Good morning, and welcome to Elanco Animal Health's Fourth Quarter and Full Year 2022 Earnings Call. All participants are in a listen-only mode. After the speakers presentation we will conduct the question and answer session. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Katy Grissom, Head of Investor Relations. Thank you. Please go ahead.

Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter and full year 2022 earnings call. I'm Katy Grissom, Head of Investor Relations. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Scott Purucker from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.com. Today's discussion will include forward-looking statements. These statements are based on our current assumptions, and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors discussed in today's earnings press release, as well as our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statements. Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we'll be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Katy. Good morning, everyone. Reflecting on our 4 years since completing our IPO, I am proud of and grateful for the determination and dedication of the Elanco team. We have fully separated and established an independent company. We've integrated the industry's largest acquisition, reset our cost base and built a strong leadership team. In 2022, we continue to execute our IPP strategy, significantly advancing our innovation pipeline while driving productivity gains across all areas of the company and positioning the business for acceleration in 2024 and beyond. In 2022, our financial results were negatively impacted beyond our expectations due to significant challenging macro factors and competitive innovation. However, we are encouraged as we look forward, as shown on Slide 4. First, while macro pressures remain in 2023, we see strengthening Elanco tailwinds and with early proof points giving us confidence in our guidance for the year. Also, our late-stage innovation is on track, and we continue to see a path towards U.S. approval of 5 potential blockbuster products by the first half of 2024. And today, very importantly, after close collaboration with the FDA, we are pleased to announce we now anticipate a first half 2024 U.S. approval and launch of Bovaer, a methane reducing product for cattle. This adds another potential blockbuster to our suite of late-stage innovation and adds to our confidence in 2024 and beyond. In addition, this year, we're executing on our plans to reduce operational complexity. Our final step in the Bayer integration, the systems transition is on track for an early Q2 go live. We are well prepared and this will be a key step to improve efficiencies, offer a better customer experience and reducing integration cash needs. Finally, with a historic launch window in front of us, we're enhancing our focus on…

Thank you, Jeff, and good morning, everyone. Before I go over our results, I want to provide some additional information about the revisions we made to our 2020 and 2021 financials that were described in today's earnings release. In connection with finalizing our 2022 financial statements, a cumulative error was identified relating to the valuation allowance for taxes for a Southeast Asia affiliate that affected our GAAP financial statements for 2020 and 2021. While immaterial to prior years, the air could not be addressed by a cumulative correction in the fourth quarter of 2022 without creating a material error to the 2022 results. Once we determine that a revision to prior periods was necessary, we then made additional revisions that would have otherwise been immaterial for 2020, 2021 and 2022 in each affected quarter. None of the revisions had an impact on revenue and they had immaterial impact on our adjusted results. If these revisions had been recorded in the correct reporting period originally, the impact to the first 9 months of 2022 would have been an increase of $2.9 million of net income and an increase of $4.1 million of adjusted EBITDA. We are finalizing our consolidated financial statements, including our income tax items and expect to file our Form 10-K timely. Accordingly, the amounts presented in today's press release and on this call are unaudited and subject to change pending such finalization. However, we believe that the numbers presented today will not change materially. We are also evaluating the effectiveness of our controls relating to income taxes. I will now focus my comments on our fourth quarter and full year adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results. Starting on Slide 10. In the…

