Q3 2025 Elanco Animal Health Inc Earnings Call

Speaker #1: Ladies and gentlemen , thank you for standing by . Welcome to Elanco Animal Health third quarter 2020 Earnings Conference Call . At this time , all lines have been placed on mute to prevent any background noise .

Speaker #1: 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 one on your keypad .

Speaker #1: If you would like to withdraw your question , please press star one again . I will now hand the call over to Tiffany Kanaga , Vice President of Investor Relations and ESG .

Speaker #1: You may begin the conference .

Speaker #2: Good morning . Thank you for joining us for Elanco Animal Health third quarter 2020 earnings call . I'm Tiffany Kanaga , vice president of investor relations and ESG .

Speaker #2: Joining me on today's call are Jeff Simmons , our president and Chief Executive Officer . Bob Van Bergen , our chief financial officer .

Speaker #2: And Beth Haney from Investor Relations . The slides referenced during this call are available on the Investor Relations section of Elanco . Com today's discussion will include forward looking statements .

Speaker #2: 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 .

Speaker #2: 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 SEC .

Speaker #2: We do not undertake any duty to update any forward looking statement . Our remarks today will focus on our non-GAAP financial measures , reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release .

Speaker #2: References to organic performance exclude the estimated impact of the Aqua business , which was divested July 9th , 2020 , for and certain royalty and milestone rights that were sold to a third party in May 20th .

Speaker #2: After our prepared remarks , we will be happy to take your questions . I will now turn the call over to Jeff .

Speaker #3: Thanks , Tiffany . Good morning everyone . A strong third quarter results build on our consistent priorities of growth , innovation and cash .

Speaker #3: As highlighted on slide four , Elanco continues to deliver , growing 9% organic constant currency in the quarter and outperforming the high end of our guidance for revenue .

Speaker #3: Adjusted EBITDA , and adjusted EPs growth was led by U.S. farm , up 20% and U.S. Pet Health up 9% . This marks nine consecutive quarters of underlying total growth and our highest quality of growth in the nine quarters .

Speaker #3: Innovation continues to exceed expectations , achieving $655 million in year to date revenue . We are further raising our full year expectations by an additional $100 million at the midpoint to $840 million to $880 million .

Speaker #3: The consistent outperformance reflects broad based momentum from our diverse basket of innovation across geographies , species and products . Large and small . The portfolio benefits of our newer products are also driving more stability in our base business .

Speaker #3: Our strong focus on cash and operational execution improved our net leverage ratio faster than planned , to 3.7 times at quarter end . We now expect to end the year at 3.7 to 3.8 times .

Speaker #3: Additionally , we refinanced our $2.1 billion term loan facility , extending the maturities through 2032 . We expect our balance sheet to be in a strong position as we exit 2025 on tariffs .

Speaker #3: Our intervention actions , FX tailwinds and year to date execution are mitigating potential impacts and risks . We continue to expect a 2025 net impact of 10 to $14 million and believe any likely tariff risk scenarios are covered in our 2025 guidance .

Speaker #3: With our consistent outperformance , we are well positioned to raise our top and bottom line outlook for the full year . We now expect organic , constant currency growth of 6 to 6.5% .

Speaker #3: Adjusted EBITDA of 880 to $900 million , and adjusted EPs of 91 to $0.94 . This guidance raised considers the dynamic macro environment and our confidence in the underlying momentum , agility and strength of our business .

Speaker #3: We are turning strategy into results , providing a long runway for shareholder value creation . Looking at the third quarter revenue performance on slide five , we break down the 9% underlying organic constant currency revenue growth .

Speaker #3: This chart demonstrates strength across our global business with all four quadrants growing nicely . US Pet Health had another solid quarter , up 9% .

Speaker #3: We saw growth in the vet clinic driven by Quattro and Zen , and also at retail through our OTC Parasiticides . It is clear that our innovation insulates us from vet visit volume declines and benefits .

Speaker #3: The broader portfolio with Galliprant and vaccines also showing growth in the quarter . Moving to international pet health , we achieved 8% organic constant currency revenue growth driven by Cordelia and Adad .

Speaker #3: We are very pleased with the early results for the launch in the EU and Great Britain . Following our success in Brazil , Japan and Canada .

Speaker #3: We expect geographic expansion to be a tailwind for our basket of innovation in the coming quarters and years . US farm animal delivered an outstanding quarter , up 20% on top of 11% in Q3 of 2024 .

Speaker #3: Bolstering our market leadership , cattle led the way with strong growth for Xperia and Poultry vaccines . Also contributed to the quarter . Finally , International farm animal was up 5% and organic constant currency , with growth coming from poultry and ruminants affected .

Speaker #3: The quarter was modestly impacted by some tariff buying . Shifting to Q2 from Q3 to satisfy customer demand , primarily in China . Overall , we are encouraged by the performance of the business supported by strong animal protein markets .

Speaker #3: Looking at slide six, we delivered $655 million of innovation revenue year to date, with outperformance across a diverse basket led by Quattro exterior and Tab and Xenophilia.

Speaker #3: We are again raising our innovation guidance for 2025 by $100 million . At the midpoint of the range to 840 million to $880 million .

