Elanco Animal Health Incorporated (ELAN) Q4 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's Fourth Quarter 2024 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Tiffany Kanaga, Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's fourth quarter 2024 earnings call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Beth Haney from Investor Relations. The slides referenced during this call are available on the Investor Relations section of elanco.com. Today's discussion will include forward-looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecast. For more information, see the risk factors in today's earnings press release as well as in our latest Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statement. The information we provide about our products and pipeline is for the benefit of the investment community, it's not intended to be promotional and is not sufficient for prescribing decisions. Our remarks today will focus on our non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. Elanco enters 2025 with momentum. Fourth quarter revenue, adjusted EBITDA, adjusted EPS, and net leverage were all in line with our expectations. We're pleased to report our sixth straight quarter of revenue growth, up 4% on an organic constant currency basis with growth across both our Pet Health and Farm Animal businesses. I want to open by highlighting several accomplishments from the full year, which position us well for accelerating growth into 2025. 2024 organic constant currency revenue growth of 3% represents a meaningful step up from 2022 and 2023, driven by our innovation, a stabilizing base, pricing, and importantly, the durability of our diverse portfolio and balanced geographic presence, that 3% reflects growth in both Pet Health and Farm Animal and market share gains in global pet retail and U.S. farm animal where we hold leadership positions. Additionally, we experienced broad based organic constant currency top line growth across our top five product franchises and in nine of our top 10 countries. We have launched our diverse portfolio of innovation with six potential blockbusters now in the market. Through focused commercial execution across global markets, we exceeded our innovation revenue target for 2024. We have also raised the range for 2025, reflecting our confidence in the continued contributions from these new products. Additionally, in 2024, we concentrated our strategic focus on the highest impact opportunities, successfully divesting our aqua business. The sale proceeds combined with more than $0.5 billion in operating cash flow allowed us to pay down approximately 25% of our debt and support increased investments in our strategic product launches. When we started 2024, we highlighted the three value drivers for Elanco: growth, innovation, and cash. We have made strong progress on each front. We accelerated growth, launched all six key products, exceeded our innovation plan while delivering our biggest year yet of operating cash flow. Looking to 2025, growth, innovation and cash remain the priorities to expand our value proposition. We continue to anticipate an acceleration in organic constant currency revenue growth of 4% to 6%. Excluding the anticipated impacts of FX and the aqua divestiture, we expect adjusted EBITDA to grow 1% to 5%. With the increasing contribution from innovation and stabilization of our base business, we expect sustained growth over time, while our optimized infrastructure and product mix should enable margin expansion in 2026 and beyond. Notably, like many other global corporations, we are negatively impacted by the stronger dollar. On Slide 5, to highlight the strength of our core business, we broke out the impact of foreign exchange on our fourth quarter results and 2025 guidance. Our global team is focused on commercial execution and full year underlying expectations are essentially unchanged. Overall, we are pleased with our fourth quarter performance against this dynamic macroeconomic backdrop and remain confident in accelerating fundamentals in 2025. Turning to the fourth quarter. On Slide 6, we break down the 4% underlying organic constant currency revenue growth, which excludes the impact of the aqua divestiture in prior periods. All four areas delivered growth or were stable in the quarter, marking our best broad based performance in more than three years. U.S. farm animal was up 6% led by cattle. Experior reached blockbuster status from the U.S. sales alone, benefiting from the use in heifers that began in November after we received FDA Combo clearance. This growth supported demand for Rumensin, demonstrating the increasing value of our comprehensive portfolio. International farm animal was flat despite challenging swine economics in Asia. The sequential improvement from the 3% decline in the third quarter was driven by stronger global poultry demand and less impact from our do different commercial model changes in certain geographies. International pet health delivered robust growth of 11%, driven by continued strength of AdTab and Seresto. We now expect AdTab peak sales to exceed $100 million, reflecting successful DTC efforts in Europe. By geography, International pet health achieved growth across a very diverse range of markets with contributions from Europe, the Middle East, Latin America, Asia Pacific, and Canada. Finally, the U.S. pet health revenue grew 2%, including early contributions from Zenrelia, which launched in late September. Importantly, Galliprant posted its best results since the third quarter of 2023 and our vaccine portfolio achieved 8% growth in the quarter. We continue to lead the retail market with share gains and increased points of distribution, capitalizing on positive trends and serving the one-third of pet owners who make purchases outside the veterinary clinics. Turning to Slide 7. We continue to advance our innovation portfolio and productivity or IPP strategy. Starting with productivity, we paid down $1.475 billion in debt in 2024, resulting in a net leverage ratio of 4.3 times at the end of the year, down from 5.6 times to start 2024. This achievement was a direct result of the strategic aqua transaction and a company-wide commitment to cash conversion improvement. From procurement to our incentive plans, our company has created a cultural priority on cash generation and debt paydown. On portfolio, we saw benefits across both sides of our business and around the globe, ultimately driving 2024's durable growth. In U.S. pet health, we are now one of the two animal health companies to offer a comprehensive portfolio with products in all four key markets, parasiticides, dermatology, vaccines, and pain and other therapeutics. Vet clinics prioritize partners who offer a complete set of solutions, allowing us to leverage innovation to generate a broader lift across our entire pet health portfolio. Building on the strength of our Advantage brands and OTC retail leadership, we recently introduced Pet Protect, a complete line of veterinary formulated science backed supplements. Additionally, in the European pet health market, growth in AdTab and Seresto underscores our leadership in retail parasiticides. In U.S. farm animal, the portfolio achieved $100 million in organic growth in 2024, driven by multiple species. Our recent data indicates we ended the year as the market leader in the U.S. in beef, swine, and poultry with good momentum in dairy. Our 50 year old flagship product Rumensin captured volume and dollar growth with revenue up 19% in the U.S. This growth was driven by our full complementary portfolio and further supported by the new value generated by the carbon inset market enablement in dairy. More recently, we