Q4 2024 Elanco Animal Health Inc Earnings Call
Vice President of Investor Relations and ESG joining me on today's call are Jeff Simmons, our President and Chief Executive Officer, Todd Young, our Chief Financial Officer, and Beth Hany from Investor Relations the.
The slides referenced during this call are available on the Investor Relations section of <unk> Dot Com todays discussion will include forward looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast for more information see the risk factors in today's earnings press.
Police as well as in our latest Form 10-K, and 10-Q filed with the SEC, we do not undertake any duty to update any forward looking statements.
The information, we provide about our products and pipeline is for the benefit of the investment community. It's not intended to be promotional and 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 todays slides and in the earnings press release.
After our prepared remarks, we will be happy to take your questions I will now turn the call over to Jeff.
Jeff: Thanks, Tiffany and good morning, everyone.
Jeff: One or 2025 with momentum fourth quarter revenue adjusted EBITDA adjusted EPS and net leverage were all in line with our expectations. We're pleased to report our sixth straight quarter of revenue growth up 4% on an organic constant currency basis with growth across both our pet health and farm animal businesses.
Jeff: I want to open by highlighting several accomplishments from the full year, which position us well for accelerating growth into 2025 2020 for organic constant currency revenue growth of 3% represents a meaningful step up from 2022, and 2023, driven by our innovation a stabilizing base.
Jeff: Pricing and importantly, the durability of our diverse portfolio and balanced geographic presence that 3% reflects growth in both pet health and farm animal and market share gains and global pet retail and U S farm animal where we hold leadership positions.
Jeff: Additionally, we experienced broad based organic constant currency top line growth across our top five product franchises and in nine of our top 10 countries.
Jeff: We have launched our diverse portfolio of innovation with six potential blockbusters now in the market through focused commercial execution across global markets. We exceeded our innovation revenue target for 2024. We have also raised the range for 2025, reflecting our confidence in the continued contributions from these new.
Jeff: Additionally, in 2024, we concentrated our strategic focus on the highest impact opportunities successfully divesting our aqua business. The sale proceeds combined with more than a half billion in operating cash flow allowed us to pay down approximately 25% of our debt and support increased investments in our strategic.
Jeff: <unk> product launches.
Jeff: When we started 2024, we highlighted the three value drivers for <unk> growth innovation and cash we have made strong progress on each front, we accelerated growth launched all six key products exceeded our innovation plan, while delivering our biggest year yet of operating cash flow.
Jeff: Looking to 2025 growth innovation and cash remain the priorities to expand our value proposition. We continue to anticipate an acceleration in organic constant currency revenue growth of 4% to 6%, excluding the anticipated impacts of FX and the Aqua divestiture, we expect adjusted EBITDA to grow.
Jeff: 1% to 5%.
Jeff: With the increasing contribution from innovation and stabilization of our base business, we expect sustained growth over time, while our optimized infrastructure and product mix should enable margin expansion in 2026 and beyond.
Jeff: Notably like many other global corporations were negatively impacted by the stronger dollar on slide five to highlight the strength of our core business. We broke out the impact of foreign exchange on our fourth quarter results and 2025 guidance.
Jeff: Our global team is focused on commercial execution and full year underlying expectations are essentially unchanged. Overall, we are pleased with our fourth quarter performance against this dynamic macroeconomic backdrop and remain confident in accelerating fundamentals in 2025.
Jeff: Turning to the fourth quarter on slide six we break down the 4% underlying organic constant currency revenue growth, which excludes the impact of the aqua divestiture in prior periods.
Jeff: All four areas delivered growth or were stable in the quarter, marking our best broad based performance in more than three years.
Jeff: U S farm animal was up 6% led by cattle experience reached blockbuster status from the U S sales alone benefiting from the Houston Heifers that began in November after we received FDA combo clearance. This growth supported demand for <unk>, demonstrating the increasing value of our comprehensive portfolio.
Jeff: International Farm animals flat, despite challenging swine economics in Asia, the sequential improvement from the 3% decline in the third quarter was driven by stronger global poultry demand and less impact from our do different commercial model changes and certain geographies international.
Jeff: International Pet health delivered robust growth of 11% driven by continued strength of AD tab and <unk>, we now expect to add tab peak sales to exceed $100 million.
Jeff: Reflecting successful DTC efforts in Europe.
Jeff: By geography International Pet health achieved growth across a very diverse range of markets with contributions from Europe, The Middle East Latin America, Asia Pacific and Canada.
Jeff: Finally, the U S pet health revenue grew 2%, including early contributions from <unk>, which launched in late September importantly, Gallo print posted its best results since the third quarter of 2023, and our vaccine portfolio achieved 8% growth in the quarter, we continue to lead the retail.
Jeff: <unk> with share gains and increased points of distribution capitalizing on positive trends and serving the one third of pet owners, who make purchases outside the veterinary clinics.
Jeff: Turning to slide seven we continue to advance our innovation portfolio and productivity, our IPP strategy, starting with productivity, we paid down 1.4 dollars $75 billion in debt in 2024, resulting in a net leverage ratio of four three times at the end of the year down from five six times to.
Jeff: Start 2020 for this achievement was the direct result of the strategic Aqua transaction and a companywide commitment to cash conversion improvement.
Jeff: From procurement to our incentive plans our company has created a cultural priority on cash generation and debt Paydown.
Jeff: On portfolio, we saw benefits across both sides of our business and around the globe ultimately driving 2020 for durable growth in U S. Pet health. We are now one of the two animal health companies to offer a comprehensive portfolio with products in all four key markets Parasiticide dermatology vaccines and <unk>.
Jeff: Pain and other therapeutics that clinics prioritize partners, who offer a complete set of solutions, allowing us to leverage innovation to generate a broader lift across our entire pet health portfolio.
Jeff: Building on the strength of our advantaged brands and OTC retail leadership, we recently introduced pet protect a complete line of veterinary formulated science backed supplements. Additionally, in the European Pet health market growth and add tap and Sorrento underscores our leadership in retail parasiticide.
Jeff: And U S farm animal the portfolio achieved $100 million in organic growth in 2024, driven by multiple species. Our recent data indicates we ended the year as the market leader in the U S and beef swine and poultry with good momentum and dairy are 50 year old flagship product momentum captured volume and <unk>.