Speaker #3: This target reflects several large margin accretive products , and they are gaining traction in the marketplace with our no Regrets launch approach . Let's further discuss the progress of our major innovation products on slide seven .

Speaker #3: Starting with Cordelia Quattro in early September , Quattro became a lankos fastest pet health blockbuster in history and one of the industry's fastest ever , reaching blockbuster status of $100 million in net sales and less than eight months .

Speaker #3: This is especially notable with a single geographic approval . We seeing incredibly strong demand for the all in one products from both pet owners and veterinarians , pushing the US broad spectrum injectable market to $1.4 billion today , with growth at almost 40% .

Speaker #3: We believe Quattro is best medicine in this fastest growing animal health market , and our product is not only expanding the market , even further , but we're also gaining share ahead of expectations .

Speaker #3: These gains grew from the second quarter , both into and out of the clinic . Our strategic DTC investments are expanded . Sales team and distribution partners are all driving the success of this launch .

Speaker #3: As veterinarians and pet owners clearly appreciate Quattro's three dimensions of differentiation , first , Quattro has broad coverage . This includes multiple species of tapeworms , and following a recent label update , also includes protection against the black and longhorn ticks for prevention of Lyme disease .

Speaker #3: Second , Quattro kills ticks twice as fast as the competition , as detailed in a published head to head study , and third Quattro has heartworm coverage from month one .

Speaker #3: We've also received positive feedback from vets and pet owners , praising its great palatability , the introduction of Quattro has bolstered our broader Elanco portfolio in clinics , as we now offer veterinarians a complete ecto endo and injectable portfolio with a variety of parasiticide coverage at a variety of price points to meet veterinarian and pet owner needs .

Speaker #3: This more complete portfolio is especially enhancing our offering for corporates , where we've historically under indexed cannibalization has been limited as approximately 70% of quattro share capture has come from the competitive product switches .

Speaker #3: New starts or repeat patients . Our product ranks highest on kinetics puppy Index versus other broad spectrum inductos . This is supported by our puppy Program and DTC investments .

Speaker #3: But mostly by the differentiated product profile and performance . Looking ahead , we are excited about Quattro's international rollout , with launches expected to start in 2026 .

Overall, we believe this data combined with 13 months of positive use in the US along with 35 country, approvals all with non-restrictive labels. Support further positive change to the US and relia label.

In the 700 million Derm Market outside the US zeneli continues, its good progress, launching in the European Union, Great Britain. And now Australia, you remember, we completed a head-to-head study in Europe versus the marketplace incumbent, as part of the EU approval process, we are encouraged by the early results in these geographies reflecting the head-to-head data and overall strong efficacy of Zen relia.

The newest launches, follow success in Brazil, Canada, and Japan, notably Zen Ria has double-digit percent market share in these markets, supporting our long-term belief in the product with a clean label. We believe the consistent key driver is enelia's, increased momentum is product, testimonials on its differentiated efficacy profile.

Now our OTC parasiticide product, add table in Europe, it continues to achieve good growth with sales up more than 25%.

Add tabs robust trajectory is fueled by the April approval and launched in the UK and supported by data driven strategic DTC Investments.

Add tab is now the market leader in the European isox OTC market, and the only product in the space that can be used in both dogs and cats.

Treatment for the deadly canine, parvo virus, we do expect growth to remain tempered in the near term. We are working to expand access to shelter promotions

Moving to farm animal experior continues to grow, rapidly up 70%, in Q3 on top of more than 100% growth in Q3 of 2024.

We continue to benefit from the historically. Small us cattle, herd size, which reached the lowest mid-year count. And more than 50 years of record, keeping

This Dynamic is driving stronger, producer economics and sticky Demand with experienced customer retention rate, remaining over 90%.

Looking ahead experior does face stronger comparisons as it lapse the combination clearance for heers. However, their early positive signs of herd rebuilding representing a multi-year Tailwind.

We see significant runway for this Blockbuster and the benefits of its portfolio synergies. And an estimated potential Market of over 350 million dollars in the US and Canada with also, Geo expansion as a nether expected Tailwind over the longer term.

Lastly regarding Bair, the product continues to grow. But at a more measured Pace than initially projected, we see consistent demand from cpg Brands which supports sustained interest and consistent count numbers.

As we've seen with other Innovative farm animal products, the adoption curve can take time. However, our experience shows that once these products are integrated and their value realized, they become sticky, providing significant and Lasting benefits to Farmers overall. We continue to see substantial value in B for both our cpg partners. And the producers we serve

Moving to slide 8, we offer some recent highlights across the three parts of our IPP strategy: Innovation, Portfolio, and Productivity.

First on Innovation, Allen and her team have a refilled the pipeline and are progressing. Our next wave of Blockbuster products. She's created an organizational capability to generate a consistent flow of high impact Innovation. More near-term il-31 remains on track for commercialization in the first half of 2026. We are in the final stages of the USDA dossier review.

Given our data submissions and constructive conversations with the USDA or cautiously optimistic that the product will be approved in the fourth quarter.

However, the lack of a Dua timelines and the government shutdown introduced some potential for variability beyond our control.

Our commercialization timeline can absorb a modest potential Delay from the shutdown and perhaps most importantly, this year's progress and growth innovation. In cash has clearly demonstrated that our results are driven by our total portfolio.

