry improving in the fourth quarter.

Speaker Change: Xperia deliberate $18 million in the fourth quarter above the expected annualized run rate of $70 million that we shared in November.

We remain encouraged by experienced progress and expect continued growth for the product globally in 2024.

Speaker Change: Moving to pet health global revenue declined 1% in constant currency, representing an encouraging improvement from the 5% constant currency decline in 2022.

Jeffrey N. Simmons: Global revenue declined 1% in constant currency, representing an encouraging improvement from the 5% constant currency decline in 2022. For the U.S. pet health business, revenue declined 1%, a significant improvement from the 9% decline in 2022. Enhancements in share of voice, physical availability, innovation contribution, and increased price were more than offset by competitive pressure in the vet clinic market. Our OTC parasiticide business had a strong year in 2023, growing net sales 11% in retail channels, as our top six retailers grew dispensing sales in both units and dollars. In the veterinary clinic, we're encouraged by the growth of Cordelio and new products like CPMA, Zorbium, and Vexacan. As we look towards 2024, we are investing in an expanded sales force and implementing enhanced incentives to drive growth ahead of our anticipated new innovation launches in the veterinary clinic this year. Finally, in international pet health, the 1% constant currency revenue decline was primarily driven by demand pressure in the Spanish retail market in the first half of the year, which more than offset the encouraging growth from the Cordelio family and AdTab in Europe.

Speaker Change: For the U S pet health business revenue declined 1% a significant improvement from the 9% decline in 2022 enhancements and share of voice physical availability innovation contribution and increased price were more than offset by competitive pressure in the vet clinic market.

Speaker Change: Our OTC parasiticide business had a strong year in 2023 growing net sales of 11% and retail channels as our top six retailers grew dispensing sales in both units and dollars and.

Speaker Change: In the vet clinic, we're encouraged by the growth of <unk> and new products like <unk> and <unk>.

As we look towards 2024, we are investing in an expanded sales force and implementing enhanced incentives to drive growth ahead of our anticipated new innovation launches in the vet clinic this year.

Speaker Change: Finally in international Pet health, the 1% constant currency revenue decline was primarily driven by demand pressure in the Spain retail market in the first half of the year, which more than offset the encouraging growth from the <unk> family and add tab in Europe, the Spain situation improved in the second half of the year.

Jeffrey N. Simmons: The Spain situation improved in the second half of the year, and we expect that market to recover in the first half of 2024. Moving to slide six, I'll cover our execution highlights across our innovation portfolio and productivity strategy for 2023. Starting with productivity, improving cash conversion continues to be a key priority across the organization. We continue to drive cross-functional efforts to improve networking capital, specifically balance sheet inventory management, which gradually improved in the second half of the year, with inventory being a source of cash in the fourth quarter. For the full year, we paid down $76 million of gross debt and finished with year-end leverage at 5.6 times, slightly better than the midpoint of our November guidance.

Speaker Change: And we expect that market to recover in the first half of 2024.

Speaker Change: Moving to slide six I'll cover our execution highlights across our innovation portfolio and productivity strategy for 2023.

Speaker Change: Starting with productivity improving cash conversion continues to be a key priority across the organization. We continue to drive cross functional efforts to improve networking capital specifically on balance sheet inventory management, which gradually improved in the second half of the year with inventory being a source of cash in.

Speaker Change: In the fourth quarter.

Speaker Change: For the full year, we paid down $76 million of gross debt and finished with a year end leverage at five six times slightly better than the midpoint of our November guidance. Finally earlier. This year, we achieved a significant milestone of completing our ERP system integration, which will free up over 100.

Jeffrey N. Simmons: Finally, earlier this year, we achieved a significant milestone of completing our ERP system integration, which will free up over $100 million of free cash flow for debt paydown in 2024. Moving now to the portfolio. Price growth was 4% for the year, up from our previous average of 2%, with 4% in both pet health and farm animals. The core portfolio continues to stabilize, driven by stronger commercial capabilities, a global omni-channel approach, and the complement of new innovation. We continue to invest in our highest value creation opportunities across commercial, R&D, and manufacturing. Now on to innovation, where we had a very productive year of submissions, new product approvals in major markets, and advancement of our early stage pipeline. In-market innovation contributed $275 million of revenue in 2023, representing three percentage points of growth for Elanco and more than doubling the contribution from 2022. Growth was led by Xperia and NutriQuest on the farm animal side and Credelio Plus, Credelio Cat, AdTab, and CPMA on the pet health side, with Lifecycle Management and Geo expansions also contributing across both. CPMA finished in line with our expectations in 2023 with sales of $6 million.

Speaker Change: A free cash flow for debt Paydown in 2024.

Speaker Change: Moving now to portfolio.

Speaker Change: This growth was 4% for the year up from our previous average of 2% with 4% in both pet health and farm animals.

Speaker Change: The core portfolio continues to stabilize driven by stronger commercial capabilities global Omnichannel approach and the complement of new innovation, we continue to invest in our highest value creation opportunities across commercial R&D and manufacturing now.

Speaker Change: Now on innovation, where we had a very productive year of submissions new product approvals in major markets and advancement of our early stage pipeline.

Speaker Change: In market innovation contributed $275 million of revenue in 2023, representing three percentage points of growth free land go and more than doubling the contribution from 2020 to.

Speaker Change: Growth was led by experienced neutral quest on the farm animal side and critically O plus <unk> cat add tab and <unk> on the pet health side with lifecycle management and Geo expansions also contributing across both.

Speaker Change: <unk> finished in line with our expectations in 2023 with sales of $6 million expanded supply capacity and increased marketing efforts aimed at both veterinarians and pet owners are expected to make this product a key contributor to growth in 2024.

Jeffrey N. Simmons: Expanded supply capacity and increased marketing efforts aimed at both veterinarians and pet owners are expected to make this product a key contributor to growth in 2024. In the late-stage pipeline, our three differentiated assets, Cordelio Quatro, Zenrelia, and Beauvair, are all progressing with the FDA. As we shared previously, the regulatory process is rolling and iterative at this stage, and we are in ongoing productive dialogue with the FDA's Center for Veterinary Medicine. These three potential blockbusters continue to have a path to U.S. approval in the first half of 2024. While we are focused on the U.S. market first for these products, we are pleased to share we have also completed submissions for Zenrelia in nine additional markets, including the EU, UK, and Australia.

Speaker Change: On our late stage pipeline, our three differentiated assets Cardello Cuatro <unk> Annabelle there are all progressing with the FDA as we've shared previously the regulatory process is rolling and entered it at this stage and we are in ongoing productive dialogue with the FDA Center for veterinary Medicine. These three.

Speaker Change: Potential blockbusters continue to have a path towards U S approval in the first half of 2024, while we are focused on the U S market first for these products. We are pleased to share. We have also completed submissions for <unk> in nine additional markets, including the EU UK and Australia.

Jeffrey N. Simmons: Additionally, the team continues to deliver targeted lifecycle management, which extends the life and the value of existing brands, helping to stabilize and protect the core. Total innovation sales in 2024 are expected to be $350 to $400 million before the potential upside from our three late stage pipeline assets, putting us well on track to deliver the $600 to $700 million of innovation sales by 2025. Finally, 2023 marks significant progress in our early-stage portfolio, with a number of promising assets in our next wave expected to drive growth in the second half of the decade. A special credit to Ellen Dubrovander and her global R&D and regulatory team, as they've really set Elanco up to deliver significant, high-impact innovation in major markets for the years ahead.

Speaker Change: Additionally, the team continues to deliver targeted lifecycle management, which extends the life and the value of existing brands, helping to stabilize and protect the core.

Speaker Change: Total innovation sales in 2024 expected to be $350 million to $400 million before the potential upside from our three late stage pipeline assets, putting us well on track to deliver the $600 million to $700 million of innovation sales by 2025.

Speaker Change: Finally, 2023 marks significant progress in our early stage portfolio with a number of promising assets in our next wave expected to drive growth in the second half of the decade, a special credit to <unk> and her global R&D and regulatory team as they've really steady land go up to deliver significant.

Speaker Change: High impact innovation in major markets for the years ahead.

Jeffrey N. Simmons: Before I cover our outlook for 2024 on slide eight, I want to briefly discuss the announcement we made earlier this month to sell our aqua business for approximately $1.3 billion. This decision was the result of a strategic process that started about a year ago as we evaluated the expected growth drivers of our business in the future. We saw the opportunity to focus our investment in larger markets with greater earnings potential, namely pet health and livestock sustainability, which are aligned with our pipeline efforts. We expect the transaction to close around mid-year. Importantly, with over a billion dollars of expected proceeds from this transaction, combined with improved free cash flow from the business, we expect to accelerate that paydown. We are deeply grateful to our ACWA team's dedication to delivering for our customers as well as our bigger purpose of enriching lives with animal protein.

Speaker Change: Before I cover our outlook for 2024 on slide eight I want to briefly discuss the announcement, we made earlier this month to sell our Aqua business for approximately $1 3 billion.

Speaker Change: This decision was a result of our strategic process that started about a year ago as we evaluated the expected growth drivers of our business in the future. We saw the opportunity to focus our investment in larger markets with greater earnings potential, namely pet health and livestock sustainability, which are <unk>.

Speaker Change: Lined with our pipeline efforts, we expect the transaction to close around midyear importantly, with over $1 billion of expected proceeds from this transaction combined with improved free cash flow from the business, we expect to accelerate debt paydown.

Speaker Change: We are deeply grateful to our awkward team's dedication to delivering to our customers as well as our bigger purpose of enriching lives with animal protein.

Jeffrey N. Simmons: Now moving to our outlook for 2024 on slide nine. As we begin the year, we remain confident in the resilient underlying demand for animal care. Our outlook for the animal health market reflects underlying tailwinds from the humanization of pets and global protein demand, balanced by economic conditions impacting consumers, cyclical and profitability factors in livestock, and macroeconomic and political tensions around the world. Despite this, we believe Elanco is uniquely well-suited for growth this year. Our innovation expectations, our investment and key capabilities, our restructuring actions, the experienced team, and differentiated omni-channel strategy will contribute to this conference. For the full year 2024, we expect 1 to 3% constant currency revenue growth. This includes price growth of approximately 3% and incremental innovation revenue contribution of at least 2-3%. Headwinds on year-over-year core volumes are expected to lessen sequentially as we stabilize our base business through improved execution and lapping, as well as some regulatory and macroeconomic challenges last year. Importantly, our guidance includes the aqua business for the full year, but it excludes the contribution from our three late-stage products currently under regulatory review with the FDA.

Speaker Change: Now moving to our outlook for 2024 on slide nine.

Speaker Change: As we begin the year, we remain confident in the resilient underlying demand for animal care or.

Speaker Change: Our outlook for the animal health market reflects underlying tailwind from the humanization of pets and global protein demand balanced by economic conditions impacting consumers cyclical and profitability factors in livestock and the macroeconomic and political tensions around the world.