Thanks, Todd. Before we take your questions, I'd like to provide our view on why the Elanco Board and team have deep belief and confidence in our future. First, pipeline delivery. Dr. Ellen De Brabander, and her team are consistently delivering milestones across the portfolio from research to late-stage development. We are refreshing our pet health OTC portfolio with advantage and K9 Advantix as well as Advantage XD for cats. We are launching first-in-class innovation in the vet clinic with Zorbium, Bexacat, soon parvovirus and Experior ramping. In the U.S., we have a path to approval by the first half of 2024 for our broad spectrum parasiticide, our K9 dermatology products, the JAK1 inhibitor and the IL-31 monoclonal antibody and now also Bovaer, as I discussed earlier. Our excitement about Bovaer enhanced by tangible progress on farmers' ability to monetize environmental sustainability efforts. In 2023, we expect the first carbon credits will be minted for beef producers, which will be proof that farm animal sustainability can transition from strategy to tangible action that can create value for farmers, investors and society as a whole. The next reason for confidence is our focus on reducing operational complexity. With the Bayer system integration going live in April, we're fast approaching one operating environment for our complete portfolio, creating more stability, a better customer experience and opportunity for more efficiencies. Importantly, it allows us to move past the distraction and the significant associated cash cost pivoting the organization towards driving the portfolio and improving free cash flow generation, as Todd laid out. And finally, we are building a commercial leadership team that will drive our commercial execution and launch excellence as we enter the next era for Elanco. In this first year leading the U.S. pet health business, Bobby Modi has built a data-driven organization, improving capabilities across sales force excellence, pricing, digital engagement, retail marketing and vet clinic targeting. Jose Simas a nutritionist and our U.S. farm animal leader is growing Elanco's share across the business while helping to shape the industry's future with antibiotic alternatives and game-changing sustainability offerings. Ramiro Cabral, a veterinarian and seasoned international animal health leader has demonstrated his ability to lead across our diverse business outside the U.S. across many geographies, species and products. And finally, we're pleased to announce we are further enhancing the strength of our commercial leadership team with the addition of Tim Bennington. With his 25 years of industry experience across both farm animal and pet health, Tim will be a great complement to our commercial leaders and our organization broadly. He has led some of the most successful blockbuster launches in our industry. and run some of the largest P&Ls in Animal Health. We are confident he will enhance our overall competitiveness as our team prepares for this historic launch window and sustainable growth. With that, I'll turn it over to Katy to moderate the Q&A.

Thanks, Jeff. [Operator Instructions] Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

[Operator Instructions] Our first question comes from Michael Ryskin from Bank of America. Please go ahead. Your line is open.

Jeff, maybe one for you to start, and then I have a follow-up for Todd. So first, you continue to emphasize a focus on OTC parasiticides. How do you see the OTC market there playing out longer term? It seems like we're seeing an increasing shift in recent years, so some of the more prescription oral products in the market, including the combination products. So but you're continuing to sort of double down at least this year on the OTC. That seems to be a that's lost market share in 2022 and is expected to do again in '23. So can you just talk about the OTC versus prescription. In particular, maybe you can comment on Seresto expectations going forward, given pretty disappointing 2022?

Yes, absolutely, Michael. Thank you for the question. So we believe this is an and not an or. You can see the pipeline that's coming. We believe that the vet clinic in the vet is critical -- we've got game-changing technology that's coming, some of the biggest blockbusters in some of the biggest spaces -- so the vet clinic will be critical. And then really, this is about the omnichannel, right, in terms of meeting more pet owners where they want to shop. We still have a large segment of the pet owner population that does not go to the vet and even the economic challenges may even drive some of that. So we believe this is a combination of both -- and what we've done since picking up the Bayer portfolio is do what we said we were going to do, more physical availability. We're in more retailers today than ever on more end caps and more shelves. Two is innovate. We're bringing three advantaged products here with the 2 that we announced today and XD that we've announced before. And that really puts us targeting more different consumer segments from the cost conscious to those that are more loyal and want to products that are maybe more convenient like a Seresto. So we see the medium and long term as this is a growth segment. It's global. The key initiatives we said we were going to put in place are now coming to life, and we see this as something in the medium and long term as strong. Seresto, loyalty continues to remain high. it was impacted heavily by the economic pressures that we mentioned in the U.S. and EU the step down in retailer inventory as well as trade down and some, yes, movement over across maybe new innovations in the vet clinic. But as a whole, again, improvements in '23, we see with Seresto continuing to be a product that's going to have we think a strong profile that will help this company going forward, not just in margin, but in growth with more physical availability, we'll see that in '23, more price more geographic presence. So again, an improving year for Seresto in '23.

Follow up, Mike? Your follow-up for Todd.