Jeff: <unk> growth with revenue up 19% in the U S.
Jeff: This growth was driven by a full complementary portfolio and further supported by the new value generated by the carbon insert market enablement and dairy more recently, we launched <unk> a medically important antibody <unk> treatment for bovine swine respiratory disease conveniently given as a one low volume shot.
Targeted innovations like <unk> bolster our wider portfolio of solutions and we continue to boost our portfolio even further to bring solutions to emerging unmet needs. We have just announced our agreement with <unk> to commercialize high path avian influenza vaccines for dairy the vaccine for use.
Jeff: And dairy cattle is in the final stages of USDA conditional approval review the cross species transmission of the disease and to nearly 1000 dairy herds across the U S. Along with the zoonotic transmission shows that more interventions are quickly needed a cattle vaccine will be critical to slow the spreading of the VI.
Jeff: Iris between birds and cattle.
Jeff: <unk> is pleased to partner with <unk> to bring customers options to fight this devastating disease.
Jeff: Now onto innovation <unk> delivered five new U S product approvals and market authorizations in 2024 alone Ellen and her team have built an integrated engine well positioned to deliver a consistent flow of high impact innovation into major markets on top of the progress made to bring late stage developments through.
Jeff: Our recent approvals her team is focused on a robust portfolio of differentiated and transformational early and mid stage assets, including a strong monoclonal antibody platform that address significant unmet needs in core and emerging spaces.
Jeff: Looking at slide eight we delivered $140 million of innovation revenue in the fourth quarter and $461 million for the full year, surpassing our target of $420 million to $450 million.
Jeff: With growing momentum from our six potential blockbusters, we are increasing our expected innovation contributions for 2000 $25 million to $640 million to $720 million. This does not assume any revenue from IL 31, which we expect to be approved by the USDA in the fourth quarter of 2025.
Jeff: Let's double click on the progress of these six blockbusters on slide nine starting with <unk>.
Jeff: Five months ago, we launched <unk> and entered the $1 $8 billion global dermatology market, which has demonstrated robust double digit growth over the last decade. Centrella is now used in nearly 8000 U S vet clinics or approximately 30% of the total of which about 6000 have fully adopted the product.
Jeff: And more than 2000 are piloting use customer reviews have been positive driven by the efficacy and the value of the product.
Jeff: Our reorder rate is above 60% and growing with adoption and time, a clear Testament to Zen rally has efficacy and value proposition. The number of that's willing to prescribe the product is growing demonstrating the success of the <unk> launch approach. This feedback gives us confidence that used per clinic.
Jeff: We will continue to increase and is then rally a can and will be used increasingly as the first line treatment over time as we have seen in international markets.
Jeff: We've experienced good momentum to date and have reached critical milestones with vet education in clinic penetration, including our sampling program.
Jeff: We've accelerated investments in DTC and other targeted multichannel marketing into January we are proactively communicating our message of efficacy convenience and value directly to pet owners are ahead of the allergy season outs.
Jeff: Outside of the U S and really launched in Canada in January joining Brazil, and Japan, all with less restrictive labels than in the U S. We also expect approvals in Europe, the UK and Australia. This year as part of our fastest globalization rollout to date.
Jeff: Now shifting to crude Elio Cuatro, we launched and shipped product in January ahead of the parasiticide season again, it's early days for Quadro, but we're thrilled with the initial product reception, which has exceeded our expectations for distributor uptake early clinic adoption and that response to the three dimensions of differentiation.
Jeff: <unk> broad coverage, including tapeworm speed of Tic Hill, and heartworm coverage from month. One. These differentiators are resonating with veterinarians across the U S. Remember then in Dec decides our fleet tick an intestinal parasite combination products is the fastest growing category in pet health market today with broad.
Jeff: Spectrum products now representing nearly 30% of the $3 9 billion dollar U S parasiticide market and although it's early we see notably less cannibalization of our core portfolio than with other recent launches in the index space Quadro.
Jeff: Quadro is a meaningful accretive growth opportunity for <unk> as it significantly increases our portfolio competitiveness and our value proposition in the U S that clinic and.
Jeff: In the European OTC market, we offer add tab for flea and tick protection for both dogs and cats the product Leverages. The same active ingredient found in crude Elio and is labeled under the advantage family add tab is achieving robust growth through DTC efforts and share gains also with minimal cannibalization in January.
We share that add tab is now expected to become a blockbuster at peak and we are encouraged by the brand's momentum entering the parasiticide season.
Jeff: Rounding out pet health adoption of our canine parvovirus monoclonal antibody has been somewhat slower than initially expected as customers balanced the vital importance of defending puppies against this deadly virus versus the cost of treatment. We continue to explore strategic interventions to accelerate clinic penetration across all channels.
Jeff: Additionally, we received conditional approval in Canada at the end of January.
Jeff: And farm animal we remain encouraged by <unk> progress and what we estimate can be a $2 billion carbon market last year, we created and substantiated. The first independent carbon insert cattle market, creating additive economic value for both dairy farmers and consumer product good companies.
Jeff: As a proof point in the fourth quarter U S. Dairy farmers earned approximately $10 million in credits created by using <unk> more than 1 million cows or over 11% of the U S. Dairy herd are now enrolled in our uplift database <unk> digital solution for quantifying greenhouse gas emission reductions and the first step to enabling <unk>.
Jeff: Farmers to monetize their on farm interventions to lower their footprint.
Jeff: We see strong demand from farmers and multiple cpg's have contracted with a carbon marketplace to Bible. There credits in 2025, our attention is now focused on the center of the value chain and bringing the product to use and to implementation among co ops processors in feed mills, we expect <unk> revenue trajectory to <unk>.
Jeff: Following positive, but measured ramp through 2025, as we execute our ground game state by state farm by farm feed mill by female.
Jeff: Finally, xperia became the first farm animal blockbuster in over a decade.
Jeff: <unk> ended 2024 on a strong note with the benefit of the U S have a clearance the increased access is significant opening a larger market as heifers comprised about 40% of the feedlot animals, we're confident and experienced growth trajectory in the U S and Canada in 2025 and its strong value.
