Elanco Animal Health - Earnings Call - Q1 2025

Transcript

Operator 1 (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Elanco Animal Health's First Quarter 2025 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number one once again. Thank you. I would now like to hand the call over to Tiffany Kanaga, Head of Investor Relations. You may begin your conference.

Tiffany Kanaga (Head of Investor Relations)

Good morning. Thank you for joining us for Elanco Animal Health's First Quarter 2025 Earnings all. I'm Tiffany Kanaga, Vice President of Investor Relations in 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 discussed in today's earnings press release, as well as in our Form 10-K and 10-Q filed with the SEC. We do not undertake any duty to update any forward-looking statement. Our remarks today will focus on our non-GAAP financial measures.

Reconciliations of these non-GAAP measures are included in the appendix of today's slides and in the earnings press release. References to organic performance exclude the estimated impact of the aqua business, which was divested July 9th, 2024. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Jeff Simmons (President and CEO)

Thanks, Tiffany. Good morning, everyone. Elanco exceeded first quarter guidance for revenue, adjusted EBITDA, and adjusted EPS. Continuing our momentum from the end of 2023, we have delivered a high-quality quarter with 4% organic constant currency revenue growth, evenly driven by price and volume. This strong Q1 performance represents our seventh quarter of underlying growth. On innovation, after delivering $198 million of first quarter revenue from our new products, we are raising our full-year expectations to $660 million to $740 million. We are pleased by the commercialization of our basket of six potential blockbusters, with the most recently launched product, Credelio Quattro, off to a great start, surpassing our expectations to date.

With a relentless focus on cash, we are deleveraging faster than planned, improving our net leverage target for year-end to 3.9x-4.3x, reflecting strong working capital performance, favorable currency, and the monetization of our lotilaner U.S. royalty stream for $295 million that we announced earlier this week. Looking ahead, we have raised our 2025 full-year revenue guidance for FX, and we are maintaining our outlook for organic constant currency growth of 4%-6%. We continue to expect accelerating quarter-on-quarter growth, with Q2 up 4% to 6%. March-April trends have provided early proof points, and innovation continues to ramp on top of a strong base business. We also continue to expect full-year adjusted EBITDA of $830 million-$870 million and adjusted EPS of $0.80-$0.86. The Elanco strategy is working and offsetting external uncertainty.

Our prudent approach recognizes our first quarter outperformance, recent momentum, and favorable FX, balanced by expected tariff impact and a dynamic macroeconomic backdrop. Our execution and our one Elanco global operating model give us the agility needed to cover various scenarios that may emerge in this external environment, including tariff and trade impacts, regulatory and policy changes, and shifts in the consumer sentiment and spending. We have a dedicated team implementing multifaceted intervention plans to allow us to deliver even during these turbulentx, and we will remain focused on growth, innovation, and cash as the right priorities to expand our long-term value proposition. Let's take a moment to walk through how we're covering our expected tariff exposure on slide five. You'll remember that with our late February call, we outlined $3 million-$4 million of potential impact from the first 10% imposed on China.

We would strongly caution against extrapolating that impact to the 145% imposed today without also considering the pharmaceutical exemption and our intervention plans already in action. Since late February, we've begun implementing several mitigating strategies, including supply chain optimization, inventory management, tactical pricing in select geographies, and strategic API sourcing. We believe the total net impact in 2025 to Elanco adjusted EBITDA from tariffs as they stand as of May 5th is an estimated $16 million-$20 million, almost entirely related to the tariffs imposed by the U.S. and China. This negative impact is fully offset by our first quarter outperformance as we are maintaining our full-year adjusted EBITDA and adjusted EPS guidance. We have a balanced profile of risks and further mitigating strategies, also allowing for maintained guidance.

While we benefit from the pharma exemption today, if this policy is removed and a 5%-25% tariff is imposed, we estimate our incremental exposure at $10 million-$30 million in 2025. This risk and others, including potential economic slowdown, are offset by anticipated foreign exchange favorability based on April rates and a targeted value-based pricing increase. Elanco is well-positioned to overcome macroeconomic challenges and uncertainty to deliver our plan. Turning to the first quarter revenue performance on slide six, we break down the 4% underlying organic constant currency revenue growth. This chart highlights the importance of our diverse portfolio, with three of our four business areas growing. We achieved the top end of our expected growth range in Q1, despite the challenging U.S. retail backdrop in January-February. Our U.S.