launched Pradalex, a medically important antimicrobial treatment for bovine and swine respiratory disease conveniently given as a one low volume shot. Targeted innovations like Pradalex bolster our wider portfolio of solutions. And we continue to boost our portfolio even further to bring solutions to emerging unmet needs. We've just announced our agreement with Medgene to commercialize high path avian influenza vaccines for dairy. The vaccine for use in dairy cattle is in the final stages of USDA conditional approval review. The cross species transmission of the disease into nearly 1,000 dairy herds across the U.S. along with the zoonotic transmission shows that more interventions are quickly needed. A cattle vaccine will be critical to slow the spreading of the virus between birds and cattle. Elanco is pleased to partner with Medgene to bring customers options to fight this devastating disease. Now on to innovation. Elanco delivered five new U.S. product approvals and market authorizations in 2024 alone. Ellen and her team have built an integrated engine well-positioned to deliver a consistent flow of high impact innovation into major markets. On top of the progress made to bring late stage developments through recent approvals, her team is focused on a robust portfolio of differentiated and transformational early and mid-stage assets, including a strong monoclonal antibody platform that addresses significant unmet needs in core and emerging spaces. Looking at Slide 8. We delivered $140 million of innovation revenue in the fourth quarter and $461 million for the full year, surpassing our target of $420 million to $450 million. With growing momentum from our six potential blockbusters, we are increasing our expected innovation contributions for 2025 to $640 million to $720 million. This does not assume any revenue from IL-31, which we expect to be approved by the USDA in the fourth quarter of 2025. Let's double-click on the progress of these six blockbusters on Slide 9, starting with Zenrelia. Five months ago, we launched Zenrelia and entered the $1.8 billion global dermatology market which has demonstrated robust double-digit growth over the last decade. Zenrelia is now used in nearly 8,000 U.S. vet clinics or approximately 30% of the total, of which about 6,000 have fully adopted the product and more than 2,000 are piloting use. Customer reviews have been positive, driven by the efficacy and the value of the product. Our reorder rate is above 60% and growing with adoption and time, a clear testament to Zenrelia's efficacy and value proposition. The number of vets willing to prescribe the product is growing, demonstrating the success of the tech to tech launch approach. This feedback gives us confidence that use per clinic will continue to increase and as Zenrelia can and will be used increasingly as the first-line treatment over time, as we have seen in international markets. We've experienced good momentum to date and have reached critical milestones with vet education and clinic penetration including our sampling program. We've accelerated investments in DTC and other targeted multichannel marketing into January. We are proactively communicating our message of efficacy, convenience and value directly to pet owners ahead of the allergy season. Outside of the U.S., Zenrelia launched in Canada in January, joining Brazil and Japan, all with less restrictive labels than in the U.S. We also expect approvals in Europe, the UK, and Australia this year, as part of our fastest globalization rollout to date. Now shifting to Credelio Quattro. We launched and shipped product in January, ahead of the parasiticide season. Again, it's early days for Quattro, but we are thrilled with the initial product reception, which has exceeded our expectations for distributor uptake, early clinic adoption, and that response to the three dimensions of differentiation, broad coverage including tapeworm, speed of tick kill, and heartworm coverage from month one. These differentiators are resonating with veterinarians across the U.S. Remember that insecticides or flea, tick, and intestinal parasite combination products is the fastest growing category in pet health market today with broad spectrum products now representing nearly 30% of the $3.9 billion U.S. parasiticide market. And although, it's early, we see notably less cannibalization of our core portfolio than with other recent launches in the Endecto space. Quattro is a meaningful accretive growth opportunity for Elanco as it significantly increases our portfolio competitiveness and our value proposition in the U.S. pet clinic. In the European OTC market, we offer AdTab for flea and tick protection for both dogs and cats. The product leverages the same active ingredient found in Credelio and is labeled under the Advantage family. AdTab is achieving robust growth through DTC efforts and share gains also with minimal cannibalization. In January, we shared that AdTab is now expected to become a blockbuster at peak and we are encouraged by the brand's momentum entering the parasiticide season. Rounding out Pet Health, the adoption of our canine parvovirus monoclonal antibody has been somewhat slower than initially expected as customers balance the vital importance of defending puppies against this deadly virus versus the cost of treatment. We continue to explore strategic interventions to accelerate clinic penetration across all channels. Additionally, we received conditional approval in Canada at the end of January. In farm animal, we remain encouraged by Bovaer's progress and what we estimate can be a $2 billion carbon market. Last year, we created and substantiated the first independent carbon inset cattle market, creating additive economic value for both dairy farmers and consumer product good companies. As a proof point, in the fourth quarter, U.S. dairy farmers earned approximately $10 million in credits created by using Rumensin. More than 1 million cows or over 11% of the U.S. dairy herd are now enrolled in our UpLook database, Elanco's digital solution for quantifying greenhouse gas emission reductions and the first step to enabling farmers to monetize their on-farm interventions to lower their footprint. We see strong demand from farmers and multiple CPGs have contracted with a carbon marketplace to buy Bovaer credits in 2025. Our attention is now focused on the center of the value chain and bringing the product use into implementation among co-ops, processors, and feed mills. We expect Bovaer's revenue trajectory to follow a positive, but measured ramp through 2025 as we execute our ground games state by state, farm by farm, feed mill by feed mill. Finally, Experior became the first farm animal blockbuster in over a decade. Experior ended 2024 on a strong note with the benefit of the U.S. Heifer clearance. The increased access is significant, opening a larger market as Heifers comprise about 40% of the feedlot animals. We are confident in Experior's growth trajectory in the U.S. and Canada in 2025 and its strong value proposition to feedlot owners allows us to increase price while leveraging greater overall portfolio strength. In summary, our global team is entering this new era for Elanco equipped with game changing innovation and comprehensive differentiated portfolios. Our six potential blockbusters are all in the market and we are in commercial execution mode. Early indicators on these launches are broadly positive, driving our increased expectations around innovation sales and continued confidence and acceleration to 4% to 6% organic constant currency revenue growth in 2025. With that, I'll hand it over to Todd to discuss our fourth quarter results and outlook in more detail.