As our diverse portfolio of innovation scales. It also stabilizes our base business, driving overall industry-leading growth, our us farm animal. Business is consolidating its leadership having achieved 11% growth on a trailing 12-month basis. Led by beef cattle,

At the same time, our life cycle management efforts continue to strengthen our portfolio. For example, Credelio recently became the first-ever FDA product to receive emergency use exemption for treatment of New World screwworm in dogs.

Price is also an important portfolio. Growth enabler. We have achieved 2% price growth year to date and we continue to expect the full year to also be up 2%

while pricing was flat in the third quarter, this performance aligned with our expectations representing fluctuation in customer and product mix

Remember that our newest launches like Quattro are not reflected in price.

Our strategy continues to align price with customer value.

Finally, on productivity, we continue to rapidly pay down debt and strengthen our balance sheet. We now expect to improve our net. Leverage ratio by 2 turns in Just 2 years with the under 3 times milestone in sight in 2027 especially as our companywide margin enhancing initiative. A Leno Ascend drives meaningful efficiencies beginning next year.

Our recent debt refinancing further, strengthens our balance sheet with an improved, capital structure that both extends our maturities and lowers our cost of debt. We expect our net leverage ratio to benefit on multiple, fronts ahead, growing ibida and Debt Pay down.

Expansion of our facilities in Fort Dodge, Iowa, and Elwood, Kansas, with the latter supporting our MAD platform for IL 31 and beyond. With that, I'll pass it to Bob to review our third-quarter results and financial guidance.

Thank you, Jeff and good morning, everyone. I will focus my comments on adjusted measures. So please refer to today's earnings press release for a detailed description of the year of your changes in reported results.

Starting on slide 10. We delivered 1.137 billion dollars of Revenue representing an increase of 10% on a reported basis. Organic constant currency growth was 9%, primarily driven by an increase in volume as anticipated and as Jeff noted price was flat in the quarter.

on slide 11, you'll see Revenue by the 4 quadrants of our business

Globally, Pet, Health, Revenue. Increased 8% in constant currency in the third quarter.

In the US Pet, Health delivered 9%. Growth driven by demand for our key, Innovation products cordellia Quattro ends in reia.

Outside the US, our pet health business grew 8% in constant currency with growth led by Zenia.

Movita farm animal a global business achieved. 10% organic constant currency growth.

The US farm animal business grew, 20% driven by the strength of experior and poultry vaccines.

Outside the US, the farm animal business. Contributed 5% growth in organic constant currency driven by cattle in Europe and poultry in both the latam and APAC regions.

Continuing down the income statement on slide, 12 gross margin increased 90. Basis points to 53.1% primarily driven by productivity from increased volume.

Our operating expenses grew by 7% year-over-year, largely driven by strategic investments in the global pet health, product launches.

The increase was slightly below our 8% Target at some expenses. We'll shift to the fourth quarter.

Interest expense totaled. 34 million representing a 122 million reduction from the same period last year.

This decrease reflects our continued progress and deleveraging.

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

Adjusted EVA was $198 million, an increase of $35 million.

Adjusted EPS was 19 cents in the quarter. It increased of 6 cents year-over-year.

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

Cash generated from operations was 219 million in the quarter compared to 162 million in the same quarter last year.

We entered the quarter with net debt of approximately 3.3 billion, and the net leverage ratio of 3.7 times better than expectations.

Now moving to slide 15. We have communicated a consistent Capital allocation strategy with Debt Pay down as a primary use of free cash flow. We are pleased with the progress we have made on deleveraging this year, having already exceeded our 2025 Debt. Pay down Target with gross Debt, Pay down of 562 million, we expect to end the year. With net leverage between 3.7 and 3.8 times longer term, we aim to be under 3 times levered and anticipate Capital allocation flexibility below that level.

On slide 16. We provide an update on our debt capital structure.

On October 31st, we successfully refinanced. Our 2.1 billion Term Loan B. Facility into 3, new debt facilities. Importantly, this refinancing activity, improves our debt portfolios maturity risk profile by extending the 2027 maturity to 2029 and 2032 and reduces our cost to debt.

Looking ahead to 2026, we forecast interest expense to increase by approximately $15 million year-over-year.

Is due to the expiration of a favorable interest rate swap, amortization benefit, and the third quarter of 2025 which originated from a 2022. Interest rate swap restructuring

The increase is inclusive of the interest savings secured through our recent debt, refinancing transaction.

Now, let's move to our guidance, starting on slide 18.

We have consistently delivered on our commitments, this year. And this momentum gives us confidence to once again raise our full year expectations.

We now expect to deliver organic constant currency Revenue, growth of between 6% and 6.5% versus our previous Outlook of 5% to 6%.

We are increasing our expected. Reported Revenue range to be between 4.645 billion and 4.67 billion inclusive of an expected, 30 million, Tailwind from foreign exchange rates since our August earnings call.

Slide, 19, provides you over your bridges for 2025, adjusted ibida and adjusted DPS.

We are also raising adjusted Eva guidance by 20 million at the midpoint of the range.

The increase reflects our 28 million outperformance, in Q3 partly offset by 10 million of increased investments in our recent launches and shifted timing.

We're also passing through the 15 million in FX Tailwind for adjusted Eva. That was previously held back with macroeconomic uncertainty half of which benefited the third quarter results with remaining expected to benefit the fourth quarter.

