Q2 2025 Elanco Animal Health Inc Earnings Call

Ladies and gentlemen, thank you for standing by, welcome to Atlanta Home. Animal Health second quarter 2025 earnings conference call. 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 would like to ask a question during this time, simply press star followed by the number 1 on your keypad. If you'd like to redraw your question, please, press star. Followed by the number 1. Once again, thank you. I would now like to hand the call over to Tiffany cago head of investor relations, you may begin your conference

Good morning. Thank you for joining us for Alano animal Health's second quarter, 2025 earnings call. I'm Tiffany and Kanga vice president of investor relations and ESG. Joining me on today's call are Jeff Simmons. Our president, and chief executive officer, Bob Van Bergen, our Chief Financial Officer and Bethany from investor relations.

Besides reference during this call are available on the investor relations section of Alano. Cam, today's discussion will include forward-looking statements, the statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast, for more information. See the risk factors discussed in today's earnings press release as well as in our latest form 10 K and 10. Q filed with the FCC. We do not undertake any duty to update any forward-looking statements.

That were sold to a third party in May 2025. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks Tiffany. Good morning everyone. I'd like to begin with a, thank you to the globally lanco team for these strong results and in recognition of many years of loyalty and steadfast hard work across the business, our priorities have been consistent and clear growth Innovation and cash by focusing on our customers and delivering a diverse portfolio of innovative solutions. We accelerated growth and achieved strong cash generation in the second quarter as highlighted on slide 4 alleno continues to deliver growing 8% organic constant currency in the quarter and exceeding. The high end of guidance for Revenue, adjusted ibida and adjusted eps,

Growth was driven by both price and volume, led by the U.S. Pet Health, which was up 11%.

This marks, 8 consecutive quarters of underlying growth.

Innovation is outperforming expectations, achieving 420 million dollars. In first half Revenue. We are once again, raising our full year Expectations by an additional $60 million to 720 million, to 800 million. The consistent outperformance, reflects a diverse basket of current and potential Blockbusters in major markets with meaningful.

Will differentiation bring added value to the marketplace? And importantly, this portfolio of innovation is also driving more stability in our base business.

Also, we are de-levering faster than plan with our commercial and operational outperformance and strong focus on cash our quarter end. Net leverage ratio improved to 4.0 times reflecting the strong second, quarter results and working capital discipline, as well as the proceeds from the lotto Lander royalty. Monetization with this momentum, we are improving our net leverage Target for year-end to 3.8 to 4.1 times.

On tariffs, our intervention actions and FX Tailwinds are mitigating potential impacts and risks. We now estimate a 2025 net impact of 10 to 14 million, Which is less than our prior assumption and more than offset by the first half outperformance.

We believe there is any likely tariff risk. Scenarios are covered in our 2025 guides.

With our consistent execution and good, momentum to date. We've arrived at the midpoint of 2025 and a strong position to raise our top and bottom line Outlook.

For the full year. We now expect organic constant currency growth of 5 to 6% adjusted, ibaa of 850 to 890 million and adjusted, EPS of 85 to 91 cents.

This guidance raised takes a prudent and disciplined approach, with a strong balance between opportunities and business momentum, while considering the dynamic environment.

Overall, entering the second half of 2025, we believe we are well positioned to navigate external uncertainty and execute our long-term growth strategy by delivering our diverse portfolio of innovation and building on our leadership in pet health, retail, and farm animal. We are on a clear path to becoming a company with consistent competitive revenue growth, a higher margin profile, a stronger balance sheet with stronger cash flows, and higher returns on invested capital.

Turning to the second quarter Revenue performance on slide 5, we break down the 8%. Underlying organic constant currency Revenue growth,

This chart highlights the broad strength, we're seeing across our Global business, with all 4, quadrants growing nicely.

us pet help led the quarter up 11%

Driven across both the vet clinic and U.S. retail, Cordelio Cuatro and Zhenya provided substantial contributions, which I will review in more detail shortly.

Our Innovation, lessens the impact of vet visit volume declines and benefit the greater portfolio with vaccines and pain. Also both positive in the quarter.

At retailer OTC, Paris citizens, a family sales, both recovering to double-digit growth.

We are pleased with our performance and a delayed peak season, as we continue to build on our leadership position and expand our physical availability.

Expansion, including add table, successful launch in the UK, in April, and then rally as positive performance in Brazil, Canada and Japan.

The US farm animal business delivered, another solid quarter up 5% and reinforcing our Market leadership. Our recent data shows Market leadership and beef poultry and Swine reflecting to our portfolio. Our customer Centric approach and our continued commitment to the space.

Experior leads the way with rapid adoption in heers since we received FDA combo clearance in late. 2024 experience. Also driving portfolio benefits with other cattle products like remenson, partially offset by a difficult comparison from vaccine resupply and a second quarter of last year.

Finally International farm animal was up. 6% in organic constant currency with growth, coming from poultry and Swine.

We did observe some pre-teen to satisfy customer demand primarily in China. Importantly, underlying growth was healthy. Even when excluding this timing shift?

We are encouraged by the continued durability and growth of global farm. Animal markets supported by increased demand from animal protein.

looking at slide 6, we delivered 420 million of innovation, Revenue in the first half,

This continued outperformance is driven by our broad basket of innovation, namely credelio, Quattro experior, add table and Zen relia.

We're increasing our expected innovation contribution for 2025 by $60 million, at both ends of the range, to $720 million to $800 million, representing our success in bringing multiple products to big markets around the world.

You'll remember, this target does not include IL 31, which remains on track for approval. In the fourth quarter of this year with commercialization, in the first half of 2026,

Let's further discuss the progress on our major Innovation products on slide 7 starting with cordelio cuatro.

We believe this is a best-in-class product in the fastest growing Animal Health Market and we're very encouraged by how it is resonating with vets and pet owners.