Retail business declined 21% during that two-month period, driven by cooler weather that significantly impacted consumer spending. January was the coldest on record since 1988. Tick bites reported by the CDC tracked at an eight-year low. Importantly, retailers have broadly observed that when the weather cooperates, consumers engage, citing better trends into the spring. Our results support this, with March rebounding to a positive 13% growth and strength carrying into April as we enter the heart of the North American parasiticide season. Our leadership in the U.S. retail market has never been more relevant with a consumer under pressure. We provide a superior value proposition for pet owners with our strong OTC portfolio and broad physical availability. In the U.S. vet clinic, our revenue was flat in the quarter.

Importantly, as we discussed on our earnings call a year ago, we are lapping an approximate $13 million benefit related to moving certain legacy Bayer products into distribution. Excluding this impact in the comparison, our vet clinic revenue growth would be approximately 8%. We benefited from the early and ramping contributions from Credelio Quattro and Zenrelia, which I will cover more in depth shortly. Altogether, we see a rebounding retail environment, good early traction for innovation, and solid underlying fundamentals in our portfolio, all driving our expectation for U.S. pet health to return to a step up in growth in Q2. Moving now to international pet health, we delivered 5% organic constant currency revenue growth driven by AdTab, Credelio, and Seresto. Our international pet health business remains a clear example of the value of innovation, with new products driving 2 percentage points of growth for total Elanco in the quarter.

Specifically, AdTab more than doubled its revenue in the first quarter compared to last year, and we continue to be very pleased with Zenrelia's performance in Brazil, Canada, and Japan. The power of innovation and a diverse portfolio is also clear in the U.S. farm animal business, up 17%, with continued strength in cattle. EXCEDE again led the way with rapid adoption in heifers since we received FDA combo clearance in November. International farm was up 2% in organic constant currency, with growth in ruminants partly offset by the impact of the Keystone recall and our commercial model changes in certain geographies from last year. We estimate these two items created a combined 4 percentage point headwind to our year-over-year growth. Looking at slide seven, we delivered $198 million of innovation revenue in the first quarter.

This outperformance, with growing momentum from our big six portfolio of potential blockbusters, leads us to increase our expected innovation contribution for 2025 by $20 million at both ends of the range to $660 million-$740 million. We expect a consistent flow of high-impact innovation to fuel our growth for the next decade through targeted areas, including our monoclonal antibody platform. In the near term, we continue to expect this platform to deliver our IL-31 approval in the fourth quarter of this year, with commercialization in the first half of 2026. We remain in close dialogue with the USDA, where we believe recent changes have not materially impacted the review team and process. Let's dig deeper on the progress of these six products on slide eight, starting with Zenrelia.

Zenrelia is our entry into the $1.9 billion rapidly growing global dermatology market, and it continues to make meaningful strides in clinic penetration. Zenrelia is now used in approximately 11,000 U.S. vet clinics, or 35% of the total, up from 8,000 total clinics when we updated you in late February. Of this 11,000 today, about 8,000 have fully adopted the product, and about 3,000 are piloting use. In line with positive trends broadly across our U.S. pet health business, we're encouraged by the progression of the Zenrelia sales. Importantly, as vets experience the strong and consistent efficacy of the product firsthand, they are responding. One in three clinics that have received samples has purchased Zenrelia and integrated it into their derm portfolios. Our reorder rates have climbed to 70%, up approximately 10 percentage points since late February. We expect continued momentum as we've entered the allergy season.

Our survey work shows that 26% of vets not using Zenrelia today expect to use it in the future, with the majority of that cohort citing seasonal allergies and frustrations with current options. Customers are responding too, with broadly positive reviews applauding the efficacy, convenience, and the value of the product. We are continuing with targeted outreach to pet owners, and we are increasing our focus on tech-to-tech sessions, which have proven to be highly effective. The biggest challenge we face in the U.S. for Zenrelia is moving beyond second-line treatment, where it has been positioned in various clinics. Also, we're actively engaged in the process to update the U.S. label. Data supporting a language change on the current label is already under CVM review, and we expect to receive feedback later this year. In addition, we've already initiated new studies for a more comprehensive label change.

Overall, we continue our robust engagement with the FDA, and we will keep you updated with our progress on both fronts. Outside the U.S., where we have less restrictive labels, we are very pleased with the launch of Zenrelia in Brazil, Canada, and Japan, which is a great start to capturing share in the $600 million-$700 million international dermatology market. Brazil, the first international market to launch, has outperformed our initial expectations for both penetration and sales, with efficacy being the key driver for switching to Zenrelia. We continue to expect approvals in Europe, the U.K., and Australia this year. Moving to Credelio Quattro, we launched and shipped product in January ahead of the parasiticide season. We are very encouraged by the early results, with share capture ahead of expectations, while cannibalization has also been favorable to our assumptions.

