Q3 2024 Elanco Animal Health Inc Earnings Call
Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to Atlanta Animal Health's third quarter 2024 earnings conference call. All lines.
At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session.
If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question, please press star followed by the number one again. Thank you. I would now like to hand the call over to Katie Grissom, Head of Investor Relations. You may begin your conference.
Good morning. Thank you for joining us for Alenco Animal Health's third quarter 2024 earnings call. I'm Katie Grissom, Head of Investor Relations in ESG. Joining us on today's call are Jeff Simmons, our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Beth Haney from Investor Relations.
The slides referenced during this call are available on 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 statement.
The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional, and it is not sufficient for prescribing decisions.
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.
Speaker Change: After our prepared remarks, we will be happy to take your questions. I'll now turn the call over to Jeff.
Thanks, Katie. Good morning, everyone.
Jeff: Elenko reported a strong third quarter, delivering constant currency, organic top-line growth with adjusted EBITDA and adjusted EPS above the midpoint of our guidance ranges. Organic constant currency revenue growth of 1% was driven by the contribution from new products led by Xperia, AdTab, Credelio Plus, and Zenrelia.
Jeff: Our consistent strategy focused on growth, innovation, and cash is paying off, with innovative new products driving growth, enabling improved cash flow.
Beginning on slide 4, we achieved key milestones advancing our innovation portfolio and productivity strategy. Third quarter revenue growth excluding the impact of our aqua divestiture was led by our U.S. farm and international pet health businesses.
Jeff: For ELANC overall, we expect organic growth to accelerate sequentially in the fourth quarter and into next year.
Jeff: Since our last earnings call, we achieved several milestones for key potential Blockbuster products as we now shift from regulatory into commercial launch mode.
Jeff: On the PetHealth side, we received U.S. FDA approval for both Senrelia and Credelio Quattro, positively differentiated products expected to be meaningful competitors in the two largest markets in pet health.
On the farm side, Bovaire saw the first on-farm feeding into dairy cows.
Jeff: The flywheel is beginning to move as multiple consumer packaged good companies have signed contracts to purchase inset carbon credits from Appian derived from the use of Beauvair to reduce methane emission from dairy cows.
Jeff: As we shared in August, we paid down $1.3 billion of debt in the third quarter, enabled by the divestiture of our aqua business.
Jeff: Debt pay down remains our top capital allocation priority and net leverage down from the mid-five times at the start of the year, now expected to be in the mid-four times range at the end of this year.
Finally today, we're introducing a framework around our 2025 expectations.
Jeff: With continued confidence in our expected $600 to $700 million of revenue from new products, we expect 2025 organic constant currency revenue growth to accelerate to mid-single digits in 2025.
Jeff: We expect the underlying business to drive mid-single-digit adjusted EBITDA growth, excluding the aqua divestiture, as we invest strategically in our new pet health launches.
Jeff: Ultimately, we expect organic adjusted EBITDA to grow low single digits driven by an expected headwind from the court-supervised insolvency of one of our key CMOs located in the UK.
Jeff: We continue to expect year-end net leverage to be in the low four to high three times range. Todd will further address our outlook towards the end of our prepared remarks.
Jeff: Moving to slide 5. We provide third quarter year-over-year revenue growth by our four business areas. We've separated out the impact of the aqua divestiture to show the underlying organic constant currency growth of 1%.
Jeff: First, starting with the U.S. pet health revenue, which declined 4% in the quarter as strong retail performance was more than offset by competitive pressure and vaccine supply volatility in the vet clinic.
Jeff: On the retail side, the business returned to growth as the positive dispensing trends we saw starting in May continued in the third quarter.
Jeff: U.S. Soresto sales grew over 20% in the third quarter, driven all by volume.
Jeff: On the Vets side, we're excited about the launch of Zenrelia late in the third quarter and the expected first quarter 2025 launch of Cordelia Quattro.
Jeff: These products will be key contributors to the U.S. pet business expected return to growth in the fourth quarter of this year and into 2025.
Jeff: Outside the U.S., PetHealth delivered constant currency revenue growth of 2%, driven by the continued strength of AdTap, Credelio Plus, and Soresto.
Jeff: AddTab has exceeded our expectations each quarter this year as our source of volume analysis points to less cannibalization of our existing portfolio in both VAT and retail channels.
Jeff: Our strategic investment in the brand is driving AdTab to lead category growth for both dogs and cats, recruiting more new users into the fast-growing oral over-the-counter market than competitors.