Jeff: <unk> to feedlot owners allows us to increase price, while leveraging greater overall portfolio strength.
Jeff: In summary, our global team is entering this new era of free Langkow equipped with game changing innovation and comprehensive differentiated portfolios are six potential blockbusters are all in the market and we are in commercial execution mode. Early indicators on these launches are broadly positive driving our increased expectations.
Jeff: Around innovation sales and continued confidence in acceleration to 4% to 6% organic constant currency revenue growth in 2025 with that I'll hand, it over to Todd to discuss our fourth quarter results and outlook in more detail.
Todd: Thank you, Jeff and good morning, everyone.
Todd: I'll focus my comments on our 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: Our fourth quarter results demonstrated good execution phase of FX headwinds with revenue adjusted EBITDA and adjusted EPS All in line with our expectations and net leverage also reaching our year end target.
Todd: Starting on slide 11, we delivered $1.02 billion in revenue, representing a 1% reported decline excluding the impact of foreign exchange rates and the divestiture of our Aqua business, we achieved organic constant currency growth of 4%.
Todd: <unk> contributed 3% while volume increased 1% change.
Todd: Changes to FX rates since we provided our guidance in November caused a $10 million reduction to our Q4 reported revenue.
Todd: Slide 12 shows revenue by the four quadrants of our business in the quarter.
Todd: Total pet health revenue increased 6% in constant currency in the fourth quarter with price growth of 3%.
Todd: Our U S business increased 2% driven by contributions from key innovation products, including <unk> <unk> and the OTC retail parasiticide business, partially offset by competitive pressures in the veterinary clinic.
Todd: International total delivered robust, 11% constant currency growth driven by strong demand for innovative products led by Ed tab and the continued strength of <unk>.
Todd: Moving to farm animal globally fourth quarter organic constant currency revenue growth was 2%.
The U S fundamental business achieved $223 million in sales a 6% increase this was driven primarily by market expansion and increase share with our cattle business with continued strong demand for <unk> Andrew Medicine.
Todd: Really offset by the comparison to last year's vaccine resupply.
Todd: Swine product sales saw growth in the fourth quarter due to improved vaccine supply compared with constraints a year ago. Lastly, the timing of poultry rotations was a headwind in the quarter and is expected to continue to impact purchasing patterns in the first half of 2025.
Todd: International <unk> revenue was flat.
Todd: Jason and strong demand in poultry across multiple geographies was offset by the impact of the capstone recall and our strategic do different approach in certain geographies. We estimate. These two items were combined four percentage point headwind to year over year growth.
Todd: Continuing down the income statement on slide 13, gross margin increased by 80 basis points to approximately 51% primarily due to price beneficial product mix, especially in our fundamental business and improved manufacturing performance.
Todd: These positive factors were partially offset by the awkward divestiture inflationary pressures and foreign exchange headwinds.
Todd: Operating expense saw a 3% uptick driven primarily by increases in employee related expenses and investments to support our expanding pet health business. These.
Todd: These increases were partially offset by savings realized from our first quarter restructuring initiative.
Todd: As we've stated before strategic investment in the key product launches, while preserving a near term headwind to adjusted EBITDA are critical for long term brand success and profitability.
Interest expense decreased significantly from $67 million to $46 million due to debt reduction funded by the third quarter Aqua divestiture.
Todd: On Slide 14, we included bridge for fourth quarter results compared to the prior year.
Todd: Adjusted EBITDA was $177 million in the quarter, an increase of $12 million on a reported basis or approximately $42 million, excluding the impact of the Aqua divestiture and foreign exchange headwinds.
Todd: Adjusted EPS grew by six to 14 cents per share, including the benefit of lapping last year's Argentinean peso devaluation.
Todd: For the full year 2024 on slide 15, we generated over $4 4 billion and reported revenue. While this is flat year over year. It is important to consider the impact of the Aqua divestiture, which was a headwind of approximately 200 basis points to growth.
Todd: Strong demand for innovative products was the key driver of our performance.
Innovation led value creates pricing leverage and the portfolio of benefits stabilized as the base business.
Todd: Further detail on revenue broken down by top affiliate in key products is available on slides 28 and 29.
Todd: Continuing down the P&L gross margin was 54, 9% a decrease of 140 basis points compared to 2023. This decrease was mainly attributable to the impact of the Aqua divestiture. The strategic approach, we've taken to slowing manufacturing throughput to optimize inventory levels foreign exchange.
Todd: Ends and persistent inflationary pressures, all partially offset by higher realized prices.
Todd: These factors combined with increased investment in our commercial launches resulted in an adjusted EBITDA of $910 million for the full year as shown on slide 16.
Todd: Full year adjusted EPS came in at <unk> 91, compared to 89 in 2023.
Todd: <unk> divestiture impact on our adjusted EPS was neutral due to the interest expense savings achieved through our resulting in debt reduction.
Todd: The tax rate for 2024 was 18, 1% a year over year decrease of 420 basis points due to the recognition of nonrecurring tax credits in 2024 adjustments to tax reserves in 2023.
Todd: Now let me offer a few words on our cash working capital and debt on slide 17.
Todd: Achieved a significant improvement in operating cash flow throughout the year driven by a focused approach to working capital management cash provided by operations for the quarter was $177 million for the full year, we generated $541 million of operating cash flow were 120% of adjusted net income.
Todd: This was an improvement versus last year, a $270 million driven by improved inventory performance strong collections and lower project expenses.
Todd: We exceeded our net leverage target for the year underscoring our commitment to disciplined financial management. We ended the quarter with net debt of $3 8 billion and net leverage of four three times.
Todd: Let's move to our financial guidance starting on slide 19, we remain confident in the underlying drivers of the 2025 outlook provided during the November earnings call for the year. We continue to expect mid single digit organic constant currency revenue growth, we expect adjusted EBITDA of 1% to 5% excluding the impact of <unk>.
Speaker Change: Opex in Aqua rich.
Speaker Change: Reported revenue is expected between 4445, and four 510 billion.
Speaker Change: This projection incorporates a 2% contribution from price offset by an estimated $110 million headwind from FX.