Yes, I appreciate that. Todd, a quick follow-up on cash balance sort of debt pay-up plans. Can you provide a lot more color on sort of the cash projects going on, Slide 22 really helpful. But any you could say on operating cash flow, debt leverage targets for end of year '23, just sort of as we think through where we should be exiting this year?

Mike, looking at year-end leverage, right, we've just provided the net debt numbers relative to EBITDA. So that's 5.3 times to 5.9 times. Projected. If you do look at all the assumptions we've provided in the appendix for modeling purposes, there's a lot of cash that still goes out the door on the project expense as we said. We've got cash taxes, CapEx as well as the cash interest. So if you look at all of that, while we're not guiding to a gross debt paydown, that gets you to about $100 million of paydown depending on net working capital performance. That was a very disappointing area for us in 2022, and we've got new initiatives with a lot of focus on that across the company in 2023 as that needs to improve to help us drive better performance on the cash line. So those are the key things we're looking at. But at the end of the day, right now, it would be about $100 million of net pay down.

Next question comes from Erin Wright from Morgan Stanley. Please go ahead. Your line is open.

So one on innovation and one on the parasiticide. So can you break down what you are baking in, in terms of the guidance for 2023 in terms of innovation contribution? And how we should be thinking about that ramping in 2024? And what's that growth as well as net contribution from innovation in '24. Does your long-term innovation target now embed the small acquisition as well as the expedited launch of Bovaer. And then just my second question is on the broad spectrum parasiticide, -- how are you thinking now in terms of the competitive positioning -- do you you'll think be still third to market? Or is it for to market? And will you be able to take share more so from the existing combination products out there? Or will it be mostly legacy OTC and oral parasiticides?

Sure. Todd, do you want to start on innovation?

Sure. Erin, we've got $220 million to $250 million in innovation sales in 2023 after doing $133 million in 2022. So that's ramping in the $90 million to $115 million range. Overall, we have not changed the $600 million to $700 million, but we are excited about these innovative antibiotic alternatives we're adding as well as Bovaer coming earlier, just gives us more confidence in the ability to deliver on that $600 million to $700 million amount. And again, we look forward to ramping in '24, but we're not giving guidance on that today.

Erin, regarding the broad spectrum parasiticide, -- so submission made last year, continued path. I want to emphasize on really the whole pipeline that really nothing has slipped we have increased confidence in the overall pipeline and the progress, the quality of the submissions that are being made, I will highlight really the differentiation. We're not going to highlight all the details of what that is. But what we would say is differentiation matters most, and we believe we have a differentiated leading product that can come in that's already passed the heartworm threshold coming into this product. The other news here in this earnings call is our pivot as we finish the system standup, we're pivoting now to commercial excellence. Bringing Tim on, Tim Bennington, with his experience leading some of the largest launches in the business, our energy is now channelled around launch readiness, commercial excellence globally, how we can ramp products more segment them even better and take more share earlier. That is the focus and Tim's charge as he comes in, complementing the existing team that's focusing on the existing business.

Our next question comes from Nathan Rich from Goldman Sachs. Please go ahead. Your line is open.

I'll ask both upfront. One, I kind of just wanted to build on Erin's question. Jeff, when you're thinking about the launches next year and that kind of historic launch window that you referenced, how should we think about the contribution of new products ramping up in 2024? And what are the biggest kind of swing factors and things we should keep in mind as you think about kind of go-to-market strategy. And then secondly, I wanted to ask just on cadence of earnings this year. It seems like the first half numbers were maybe a little bit than we would have expected, especially on the EBITDA line. Could you maybe just talk about kind of first half versus second half cadence and what you kind of expect for kind of underlying growth as we think -- as we move through the year.