Jeff: Across markets in Europe, we are seeing significant penetration in key channels and very high reorder rates, while positive consumer preference survey data supports continued brand building investment. We expect AdTab to be a key growth driver in 2025 as well.
Jeff: Now moving to farm animal, which grew revenue 3% globally. The U.S. business grew 11% led by cattle.
Jeff: Despite the declining U.S. cattle numbers, Elanco's cattle business remains strong, led by Xperia. With continued strong performance, we now expect Xperia to reach blockbuster status, with sales expected to exceed $100 million globally this year.
Jeff: Recent combination clearance approvals for Xperia are expected to allow for broader expansion into heifers, which represents nearly 40% of the US feedlot population, a key growth driver in 2025.
Jeff: Additionally, we continue to see very strong demand for Remensen as the strength of our integrated portfolio continues to deliver.
Jeff: Cattle vaccines benefited from favorable comparisons to the third quarter last year, but to a lesser extent than in the prior three quarters.
Jeff: In swine, difficult producer economics in the U.S. are impacting the industry as producers are reducing investment in productivity and certain other products. We expect this dynamic to continue in 2025.
Jeff: Finally, our portfolio benefited from poultry rotations again in the third quarter.
Jeff: Given the variability in purchasing patterns driven by rotations in this business, and our positive performance in late 2023, we expect a headwind to growth in the fourth quarter and into the first half of 2025.
Jeff: Finally, in International Farm Animal, the 3% organic constant currency revenue decline was driven by two discrete factors. The intentional two different commercial model changes we introduced with the initial 24 guidance, as well as the impact from the Keckstone product recall.
Overall, we're encouraged by the performance of the business.
Jeff: with growth led by price and the new products along with a stabilizing base allowing us to report our fifth consecutive quarter of underlying revenue growth.
Jeff: Moving to slide 6, we continue to advance our innovation portfolio and productivity strategy. To hit the highlights, our net leverage ratio was 4.3 times at the end of the third quarter, and price growth is 3% on a year-to-date basis.
Jeff: Now on to innovation, which delivered $112 million of sales in the third quarter and $321 million on a year-to-date basis as shown on slide 7.
Jeff: Today, we are tightening our expectations for 2024 innovation sales, bringing up the bottom end of the range by $20 million, with $420 to $450 million now expected for the full year of 2024, and $600 to $700 million next year.
Jeff: Third quarter growth was driven by continued momentum from Xperia, AdTab, and Credelio Plus, as well as the US and Brazil launch of Zenrelia late in September.
Jeff: Now let's talk about our three key innovation products in more detail on slide 8. We are thrilled to be the second animal health company to enter the 1.7 billion dollar global dermatology market.
Jeff: Since our U.S. approval in late September, the launch is progressing very well. We are pleased to be hitting all our key internal metrics, as we've now been executing the strategy we laid out in our conference call on September 20th.
Jeff: Focusing first on vet education, driving positive experience, and accelerating the incentive to buy.
Our vet education strategy starts with our field sales team.
Jeff: who bring the product benefits and considerations to life in the clinic utilizing the U.S. product label and the head-to-head study data results.
Jeff: Additionally, over the past several weeks we have hosted numerous medical education meetings, advisory boards, weekly webinars, and regional dinner meetings where board-certified dermatologists and well-respected veterinary thought leaders have shared their positive experiences.
Jeff: These discussions include clinical data outcomes and successful case studies from trial participants. Our survey data shows the intent to buy increases significantly after these educational touchpoints with KOLs and veterinary peers.
Jeff: Additionally, in mid-October, a Zonrelia vaccine booster study was presented at the ISCAID symposium.
Jeff: The promising results concluded that when dogs were administered illicit NED for 56 days at one time or three times the labeled dose, the number of dogs with protective titers on days 43 and 56
Jeff: following administration of canine core booster vaccinations, including rabies, were similar among all treated and controlled groups.
Jeff: No serious adverse events were observed. The data is accessible to interested veterinarians and our Elanco regional consulting veterinarians continue to provide support on questions and individual treatment decisions.
Jeff: The second pillar of our strategy is driving a positive experience. We continue to execute a targeted sample strategy.
Jeff: We had a number of early adopters enrolled in our early experience program allowing us to gain valuable success data around real-world outcomes of Xenrelia and a variety of different case types.
Jeff: We see a clear opportunity for Zinralia to be used in all types of allergic itch cases and believe it has the profile to be a first-line treatment.