Speaker Change: Gross margin is expected to decline as the benefits of price growth are expected to be more than offset by the margin impact from the UK CMO transition and FX headwinds, we anticipate operating expenses up approximately 6% in constant currency with strategic investment in the global launches of our innovation portfolio.
Speaker Change: Full year adjusted EBITDA is expected between 830 and $870 million, including an estimated FX headwind of approximately $45 million year over year and since our November outlook, we expect <unk> to represent a relatively smaller portion of full year adjusted EBITDA versus the 61.
Speaker Change: Percent weighting in 2024, and 2023 as the commercial investments impact operating expenses earlier in the year and then drive greater contributions to revenue in the second half.
We anticipate adjusted EPS of 80 to 86, including an estimated FX headwind of approximately <unk> <unk> year over year and since our November outlook.
Speaker Change: I'll share a few comments on our cash and balance sheet expectations for 2025, we anticipate 2025 capex to be approximately $225 million to $255 million, an increase versus $147 million in 2024 due in part to the expansion of our monoclonal antibody manufacturing.
Speaker Change: City of Elwood, Kansas, and our expansion in France for our <unk> franchise.
Speaker Change: As a reminder, cash available for debt Paydown will be reduced by approximately $150 million due to the deferred cash taxes related to last year's Aqua transaction.
Speaker Change: Given the FX impact to adjusted EBITDA and lower debt is dollar denominated the calculation of our net leverage ratio is affected by unfavorable currency.
Speaker Change: Consequently, we expect net leverage in the low to mid fours at year end with an uptick in the first half of the year, including typical seasonality and working capital.
Speaker Change: A weaker U S dollar would create a potential path back to the high threes at the end of 2025, and our companywide focus on operating cash flow at our prioritization of repaying debt should lead to further significant improvements in net leverage overtime.
Speaker Change: Slide 20 walks through the year over year bridge for revenue breaking down our expectations for mid single digit organic constant currency growth.
We expect contribution from innovation to drive growth of approximately $180 million to $260 million year over year. We also anticipate stability in our base portfolio with the benefit of innovation and pricing more than offsetting volume declines for mature products and the competitive U S Pet health clinic business.
Speaker Change: Slide 21 provides year over year bridges for 2025, adjusted EBITDA and adjusted EPS on Slide 31 in the appendix provides a number of additional assumptions to help support your modeling efforts.
Speaker Change: Now, let's move to our Q1 guidance starting on slide 22, we expect organic constant currency revenue growth of 2% to 4%, including some softness in the broader U S retail market in January on a reported basis, including an estimated FX headwind of $40 million, we expect 1.155.
Speaker Change: 21180, or $1 billion in revenue operating expense is expected to increase 6% to 8% year over year in the quarter on a constant currency basis, primarily to support our recent pet health launches. Consequently, we anticipate adjusted EBITDA of 240 to 260.
Speaker Change: Including an estimated FX headwind of approximately $15 million and adjusted EPS of <unk> 29 to 34 <unk>.
Speaker Change: Including an estimated FX headwind of approximately three subs, we expect our adjusted effective tax rate in Q1 to be in the mid single digit range. As a result of a discrete tax item volume in the quarter that will also benefit our full year expected tax rate of 21% to 22%.
Speaker Change: Lastly on slide 23, we summarize the headwinds and tailwind that are expected to impact our results in 2025 and are factored into our guidance. The list is essentially unchanged since the third quarter, except for the addition of currency volatility to materially impact results, which we did note at an Investor Conference in January.
Jeff: Now I'll hand, it back to Jeff for closing comments.
Jeff: Thank God <unk> delivered a strong finish to 2020 for achieving our sixth consecutive quarter of organic constant currency revenue growth and building momentum as we head into 2025. This performance with both pet health and farm animal contributing to this growth in the fourth quarter underscores the effectiveness of our innovation driven strategy.
Jeff: The collective portfolio led by our six potential blockbuster products is exceeding expectations with 2024 innovation revenue, surpassing our targets and setting the stage for an even stronger performance in 2025.
We are reaffirming our outlook for accelerating organic constant currency revenue growth of 4% to 6% driven by innovation and focused commercial execution. This is a much awaited period for <unk> and our strategic trajectory the energy and enthusiasm within our organization can be felt in every level evidenced by a four year high for employee.
Jeff: Engagement as we build on our 70 year legacy of going beyond to transform animal care.
Jeff: To our global teams for your focus and discipline and delivering a successful 2024 positioning us well to create long term value in 2025 and beyond with that I'll turn it over to Tiffany to moderate the Q&A.
Tiffany: 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: Thank you we will now begin the question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: Your first question comes from the line of Jon Block from Stifel. Your line is open.
Thanks, Good morning, Joseph Rally as U S penetration slightly ahead of our diligence. If you will so where do you think this can go by year end 'twenty five and maybe more importantly, what about market share at these practices by year end 'twenty five and also curious.
Speaker Change: Any differences in the international markets for Us and really a recall of the label and it was less onerous.
Speaker Change: And then Todd I guess I'll just ask my follow up here the accelerating revenue growth off the 125 levels I think you talked a bit about it but is that just a function of.
Speaker Change: Call. It then rally in crude Elio QUADRA the contribution of ramping.
Speaker Change: Throughout <unk> 25, or anything else to call out to give investors our people more comfort with the accelerating constant currency revenue growth off the <unk> 25, guys. Thanks guys.
Speaker Change: Thanks, John for the question, Yes, we're excited about Zen rally and where we stand and maybe how we're looking at it and maybe to start with your specific question, we're adding use and growing revenue.
Speaker Change: Free week on a relative basis was in Raleigh, and we see that trajectory coming but if I step back.
Speaker Change: The $1 8 billion derm market as you know John has grown 16% in 2024, it'll it will very likely surpassed $2 billion. So we're in a market that is growing since the launch as I mentioned, we are at 8000 clinics today. That's about the same number of crude elio and we've come through really the three low.
Speaker Change: <unk> months of Derm and the overall season 6000 clinics have adopted and we've got 2000 piloting and probably one of the greatest right now converters to clinic penetration is the sampling program thats quite aggressive in the field once people see this efficacy in vet clinics.