Share capture continues to track ahead of expectations and we're also seeing Quattro grow the market.

The US broadspectrum and Dexter Market is 1.3 billion dollars and growing substantially. At almost 40% in June, we achieved approximately 14% dollar share a broad spectrum sales out of that clinics directly to pet owners.

Out rates were relatively consistent levels to each other, at quarter end, reflecting healthy, inventory, Dynamics, and standard distribution, fill effects typical of new launches.

Strong Clinic, Buy in demonstrates Veterinary confidence. In Quattro and sellout levels, reflect growing consumer Demand with our increased DTC Investments, showcasing the 3 dimensions of differentiation

Quattro has broad coverage, including multiple species of tapeworms.

Speed of tick kill and heartworm coverage from month 1. We're also pleased with a continued, consistent feedback from vets and pet owners, really appreciating the great. Palatability with cordelio Quattro,

And although still early we're quite encouraged by the performance of our DTC campaign. For Quattro, we've seen dispensing sales increase as we've continued to ramp investment. We are leaning more into DTC based on the long-term Roi and the growing potential. We see in this product

We also remain pleased with the limited cannibalization impact. As approximately 70% of Quattro, share capture has come from competitive product switches or new starts. Additionally, its bolstering. The broader portfolio in the clinic, for example, 2200 clinics, that bought Quattro for the first time bought another elanco product for the first time of those 2200 clinics. 500 had never bought any lanco product before.

This Innovation is also improving our presence with corporate accounts where we've historically under indexed to successful launch to give dogs. Quattro level protection is a credit to our expanded sales team. Our well-informed veterinarian customers, and our distribution partners.

finally, we're preparing to take Quattro Global with numerous submissions made in Australia, Canada, the EU, the UK and Japan setting up what we expect to be a nice, Geographic expansion starting in 2026,

Quarter so far. Operationally strategically and globally. We're making steady progress, gaining share in the 1.9 billion rapidly growing Dermatology Market. As we moved into Peak allergy season during the quarter, we achieved growth ahead of our expectations with more first line treatment use and willingness to use.

This is a testament to zeneli, aspic convenience, and value with our multi-faceted approach to building awareness and appreciation for these key points of differentiation.

In the US, we have approximately 10,000 clinics, buying the product with a reorder rate of almost 80% up from 70%, shared in, May zenellis, Real World Experience coupled with our strong Tech to Tech selling is driving greater adoption and product usage. We've seen our patient market share in the US during Market, double from 2%, in March, to 4% in June, and us, and reia sales, more than doubled in Q2 versus q1.

The patient share adoption growth has been very balanced with both average sales per clinic and the number of clinics spine growing at Double Digit rates month over month in the quarter.

Our market research data shows that approximately 50% of zhenya users are now using the product as the first line treatment primarily for new patients or seasonal restarts versus just a second line treatment option.

We'd like to share a very recent positive update regarding the zeneli, label zeneli, achieved a milestone with receipt of FDA cvms complete letter for its safety. Supplement. This supplemental nadha and included additional publish data to address cvms concerns for the risk of fatal vaccine induced disease, the 60-day administrative supplemental. NADA process is now underway, which is expected to result in removal of this risk language from the box warning section of the label.

Once the supplemental NADA is fully approved. The revised label is expected to be made public in Q4.

We're pleased with this progress and continue to actively pursue the generation of additional data. To further, improve the label. Even more, our goal is a US label. That is more consistent with our International approvals.

On the international front for Zen relia. We recently received approval in the European Union and in Switzerland. We're encouraged that. The labels are consistent with less restrictive labels and other markets outside. The US where product has already been approved. You remember, we have done a head-to-head non-inferiority study in Europe versus the marketplace incumbent as part of the EU approval process.

We are very pleased with the results confirming and really as strong efficacy profile and reflecting what we're seeing in the global market with more than a half million dogs treated Within relia.

The launch in Europe began immediately with approval last month, orders being taken now and product in the market before the end of the third quarter.

This follows a strong start in Brazil, Canada and Japan.

Additionally, we continue to expect approvals in the UK and Australia. This year, creating a significant foothold and a 600 to 700 million International therm Market

Also, in Europe, we continue to see very robust growth for add tab. A leading, oral OTC, flea and pick product for both dogs and cats.

Sales increased over 60% in a quarter supported by strategic DTC Investments. Add table anchors are comprehensive portfolio of OTC parasiticides, including oral collar and spot-on. And is the only oral OTC isox saline for caps and EU Market, which is a key differentiator add tab. Also was approved and launched in the UK in April with good early traction.

Finally, our K9 Parable virus monicon, antibody remains an important treatment for the deadly, parbhoo virus. We're excited for the prophylactic claim extension to help more paths. Fight the disease, we're working through strategic interventions to address, the cost of treatment and to accelerate Clinic penetration across all channels.

In farm animal. Xperia had another outstanding quarter continuing to grow rapidly in an estimated potential Market of over 350 million dollars in the US and Canada.

We're also pursuing other International expansion opportunities.

We are pleased to see our cattle showing the first signs of rebuilding the herd.

And Geo expansion should all form a nice backdrop for what we expect to be strong. Experior growth ahead.

Overall, we see a significant runway for continued robust growth, up over 80% in Q2 despite a tougher comparison. Additionally, we're driving portfolio synergies.

Lastly, on B, we are encouraged by sustained, strong demand and accelerating adoption reflecting its economic value to Dairy Farmers and brand value to Consumer packaged. Good companies, notably cpgs have demonstrated robust demand for Bo

With approximately $20 per head return to the farm gate, we can add 5 to 10% to the dairy's cash flow.

since February, we've quadrupled the number of cows on Bair to approximately 150,000

Customer retention is likewise very high at over 90%.

We expect the entire ecosystem around Bo to support long-term use as we continue to see the product as our next farm animal blockbuster.