Jeff: It is very clear Zenrelia works, and it works really well. Both veterinarians and pet owners that have experienced the product have been very pleased with the speed and the level of improvements of their dogs.
Jeff: With only a few weeks past since the booster vaccine data was presented, key launch metrics, including clinic penetration, reorder rates, and average order size, are all progressing in line with our expectations. We are tracking reorder rates for many clinics, demonstrating the product is being used, and replenished.
Jeff: The key leading indicator we are tracking is clinic penetration. We are seeing the product placed in hundreds of new clinics each week. We plan to update the market quarterly on this metric beginning early next year.
Jeff: Our global launch is in full motion and we continue to invest in and execute a no regrets approach.
Jeff: Overall, we are pleased with the launch of Zenrelia and encouraged by the adoption we are seeing in both the US and Brazil.
Jeff: both with less restrictive labels than the U.S. and launching over the coming months.
Jeff: We are thrilled to be just the second company to offer an innovative, new treatment in canine dermatology space and strongly believe in the efficacy benefits Enreli has to offer.
Jeff: We see relevance for all cases of atopic dermatitis for this product and believe Zenrelia has the potential to grow the market while unleashing a significant growth lever for Elanco.
Jeff: We are focused on building a sustainable leadership position in dermatology and Xenrelia is just the beginning.
Jeff: Additionally, as expected, less than a month after the approval of Xenrelia, we received US FDA approval for Cordelio Quatro, the newest addition to the Cordelio franchise, which includes Cordelio Dog, Cordelio Cat, and Cordelio Plus.
Jeff: Cordelio quattro is the first and only canine oral parasiticide to protect against fleas, ticks, heartworms, roundworms, hookworms, and three different species of tapeworm in a single monthly dose.
Jeff: We are thrilled to bring this differentiated product to the U.S. market.
Jeff: Indecticides or flea, tick and intestinal parasite combination products are the fastest growing category in the 3.8 billion dollar US parasiticides market with these broad-spectrum products now making up nearly 25% of the market.
Jeff: and Quatro is positioned also to strengthen Elanco's value proposition in the prescription parasiticide market.
Jeff: We are progressing nicely through the final stages of manufacturing scale-up to optimize the launch, which remains on track for the first quarter of 2025, prior to the major parasiticide season.
Jeff: We expect Credelio Cuatro to be a major consumer-focused launch, contributing to the growth of the overall parasiticide market, driving share growth for Elanco.
Jeff: Shifting to farm animal innovation, we are encouraged by the progress of Beauvair. In the third quarter, we achieved several key milestones. Notably, permission was granted for the sale and use of Beauvair in California, a key dairy production state, and the first cows were also fed Beauvair.
Jeff: We continue to expand the reach of our Uplook database, with approximately 800,000 dairy cows enrolled and activated, expected to trend towards 1 million cows by the end of the year. Overall, farmer demand is very robust.
Jeff: And finally, multiple large CPG companies have signed contracts with Atheon to purchase inset carbon credits.
Jeff: We've updated our pipeline chart on slide 9, and as you can see, we are now in or entering the commercial execution phase for the majority of these products.
Jeff: We're excited to share more information on the progress of these launches in the coming quarters, but early indicators are positive. We're focused on investing appropriately to ramp adoption, take share, expand markets, and build strong brands.
Jeff: With that, I'll hand it over to Todd to discuss our third quarter results and outlook in more detail.
Thank you, Jeff, and good morning, everyone.
Todd Young: Today I'll focus my comments on our third quarter adjusted measures so please refer to today's earnings press release for a detailed description of the year-over-year changes and our reported results.
Jeff: Starting on slide 11, we delivered $1.03 billion in revenue, representing a 4% reported decline. Excluding the impact of foreign exchange rates and the divestiture of our aqua business, organic cost and currency growth was 1%.
Jeff: Slide 12 provides revenue by the four quadrants of our business in the quarter.
Jeff: Total pet health revenue declined 2% in the third quarter, with price growth of 2%.
Jeff: Our U.S. business declined 4 percent, with supply volatility for vaccines and competitive pressure in the veterinarian clinic contributing an estimated 12 percentage points of decline in the quarter.
Jeff: We are pleased by the volume growth from our OTC Retail Parasiticide business, which saw the normalization of retailer purchasing patterns more in line with demand in the third quarter and by the contribution of increased sales of new products, which together contributed eight percentage points of growth.