Speaker Change: Again to bring the product on so as we start to head into the season here is our strategy as we look at this accelerating use and adoption of <unk>.
Speaker Change: Then rally as you talk about by the end of 'twenty five first is.
Speaker Change: All around the vet clinic is continued acceleration of vet clinic adoption with a heavy focus on tech attack right now we've got more of that's willing to script.
Speaker Change: This month and last month and Thats growing.
Speaker Change: And also this sampling sampling is driving more clinics to try try is turning to conversion at or better than we expected right. So we will continue to be very aggressive with our sampling now we enabled BTC, which we've noted dtc's turned on and we're now bringing the pet owner and and we believe not just efficacy, but the affordability.
Speaker Change: <unk> and convenience are really resonating, we think will resonate even more with pet owners. So when we kind of see coming into the season. We also have the number of seasonal and acute cases, John that we will see rising as well and we think that will drive us which is our ultimate goal is not just clinic penetration to move more into front.
Speaker Change: Blind treatment during peak season, this will be the key success factor for accelerating use as we go forward. So I do as I step back I think efficacy continues to resonate. It's what we hear the most globally not just in the U S. But globally to answer your international question as I mentioned, we've added Canada.
Speaker Change: Brazil, and Japan launches are on or above expectations doing extremely well and Brazil, and Japan candidates very early they do have less restrictive labels and we point to EU, a very large market U K and Australia as key factors to make Zen rally has significant impact here.
Speaker Change: In 2025, and our in our international Pet business. So that's where we are we're happy where we stand and we're excited to be leaning in as the season starts to ramp up on the DRAM side.
Speaker Change: John to your question on revenue growth clearly, 2% to 4% constant currency in Q1, but then getting into 4% to 6% for the full year.
Speaker Change: I will start with a few one time items or headwinds from Q1 of last year that we called out at the time, we put products from bear into distribution that increased sales in Q1 of last year in U S. We were still working through the Argentinian exit as well as capstone and some of them do different.
Speaker Change: Opportunities in international farm that became headwind here in Q1, but then we don't have that same headwind in Q2 through Q4 I would also address the innovation ramp as Jeff mentioned, we're really penetrating is enrolling in the U S vet clinics in preparation for the season that spring and summer hitting.
Speaker Change: Q2 and Q3.
Speaker Change: Early.
Speaker Change: Continued growth again, Q2, Q3 inflection on OTC retail in Europe, and then again just continued growth of innovation portfolio, especially BOE, there, which we expect to start to be a bigger contributor to growth in the back half of the first half all of those items that make us confident that while.
Speaker Change: Starting at 2% to 4% will deliver the 4% to 6% for the full year.
Michael <unk>: Your next question comes from the line of Michael <unk> from Bank of America. Your line is open.
Speaker Change: Great.
Speaker Change: Taking the question guys.
Speaker Change: Maybe this is a follow up to.
Speaker Change: John's question, just now on for Brian.
But just looking at your innovation contribution for 2025, I mean first of all you can ahead for <unk>.
Speaker Change: For fourth quarter, so that was really encouraging but can you really you're 25.
Speaker Change: Innovation numbers, but I think $30 million at the midpoint I'm not I'm not going to Astro certainly.
Speaker Change: Specific point estimates for each of your contribute product, but directionally what gives you more confidence in that.
Speaker Change: I'd like to open the call out whether that is <unk> or the first month of Codelco quattro.
Speaker Change: Sort of what's behind that.
Speaker Change: Got a follow up.
Speaker Change: Yes, Michael I'll start here and Todd anything that I may Miss I think.
Speaker Change: The momentum at the end of the year No question in our U S farm animal business.
Speaker Change: Led by Xperia or that they have for clearance definitely accelerated use some of that effort clearance and just enabled more feed yards to be able to treat it to steers and as we see kind of the decline in the herd level off that's going to be positive as well. So the value of Xperia has done well in the U S and Canada and it gives us a lot of confidence and a lot of growth opportunities.
Speaker Change: <unk> in 2025, and add probably our best launch I've experienced in the last five years, what our U S retail team as Don It's even contributed a nice growth in <unk> across the European affiliates as well those two products are definitely driving growth and then look we got when you step back and say Zen rally going into now.
Close to be $2 billion derm market, that's growing globally and Quadro. That's got three dimensions of differentiation going into the fastest growing market segment, Michael I think we see the early uptake and interest in cuatro combined with a <unk>.
Speaker Change: A third of the clinics on Zen rally in using gives us a lot of excitement a goal there as Todd mentioned will probably be a little bit more of a second half, but we like the progress we've made since November with both there.
Speaker Change: Okay, and then maybe as a follow up I think in the prepared.
Speaker Change: Mark you called out your IL.
Speaker Change: Everybody at least <unk> five approval, but it is not in your guidance on the acquisition.
Speaker Change: Just given what we've seen with Brexit.
Speaker Change: We are into a lot of things that's taken a little bit longer frankly, and theres a lot of uncertainty.
Regulatory environment overall, just what gives you confidence in that this far out.
Speaker Change: Any color you can provide on how those conversations are going.
Speaker Change: Yes. Thank you Michael is that we look at IL 31, again, we see it as a differentiated asset going into the dairy market.
Speaker Change: To play very nicely with Zen rally are going into the marketplace.
Speaker Change: You're right. It does not have an <unk> like you have in the FDA with the USDA, but again nothing nothing has changed relative to the progress we continue to progress with the USDA. We just simply are putting more clarity on that it is not in our guidance and we expect a late 'twenty five approval, but again nothing has changed with the program.
Speaker Change: And we continue to be confident and its differentiation and its role in our portfolio.
Speaker Change: Okay.
Speaker Change: Your next question comes from the line of Daniel Clark from Leerink Partners. Your line is open.
Daniel Clark: Great. Thank you for taking the question.
Speaker Change: Was just curious.
Speaker Change: When you talked about the success of sampling in Centralia, thus far is that causing you to.
Maybe change how you're sort of approaching your sales and marketing strategy for that launch. Thank you.