Thank you, Jeff, and good morning, everyone. I'll focus my comments on our adjusted measures, so please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results. Our fourth quarter results demonstrated good execution in the face of FX headwinds with revenue, adjusted EBITDA, and adjusted EPS, all in line with our expectations and net leverage also reaching our year-end target. Starting on Slide 11, we delivered $1.02 billion in revenue, representing a 1% reported decline. Excluding the impact of foreign exchange rates and the divestiture of our aqua business, we achieved organic constant currency growth of 4%. Price contributed 3%, while volume increased 1%. Changes to FX rates since we provided our guidance in November caused a $10 million reduction to our Q4 reported revenue. Slide 12 shows revenue by the four quadrants of our business in the quarter. Total Pet Health revenue increased 6% in constant currency in the fourth quarter with price growth of 3%. Our U.S. business increased 2%, driven by contributions from key innovation products, including Zenrelia and the OTC retail parasiticide business, partially offset by competitive pressures in the veterinarian clinic. International Pet Health delivered robust 11% constant currency growth, driven by strong demand for our innovative products led by AdTab and the continued strength of Seresto. Moving to Farm Animal. Globally, fourth quarter organic constant currency revenue growth was 2%. The U.S. Farm Animal business achieved $223 million in sales, a 6% increase. This was driven primarily by market expansion and increased share within our cattle business with continued strong demand for Experior and Rumensin, partially offset by the comparison to last year's vaccine resupply. Swine product sales saw growth in the fourth quarter due to improved vaccine supply compared to constraints a year ago. Lastly, the timing of poultry rotations was a headwind in the quarter and is expected to continue to impact purchasing patterns in the first half of 2025. International Farm Animal revenue was flat as innovation and strong demand in poultry across multiple geographies was offset by the impact of the Kexxtone recall and our strategic do different approach in certain geographies. We estimate these two items were a combined 4 percentage point headwind to year-over-year growth. Continuing down the income statement on Slide 13. Gross margin increased by 80 basis points to approximately 51%, primarily due to price, beneficial product mix, especially in our farm animal business, and improved manufacturing performance. These positive factors were partially offset by the aqua divestiture, inflationary pressures, and foreign exchange headwinds. Operating expense saw a 3% uptick driven primarily by increases in employee related expenses and investments to support our expanding Pet Health business. These increases were partially offset by savings realized from our first quarter restructuring initiative. As we've stated before, strategic investment in the key product launches, while presenting a near term headwind to adjusted EBITDA are critical for long term brand success and profitability. Interest expense decreased significantly from $67 million to $46 million due to debt reduction funded by the third quarter aqua divestiture. On Slide 14, we include a bridge for fourth quarter results compared to the prior year. Adjusted EBITDA was $177 million in the quarter, an increase of $12 million on a reported basis or approximately $42 million, excluding the impact of the aqua divestiture and foreign exchange headwinds. Adjusted EPS grew by $0.06 to $0.14 per share, including the benefit of lapping last year's Argentinian peso devaluation. For the full year 2024 on Slide 15, we generated over $4.4 billion in reported revenue. While this is flat year-over-year, it's important to consider the impact of the aqua divestiture, which was a headwind of approximately 200 basis points to growth. Strong demand for our innovative products was the key driver of our performance. Innovation led value creates pricing leverage and the portfolio benefit stabilizes the base business. Further detail on revenue broken down by top affiliates and key products is available on Slides 28 and 29. Continuing down the P&L. Gross margin was 54.9%, a decrease of 140 basis points compared to 2023. This decrease is mainly attributable to the impact of the aqua divestiture, the strategic approach we've taken to slowing manufacturing throughput to optimize inventory levels, foreign exchange headwinds, and persistent inflationary pressures, all partially offset by higher realized prices. These factors, combined with increased investment in our commercial launches, resulted in an adjusted EBITDA of $910 million for the full year as shown on Slide 16. Full year adjusted EPS came in at $0.91 compared to $0.89 in 2023. The aqua divestiture impact on our adjusted EPS was neutral due to the interest expense savings achieved through our resulting debt reduction. The adjusted tax rate for 2024 was 18.1%, a year-over-year decrease of 420 basis points due to the recognition of non-recurring tax credits in 2024 and adjustments to tax reserves in 2023. Now let me offer a few words on our cash, working capital, and debt on Slide 17. We achieved a significant improvement in operating cash flow throughout the year, driven by a focused approach to working capital management. Cash provided by operations in the quarter was $177 million. For the full year, we generated $541 million of operating cash flow or 120% of adjusted net income. This was an improvement versus last year of $270 million, driven by improved inventory performance, strong collections and lower project expenses. We exceeded our net leverage target for the year, underscoring our commitment to disciplined financial management. We ended the quarter with net debt of $3.88 billion and net leverage of 4.3 times. Let's move to our financial guidance starting on Slide 19. We remain confident in the underlying drivers of the 2025 outlook provided during the November earnings call. For the year, we continue to expect mid-single-digit organic constant currency revenue growth. We expect adjusted EBITDA up 1% to 5% excluding the impact of FX and aqua. Reported revenue is expected between $4.445 billion and $4.510 billion. This projection incorporates a 2% contribution from price offset by an estimated $110 million headwind from FX. Gross margin is expected to decline as the benefits of price growth are expected to be more than offset by the margin impact from the UK CMO transition and FX headwinds. We anticipate operating expenses up approximately 6% in constant currency with strategic investment in the global launches of our innovation portfolio. Full year adjusted EBITDA is expected between $830 million and $870 million, including an estimated FX headwind of approximately $45 million year-over-year and since our November outlook. We expect H1 to represent a relatively smaller portion of full year adjusted EBITDA versus the 61% weighting in 2024 and 2023 as the commercial investments impact operating expenses earlier in the year and then drive greater contributions to revenue in the second half. We anticipate adjusted EPS of $0.80 to $0.86 including an estimated FX headwind of approximately $0.07 year-over-year and since our November outlook. I'll share a few comments on our cash and balance sheet expectations for 2025. We anticipate 2025 CapEx to be approximately $225 million to $255 million, an increase versus $147 million in 2024 due in part to the expansion of our monoclonal antibody manufacturing facility in Elwood, Kansas and our expansion in France for our Credelio franchise. As a reminder, cash available for debt paydown will be reduced by approximately $150 million due to the deferred cash taxes related to last year's aqua transaction. Given the FX impact to adjusted EBITDA and that our debt is dollar denominated, the calculation of our net leverage ratio is affected by unfavorable currency. Consequently, we expect net leverage in the low- to mid-4s at year end with an uptick in the first half of the year including typical seasonality in working capital. A weaker U.S. dollar would create a potential path back to the high-3s at the end of 2025, and our company wide focus on operating cash flow and our prioritization of repaying debt should lead to further significant improvements in net leverage over time. Slide 20 walks through the year-over-year bridge for revenue, breaking down our expectations for mid-single digit organic constant currency growth. We expect contribution from innovation to drive growth of approximately $180 million to $260 million year-over-year. We also anticipate stability in our base portfolio with the benefit of innovation and pricing more than offsetting volume declines for mature products in the competitive U.S. Pet Health vet clinic business. Slide 21 provides year-over-year bridges for 2025 adjusted EBITDA and adjusted EPS, and Slide 31 in the appendix provides a number of additional assumptions to help support your modeling efforts. Now let's move to our Q1 guidance, starting on Slide 22. We expect organic constant currency revenue growth of 2% to 4% including some softness in the broader U.S. retail market in January. On a reported basis, including an estimated FX headwind of $40 million, we expect $1.155 billion to $1.180 billion in revenue. Operating expense is expected to increase 6% to 8% year-over-year in the quarter on a constant currency basis, primarily to support our recent Pet Health launches. Consequently, we anticipate adjusted EBITDA of $240 million to $260 million, including an estimated FX headwind of approximately $15 million and adjusted EPS of $0.29 to $0.34, including an estimated FX headwind of approximately $0.03. We expect our adjusted effective tax rate in Q1 to be in the mid-single digit range as a result of a discrete tax item falling in the quarter that will also benefit our full year expected tax rate of 21% to 22%. Lastly, on Slide 23, we summarize the headwinds and tailwinds that are expected to impact our results in 2025 and are factored into our guidance. The list is essentially unchanged since the third quarter except for the addition of currency volatility to materially impact results, which we did note at an Investor conference in January. Now I'll hand it back to Jeff for closing comments.