Speaker Change: Despite this we believe <unk> is uniquely well suited for growth this year.

Speaker Change: Our innovation expectations, our investment in key capabilities, our restructuring actions the experienced team and differentiated omnichannel strategy contribute to this confidence for the full year 2024, we expect 1% to 3% constant currency revenue growth.

Speaker Change: This includes price growth of approximately 3% and incremental innovation revenue contribution of at least 2% to 3%.

Speaker Change: Headwinds on a year over year core volumes are expected to lessen sequentially as we stabilize our base business through improved execution and lapping as well from regulatory and macroeconomic challenges last year.

Speaker Change: Importantly, our guidance includes the Aqua business for the full year, but it excludes the contribution from our three late stage products currently under regulatory review with the FDA, We plan to update our expectations in line with our quarterly cadence to account for the transaction close and product approvals.

Jeffrey N. Simmons: We plan to update our expectations in line with our quarterly cadence to account for the transaction close and product approval. This year, we expect revenue growth in both pet health and farm animals. For pet health, we see value drivers across all parts of our omni-channel strategy, and Proof Supply and Innovation, led by CPMA and ADTAB, are expected to be tailwinds. Our overall SG&A is increasing in 2024 as we reallocate investment from other parts of the business into our pet health portfolio. As part of this, we have expanded our U.S. field force, increased investment and efforts with our corporate groups, and are shifting resources in our international business to support improved share of voice. Importantly, this increased investment will be front-loaded as we increase promotional investments behind our market-leading retail OTC parasiticide business during the Northern Hemisphere flea and tick season. On the retail side, we've expanded physical availability in new channels, like Club and Dollar, and within existing channels like Mass, Pet Specialty, and Grocery. These efforts in both the U.S. and Europe, paired with enhanced brand activations, are expected to drive increased awareness.

Speaker Change: This year, we expect revenue growth in both pet health and farm animal for Pet health, we see value drivers across all parts of our Omnichannel strategy improved supply and innovation led by <unk> and add tab are expected to be <unk> or.

Speaker Change: Our overall SG&A is increasing in 2024 as we reallocate investment from other parts of the business into our pet health portfolio as part of this we have expanded our U S field force increased investment and efforts with our corporate groups and are shifting resources and our international.

Speaker Change: Business to support improved share of voice importantly, this increased investment will be front half loaded as we increased promotional investments behind our market, leading retail OTC parasiticide business during the northern hemisphere, flea and tick season.

Speaker Change: On the retail side, we've expanded physical availability in new channels like club and dollar and within the existing channels like mass pet specialty and grocery. These efforts in both the U S and Europe paired with enhanced brand Activations are expected to drive increased awareness overall.

Jeffrey N. Simmons: Overall, our pet health business is set up for improved performance and growth in 2024, even ahead of our anticipated new products in parasiticides and dermatology. Moving to farm animal nutrition, we also expect growth for this business globally, with innovation and price offsetting market challenges and generic pressure. We expect poultry and cattle to remain growth drivers. The livestock sustainability market continues to develop, and the functionality of the carbon credit marketplace has been validated.

Speaker Change: Our pet health business is set up for improved performance and growth in 2024, even ahead of our anticipated new products and parasiticide and dermatology.

Speaker Change: Moving to farm animal we also expect growth for this business globally with innovation and price offsetting market challenges in generic pressure, we expect poultry and cattle to remaining growth drivers the livestock sustainability market continues to develop and the functionality of the carbon credit marketplace has.

Speaker Change: Been validated.

Todd S. Young: We look towards the Bovera approval as a catalyst for further expansion. The durability and diversity of our global farm animal business are well positioned for both revenue and market share growth in 2024. With that, I'll turn it over to Todd. Thank you, Jeff, and good morning, everyone.

Speaker Change: We look towards the <unk> approval as a catalyst for further expansion there.

Speaker Change: Durability and the diversity of our global farm animal business is well positioned for both revenue.

Speaker Change: And market share growth in 2024 with that I'll turn it over to Todd.

Todd S. Young: Thank you, Jeff and good morning, everyone I will focus my comments on our fourth quarter and full year 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.

Todd S. Young: I will focus my comments on our fourth quarter and full-year 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 11, in the fourth quarter, revenue was $1.035 billion, a 5% increase with price growing 3%. Slides 12 and 13 break down our revenue performance in the quarter by price, rate, and volume, as well as by species and region. For pet health globally, we declined 1% in constant currency in the quarter.

Todd S. Young: Starting on slide 11 in the fourth quarter revenue was 1.035, billion% to 5% increase with price growing 3% slides.

Todd S. Young: Slides 12, and 13 breakdown our revenue performance in the quarter by price rate and volume as well as species in region.

For pet health globally, we've acquired 1% in constant currency in the quarter.

Todd S. Young: Our U.S. business declined 5% as competitive pressure in the veterinary clinic was partially offset by innovation revenue, increased prices, and an improved retail inventory situation compared to the reduced purchasing we experienced in the fourth quarter of last year. Our international pet health business grew 4% in constant currency, primarily driven by the economic rebound in Europe compared to the back half of last year and innovation revenue, partially offset by soft market dynamics in several Asian countries. Globally, sales of Soresto grew 25% in the quarter, driven by the U.S., which implemented a lower list price starting in December to maximize the elasticity of the brand and the rebound in Europe I just described. The advanced family sales declined 8% in the quarter, primarily driven by international markets.

Todd S. Young: Our U S business declined 5% as competitive pressure in the veterinary clinic was partially offset by innovation revenue increased price and an improved retail inventory situation compared with reduced purchasing we experienced in the fourth quarter of last year.

Todd S. Young: Our international breast health business grew 4% in constant currency, primarily driven by the economic rebound in Europe compared to the back half of last year, and then innovation revenue, partially offset by soft market dynamics and several Asian countries.

Todd S. Young: Globally sales of <unk> grew 25% in the quarter driven by the U S was implemented a lower list price starting in December to maximize elasticity of the brand and the rebound in Europe I just described.

Todd S. Young: <unk> family sales declined 8% in the quarter, primarily driven by international markets.

Todd S. Young: Both products benefited from the improved retail inventory situation in the U.S. in the quarter compared to last year. Shifting to farm animal products, global revenue grew 10% in constant currency in the fourth quarter. As anticipated in our November guidance, U.S. farm animal growth was driven by a resupply for cattle vaccines, strong expiry growth, and favorable timing of poultry rotation. While we expected U.S. farm animal growth to be strong, the 28% growth was significantly higher than we expected, which was the key contributor to us delivering above the top end of our revenue guidance. Solid international farm animal growth of 3% was driven by continued strength in international poultry. Continuing down the income statement on slide 14, gross margin decreased 440 basis points to 50.1%.

Todd S. Young: Both products benefited from the improved retail inventory situation in the U S in the quarter compared to last year.

Todd S. Young: Shifting to farm animal global revenue grew 10% in constant currency in the fourth quarter.

Todd S. Young: As anticipated our November guidance U S far metal growth was driven by a resupply for cattle vaccines strong experience growth and favorable timing of poultry rotations, while we expected U S farm animal, but have a strong quarter with 28% growth was significantly higher than we expected, which was the key contributor to us delivering above.

Todd S. Young: The top end of our revenue guidance.

Todd S. Young: Solid international <unk> growth of 3% was driven by continued strength in international poultry.

Todd S. Young: Continuing down the income statement on slide 14, gross margin decreased 440 basis points to 51% to.

Todd S. Young: The decline was driven by an approximate 150 basis point headwind from slowing manufacturing output as we worked to reduce balance sheet inventory as well as unfavorable manufacturing performance including higher than expected inflation on certain key inputs and higher affiliate expenses, including a recently implemented higher import duty rate in Argentina, partially offset by improved prices. Operating expenses declined 3% year-over-year in the quarter.

Todd S. Young: The decline was driven by an approximate 150 basis point headwind from slowing manufacturing output as we work to reduce balance sheet inventory as well as unfavorable manufacturing performance, including higher than expected inflation on certain key inputs.

Todd S. Young: And higher <unk> expenses, including a recently implemented higher import duty rate in Argentina, partially offset by improved price.

Todd S. Young: Operating expenses declined 3% year over year in the quarter.

Todd S. Young: R&D expenses were largely in line year over year, and SG&A declined 3% driven by disciplined cost management across the business and savings from completing our systems integration, partially offset by higher employee-related expenses. Moving to slide 15, where we bridge adjusted EBITDA and adjusted EPS to our guidance from November. Adjusted EBITDA was $165 million in the quarter. Along with the gross margin headwinds from unfavorable mix and manufacturing performance, this was adversely impacted by approximately $18 million of unexpected items primarily related to Argentina. Adjusted earnings per share was $0.08 in the quarter.

Todd S. Young: R&D expenses were largely in line year over year.

Todd S. Young: While SG&A declined 3% driven by disciplined cost management across the business and savings from completing our systems integration, partially offset by higher employee related expenses.

Todd S. Young: Moving to slide 15, where we bridge adjusted EBITDA and adjusted EPS to our guidance from November.

Todd S. Young: Adjusted EBITDA was $165 million in the quarter, along with the gross margin headwinds from unfavorable mix and manufacturing performance. This was adversely impacted by approximately $18 million of unexpected items primarily related to Argentina.

Todd S. Young: Adjusted earnings per share was eight cents in the quarter.

Todd S. Young: Our adjusted effective tax rate in the fourth quarter was 39.7%, primarily as a result of unfavorable return-to-provision adjustments, partially offset by the benefit of certain refundable state income tax credits. On slide 16, I'll provide a few comments on our 2023 full year performance. We delivered just over $4.4 billion in sales, with 1% constant currency growth driven by improved prices, adoption of new products, and strength in international poultry. However, these were partially offset by competitive pressure in the U.S. vet clinic, a soft European economic environment in the first half of last year, and generic pressure and changes in regulatory requirements in the U.S. farm business. On slides 27 to 28, we've provided additional revenue breakdowns, including by top affiliates and certain products.

Todd S. Young: Our adjusted effective tax rate in the fourth quarter was 39, 7% primarily as a result of unfavorable return to provision adjustments, partially offset by the benefit of certain refundable state income tax credits.

Todd S. Young: On slide 16, I'll provide a few comments on our 2023 full year performance we.

Todd S. Young: We delivered just over $4 $4 billion in sales with 1% constant currency growth driven by improved price adoption of new products and strengthen international poultry.

Todd S. Young: These were partially offset by competitive pressure in the U S. Vet clinic, a soft European economic environment in the first half of last year and generic pressure and changes in regulatory requirements in the U S foreign business.

Todd S. Young: Slides, 27% 28, we provided additional revenue breakdowns, including by top affiliates and certain products.