Speaker Change: Yes. Thank you Daniel again, I would step back and say, we feel good about Bobby and the team really a lot of expertise and a lot of work in property prepping for this launch in and Quadro, helping it too is we've got a multifaceted approach we got multimedia kicking in is that <unk> approach and now we know the sampling.
Speaker Change: And even right down to the sales rep incentives in distributor incentives all aligned to say Hey, we know that we get a vet clinic to experience Zen rally here.
Speaker Change: It creates adoption. So we will continue to look at it.
Speaker Change: This in a very focused way and I would say that the sampling program. What it does is it a leads it takes us just a few examples.
Speaker Change: <unk> and yes, we have been put into some of the hard cases, and thats actually been a good thing because it just shows the demonstration of the efficacy that we saw in the head to head studies and that's driving the adoption. So look at us to continue to lean in on sampling as we head into the spring summer term season, as well as continue to Incent clinics.
Speaker Change: And then when the pet owner walks in from the DTC and multimedia theyre going to see the value differentiation. All of these things, we believe set us up well to become more of a first line treatment in clinics, which we think is the next critical success factor.
Speaker Change: Got it and then just on the point of becoming a first line treatment.
Speaker Change: Sure some of the feedback you've been getting that's.
Speaker Change: Can you give some color on how many are using it as a first line treatment.
Speaker Change: Yes every segment is a little different but.
Speaker Change: Would say his experience what is what is needed that demonstration of efficacy how the product can be used into different vet clinics and how fast you are looking at it as essential these tapped detect meetings really matter being able to bring kols in which <unk> got really good support from Kols.
Speaker Change: Seeing a nice uptake on the strategic side, Bobby and the team have done a lot with the strategics.
Speaker Change: It really allows that to that exchange kols exchange to be able to give those that maybe have less comfort or or want to know more about how to manage the label.
Speaker Change: That's what's I think helps bring.
Speaker Change: Bring bring more more vets into their willingness to script, which we're seeing in the surveys that are being done. So continued progress and I think as the season ramps up and the challenge and as I mentioned, the acute and seasonal cases ramp up this opens a nice door for Centralia.
Speaker Change: Our next question comes from the line of Andrea Alfonso from UBS. Your line is open.
Andrea Alfonso: Hi, good morning, everyone. Thank you so much for taking my question.
Speaker Change: I just want to switch gears a little bit.
Speaker Change: Sort of asking about how the early launch of curtailing, our QUADRA is going so far.
Speaker Change: In the prepared remarks, you identified that.
Legacy products were sort of seeing low cannibalization.
Speaker Change: Within the portfolio so.
Speaker Change: I'm curious about just some color on the initial momentum if you can frame maybe the <unk>.
Speaker Change: <unk> strategy, what might be different this time around as well as appetite for partnering with retailers and I just had a follow up question after that.
Speaker Change: Thank you Andrea Great question, Yeah, we're it's really early days with Quadro, but we're excited we've got the product in the market. We're shipping Theres orders nice launch at <unk> will be at Western Vet next week.
Speaker Change: And things are moving nicely I think I think a few things resonating early there is no question. Thanks, three dimensions of differentiation and they all resonate differently with different verse I think the first is I would just say speed to tick Hill is what we're seeing if you look at the <unk> franchise growth last year overall globally I mean, this technical data.
Speaker Change: And speed to tick Hill has really.
Speaker Change: Had it had a nice impact with veterinarians.
Speaker Change: A lot of uptake on an interest on the tape worm and broad coverage and then the heartworm coverage on month, one so three dimensions of differentiation I think that a we plan to take a aggressive approach on DTC. We see this as a little less involved pet owner category. So you need to get to.
Speaker Change: Pet owner involve and so we spent a lot of time on our multi media DTC approach. We brought in a lot of expertise to ensure that we can really resonate with with pet owners going into this year and yes, we will take an omnichannel approach as we have with others and I think we're as best equipped.
Speaker Change: With our Bayer capabilities to be able to do that and I also think that the energy around Zen rally will play out positively with cuatro and vice versa, as well and we will have the right introductory offers to incent usage as well out of the gate.
Speaker Change: Great.
Speaker Change: And just a separate question.
Speaker Change: Just probing a little bit more into the Gallup grass callout.
Speaker Change: If you can just discuss the dynamics of the surge there in the quarter.
Speaker Change: Entirely driven by switchers from another therapy versus those who are new to therapy, and if you could just sort of speak of the durability of that four key trends persisting into 2025. Thanks, so much everyone.
Speaker Change: Alright, Thanks for the question on Gallup, Brad it's always been a really strong product as it directly impacts the inflammation claim for Osteo arthritis.
The trend here in Q4 was positive for US is our best quarter in a few for us on Gallup Brad.
Speaker Change: We're really leaning in just given the strong safety profile it has to address pain or the patients similar to what we saw from just the improvements in Europe.
Speaker Change: Similar here in the U S as well and again, we're looking forward to calibrate delivering in 2025 for pet parents across the U S.
Speaker Change: Your next question comes from the line of Erin Wright from Morgan Stanley. Your line is open.
Erin Wright: Great. Thanks, a follow up on <unk>.
Erin Wright: You think about the competitive environment in terms of do you anticipate your competitors in 2025 is that embedded in your guidance at this point.
Erin Wright: And just how can you better leverage that I guess expanding portfolio with the injectable product as well can you also remind us how differentiated the injectable IL 31 kind of Kobe.
Erin Wright: Yeah, we're not we're not seeing anything Erin different on the competitive front then.
Erin Wright: I think what everyone else sees and it is assumed in our guidance. So.
Erin Wright: Competition is a headwind assumed in the guidance, we continue to see though the robustness of the growing market is exciting for us in the U S and globally.
Erin Wright: The unmet need the number of untreated dogs that are out there and the opportunity that we see was really again, a third of the clinics coming into the season, the ramping and the international approvals will drive that and then back on IL 31, we continue to see this is one of many Durham assets at Allen has coming in this category.
Erin Wright: Got other things that are coming yes, not just a long acting but next generation derm. So we're really beginning to build what we believe is going to be a great decade and beyond of upturn leadership and opportunity in this marketplace and then we haven't really noted the specific differentiation on the IL 31, but we do continue to see that as we go.
Erin Wright: Yeah.