Thanks, Todd. Elanco delivered a strong finish to 2024, achieving our sixth consecutive quarter of organic constant currency revenue growth and building momentum as we head into 2025. This performance with both Pet Health and Farm Animal contributing to this growth in the fourth quarter underscores the effectiveness of our innovation driven strategy. The collective portfolio led by our six potential blockbuster products is exceeding expectations with 2024 innovation revenue surpassing our targets and setting the stage for an even stronger performance in 2025. We are reaffirming our outlook for accelerating organic constant currency revenue growth of 4% to 6%, driven by innovation and focused commercial execution. This is a much awaited period for Elanco in our strategic trajectory. The energy and enthusiasm within our organization can be felt at every level, evidenced by a four year high for employee engagement as we build on our 70 year legacy of going beyond to transform animal care. Thank you to our global teams for your focus and discipline in delivering a successful 2024, positioning us well to create long term value in 2025 and beyond. With that, I'll turn it over to Tiffany to moderate the Q&A.

Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to one question and one follow-up. Operator, please provide the instructions for the Q&A session and then we'll take the first caller.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Jon Block from Stifel. Your line is open.

Great. Thanks. Good morning. Jeff, Zenrelia's U.S. penetration is slightly ahead of our diligence, if you would. So where do you think this can go by year end '25? And maybe more importantly, what about market share at these practices by year end '25? And also curious, any differences in the international markets for Zenrelia where call it, the label is less onerous? And then, Todd, I guess I'll just ask my follow-up here. The accelerating revenue growth of the 1Q ‘25 levels. I think you talked a bit about it, but is that just a function of, call it, Zenrelia and Credelio Quattro, the contribution ramping throughout '25 or anything else to call out to give investors or people more comfort with the accelerating constant currency revenue growth off the 1Q ‘25 guide? Thanks, guys.