For adjusted EPS, we are raising our guidance by 5 cents at the midpoint bringing the new range to 91 cents to 94 cents.

On slide 20, we continue to expect net impact of 10 to 14 million and adjusted Ava in 2025 due to previously announced tariffs.

This estimate is included in our guidance and considers our multiple mitigation strategies.

For 2026, we will continue with our prudent and balanced approach to guidance and proactive interventions. As we navigate potential changes in tariff exposure.

Our fourth quarter guidance, presented on site, 21 includes organic constant currency Revenue, growth of 4 to 6%.

On a reported basis, we expect 1.085 billion to 1.11 billion dollars in Revenue.

The year-over-year increase in operating expenses is expected to be approximately, 10% in constant currency, including the incremental DTC investment and a shift in timing of some expenses.

As a result, we anticipate adjusted Eva of 168 million to 188 million and adjusted, EPS of 9 cents to 12 cents.

Finally, as usual for the time of year, we provide some preliminary contacts on our expectations for 2026 on slide 22.

We see a clear path for sustainable competitive Revenue, growth through our diverse portfolio. Of innovation, continuing to scale globally on top of a stabilizing base.

this Innovation helps to insulate us from macro headwinds, like the clients in US vet, visit volumes

Price. It also contribute to our Revenue growth.

In Pet Health, while we recognize pressures for competitive. Launches we believe we are. Well, positioned to gain incremental, share, both in the us where our corporate offering benefits from our more complete portfolio and globally. As we launch our innovation in New Markets, we also expect to build on our OTC Pet Health, retail leadership.

On the farm, animal side. What we are facing are difficult comparisons, especially in the U.S. However, there remains a runway for continued solid growth driven by our new products, as well as cattle and favorable producer economics. We expect bolstered leadership in cattle and poultry.

We continue to expect even a margin expansion, beginning in 2026, led by General administrative cost savings and Manufacturing, efficiencies under the alenco sin program.

This is a companywide initiative that we anticipate will drive additional productivity and keep capabilities and curious. As you are looking beyond the margin benefits, we can actually capture through Better Mix consistent growth and moving past heavier launch investments in 2025.

There's more we can do in digital Automation and AI to leverage those capabilities across the organization.

Procurement is working to identify opportunities with suppliers to help offset inflation.

Terrorists remain a headwind and a risk, but they have been manageable to date with our strong execution and proactive mitigation plans.

Lastly, as I shared earlier, we expect to step up and interest expense in 2026 of approximately 15 million dollars.

From a cash perspective. We expect accelerating free cash flow to fuel additional Debt. Pay down with net leverage improving towards our goal of under 3 times.

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

Thanks Bob.

Alano knows our charge consistent, reliable delivery to our customers and shareholders. And I'd like to thank our teams for the discipline execution and the delivery this quarter.

Employee engagement is at a high at Elanco, which I believe is a strong leading indicator demonstrating confidence in our future. We know the hard work continues in this competitive, fast-growing Animal Health industry, and we are committed to continuing to deliver for our customers. I see a durable path forward; our IPP strategy is driving results, positioning us well to raise our 2025 guidance. Even in a dynamic global backdrop, Elanco is clearly in a new era of growth and innovation with significant opportunity for continued shareholder value creation. We look forward to sharing more on our strategy, our financial outlook, and our innovation pipeline at our December 9th investor day. With that, I'll turn it over to Tiffany to moderate the Q&A.

Possible. So we ask that you limit yourself 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.

Thank you.

Ladies and gentlemen, we will now begin the question and answer session. I would like to remind everyone for 1 question 1, follow-up.

Should you have a question, please press star, followed by the number 1 on your telephone keypad, and you will hear a prompt that your hand has been raised.

Should you wish to redraw? Please press star 1. Again, if you're using a speaker-phone, please leave the handset before pressing any keys.

Our first question comes from the line of Omar Rafa from evercore Sir. Your line is open.

Hi guys, thanks for taking my question. Congrats on the quarter. Um, I wanted to clarify something, Jeff you mentioned, unless I heard it wrong. Did you say quarter? Did a hundred million dollars in 3 Q. Um and if so what does that mean for Innovation basket X Quattro on a year-over-year basis and then secondly um to the extent Quattro is annualizing in that 3 to 400 million range right now. What do you see as a realistic Peak sales potential, I guess Thinking Out Loud? Why can or can't it be a billion dollars at Peak? Thank you very much.

Thanks Umar. Um, I appreciate the question. Yeah, let me clarify. We, we announced in September that it had reached 100 million, um, in, in the year up till September. So it wasn't in the third quarter. Let me clarify that. Um, but but let me put a little color, though, to the question. There's no question. We believe that, um, this is our fastest, um, Blockbuster, uh, to date. It's only in 1 country and to reach that, in 8 months, I think it shows a lot about the value of the differentiation of the product. Um, a little bit more color, just on the product itself. I think, um, the differentiation is playing out in the field, um, as well as we're not only taking share, but the, the broad spectrum and dect Market continues to grow. Its a 1.4 billion dollar market, um, or it's growing at 40%. So we've got the, the, the rise of the market combined, with the share that we're taking. Um, and we've, we're only in a third of the clinics at this point in time. So we're adding business.