Yes. Great question, Nathan. So I think, first of all, it is to us, taking the existing capabilities that we're actually building and building on. And I think Zorbium is a good example of this is we're looking at adding enhanced back to our Investor Day marketing enablers from the right pricing to digital, to globally, making sure we've got the right share of voice in the right markets, that will be absolutely critical. We feel like we're in a really strong place now. We don't need to add a significant number of sales reps we believe, but it will be targeting and enhancing the appropriate insurance of having the right share of voice the right capabilities to drive demand. And we're seeing that, and we're able to test that with the Zorbiums, the Bexacats, the parvovirus is coming the vet clinic. And actually, these are first-in-class products that are drawn a lot of interest in bringing us into a lot more clinics. That's number one. Two then is all around the segmentation of the differentiation in the products and what segments that we'll go after. And that will be all building around this launch readiness. So we've had a lot of good progress on our launch plans for these products. what Tim is going to be able to do is bring his experience and take our existing teams and actually enhance those launch plans and ensure that we're efficiently but putting the resources in the right place to capture those areas. And then look, we're going to look at the timing of these launches with numerous coming is where do we leverage them together and where do we lean in individually. And as Todd said, there will be pushes and pulls. There will be some that will come sooner than we expect and maybe some of that will be a little bit delayed. But as a whole, we'll be timing those resources and looking at how we can complement them together as well.

And Nathan, let me provide you how we're seeing the first half, second half dynamics first half, Northern Hemisphere, parasiticide season, and the contribution from the retail product is the big driver of both gross margin and EBITDA. We do have that declining year-over-year in the first half as we've got this recessionary pressure the Q4 ending and taking those things into account. So that does make it a tougher EBITDA situation. The other part, I would say, Bobby Modi came on at the end of the first quarter last year, his team has really ramped up their execution is seen by bringing the new advantage relaunches to play and making sure we're investing appropriately behind our biggest brands at the right time and doing that. So I think that's probably the mix element and that expectation of what those sales in the first half contribute being the biggest item on the cadence. And then on the second half, Again, it's just -- it was a really tough compare in the -- or an easy compare for the second half versus the first half for us, and that again gives us confidence in the EBITDA split between the two halves of the year.

Our question comes from Chris Schott from JPMorgan. Please go ahead. Your line is open.

Just two questions for me. Maybe first on price. It seems like some of your peers are seeing a larger contribution from price this year. So can you just elaborate on I think it was kind of a 2%-plus contribution and just some of the dynamics you're seeing across the portfolio? And then my second was on interest expense. I guess with interest kind of expense ramping in the second half, and I think some of your interest rate swaps rolling off -- can you help us just understand what a reasonable run rate for interest expense would look like if we're just kind of looking out to 2024, assuming rates stay where they are today, I guess, can we just kind of take that second half kind of run rate on interest expense and annualize that as a reasonable target? Or could it step up further from there?

Yes, I'll take the first one on price. We saw, Chris, price increased throughout the year with 3% in Q4, 2% for the full year. we are saying more than 2%. I will put some kind of support points behind that. One, we will have some lapping of price increases taken last year, and we'll have that effect in the first half of this year. We see some good leading indicators as we start the year as well. We've also taken most of the significant price increases here at the end of last year, beginning of this year. So the price increases are in place and we're doing the things necessary to sustain and build price, which is adding innovation, targeting customers better, building out value beyond product and both on the farm animal and on the pet side. I mean adding nutritional health products, sustainability is going to help our bundle and our portfolio on the farm animal side, bringing more innovation in pet do the same. So -- and we've added some price experts and capabilities coming in. So again, we're going to hold here saying more than 2% price, but we will say that pricing will be a key growth driver for us in '23 and beyond.

And Chris, on your question on interest, on our Q3 call in November, we provided the debt stacks as well as the facts regarding our interest rate swap portfolio. And as you rightly pointed out, we do have another $1 billion of swaps rolling off at the start of Q4. That would give us roughly we're at about $1.8 billion of floating rate debt today, that would get you up to $2.8 billion so as we get into higher interest rate environments with the Fed, these are all at SOFR plus 185. So for the back half of the year, we're expecting to be in about the 7% range on our debt -- so that's the big driver. I want to make that clear back in Q3 on the impact of floating rate debt and the amount of leverage we have. As we look to 2024, I'd focus you on the cash project slide, those dropping off dramatically as we finish up the integration of the Bar systems and our systems will allow for more cash -- free cash to pay down debt. And then the forward curves would suggest interest rates are going to drop with the Fed starting to cut rates in '23 or '24. I'm not going to comment on that. That's why I really can't comment on is the second half a good run rate into '24 because a lot of it is floating rate debt that will be driven by Fed policy and how the economies play out over time.