Thanks, Jon for the question. Yeah. We're excited about Zenrelia and where we stand and maybe how we're looking at it. And maybe to start with your specific question, we're adding use and growing revenue every week on a relative basis with Zenrelia and we see that trajectory coming. But if I step back, the $1.8 billion derm market, as you know, Jon, has grown 16% in 2024. It'll very likely surpass $2 billion. So we're in a market that is growing. Since the launch, as I mentioned, we are at 8,000 clinics today, that's about the same number of Credelio. And we've come through really the three lowest months of derm in the overall season. 6,000 clinics have adopted and we've got 2,000 piloting. And probably one of the greatest right now converters to clinic penetration is a sampling program that's quite aggressive in the field. Once people see this efficacy in vet clinics, they begin to bring the product on. So as we start to head into the season, here's our strategy, as we look at this accelerating use and adoption of Zenrelia, as you talk about by the end of '25. First is, all around the vet clinic, it's continued acceleration of vet clinic adoption with a heavy focus on tech-to-tech. Right now, we got more vets willing to script this month than last month and that's growing, and also there is sampling. Sampling is driving more clinics to try. Try is turning to conversion at a better than we expected rate. So we'll continue to be very aggressive with our sampling. Now we enable DTC, which we've noted. DTC is turned on. We're now bringing the pet owner in and we believe not just efficacy, but the affordability and convenience are really resonating. We think they'll resonate even more with pet owners. So when we kind of see coming into the season, we also have the number of seasonal and acute cases, Jon, that we will see rising as well. And we think that will drive us, which is our ultimate goal is not just clinic penetration to move more into front line treatment during peak season. This will be the key success factor for accelerating use as we go forward. So I do, as I step back, I think efficacy continues to resonate. It's what we hear the most globally, not just in the U.S., but globally. To answer your international question, as I mentioned, we've added Canada to Brazil and Japan. Launches are on or above expectations, doing extremely well on Brazil and Japan. Canada is very early. They do have less restricted labels. And we point to EU, a very large market, UK, and Australia as key factors to make Zenrelia a significant impact here in 2025 in our international pet business, so that's where we are. We're happy where we stand and we're excited to be leaning in as the season starts to ramp up on the derm side.

And Jon, to your question on revenue growth, clearly 2% to 4% constant currency in Q1, but then getting to 4% to 6% for the full year. I'd start with a few one-time items or headwinds from Q1 of last year that we called out at the time. We put products from Bayer into distribution that increased sales in Q1 of last year in U.S. pet. We were still working through the Argentinian exit as well as Kexxtone and some of the do different opportunities in international farm that became headwind yet here in Q1, but then we don't have that same headwind in Q2 through Q4. I would also then address the innovation ramp. As Jeff mentioned, we're really penetrating Zenrelia into the U.S. vet clinics in preparation for the season, that's spring and summer hitting Q2 and Q3. Similarly, AdTab's continued growth, again, Q2, Q3 inflection on OTC retail in Europe. And then again, just continued growth of the innovation portfolio, especially, Bovaer which we expect to start to be a bigger contributor to growth in the back half than the first half. All of those items that make us confident that while starting at 2% to 4%, we will deliver the 4% to 6% for the full year.

Your next question comes from the line of Michael Ryskin from Bank of America. Your line is open.

Great. Thanks for taking the question, guys. First, maybe this is a follow-up to Jon's question just now on Zenrelia. But just looking at your innovation contribution for 2025, I mean, first of all, you came ahead for 2024 fourth quarters, that was really encouraging. But then you raised your '25 innovation numbers by, I think, $30 million at the midpoint. I'm not going to ask for certainly specific point estimates for each of your contributing products, but directionally, what gives you more confidence in that? And you can particularly call out whether that is Zenrelia or your first month at Credelio Quattro versus what's behind that? And then I've got a follow-up.

Yeah, Michael. I'll start here. Todd, anything that I may miss. I think the momentum at the end of the year, no question our U.S. Farm Animal business that led by Experior, the Heifer clearance definitely accelerated use. And with that Heifer clearance, it just enabled more feed yards to be able to feed it to steers. And as we see kind of the decline in the herd level off, that's going to be positive as well. So the value of Experior has done well in the U.S. and Canada, and it gives us a lot of confidence and a lot of growth opportunity in 2025. And AdTab, probably our best launch I've experienced in the last five years, what our U.S. retail team has done, it's even contributed to nice growth in Seresto across the European affiliates as well. Those two products are definitely driving growth. And then look, we got -- when you step back and say, Zenrelia going into a now close to be $2 billion derm market that's growing globally and Quattro, that's got three dimensions of differentiation going into the fastest growing market segment, Michael, I think we see the early uptake and interest in Quattro combined with a third of the clinics on Zenrelia are using gives us a lot of excitement. Bovaer, as Todd mentions, will probably be a little bit more of a second half, but we like the progress we've made since November with Bovaer.

Okay. And then maybe for the follow-up, I think in the prepared remarks, you called out your IL monoclonal antibody. I think you said 4Q '25 approval, but it's not in your guidance on [Technical Difficulty]. Just given what we've seen with regulatory clearances, a lot of things have taken a little bit longer frankly and there's a lot of uncertainty in the regulatory environment overall. Just what gives you confidence in that this far out? Any color you can provide on how those conversations are going? Thanks.

Yeah. Thank you, Michael. As we look at IL-31, again, we see it as a differentiated asset going into the derm market, going to play very nicely with Zenrelia going into the marketplace. You're right, it does not have an ADUFA, like, you have in the FDA with the USDA. But again, nothing has changed relative to the progress. We continue to progress with the USDA. We just simply are putting more clarity on that it is not in our guidance and we expect a late '25 approval. But again, nothing has changed with the programs and we continue to be confident in its differentiation and its role in our portfolio.