This Innovation also further establishes alleno as a Pioneer in strengthening cpg, brand value, all the way back to the farm.

Moving to slide 8, we provide some recent highlights across all 3 elements of our IPP or innovation portfolio productivity strategy as Innovation accelerates our growth. It also stabilizes our base portfolio and US Pet Health. We continue to gain share in parasiticides insides. Ander

Our recently approved K9 influenza vaccine enhances our extensive line of true portfolio vaccines, providing a list of the full offering.

We began shipping the product last month.

In June, the EPA approved our Advantage collar. For dogs, with Seresto already available as a premium 8-month product on the market, our Advantage collar will provide pet owners and veterinarians with a 4-month collar for protection under the trusted Advantage brand.

We anticipate this innovation to strengthen our retail leadership with an expected U.S. launch in the first half of 2026.

All of this in Innovation while Ellen. And her R&D team continued to progress the next era of Blockbuster Innovations

Finland productivity, we are delivering substantial progress in the balance sheet and optimizing our operations. We've improved our net leverage ratio by 1 and a half turns in just 6 quarters to a disciplined focus on cash generation.

On the manufacturing front, we're on track for our strategic expansion in our facilities. In Fort Dodge, Iowa and Elwood Kansas with the latter supporting our monoclonal antibody platform.

We continue to expect capex to step down next year.

As I close, I want to highlight an important program. We have launched in Q2 called the lanco ascent. This is a companywide initiative that we expect will drive additional productivity and capability in key areas as we have stated before we expect to grow adjusted ibaa in 2026 all while investing behind our launches and positioning, Alano for improved productivity and efficiency over the rest of the decade. We expect Alano as send to create a key platform to enable sustained and consistent value creation, while making any lanco more competitive and Innovative going forward with that. I'll pass it to Bob to provide a few comments on where he's focused his initial Reflections and review our second quarter results in financial guidance.

Bob, welcome to your first day, lanco earnings call.

Thanks, Jeff and good morning, everyone.

I'm thrilled to be part of the Alleno team as the company enters its next era of growth.

I'm eager to work. Alongside the leadership team and build on our existing momentum and growth Innovation and cash generation.

Over the past month. It's already evident to me that the talent here is world-class grounded in a purpose-led vision with a culture that is uniquely collaborative

Our people are truly the foundation of our accelerating performance and the long-term positive trajectory. I see ahead.

my goal is to build and support the current team and momentum, while bringing a fresh perspective to key opportunities,

I'm confident in our ability to execute on our plans and I'm focused on driving value creation through a continuation of our productivity at cast generation efforts.

More specifically, I have 2 priorities going forward.

First, the Leno ascend.

And Beyond.

We are looking beyond the margin benefits. We can naturally capture through Better Mix and consistent growth.

There's more we can do in digital.

We are leaning in to Automation and AI to leverage those capabilities across the business.

Procurement is working to identify opportunities to suppliers and we have fresh eyes with an early priority on General and administrative expenses and Manufacturing.

With the send, we'll look for opportunities across the company.

Welcome to invest in the muscle behind our no regrets launches and R&D.

Ultimately, we want to create the most Innovative efficient and competitive Animal Health leader that delivers consistent shareholder value.

This is my top priority.

And second, we're examining how we can further improve cash flow generation, including working capital and capex initiatives.

I appreciate the importance of continued Debt. Pay down which remains our top Capital, allocation priority.

We are also beginning to evaluate refinancing possibilities for our 2027 Tower with ample time and optionality for this transaction.

In my view, these priorities lead to a significant opportunity for sustainable value creation.

After 1 month with the company, I mean, more confident, and momentum, and trajectory of our business.

The finance team is partnering closely across the organization to enable long Runway of durable growth.

With our diverse portfolio of innovation growth in the vet clinic, and leadership in pet retail, and farm animal.

I'm excited to help the street see what I see through consistent execution and transparent communication. I look forward to connecting across the investor community in the days and months ahead.

Now, let's turn to second quarter results. I will 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.

Starting on slide 10. We delivered, 1.241 billion, dollars of Revenue, representing an increase of 5% on a reported basis.

Organic constant currency growth was 8% driven by a 5% increase in volume and 3% contribution from price.

Slide 11 provides Revenue by the 4 quadrants of our business.

Total Pet Health Revenue, increased 10% in conseil currency and the second quarter with price contributing 4%.

In the US Pet. Health delivered, 11% growth driven by demand for our key Innovation products and contribution from the vaccine portfolio.

Improving retail dispensing. Trends resulted in increased sales for our Sesto and a family brands.

Outside the US, our pet health business. Grew 7% in constant currency led by continued, demand for add tab across Europe and sales, those in relia in 3, International markets,

Globally. Our farm animal business achieves, 6%, growth in organic consequences.

The US farm animal business grew 5% driven by the strength of experior.

Outside the US, our farm animal business. Contributed 6% in organic constant, currency driven by higher, demand and poultry, and Swine across multiple geographies.

I'd like to highlight that we also experience pretty tariff customer buying primarily in China, which we estimate at approximately $15 million in revenue.

Continuing down the income statement on slide 12.

Gross margin decreased 90 basis points to 57.3% due to inflation and the higher manufacturing costs associated with owning the speak facility.

Partially offset by favorable price volume and beneficial product. Mix driven by the US Pet Health performance.

Operating expenses increased 11% compared to the same period last year, driven by our Global Pet, Health product, launch investment, and the q1 to Q2 timing shift as we adapted to a weather delayed parasiticide season. While these Investments are currently impacting adjusted ebit a flow through, we believe they are yielding, strong returns and are critical for long-term brand success and value creation, interest expense decreased, 27 million year-over-year to 38 million driven by the significant that reduction from last year's Aqua Duster.

On slide 13. We have provided walks to illustrate our year-over-year performance and adjusted Ava and adjusted eps.