Our next question comes from Umer Raffat from Evercore ISI. Please go ahead. Your line is open.

I have two here, if I may. First, Jeff, as you reflect back over the course of last year, so and all the negative guidance revisions, -- why do you think the Elanco team was overestimating numbers in such a consistent way? And can we reasonably assume that the $0.74 to $0.83 is truly a trough first? And then secondly, on the base business EPS, which is no longer that $1 that it used to be, I think an important question for a lot of new investors looking at Elanco is, what's the incremental operating margin on the new launches? Will they come in at 65% or so? Or would it be much less than that.

Yes. Thank you, Mark. We stand here today with confidence in our '23 guidance, as Todd has highlighted. As we look back at last year and we came into our May call and went to the second half, we had put together 6 consistent quarters of holding and staying to our guidance. And we had an environment that that hit us in a multitude of ways, and predicting war, coved lockdowns in China, the inflation and the recession and the impact on really us where we were over-indexed into China in a pet retail situation in the Northern Europe. Those were things that I'm not sure that we could have predicted. I would say that we've taken a very measured approach this year and looking at overall, our confidence in this guidance is looking at saying, yes, we've got a competitive portfolio and a team -- but looking at this macro environment, as Todd highlighted, we've taken assumptions. We've assumed that we're going to carry a lot of these same headwinds and challenges out of '22 into the first half -- and we will -- we have seen a lot of sequential improvements, but we're seeing this as a lower step-up throughout the year. And so again, I stand here with confidence in the assumptions, the approach we've taken in our guidance. We start to return to growth in the second half of the year. We're going to do it in a balanced way and also prepare this next era of growth in '24 and '25, that's so critical to our investors and long-term value of this company.

Over on the launches, certainly, over time, these launches will be incrementally higher margins and will provide really good EBITDA flow-through given our installed base at the vet clinic where these big launches will go is appropriate for the coverage needed. And so it will really be about incremental margin or marketing expenses to drive the launches versus needing to double the sales force or something that in. So over time, certainly, we expect these to be incrementally higher margins. But as you know, scale helps. And as we drive them higher over time, margins is to continue to improve.

Our next question comes from Jon Block from Stifel. Please go ahead. Your line is open.

Todd, just the $5.3 million to $5 million leverage for year-end '23, and there's a lot of reasons in the slides, why the cash requirements stepped down in '24. I think I get that, but -- is there anything from a covenant perspective to be aware of? Any step downs in 24 or 25 on the leverage ratios to call out? And then the second question, I'll ask about the front. Just Seresto down Q-over-Q, Jeff, I don't think it's been down 3Q to 4Q for the past 4 to 5 years, at least since I've got the breakout. So can you talk about the product share. And then anything new with the EPA on the horizon, do you expect resolution with the EPA in 2023?

Jon, the leverage covenants are over 7 times. We don't think there's any issue on that going forward. We continue to feel confident in this guide and EBITDA expanding in future years.

Yes, Jon, on Q4, as you know, the seasonality, this is a much smaller quarter for Seresto. It's off season. We think the economic dynamics and the recessionary pullback on the retail segment where people went more for treatment and prevention. That was definitely a big driver. Retailers stepped down in inventory. It was a little trade down and maybe a move over to the vet clinic, but not substantial. So we've done a lot of study into this. I think the key lead indicators that give us a lot of confidence as we come into the season and the early indicators in the year are positive as we look at sequential change is 1 as we move into the season, Seresto's brand loyalty, the retailer and e-com loyalty to this product, we've got as many as much physical availability, as I mentioned, and more retailers, probably more end caps going into this season as ever. And so I think it was a lot of economic-driven off-season, smaller quarter that caused the bigger percentages. Now we're going to have some of these same pressures across the bigger notion of our total business. So we're going to see some step down, but as a whole, again, a lot of confidence in Seresto. I would highlight that as we look at the EPA, yes, we're having a very constructive positive dialogue -- we do expect to report as we look at the overall working arrangement with the EPA on how we can improve brand stewardship and oversight of this product is something that we're endorsing and looking at as FDA products like the EPA. So look for us to have an outcome with EPA, yes, I would see it in '23. And again, the dialogue has been very collaborative and constructive and something that we're encouraging. And again, we see Seresto medium, long term being a key product that will help drive the strength and profile of this company.