Todd S. Young: Continuing down the P&L, gross margin was 56.3 percent, a decrease of 30 basis points compared to last year. The impact of slowing down manufacturing output and inflation was partially offset by improved prices. These factors, combined with a 2 percent increase in operating expenses and the fourth quarter impact of the devaluation in duty rate in Argentina, resulted in adjusted EBITDA of $979 million for the full year. Adjusted earnings per share was $0.89, compared to $1.11 last year, with $0.14 coming from higher interest expense and tax.

Todd S. Young: Continuing down the P&L gross margin was 56, 3% a decrease of 30 basis points compared to last year.

Todd S. Young: Impact of slowing down manufacturing output and inflation was partially offset by improved price. These factors combined with a 2% increase in operating expenses in the fourth quarter impact of the devaluation of duty rate in Argentina resulted in adjusted EBITDA of $979 million for the full year.

Todd S. Young: Adjusted earnings per share was 89 cents compared to $1 11, since last year with 14 coming from higher interest expense and tax.

Todd S. Young: Our non-GAAP tax rate increased from 17.7% in 2022 to 22.3% in 2023, primarily driven by the items I described impacting the fourth quarter. Before moving to our 2024 guidance, let me offer a few words on our cash, debt, and working capital on slide 18. Operating cash flow was $271 million for the full year and $157 million in the fourth quarter.

Todd S. Young: Our non-GAAP tax rate increased from 17, 7% in 2022 to 22, 3% in 2023, primarily driven by the items I described impacting the fourth quarter.

Speaker Change: Before moving to our 2024 guidance, let me offer a few words on our cash debt and working capital on slide 18.

Operating cash flow was $271 million for the full year and $157 million in the fourth quarter.

Todd S. Young: The year-over-year increase in the fourth quarter reflects improved net working capital performance, specifically on inventory and receivables, partially offset by higher cash interest costs. We ended the year with net debt of $5.472 billion and the net leverage ratio at 5.6 times. We reduced gross debt by $76 million for the full year, exceeding our November expectations of $50 million.

Speaker Change: Year over year increase in the fourth quarter reflects improved net working capital performance, specifically on inventory and receivables, partially offset by higher cash interest costs.

Speaker Change: We ended the year with net debt of $5 $4 $72 billion and the net leverage ratio at five six times, we reduced gross debt by $76 million for the full year exceeding our November expectations of $50 million.

Todd S. Young: In a moment, I'll touch on our expectations for debt paydown in 2024 and the factors improving our cash outlay. Now, let's move to our 2024 financial guidance, starting on slide 20. As Jeff mentioned, today's guidance includes full-year contribution from our aqua business but excludes contribution from our three key late-stage pipeline assets, Credelio Cuatro, Zenrelia, and Beauvair. We will update our guidance throughout the year to reflect evolution on both topics. For the year, we expect revenue to be between $4.45 billion and $4.54 billion, or approximately 1 to 3 percent constant currency growth. We expect innovation to contribute $350 to $400 million, or $75 to $125 million of growth year over year.

Speaker Change: In a moment I'll touch on our expectations for debt pay down in 2024, and the factors improving our cash outlook.

Speaker Change: Now, let's move to our 2024 financial guidance starting on Slide 20 adjust mentioned today's guidance includes full year contribution from our Aqua business with excludes contribution from our three key late stage pipeline assets crude oil Quadro <unk> and <unk>, we will update our guidance throughout the year to reflect Evan.

Speaker Change: Loosen on both topics for the year, we expect revenue to be between $4 $45 billion.

Speaker Change: $454 billion or approximately 1% to 3% constant currency growth, we expect innovation to contribute $350 million to $400 million.

Speaker Change: Our $75 million to $125 million of growth year over year.

Todd S. Young: Credelio Cuatro, Zinrelia, and Vildare would increase this range, and regardless of timing, once launched, we expect these products to be accretive to EBITDA in 2024. Additionally, we expect a revenue headwind of approximately $50 million as a result of strategic choices to change our distribution model, primarily in Argentina, exit low-margin distribution agreements, and the continued phase-out of contract manufacturing agreements. Gross margin is expected to decline slightly in 2024, as benefits from revenue growth will be more than offset by the impact of actions we are taking to slow down our manufacturing output to reduce balance sheet inventory and improve networking capital. The headwinds experienced in the second half of 2023 related to this and certain increased operating costs are expected to continue in the first half of the year, improving in the third quarter and shifting to a tailwind in the fourth quarter.

Speaker Change: Crude oil Quadro Cinderella Anvil, there would increase this range and regardless of timing once launched we expect these products to be accretive to EBITDA in 2024.

Speaker Change: Additionally, we expect a revenue headwind of approximately $50 million as a result of the strategic choices to change our distribution model, primarily in Argentina exit low margin distribution agreements and the continued phase out of contract manufacturing agreements.

Speaker Change: Gross margin is expected to decline slightly in 2024 as benefits from revenue growth will be more than offset by the impact of actions. We are taking to slow down our manufacturing output to reduce balance sheet inventory and improved net working capital.

Speaker Change: The headwinds experienced in the second half of 2023 related to this and certain increased operating costs are expected to continue in the first half of the year improving in the third quarter and shifting to a tailwind in the fourth quarter.

Todd S. Young: Operating expenses are expected to increase 2 to 4 percent in 2024, driven by increased employee-related expenses and investment in commercial capabilities to support our pet health business. The increase is expected to be partially offset by reduced expenses, primarily in the second half of the year, from the restructuring we announced this morning, taking advantage of efficiencies resulting from our ERP system consolidation and reallocating resources to business areas and countries with the ability to generate greater earnings potential over time. For adjusted EBITDA, we expect $960 million to $1.01 billion.

Speaker Change: Operating expenses are expected to increase 2% to 4% in 2024, driven by increased employee related expenses and investments in commercial capabilities to support our pet health business. The increase is expected to be partially offset by reduced expenses, primarily in the second half of the year for the restructuring we announced this morning.

Speaker Change: Taking advantage of efficiencies, resulting from our ERP system consolidation and reallocating resources to the business areas and countries with ability to generate greater earnings potential over time.

Speaker Change: For adjusted EBITDA, we expect $960 million to $1.01 billion with.

Todd S. Young: We anticipate adjusted EPS of $0.87 to $0.95. Given the cadence of dynamics in gross margin and operating expenses, adjusted EBITDA and adjusted EPS are expected to decline in the first half of the year and increase in the second half of the year. Slide 22 provides year-over-year bridges for adjusted EBITDA and adjusted EPS, and slide 32 in the appendix provides a number of additional assumptions to help support your modeling efforts.

Speaker Change: We anticipate adjusted EPS of <unk> 87 to 95.

Speaker Change: Given the cadence of dynamics in gross margin and operating expenses adjusted EBITDA and adjusted EPS are expected to decline in the first half of the year and increase in the second half of the year.

Speaker Change: Slide 22 provides a year over year bridges for adjusted EBITDA and adjusted EPS on Slide 32 in the appendix provides a number of additional assumptions to help support your modeling efforts.

Todd S. Young: On slide 23, we share our first quarter 2024 guidance. We expect revenue of $1.16 billion to $1.185 billion, adjusted EBITDA of $255 million to $275 million, and adjusted EPS of $0.25 to $0.28. As a reminder, as a result of our ERP system blackout in 2023, approximately $100 million of revenue, $80 million of adjusted EBITDA, and 13 cents of adjusted EPS shifted into the first quarter from the second quarter.

Speaker Change: On Slide 23, we show our first quarter 2024 guidance, we expect revenue of $1 $1 6 billion to $1 185 billion.

Speaker Change: Adjusted EBITDA of 255 million to $275 million and adjusted EPS of <unk> 25 to 28 sets as.

Speaker Change: As a reminder, as a result of our ERP system blackout in 2023, approximately $100 million of revenue $80 million of adjusted EBITDA and 13 of adjusted EPS shifted into the first quarter from the second quarter.

Todd S. Young: In addition to the manufacturing headwinds discussed above impacting the first quarter, we are also increasing our investments in pet health, with both the U.S. Salesforce expansion and the increase in promotional investments behind our retail OTC products. Given the timing of the Northern Hemisphere flea and tick season, we are making these investments starting in Q1, which will be in advance of the savings we expect to realize from the restructuring we announced this morning. Finally, I'll share a few comments on our cash and balance sheet expectations for 2024 on slide 25. We expect meaningful improvement in free cash flow conversion with $280 to $320 million available for debt pay-down, about four times more than our $76 million in 2023. The improvement is driven by reduced project costs, most notably moving past our ERP system implementation, plus lower cash interest and improved networking capital from our inventory efforts, offset by slightly higher capex to support new launches.

Speaker Change: In addition to the manufacturing headwinds discussed above impact in the first quarter. We are also increasing our investments in pet health with both the U S sales force expansion and the increase in promotional investments behind our retail OTC products given the timing of the northern hemisphere, 40th tick season, we are making these investments starting in Q1.

Speaker Change: Which will be in advance of the savings we expect to realize from the restructuring we announced this morning.

Speaker Change: Finally, I'll share a few comments on our cash and balance sheet expectations for 2024 on slide 25.

Speaker Change: We expect meaningful improvement in free cash flow conversion with $280 million to $320 million available for debt pay down about four times more than our $76 million in 2023.

Speaker Change: The improvement is driven by reduced project costs, most notably moving past, our ERP system implementation, plus lower cash interest and improved net working capital from our inventory efforts offset by slightly higher capex to support new launches.

Todd S. Young: Using the same assumptions for innovation in the Aqua transaction as we did with the P&L, a year from now, we expect the net leverage ratio to be between 5.2 and 5.5 times. With the anticipated $1.05 to $1.1 billion in net proceeds from the Aqua transaction, we expect to reduce our net leverage to the mid-4 range by year-end. Now I'll hand it back to Jeff for closing comments.

Speaker Change: Using the same assumptions for innovation in the awkward transaction, we did with the P&L at year end 2024, we expect the net leverage ratio to be between five two and five five times.

Speaker Change: With the anticipated 1.05 to $1 $1 billion in net proceeds from the Aqua transaction, we expect to reduce our net leverage to the mid four range by year end.

Speaker Change: Now I'll hand, it back to Jeff for closing comments.

Jeffrey N. Simmons: Thanks, Todd. As we enter our 70th year as a company and as the longest-standing brand in animal health, we are humbled by the opportunity to serve our customers around the world, the farmers, veterinarians, pet owners, and the animals in their care. As we enter 2024, we are laser focused on three priorities: sustain revenue growth, innovation, and improve cash conversion. Importantly, this management team is taking disciplined, decisive actions to improve our earnings potential and leverage profile over time, as evidenced by the sale of our aqua business for over a billion dollars in net proceeds, the restructuring announced today to reallocate resources to higher value creation areas, our investment in expanding our U.S. pet health field force to enhance These are difficult but the right decisions.