Inside the clinics, we have with, uh, you know, a return rate of over 80% of reorder rate. Um, and at the same time, you know, we're seeing really positive indicators and the 1. I point to is actually, uh, the kinetic data on the puppy index. I mean, today, we've got the highest puppy share, um, overall. And when you look at that, that means that puppies are a higher percentage of our total Quattro patients, compared to any of the competition and this is a lead indicator.

The Vets confidence in this product. And that, this product I've said, has been best medicine. I now, believe it has the potential. And in my eyes, it is the best in class product and the fastest growing animal health markets. So, um, it's set up, well, there's a lot more room to grow, uh, will be a globalizing this product with International approvals next year. And, uh, we see, uh, really, really nice upward opportunity

Thank you very much.

Thank you. Our next question comes from the line of John block from staple. Please go ahead.

Thanks guys and good.

Um,

Jeff, I'm gonna

more color on the US Zen relia, call it like cleaner, label aspirations.

And maybe the timing behind that initiative. I know you took a step forward, you mentioned, the share gains accelerating exiting 32. But I mean obviously, removing the Box warning would be a big step forward and you know, I'm asking because you also referenced I believe the higher share gains in the international markets versus in rally despite being there for a shorter period of time. So uh you know would love any color or what needs to get done and then maybe the the timing behind that and then allow us to follow up. Thank you.

Multi-prong approach on the label. The first 1 was the PCR data that allowed us to remove the fatally induced, um, disease off the label. Um, and then this last quarter, we have submitted another package of data, um, peer-reviewed published data all around, um, the booster, uh, side. And we do believe that, you know, combining that data, um, will hopefully satisfy the fda's need to be able to see this, as well as 13 months of use in the US over a half million dollars. Uh, all of this, I believe will further, um, support a label that could be updated to look more like the international markets. I will say, though, that label change did in September and October. You can see, um, we're adding, you know, close to 2,000 clinics a quarter. But the the actual use monthly sales per Clinic has grown here in the US, nearly 50% since q1. So our our base is becoming more loyal.

We're moving to more first line treatment. And, uh, and I think that's all coming back from the testimonies on efficacy. So more to come the regulatory strategies working, big milestone with this other data submission that we made here in this last quarter.

Follow up John.

Yeah. No, that was great caller. Thanks. And then maybe for the follow-up and, you know, Bob this might be for you. But the 2025 EBA guide is the midpoints now.

890 million. It's up from the initial. I think, I've got this right of 850 million, but importantly, that's where the good amount of incremental, Opex Investments, you know, all throughout 2025 along the way. So, I'm curious where you guys are.

With those incremental Opex Investments. You know, how do we think about that going into the 26? In other words, does that continue to occur because maybe this is just a moving Target. In other words, as you continue to see favorable returns, do you just sort of keep your foot on the gas so just maybe asking for some context in that regard. Thank you sure. Yeah, yeah, John, hey, thanks for the question. Yeah. So you're absolutely right our, our previous guidance had a range on ibida of 850 to 8.90 and so we did range or did provide an updated range of 8.80 to 900. So we, we did raise the guide at the midpoint, uh, fueled by the 28 million beat in Q3. And again, I want to highlight is that my prepared remarks, but that did include 8 million dollars of foreign exchange with the other 7 of of FX coming in Q4, but then now the 2 the 2 offsets 1 is 10 million of incremental Opex and you know it's continuing down this no regrets approach to launches. We've been extremely pleased with uh with the innovation.

Basket, raising that that bar by another hundred million dollars. And we're going to continue to use a data-driven approach with uh, with DTC and continue to drive that Top Line and I have the opportunity to meet with the team again here recently. And the data suggesting, our marketing is working and we're seeing that that Topline growth. So, as I think about 202026, uh, John listen, we're we're still going to use data to to drive, uh the right behaviors and and again continue that no regrets approach. But with that being

Said, I do. I do, we do see 2026?

And EPS growing and it's because of the strong Market. Fundamentals, we have and our products are performing extremely well.

Thanks for the caller, guys.

Thank you. Our next question comes from the line of Andrea. Alonso from UBS. Please go ahead.

Hi. Good morning everyone and congrats on the nice quarter. Um, just got, just a quick question, um, on the slide, outlining the early considerations for 26, uh, you know, we didn't notice that there was a call out on consumer, macro pressure in us, that visit the clients, you know, it seems to be a bit of a newer call out versus when you outlined considerations for 2025 a year ago. So just curious if anything's changed structurally in 3Q versus 2q, you know, thoughts on the makeup of, you know, the non

On Wellness visits and whether there's been some consumer reticence around, you know, the use of Therapies.