Jeff: Outside the U.S., constant currency pet health revenue growth of 2% was driven by Europe, led by ADTAB and Soresto as a retail investment strategy and execution continues to drive demand growth throughout the region. This was partially offset by competitive pressure in Australia.
Jeff: Moving to farm animal, globally third quarter revenue growth was 3%, excluding the unfavorable impact of foreign exchange rates and the impact of the aqua divestiture.
Jeff: In the U.S., revenue growth was 11%, primarily driven by strength in cattle, across both new and legacy products.
Jeff: Xperia and Remington continue to be key contributors to growth along with poultry in the third quarter partially offset by the profitability challenges for swine customers.
Jeff: We are very pleased with the 18% growth in U.S. farm animal over the trailing 12 months, as our innovation has driven greater benefit across the portfolio.
Jeff: In 2025, we expect growth will decelerate from this elevated level, but remain above average industry growth rates driven by Xperia and Bovair.
Speaker Change: David Westenberg, David Westenberg, David Westenberg
Speaker Change: Outside the U.S., farm animal revenue declined 3 percent, excluding the impact of the aqua divestiture and the unfavorable impact of foreign exchange rates.
Speaker Change: Aligned with our expectations, the decline was driven by our strategic decision to change our go-to-market model in certain geographies, including Argentina, and exit low-margin distribution agreements. We estimate this do-different approach and the Keckstone recall in Europe drove three percentage points of decline year over year.
Speaker Change: Excluding these discrete impacts, increased demand for our poultry products in Europe was offset by declines in Australia driven by drier weather and generic pressure.
Speaker Change: Continuing down the income statement on slide 13, gross margin declined 230 basis points to 52.2 percent of revenue.
Speaker Change: Operating expense increased by 3% in the third quarter, driven by higher employee related expenses and increased expenses supporting the US pet health business, partially offset by savings related to our first quarter restructuring announcement.
Speaker Change: Strategic investment in the key launches is critical to the long-term success and profitability of the brands, despite being a temporary, near-term EBITDA headwind.
Speaker Change: Interest expense was $46 million, a decrease of $26 million year over year as the proceeds from the aqua divestiture enabled significant debt pay down at the beginning of the third quarter.
Speaker Change: Adjusted EBITDA was $163 million in the quarter, a decrease of $51 million on a reported basis or $27 million, excluding the impact of the Aqua divestiture. Adjusted EPS was <unk> 13 cents the decrease of five cents in the quarter.
Speaker Change: Adjusted EBITDA was $163 million in the quarter, a decrease of $51 million on a reported basis or $27 million excluding the impact of the aqua divestiture.
Speaker Change: Adjusted EPS was $0.13, a decrease of $0.05 in the quarter. On slide 14, we include a bridge for the third quarter results compared to the prior year. Additionally, in the quarter, we recorded a gain on the sale of our aqua business, which impacted reported EPS by $0.94.
Speaker Change: On Slide 14, we include a bridge for the third quarter results compared to the prior year. Additionally, during the quarter, we recorded a gain on the sale of our Aqua business was impacted reported EPS by <unk> 94 cents.
Speaker Change: Now let me offer a few words on our cash working capital and debt on slide 15.
Speaker Change: Now, let me offer a few words on our cash, working capital, and debt on slide 15.
Speaker Change: Cash provided by operations was $162 million in the quarter on a year to date basis operating cash improved by $250 million driven by improved inventory performance strong collections and lower project expenses.
Speaker Change: Cash provided by operations was $162 million in the quarter. On a year-to-date basis, operating cash improved by $250 million, driven by improved inventory performance, strong collections, and lower project expenses.
Speaker Change: We ended the quarter with net debt of $3.897 billion, inclusive of the $1.3 billion of debt pay down from the proceeds of our aqua sale.
Speaker Change: The net debt-to-adjusted EBITDA ratio was 4.3 times at the end of the quarter, down from 5.7 times at the end of the third quarter in 2023. We remain confident in our year-end net leverage in the mid-4 times range.
Speaker Change: We've updated slides 25 and 26 in the appendix to reflect updates to our key debt information.
Speaker Change: Based on our third quarter debt pay down, we now expect to have income statement interest expense of approximately 225 million dollars and cash interest of approximately 295 million dollars in 2024.
Speaker Change: We expect 2025 income statement interest expense to improve by $5 to $15 million and cash interest to be lowered by $20 to $30 million. Additionally, we expect an incremental $150 million of cash taxes next year for deferred tax payments related to the AQUA transaction.
Speaker Change: Next, I'll provide an update to the September 13th press release regarding the UK contract manufacturing organization that entered court supervised insolvency in September.
