Elanco Animal Health Incorporated Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Growth: Elanco grew 8% organic constant currency in the quarter, exceeding revenue, adjusted EBITDA, and adjusted EPS guidance. U.S. Pet Health led with 11% growth, marking 8 consecutive quarters of underlying growth.
• Innovation: First half innovation revenue reached $420 million, with full-year expectation raised by $60 million to $720M-$800M. Key products like Credelio Quattro, Zenrelia, AdTab, Experior, and Bovaer performed well, driving growth and portfolio stability.
• Cash and Leverage: Net leverage ratio improved to 4.0x, aiming for 3.8-4.1x by year-end. Tariff impact mitigated, with net impact estimated $10M-$14M for 2025, offset by first half outperformance.
• Elanco Ascend: Company-wide initiative to drive efficiencies, including automation, AI, procurement, and G&A expenses, to enhance productivity and competitiveness.

Segment Performance

• U.S. Pet Health: Grew 11% organic constant currency in the quarter, led by Credelio Quattro and Zenrelia. Retail OTC parasiticide portfolio, including Seresto and A Family, recovered to double-digit growth. Revenue contribution significant due to strong performance.
• International Pet Health: Achieved 7% organic constant currency revenue growth, driven by AdTab, Zenrelia, and Credelio. Geographic expansion, like AdTab's launch in the U.K. and Zenrelia's performance in Brazil, Canada, and Japan, contributed.
• U.S. Farm Animal: Up 5%, with Experior leading due to rapid adoption since FDA combo clearance. Reinforced market leadership in beef, poultry, and swine.
• International Farm Animal: Grew 6% organic constant currency, with growth in poultry and swine. Some pre-tariff buying in China, but underlying growth remained healthy.

Guidance

• Full Year: Organic constant currency growth expected 5%-6%, reported revenue $4.57B-$4.62B, adjusted EBITDA $850M-$890M, adjusted EPS $0.85-$0.91.
• Third Quarter: Organic constant currency revenue growth 4%-6%, reported revenue $1.08B-$1.11B, adjusted EBITDA $160M-$180M, adjusted EPS $0.12-$0.16. Driven by positive momentum in pet and farm businesses, with consideration of seasonality and tariff impacts.

Risks

• Tariffs: Mitigated by intervention actions and FX tailwinds, but potential risks from economic slowdown are offset by foreign currency exchange favorability and mitigation plans. Net impact of tariffs on 2025 estimated $10M-$14M.
• Operational: Potential challenges in supply chain and market dynamics, but Elanco's strategies to optimize operations and leverage innovation aim to address these.

Question and Answer

• Q: Talk about accelerated investments and leverage in 2026 A: Investments in DTC and R&D are key, with Elanco Ascend driving efficiencies. Leverage will come from innovation growth and productivity initiatives, aiming for improved margins and cash flow.
• Q: Innovation sales target raise color A: The $60M increase in innovation sales target is driven by products like Credelio Quattro and others, with seasonality considered and a diverse basket of innovations contributing.
• Q: Zenrelia label change and launch benefit A: FDA progress on Zenrelia's label to remove fatal vaccine risk language, with positive impact on U.S. and international launches. Growing share and first-line use in markets like Brazil, Canada, Japan, and Europe.
• Q: Pet Health growth sustainability and market trends A: Pet Health growth is insulated from vet visit declines by innovation, globalization, and positive trends in pet ownership and protein demand. Elanco's portfolio and innovation drive continued growth.
• Q: Credelio Quattro share source and Experior expansion A: Credelio Quattro's share comes from new starts and competitor switches (70% of growth). Experior's growth is driven by herd rebuilding, strong producer economics, and potential geo expansion in markets like Europe.
• Q: Bovaer progress and Advantage collar vs Seresto A: Bovaer shows strong demand and adoption, with focus on farmer economic value and CPG brand value. Advantage collar is a 4-month option leveraging the Advantage brand, complementing Seresto's 8-month offering.
• Q: Second half growth and IL-31 update A: Second half growth considers normal seasonality and competitive dynamics. IL-31 is on track for Q4 2025 approval with commercial launch in H1 2026, continuing to differentiate in the derm market.