Elanco Animal Health Inc (ELAN) 2025 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health second-quarter 2025 earnings conference call. (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 second quarter 2025 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; Robert VanHimbergen, 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 discussed 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 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. References to organic performance include the estimated impact of the Aqua business, which was divested July 9, 2024, and certain royalty and milestone rights that were sold to a third party in May 2025. After our prepared remarks, we will be happy to take your questions.

I will now turn the call over to Jeff.

Thanks, Tiffany. Good morning, everyone. I'd like to begin with a thank you to the Global Elanco team for these strong results and in recognition of many years of loyalty and steadfast hard work across the business. Our priorities have been consistent and clear: growth, innovation and cash. By focusing on our customers and delivering a diverse portfolio of innovative solutions, we accelerated growth and achieved strong cash generation in the second quarter.

As highlighted on Slide 4, Elanco continues to deliver, growing 8% organic constant currency in the quarter and exceeding the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was driven by both price and volume and led by the US Pet Health, up 11%. This marks 8 consecutive quarters of underlying growth.

Innovation is outperforming expectations, achieving $420 million in first half revenue. We are once again raising our full year expectations by an additional $60 million, to $720 million to $800 million. The consistent outperformance reflects a diverse basket of current and potential blockbusters in major markets with meaningful differentiation, bringing added value to the marketplace.

And importantly, this portfolio of innovation is also driving more stability in our base business. Also, we are delevering faster than planned with our commercial and operational outperformance and strong focus on cash. Our quarter end net leverage ratio improved to 4.0 times, reflecting the strong second quarter results and working capital discipline as well as the proceeds from the (inaudible) royalty monetization. With this momentum, we are improving our net leverage target for year-end to 3.8 to 4.1 times.

On tariffs, our intervention actions and FX tailwinds are mitigating potential impacts and risks. We now estimate a 2025 net impact of $10 million to $14 million, which is less than our prior assumption and more than offset by the first half outperformance. We believe any likely tariff risk scenarios are covered in our 2025 guidance. With our consistent execution and good momentum to date, we've arrived at the midpoint of 2025 in a strong position to raise our top and bottom line outlook.

For the full year, we now expect organic constant currency growth of 5% to 6%, adjusted EBITDA of $850 million to $890 million and adjusted EPS of $0.85 to $0.91. This guidance raise takes a prudent and disciplined approach with a strong balance between opportunities and business momentum while considering the dynamic environment. Overall, entering the second half of 2025, we believe we are well positioned to navigate external uncertainty and execute our long-term growth strategy.

By delivering our diverse portfolio of innovation and building on our leadership in Pet Health, Retail and Farm animal, we are on a clear path to becoming a company with consistent competitive revenue growth, a higher-margin profile, a stronger balance sheet with stronger cash flows and higher returns on invested capital.

Turning to the second quarter revenue performance on Slide 5. We break down the 8% underlying organic constant currency revenue growth. This chart highlights the broad strength we're seeing across our global business with all four quadrants growing nicely. US Pet Health led the quarter, up 11%, driven across both Vet clinic and US retail. Credelio Quattro and Zenrelia provided substantial contributions, which I will review in more detail shortly. Our innovation lessens the impact of vet visit volume declines and benefit the greater portfolio with vaccines and pain also both positive in the quarter.

At retail, OTC parasiticide portfolio performed well with Seresto A family sales both recovering to double-digit growth. We are pleased with our performance and a delayed peak season as we continue to build on our leadership position and expand our physical availability.

Moving to International Pet Health. We delivered 7% organic constant currency revenue growth, driven by AdTab, Zenrelia and Credelio. We see meaningful tailwinds for our innovation through geographic expansion, including AdTab's successful launch in the UK Enable and Zenrelia's positive performance in Brazil, Canada and Japan.

The US Farm Animal business delivered another solid quarter, up 5% and reinforcing our market leadership. Our recent data shows market leadership in beef, poultry and swine, reflecting the strength of our portfolio our customer-centric approach and our continued commitment to the space. Experior leads the way with rapid adoption in Hefer since we received FDA combo clearance in late 2024.

Experior also driving portfolio benefits with other cattle products like Rumensin, partially offset by a difficult comparison from vaccine resupply in the second quarter of last year. Finally, international farm animal was up 6% in organic constant currency with growth coming from poultry and swine. We did observe some pre-tariff buying to satisfy customer demand primarily in China.

Importantly, underlying growth was healthy even when excluding this timing shift. We are encouraged by the continued durability and growth of global farm animal markets supported by increased demand from animal protein. Looking at Slide 6, we delivered $420 million of innovation revenue in the first half. This continued outperformance is driven by our broad basket of innovation, namely Credelio Quattro, Experior, AdTab and Zenrelia. We're increasing our expected innovation contribution for 2025 by $60 million at both ends of the range to $720 million to $800 million, representing our success in bringing multiple products to big markets around the world.

You'll remember this target does not include IL-31, which remains on track for approval in the fourth quarter of this year with commercialization in the first half of 2026. Let's further discuss the progress on our major innovation products on Slide 7, starting with Credelio Quattro. We believe this is a best-in-class product in the fastest-growing animal health market and we're very encouraged by how it is resonating with vets and pet owners.

Share capture continues to track ahead of expectations, and we're also seeing Quattro grow the market. The US broad spectrum and decto market is $1.3 billion and growing substantially at almost 40%. In June, we achieved approximately 14%-dollar share of broad spectrum sales out of vet clinics directly to pet owners.