Speaker Change: This CMO is a critical supplier for Olenco, representing approximately $160 million to $180 million in annual farm animal revenue across species and countries.
Speaker Change: The entity remains in court supersized insolvency, and we are working closely with the parties involved to maintain continued product supply.
Speaker Change: For 2024, we continue to expect an adjusted EBITDA headwind of approximately $5 to $10 million, primarily in the fourth quarter.
Speaker Change: For 2025, we believe there are a variety of scenarios, all with an expected year-over-year adjusted EBITDA headwind between $25 million and $35 million, primarily on gross profit.
Speaker Change: We expect to reach a resolution in the coming weeks that will reflect this expected outcome in our 2025 growth outlook.
Speaker Change: Finally, let's move to guidance on slide 17. For the full year, the outlook for our underlying business remains positive.
Speaker Change: We are narrowing the range for revenue to be between $4.42 billion and $4.45 billion, representing 3% growth when excluding headwinds from foreign exchange rates and the impact of the aqua divestiture.
Speaker Change: There is no change to the midpoint of the sales guidance range as increased expectation for innovation sales is offset by lower expectations for U.S. pet health parasiticide revenue.
Speaker Change: We expect adjusted EBITDA of $900 million to $930 million, reflecting expected gross margin headwinds from product mix and manufacturing performance.
Speaker Change: And finally, adjusted EPS is expected to be between $0.89 and $0.95, with improved expectations for interest expense and tax offsetting the items impacting adjusted EBITDA to result in no change to the midpoint compared to August.
Speaker Change: Our fourth quarter guidance as detailed on slide 18, with organic constant currency revenue growth expected to be between 1% and 4%. Despite the headwind from Aqua adjusted EBITDA and adjusted EPS are expected to grow primarily based on the comparison of the fourth quarter of 2023, which included meaningful headwinds related to Argentina as detailed on slide.
Speaker Change: Our fourth quarter guidance is detailed on slide 18, with organic cost and currency revenue growth expected to be between 1% and 4%.
Speaker Change: Despite the headwind from Aqua, adjusted EBITDA and adjusted EPS are expected to grow, primarily based on the comparison of the fourth quarter of 2023, which included meaningful headwinds related to Argentina, as detailed on slide 19.
Speaker Change: 19, finally, we wanted to provide some additional context on our expectations for 2025 on slide 20.
Speaker Change: Finally, we wanted to provide some additional context on our expectations for 2025 on slide 20.
Speaker Change: While the top line, we remain confident our trajectory towards innovation sales of $600 million to $700 million.
Speaker Change: On the top line, we remain confident in our trajectory towards innovation sales of $600 to $700 million with expected organic revenue growth to accelerate to mid-single digits compared to our expected 3% growth in 2024, with growth expected in both pet health and farm animal.
Speaker Change: With expected organic revenue growth to accelerate to mid single digits compared to our expected 3% growth in 2024 with growth expected in both pet health and farm animal.
Speaker Change: Third health growth is expected to be enabled by increased contributions from new products and strength in our pet health OTC business. We expect continued headwinds on our legacy U S pet health that chronic business, although lessening as crude oil cuatro and <unk> are expected to contribute to returning this business area to growth.
Speaker Change: In pet health, growth is expected to be enabled by increased contributions from new products and strength in our pet health OTC business.
Speaker Change: We expect continued headwinds on our legacy U.S. Pet Health Vet Clinic business, although lessening as Cordelia Quatro and Zenrelia are expected to contribute to returning this business area to growth.
Speaker Change: On the farm animal side, we continue to expect above market average growth led by new products in cattle, but anticipate headwinds, resulting from poor swine producer economics, generics and unfavorable comparisons related to strong poultry rotation in 2024.
Speaker Change: Based on our updated guidance for 2024, the jump off point, excluding the estimated aqua contribution for the full year should be approximately $875 million of adjusted EBITDA.
Speaker Change: Based on our updated guidance for 2024, the jump-off point, excluding the estimated AQUA contribution for the full year, should be approximately $875 million of adjusted EBITDA.
Speaker Change: This reflects our 2024 guidance midpoint of $915 million less approximately $40 million of estimated Aqua EBITDA contribution in the first half of 2024.
Speaker Change: This reflects our 2024 guidance midpoint of $915 million, less approximately $40 million of estimated AQUA EVADOT contribution in the first half of 2024.