Speaker Change: Okay. Thanks, and then can you speak to the sequential progression for margins here in the cadence of some of those investments that you're making around the commercialization of new products.
Erin Wright: And can you kind of how to think about.
Speaker Change: Stepped up investments I guess in the first half.
Speaker Change: So earlier and we appreciate the questions as we called out in the prepared remarks, we do expect to have.
Speaker Change: EBITDA on a percentage basis in the first half of 'twenty five than we've had the last couple of years, that's driven by two things primarily the first is the investment we're making to really drive this adoption and loss curve for both crude oil and <unk> as well as <unk> as well as add tab.
Speaker Change: And those investments, we believe will pay off over the long term as we think about how to best position <unk> for the next three to five years not next three months. So that one is certainly in play as we called out in November. The other part is the FX headwinds are higher in Q1 than they are in the back half of the year from just the current spot.
Speaker Change: Rates versus how last year played out so that would be the main thing to call out the confidence in the underlying.
Speaker Change: Growth that these investments will make for us over the next few years.
Velocity Prasad: Our next question comes from the line of velocity Prasad from Barclays. Your line is open.
Velocity Prasad: Hi, good morning.
Speaker Change: Two questions from me Firstly, a follow through on IL 31 is 2025 are we going to see an approval or if I need three alliance in January when he said that it's coming in 2025 should we also expect to launch or is that a meaningful gap between approval to launch that's one.
Speaker Change: To poultry pretty important segment organic growth rate declined year.
Speaker Change: Could you maybe then comment on the broader poultry market that dry wasn't that Vince.
Speaker Change: And any major innovations are changes that we can expect to see in the segment in the near future. Thank you. Thanks <unk> yeah on the IL 31, we expect to again in Q4 25 approval, we don't have a sales or a launch plan.
Speaker Change: We'll continue to have a nice efficient from launch to our approval to launch timing, but again that is not in our 25 plans at this time on the poultry market continues to be durable global will probably the protein that is the most durable we've seen nice low single digit growth last year in the marketplace. We continue to.
Speaker Change: Have we got no question, some poultry rotations that happen market to market that may change, but when we step back and look at our market share look at our portfolio and our growth and continues to be a very strong market for <unk> that we have a leadership position and we now are number one in the U S poultry market as well and we see that market that.
Speaker Change: Current prediction is about 3%.
Speaker Change: <unk> to be one of the best economical environmental and even from a religious standpoint freer market for the overall protein. So we like our position and like our portfolio going forward.
Speaker Change: Okay.
Your next question comes from the line of whom are robot from Evercore ISI. Your line is open.
Speaker Change: Hey, guys. This is might be fury in for Omar. Thanks, So much for taking my question two for me I just wanted to dig in more on cuatro.
Speaker Change: The whole concept of cannibalization I think you touched on this slightly before but in terms of the omni channel.
Speaker Change: <unk> here any specifics.
Speaker Change:
Our strategy here in terms of your channel approach that could be done to mitigate cannibalization.
Speaker Change: And my second question regards to tariffs just I may have missed this but.
Speaker Change: Any.
Speaker Change: Any.
Speaker Change: On input costs, and overall supply chain dynamics expected due to potential tariff wars. Thank you.
Mike: Yes, Mike.
Mike: I'll anchor back just to the notional difference when you look at this $3 $9 billion market, we've got about $300 million.
Mike: Parasiticide in the U S. In this marketplace. So we notionally are smaller and we've seen as we're tracking the early uptake of quatro less cannibalization relative to other broad spectrum.
Mike: <unk> that have come into the marketplace I think the differentiation is driving that I'm not sure from it from an Omnichannel standpoint. This is definitely going to be focused initially on the vet clinic and activating pet owners to get into the back clinic two to leverage that.
Mike: It is already online.
Mike: The key kind of omnichannel options like our competitors. So access will not be a problem, but if I had to point to one thing I think now is where we're not as concerned about cannibalization, we haven't seen any trend early to be concerned about that it's all about activating pet owners to move and have an interest in <unk>.
Mike: And that's where our focus is and that's where our investment is and why it's quite sizable that Todd mentioned.
Speaker Change: Yes, Michael on the tariffs, we're very focused on the global dynamics that are out there today. The only tariffs that are currently impacted or the 10% additional in China, we've factored that into our guidance for 2025, it's about a $3 million to $4 million impact on our cost of.
Speaker Change: Goods sold in 2025 based on just the timing of when those products would hit.
Speaker Change: Into the products that we sell and recognize revenue on we're continuing to look and make sure. We're aware of the future tariffs that may come into play Mexico, and Canada are not big players for us from a manufacturing standpoint, so if those are reintroduced.
Speaker Change: Later this month that will have less of an impact.
Speaker Change: We're very focused on the global macro and the tariff impact on the dollar seems to be sort of a play.
Speaker Change: Where we've had the bigger headwinds as we've called out today relative to November.
Speaker Change: Our next question comes from the line of Chris Scott from Jpmorgan. Your line is open.
Chris Scott: Hi, great. Thanks, so much just a couple of questions from me maybe just on the margin dynamics over time can you just talk a little bit about as we look beyond 25, how we should think about the cadence of gross margin and operating margin improvement for the business like some of the kind of the headwinds this year on the gross margin side Youre kind of fade away and you leverage some of this.
Chris Scott: Opex investments during a sense of like how how quickly should we think about those margins stepping up over time and then my second question was just on both air and just a little bit more color ahead about how to think about that launch curve and maybe compare and contrast, a little bit of what how youre thinking about that relative to what we saw with the xperia. Thank you.
Speaker Change: Sure Chris on the margin side, we do expect to have better margins going forward from an improvement standpoint, the big headwind. We've got this year is the re acquisition of the speak manufacturing facility in the UK as we called out in November.
Speaker Change: 85% to $35 million headwind on gross margin, we bought that because of the $160 million to $180 million of farm animal revenue that comes with it from the standpoint of the cost to maintain that revenue. It's a very good return on our capital, but it does have a percentage impact on gross margin.
Speaker Change: With respect to the operating margins again, Thats, where we are investing behind these launches the innovation portfolio is accretive to our overall corporate gross margins and we expect that to play out over the next two to three years as we make these initial investments.