Adjusted Eva was 238 million. A decrease of 37 million.

Adjust the EPS was 26 Cents in the quarter. A decrease of 4 cents your rear.

On slide 14, we provide an update on our cash, debt, and working capital.

Cash generated from operations, was 237 million in the quarter compared to million dollars in the same quarter last year.

We ended the quarter with net debt of approximately 3.4 billion and a net debt, leverage ratio of 4 times.

now, I'd like to say a few words on Capital, allocation,

Leveraging and it's made substantial progress towards reducing debt and a 2025 Target.

Investors can expect consistent Capital, allocation strategy going forward.

As outlined on slide 15, debt paydown will be the primary use of free cash flow.

Longer term, we aspire to be under 3 times levered and anticipate capital allocation flexibility once these levels are reached.

Now, let's move to our guidance on slide 17.

Driven by the strength of our Innovation, portfolio on a stabilizing base. We are raising the bottom end of our organic cost of currency Revenue, growth range. Now, expecting 5 to 6%, Top Line growth,

We are increasing reported Revenue guidance to 4.57 to 4.62 billion inclusive of approximately 35 million from the favorable impact of foreign exchange rates since the May earnings call.

To further fuel the trajectory of our Innovation launches. We are increasing DTC spend.

Operating expenses are now expected to increase by 7% in constant currency for the full year versus the previous outlook of 6%.

Adjusted EPS is expected to be between 85 cents and 91 cents which includes a penny for improved expectations for interest expense.

We are also updating our cash and balance sheet, expectations for 2025.

With the proceeds of the ladder Lantern us, royalty modernization combined with cash generated from the business. We now expect between 500 and 550 million of cash available for Debt. Pay down this year.

As a result, we now anticipate end-of-year leverage improving to 3.8 times to 4.1 times.

Flight, 18 provides Walks from our May to August guidance for adjusted ibida and adjusted eps.

And Flight 26 in the appendix provides several additional assumptions to help support your modeling efforts.

We are increasing adjusted EVA guidance by $20 million to reflect our $28 million outperformance in Q2.

This is partially offset by approximately 10 million dollars of increased investments in our recent launches and a normalization from pre- tariff. Customer buying with the Q3 impact of approximately 10 million.

You'll remember in May that we previously held back 25 million and FX Tailwind for adjusted Eva. Given the macro uncertainty and 3/4 of the year left to go. Today we are flowing through 15 million while holding back 15 million.

Let me share how we continue to navigate our expected terror of exposure in 2025 on slide 19.

With mitigating strategies implemented and pauses and trade deals announced since our previous assumptions, we believe the total net impact to adjusted Eva. As of August 5th, is now an estimated 10 to 14 million.

This range is slightly down from our prior expectation and includes tariffs imposed by the US China. And the EU.

We have maintained a balanced profile of risks and proactive opportunities in recognition of an involving situation. Our potential risk scenarios for 2025, including tariff, escalation and economic slowdown are offset by that 15 million dollars of potential. Foreign currency exchange favorability that we have not flowed through in guidance.

Overall, our mitigation plans, the weaker dollar and our strong execution, allow us to cover the potential 2025 tariff impacts and macroeconomic challenges.

We remain confident, we can execute and Achieve our Targets in multiple scenarios.

Our tariff related actions are now focused on 2026, which should benefit from several mitigating strategies including supply chain optimization, Inventory management, tactical pricing and select geographies and strategic API sourcing.

We have the right teams and the right portfolio to deliver for our shareholders and our customers. And the goal of communities, we serve

on slide 20, you'll see our guidance for the third quarter.

We expect organic constant currency Revenue, growth of 4 to 6%. Largely driven by the positive momentum. In both, our Pat and farm businesses with 1 percentage point of impact from accelerated, customer purchases in advance of expected. Future tariff increases.

On a reported basis, we expect 1.08 billion to 1.11 billion dollars in Revenue.

Through your rear increase in operating expenses, is expected to be approximately 8% constant currency including the incremental DTC investment.

Putting it all together. We anticipate adjusted. Evida of 160 million to 180 million, and adjusted, EPS of 12 cents to 16 cents.

Now, with that, I'll hand it back to Jeff for closing comments.

Thanks Bob. We entered 2025 knowing our customers and our investors expect consistent delivery and I'd like to once again, congratulate our team. I'm not just delivering results, but in true elanco Spirit going Beyond

Cast generation is driving rapid Debt, Pay down.

Given our strong first half performance. We are well positioned to raise our full year outlook, even in a highly Dynamic landscape mixed with opportunity and challenge with employee engagement at a 5-year High. We are all energized to execute on the back, half of 2025.

But speaking to my Global Elaine Co team members, our work is not done the last 8. Quarters of growth are setting up the next 8. Quarters of opportunity, Alano is an execution story and the outcomes of that execution will drive the value to our customers to our shareholders. And yes, to our futures. This is a long-awaited moment in our strategic trajectory and I have never been more confident in Leno's opportunity to deliver long-term. Shareholder value, and transform Animal Care with that. I'll turn it over to Tiffany to moderate the Q&A.

Thanks, Jeff. We'd like to take questions.

To 1 question and 1 follow-up operator, please provide the instructions for the Q&A session and then we'll take the first caller.

At this time, I would like to remind everyone in order to ask a question. Press star, then the number 1 on your telephone keypad will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of John block with stipho.

Please go ahead.

Thanks guys.

Um, Jeff or Bob, can you talk about some of these?

Accelerated Investments that you're making in the business. I think it was the slides pointing to, you know, an incremental 10 million, is this around or specific to credelio quattro. That seems to certainly be doing well. And then maybe just the tack on to that. First question, would be at a high level. Do we think about

You know, the business leverageable in 26x as Ascend and then is Ascend initiatives margin of creative, call it, you know, day 1. Uh and then I'll ask my follow-up. Thanks.