Speaker Change: Looking forward to next year, we expect the underlying business to drive mid single digit organic adjusted EBITDA growth inclusive of meaningful strategic investments in our key blockbuster potential launches.
Speaker Change: Looking forward to next year, we expect the underlying business to drive mid-single-digit organic adjusted EBITDA growth, inclusive of meaningful strategic investments in our key blockbuster potential launches.
Speaker Change: As I shared earlier, the anticipated, 25% to $35 million headwind from the U K CMO situation ultimately puts our organic adjusted EBITDA growth expectations in the low single digits range.
Speaker Change: As I shared earlier, the anticipated $25 to $35 million headwind from the UK CMO situation ultimately puts our organic adjusted EBITDA growth expectations in the low single digits range.
Speaker Change: From a cash perspective, we expect a few headwinds to our cash available for debt paydown, including deferred tax payments from the 2020 for Aqua proceeds.
Speaker Change: From a cash perspective, we expect a few headwinds to our cash available for debt pay down, including deferred tax payments from the 2024 ACWA proceeds, and increased capital expenditures to support capacity expansion at our monoclonal manufacturing facility.
Speaker Change: Increased capital expenditures to support capacity expansion of our monoclonal manufacturing facility with all this in consideration we continue to expect net leverage to be in the high threes to low fours range continuous on our deleveraging path.
Speaker Change: With all this in consideration, we continue to expect Net Leverage to be in the high 3's to low 4's range, continuing us on our deleveraging path.
Speaker Change: We will continue to keep our eyes on the foreign exchange markets over the coming months and look forward to providing our detailed 2025 guidance next February.
Speaker Change: We will continue to keep our eyes on the foreign exchange markets over the coming months and look forward to providing our detailed 2025 guidance next February.
Speaker Change: Now I'll hand, it back to Jeff for closing comments.
Now, I'll hand it back to Jeff for closing comments.
Jeff Simmons: Thanks, Todd <unk> is delivering on our expectation of an improved portfolio with our fifth consecutive quarter of underlying top line growth in the third quarter and six projected in our fourth quarter guidance. This year, we expect full year organic constant currency revenue growth of 3% an acceleration from 1% growth.
Speaker Change: Thanks, Todd. Elanco is delivering on our expectation of an improved portfolio.
Speaker Change: with our fifth consecutive quarter of underlying top-line growth in the third quarter and sixth projected in our fourth quarter guidance this year. We expect full-year organic constant currency revenue growth of 3% and acceleration from 1% growth in 2023.
Speaker Change: In 2023, we're continuing to outperform where we have leadership like pet retail on farm animal and are launching into big market spaces, where we had previously portfolio gaps and competitive pressure.
Speaker Change: We are continuing to outperform where we have leadership like pet retail and farm animal and are launching into big market spaces where we've had previously portfolio gaps and competitive pressure.
Speaker Change: Gaining regulatory approval for two differentiated blockbuster products in the two largest spaces and pet health within a month is unprecedented.
Speaker Change: gaining regulatory approval for two differentiated Blockbuster products in the two largest spaces in pet health within a month is unprecedented.
Speaker Change: Determination resolve and unwavering commitment of the <unk> team was on full display not just recently, but over many years, leading up to this point of delivery.
Speaker Change: The determination, resolve, and unwavering commitment of the Juan Ylanco team was on full display, not just recently, but over many years leading up to this point of delivery.
Speaker Change: We have officially moved from R&D and regulatory to commercial launch mode for all three big products, <unk>, Centralia, and credential cuatro with growing tailwind from experience add tab and codelco plus two.
Speaker Change: We have officially moved from R&D and regulatory to commercial launch mode for all three big products Bovair, Zenrelia and Credelio Quattro with growing tailwinds from Xperia AdTab and Credelio Plus
Speaker Change: 2025 presents an invigorating opportunity to strengthen our position in pet health globally, and see the market come to life for livestock sustainability building on our momentum. This year, we expect revenue growth to accelerate next year to mid single digits, we expect to grow adjusted EBITDA low single digits in 2020.
Speaker Change: 2025 presents an invigorating opportunity to strengthen our position in pet health globally and see the market come to life for livestock sustainability.
Speaker Change: We expect to grow adjusted EBITDA, low single digits, in 2025, excluding ACWA, as we make intentional investments with expected multi-year benefits aimed at building our brands and maximizing the returns on our innovation investments.
Speaker Change: <unk>, excluding aqua as we make intentional investments with expected multiyear benefits aimed at building our brands and maximizing the returns on our innovation investments.