In the span of just a few short months, we've already achieved approximately 10% dollar share of broad spectrum sales in the U.S. vet clinics. Approximately 2/3 of share capture has come from competitive broad spectrum Endecto products or new starts, highlighting the high veterinary interest in Credelio Quattro's differentiated profile. All of our distributors have ordered multiple times within the quarter, and inventories at distribution are still running relatively lean. We attribute our initial success to strong vet response to the three dimensions of differentiation for Credelio Quattro. First, broad coverage, including multiple species of tapeworms, the speed of tick kill, and heartworm coverage from month one. Both vet clinics and pet owners have proactively shared how pleased they are with the palatability of Credelio Quattro to dogs. Having seen this robust clinic demand, we're now increasing DTC investment to activate even more pet owners.

We're also preparing for a global launch with approval submissions made in Australia, Canada, and Japan. In Europe, our pet health business has been led by the strength of AdTab, our OTC flea and tick product for both dogs and cats. We've seen accelerating growth, doubling sales year-over-year with a clear runway for further gains. AdTab was approved and launched in the U.K. in April, and we are strategically increasing brand-building DTC in the second quarter beyond our initial expectations, reflecting the attractive returns we're seeing on our investment. AdTab is quickly gaining share, and we're also seeing minimal cannibalization of our existing portfolio. Finally, in pet health, our canine Parvovirus monoclonal antibody is the first and only USDA conditionally approved treatment for Parvo. Making CPMA widely available is crucial in our fight against this devastating virus, including in shelter environments where resources are often strained.

We are focused on increasing access to this life-saving treatment, and we continue to explore strategic interventions to address the cost of treatment and to accelerate clinic penetration across all channels. In farm animal, EXCEDE continues to rapidly grow in a market which we now estimate has potential size of over $350 million in the U.S. and Canada, with other additional international expansion opportunities. We have unlocked more of this market for EXCEDE through the benefit of the U.S. heifer clearance in November. We are confident in EXCEDE's growth trajectory in the U.S. and Canada and the product's continued ability to drive overall portfolio benefits. Lastly, with respect to Bovaer, we remain encouraged by the strong demand from dairy farmers and CPGs. Since February, we've doubled the number of cows on the product. However, adoption and our margins have been impacted near-term as government incentives have not yet been released.

Moving forward to optimize Bovaer's economic value and to enhance dairy farmer flexibility, we intend to expand our label as well as lower manufacturing costs. Importantly, the Bovaer demand is robust, with April being our most significant month of new cows starting, while customer retention is high, consistent with farm animal feeding like Experior. We do believe that Bovaer can become another farm animal Elanco blockbuster, and create the next major market in farm animal health. Overall, the basket of the big six innovations is outperforming and driving accelerating growth for the entire company. Moving to slide nine, we highlight all three elements of our IPP, or innovation, portfolio, and productivity strategy. Our innovation builds on our portfolio, which remains a key source of our resilience, enabling this robust growth even in challenging times. Our diverse, durable product portfolio is balanced across geographies and species. In U.S.

Pet health, we gain share in each of the four key markets in our comprehensive portfolio: para, insects, derm, and vaccines. Vet clinics prioritize partners who offer a complete set of solutions, allowing us to leverage innovation to lift our broader pet health portfolio. As an example, over 500 U.S. clinics that adopted Credelio Quattro in Q1 also bought for the first time other Elanco products. In U.S. farm animal, we continue to build on our market leadership and targeted innovations like Pradalex, a treatment for bovine and swine respiratory disease, conveniently given as one low-volume shot, bolstering our wide portfolio of solutions. Finally, on productivity, earlier this week, we announced the monetization of our lotilaner milestones and U.S. royalties for $295 million. This is a great example of Elanco pioneering new value streams and translating animal health into human health.

Monetizing this non-core part of our portfolio accelerates our deleveraging objective. The transaction, combined with our more favorable foreign exchange rates positively impacting our cash balances and additional improvements in working capital, is driving our net leverage target for 2025 down to 3.9x-4.3x adjusted EBITDA. We also remain focused on the cost discipline as an element within our control in this challenging macro backdrop, while we still strategically continue to invest in our innovation product launches and the expansion of our Elwood, Kansas, and Fort Dodge, Iowa facilities, which are progressing as planned. Our ongoing company-wide productivity agenda was further evidenced by the gross margin expansion in the quarter, driven by better-than-expected manufacturing performance with good management of absorption, losses, and expenses. With that, I'll pass it to Todd to provide more on the first quarter results and financial guidance.

Todd Young (CFO)

Thank you, Jeff, and good morning, everyone.