Speaker Change: Higher peak revenues in later years, so we do expect.
Speaker Change: Subject to no surprises on tariffs to increase EBITDA.
Speaker Change: Faster than revenue in 2006 and beyond but again, we continue to be focused on delivering the 2025 and setting ourselves up for the longer term margin expansion opportunities.
Speaker Change: Let Jeff address <unk>, yeah. Thanks, Chris a question on <unk> first of all I wanted to just highlight that this is very much of an economic driven initiative from <unk>, We believe it's.
Speaker Change: It's critical for both there and if we look at the milestones in 'twenty for that matter that will drive. This question you have on ramp is one we had to create a carbon market, we prove that in the fourth quarter with CPG.
Speaker Change: <unk> is actually contributing $10 million that went through for the <unk> and used to actually dairy farmers.
Speaker Change: And then the two nodes that need to have the demand we see one as farmers getting net additive.
Speaker Change: Money from from really a carbon check from the CPG companies that demand, we have farmer demand very high with now 1 million cows with the uplink system and we've signed numerous CPG contracts that want to buy the carbon so the two nodes of value are locked in so now what's going to drive.
The ramping is going to be in field implementation in between a CPG company in the farm is a co op dairy processor in feed mills and every state is a little different so we're doing what we do best and farm animal which is kind of in field implementation in between and that's what will drive the ramp I believe it will be similar to <unk>.
Speaker Change: Barrier in terms of as operations come on it will become sticky once you get something into a feeding program like we've seen with experience positive people will be demonstrated the value by our teams with our systems that will make it sticky as well and then more used by the big high profile Dairies will start to create an inquiry.
Speaker Change: Demand that will speed that adoption, but again I think it'll be a little bit more second half and as we said positive but measured ramp through 2025, but I do believe a resilient one and a sticky once we get there and again, we're creating this market. It is a new market, which is a real opportunity for us here.
Speaker Change: Yeah.
Speaker Change: Your next question comes from the line of David Westenburg from Piper Sandler Your line is open.
Speaker Change: Hi, Thanks for taking the question were up on the hour. So I'll ask both my questions upfront. So just in 2023 during the launch of <unk>, plus we did see multiple competitors discounting.
Speaker Change: In anticipation of launch are you seeing anything like that now and if so why is the dynamic here different is it maybe because the one next guard you used to be like the or was it kind of more leading product, whereas youre playing now.
Speaker Change: Not necessarily from the same market share standpoint.
Speaker Change: And then just the same thing on Gallup brand.
Speaker Change: If you look at <unk>, you had some starts and stops in the incoming of competition is this year really.
Speaker Change: A an acceleration point until maybe the next competitive launch just looking at that in history and then my second question here is on the biologic manufacturing you called out $225 250, <unk> I'm not asking for specifics on the pipeline here, but do you think you can have some first to market products and biologics in say 2027 and 2030.
Speaker Change: Kind of timeframe because that is a lot of investment into biologic manufacturing sorry, that's a lot of questions.
Speaker Change: Yes, David just on Cuatro, we see again I think the whole market dynamic of this is the fastest growing market is growing.
Speaker Change: 340% to 50% the broad spectrum I think that growth is maybe we are not seeing the price dynamic that you mentioned, we are pricing to parity to that marketplace offering incentives to get into the market to drive.
Speaker Change: First time use but so we're not seeing that and I think a lot of that is just because of the actual market growth in the size dynamic and.
Speaker Change: I think to Todd's point on Gallup brand, we continue to see this is an in home <unk>.
Speaker Change: Safe option. It creates I think our differentiation has grown over the last year and that's what really is representative and we will we will continue to stand behind that brand and really push because pain is going to be a long term play for us.
Speaker Change: And then with respect to the manufacturing.
Speaker Change: We called out previously the investment for the monoclonal facility in Kansas is $130 million spread over both.
Speaker Change: 2020 for 2025, and a little bit into 2026, we're also expanding in France for our oral solid dose that's really for the <unk> franchise as we say.
Speaker Change: Nice opportunity with crude oil quadro, while continuing to have.
Speaker Change: Good growth with crude oil crude.
Speaker Change: Crude oil clause as well of the maintenance of Interceptor, plus and then we're also needing to expand our vaccine capacity in Iowa, our prep.
Speaker Change: <unk> vaccine for persons wind continues to be a growth driver for us both in the U S and internationally and so theres a number of different facilities. We're expanding right now all driven by continued revenue growth and demand for these products across the globe. So it's not just biologics, but certainly we are excited.
Speaker Change: By the next wave of biologics that Ellen and her team are working on inside the R&D investments.
Speaker Change: And that concludes our question and answer session I will now turn the call back over to Jeff Simmons for closing remarks.
Jeff Simmons: Yes, Thank you everybody and I want to thank our customers around the world just the vets farmers and pet owners that it's an honor to be able to do business in and add value to animal health. It continues to be more relevant to society than ever thanks to the <unk> team for the loyalty the engagement, but most importantly, just the determination to execute.
Jeff Simmons: Ankle enters 2025 with a lot of momentum as I opened up with we've kept it real simple and we're going to continue to this year like we did last year, it's all about growth innovation and cash that's what's going to drive an increased value proposition that we already see happening growth's accelerating we're guiding 4% to 6% on the top line on a constant currency basis.
Jeff Simmons: 1% to 5% on the bottom line the six blockbusters, our confidence is raising and has grown since since November as we've raised the guidance and on cash.
Jeff Simmons: As Todd mentioned, it's really become cultural and our company and we're all incentive to continue to drive.
Jeff Simmons: Free cash flow conversion and debt Paydown.
Jeff Simmons: Yes, there is a volatile environment, but we've got a durable company, we're controlling the controllable and we're going to continue to keep this company growing our value proposition is increasing to our customers and we believe that will drive an increasing value proposition in investment thesis to you and your investments and thank you for your investments in our company and we look forward to working.
Jeff Simmons: With you in 2025.
Jeff Simmons: This concludes today's conference call. Thank you for your participation you may now disconnect.
Jeff Simmons: Okay.
Jeff Simmons: Okay.