Speaker Change: This sets us up for continued top line momentum coupled with anticipated margin expansion in 2026 and beyond shifting our focus towards the bottom line growing faster than the top line we.
Speaker Change: This sets us up for continued top line momentum, coupled with anticipated margin expansion in 2026 and beyond, shifting our focus towards the bottom line growing faster than the top line.
Speaker Change: We think this creates an exciting value proposition and look forward to updating you more formally on our 2025 guidance in February next year with that I'll turn it over to Katie to moderate the Q&A.
Speaker Change: We think this creates an exciting value proposition and look forward to updating you more formally on our 2025 guidance in February next year. With that, I'll turn it over to Katie to moderate the Q&A.
Speaker Change: Thanks, Jeff.
Speaker Change: Thanks, Jeff. We'd like to take questions from as many callers as possible, so we ask that you limit yourself to one question and one follow-up. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.
Speaker Change: 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. We will now begin the question and answer session. If you would like to ask a question, please press star 1 in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of Michael Riskin from Bank of America. Your line is open.
Michael Riskin: Great, thanks for taking the question guys and congrats on the on the quarter and the update.
Michael Riskin: Jeff, maybe one for you to start. You know, you talked about Zinrelli, obviously a lot of focus there. You mentioned a couple times hitting key internal metrics. Specifically, I think you outlined clinic penetration as something to really watch.
Speaker Change: Any early indications of what those metrics are exactly, just give us some specifics in terms of where you are now, where you hope to be at the start of the year or middle of next year, just anything you can point to so that we can track progress. Obviously, revenue contributions expect to be small in the first couple of months, but...
Speaker Change: What should we be looking for? Anything you can quantify to give us a sense of that early progress.
Great. Thank you, Michael. Great question.
Speaker Change: Yeah, let me just step back. The launch is going well, rapid evolving, dynamic launch. We are six weeks in and the metrics that we are focusing on and that we will communicate more about. We're not going to do that today in great detail, but we will as we get towards the next earnings call and we get into 2025. And those metrics being clinic penetration and reorder rates. So placing the product into clinics.
Speaker Change: and then seeing it being used and replenished. Those are the two key things. I think a couple things I would focus on that I think are really important at this stage. The first is it's all about efficacy.
Speaker Change: And let me share that, you know, as I've said, you know, Xenrelia works, it works really well. That's what we saw in the head-to-head studies and the studies as we move forward with the registration. And what I can say is, yes, Elinuocidinib is a different active ingredient and it is delivering great efficacy. And again, as I said, we saw it in the head-to-head. We're now seeing it in the field.
Speaker Change: You know, of course, it's been given the tough cases where other products did not work. That's been obvious in the early stages. And what I can share, Michael, is it's performed exceptionally well. Some of these have become case studies that are being used with other veterinarians.
Speaker Change: I think a couple things I would say is we do see several hundred new clinics are taking on Xenrelia each week. The ramp is tracking nicely to our expectations.
Speaker Change: And our first kind of round of incentives for our reps are targeted for the end of the year. And again, we'll be reporting those results as we get into Q1 with you.
Speaker Change: and I think it's just a couple other just real quick is you know it's been asked about where this products being used we will say in the early stages it is being used in all three segments of chronic seasonal acute
Speaker Change: It's being used in general practices, and we continue to make good progress with strategic accounts. We've actually secured agreements a little faster than we originally thought with strategics, and it's being placed online. And look, I will point to the segment of there are veterinarians.
Speaker Change: that actually, you know, desire more information before full adoption. And this is where we've taken a very tech-to-tech approach, where the booster data has been helpful.
Speaker Change: and what we're seeing there is that there's a longer selling cycle or maybe a lower first order rate initially. So that's where we are and we'll continue to give you more specifics as we head into 2025.
Speaker Change: Okay, that's helpful. And then maybe for my follow-up, a little bit more of a big-picture question. Something you touched on at the end of the prepared remarks in terms of the 2025 framework.
Speaker Change: As you indicated before, not expecting a ton of operating leverage in 25 because of the investment to drive those new brands. So hence the mid-single digit top-line growth, but then EBITDA is sort of mid-single, low-single, depending on what you're looking at.
Speaker Change: But I think what we're focused on is sort of that underlying operating leverage or what the operating leverage could be in 26, 27.
Speaker Change: I'm not going to ask you to guide to 2026 just now, but just could you sort of walk us through that bridge of...