Sell-in and sellout rates were at relatively consistent levels to each other at quarter end, reflecting healthy inventory dynamics and standard distribution fill effects typical of new launches. Strong clinic buy-in demonstrates veterinary confidence in Quattro and sell-out levels reflect growing consumer demand with our increased DTC investments showcasing the three dimensions of differentiation.

Quattro has broad coverage, including multiple species of tape arms, speed of tick Hill and heartworm coverage from month 1. We're also pleased with the continued consistent feedback from vets and pet owners really appreciating the great palatability with Credelio Quattro. And although still early, we're quite encouraged by the performance of our DTC campaign for Quattro.

We've seen dispensing sales increase as we continue to ramp investment. We are leaning more into DTC based on the long-term ROI and the growing potential we see in this product. We also remain pleased with the limited cannibalization impact. as approximately 70% of Quattro's share capture has come from competitive product switches or new starts. Additionally, it's bolstering the broader portfolio in the clinic.

For example, 2,200 clinics that bought Quattro for the first time, bought another Elanco product for the first time. Of those 2,200 clinics, 500 had never bought any Elanco product before. This innovation is also improving our presence with corporate accounts, where we've historically underindexed.

This successful launch to give dogs Quattro level protection is a credit to our expanded sales team our well-informed veterinarian customers and our distribution partners. Finally, we're preparing to take Quattro global with numerous submissions made in Australia, Canada, the EU, the UK and Japan, setting up what we expect to be a nice geographic expansion starting in 2026.

Turning to Zenrelia. This has been a robust quarter. Our best quarter so far, operationally, strategically and globally. We're making steady progress, gaining share in the $1.9 billion rapidly growing dermatology market. As we moved into peak allergy season during the quarter, we achieved growth ahead of our expectations with more first-line treatment use and willingness to use.

This is a testament to Zenrelia's efficacy, convenience and value with our multifaceted approach to building awareness and appreciation for these key points of differentiation. In the US, we have approximately 10,000 clinics buying the product with a reorder rate of almost 80%, up from 70% shared in May. Zenrelia's real-world experience coupled with our strong tech-to-tech selling is driving greater adoption and product usage. We've seen our patient market share in the US derm market double from 2% in March to 4% in June, and US Zenrelia sales more than doubled in Q2 versus Q1.

The patient share adoption growth has been very balanced with both average sales per clinic and the number of clinics buying, growing at double-digit rates month-over-month in the quarter. Our market research data shows that approximately 50% of Zenrelia users are now using the product as the first-line treatment, primarily for new patients or seasonal restarts versus just a second-line treatment option.

We'd like to share a very recent positive update regarding the Zenrelia label. Zenrelia achieved a milestone with the receipt of FDA CBM's complete letter for its safety supplement. This supplemental NADA included additional published data to address CBM's concerns for the risk of fatal vaccine-induced disease.

The 60-day administrative supplemental NADA process is now underway, which is expected to result in removal of this risk language from the box warning section of the label. Once the supplemental NADA is fully approved, the revised label is expected to be made public in Q4. We're pleased with this progress and continue to actively pursue the generation of additional data to further improve the label even more. Our goal is a US label that is more consistent with our international approvals.

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

We are very pleased with the results confirming Zenrelia's strong efficacy profile and reflecting what we're seeing in the global market, with more than 0.5 million dogs treated with Zenrelia. The launch in Europe began immediately with approval last month, orders being taken now and product in the market before the end of the third quarter. This follows a strong start in Brazil, Canada and Japan.

Additionally, we continue to expect approvals in the UK and Australia this year, creating a significant foothold in a $600 million to $700 million international derm market. Also in Europe, we continue to see very robust growth for AdTab, a leading oral OTC flea and tick product for both dogs and cats.

Sales increased over 60% in the quarter, supported by strategic DTC investments. AdTab anchors our comprehensive portfolio of OTC parasiticides, including oral collar and spot-ons and is the only oral OTC isoxazoline for cats in the EU market, which is a key differentiator. AdTab also was approved and launched in the UK in April with good early traction.

Finally, our canine parvovirus monoclonal antibody remains an important treatment for the deadly parvovirus. We're excited for the prophylactic claim extension to help more pets fight the disease. We're working through strategic interventions to address the cost of treatment and to accelerate clinic penetration across all channels.

In Farm Animal, Experior had another outstanding quarter, continuing to grow rapidly in an estimated potential market of over $350 million in the US and Canada. We're also pursuing other international expansion opportunities. We are pleased to see US cattle showing the first signs of rebuilding the herd.

This heard growth and strong cattle producer economics, combined with growing share sticky customer retention at over 90% and geo expansion should all form a nice backdrop for what we expect to be strong Experior growth ahead. Overall, we see a significant runway for Experior's continued robust growth, up over 80% in Q2 despite a tougher compare while additionally driving portfolio synergies.

Lastly, on Bovaer. We are encouraged by sustained strong demand and accelerating adoption, reflecting its economic value to dairy farmers and brand value to consumer packaged good companies. Notably, CPGs have demonstrated robust demand for Bovaer. With approximately $20 per head return to the farm, Bovaer can add 5% to 10% to the dairy cash flow. Since February, we've quadrupled the number of cows on over to approximately 150,000.

Customer retention is likewise very high at over 90%. We expect the entire ecosystem around Bovaer to support long-term use as we continue to see the product as our next farm animal blockbuster. This innovation also further establishes Elanco as a pioneer in strengthening CPG brand value all the way back to the farm.