Your next question comes from the line of Daniel Clark from Leerink Partners. Your line is open.

Great. Thank you for taking the question. I was just curious when you talked about the successes of sampling in Zenrelia thus far, is that causing you to maybe change how you're sort of approaching your sales and marketing strategy for that launch? Thank you.

Yeah. Thank you, Daniel. Again, I would step back and say, we feel good about Bobby and the team, really a lot of expertise and a lot of work in preparing -- prepping for this launch and Quattro helping it too is, we've got a multifaceted approach. We got multimedia kicking in, the vet tech-to-tech approach, and now we know the sampling. And even the right down to the sales rep incentives and distributor incentives all aligned to say, hey, we know that we get a vet clinic to experience Zenrelia, it creates adoption. So we will continue to look at this in a very focused way. And I would say that, the sampling program, what it does is that it leads, it takes us just a few examples. And yes, we've been put in some of the hard cases and that's actually been a good thing because it just shows the demonstration of the efficacy that we saw in the head-to-head studies and that's driving the adoption. So look at us to continue to lean in on sampling as we head into the spring/summer derm season as well as continue to inset clinics. And then when the pet owner walks in from the DTC and multimedia, they're going to see the value differentiation. All of these things, we believe set us up well to become more of a first line treatment in clinics, which we think is the next critical success factor.

Got it. And then just on the point of becoming a first line treatment, can you share some of the feedback you've been getting from vets, like, can you give some color on how many are using it as a first line treatment today? Thank you.

Yeah. Every segment is a little different, but what we would say is, experience is what is needed, the demonstration of efficacy, how the product can be used into different vet clinics, and how vets are looking at it is essential. These tech-to-tech meetings really matter. Being able to bring KOLs in, which we've got really good support from KOLs. We're seeing a nice uptake on the strategic side. Bobby and the team have done a lot with the strategics but it really allows vet-to-vet exchange, KOL exchange to be able to give those that maybe have less comfort or want to know more about how to manage the label on that, that what's I think helps bring more vets into their willingness to script, which we're seeing in the surveys that are being done, so continued progress. And I think as the season ramps up and the challenge, and as I mentioned, the acute and seasonal cases ramp up, this opens a nice door for Zenrelia.

Your next question comes from the line of Andrea Alfonso from UBS. Your line is open.

Hi. Good morning, everyone. Thank you so much for taking my question. I did want to switch gears a little bit to sort of asking about how the early launch of Credelio Quattro is going so far. In the prepared remarks, you identified that legacy products were sourcing low cannibalization within the portfolio. So curious about just the color of the initial momentum. If you can frame maybe the commercialization strategy, what might be different this time around, as well as appetite for partnering with retailers. And I did have a follow-up question after that.

Yeah. Thank you, Andrea. Great question. Yeah. It’s really early days with Quattro, but we're excited. We've got the product in the market, we're shipping, there's orders. Nice launch at VMX. We'll be at Western Vet next week and things are moving nicely. I think a few things resonated early. There's no question. I think three dimensions of differentiation and they all resonate differently with different vets. I think the first is, I would just say, speed to tick kill is what we're seeing. If you look at the Credelio franchise growth last year overall, globally, I mean, this technical data and speed to tick kill has really had a nice impact with veterinarians. We've got a lot of uptake on an interest on the tapeworm and the broad coverage and then the heartworm coverage on month one. So three dimensions of differentiation. I think that we plan to take an aggressive approach on DTC. We see this as a little less involved pet owner category. So you need to get the pet owner involved. And so we spent a lot of time on our multimedia DTC approach. We brought in a lot of expertise to ensure that we can really resonate with pet owners going into this year. And yes, we will take an omni-channel approach as we have with others. And I think we're as best equipped with our Bayer capabilities to be able to do that. And I also think that the energy around Zenrelia will play out positively with Quattro and vice versa as well. And we will have the right introductory offers to incent usage as well out of the gate.

Great. Thanks. And just a separate question on -- just probing a little bit more into the Galliprant call out. Maybe if you can just discuss the dynamics of the surge there in the quarter. Is that entirely driven by switchers from another therapy versus those who are newer to therapy? And if you could just sort of speak to the durability of that 4Q trend persisting into 2025. Thanks so much, everyone.

Andrea, thanks for the question on Galliprant. It's always been a really strong product as it directly impacts the inflammation claim for osteoarthritis. The trend here in Q4 was positive for us as best quarter in a few for us on Galliprant and we're really leaning in just given the strong safety profile it has to address pain for the patients similar to what we saw from just the improvements in Europe. It's similar here in the U.S. as well. And again, we're looking forward to Galliprant delivering in 2025 for pet parents across the U.S.

Your next question comes from the line of Erin Wright from Morgan Stanley. Your line is open.

Great. Thanks. A follow-up on derm. As you think about the competitive environment in derm, do you anticipate new competitors in 2025? Is that embedded in your guidance at this point? And just how can you better leverage that, I guess expanding portfolio with the injectable product as well? Can you also remind us how differentiated the injectable IL-31 product will be? Thanks.

Yeah. We're not seeing anything, Erin, different on the competitive front than I think what everyone else sees and it is assumed in our guidance. So competition is a headwind assumed in the guidance. We continue to see though the robustness of the growing market is exciting for us in the U.S. and globally. The unmet need, the number of untreated dogs that are out there and the opportunity that we see with Zenrelia again, a third of the clinics coming into the season, the ramping and the international approvals will all drive that. And then back on IL-31, we continue to see this as one of many derm assets that Ellen has coming in this category. We've got other things that are coming. Yes, not just the long acting, but next-generation derms. So we're really beginning to build what we believe is going to be a great decade and beyond of derm leadership and opportunity in this marketplace. And then, I haven't really noted the specific differentiation on the IL-31, but we do continue to see that as we go forward.