Thanks. We'll take the next caller. And I realize we have a few in the queue. We'll continue to answer questions. We might go a little bit over the hour.

Our next question comes from Elliot Wilbur from Raymond James. Please go ahead. Your line is open.

First question for Jeff and or Todd. I heard the number you called out specifically for competitive pressures in the fourth quarter. But if you mentioned the full year impact, I did not catch those. So I was wondering if you could detail what the full year impact was of the competitive pressures that you have cited on a couple of occasions over the last couple of calls. And then specifically, Jeff, how are you thinking about the forthcoming launch of mab for osteoarthritis in the U.S., given what you've seen to date in Europe. And I understand the product labeling is slightly more favorable in the U.S. than Europe, but just trying to sort of balance that versus what seems to be a growing desire on the part of vets to reduce or control disintermediation within the U.S. vet channel? And then for Todd, can you just talk specifically about gross margin trends the guide for next year, I guess, at the low end of the range is down about 100 basis points. But trying to tease out all the different effects in terms of inflation, or just reduce expectations for some of the performance products or higher-margin products in 2024. Just trying to think about what in a more normal environment may allow those margins to improve a little bit more than just sort of modestly. And how should we be thinking about your previous longer-term targets in light of today's update.

Okay. A lot in there. Well.

Let me do the first and the third, and I'll turn it back to Jeff on -- so first, we think competitive pressure was roughly $100 million full year. We called out $80 million previously. The vet clinic traffic continues to be reasonably similar to there was a generic launch of a product that competes against Claro that hit us in Q4 plus some of the trade from retail channel into the vet channel. When we think about gross margin, a lot of this is mix. We don't expect our pet health business to grow in '23 in constant currency. That is our highest margin business. So that is a negative impact. The other part is we still have about $80 million of inflation, adding into our top space. A lot of productivity and work across our manufacturing network to offset that in the face of both declines in pet health and inflation in '22, we were able to increase gross margin. So the team continues to find ways, but that mix element is certainly impacting it. And then we did take off the longer-term targets a year ago, right now, we're looking to stabilize on a lot of different areas before we think about reiterating any of those things. Do we expect margins to improve Absolutely. The new products will drive it. The new retail innovations will continue, but we're not putting any commitments out there at this time. And I'll turn it over to Jeff for the Galliprant.

Yes. We -- just at a high level, Galliprant, again, had a very strong year. And our overall pain segment continues to expand with on Sierra Nocita, Zorbium, as we know, and Galliprant and that whole segment is pain is growing and really one of the fastest-growing markets in pet overall, and we're well positioned with a large portfolio. When you look specifically, Elliott, at Galliprant, first of all, in the U.S. and relative to the new competitive entry coming in. It's been here longer. It has a wider label. It has more brand awareness and vets are using in an increasing way. And I would say pain for OA is multimodal. Most of that will recommend multimodal treatments with a focus on inflammation. I think that's important. And we expect the treatment guidelines will recommend typically an inset like a Galliprant. We're becoming more of a first-line treatment of an NSA segment. in addition to maybe an overall treatment regimen that would include maybe innovation. So again, we believe we're well positioned overall in pain. Galliprant in a much stronger position than we even were in Europe. And we believe that, again, this segment, even with our pipeline, pain will become increasingly more and more important to Elanco as we go forward.

Next question comes from Balaji Prasad from Barclays. Please go ahead. Your line is open.