Moving to Slide 8, we provide some recent highlights across all 3 elements of our IPP or innovation portfolio productivity strategy. As innovation accelerates our growth, it also stabilizes our base portfolio. In US Pet Health, we continue to gain share in parasiticides, NSAIDs and Derm. Our recently approved canine influenza vaccine enhances our extensive line of true portfolio vaccines providing a lift across the full offering.

We began shipping the product last month. In June, the EPA approved our advantage collar for dogs. With Seresto already available as a premium eight-month product on the market, our advantage collar will provide pet owners and veterinarians with a four-month collar for protection under the trusted Advantage brand. We anticipate this innovation to strengthen our retail leadership with an expected US launch in the first half of 2026.

All of this in innovation, while Ellen and our R&D team continue to progress the next era of blockbuster innovations. Finally, on productivity, we are delivering substantial progress in strengthening our balance sheet and optimizing our operations. We've improved our net leverage ratio by 1.5 turns in just six quarters. through a disciplined focus on cash generation.

On the manufacturing front, we're on track for our strategic expansion in our facilities in Fort Dodge, Iowa; and Elwood, Kansas with the latter supporting our monoclonal antibody platform. We continue to expect CapEx to step down next year.

As I close, I want to highlight an important program we have launched in Q2 called Elanco Ascend. This is a company-wide initiative that we expect will drive additional productivity and capabilities in key areas. As we have stated before, we expect to grow adjusted EBITDA in 2026, all while investing behind our launches and positioning Elanco for improved productivity and efficiency over the rest of the decade.

We expect Elanco Ascend to create a key platform to enable sustained and consistent value creation while making Elanco more competitive and innovative going forward. With that, I'll pass it to Bob to provide a few comments on where he's focused his initial reflections and review our second quarter results and financial guidance. Bob, welcome to your first Elanco earnings call.

Thanks, Jeff, and good morning, everyone. I'm thrilled to be part of the Elanco team as the company enters its next era of growth. I'm eager to work alongside the leadership team and build on our existing momentum in growth innovation and cash generation. Over the past month, it's already evident to me that the talent here is world-class, grounded in a purpose-led vision with a culture that is uniquely collaborative.

Our people are truly the foundation of our accelerating performance and the long-term positive trajectory I see ahead. My goal is to build and support the current team and momentum while bringing a fresh perspective to key opportunities. I'm confident in our ability to execute on our plans, and I'm focused on driving value creation through a continuation of our productivity and cash generation efforts.

More specifically, I have two priorities going forward. First, Elanco Ascend. Building on Jeff's comments, this key initiative is expected to proactively accelerate efficiencies across our organization in 2026 and beyond. We are looking beyond the margin benefits we can naturally capture through better mix and consistent growth. There's more we can do in digital.

We are leaning in to automation and AI to leverage those capabilities across the business. Procurement is working to identify opportunities with suppliers, and we have fresh eyes with an early priority on general and administrative expenses and manufacturing. With Ascend, we'll look for opportunities across the company while continuing to invest in the muscle behind our no regrets launches and R&D.

Ultimately, we want to create the most innovative, efficient and competitive animal health leader that delivers consistent shareholder value. This is my top priority. And second, we're examining how we can further improve cash flow generation, including working capital and CapEx initiatives. I appreciate the importance of continued debt paydown, which remains our top capital allocation priority.

We are also beginning to evaluate refinancing possibilities for our 2027 tower with ample time and optionality for this transaction. In my view, these priorities lead to a significant opportunity for sustainable value creation. After one month with the company, I'm even more confident in the momentum and trajectory of our business.

The finance team is partnering closely across the organization to enable a long runway of durable growth with our diverse portfolio of innovation, growth in the vet clinic and leadership in Pet Retail and Farm Animal. I'm excited to help the Street see what I see through consistent execution and transparent communication, and I look forward to connecting across the investor community in the days and months ahead.

Now let's turn to second quarter results. I will focus my comments on our adjusted measures. So please refer to today's earnings press release for a detailed description of the year-over-year changes in our reported results. Starting on Slide 10. We delivered $1.241 billion of revenue, representing an increase of 5% on a reported basis. Organic constant currency growth was 8%, driven by a 5% increase in volume, and 3% contribution from price.

Slide 11 provides revenue by the four quadrants of our business. Total Pet Health revenue increased 10% in constant currency in the second quarter, with price contributing 4%. In the US, Pet Health delivered 11% growth, driven by demand for our key innovation products and contribution from the vaccine portfolio. Improving retail dispensing trends resulted in increased sales for our Seresto and AdTab family brands.

Outside the US, our pet health business grew 7% in constant currency, led by continued demand for AdTab across Europe and sales of Zynrelia in three international markets. Globally, our farm annual business achieved 6% growth in organic constant currency. The US Farm Animal business grew 5%, driven by the strength of Experior. Outside the US, our Farm Animal business contributed 6% in organic constant currency, driven by higher demand in poultry and swine across multiple geographies.

I'd like to highlight, we also experienced pre-tariff customer buying primarily in China, that we estimated approximately $50 million in revenue. Continuing down the income statement on Slide 12. Gross margin decreased 90 basis points to 57.3% and due to inflation and the higher manufacturing costs associated with owning the Speak facility, partially offset by favorable price, volume and beneficial product mix driven by the US Pet Health performance.