Thanks John. Uh, thank you. Uh, yeah. It was a great quarter. And to answer your question on expenses, they really will fall into 2 areas and it's it's first around the DTC. So listen, Quattro. And I'll just make a couple comments on cuatro to start John and we can go deeper there, but a special product, um, off to a tremendous start. As we've said it's early um, no conclusions at this point, but in our opinion, uh, quattros acting like best medicine and is fast growing 40% growth.

Broad spectrum and Deco Market. It's not acting like a third to Market and because of that, then even if we look at Market archetypes, I mean, the the share that it's taken so far, um, we've had it in the marketplace for 5 months media on for 4 months. Uh, we see a real great opportunity with a backdrop of a very fast growing market. And I think what's doing it is is the 3 points of differentiation. We're kind of calling it The, the Quattro effects. So so what we've done is, hey, what we're doing is we're building the biggest Brand, family of angles ever had being the credelio Brand family, John. And so, we're going to lean into this. This, this family will be anchored by credelio Quattro. Um, and as we look at it, the way, the media response we've seen as we've increased it through the end of q1 and into Q2, we've seen dispensing grow. We did run an AB test and, uh, we saw a positive results, so we've made a decision to lean in on that. Um, so that's 1 of the drivers. I think, the other ones a little bit of R&D, I mean, Ellen has had a, a great quarter.

Um, with lots of Milestones, uh, with her and her team and uh we are progressing nicely. Uh the next Blockbuster is coming through uh to the pipeline and uh we made a decision to lean in a little bit on the R&D expenses as well. So as we go to 26 I'll I'll have Boba chime in here as well. The launching of a send, let me be very clear. It's a company-wide initiative that's going to drive better capabilities today. The AI the digital the Bob mentioned, as well as productivity and they'll be

Drivers, we're not giving 26 guidance today, but I think as you looked at 26, we've said ibaa will grow. It will grow from The Innovation growth in the ibaa growth and it will also as we introduced today, it will come also from productivity. We want to do both points and Bobs put a lot of time in his first few weeks here on this. Maybe a few comments from you Bob on, on on John's question. Yeah, thanks Jeff. And and John, I'll just give you my perspective.

Scales, you know, these Innovations have higher margins than our total average. And so we're going to see some benefit profitability there. But we are going to, we are going to continue to invest in the muscle behind our no regrets approach to to launches and R&D. And and with that, we're going to continue to leverage our existing cost base. But again that's where we're Ascend we'll we'll come in and and continue to provide additional capabilities through leveraging Ai and digital as an example. Uh but we'll proactively accelerate efficiencies across the organization as well, primarily focused on manufacturing and and GNA functions. And that is the last thing I'd leave you with on 2026 is you know we're going to continue to focus on cash and focusing on the fundamentals around trade working capital and and using that cash to pay down debt,

Great follow up. John? Yeah, I'm very helpful. Thank you. I I guess the follow-up.

Jeff at a high level like The Innovation. Reds are now up 300 million.

Year-over-year at the midpoint. It's sort of implies a base Biz, you know, down around 1% and change this year. There's some moving parts right behind that with like CMO Etc. But this is not a 26 question, but at a high level just, you know, your thoughts on the sustainability of like this, mid single digit growth for the company, and more importantly, maybe the Crux of the question is, like, what is that algo look like in other words, is it a flattish base? And then you have Innovation driving 4 to 500 basis points with what you and Ellen and Bob have, you know in the pipeline or do you actually see an opportunity to maybe?

Further stabilize the base. Get a little price and maybe that can improve and help the overall Dynamic. Thank you. Yeah. Great question John. And we've said all along the base matters and uh the formula is working relative to every major portfolio. That's getting a little Innovation. Not even the Blockbusters is is stable and we do it you know we and we don't have those big pockets of declines either. So yeah. Flat to minus 1 is kind of how the calculation is, you're seeing our price growth, which means we're adding value and the marketplace. So, you know what we when we inspect the businesses we go into 26 business planning, it's every portfolio. How is it strengthened, if I go down Ellen's list right now of what's happened? It's not just the big Innovations. Yes, we got the EU, zeneli approval. Uh, by the way little news, we got the UK's zeneli approval, this morning. Um but when you build on to it, adding the advantage, collar, 4 month, collar with the advantage, brand will be beneficial. Bobby picks up a Civ vaccine, flu vaccine that will help as well.

As well. Uh, the IO 31 is tracking, as we know. So what I would tell you is, it’s adding the innovation to the portfolio that will be the key algorithm. Um, but without question, what moves the dial the most, to Bob's point, is ramping. We are not going to have any regrets. We think we’ve got a basket of innovation very different than maybe other companies—not one or two, but a major basket of products. We’ve got to maximize what we have, make the ramp, you know, more steep, and give.

To that Peak and and make it as high as possible. So that's what more more to come on. 26 John.

Thank you.

Your next question comes from Daniel Clark with Lee ring Partners. Please go ahead.

Great, thank you. I wanted to ask another question initially on the Innovation, um sales Target raise. And I know you're not going to break out kind of on a productive product basis like what what drove the 60 million increase, but can you just give a little color Direction? I'm like, what the main contributors were? Was it Quattro or or were there others? That really helped drive that? Yeah, so I'll give you a

little bit of color.

with Daniel, thanks for the

We did, we did increase our expectations for the year of up. Now to 720 to 800 million, we feel great about the growth and all the launches, but I do want to remind you. There's a bit of seasonality in in that as well. So, parasitic sites for instance are more weighted versus towards the first half, add table in Europe. Is especially, you know, seasonally weighted towards the first half. But the growth is being led quite honestly about almost the entire basket but especially Quattro, uh, that that's where we're really seeing, uh, you know, some some activity there and and 1 of the reasons we're leaning in on the DTC spend because we are seeing that the data that supports it.