Okay. Thanks. And then can you speak to the sequential progression for margins here and the cadence of some of those investments that you're making around the commercialization of new products and kind of how to think about sort of those stepped up investments, I guess in the first half? Thanks.

Certainly, Erin, we appreciate the question. As we called out in the prepared remarks, we do expect to have less EBITDA on a percentage basis in the first half of '25 than we've had the last couple of years, that's driven by two things primarily. The first is the investment we're making to really drive this adoption and launch curve for both Credelio Quattro, as well as Zenrelia as well as AdTab. And those investments we believe will pay-off over the long term as we think about how to best position Elanco for the next three to five years, not next three months. So that one is certainly in play as we called out in November. The other part is, the FX headwinds are higher in Q1 than they are in the back half of the year from just the current spot rates versus how last year played out. So that would be the main thing to call out, but confident in the underlying growth that these investments will make for us over the next few years.

Your next question comes from the line of Balaji Prasad from Barclays. Your line is open.

Hi. Good morning, and two questions from me. Firstly, a follow through on IL-31. So is 2025 -- are we going to only see an approval or if I read through your lines in January where you said that it's coming in 2025, should we also expect a launch or is there a meaningful gap between approval to launch? That's one. Two, poultry, a pretty important segment, organic growth rate declined here. Could you maybe then comment on the broader poultry market, the drivers and the wins that we see here and any major innovations or changes that we can expect to see in the segment in the near future? Thank you.

Thanks, Balaji. Yeah, on the IL-31, we expect again a Q4 '25 approval. We don't have sales or launch planned. We will continue to have a nice efficient from launch to -- or approval to launch timing. But again, that is not in our '25 plans at this time. On the poultry market continues to be durable, global, probably the protein that is the most durable. We've seen nice low-single digit growth last year in the marketplace. We've continued to have -- we've got no question some poultry rotations that happen market-to-market, that may change. But when we step back and look at our market share, look at our portfolios and our growth, it continues to be a very strong market for Elanco that we have a leadership position in. We now are number one in the U.S. poultry market as well. And we see that market -- the current prediction is about 3%, continues to be one of the best economical, environmental and even from a religious standpoint, freer market for the overall protein. So we like our position and like our portfolio going forward.

Your next question comes from the line of Umer Raffat from Evercore ISI. Your line is open.

Hey, guys. This is Mike DiFiore in for Umer. Thanks so much for taking my question. Two for me. I just want to dig in more on Quattro and the whole concept of cannibalization. I think you touched on this slightly before, but in terms of the omni-channel strategy here, any specific strategy here in terms of your channel approach that could be done to mitigate cannibalization? And my second question in regards to tariffs, just -- and I may have missed this, but any effect on input costs and overall supply chain dynamics expected due to potential tariff wars? Thank you.

Yeah, Mike. I'll anchor back just to the notional difference. When you look at this $3.9 billion market, we've got about $300 million of parasiticides in the U.S. in this marketplace, so we notionally are smaller. And we've seen as we're tracking the early uptake of Quattro, less cannibalization relative to other broad spectrum products that have come into the marketplace. I think the differentiation is driving that. I'm not sure from an omni-channel standpoint, this is definitely going to be focused initially on the vet clinic and activating pet owners to get into the vet clinic to leverage that. It's already online on the key kind of omni-channel options like our competitors. So access will not be a problem. But if I had to point to one thing I think now is we're not as concerned about cannibalization. We haven't seen any trend early to be concerned about that. It's all about activating pet owners to move and have an interest in Quattro. And that's where our focus is and that's where our investment is and why it's quite sizable that Todd mentioned. Todd?

Yeah. And then, Mike, on the tariffs, we're very focused on the global dynamics that are out there today. The only tariffs that are currently impacted are the 10% additional in China. We factored that into our guidance for 2025. It's about a $3 million to $4 million impact on our cost of goods sold in 2025 based on just the timing of when those products would hit into the products that we sell and recognize revenue on. We're continuing to look and make sure we're aware of the future tariffs that may come into play. Mexico and Canada are not big players for us from a manufacturing standpoint. So if those are reintroduced later this month, that will have less of an impact. So again, we're very focused on the global macro and the tariff impact on the dollar seems to be the place where we've had the bigger headwinds as we called out today relative to November.

Your next question comes from the line of Chris Scott from JPMorgan. Your line is open.

Hi. Great. Thanks so much. Just a couple of questions for me. Maybe just on the margin dynamics over time. Can you just talk a little bit about as we look beyond '25, how we should think about the cadence of gross margin and operating margin improvement for the business? I guess some of the kind of the headwinds from this year on the gross margin side, you kind of fade away and you leverage some of this OpEx investment. Just trying to get a sense of like how quickly should we think about those margins stepping up over time? And then my second question was just on Bovaer and just a little bit more color about -- how to think about that launch curve, and maybe compare and contrast a little bit of what -- how you're thinking about that relative to what we saw with Experior? Thank you.