Jeffrey N. Simmons: Thanks, Todd as we enter a 70 appears the company and is the longest standing brand in animal health, we are humbled by the opportunity to serve our customers around the globe to farmers veterinarians and pet owners and the animals in their care.

Jeffrey N. Simmons: As we enter 2024, we are laser focused on three priorities sustained revenue growth innovation and improved cash conversion.

Jeffrey N. Simmons: Importantly, this management team is taking disciplined decisive actions to improve our earnings potential and leverage profile over time as evidenced by the sale of our Aqua business for over $1 billion of net proceeds the restructuring announced today to reallocate resources to higher value creation areas.

Jeffrey N. Simmons: Our investment in expanding our U S pet health field force to enhance share of voice and maximize innovation and our highest margin business area and our focused efforts to manage manufacturing throughput to improve networking capital performance, while investing to support the launch of differentiated products.

Jeffrey N. Simmons: In years to come these are difficult, but the right decisions. We are executing on our IPP strategy, our investments our improved capabilities and experienced team delivered a return to topline growth in 2023 and that growth will continue in 2024, we are encouraged by our <unk>.

Katy Grissom: We are executing on our IPP strategy. Our investments, our improved capabilities, and experienced team delivered a return to top-line growth in 2023, and that growth will continue in 2024. We are encouraged by our strong pipeline and the next wave of innovation, which we expect to fuel long-term sustainable growth for Elanco. With that, I'll turn it over to Katy to moderate the Q&A. Thanks, Jeff.

Jeffrey N. Simmons: <unk> pipeline and the next wave of innovation, which we expect to fuel long term sustainable growth for <unk> with that I'll turn it over to Katie to moderate the Q&A.

Katy Grissom: Thanks, Jeff.

Operator: 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. If you would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw that question, again, press star one. Your first question comes from the line of John Block from CFEL.

Katy Grissom: 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.

Speaker Change: Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad and if you'd like to withdraw that question again Crestar one.

Speaker Change: Your first question comes from the line of Jon Block from Stifel. Please go ahead.

Jonathan David Block: Please go ahead. Thanks, guys, and good morning. Jeff, you know, it's good to see the filings that you mentioned for Zinrelia OUS. Any thoughts, high-level thoughts, on the approval timelines for EU, UK, and Australia? You know, when you look at one of your competitors, I believe that actually about 40% of worldwide applicable revenue is outside the United States, where it actually resides. So, certainly, it seems like a material opportunity. Any more color on potential approval timelines OUS? Yeah, thanks, John.

Jonathan David Block: Thanks, guys and good morning.

Jonathan David Block: Jeff It's good to see the filings that you mentioned for <unk> U S. Any thoughts high level thoughts on the approval timelines for EU UK or Australia. When you look at one of your competitors I believe it's actually about 40% of worldwide <unk> revenues outside the United States is where it actually resides so sorry.

Jonathan David Block: It seems like a material opportunity any more color on potential approval timelines O U S.

Speaker Change: Yes, Thanks John.

Jeffrey N. Simmons: Yeah, we've made a lot of progress and would say that Zenrelia will be the fastest product in the history of Elanco in globalizing the major innovations. So, nine major markets we've made submissions to. And it's very similar, I think, to the U.S. on these submissions or final submissions in the case of about a year. It varies from Japan to Australia to Europe.

John: Yes, we've made a lot of progress and would say that Zen rally it will be the fastest product in the history of <unk> and globalizing. The major innovation. So nine major markets. So we've made submissions in and it's very similar I think to the U S. On the on these submissions are final submissions and in the case of about a year it varies.

John: From Japan, Australia to Europe, but if you if you figure that we count on this being an in early 2025 mode. When we would start to get these approvals.

Jonathan David Block: But if you factor that in, we count on this being in an early 2025 mode when we would start to get these approvals. Got it. Helpful. And then for the second question, which might be a little bit of a two-parter, but you know, my thought was that the ADUFA date for Xynrelia was in February. And Jeff, can you discuss any high-level thoughts on, you know, what still remains to get done after any interaction with the agency? Do you have increased conviction with Xynrelia in the 1H24 approval timeline?

Speaker Change: Got it helpful. And then the second question might be a little bit of a two parter, but cheryl.

Speaker Change: My thought was that the <unk> was in February and Jeff can you discuss any high level thoughts on what.

Speaker Change: It still remains to get done after any interaction with the agency you have increased conviction with Zen Raleigh, and one 824 approval timeline and Todd quickly just to pivot in 2020 for Gm's being down arguably that's all sort of a lower number where people's heads were at a couple of months ago.

Jonathan David Block: And Todd, quickly just to pivot, you know, the 2024 GMs being down, arguably that's off of sort of a lower number where people's heads were at a couple months ago. How do we think about the cadence of GMs for you guys? Usually, you get the benefit of parasiticides in 1H, but at the same time, you're trying to slow the plant down, and that's going to be a headwind.

Speaker Change: How do we think about the cadence of Gms for you guys. Usually you have the benefit from parasiticide and one age but at the same time you are trying to slow the plant and thats going to be a headwind so any thoughts around GM cadence throughout 'twenty four thanks guys.

Jeffrey N. Simmons: So any thoughts around GM cadence throughout 24? Thanks, guys. Yeah, John, no update today on the Zenreli timeline. We continue really with no change in terms of just a very productive dialogue with the FDA. We believe that, you know, market adoption, as we know, will be driven by value and execution. But again, the dialogue with the FDA is going well, no change.

Speaker Change: Yes, John no update today on the <unk> timeline, we continue.

Speaker Change: With no change in terms of just a very productive dialogue with the FDA, we believe that market adoption as we know it will be driven.

Speaker Change: On value and execution, but again the dialog with the FDA is going well no change when there is change of course, we'll be announcing approval and if theres any change to that we'll let you know so no no change at all.

Jeffrey N. Simmons: When there is change, of course, we'll be announcing, you know, approval. And if there's any change to that, we'll let you know. So no, no change at all.

Todd S. Young: John, thanks for the question on gross margin. As you know, for the full year, we expect gross margin to be pretty close to the same in 24 as it was in 23. The cadence of that will be a little different.

Speaker Change: John Thanks for the question on gross margin.

Speaker Change: As you know for full year, we expect gross margin to be pretty close to the same in 'twenty four 'twenty three the cadence of that will be a little different we will still have higher gross margins in the first half of the year, but just not as high as we would have had last year because of the plant slowdowns and so it's a yes.

Todd S. Young: We'll still have higher gross margins in the first half of the year, but just not as high as we would have had last year because of the plant slowdowns. And so it's a, you know, first half of the year slightly lower than last year. Q3 becomes pretty much in line, and then Q4, we get a tailwind. As we started to slow down the plant during Q3 of 23, such that, you know, we don't have that same headwind in the fourth quarter of 24.

First half of the year slightly lower than last year Q3 becomes pretty much in line and then Q4, we get a tailwind as we started to slow down the plants.

Speaker Change: During Q3 of 'twenty three such that we don't have that same headwind in the fourth quarter of 2004.

Operator: Thank you. Next caller. Thanks, John. Your next question comes from the line of Erin Wright from Morgan Stanley. Please go ahead. Great, thanks. Another one on Zinrelia.

Speaker Change: Thanks Tyler.

Tyler: Thanks, John.

Tyler: Your next question comes from the line of Erin Wright from Morgan Stanley. Please go ahead great.

Tyler: Thanks.

Erin Wilson Wright: And really I can.

Erin Wilson Wright: Can you talk a little bit about the latest thoughts on your go-to-market strategy for Zinrelia, your thoughts on differentiation of the product, leveraging distribution, price, and how you can leverage your positioning in the online channels, just given that this is a significant category for the online channel as well? Thanks. Yeah, thanks, Erin, and thanks for the focus from you and John. As you know, we're excited about entering the DERM market. It'll be a new market for us. We've got Zenrelia followed by our IL-31 short acting reactor, both of these being differentiated assets.

Erin Wilson Wright: Can you talk a little bit about the latest thoughts on your go to market strategy for then rally at your thoughts on differentiation of the product.

Erin Wilson Wright: Leveraging distribution price.

Erin Wilson Wright: And how you can leverage also your position even in the online channels just given that this is a significant category.

Erin Wilson Wright: Online channel as well thanks.

Yes, thanks, Darren and thanks to the focus from you and John as you know.

Speaker Change: We're excited about entering the dairy market and it'll be a new market for us. We've got Centralia, followed by our IL 31 short acting both of these being differentiated assets and our next wave of innovation that Alan has made a lot of progress on and her team this year and bringing more products into development into our pipeline and derm there'll be added assets. So this is mark.

Jeffrey N. Simmons: And our next wave of innovation that Ellen has made a lot of progress on and her team this year in bringing more products into development into our pipeline in DERM, there'll be added assets. So this is a market we're going to be in and be, you know, a key player in within the decade. And, you know, I think we come back consistently as we look at this market and see that, you know, there's still a lot of unmedicalized dogs that are leaving vets without being treated.

Speaker Change: We're going to be in and be a key a key player in the decade, So and I think we come back consistently is we look at this market and see that.

Speaker Change: A lot of Medicalized dogs that are that are leading vets without being treated there is a strong desire for more choice by vets and pet owner and these fundamentals we believe.

Jeffrey N. Simmons: There's a strong desire for more choice by vets and pet owners. And these fundamentals, we believe, matter, that this is a market that wants choice. And it's globalizing, as John just referenced as well.

Speaker Change: Matter that this is a market that wants choice and its globalizing as John just referenced as well so.

Jeffrey N. Simmons: So, you know, I would emphasize that we continue to feel strongly that, you know, our differentiation is going to be key as well. When you look at how we're going to launch this product, maybe just a couple points. First of all, we keep coming back to the two most important pillars: value and then execution. So value deals with the differentiation in the product, the product itself, the portfolio that it's going to be in. And then as you look at execution, you know, the first thing that we really focused on, Aaron, was getting the share of voice, you know, at a level that can be extremely competitive. And we believe we're there now.

Speaker Change: I would emphasize that we continue to feel strongly that.

Speaker Change: Our differentiation is going to be is key as well when you look at how we're going to launch this product maybe just a couple of points first of all we keep coming back to the two most important pillars of our value and then execution so value gets around the differentiation in the product the product itself. The portfolio then it's going to be in and then as you.

Speaker Change: Look at execution. The first thing that we really focused on erinn was getting a share of voice.

Speaker Change: At a level that can be extremely competitive and we believe we're there now we've got this salesforce in place out there selling powerball preparing and we need to create share of voice high enough to create awareness at the vet clinic, so that when the product.

Jeffrey N. Simmons: We've got this sales force in place out there selling Parvo, and we need to create a share of voice high enough to create awareness at the vet clinic so that when the product gets into the market, that vet clinic is aware. And then we'll start to turn up additional factors like digital and DTC. So that's going to be the staged approach.