Great. Thanks. And then just another question on how you're thinking about expenses like if there is upside in a given quarter, how much of that do you sort of expect to to reinvest into sales and marketing or R&D versus, you know, delivering like what's your philosophy there? Thanks.

and write the

Spend on that Top Line growth will continue to invest and as we see that at some point paper off, you know, that's a little ratchet down but I would highlight, you know, we did, we did increase your Opex spend in in our guidance and DTC and and a bit in R&D for that next basket. But in total dollars, we are down sequentially from Q2 to Q3. So, it's something we're actively monitoring and we're using data to make those decisions.

Your next question comes from Michael Riskin with Bank of America. Please go ahead.

Great, thanks for taking the question. Um Bob I want to touch on something, you mentioned just a little bit earlier in Q&A when you're talking about the margin uplift from Innovation gaining scale. You know if we just sort of look at some of the the comments you gave in terms of Clinic share and and wallet share into Q. It looks like it's in Ria was sort of in that 10 million range. Quattro was 50 million. If not 50 plus um those are you know really solid numbers after just a couple quarters if we sort of think about what it could mean for the year um when we think about some of these Innovative products you talked about obviously the margin of creation um as they gain scale, you're getting that scale earlier than anticipated, right? So can you talk about the benefits of gross margins and sort of what the threshold levels need to be? When a new launch goes from being diluted to break, even to really creative. Um either from a volume of Revenue perspective, just talk us through that ramp and the margin benefit there.

Yeah, but I so, so 2 things on margin, right? So again, is is I highlighted and you you've highlighted as well, you know, we are going to see margin accretion, you know, through these launches uh continuing uh, still with a with a stable base, but is to think about the entire gross margin profile. You know, we are going to make the right decisions for the long term health of the business and so again we're going to use data to support. Uh you know, when we are investing to get the Topline growth, we do have price of approximately 2%. We'll continue to work on operational improvements within our 4 Walls and and that that will include absorption. Uh but but longer term, you know, as as these continue to to move forward in these launches of the accelerate, you know, we're going to be able to get that mixed margin, you know, over a trend of several years and then and then the Leno and sand will come in on top of it. And, you know, help us think through how we, how we use Ai, and automation, as well as being cost-effective and, and reinvesting in in growth. So you, you know, I think it's safe to say we'll continue to see Improvement.

In both margins and IBA margins over time at this point. But, uh, that's what that's where I'd leave you with where we are today. And I'll just pick up Michael, as you, you know, uh, we've got hanang Francis, our planner oral dose plant. Uh, the good news is that we've been making credelio there for a long time. We've added zeneli and now we've added Quattro. So what Grace has done with her team is really, you know, we're getting that optimization now. Um, and we'll continue to scale and we'll we're putting some capex in that plan as

Well, because of the size that we're seeing in the potential of Quattro and Zen relius. So, but we've gotten a lot of that efficiency out of the gate different than maybe some of the other things that you scale from, maybe a new plant, like the monoclonal antibody out of the gate. So but but overall, we're getting that Synergy as a whole on the cops.

Okay, great. Thanks. And then um, Jeff while I got you, um, want to follow up on Cinderella and Samir comments on the, on the label change. Um, encouraging update on on getting the Fatal vaccine response taken off. Um, I know there's not a lot of data on this in terms of, you know, your launch and and external markets owe us is still relatively early. Um,

But how should we think about the benefit of that? I mean, anything you can say in terms of how it's ramped in Brazil, in Canada, in Japan versus how it's ramped in the U.S. And therefore, as the U.S. label moves closer to the international labels, you can say in terms of how that could benefit the uptake and the acceleration in the U.S.

Yeah, thank you, uh, Michael. Um, so listen, I it's great news, I mean 9 months Ellen's team and, uh, and credit to the FDA, they they, you know, accepted the science and um, just for clarity for everybody. I think it's important that uh um again we are in the middle of a 60-day administrative supplemental review. Um, it's underway and they accepted the PCR data that we submitted and they will remove the Fatal vaccine induced disease risk from the label on that 60-day Mark. So we're looking at that would happen likely with the new label.

Really is helping that, but what we're seeing is growing share growing first line use that first line use in the US is increasing, um, and definitely has in Brazil and Japan and Canada where we've got non-restrictive labels. Um, we are launching right now in Europe in the second biggest market. So we're getting a foothold on this 6 to 700 million dollar market. With, uh, you know, a product that we think uh, has got differentiation because I think the big thing right now is efficacy, everyone is looking for efficacy and we're kind of stepping into this during season um which is right in the midst of it right now with a product that's showing that differentiated efficacy. So um that's that's where we are. I think the label is a good sign and I want to emphasize or continuing to generate data. We want a US label like the international labels.

Thank you.

Your next question comes from Andrea Alfonso with UBS, please go ahead.

Hi everybody. Welcome to Bob hi, Jeff. And thank you so much for for taking the question. So the 6% organic volume growth of the second quarter was really, you know, quite impressive. And I'm just curious how much of that you think was some sort of an impact from, you know, delayed visits and 1 Q due to weather issues. And and as you think about the back half, uh, how do you see those volumes trending and I guess separately, you know, on the 10% constant currency that, uh, you reported in pets Health? Where do you see that?

Figure stacking up versus the 5 to 6%. Organic Revenue growth, that's within your full year expectation. Should be still expect more of a skewed towards volume overpriced. Um, thank you so much.