Sure, Chris. On the margin side, we do expect to have better margins going forward from an improvement standpoint. The big headwind we've got this year is the reacquisition of the Speke manufacturing facility in the UK. As we called out in November that's a $25 million to $35 million headwind on gross margin. We bought that because of the $160 million to $180 million Farm Animal revenue that comes with it. And from the standpoint of the cost to maintain that revenue, it's a very good return on our capital, but it does have a percentage impact on gross margin. With respect to the operating margins, again, that's where we are investing behind these launches. The innovation portfolio is accretive to our overall corporate gross margins and we expect that to play out over the next two to three years as we make these initial investments to get higher peak revenues in later years. So we do expect subject to no surprises on tariffs to increase EBITDA faster than revenue in '26 and beyond. But again, we continue to be focused on delivering the 2025 and setting ourselves up for the longer term margin expansion opportunities. I'll let Jeff address Bovaer.

Yeah. Thanks, Chris. The question on Bovaer. First of all, I want to just highlight that this is very much of an economic-driven initiative from Elanco. We believe it's critical for Bovaer. And if we look at the milestones in '24 that matter, that will drive this question you have on-ramp is one, we had to create a carbon market. We proved that in the fourth quarter with CPG companies actually contributing $10 million that went through for the Rumensin use to actually dairy farmers. And then the two nodes that need to have the demand we see. One is farmers getting that additive money from really a carbon check from the CPG companies. That demand -- we have farmer demand very high with now 1 million cows with the UpLook system and we've signed numerous CPG contracts that want to buy the carbon. So the two nodes of value are locked in. So now what's going to drive the ramping is going to be in-field implementation. In between a CPG company and the farm is a co-op, a dairy processor, and feed mills and every state is a little different. So we're doing what we do best in farm animal, which is kind of in-field implementation in between and that's what will drive the ramp. I believe it will be similar to Experior in terms of as operations come on, it will become sticky once you get something into a feeding program like we've seen with Experior, it's positive. People will be demonstrated the value by our teams with our systems that will make it sticky as well. And then more use by the big high profile dairies will start to create an increased demand that will speed that adoption. But again, I think it will be a little bit more second half, and as we said, positive but measured ramp through 2025, but I do believe a resilient one and a sticky one once we get there. And again, we're creating this market. It is a new market, which is a real opportunity for us here.

Your next question comes from the line of David Westenberg from Piper Sandler. Your line is open.

Hi. Thanks for taking the question. We're up on the hour, so I'll ask both my questions upfront. So just in 2023 during the launch of NexGard PLUS, we did see multiple competitors discounting in anticipation of launch. Are you seeing anything like that now? And if so, why is the dynamic here different? Is it maybe because the one NexGard used to be like the -- still was like kind of more leading product whereas you're playing, not necessarily from a same market share standpoint? And then just the same thing on Galliprant. If you look at Rimadyl, you've had some starts and softs in the incoming of competition. Is this here really an acceleration point in Tylan[ph] maybe the next competitive launch? Just looking at that in history. And then my second question here is on the biologics manufacturing. You called out 225, 250. I'm not asking for specifics on the pipeline here, but do you think you can have some first-to-market products in biologics in say 2027, 2030 kind of timeframe because that is a lot of investment into biologics manufacturing? Sorry, that's a lot of questions.

Yeah, David. Just on Quattro, we see, again, I think the whole market dynamic of this is the fastest-growing market. It's growing between 40% and 50%, the broad spectrum. I think that growth is maybe we are not seeing the price dynamic that you mentioned. We are pricing to parity to that marketplace, offering incentives to get into the market to drive first time use, but so we're not seeing that. And I think a lot of that is just because of the actual market growth and the size dynamic. And we, again, I think to Todd's point on Galliprant, we continue to see this as an in home safe option that creates -- I think our differentiation has grown over the last year and that's what is representative and we'll continue to stand behind that brand and really push because pain is going to be a long-term play for us.

Yeah. And David, with respect to the manufacturing, as we called out previously, the investment for the monoclonal facility in Kansas is $130 million spread over both of 2024, 2025 and a little bit into 2026. We're also expanding in France for our oral solid dose. That's really for the Credelio franchise as we see the nice opportunity with Credelio Quattro while continuing to have good growth with Credelio Cat, Credelio Plus as well as the maintenance of Interceptor Plus. And then we're also needing to expand our vaccine capacity in Iowa. Our Prevacent vaccine for PRRS in swine continues to be a growth driver for us both in the U.S. and internationally. And so there's a number of different facilities we're expanding right now, all driven by continued revenue growth and demand for these products across the globe. So it's not just biologics, but certainly, we are excited by the next wave of biologics that Ellen and her team are working on inside the R&D investments.

And that concludes our question-and-answer session. I will now turn the call back over to Jeff Simmons for closing remarks.

Yes. Thank you, everybody. And I want to thank our customers around the world, just the vets, farmers, and pet owners. It's an honor to be able to do business and add value to animal health that continues to be more relevant to society than ever. Thanks to the Elanco team for the loyalty, the engagement, but most importantly, just the determination to execute. Elanco enters 2025 with a lot of momentum as I opened up with. We've kept it real simple and we're going to continue to this year like we did last year. It's all about growth, innovation, and cash, that's what's going to drive an increased value proposition that we already see happening, growth accelerating. We're guiding 4% to 6% on the top line on a constant currency basis, 1% to 5% on the bottom line. The six blockbusters, our confidence is rising and has grown since November as we've raised the guidance. And on cash, it's as Todd mentioned, it's really become cultural in our company and we're all incented to continue to drive free cash flow conversion and debt paydown. Yes. There is a volatile environment, but we've got a durable company. We're controlling the controllables and we're going to continue to keep this company growing. Our value proposition is increasing to our customers and we believe that will drive an increasing value proposition and investment thesis to you and your investments. And thank you for your investments in our company, and we look forward to working with you in 2025.

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