Operating expenses increased 11% compared to the same period last year, driven by our Global Pet Health product launch investment and the Q1 to Q2 timing shift as we adapted to a weather-delayed parasiticide season. While these investments are currently impacting adjusted EBITDA flow-through, we believe they are yielding strong returns and are critical for long-term brand success and value creation. Interest expense decreased $27 million year-over-year to $38 million driven by the significant debt reduction from last year's Aqua divestiture.

On Slide 13, we have provided walks to illustrate our year-over-year performance in adjusted EBITDA and adjusted EPS. Adjusted EBITDA was $238 million, a decrease of $37 million. Adjusted EPS was $0.26 in the quarter, a decrease of $0.04 year-over-year. On Slide 14, we provide an update on our cash, debt and working capital. Cash generated from operations was $237 million in the quarter compared to $200 million in the same quarter last year. We ended the quarter with net debt of approximately $3.4 billion and a net debt leverage ratio of 4 times.

Now I'd like to say a few words on capital allocation. Elanco has consistently emphasized the importance of deleveraging and has made substantial progress towards reducing debt and achieving the 2025 target. Investors can expect a consistent capital allocation strategy going forward. As outlined on Slide 15, debt paydown will be the primary use of free cash flow. Longer term, we aspire to be under 3 times levered and anticipate capital allocation flexibility once these levels are reached.

Now let's move to our guidance on Slide 17. Driven by the strength of our innovation portfolio, on a stabilizing base, we are raising the bottom end of our organic constant currency revenue growth range, now expecting 5% to 6% top line growth. We are increasing reported revenue guidance to $4.57 billion to $4.62 billion, inclusive of approximately $35 million from the favorable impact of foreign exchange rates since the May earnings call. To further fuel the trajectory of our innovation launches, we are increasing DTC spend.

Operating expenses are now expected to increase by 7% in constant currency for the full year versus the previous outlook of 6%. Adjusted EPS is expected to be between $0.85 and $0.91, which includes $0.01 for improved expectations for interest expense. We are also updating our cash and balance sheet expectations for 2025. With the proceeds of the Ladalaner US royalty monetization combined with cash generated from the business, we now expect between $500 million and $550 million of cash available for debt paydown this year. As a result, we now anticipate end-of-year leverage improving to 3.8 times to 4.1 times.

Slide 18 provides walks from our May to August guidance for adjusted EBITDA and adjusted EPS. And Slide 26 in the appendix provides several additional assumptions to help support your modeling efforts. We are increasing adjusted EBITDA guidance by $20 million to reflect our $28 million outperformance in Q2. This was partially offset by approximately $10 million of increased investments in our recent launches and a normalization from pre-tariff customer buying with a Q3 impact of approximately $10 million.

You'll remember in May that we previously held back $25 million in FX tailwinds for adjusted EBITDA given the macro uncertainty and 3/4 of the year left to go. Today, we are pulling through $15 million while holding back $15 million. Let me share how we are continuing to navigate our expected tariff exposure in 2025 on Slide 19. With mitigating strategies implemented and pauses and trade deals announced since our previous assumptions, we believe the total net impact to adjusted EBITDA as of August 5 is now an estimated $10 million to $14 million.

This range is slightly down from our prior expectation and includes tariffs imposed by the US, China and the EU. We have maintained a balanced profile of risks and proactive opportunities. In recognition of an evolving situation, our potential risk scenarios for 2025, including tariff escalation and economic slowdown are offset by that $15 million of potential foreign currency exchange favorability that we have not flowed through in guidance.

Overall, our mitigation plans, the weaker dollar and our strong execution allow us to cover the potential 2025 tariff impacts and macroeconomic challenges. We remain confident we can execute and achieve our targets in multiple scenarios. Our tariff-related actions are now focused on 2026, which should benefit from several mitigating strategies, including supply chain optimization, inventory management, tactical pricing in select geographies and strategic API sourcing.

We have the right teams and the right portfolio to deliver for our shareholders and our customers and the global communities we serve. On Slide 20, you'll see our guidance for the third quarter. We expect organic constant currency revenue growth of 4% to 6%, largely driven by the positive momentum in both our Pet and Farm businesses with 1 percentage point of impact from accelerated customer purchases in advance of expected future tariff increases.

On a reported basis, we expect $1.08 billion to $1.11 billion in revenue. The year-over-year increase in operating expenses is expected to be approximately 8% in constant currency, including the incremental DTC investment. Putting it all together, we anticipate adjusted EBITDA of $160 million to $180 million and adjusted EPS of $0.12 to $0.16.

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

Thanks, Bob. We entered 2025 knowing our customers and our investors expect consistent delivery. And I'd like to once again congratulate our team on not just delivering results, but in true Elanco spirit, going beyond. Our innovation portfolio is accelerating growth, and our focus on cash generation is driving rapid debt paydown.

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

But speaking to my global Elanco team members, our work is not done. The last eight quarters of growth are setting up the next eight quarters of opportunity. Elanco is an execution story, and the outcomes of that execution will drive the value to our customers, to our shareholders and yes, to our futures. This is a long-awaited moment in our strategic trajectory and I have never been more confident in Elanco's opportunity to deliver long-term shareholder value and transform animal care.

With that, I'll turn it over to Tiffany to moderate the Q&A.

(Event Instructions) Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

(Operator Instructions)

Jon Block, Stifel.

Thanks guys, good morning. Jeff or Bob, can you talk about some of these accelerated investments that you're making in the business? I think it was a slide pointing to an incremental $10 million. Is this around specific to Credelio Quattro that seems to certainly be doing well. And then maybe just a bit of tack on to that first question would be, at a high level, do we think about the business leverageable in 26 ex Ascend and then is Ascend initiatives margin accretive, call it, day one? And then I'll ask my follow-up.