Yeah. Thank. Thank you, Andrea. It was a little difficult to hear, but I think at the highest level, you know, uh, you're right. We did have a slower start, especially on the retail side on the season. But we saw the rebound as we went into Q2 with nice double digit growth on our retail side with Sesto, the a family, um, as a whole. And then, of course, the Innovation growth. Um, on on Bobby's team here in the US Pet Health. Look, I think as we look at it Innovations, the key driver, and I think we're insulated from that that that visit, um, no question. And then I think as you look at, uh, compliance the globalization on the pet side, all of these things, really create a nice backdrop, we believe. Um, and then if you just study, you know, the animal health industry in the first half, you know, my belief is these pet Trends on willingness to spend compliance, globalization a pair of Market, you know, growing double digits of Durham Market growing double digits. I think we're set up. Well, so we'll continue to watch. We want visits to recover but, uh, I think elenko,

Insulated from that. Well positioned, as we go forward. Thank you.

Your next question comes from, Chris Scott with JP Morgan. Please go ahead.

Uh, thank you so much. This is Katarina on for Chris. So first question is just on Cordelia Quattro, I think you've touched upon this, but can you maybe elaborate a bit in terms of where shares coming from, for the product? You know, how much of this is triple versus doubles versus cannibalization versus kind of, you know, dogs, New York category and kind of any surprises, uh you're kind of looking at at those share numbers and then second question is just around exterior. You know? The product is obviously had a number of strong quarters. Can you maybe talk a bit more incremental, uptake is coming from? And then also, maybe elaborate on the potential for international expansion for the power, you know, which geographies do you think they the most sense there just in terms of uh you know, Europe or South America. Thank you so much.

You Katrina? Yeah, so great great quarter for Quattro. And again, uh exceeding our expectations on uptake, uh, overall. And as as we've said, 70% of, uh, our growth is coming from either new starts or competitors, in their, we're not double clicking on that. But what we would say is the incumbents in that market, some of the Legacy and again, new starts. And I think I would also say, just what we're seeing in this broad spectrum in Deco Market at 3.9 billion dollar market, it's now 1.3. So we're 30%, 70% of puppy starts. I like what's happening and I think Quattro is helping that market.

And then we'll take some value based pricing, appropriately, going forward and then look for us to have Geo expansion on experior here. Uh, as we head into 2026. So nice runway for Xperia going forward.

Thank you.

Caller.

Your next question comes from.

Brandon Vasquez with Elanco, please go ahead.

Hi, everyone. This is Russell on for Brandon. Thanks for taking the questions. I wanted to first start at a high level. Um, you had reported strong growth in Pet Health in the US specifically, uh, could you kind of talk to your confidence in the sustainability of your growth, uh, with the ramping of innovation? And I talked about underlying market growth Trends and how you would characterize the health and demand of the underlying pet market right now.

Yes, thank thank you for the question, Russell. So uh yeah, the overall us Pet Health team will speak specifically to us and then maybe to the industry, I will call out. I think this team is uh it's been a multi-year pragmatic approach and uh the the strategies been hey bring the best expertise from the industry in, let's build the capabilities and execution Rhythm we've invested as you know in an increased sales force, as well as the digital. And I believe we've got 1 of the most dynamic sales forces

And maybe 1 of the best distribution relationships in the marketplace, and then approach the Omni Channel approach with retail and, uh, and the vet clinic. So, as a whole, we're, we're set up really well, and no question Innovations key, but what? Bobby and the team are doing too is building out the portfolios from the, the vaccine portfolio to paying to retail with a little bit of innovation as well, as you know, Get Behind These Blockbusters. So we see nice growth, uh, for Pet Health going forward for the rest of this year and going into 26, no question. And we'll invest accordingly as as a, we've highlighted as I step back, I think to broaden your question briefly, as you look at animal health from a consumer basis, um, yes, visits are down and that's important, but I go past that and look at the durability and really this the the strong backdrop we have and Pat's and protein. Pat numbers are up, the needs continued compliance in what we're doing. Just in the last quarter, what's happened in the

channel is making pet owners. Get pet medicine, easier, and more frequently. That's going to drive growth. Second is globalization, every major International markets, growing faster than the US and driving these double digit growth. And then the younger Generations, willingness to spend those 3 Trends, elanco believes followed by good Innovation. Sets up it very well. And then on the protein side there, I believe there's an animal protein, Kind of Revolution going on, our farm animal businesses, uh, seeing that as well as really.

What's converging is this new diet protein? Heavy diet with really a strong Innovative products of protein, um, is set up well, so great, great backdrop for, for pets and protein and Alano boats. Well, in that

Got it. That's very helpful. Thank you. And then on that,

Your next question comes from Omar, rafat, with evercore, please go ahead.

Hey guys, this is Mike Jerry in for Omar. Thanks so much for taking my question and congrats on a great quarter uh 2 for me. And I may have missed this a little louder. Mike. If you could that'd be great. I'm just sure. Thank you.

Um, 2 for me, I and I may have missed this in the opening comments but uh, for for, tell your Quattro now that it's been 6 months into launch. Uh, was wondering if you'd be able to break down. How much is coming from? New Puppy, starts versus switches from other products and the second 1 is on on the farm animal business, as we're thinking about how to model the segment for the balance of the Year. Could you perhaps break down the, the current status and trends of the macro factors affecting each species in the US versus xus? Thank you.

Yeah, Mike real quick on the first 1, we're thinking about 70%, we're not going much deeper than that right now. We're analyzing the data. We've been in the marketplace about 5 months, media has been turned on about 4. And, uh, we got about 70% coming either from the competition, um, and, and switches so and then look on farm animal markets, overall, I think, uh,

Higher prices. And we expect that to support really a a strong finish to the year on the swine side and then you've probably seen with the the results from some of our customers, as beef prices increased, it really helped Global poultry demand, um, both here in the US and globally and with our Global poultry business, um, you know, really, really strong poultry economics right now. Overall given that the demand is up uh significantly uh, more than than the past. So uh, that's that's it. Overall, Dairy continues to probably revolutionize with new products, uh, 10 billion, going into the US. And, uh, I think we've seen a more stable Dairy business in, 2025 than we've seen in a long time.

Very helpful. Thanks so much.