Today, I will focus my comments on our first quarter 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 11, we delivered $1.193 billion of revenue, representing a decrease of 1% on a reported basis. Excluding the unfavorable impact of foreign exchange rates and the divestiture of our aqua business, we achieved organic constant currency growth of 4% compared to the first quarter of 2024. Price and volume each contributed 2% in the quarter. Relative to our Q1 guidance in February, we had an $11 million sales benefit from the weaker U.S. dollar. Slide 12 shows revenue by the four quadrants of our business. Total pet health revenue increased 1% in constant currency in the first quarter, with price growth of 2%.

In the U.S., pet health revenue declined 3%, driven by a headwind to growth from moving certain legacy Bayer products into distribution in Q1 of 2024, a challenging retail environment, and soft demand for vaccines offset by sales from key innovation products. Outside the U.S., our pet health business grew 5% in constant currency, driven by continued strong demand of AdTab across Europe and Credelio in multiple geographies. Zenrelia sales in three international markets contributed, while soft demand in the China market was a headwind in the quarter. Globally, our farm animal business achieved 7% growth in organic constant currency. The U.S. farm animal business grew 17%, driven by continued demand for EXCEDE and the launch of Pradalex in the quarter. This growth was partially offset by the expected timing of poultry rotations. Outside the U.S., our farm animal business contributed 2% in organic constant currency.

Strength in cattle and swine in APAC was partially offset by the tough comparable from the Q2 2024 Keystone recall and our strategic do-different approach in certain geographies. Continuing down the income statement on slide 13, gross margin increased 10 basis points to 57.4% due to price, strong manufacturing performance, and beneficial product mix, even with the challenge of our highest margin business, U.S. OTC, declining in the quarter. These positive factors were partially offset by inflation and foreign exchange headwinds. Operating expenses rose 3% year-over-year this quarter, driven by investments supporting our pet health product launches and continued R&D investments focused on our late-stage pipeline and geographic expansion opportunities. Interest expense was $40 million compared to $66 million last year, with the savings primarily attributable to the significant debt reduction achieved in 2024 from the divestiture of our aqua business. Slide 14 compares Q1 adjusted EBITDA year-over-year.

Adjusted EBITDA was $276 million, a decrease of $18 million. Excluding the impact of the aqua divestiture and foreign exchange headwinds, adjusted EBITDA increased $8 million in the quarter, reflecting on the underlying business strength. Approximately $5 million of adjusted EBITDA relative to our February guidance came from the weaker U.S. dollar that benefited revenue. Adjusted EPS was $0.37 in the quarter. The $0.03 year-over-year improvement was primarily driven by a favorable discrete tax rate benefit and the interest expense savings from debt reduction resulting from the July 2024 aqua divestiture. On slide 15, we provide an update on our cash, debt, and working capital. Cash used from operations was $4 million in the quarter, reflecting typical seasonality of our cash usage. We ended the quarter with net debt of $3.933 billion and a net leverage ratio of 4.4x adjusted EBITDA.

Now, let's move to our financial guidance starting on slide 17. We have maintained our expectations for organic constant currency revenue growth of 4%-6%, while raising our revenue dollar range to reflect approximately $65-$70 million from the favorable impact of foreign exchange rates since the February earnings call. We have good line of sight to the mid-single-digit growth, given the strong Q1 performance already at 4%, with our innovation quickly ramping on top of a stable base. We continue to expect operating expenses to be up approximately 6% in constant currency, with strategic investments in the global launches of our innovation portfolio.

We also continue to expect H1 to represent a relatively smaller portion of full-year adjusted EBITDA versus the 61% weighting in 2024-2023, as the first half commercial investments impact operating expenses earlier in the year, and then they drive greater contributions to revenue in the second half. Our adjusted EBITDA and adjusted EPS ranges are unchanged from February. Our year-to-date performance, proactive intervention plans covering various scenarios around tariffs, and the foreign exchange tailwinds are balanced by macroeconomic challenges and uncertainty. We have reasons to feel confident in our ability to deliver our 2025 goals, including the accelerating trends we are seeing in March-April. However, as Jeff explained, a prudent approach is warranted in this dynamic environment. We have also updated our cash and balance sheet expectations for 2025. With the proceeds of the lotilaner U.S.

Royalty monetization combined with cash generated from the business, we now expect between $450 million and $500 million of cash available for debt paydown this year. As a result, we now anticipate end-of-the-year net leverage of 3.9x-4.3x adjusted EBITDA. Slide 18 provides year-over-year bridges for 2025 adjusted EBITDA and adjusted EPS, and slide 23 in the appendix provides a number of additional assumptions to help support your modeling efforts. On slide 19, we provide our financial guidance for the second quarter. We expect organic constant currency revenue growth of 4%-6%, largely driven by the positive momentum in our U.S. pet health business. On a reported basis, we expect $1.175 billion-$1.195 billion in revenue. Our investments in recently launched products continue, with a planned approximately 11% year-over-year increase in operating expenses as we head into the peak parasiticide analogy season.