Thanks, Jon. Thank you. Yes, it was a great quarter. And to answer your question on expenses, they really will fall into 2 areas, and it's first around the DTC. So listen, Quattro, and I'll just make a couple of comments on Quattro to start, Jon, and we can go deeper there.

But a special product, off to a tremendous start as we've said, it's early. No conclusions at this point. But in our opinion, Quattros acting like best medicine and is fast-growing 40% growth, broad-spectrum and deco market, it's not acting like 1/3 to market. And because of that, then even if we look at market archetypes, I mean the share that it's taken so far, we've had it in the marketplace for five months, media on for four months we see a real great opportunity with the backdrop of a very fast-growing market.

And I think what's doing it is the 3 points of differentiation. We're kind of calling it the Quattro effects. So what we've done is, hey, what we're doing is we're building the biggest brand family Elanco has ever had being the Credelio brand family, Jon. And so we're going to lean into this. This family will be anchored by Credelio Quattro.

And as we look at it, the way the media response we've seen as we've increased it through the end of Q1 and into Q2, we've seen dispensing grow. We did run an A/B test and we saw positive results. So we've made a decision to lean in on that. So that's one of the drivers.

I think the other one is a little bit of R&D. I mean, Ellen has had a great quarter with lots of milestones with her and her team -- and we are progressing nicely. The next blockbusters coming through the pipeline, and we made a decision to lean in a little bit on the R&D expenses as well.

So as we go to 26, I'll have Bob chime in here as well. launching of Ascend, let me be very clear. It's a company-wide initiative that's going to drive better capabilities, the AI, the digital that Bob mentioned, as well as productivity and there'll be drivers. We're not giving 2016 guidance today. But I think as you look at 26, we've said EBITDA will grow and will grow from the innovation growth and the EBITDA growth.

And it will also, as we introduce today, it will come also from productivity. We want to do both points. And Bob has put a lot of time in his first few weeks here on this. Maybe a few comments from you, Bob, on Jon's question.

Yes. Thanks, Jeff. And Jon, I'll just give you my perspective on 2026 as well as the years beyond. We are going to continue to build on momentum that we've seen so far. Obviously, we're very excited for the sustainable revenue growth that we're going to achieve through the portfolio of our innovative products that we brought to the market and a stable base.

And obviously, as innovation scales, these innovations have higher margins than our total average, and so we're going to see some benefit and profitability there. But we are going to continue to invest in the muscle behind our no-regrets approach to launches in R&D.

And with that, we're going to continue to leverage our existing cost base. But again, that's where Ascend will come in and continue to provide additional capabilities through leveraging AI and digital as an example. But we'll proactively accelerate efficiencies across the organization as well, primarily focused on manufacturing and G&A functions. And then the last thing I'd leave you with on 2026 is we're going to continue to focus on cash and focusing on the fundamentals around trade working capital and using that cash to pay down debt.

Great follow-up, John.

Yes. Very helpful. I guess the follow-up, Jeff, at a high level, like the innovation reds are now up $300 million year-over-year at the midpoint. It sort of implies a base as down around 1% change this year. There's some moving parts, right, behind that with like CMO, et cetera.

But this is not a 26 question, but at a high level, just your thoughts on the sustainability of like this mid-single-digit growth for the company and more importantly, maybe the crux of the question is like what does that algo look like?

In other words, is it a flattish phase and then you have innovation driving 400 to 500 basis points with what you and Ellen and Bob have in the pipeline? Or do you actually see an opportunity to maybe further stabilize the base, get a little price and maybe that can improve and help the overall dynamic?

Thank you.

Yes. Great question, Jon. And we've said all along, the base matters and the formula is working relative to every major portfolio that's getting a little innovation not even the blockbusters is stable. And we do -- we don't have those big pockets of declines either. So yes, flat to minus-one is kind of how the calculation is.

You're seeing our price growth, which means we're adding value in the marketplace. So when we inspect the business as we go into 26 business planning, it's every portfolio, how is it strengthened. If I go down Ellen's list right now of what's happened, it's not just the big innovation, yes. We got the EU's Zenrelia approval. By the way, little news, we got the UK's Zenrelia approval this morning. But when you build on to it, adding the advantage collar, four-month collar with the Advantage brand will be beneficial. Bobby picks up a vaccine, flu vaccine, that will help as well.

The IL-31 is tracking as we know. So what I would tell you is it's adding the innovation to the portfolios, that will be the key algorithm. But without question, what moves the dial the most to Bob's point, is ramping. We are not going to have any regrets. We think we've got a basket of innovation, very different than maybe other companies, not one or two but major basket of products, we've got to maximize what we have, make the ramp more steep and get to that peak and make it as high as possible. So that's more to come on '26, Jon.

Daniel Clark, Leerink Partners.

Great, thank you. I wanted to ask another question initially on the innovation sales target raise. I know you're not going to break out kind of on a product-by-product basis, like what drove the $60 million increase. But can you just give a little color directionally on like what the main contributors were? Was it Quattro? Or were there others that really help drive that?

Yes. So I'll give you a little bit of color from my perspective, Daniel, thanks for the question. So as you know, we did increase our expectations for the year up now to $720 million to $800 million we feel great about the growth in all the launches, but I do want to remind you there's a bit of seasonality in that as well.