Making a balanced approach and and obviously reflecting on not only the competition but the macro environments as we think about next year and let me pick up Andrea, I think it's important to just to give our lens on vet visits. They're important, they are stabilizing but I want to, I want to let you, let me explain a little bit of, We Believe through our lens that visits are maybe a little bit over indexed. And so and we are we believe insulated from them even more. So going forward. And let me just explain, I think it's the strength of the markets that we play in and the strength of our strategy first. We're in strong growing markets. I think these are very important points. We're in strong growing markets in deck, builds up, 40% durm is up 13% second, we got differentiated Innovation, best medicine in these. So we're taking share with zeneli, a credelio, Quattro and I'll 31 is coming. I think the third is just this whole 4 dimensions of our portfolio. We're 1 of only 2 companies that can bring that and we're seeing

Proof points this quarter with both pain and vaccines actually growing. And lastly as we rolled in Bear and we've been talking about Omni channel, the Omni channel strategy is working. We've got the largest vet, sales team we've ever had. We've got significant media with good data. Is Bob just mentioned, we've got very unique distribution agreements today that I think give us competitive advantage. And lastly, We Are The Number 1 pet retail company. So elango is meeting more pet owners where they want to shop.

And more price points than any other animal health company. And I think that sets us up very nicely to say, we don't really see vet visits and even some of the consumer Trend. We're entering this time as durable and as competitive as any animal health company and uh, and again, I see that in a really balanced positive way, not just in 256.

Next question.

Our next question comes from the line of Michael Rayon from Bank of America. Please go ahead.

Great. Um, thanks for taking the question and congrats on the, on the quarter on the update. Um, I want to go back to um, something that John touched on in earlier, question on, um, on the margins and just sort of the investment. You need to sustain it especially around the Innovation uh component. But when you see you know really good traction with cordelio, um Quattro obviously so far uh zeneli it seems like it's accelerating very very nicely. As we think about going into year 2 and year 3 of these um, you know, very competitive markets. You're going to see more competitive entrance from Merlin MLV. You're going to see um you know, possibly procto um, have something coming up. So competition is only going to ramp up. Can you talk about how you think about that? No, regrets approach to supporting them. Um, going forward. How should we think about incremental margins as these ramp? And

Um, you know over $100 million over several hundred million dollar products. Um, what has that ramp looked like in years 1, 2, 3, and 4 post-launch? Because they should become meaningfully margin accretive. I'm just trying to think through the timing of that relative to the investment you need to support them.

Yeah, Michael, let me just share a few comments here relative to this and then uh, maybe have Bob share a little bit from an investment perspective but yeah, the No Regrets approach. Um, you know, we we've been working on this for for multiple years and preparing the capability. Hiring the expertise from around the industry, making sure we've got good lead indicator data for the legs and the industry. And now we're globalizing faster than we ever have. So I start with the differentiation is significant, and even as we start to enter, you know, a Dior Market in Europe. That's very competitive. The early signs are that we've got a differentiated product. We've got launch capabilities, that are we we think, uh, close to best in industry and all of that is going to allow us to say, hey, we globalize The Innovation. We really, really doubled down on showing the differentiation. We are in growing markets. I think that's the other thing is you look at Derm continues to expand as we've pointed to just, you know, we've got 18% of Zen relia.

It is probably as strong as any in and outside of the vet clinic as well. So maybe, Bob, just from an investment philosophy perspective in the data we're looking at. Yeah. So, thanks, Jeff. Um, so.

Listen. I I would highlight that this basket of innovation already has margins above our, corporate gross margins. All right, so that's the reason we continue to lean in and again using data to support the effectiveness of of our DTC. But as I, as I think maybe just holistically about about margins, we're going to continue to see growth. And so by leveraging our existing cost space we're going to see natural margins come through. Just the volume as well as the natural mix. And then I want to again reh highlight what we talked about last quarter is is launching a Leno Ascend and that's going to help us go beyond just the natural mix benefits of of the The Innovation as well as the volumes but really helping us be proactive in accelerating the organization. And that's going to be not only within our 4 Walls of manufacturing facilities, it's going to include GNA, but also our procurement team is doing a fantastic job. Already leaning in and finding uh cost savings across the organization. So with that being said, like

Listen on investor day here in a month. Uh we'll really looking forward to uh, sharing more about the direction of the company and sharing a lot more on on Leno ascend.

All right, and can I squeeze in a quick follow-up? Um,

Really strong growth in livestock, um, not just the square and farm animal, but a couple quarters in a row. You've also seen really strong results from Zillow. It is from fibro, mark on this. Um, the only longer term we think of last deck is a low to mid single digit Market. It seems with 25 is the particularly good year for everybody. Um, could you just give us an update on sort of what's driving that has sustainable? That is, is this a 1 year cyclical event? Or is this a multi-year event? Just how to, you know, broad Strokes that. I think about a lot of stock in 46 and 27, maybe thanks.

Yeah, Michael I think as you and I have talked in the past it's probably 1 of the more underappreciated things about a landco and and even our industry, you know, farm animals still bigger than Pet Health. It is a very Global industry. Um, I I would just point to a few things on the industry and then on elango, um, you know, we continue to see uh, the demand for protein growing. I mean, it is, it is rebounded, I say a lead. Indicator is the US dairy industry is now, well, over 10 billion dollars of investment, just because of this trend of of where things are. And we, we're looking for a new dietary guideline coming out here in the US that I think is going to increase, you know, saturated fats, Dairy and, and, and animal proteins. So there is a Resurgence. I was on the phone yesterday with 1 of the largest CEOs, and, and he and that they're seeing it globally.