Speaker Change: It gets into the market.

Speaker Change: <unk> clinic is aware and then we'll start to turn up additional factors like digital and DTC. So thats going to be the staged approach. We're still looking at distribution. The great News is we've got lots more options with distribution given our ERP setup.

Jeffrey N. Simmons: We're still looking at distribution, but the great news is we've got lots more options for distribution given our ERP setup. We intend to price to value and focus on, you know, we believe innovation will be rewarded and differentiation will be rewarded. So we will focus on a value-based pricing approach relative to our differentiation. And I think the last thing is, you know, what DERM does with us now is it adds kind of the fourth pillar. We've got paraphernalia, we've got therapy, and we've got vaccines. And we think as we look at, you know, corporates and other vet clinics, other segments, that fourth pillar, having DERM and that total portfolio, is going to give us an advantage, and that'll be a key part of our launch strategy as well, Aaron. Thank you. Okay, thanks.

Speaker Change: We will intend to price to value and.

And focus we believe innovation will be rewarded and differentiation will be rewarded. So we will focus on a value based pricing approach relative to our differentiation and I think the last thing is what <unk> does with US now as it adds kind of the fourth pillar. We've got para we've got therapy, and we've got the vaccines and we say.

Speaker Change: As we look at corporates and other vet clinics other segments that fourth pillar haven't derm and that total portfolio is going to give us advantage and that'll be a key part of our launch strategy is well Aaron Thank you.

Aaron: Okay. Thanks, and then just on restructuring in the bigger picture around the sale of Aqua <unk>.

Erin Wilson Wright: And then just on restructuring in the bigger picture around the sale of aqua too, are you just continuing to evaluate other parts of your businesses here, or what other segments could you evaluate as potential divestitures? Yeah, just a comment. Here's how we're looking at it. I mean, you know, we are concentrating our focus, let me be very clear, on pet health and livestock sustainability. And both of these decisions, both the sale of our aqua business and the restructuring we announced today, are all around creating enough resources to win and align to our pipeline in these bigger markets with greater earnings potential with these large blockbuster differentiated assets that we have. We have no intention of, you know, making any more strategic decisions here relative to other segments.

Aaron: Are you just continuing to evaluate other parts of your business is.

Aaron: Or what other segment could you evaluate as potential divestitures.

Aaron: Yes.

Aaron: Maybe just a comment here here's how we're looking at it I mean, we are concentrating our focus let me be very clear on pet health and livestock sustainability and both of these decisions both the sale of our Aqua business and the restructuring we announced today is all around creating enough resources to win and aligned to our pipeline.

Aaron: These bigger markets with greater earnings potential with these large blockbuster differentiated assets that we have we have no intention of.

Aaron: Making any more strategic decisions here relative to other segments.

Jeffrey N. Simmons: Really, I would highlight, coming to the restructuring, you know, we're doing really three things, as my comments, you know, that I made this morning, we're shifting resources into these markets, pet health and livestock, you know, sustainability. Think like in Europe, we're going to move to much more of a B2B approach in pigs and put a lot more resources into pets. Second, we're going to capitalize on this ERP implementation that's now done and concentrate roles in strategic areas. And then, and importantly, we're going to transition our business model, you know, in non-strategic markets like Argentina. We've got about 90 countries we're in, about 45 of them we're in with people, and we're moving some additional markets like Argentina into what we're doing in the other 45, which is using a distribution model. So all of this allows us, you know, more resources that we can double down on these big areas, pet health and livestock sustainability. Looks like you are next.

Aaron: I would highlight coming to the restructuring we're doing really three things as my comments that I made this morning, where we're shifting resources.

Aaron: These markets Pat helped in livestock sustainability think like in Europe, we're going to move to a much more of a <unk> approach in pigs, and put a lot more resources and Pat's second is we're going to capitalize on this ERP implementation, that's now done and concentrate roles in strategic areas and then lastly, and importantly is we're going to transition our business.

Aaron: Model and non strategic markets like Argentina, We've got about 90 countries. We're in about 45 of them were in with people and we're moving some additional markets like Argentina and do what we're doing in the other 45% which is using a distribution model. So all of this allows us.

Aaron: More resources that we can double down on these big areas pet health and livestock sustainability.

Speaker Change: Thank you our next.

Operator: Your next question comes from the line of Michael Ryskin from Bank of America Securities. Please go ahead. Great, thanks for taking the question. Can you guys hear me?

Speaker Change: Your next question comes from the line of Michael <unk> from Bank of America Securities. Please go ahead.

Michael: Great. Thanks for taking the question can you guys hear me.

Michael Ryskin: Yeah. Great. Thanks, guys. So first, I want to clarify a question on the guide for you, Todd. I think you're really clear that the revenues from the Zinrelli Acredeli Quattro Bovair are not included in the guide.

Speaker Change: Yes.

Michael: Great. Thanks, guys. So first I want a clarifying question on the guide for you Todd.

Michael: You are really clear that the revenues from the rally of Codell quadruple there or.

Michael: Not included in the guide, but I wanted to be clear on how much of the cost is because from an opex perspective, obviously the expansion of the commercial sales force things that you've already put that into place that's already in numbers as it is but what about incremental spend as the products get approved so let's say they get approved let's say to go to market and you do put some of that digital and DTC.

Michael Ryskin: But I want to be clear on how much of the cost is because, from an OPEX perspective, obviously, the expansion of the commercial sales force, things like that, you've already put that into place. That's already in the numbers, as it is. But what about incremental spend as the products get approved? So let's say they get approved, let's say they go to market, and you do put some of that digital and DTC spend behind them in the second half of this year. Is that already included in the OPEX numbers?

Michael: <unk> spend behind it in the second half. This year is that already included in the Opex numbers or would that also be incremental just like the revenues.

Todd S. Young: Or would that also be incremental, just like the revenue? So, Mike, those will also be incremental, but what we did say in the prepared remarks is that we expect it to be accretive to EBIDTA, so the EBIDTA guidance you have will get better with the launch of the Big Three, got it okay no that's helpful just want to get that clarification on like you know how the model would change, And then a follow up question on, again, on the guy for 24, I think you talked about 3% price, the revenues, about 2-3% from existing innovation, so from, you know, regular Cordelio and Gallup-Ram, things like that, but, you know, 2% whole business, current, constant currency, so volume is another year of down volumes. Could you break that again into what you're expecting from end market or specific headwinds, you know, to the LiveXD portfolio or maybe headwinds for competition? Just help us sort of deconvolute the volume expectation to 24 a little bit.

Speaker Change: So those will also be incremental but what we did say.

Speaker Change: The prepared remarks is that we expect it to be accretive to EBITDA. So the EBITDA guidance you have we will get better with the launch of the victory.

Speaker Change: Got it okay. No. That's helpful. I just wanted to get that clarification on like how the model would change.

Speaker Change: As the products get approved so I appreciate that and then a follow up question on.

Speaker Change: Again on the guide for 'twenty, four I think you talked about 3% price.

Speaker Change: The revenues about 2% to 3% from existing innovation so from <unk>.

Speaker Change: Irregular codell, Leo and Gallup ran and things like that but.

Speaker Change: But 2% total business.

Speaker Change: Constant currency, so volumes another year of gone volumes could you break that out again.

Speaker Change: You are expecting from a market specific headwinds.

Speaker Change: To the legacy portfolio, there will be headwinds for competition, just help us sort of deconvolute the volume expectation for 'twenty for a little bit.

Michael Ryskin: Sure, Mike. We do expect volumes to be down in 2024. Volumes were down in 2023, but less than they were in 2022. Some of this is just the competition inside the vet clinic that we've called out previously. You'll see Trifax has declined 21% in 2023. It's down to about $82 million in total revenues. It's still a big product for us, but one that we just know has greater competition there. You'll also see that both Soresto and Advantage Family were down last year.

Speaker Change: Sure Mike.

Speaker Change: Do you expect volumes down in 'twenty 'twenty four volumes were down in 2023, but less than they were in 2022.

Speaker Change: Some of this is just the competition inside the vet clinic that we've called out previously Youll see trade taxes declined 21% in 2003, it's down to being about 82 million in total revenues is still a big product for us, but one that we just know has greater competition. There you will also see.

Speaker Change: So resto and his family were down last year again, Thats a lot of that in the vet clinic, the retail side of our business.

Todd S. Young: Again, that's a lot of that in the vet clinic. The retail side of our business in the U.S. grew double digits. It was really strong as Bobby and his team got to more points of distribution, more physical availability, the share of boys, and all of the work they're doing. So some of the volumes are that legacy. Xperia Ramp is great.

Speaker Change: U S grew double digits. It was really strong as Bobby and his team got more points of distribution more physical availability the share of voice in all of the work. They are doing so some of the volumes are that legacy experienced ramp is great.

Todd S. Young: As you know, that generally takes out OptiFlex, which is a different part of the portfolio. And so that impacts volumes as much as Xperia Ramp. So overall, we continue to feel very good about the sales momentum we have, the acceleration in 2023 versus 2022. And so as we move forward, we have that. There's also an impact from these two different countries on volume as we exit some of the low margin distribution and flip Argentina and a few other markets to using a third party distributor versus our own internal people on the ground. Your next question comes from the line of Balaji Prasad from Barclays. Please go ahead.

Speaker Change: You know that generally takes out after flex, which is a different part of the portfolio and so thats impacts volumes as expire ramp. So overall, we continue to feel very good about the sales momentum we have the acceleration in 'twenty three versus 22, and so as we move forward. We have that there's also an impact from these do differ.

Speaker Change: <unk> countries on volume as we exit some of the low margin distribution and flip.

Speaker Change: Argentina, and a few other markets to using a third party distributor versus our own internal people on the ground.

Speaker Change: Yeah.

Balaji V. Prasad: Your next question comes from the line of <unk> Prasad from Barclays. Please go ahead.

Operator: Hi, good morning, and thanks for the question. Firstly, with regard to the decline in pet health in 4Q and Outlook, you spoke about competitive pressure in veterinary clinics. Can you help us understand if this is transient or otherwise?

Prasad: Good morning, and thanks for the question.

Balaji V. Prasad: Lee with regard to the decline in <unk> and <unk> and also so you spoke about competitive pressure in what <unk> can you help us understand of the strains in otherwise.

Balaji V. Prasad: Is it driven by new launches from competitors, or are there some other factors at work? Also, in 2024, as you speak about enhancing Salesforce, could you quantify the Salesforce ad, and do you think you'll be adequately staffed to support the new launches? Thank you. Yeah, thank you very much.

Prasad: Driven by new launches from competitors or are there some other factor that mark.

Prasad: Also on 2024 as I speak about enhancing the sales force could you quantify the sales all of that and do you think youll be adequately staffed to support the new launches. Thank you.

Speaker Change: Yes, thank you very much.