So (inaudible), for instance, are more weighted towards the first half. AdTab in Europe is especially seasonally weighted towards the first half. But the growth is being led, quite honestly, about almost the entire basket, but especially Quattro. That's where we're really seeing some activity there. And one of the reasons we're leaning in on the DTC spend because we are seeing the data that supports it.

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

Yes. As Jeff mentioned, right, the data is supporting that the investment in DTC spend and R&D is supporting that top line growth, and we're seeing dispensing levels increase. And so we'll obviously monitor the effectiveness on an ongoing basis. But as we continue to see the effectiveness of that spend and that top line growth, we'll continue to invest.

And as we see that at some point, taper off, that's what we'll ratchet down. But I would highlight, we did increase year-over-year OpEx spend in our guidance in DTC and a bit in R&D for that next basket. But in total dollars, we are down sequentially from Q2 to Q3. So it's something we're actively monitoring and we're using data to make those decisions.

Michael Ryskin, Bank of America.

Great, thanks for taking the question. Bob, I want to touch on something you mentioned just a little bit earlier in Q&A when you're talking about the margin uplift from innovation gaining scale. If we just sort of look at some of the comments you gave in terms of clinic share and wallet share in 2Q, it looks like Zenrelia sort of in that $10 million range. Quattro was $50 million, if not $50 million-plus.

Those are really solid numbers after just a couple of quarters if we sort of think about what it could mean for the year. When we think about some of these innovative products, you talked about obviously the margin accretion as they gain scale.

You're getting that scale earlier than anticipated, right?So can you talk about the benefit to gross margin, sort of what the threshold levels need to be when a new launch goes from being dilutive to breakeven to really accretive, either from a volume or a revenue perspective. Just talk us through that ramp and the margin benefit there?

So two things on margin, right? So again, as I've highlighted, and you've highlighted as well, we are going to see margin accretion through these launches continuing still with a stable base. But as you think about the entire gross margin profile, we are going to make the right decisions for the long-term health of the business. And so again, we're going to use data to support when we are investing to get that top line growth. We do have price of approximately 2%.

We'll continue to work on operational improvements within our four walls, and that will include absorption. But longer term, as these continue to move forward and these launches to accelerate, we're going to be able to get that mix margin over a trend of several years. And then Elanco and will stand, come in on top of it and help us think through how we use AI and automation as well as being cost-effective and reinvesting in growth. So I think it's safe to say we'll continue to see improvements in both margins and EBITDA margins over time at this point, but that's where I'd leave you with where we are today.

And I'll just pick up, Michael. As you know, we've got [HenanFrance] as our plan or oral dose plant. The good news is we've been making Credelio there for a long time. We've added Zenrelia. Now we've added Quattro.

So what Grace has done with her team is really we're getting that optimization now and we'll continue to scale, and we're putting some CapEx in that plan as well because of the size that we're seeing and the potential of Quattro and Zenrelia. But we've gotten a lot of that efficiency out of the gate different than maybe some of the other things that you scale from maybe a new plant like the monoclonal antibody out of the gate. So -- but overall, we're getting that synergy as a whole on the COGS.

Okay. Great. Thanks. And then Jeff, you want to follow-up on Zinreliand some of your comments on the label change. encouraging update on getting the fatal vaccine response taken off. I know there's not a lot of data on this. In terms of your launch in external markets, OUS is still relatively early. But how should we think about the benefit of that?

I mean anything you can say in terms of how it's ramped in Brazil, in Canada and Japan versus health ramps in the US And therefore, as the US label moves closer the international labels, anything you could say in terms of how that could benefit the uptick in the acceleration in the US?

Yes. Thank you, Michael. So listen, great news. I mean nine months, Ellen's team and credit to the FDA, they accepted the science and just for clarity for everybody, I think it's important that Again, we are in the middle of a 60-day administrative supplemental review. It's underway. They accepted the PCR data that we submitted, and they will remove the fatal vaccine-induced disease risk from the label on that 60-day mark. So we're looking at -- that would happen likely with the new label in Q4.

So what does it mean? Well, I think more clarity creates more confidence, more confidence was going to create more clinics and more dog penetration. We believe that that's going to happen. If I back up very quickly on Zenrelia, it was our best quarter so far, operationally, strategically globally. And the market is growing double digit, right?

So we have a great backdrop of derm growing, and I think Zenrelia helping that. But what we're seeing is growing share growing first-line use. That first-line use in the US is increasing and definitely has in Brazil and Japan and Canada, where we've got nonrestrictive labels.

We are launching right now in Europe in the second biggest market. So we're getting a foothold in the $600 million to $700 million market with a product that we think has got differentiation because I think the big thing right now is efficacy. Everyone is looking for efficacy, and we're kind of stepping into this derm season which is right in the midst of it right now with a product that's showing that differentiated efficacy. So that's where we are. I think the label is a good sign, and I want to emphasize, we're continuing to generate data. We want a US label like the international labels.

Andrea Alfonso, UBS.

Welcome, Bob. Hi Jeff and thank you so much for taking the question. So the 6% organic volume growth in the second quarter was really quite impressive -- just curious how much of that you think was some sort of an impact from delayed visits in 1Q due to weather issues. And as you think about the back half, how do you see those volumes trending.

And I guess separately on the 10% constant currency that you reported in Pet health, where do you see that figure stocking up versus the 5% to 6% organic revenue growth that's within your full year expectation. Should we still expect more of a skew towards volume over price?

Thank you so much.

Yes. Thank you, Andrea. It was a little difficult to hear. But I think at the highest level, you're right, we did have a slower start, especially on the retail side on the season, but we saw the rebound as we went into Q2 with nice double-digit growth on our retail side with Seresto, the A family as a whole. And then, of course, the innovation growth on Bobby's team here in the US Health.