Your next question comes from nanti with BNT paraba.

Please go ahead.

Hi. Hi, good morning. Uh, maybe on both ends. If you could discuss the progress on the government incentives, um, also interested to hear how you will position the advantage of color versus Sesto and maybe a longer term question. So uh, elanco progressed very well on Del leveraging. So I don't know if you it's too early to discuss your Capital allocation once uh you reached that 3 times leverage. Thank you.

Yes, thank you for the question. I'll take the first 2, B, and advantage and then Bob just briefly. But, uh, at a high level, I'll be be brief to say, a great quarter for Bo. And I think the simple message here is we've pivoted from Grants and just sustainability to really focusing on Farmer value, economic value and cpg, brand value, and I believe it's working. It's early on as as we know, but we've seen robust cpg value and our, our vision really here is non is really to strengthen cpg, brand value with a b and take that all the way back to the farm and add 5 to 10% to their their, to their cash flow. So we've right now, it's really a logistics game, very similar to Experian in the early days. It's on the farm on the ground. That's the the battle. It's an execution. Um but elen goes well positioned where a feed additive leader. We got a good portfolio and we've got the only digital mechanism upload on the farm that can actually monetize. Uh, this

Into value for the farmer. So a great quarter and a lot of momentum, 4 times the cows on boar and look on Advantage. It's a 4-month collar, we're going to do just what we've done before, we're going to leverage the advantage, brand all around the mission of it. With 4 months is, hey, we're going to give more forms at different price points to more pet owners. And we know that when we bring Innovation into this retail and e-com, you, you drive overall portfolio growth, and that's what we're looking for, in 2026, uh, a real nice.

Between Helen embodies team.

Yeah, and then I'll take the capital allocation uh question of on uh so so first off. No change in the capital allocation strategies. We sit here today Debt Pay down is absolutely going to be the primary use of of cash. Uh we were to continue to focus on fundamentals around trade working capital and improved cash flow over time. Uh you know as we stated we do expect our leverage to get to 38 to 41 by end of the year but but longer term we aspire to get under that that 3 times leverage uh which will allow for, you know, Capital allocation flexibility once. Those levels are reached

Next caller.

Your next question comes from Aaron Wright with Morgan Stanley. Please go ahead.

Great, thanks for squeezing me in. So um, the implied growth for the second half, I want to part take that apart a little bit in terms of like particularly what's implied in the fourth quarter, it does anticipate that slowdown, I get it through seasonality particularly across that that parasitic side business, but you know what's driving, kind of the more meaningful kind of step down, you know, as you continue to ramp and, and new and existing markets across the new products.

You know, how do we think about stalking Dynamics? Both at, you know, Distributors and at retail and um anything to call out on that front and the quarter. And is there just conservatism like why wouldn't the momentum continue here? Should cordelio. Uh, Quattro continue to build should Pet Health, continue to see double digit growth in the second half. Um if you could provide some detail there and then my second question, which I'll ask up front is on Ajo 31. I think you mentioned, it's on track, which is great. Um, where do we stand now? In terms of your conversations with the regulator's? When will we expect to hear something more material in terms of an update on that front? And and um, and yeah, your confidence in that product thing?

Overall, as a company are at at or below, uh, you know, all-time lows or at least, at 4 or 5 year lows. Um, and we see nice demand in and nice. Pull through out from vet clinics to even on our farm animal business. So nothing out of the ordinary that we have to date, or we see for the rest of the year on, sell in, sell out and inventory levels, nothing more than what's normal when you launch a new product. So that I want to be very clear, none of those Dynamics or any of the guidance, uh, at all and nothing's expected. Um, so that's that's 1 and then, uh, um, I think on your your second question is, uh, you know, that the fourth quarter, I would just say you've got your normal pushes and pulls, you've got a, a competitive environment out there. You've got competitive Innovation that we have in our guidance as well. We're trying to take up prudent, disciplined approaches of the pushes in the pulls. You got a dynamic environment. I don't think it's volatile, I think it's mixed with challenges and opportunities for us, but that's, that's being considered. And then you've got that FX Factor

In there as well. That's, uh, a little bit of up and down week to week, so I think that's our approach there. Yes, there is seasonality, but, um, we we continue to and will take advantage of leaning in on this basket of innovation, look on aisle, 31. Let me be real clear. Uh, we're excited about this. We're excited about bringing, uh, another Derm product into this great Derm Market. It continues to be differentiated, uh, we've had no real change in the USDA relative to any of the dialogue. We've hit a few key Milestones that needed to be

Achieved to keep us on track. And again, we're on track for an approval for Q4 of 2025, with a commercial launch in the first half. You know, this Aaron, you know, we don't have a Dua inside the USDA, so there's always that variable but, um, you know, we feel as strong or stronger than we did at the last quarter relative to our tracking on, uh, uh, on the aisle 31.

Got up 1. More caller know.

There are no further questions, I turn the call back over to Jeff Simmons CEO for closing remarks.

Thank you. Thank you. I just want to highlight here very much at the close again. A special thanks to the Elanco colleagues. We need to keep executing, keep acting like owners. I want to thank our customers. I mean, there's a lot of trust and a lot of time that has been given with all the innovation in this dynamic time, and we don’t succeed without our customers. And, uh, most importantly too here is thanking you, our investors: your belief, your trust, your time. We know that we are a story about delivering that promise; we're an execution story, and we're going to keep this. We know to keep your trust, we need to do what we say: quarterly guidance, high transparency and clarity, and I will assure you of that. We believe we're well positioned for the rest of 2025. We're preparing for 2026 and even the rest of the decade with a focus on growth, innovation, and cash. Engagement is high, and so is our resolve.

And our execution. So we look forward to working with you and engaging with you throughout the second quarter, third quarter. Thank you very much. Have a great day.

this concludes today's conference call, you may now disconnect