Jeffrey N. Simmons: Yeah, you know what the highest level just on USPET is, and I would step back and say we made a lot of progress in USPET overall. And at the highest level, I think we're much more competitive today. We've seen significant improvement in our overall engagement, our team, and I think the strategy is working that Todd just highlighted in terms of shareable waste, physical availability, innovation, and price. So we're much more, you know, competitive as an organization today. And, you know, 2023 was a strong year.

Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Highest level just on the U S. Pat and I would step back and say we've made a lot of progress in U S. Pat overall and.

At the highest level I think we're much more competitive today, we've seen significant improvement in our overall engagement our team and I think the strategy is working and that Todd just highlighted in terms of share of voice physical availability innovation and price. So we're much more competitive as a.

Speaker Change: As an organization today in 2023 was a strong year, if you step back and look it was.

Jeffrey N. Simmons: If you step back and look, it was, you know, we saw an eight-point improvement sequentially from down minus nine in 2022 to minus one overall. And I see this from the standpoint of stronger portfolios, more shareable waste, and a stronger team. We've changed incentives for the sales force, and our overall portfolio is stronger when you start adding Bexicat, you know, Zorbium, and now Parvo. And Parvo is opening a lot of doors for the vet clinic. So as we step back, there's no question we're set up, and we see nice growth coming ahead of, you know, our total global pet health business and farm animal business, both contributing to growth in 2024. No question, the competitiveness in the vet clinic in the US is high. I mean, without question, I would say there's a few factors that we would know are, you know, there's always the seasonality and weather factors.

Speaker Change: We saw an eight point improvement sequentially from down minus 9% in 2022 to minus one overall and I see this from the standpoint of stronger portfolio has more share of voice is stronger team we've changed incentives for the sales force and our just overall portfolio is stronger when you start adding back some cat <unk>.

Speaker Change: <unk> and know Parvo and parvo is opening a lot of doors for the vet clinic. So as we step back. There's no question, we're set up and we see nice growth coming ahead of our total global pet health business and farm animal business, both contributing to growth in 2024, no question the competitive niche in Nevada.

Speaker Change: Clinic in the U S is high I mean without question I would say there is a few factors that we would note is.

Speaker Change: There is always the seasonality and weather factors, there's some economics, we've seen more on the retail side, where there is some trade down and the competitive.

Umer Raffat: There are some economics we've seen more on the retail side where there's some trade down and, you know, the competitive pressure inside the vet clinic. But I think we're well positioned as we're bringing innovation, as we're, you know, there's an anticipation of these blockbusters that are coming and our omni-channel approach, being able to have the retail business complementing the vet clinic business. You know, we're probably better indexed relative to those vet visits than most companies. Your next question comes from the line of Umer Raffat from Evercore ISI; please go ahead. Hi guys, thanks for taking my question. Just two here, if I may.

Speaker Change: Live pressure inside the vet clinic, I think we're well positioned as we are bringing innovation as where there is an anticipation of these blockbusters that are coming and our omnichannel approach being able to have the retail business complementing the vet clinic business, we're probably better indexed relative to those that visits than most companies.

Okay.

Your next question comes from the line of <unk> from Evercore ISI. Please go ahead.

John Kreger: Hi, guys. Thanks for taking my question just two here if I may 1st there's some language on distribution model changes could you just confirm there is no changes in distributor strategy in U S and nor are there any payment term extensions in U S. For 2024, and then secondly on heading into your sort of quiet. The QUADRA launch there is some feedback that the.

Umer Raffat: First, there's some language on distribution model changes. Could you just confirm there are no changes in distributor strategy in the U.S., nor are there any payment term extensions in the U.S. for 2024? And then secondly, on heading into your sort of quatro launch, there's some feedback that Zoetis is starting to preempt that potentially by making free tapeworm treatments available in case a dog does contract tapeworms. How are you thinking about that relative to your differentiation and expectations for launch? Well, let me take the first one, Umer, and I'll pass it over to Jeff on tapeworm.

John Kreger: <unk> is starting to preempt that potentially by making free tape worm treatments available in case of dog does contract forms how are you thinking about that relative to your differentiation and expectations for launch.

Speaker Change: Well, let me take the first one.

Speaker Change: I'll pass over to Jeff on tape were.

Todd S. Young: So with respect to distribution, we're really speaking, in this case, to, like, Argentina. As Jeff mentioned, we're in 90 countries in total with people on the ground and about 45. Those other countries, we use distributors to take our products to market, and we just sell to them. So that's what we're speaking about. With respect to the U.S., we are bringing some bear products into the U.S. distribution channel, and it's reflecting that guidance. It's not material, but with our system consolidation, we're able to, you know, now be more efficient and do it one way versus having two different models that we've been running the last few years. Jeff on... Yeah, thanks, Umer.

Speaker Change: With respect to distribution, we're really speaking in this case feel like Argentina as Jeff mentioned, we're in 90 countries in total with people on the ground in about 45, those other countries, we use distributors to take our products to market and we just sold to them. So that's what we're speaking to with respect to the U S. We are.

Bringing some bear products into the U S distribution channel.

Speaker Change: Reflecting the guidance its not material, but with our system consolidation, we're able to now be more efficient and do it one way versus having two different models that we've been running the last few years Jeff.

Jeffrey N. Simmons: Yeah, we're excited about Credelio Quattro, and again, no update. The timeline continues. We continue to have productive dialogue with the FDA. You know, I think I would just back up and just make a couple of comments. I think we know parasiticides are really an uninvolved category for pet parents and vets.

Jeffrey N. Simmons: Yes, Thanks, Omar Yeah, we're excited about Cornelio cuatro.

Jeffrey N. Simmons: And again no no update the timeline continues we continue to have productive dialogue with the FDA.

Jeffrey N. Simmons: I think I would just back up and just make a couple of comments I think we know parasiticide is really an uninvolved category for pet parents invest.

Jeffrey N. Simmons: You know, vet recommendation is key, so I come back to the core strategy, which is, you know, making sure share of voice is high and noted, yes, we've added our 75 reps. They've got experience. They're in the field right now, and, you know, they're trained, and they're adding value as we speak, selling Parvo and other products. So we've got to share a voice, and then the second thing is, yes, differentiation. You know, we believe there are, you know, a few fundamentals that are key as you look at differentiation. One is, broader coverage is always better, and full solutions are, you know, definitely preferred by the veterinarian. The second is diagnostics that can match the disease, and there's evidence today with increased diagnostics from IDEX and others around tapeworm that this concern is there, and it's a zoonotic concern as well.

That recommendation is key so I come back to the core strategy, which is making sure share of voice is high and noted yes. We've added are 75 reps they've got experience or in the field right now and.

Jeffrey N. Simmons: They're trained and they're adding value as we speak selling <unk> and other products. So we've got the share of voice and then the second is yes differentiation and we believe there is a few fundamentals that are key as you look at differentiation. One is broader coverage is always better and full solutions.

Jeffrey N. Simmons: Definitely preferred by the veterinarian. The second is diagnostics that can match the disease and there is evidence today and with increased diagnostics from IDEXX and others around tape worm that this this concern is there and it is not a concern as well so I think that's.

Jeffrey N. Simmons: So I think that's, you know, second, and with more people and more focus, both on the diagnostic side and the animal health side, awareness is higher, and it usually leads to more prevalence. And I think the last trend is zoonotic concerns continue to be there, especially after COVID, and specific to tapeworms, look, one common tapeworm is transmitted by fleas, but there are many tapeworms relevant to domestic dogs and have the potential to carry tapeworms, and that's, you know, a serious disease impact. So we always say that, you know, if all else is equal, why wouldn't you use a product with more coverage?

Jeffrey N. Simmons: Second and with more people and more focus both on the diagnostic side of the animal health side that the awareness is higher that usually leads to more prevalence and I think the last trend is do not have concerns omer continue to be there, especially after COVID-19 and specifics of Tapeworms look one common tapeworm is transmitted by fleece.

Jeffrey N. Simmons: But there's many tapeworms.

Jeffrey N. Simmons: Relevant to domestic dogs, and and have the potential to carry tapeworms and thats a serious disease impacts. So we always say that if all else is equal why wouldn't use a product with with more coverage. So that's our approach again, we've got the right teams in place preparing for the launch we've had a long history in parasiticide with the broadest.

Todd S. Young: So that's our approach. Again, we've got the right teams in place preparing for the launch. We've got a long history in parasiticides with the broadest portfolio in and outside the vet, and we're excited to be bringing Quatro to the market. One thing, Umer, on your payment terms. Payment terms generally stayed the same.

Jeffrey N. Simmons: Folio in and outside of that we're excited to be bringing quadro to the market.

Jeffrey N. Simmons: Just one thing on your payment terms payment terms generally stay the same we're always different things with different customers, but overall accounts receivables was a big inflow of cash in Q4, as we had strong operating cash flow performance relative to previous quarters and a lot of that was just the work done by our teams around the globe to collect cash.

Operator: We're always different things with different customers. But overall, accounts receivable was a big inflow of cash in Q4, as we had a strong operating cash flow performance relative to previous quarters. And a lot of that was just the work done by our teams around the globe to collect cash and really focus on our one system to get after AR in a better way. Your next question comes from the line of Glenn Sant'Angelo from Jefferies. Please go ahead. Oh yeah, thanks for taking my question. Just two quick ones for me.

Jeffrey N. Simmons: And really focus with our one system to get after.

Jeffrey N. Simmons: We're in a better way.

Jeffrey N. Simmons: Your next question comes from the line of Glen Santangelo from Jefferies. Please go ahead.

Glen Santangelo: Hi, yes, thanks for taking my questions. Just two quick ones for me I just wanted to follow up on the competitive pressure in the vet clinics. It sounds like you're certainly, making some progress and I'm just kind of curious about your confidence in the ability to take those 3% price increases this year that you are forecasting.

Glenn Sant'Angelo: You know, I just want to follow up on the competitive pressure in the vet clinics. It sounds like you're certainly making some progress, and I'm just kind of curious about your confidence in the ability to take those 3% price increases this year that you're forecasting, you know, in the guidance. Have you taken those already, and has there been any pushback as far as those are concerned?

Glen Santangelo: The guidance have you taken those already and has there been any pushback as far as those are concerned.

Jeffrey N. Simmons: Yeah, first of all, Glenn, thank you for the coverage and joining, joining the interest in research on Elanco. Yeah, absolutely, there's the competitive pressure is there, but I would believe, as I've said, we're in a much stronger position with stronger teams, a stronger portfolio. And I think a lot of the tactics that we're doing relative to this, and I think, you know, the anticipation of our innovation as well, Glenn, really creates partnerships with distributors, corporate clinics, and others. It's opened a lot more doors, which has been, you know, strong.

Speaker Change: Yes first of all Glen Thank you for the coverage and joining joining the interest in <unk>.

Speaker Change: Research on a landfill.