Look, I think as we look at it, innovation is the key driver, and I think we're insulated from that visit, no question. And then I think as you look at compliance, the globalization on the pet side, all of these things really create a nice backdrop, we believe. And then if you just study the animal health industry in the first half, my belief is these pet trends on willingness to spend, compliance, globalization, a payer market,growing double digit, a derm market growing double digit, I think we're set up well. So we'll continue to watch. We want visits to recover. But I think Elanco is insulated from that and well positioned as we go forward.

Chris Schott, JPMorgan.

Thank you so much. This is Katerina, on for Chris. So first question is just on Credelio Quattro. I think you've touched upon this, but can you maybe elaborate a bit in terms of where share is coming from for the product. How much of this is triple versus double versus cannibalization versus kind of dogs newer to the category? And kind of any surprises as you're kind of looking at those share numbers.

And then second question is just around Experior. The product has obviously had a number of strong quarters. Can you maybe talk a bit where incremental uptake is coming from? And then also maybe elaborate on the potential for international expansion. For the part, which geographies do you think make the most sense there just in terms of Europe or South America?

Thank you so much.

Thank you Katrina. Yes. So great quarter for Quattro and again, exceeding our expectations on uptake overall. And as we've said, 70% of our growth is coming from either new starts or competitors in there. We're not double clicking on that. But what we'd say is the incumbents in that market, some of the legacy again, new starts.

And I think I would also say just what we're seeing in this broad spectrum endecto market, a $3.9 billion market, it's now $1.3 billion. So we're 30%, 70% of puppy starts, I like what's happening. And I think Quattro is helping that market continue to grow at that 40%. So -- and cannibalization is lower than we expected at this stage.

And again, to build on everything we've said, that's why we're going to lean in on media and a real credit to our sales team our distributors and to the vet relationships to make that happen. And then on Experior, yes, great question. Another great quarter for Farm Animals. Here's our growth plan very briefly. Herd is starting to be rebuilt. So we're going to get some advantage from that herd growth numbers, both steers and efforts.

Producer economics are strong. That bodes very well for Experior the share. We'll get customer retention is also at over 90%. And then we'll take some value-based pricing appropriately going forward and then look for us to have geo expansion on Experior here as we head into 2026. So a nice runway for Experior going forward.

Brandon Vazquez, William Blair.

Hi everyone, This is Russell, on for Brandon. I wanted to first start at a high level. You have reported strong growth in pet health in the US specifically. Could you kind of talk to your confidence in the sustainability of your growth with the ramping of innovation and talk about underlying market growth trends and how you would characterize the health and demand of the underlying pet market right now?

Yes. Thank you for the question, Russell. So yes, the overall US Pet Health team will speak specific to us and then maybe to the industry, a real call out, I think this team has -- it's been a multiyear pragmatic approach and the strategy has been, Hey, bring the best expertise from the industry in, let's build the capabilities and execution rhythm.

We've invested, as you know, in an increased sales force as well as the digital and I believe we've got one of the most dynamic sales forces and maybe one of the best distribution relationships in the marketplace and then approach the omnichannel approach with retail and the vet clinic.

So as a whole, we're set up really well and no question, innovation is key, but what Bobby and the team are doing, too, is building out the portfolios from the vaccine portfolio to pain to retail with a little bit of innovation as well as get behind these blockbusters. So we see nice growth for pet health going forward for the rest of this year and going into '26, no question, and we'll invest accordingly as we've highlighted.

As I step back, I think, to broaden your question briefly, as you look at Animal Health, from a consumer basis, yes, visits are down, and that's important. But I go past that and look at the durability and really the strong backdrop we have in pets and protein. Pet numbers are up, the needs continue, compliance and what we're doing. Just in the last quarter, what's happened in the channel is making pet owners get pet medicine easier and more frequently, that's going to drive growth.

Second is globalization. Every major international markets growing faster than the US and driving these double-digit growth, and then the younger generations willingness to spend. Those three trends, Elanco believes, followed by good innovation sets up very well.

And then on the protein side, the -- I believe there's an animal protein kind of revolution going on and our Farm Animal businesses seeing that as well as really what's converging is this new diet, protein heavy diet with really a strong innovative products to protein is set up well. So great backdrop for pets and protein and Elanco bodes well in that.

Got it, that's very helpful, thank you. And then on (technical difficulty)

Michael DiFiore, Evercore ISI.

Hey guys, This is Mike DiFiore, in for Umer. Congrats on a great quarter. Two for me. And I may have missed this --

A little louder, Mike, if you could, that would be great. I'm just --

Sure. Two for me, and I may have missed this in the opening comments, but for Credelio Quattro, now that it's been six months into launch, I was wondering if you'd be able to break down how much is coming from new puppy starts versus switches from other products. And the second one is on the farm animal business. As we think about how to model this segment for the balance of the year, could you perhaps break down the current status and trends of the macro factors affecting each species in the US versus ex US?

Yes, Mike, real quick on the first one. We're thinking about 70%. We're not going much deeper than that right now. We're analyzing the data. We've been in the marketplace about five months. Media has been turned on about four, and we got about 70% coming either from the competition and switches. So -- and then look, on farm animal markets overall, I think continued trends from the first quarter, Mike, as we look at it.