And, uh, they're expanding globally. So I think I think, overall, that is part of it. And look, when it comes to, whether it's biles and prevention of disease, to food safety, to productivity, to a, a small, you know, cattle herd of 50 years in history. Um, producers are making money, but producers are willing to spend, um, because every pound of protein matters more today than ever, it has. So I think that's important and not we point to ruminants Dairy and beef and we point to poultry as where we think we can take competitive advantage and our strategy has been clear and, and we will have Jose Seamus and Romero 2 of the best. I think in the industry highlight this 4-prong strategy, it's Innovation, it's winning portfolios, it is value Beyond product and that it is competitive, kind of customer interface that Farmgate access and that strategy is is playing out. Well, it isn't just about experior. That's been a key driver. It's been about building winning portfolios, especially in ruminants. And in p

P tree. And we'll, we'll share more about that on in December.

Great. Thank you so much. Appreciate it.

Thank you. Our next question comes from the line of Aaron Wright from Morgan Stanley, sir, please go ahead.

Hi. This is Linda bulock on for RMA. Thanks for taking our question.

So, given some recent competitive launches in turn and parasiticides any thoughts on how it has evolved for the company in third quarter and into fourth quarter date. Also any thoughts on how much competition has been embedded in the latest guide and will that amount ramp significantly in 2026?

A strong Marketplace. And then again, our differentiated portfolios allowing us to take share.

and,

and covered in the upcoming events today, in addition to elanco events

Yeah, you know, we we have uh, thank you for the question. We've actually uh, you know, uh, reached out to our investors when uh, and really what we're planning to do is really the content will reflect uh, the investor feedback. So we heard your desire to get more clarity as Bob just highlighted on our growth trajectory, uh, also on the margin Improvement and Alano was send opportunity. Uh, you'll see aspects of our Pipeline and, uh, and also our leverage reduction plan. So we'll really double down on our IPP strategy and most importantly to me, as you'll be able to have a chance to meet and hear that directly from the executive team. So again, December 9th in New York City and looking forward to a real efficient high-value 3 hours between 9:00 and 12:00.

Wonderful. Thanks.

Thank you. Our next question comes from the line of Daniel Park from luring Partners. Please, go ahead.

Great thanks. Um, good morning wanted to ask on the Innovation sales obviously you know, Target up a fair amount. Once again here. Um can you just help break out? Maybe what the drivers or or or main products of that guide increase were and how should we think about growth of the Innovation basket as we look ahead to next year?

Yeah, so thanks for the question. So again, we're really pleased with what we've seen already on the basket of innovation. Uh, we did raise the guy as a hund million dollars as as Jeff has highlighted. Uh, I do want to highlight a bit on timing, right? So you think about, uh, the first half of the year, we are more weighted, just do the seasonality of the business with parasiticides more weight on the first half and add tabs specifically in Europe. Is a, is a first half weighted, uh, uh, uh, a product we have. But, but we think about this as a basket. Now, with that being said, I'd tell you, you know, in in the year, we're seeing great, uh, great progress with Xperia add table cordelio and zeneli and more specifically in Q3. Uh, but as we think about moving, moving forward. Listen, we've got a lot of momentum going into 2026. We're in growing markets and we're seeing uh share uh improve as well.

Next question, thank you.

Our next question comes from the line of Chris shot from JP Morgan. Please go ahead.

Hey, uh, this is a Karina on for Chris. Uh, thank you so much for taking your questions and congrats on the quarter. Uh, so first question is just on zeneli and any initial thoughts on the launch in Europe, just you know how that's turning relative to your expectations and any surprises that you kind of think about the competitive landscape and just the level of promotional activity. Uh you're seeing and then second question is just on Cordelia Quattro. Give us a sense of what percent of your volume is is coming kind of from the vet clinic versus online and how do you see that changing over the next several quarters? And any interesting Trends you're seeing if you kind of look at both uh channels. Thank you so much.

Yeah, thank you. Yes. We have, uh, we have launched in, uh, Europe and Great Britain, um, and uh, it's still early days. But I would say, is, we are ahead of our launch expectations. We're off to a very fast start and I think that the headline is the head-to-head non-inferiority study, that we actually did compared to, the incumbent is playing out in the, in the marketplace. I mean, we're we're using that data with customers. Um, and we're, we're seeing that in the testimonials early on that. This is a product that uh, we believe has, you know, really strong efficacy profile, as well as the convenience, um, and value overall. But uh, that that's the early days playing.

And and repeat patients. And I'll Point again to that puppy index to really highlight. That is a great lead indicator for us to say we've got a nice Runway of growth. And then, um, we will see this this profile. We think play very nicely in the international markets. Yes, we have credelio plus, but now when we put Quattro into these markets, we we believe that International will be a nice move also for 2026 growth in Paw with Quattro as well.

Our next question comes from the line of Brandon Vasquez from William Blair, please go ahead.

Hey, everyone. Thanks, uh, good morning and thanks for taking the questions. Os2 upfront. Um, a little bit related in terms of, uh, what races the next year into 2026. So, you were talking earlier about Opex growth and, and, you know, no regrets kind of investment which clearly has been coming to fruition within the sales growth. And even frankly within profitability growth, the question being, I think, you said, uh, expectations are now for 10% Opex growth for the year as we go into 2026. Is there a tail on some of these Investments or should we be basing around kind of a double digit Opex growth into next year as well? Basically asking, can you modulate those back and then similarly for 26 on the top line uh the follow-up that I'll just ask now is you going to give a helpful slide on the tailwind and the headwinds going into next year?