Speaker Change: Yes, so absolutely there is the competitive pressure is there I would believe as I've said, we're in a much stronger position with stronger teams stronger portfolio and I think a lot of the tactics that we're doing relative to this and I think the anticipation of our innovation as well Glenn really creates partnerships with distributors court.

Speaker Change: Clinics in others, it's opened a lot more doors, which which has been.

Jeffrey N. Simmons: And I would say even the introduction, and as an example of proof point, if you point to the introduction of the latest broad spectrum parasiticide, what we're actually seeing is really, you know, more share taken within those and actually less share compared to other competitive launches taken from us. And I think that shows our differentiation, our segmentation, digital, all these things are working. So we're set up well, and relative to price, you know, we've continued to execute price in a very value-based way. And, you know, more innovation always allows us to bring those prices down, and we've not seen, you know, a pushback on price and continue to see strong resilience for the market and a lot of interest in adoption from the vet side of our products in our portfolio. Perfect.

Speaker Change: Strong and I would say, even the introduction and again, an example of proof point, if you point to the introduction of the latest broad spectrum parasiticide, what we're actually seeing is really more shake share taken within those and actually less share compared to other competitive launches taken from us and I think that shows our.

Speaker Change: Differentiation, our segmentation digital all of these things are working so we're set up well and relative to price. We've continued to execute price in a very value based way and more innovation always allows us to bring those prices and we have not seen.

Speaker Change: A pushback on price and continue to see strong resilience for.

Speaker Change: The market and a lot of a lot of interest in adoption from the vet side of our of our products in our portfolio.

Glenn Sant'Angelo: Maybe if I could just ask one revenue follow-up here. I'm just trying to, you know, triangulate your comments on innovation sales in 2025. And I appreciate you don't want to talk about 2025 at this point, but you're sort of guiding people to six to 700 million sales from new innovation products. And if I sort of, you know, back out what you've done so far in 23 and what you're expecting in 24, is it fair to say that we can sort of triangulate what you're sort of talking about with respect to the three pending launches? Yes, we have, again, been very consistent with the commitment of $600 to $700 million. It isn't all exact math, as you do see, as Todd is a reference, you're going to have Xperia climb, and you're going to have some, you know, overlap in products that come out, such as an OptiFlex. So, but yes, as we start to guide to the $350 to $400 million this That is correct. Your next question comes from Chris Schott from J.P. Morgan. Please go ahead. Great. Thanks so much.

Speaker Change: Perfect and maybe if I could just.

Speaker Change: One revenue follow up here I'm, just trying to triangulate your comments on innovation sales and in 2025 and I. Appreciate you don't want to talk about 2025 at this point, but youre sort of guiding people to $6 million to $700 million.

Speaker Change: Sales from new innovation products, and if I sort of.

Speaker Change: Back out what you've done so far in 'twenty, three and what you're expecting in 'twenty. Four is it fair to say that we can sort of triangulate, what you're sort of talking about with respect to the the three pending launches.

Speaker Change: Yes, we have again been very consistent to the commitment of 6% to $700 million. It isn't all exact math is you do see as Todd as a reference youre going to have experience climb and youre going to have some.

Speaker Change: Overlap and products that come out such as a not to flex so, but yes, as we start to guide to the <unk>.

Speaker Change: $3 50 $400 million this year before the new products than with the launches of the new products and our IL 31 that we have coming in 2025, those products will contribute and yes, we were staying and feel very confident in our commitment of 6% to $700 million by the end of 'twenty five that if that is correct.

Speaker Change: Your next question comes from Chris Schott from Jpmorgan. Please go ahead.

Jeffrey N. Simmons: Two questions for me. First, on just the Parvo opportunity in 2024, just any additional color on how much inventory you have this year and how big of a product that could become. And maybe, just as we think about longer term with that, just update us on the ex-US opportunity for Parvo. And then my second question was just on gross margins.

Hi, great. Thanks, so much just two questions from me maybe first one just the parvo opportunity in 2024, just any additional color on how much inventory you have this year and how big of a product that could become and maybe just as you think about longer term with that just update us on the ex U S opportunity for parvo.

Speaker Change: And my second question was just on gross margins.

Chris Schott: Just any color you can provide on how much some of these inventory and manufacturing slowdown actions are having on gross margins in 2024. We're just trying to get some color on what the underlying trends are as we start to think about kind of beyond this year about where gross margins can go. Thanks so much.

Speaker Change: Just any color you can provide on how much some of these inventory and manufacturing slowdown actions are having on gross margins in 2024 really try to get some color on what the underlying trends are as we start to think about kind of beyond this year of where gross margins could go. Thanks. So much.

Jeffrey N. Simmons: Yeah, thanks, Chris, for the question on Parvo. I'll take that one first. It did land in line with our expectations in the quarter. But the bigger news is, yes, we've demonstrated the ability to scale our 2,000 liter production facility, which gives us confidence that we've got the capacity and the supply to really go into the marketplace full force. And we're doing that with our new sales force right now, and the product is performing well. That's very important.

Yes, Thanks, Chris for the question on par, but I'll take that one first it did it did land in line with our expectations in the quarter, but the bigger news is yes, we've demonstrated the ability to scale, our 2000 leader, which gives us confidence that we've got the capacity and the supply to really go into the marketplace for us and we're doing that with our new sales force right now on the product is performing.

Speaker Change: Well.

Jeffrey N. Simmons: I think another important note, Chris, is that the product is already in about 3,300 clinics, and more so with the general practitioner, which demonstrates that, you know, this is out there, there's prevalence, and many clinics are seeing this. Seventy-three percent of the adoption of those clinics is in general practitioners, you know; 12 or so are in the shelter market. So we see the uptake initially. We're seeing reorder

Speaker Change: That's very important I think another important note Chris is the products are in about 3300 clinics and more so with the general practitioners, which demonstrates that.

Speaker Change: This is out there there is prevalent in many clinics are seen as 73% of the adoption of those clinics as in general practitioners.

Speaker Change: <unk> is in a shelter market. So we see the uptake initially we're seeing reorders as well.

Jeffrey N. Simmons: So we see this product being a key contributor to growth and a real step up this year. And then, yes, we would, and we've also launched, just to highlight, a pretty significant defender campaign to really drive, you know, just awareness of Parvo. You know, right out of the gate, we've got about 1.2 billion impressions in a social media marketing campaign that we're doing. We've set a charge with the veterinary clinic industry and a pledge to save a million puppies by the end of the decade.

Speaker Change: So we see this product being a key contributor to growth and a real step up this year.

Speaker Change: And then yes, we would and we've launched also just to highlight we've launched a pretty significant.

Speaker Change: Offender campaign to really drive.

Speaker Change: Just awareness of parvo.

Speaker Change: Right out of the gate, we've got about $1 2 billion impressions in a social media marketing campaign that we're doing we've set a charge with a vet clinic industry and a pledge to save 1 million copies by by the end of the decade. So all of that I think is just creating awareness strong marketing more share of voice and then yes. The next thing is we are.

Jeffrey N. Simmons: So all of that, I think, is just creating awareness, strong marketing, more share of voice. And then, yes, the next thing is we are starting to target key markets internationally where we can actually bring that product in, where there's a higher prevalence of Parvo. And that might not always be the typical, just a European market. There are, you know, other emerging markets as well with higher Parvo prevalence.

Speaker Change: Starting to target key markets internationally, where we can actually bring that that product and where theres a higher prevalence of parvo and then might not be always the typical just a European market. There are other emerging markets as well with with higher parvo and we see a blockbuster here potential as we globalize the <unk>.

Jeffrey N. Simmons: And we see potential for a blockbuster here as we globalize the product. So, off to a good start. We'll definitely be updating you quarter to quarter on some of the key metrics and adoption. Chris, with respect to the manufacturing slowdown, embedded in our guidance for 2024 is a 150 to 170 basis point headwind from those plant slowdowns. Your next question comes from Steve Scala from TD Cowen. Please go ahead. Hi, this is Chris.

Speaker Change: So off to a good start we'll definitely be updating your quarter to quarter and some of the key metrics in the adoption.

Speaker Change: Hey, Chris with respect to the manufacturing slowdown embedded in our guidance for 2024, and 150 to 170 basis point headwind from those plant slowdowns.

Speaker Change: Our next question comes from Steve Scala from TD Cowen. Please go ahead.

Chris Schott: I'm with Steve. Thanks for taking our questions. We had two.

Speaker Change: Hi, This is Chris on for Steve Thanks for taking our questions.

Chris Schott: First, on the new marches, are there any other gating factors for U.S. March post-FDA approval, like state-level approvals, building inventory, or contracting with distributors? And then second, on the U.S. sales force, what sort of initial feedback have you received, and has that had any positive impact on the positioning of the company's current portfolio? Thank you.

Chris Schott: First on the new launches are there any other gating factors for U S launch post FDA approval at the state level approvals building inventory or contracting with distributors.

Chris Schott: And then second on the U S sales force, what sort of initial feedback heading into the season has that had any positive impact on positioning.

Chris Schott: Of the Companys portfolio.

Speaker Change: Yes, Thanks, Chris real quick.

Jeffrey N. Simmons: Real quick, as we've noted here on gating factors, we expect that upon approval, there are typically a couple months before actually, you know, there is a launch, and that's driven heavily by manufacturing, packaging, labeling, and that's the typical gating factor. And then, you know, a lot of positive feedback. We had a tremendous interest in many, many applications, and I believe we selected a very experienced, strong sales force. And actually, the transition's gone faster, and we don't believe the distraction factor may be as high as we expected, and we're looking forward to that sales force with that added investment in the first half to help us ramp our existing sales here in the first half. Your next question comes from the line of Navin Thai from BNP Paribas; please go ahead. Hi, good morning, thanks for taking my questions.

As we've noted here on gating factors, we expect that upon approval. There is typically a couple of months before actually there is a launch and that's driven heavily by manufacturing packaging labeling and that's the typical gating factor and then.

Speaker Change: A lot of positive feedback we had a tremendous interest.

And many many applications and believe we selected a very experienced strong sales force and actually the transition has gone faster and <unk>.

Speaker Change: We don't believe the distraction factor may be as high as we expected and we're looking forward to that sales force with that added investment in the first half to help us ramp our existing sales here in the first half.

Speaker Change: Your next question comes from the line of <unk> from BNP Paribas. Please go ahead.

BNP Paribas: Hi, good morning, Thanks for taking my question.

Navin Jacob: My first one is, you touched base on pricing for Zenrelia. Are you able to expand on the general pricing strategy versus potential differentiation for Quattro, Bovair, and Zenrelia? And my second question is just a clarification.

BNP Paribas: The first one.

BNP Paribas: Touch base on the pricing for than linear.

BNP Paribas: We're able to expand on general pricing strategy.

Potential differentiation for <unk>.

BNP Paribas: And then within India.