I think cattle, you've got that low supply, high demand, really strong producer economics in beef is really doing well when we look at our portfolio and the value that we can add, swine is probably the change story. There's improved economics definitely in the US and swine as we see lower supply, higher prices, and we expect that to support really a strong finish to the year on the swine side.

And then you've probably seen with the results from some of our customers, as beef prices increased, it really helped global poultry demand, both here in the US and globally and with our global poultry business. Really strong poultry economics right now overall, given that the demand is up significantly more than the past. So -- that's it, overall, dairy continues to probably revolutionize with new products, $10 billion going into the US. And I think we've seen a more stable dairy business in 2025 than we've seen in a long time.

Very helpful, thanks so much.

Navann Ty, BNP Paribas.

Good morning. Maybe on Bovaer, if you could discuss the progress on the (inaudible). Also interested to hear how you will position the advantage color versus Seresto and maybe a longer term question. So Elanco progressed very well on deleveraging. So I don't know if it's too early to discuss your capital allocation once you reach that 3 times leverage?

Thank you.

Yes. Thank you for the question. I'll take the first two, Bovaer and Advantage and then Bob just briefly. But at a high level, I'll be brief to say a great quarter for over. And I think the simple message here is we pivoted from grants and just sustainability to really focusing on farmer value, economic value and CPG brand value.

And I believe it's working. It's early on, as we know, but we've seen robust CPG value. And our vision really here is, Navann, is really to strengthen CPG brand value with a over and take that all the way back to the farm and add 5% to 10% and to their cash flow.

So we've -- right now, it's really a logistics game, very similar to Experian in the early days. It's on the farm on the ground. That's the battle, it's an execution but Elanco is well positioned. We're a feed additive leader. We got a good portfolio, and we've got the only digital mechanism uplook on the farm that can actually monetize this into value for the farmer. So a great quarter and a lot of momentum, 4 times the cows on Bovaer.

And look, on Advantage, it's a four-month collar. We're going to do just what we've done before. We're going to leverage the Advantage brand all around the mission of with 4 months is, hey, we're going to give more forms at different price points to more pet owners. And we know that when we bring innovation into this retail and e-com, you drive overall portfolio growth, and that's what we're looking for in 2026, a real nice job between Helen and Bobby's team.

Yes. I'll take the capital allocation question, Navann. So first off, no change in the capital allocation strategy as we sit here today. Debt paydown is absolutely going to be the primary use of cash. We look to continue to focus on fundamentals around trade working capital and improve cash flow over time.

As we stated, we do expect our leverage to get to 3.8% to 4.1% by end of the year. But longer term, we aspire to get under that 3 times levered, which will allow for capital allocation flexibility once those levels are reached.

Next caller.

Erin Wright, Morgan Stanley.

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

How do we think about stocking dynamics, both at distributors and at retail. And anything to call out on that front in the quarter? And is there just conservatism? Like why wouldn't the momentum continue here? Should Credelio Quattro continue to build? Should Pet Health continue to see double-digit growth in the second half.

If you could provide some detail, there. And then my second question, which I'll ask upfront is on IL-31. I think you mentioned it's on track, which is great. Where do we stand now in terms of your conversations with the regulators when will we expect to hear something more material in terms of an update on that front? And yes, your confidence in that product?

Thank you very much, Erin. So let me be very clear. I think Elanco inventory levels overall as a company are at or below all-time lows or at least five-year lows, and we see nice demand in and nice pull-through out from vet clinics to even on our farm animal business. So nothing out of the ordinary that we have to date or we see for the rest of the year on sell-in, sell-out and inventory levels, nothing more than what's normal when you launch a new product. So that I want to be very clear.

None of those dynamics or any of the guidance at all and nothing is expected. So that's one. And then I think on your second question is the fourth quarter, I would just say, got your normal pushes and pulls. You've got a competitive environment out there. You've got competitive innovation that we have in our guidance as well. We're trying to take a prudent disciplined approaches of the pushes and the pulls you got a dynamic environment. I don't think it's volatile.

I think it's mixed with challenges and opportunities for us, but that's being considered. And then you've got that FX factor in there as well that's a little bit of up and down week to week. So I think that's our approach. Yes, there is seasonality, but we continue to and will take advantage of leaning in on this basket of innovation. Look, on IL-31, let me be real clear, we're excited about this, we're excited about bringing another derm product into this great derm market. It continues to be differentiated. We've had no real change in the USDA relative to any of the dialogue.

We've had a few key milestones that needed to be achieved to keep us on track. And again, we're on track for an approval for Q4 of 2025 with a commercial launch in the first half. You know this Erin, we don't have a DFA inside the USDA. So there's always that variable. But we feel as strong or stronger than we did at the last quarter relative to our tracking on the IL-31.

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

Thank you. I just want to highlight here very much at the close. Again, a special thanks to the Elanco colleagues, we need to keep executing, keep acting like owners. I want to thank our customers. I mean there's a lot of trust and a lot of time it's been given with all the innovation and a dynamic time, and we don't succeed without our customers.

And I and, most importantly, to here is thanking you, our investors, your belief, your trust, your time, we know that we are a story about delivering, not promising. We're an execution story, and we're going to keep this. And we know to keep your trust. We need to do what we say. Quarterly guidance, high transparency and clarity. And I will assure you that we believe we're well positioned for the rest of '25.

We're preparing for '26 and even the rest of the decade with a focus on growth, innovation and cash. Engagement is high, and so is our resolve and our execution. So we look forward to working with you and engaging with you throughout the third quarter. Thank you very much. Have a great day.

This concludes today's conference call. You may now disconnect.