Here. Um, I think encouragingly, this is the first year in a while that there are a lot more tailwinds than there are headwinds. So, is it safe to assume that we should be modeling? I think, like the street, has an acceleration of the business into 2026. Thanks.

Yeah, so maybe I'll give you just a couple couple points for consideration there. So the 10% is really for the quarter, not for the year. But again, we'll we'll be focusing on data to drive decisions on investments. But the thing I would highlight again is the Leno Ascend. We are going to be operationally, excellent in GNA. And you can actually look at our 10q, you can see the effectiveness we've had on GN, it's actually down your over year, but we've been leaning in to R&D and uh, DTC and marketing spend. And so I would expect that Trend to continue and US continue to be operationally. Excellent, with Ascend coming in but again the on your on your point on 2026 Tailwinds and headwinds listen, we we have a strong or operating a strong Market. Our products are performing extremely well, we have momentum going into 2026 and and so again as we sit here today, we believe we're going to have Topline growth even a growth and EPS growing

Our next question comes from the line of navanti from BNP paraba, please go ahead.

Hi, thanks for taking my questions. Um, can you discuss the pricing and promotional strategy of Zen relia and Quattro, including the extent and the length of promotional activity?

Um and then I have 1 on B, is that status quo on governmental incentives? And can you discuss the progress on pivoting to our productivity, Focus? Thank you.

Yeah, thank you. Nan. Ya, our, uh, in the US with Zen rally, we've highlighted that, we've been, uh, we priced initially in the market things that changed a little bit, but, uh, at a 20% discount because of the label, um, what I would say is the value profile is growing and, uh, and we're excited about that and over time we will price to Value, uh, in Europe. We've not highlighted our detail there. But uh, you know, the label's different. The the value profiles being seen very strongly, more details, uh, overall and then really on both s and rally and Quattro. This increased investment Bob is talking about, it's a combination of multimedia. Um, it's uh, it's also including, you know, an increase in our sales force and sales force incentives as well as distribution. So it is a multi-prong approach to have as competitive of share, of voice and really next-gen commercial, uh, in in the fields.

Going from cpg companies into the Dairy Producers and that will continue to be our strategy going forward.

Our last question comes from the line of Andrew. The sing from Cleveland research, please, go ahead.

Hey, you guys good morning. Uh, just want to ask 2 quick. I'll I'll ask him up front on pricing. Um I saw that was called out for a driver for 26 and I don't want to get too far ahead of the guide. Um, but maybe you wanted to dig in specifically, on your thoughts, on the pet side of things, I think the industry, you know, the last couple years, it seemed Pat pricing up in the 3 to 4% range. You know, I think if you look at this year with a Lanka it's probably closer to 1 and a half if my Math's, right? Um, You, you know, strategically I guess as we think about a Lanka for FY, 26, um, can you guys get into that like, normal range, or should we even think there's potential to be above it when you throw in the Innovation and lapping, some of the launch promos? Um, any commentary and pushes and pulls or directionally what we should think about pet. Health pricing would be would be helpful. And then on Zenia, you know, great to see the progress here, I wanted to ask and go to market, you've mentioned the strong distribution agreements earlier today. Uh, you did have a competitor come out and give their largest Derm product to distribution kind of at the end of September.

I'm curious just feedback on how October's gone if there's been any changes uh due to the distribution changes at a competitor. Thanks.

Yeah, so I'll I'll uh I'll take that first 1 here. It's just just a couple tidbits on on price and so our strategy is to continue to align price with customer value. But what's an important, uh, factor to, to remember Andrew is that, uh, our launches are excluded from our pricing calculation. So a Quattro is unreal for instance, those are excluded from pricing calculation today and you'll see that lap in 2026 or 2026. Price will include those those current year launches

Yeah, and on Andrew on zeneli and the change. Yeah, we've been very consistent. I think it's what's put us in a really nice position with distribution. We've got great relationships, they're adding a lot of value to us, um, and our agreements have been very consistent. And most importantly, we offer the total portfolio and uh, the, the highlights that you just had with competitors, we've seen them be more selective to 1 SKU. Maybe not the other SKU year to year a lot of change and we've we've really prided ourselves in being very consistent partners with distribution and uh, we believe that's paid off and and that's differentiated

Thank you.

I will now turn the call over back to our CEO, Jeff Simmons for closing remarks.

Yes, thank you everybody for your time. Um, as you see, we've entered Alano into a new era of growth and Innovation, uh, built on 9 quarters more than 2 years of consistent. Reliable delivery. Our basket of innovation is performing and beginning, a globalized driving renewed opportunity. In the full portfolio. While our R&D team is laser focused on delivering a consistent flow of high impact Innovation. So this will continue. Most importantly, most importantly, our lanco team is highly engaged and driven by creating value for our customers and our vision to make life better. And I would just say we're turning strategy into results and I want you to be assured that we're staying very disciplined and balanced as a company. We welcome being an execution and show me story and it is our intent to create long-term value for you as investors. Um not just this quarter but going forward um into the rest of the decade. We look forward to seeing you all.

At our investor day on December 9th. Thanks for your time today.

Thank you for joining the call today. You may now disconnect