Just getting back to the guidance part of the question on Slide 17. As I look at the Elanco-specific factors and the guidance bridge. What I understand from this is you're likely to get around $90 million of pricing benefit this year, assuming 2% and another $100 million to $110 million of innovation driven incremental revenue. So that gives me around of positive on positive contribution. And on the other side, balancing it seems to be competitive innovation and supply. So is there a case where both competitive innovation and supply can fully offset this $20 million benefit going with the range you provided. That's one. And secondly, on the OpEx side, I was surprised to see FX not impacting the EBITDA bridge. Can you help us understand that and also call out the investments this year as that needs to go into supporting new launches.

Sure. Todd, do you want to start on the -- just the bridge for '23?

Sure. You've got a very good handle on how you think about the bridge. We have spent more than 2% price Yes, the innovation revenues, competitive and supply provide an offset. But again, this is all built into constant currency guidance for sales being flat to down 3%. Certainly, if certain things play out our way as we continue to execute through the year, we'll do better than that. And that certainly what our commercial leadership is focused on as they continue to drive demand for products. And again, as Jeff mentioned, China off to the start demand getting better there, demand is getting better at retail. So again, we're confident in the guidance. With respect to the EBITDA, as we mentioned, it's about a $10 million to $15 million headwind on top line. It's just a little bit off in that -- it's a big headwind in the first half. It becomes a tailwind in the second half and that out, it's $3 million to $5 million headwind from an EBITDA standpoint at this point. But again, that's always some timing. So we just didn't make a big deal of it in the walk.

Our next question comes from Brandon Vazquez from William Blair. Please go ahead. Your line is open.

I'll ask Tom as well. The first is just -- there's been a couple of mentions of inventory levels. I think it was in the U.S. in Q4. Curious if kind of like reduced inventory levels are expected to continue in '23, and if that's already baked into the guidance? And the second is just on the relaunch of Advantage and Advantix, maybe these more value plays. Can you talk about, are those kind of margin accretive at launch? Does that need to sale as well as you were talking about before? And can that help through the year?

Sure. Thanks, Brandon. So on inventory levels and how we're seeing those again, there was a step down in Q4 from the farm animal side. We've not assumed a rebuild there or rather just that they would continue at that point. So it's not a headwind in '23 in theory from a growth perspective, to be a tailwind if we don't have that headwind again in the back half, that's part of back half acceleration. Similarly, on retail inventories, for the OTC pet products, again, retailers did take that down at the end of the year, $10 million to $15 million Overall, it will be volatile over the course of the year. We've not assumed an increase of that. So again, assuming it stays at this level, and we think it's about at a level they need in order to serve the customers well. then again, that would be part of the growth in the back half as we wouldn't have that headwind making through an easier comp. With respect to the relaunch products, again, very efficient scale at our keel manufacturing facility. And so yes, even at the lower price point for the consumer, they're accretive to overall gross margins of Elanco.

We have no further questions in queue. I would like to turn the call back over to Jeff Simmons for closing remarks.

Okay. Very briefly. Thank you for your time today. Coming off from a challenging environment in 2022, maybe 3 points to close as this next area of innovation and growth is really in front of us here in Elanco. We do see this challenging environment persisting into the first half of this year that came from '22 into '23, but I really leave it with one. We do have confidence in this '23 guide that was shared our guidance. We do see our business returning to growth in the second half. But when we back up and look at the overall macro environment, our assumptions, it gives us confidence, we believe, that this guidance is the right guidance. And then second is really the 23 proof points. As highlighted, just in summary, sequential improvements in sell-out data, China returning to growth, OTC, early signals as well as FX. And then the big drivers that will offset this environment is innovation, 2 to 3 percentage points of growth, price more than 2 and supply being better. And then I really end with the third point, which is just really the next area of innovation growth. Over the next 2 months we finish up the system, stand up, which really takes the complexity out of Elanco and really allows us to lean into this pipeline. 6 blockbusters as we add Bovaer now with a path to the first half of 2024, and that will again open the door for the next era of innovation and growth. So thank you for your time today. We look forward to engaging with you as we go through the quarter. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.