Speaker Change: What's holding back 2025 operating leverage and how much so, you know, how much from the gross margin pressures
Speaker Change: how much from the incremental investments, how much from sort of, you know, these are going to be quattros and are going to be low volume products. So not as much contribution to margins. And that'll help us get a sense of sort of, you know, let's say you do mid single digit growth going forward, what kind of operating leverage we could expect in the out years.
Speaker Change: We will be investing.
Speaker Change: Accordingly, because we do believe the season matters.
Speaker Change: But I also would say that this broad spectrum parasiticide segment has shown less seasonality and much more focused on launching penetrating in the markets that youre going to targets. So.
Speaker Change: We expect it to ramp, but we do expect that will occur over the course of the full year.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of <unk> <unk> from Evercore ISI. Your line is open.
Speaker Change: Hey, guys. This is Mike difiore in for <unk>. Thanks, So much for taking my questions three quick ones for me.
Speaker Change: First regarding the <unk> doesn't really have a vaccination booster study.
Speaker Change: Noticing that trial, except for canine timber virus, 100% of dogs remained above the pre specified protective thresholds at the onex and <unk> dose levels.
Speaker Change: Kind of curious as to what explains the.
Speaker Change: <unk> canine distemper component not hitting these levels and is that a sticking point among that's maybe on the line.
Speaker Change: I have two follow ups. Thank you.
Michael Riskin: Yes, Michael.
Speaker Change: Booster study again.
Speaker Change: Was run very well one three times isn't really a dose number of dogs, achieving as I said appropriate titers above the vaccine and this has been received very well and very consistent results and again no serious adverse events were observed in this has been extremely helpful in that to that conversation.
Speaker Change: Got it Okay next moving onto Cuatro.
Speaker Change: Obviously tapeworm is surely more endemic to certain geographic regions in the U S. But.
Speaker Change: In geographic areas that it isn't endemic can you speak to the level of enthusiasm and Receptiveness for this product and would you expect more seasonality for cointreau in these non endemic regions and lastly.
Speaker Change: Separately I know.
Speaker Change: Just that you expect to innovation sales in 2024 has crept up.
Speaker Change: $10 million at the midpoint from.
Speaker Change: 400 to 450 now to $420 to $4 50.
Speaker Change: I may have missed this but what's expected to drive this incremental.
Speaker Change: And innovation revenue. Thank you.
Speaker Change: Yes, I'll, let Todd take the second one on the first one look the first thing Mike is going to drive is what Youre seeing is this trend you've got $3 8 billion in the U S. The parasiticide a little over 1 billion now as these broad spectrum in that dose where coming into that market. We see the natural growth of taking share across that that larger market.
Todd Young: It's probably one of the best tailwind that we see overall broadest coverage always is there a broad coverage always has a benefit. We also would add not just the tapeworm element, but we put out recent data around tick efficacy, which I think is a real positive and we've got heartworm for first month control.
Speaker Change: And prevention, so a few layers of differentiation a big fast growing market and we've got a lot of expertise and one of the largest sales forces in the U S and a good distribution relationship as well all of these are components that give us great advantage going into 2025 with codelco cuatro.
Speaker Change: Mike on the innovation increase it's really the experience continuing to ramp a little faster than we expected last quarter as well as add tab and <unk> plus outside the U S.
Speaker Change: The next question.
Speaker Change: Your next question comes from the line of David Westenburg from Piper Sandler Your line is open.
Speaker Change: Hi, Thank you for taking the questions.
Speaker Change: I'm going to sound like I'm jumping around but in all actuality I'm just trying to get to kind of kind of contribution margins as we're moving into 25% in 2026.
Speaker Change: So on on the phone.
Speaker Change: Minimal side nice update on both there.
Speaker Change: Are there any other states or countries in the pipeline that could be.
Speaker Change: Active and staying on farm animal Hepper experience have a update that's great can you give us a little bit of.
Speaker Change: Flavor in terms of the size of this opportunity and his experience have more of a pet.
Speaker Change: Op margin or more of a farm animal margin and maybe it is going to change as we get more volume and then if we are going to see cuatro, replacing <unk>.
Speaker Change: How should we think about like <unk>, becoming a blockbuster because I would imagine that maybe it's that the $50 million point.
Speaker Change: It's dilutive to accretive or something like that okay. Thank you.
Speaker Change: Yes, David real quick on both their we have rights for North America, including Canada, and Mexico, but our focus is on dairy even over beef the clearances for dairy here in the U S and the size of the market is significant and the efficiency to reach that market.