BNP Paribas: And my second question is just a clarification this EPS guidance reflects.

Todd S. Young: Does EPS guidance reflect the lower interest expenses resulting from the Aquacer? Thank you. Let me take the first one, Navin, and welcome back to coverage. We have not reduced interest expense in our guidance for the AQA sale.

BNP Paribas: Interest expenses, resulting from the AR question.

BNP Paribas: Jim.

BNP Paribas: Okay.

Jim: Let me take the first one.

Speaker Change: Welcome back to coverage.

Jim: We have not reduced interest expense on our guidance for the Aqua sales. So thats that interest expenses as if aqua sale doesn't happen. So we will update all of the guidance for Aqua post conclusion of that sale on a quarterly call Levine.

Jeffrey N. Simmons: So that interest expense is as if the AQA sale doesn't happen. So we'll update all the guidance for AQA post-conclusion of that sale on the quarterly call. Yeah, Navin, on all of our products, actually, we see future blockbusters with differentiation. With our portfolio, you know, we intend to price for value. We see this in past innovations that have been launched, and we believe that innovation will be rewarded, and that'll be part of our offer. So can I- Your next question...

Jim: <unk> on all of our products actually we see any of the future blockbusters with the differentiation with our portfolio, we intend to price for value.

Jim: We see this in past innovations that have been launched and we believe that innovation will be rewarded and that'll be part of our offering.

Speaker Change: So can I.

Speaker Change: Oh.

Speaker Change: Yes.

Speaker Change: Yes.

Operator: Your next question comes from Nathan Rich from Goldman Sachs. Please go ahead. Great. Thanks for the questions. Just a few quick ones at the end here.

Speaker Change: Your next question comes from Nathan Rich from Goldman Sachs. Please go ahead.

Nathan Rich: Great. Thanks for the questions just a few quick ones at the end here.

Nathan Rich: So, Todd, you highlighted the $20 to $25 million investment in pet health in the first quarter. Could you give us the rough split between what's related to the field forest expansion versus what might be promotional dollars focused on parasiticides, just as we think about maybe what the underlying kind of expense base will go up in 2024? And then on the OTC growth for 2024, anything more specific you could share on your expectations for Advantage and Soresto this year? And then lastly, Jeff, maybe just going back to your comments on having that kind of fuller, more innovative portfolio in pet health with Durham and Parvo, could you maybe talk about what that means in the market and the flexibility that gives you? Is that better access to corporate accounts, the ability to use volume discounts? Is there any additional color there? It would be great.

Nathan Rich: So Todd you highlighted the 20% to $25 million investment in pet health in the first quarter could you give us a rough split between what is related to the field force expansion versus what might be promotional dollars focused on parasiticide is just as we think about maybe what the underlying kind of expense space.

Nathan Rich: It goes up in 2024, and then on the OTC growth for 'twenty for anything more specific you could share.

On your expectations for advantage and thrust, though this year and then lastly, Jeff maybe just going back to your comments on having that kind of full or more innovative portfolio in pet health with Durham, and Parvo could you maybe talk about what that means in the market and the flexibility that gives you is that better access to corporate accounts ability.

Jeffrey N. Simmons: To use volume discounts just any additional color there would be great.

Todd S. Young: Sure, Nate. Thanks for the question. Yes, there's about $20 million in total investment for the sales force on a full-year basis. So, you know, essentially that's pretty standard given its people, it's pretty standard over the course of the year. So, about five in Q1.

Jeffrey N. Simmons: Sure. Thanks for the question, Yes, there was about the total investment for the sales force is about $20 million on a full year basis. So yes.

Jeffrey N. Simmons: Essentially that's pretty dividends people, it's pretty standard over the course of the year. So about five in Q1, and then the investments and put all but really about the promotional spend and a lot of that is to drive AD, which we're excited about the first oral parasiticide, we OTC markets in Europe and part of our.

Todd S. Young: And then the investments in pet health are really about promotional spend. And a lot of that is to drive ADTAB, which we're excited about. That's the first oral parasiticide in the OTC markets in Europe.

Todd S. Young: And, you know, part of our, you know, kind of oddity of first half and second half is the restructuring we announced today. That's going to provide a lot of savings that we're using to fund these incremental investments behind big opportunities. But that savings is more second half loaded, where with the Northern Hemisphere parasiticide season, we really have to make the investments in the first half to drive the uptake of those products.

Jeffrey N. Simmons: The oddity of first half second half is the restructuring we announced today that is going to provide a lot of savings that we're using to fund these incremental investments by big opportunities, but that savings is more second half loaded where with the northern hemisphere Parasiticide season, we really got to make the investments in the first half to drive the uptake of those.

Jeffrey N. Simmons: With respect to Seresto and A-Family, you know, we're not guided by product today. But, you know, overall, we are feeling good about the positioning of those in retail. And that's a big place where we have leadership, and we expect that leadership to continue. And then, relative to just the overall portfolio, I would say, no matter the segment, when you, you know, enter a clinic and have all four dimensions that I just mentioned, and DERM will be the new one for us, it really puts us in a unique position as, you know, the next company to be able to do that. And that just gives that option to the vet.

Jeffrey N. Simmons: <unk>.

Jeffrey N. Simmons: With respect to <unk>, we're not guiding by.

Jeffrey N. Simmons: Today, but overall, we are feeling good about the positioning of those in retail and that's a big place, where we have leadership and we expect that leadership to continue.

Jeffrey N. Simmons: And then relative to just the overall portfolio I would say no matter. The segment. When you when you enter a clinic and have all four dimensions that I, just mentioned and <unk> will be the new one for us it really puts us in a unique position as the.

Jeffrey N. Simmons: The next company to be able to do that and that just gives that optionality to the vet and we'll be looking at that against all segments, but I do think that will be a major factor and a major differentiator to most of the major animal health companies to be able to have the breadth of the portfolio that we do have with the Durham edition.

Jeffrey N. Simmons: And we'll be looking at that against all segments. But I do think that will be a major factor and a major differentiator for most of the major animal health companies to be able to have the breadth of the portfolio that we do have with the DERM addition. Thanks, we'll take the last caller. Your last question today comes from Brandon Vazquez from William Blair. Please go ahead. Hi, everyone. Thanks for taking the question and sneaking me in. Can I just ask one? I'll ask two up front here.

Speaker Change: Thanks, we'll take the last caller.

Speaker Change: Your last question today comes from Brandon Vazquez from William Blair. Please go ahead.

Speaker Change: Yeah.

Brandon Vazquez: Hey, everyone. Thanks for taking the questions sneaking me in here.

Brandon Vazquez: That's one.

Operator: First, on the FDA conversations that you guys are having, I guess, as you get closer to an approval here in the first half of 24, that you're reiterating, I think maybe I would have expected you could give a little bit more confidence or a little narrowing of the timeframe. So, am I, what, am I overreading that? Is there anything going on in the conversations?

Brandon Vazquez: Ask two upfront here first on the FDA conversation that you guys are having I guess as you get closer to an approval here in first half 'twenty core that Youre reiterating I think maybe I would have expected you could give a little bit more confidence or a little.

Brandon Vazquez: Narrowing of the timeframe so my.

Brandon Vazquez: One of my overriding that is there anything going on in conversations do you guys feel more confident as youre going through these discussions.

Brandon Vazquez: Do you guys feel more confident as you're going through these discussions? And then maybe the second one is just to highlight a couple of key products within innovation that bucket that are driving growth into 24. Thank you. Yeah, let me take this second one first.

Brandon Vazquez: And then maybe the second one is just highlighted.

Brandon Vazquez: A couple of key products within innovation that bucket.

Brandon Vazquez: That are driving growth into 'twenty four thank you.

Jeffrey N. Simmons: You know, there's no question, and we're excited about Xperia. Xperia exceeded our 70 million run rate, and it ended the year at 54 million.

Speaker Change: Yeah, Let me take the second one first.

Speaker Change: There is no question and we're excited about exterior experience exceeded our $70 million run rate. It ended the year at $54 million and with that with that growth and that trajectory we see.

Jeffrey N. Simmons: And with that growth and that trajectory we see, and a shortage of cattle numbers, Xperia plays into all of that relative to the value proposition. So, and then, of course, Parvo will be a driver, one we, you know, don't talk as much about. But with this restructuring, we're really adding significant investment in ADTAB in Europe, which had a good, strong finish to the year. So, those would be the three key things that I would point to. And then, look, Brandon; I wouldn't read into anything.

Speaker Change: And a shortage of cattle numbers experience plays into all of that relative to the value proposition. So and then of course <unk> will be a driver one we don't talk as much about but with this restructuring we're really adding significant investment in AD tab in Europe that had a good strong finish to the year. So those would be the three key that I would point.

Speaker Change: Two and then look Brandon I wouldn't read into anything.

Jeffrey N. Simmons: We're, you know, our confidence remains. Our confidence in the differentiation remains. These are great assets.

Speaker Change: Our confidence remains our confidence in the differentiation remains these are great assets, our regulatory team is doing a great job and we're in a very proactive productive dialog with the CDM and we'll update you if anything does change.

Jeffrey N. Simmons: Our regulatory team is doing a great job, and we're in a very proactive, productive dialogue with the CVM. And we'll update you if anything does change. Thank you, ladies and gentlemen. I will now turn the conference over to Jeff Simmons for closing remarks. I know we're on time here, but I just want to say to everybody, thank you for your time. I think 2023, the second half, really marks progress and momentum. Two quarters at 5% constant currency growth. We doubled our innovation. We, you know, increased our debt pay down beyond our expectations. And as you look to 24, the priorities remain the same.

Speaker Change: Thank you, ladies and gentlemen, I will now turn the conference over to Jeff Simmons for closing remarks.

Jeffrey N. Simmons: I know we're on time here, but I just wanted to say to everybody. Thank you for the time I think 2023% of second half really Mark's progress and momentum two quarters at 5% constant currency growth.

Jeffrey N. Simmons: We doubled our innovation.

Jeffrey N. Simmons: <unk>.

Jeffrey N. Simmons: Increased our our debt paydown beyond our expectations and as you look to 'twenty four priorities remain the same.

Jeffrey N. Simmons: You know, sustained growth on the top line, innovation and bringing innovation forward, and cash, and against all of those metrics, we have strong expectations to continue to make great progress. Thank you for your interest and your investment in Elanco. We look forward to a very exciting year and a year of high engagement with all of you. This concludes today's conference call. Thank you for your participation, and you may now disconnect.

Jeffrey N. Simmons: Sustained growth on the top line innovation, and bringing innovation forward and cash in and against all of those metrics we have inside the guide.

Jeffrey N. Simmons: <unk> expectations to continue to make great progress. Thank you for your interest and your investment in <unk>, we look forward to a very exciting year and a year with high engagement with all of you.

Speaker Change: This concludes today's conference call. Thank you for your participation and you may now disconnect.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Okay.