Consequently, we expect adjusted EBITDA of $200 million-$220 million and adjusted EPS of $0.17-$0.21. These ranges include a minimal impact from tariffs given the timing of their implementation and our mitigating actions. The expected adjusted effective tax rate in Q2 is 25%-27%. Now I'll hand it back to Jeff for closing comments.

Jeff Simmons (President and CEO)

Thanks, Todd. We started the year saying 2025 is about delivering, not promising, and that's exactly what we're continuing to do. Elanco delivered a strong first quarter, outperforming our expectations across all key metrics. Growth is accelerating with revenue guidance being raised, and innovation and cash are tracking ahead of expectations. We also continue to accelerate deleveraging, reducing debt while investing in launches in key markets. Our organization is engaged, energized, and well-equipped to navigate these dynamic market conditions. Our people share my confidence and excitement into the balance of the year.

Truly, Elanco's in a position of strength. We are taking a prudent approach and executing our playbook in a dynamic external environment. We have the right teams, interventions, and actions to keep progressing towards our goals, to transform animal care, and to deliver lasting value creation for shareholders and for society. With that, I'll turn it over to Tiffany to moderate the Q&A.

Operator 2 (participant)

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.

Operator 1 (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue.

If you would like to withdraw your question, simply press star one again. Your first question comes from a line of Jon Block from Stifel. Your line is open.

Jon Block (Analyst)

Great. Thanks, guys. Good morning. Todd, I'd love to hear just a little bit more about the 2Q guidance. I think the 2Q investments would seem to be dampening the near-term EBITDA result. I think you talked about 11% constant currency OpEx spend, but 6% for the full year. If you could just talk about the cadence there and then maybe the leverage going forward as that spend sort of subsides looking forward. Sure, Jon. Thanks for the question. Yes, we've said from the start we're going to have a no-regrets launch approach on our big six blockbusters. In Q2, we're at the heart of the northern hemisphere parasiticide season. We are investing behind Credelio Quattro.

Todd Young (CFO)

It's off to a great start. As you heard in the prepared remarks, sales from distribution to vet clinics, we took a 10% share already. The product is resonating with its tick-kill quickness, the tapeworm coverage, as well as heartworm coverage from month one. Overall, we're going to be putting a lot of media dollars behind that, and that's increasing the spend. Also, in Europe, AdTab continues to have a nice run, doubling year-over-year in Q1. Part of the timing in Europe is there's a lot of sales in Q1, and then the investment to pull that sale out to consumers happens in Q2. There is a little timing mismatch between the revenue and the investment.

Fundamentally, given the importance of northern hemisphere parasiticide season to us, we really think of Elanco on a first-half, second-half basis, and we're overachieving our expectations here in the first half relative to the start of the year on the back of these investments in AdTab, Credelio Quattro, and Zenrelia. That's the cadence, and we're going to get the lift here in the back half as those investments in Q2 really pay off to drive revenue on a continued accelerating basis to get to our mid-single-digit growth for the full year.

Jon Block (Analyst)

Got it. Very helpful. Maybe just, I hate to burn one here, but I just want to be really clear. On the tariffs, if nothing were to incrementally occur from here, you have what, $25 million in EBITDA from the FX moves that's not reflected in the guidance.

You'll just sort of, for now, keep that in your back pocket to see how the pharma exemption plays out. Maybe if you could just talk to that. Jeff, I'll just sort of ask an offshoot to the second part of that question. Some of your wording around Zenrelia, the label change or potential, seemed a little bit more fulsome or upbeat relative to past. Maybe if you can give a little bit more details there on the potential timing behind that if that were to occur. Thank you.

Todd Young (CFO)

Yeah, John, you're reading slide 18 correctly. We've got a $25 million EBITDA tailwind from the weaker dollar. We decided not to reflect that in increasing our guidance here in May, just given the uncertainty with the pharma exemption.

If everything holds as it is, then yeah, there'd be a $25 million upside from FX on our base business that would push us close to $900 million of EBITDA behind the range or $875 at the mix.

Jon Block (Analyst)

Yeah, John, and on the Zenrelia label, a lot of good constructive dialogue. As we've said, we got two work streams, one on the language of the label that's more short-term and one on the overall label itself. I would just emphasize, yes, we continue to have good dialogue with the FDA. Some of the regulatory changes, we do not see any impact to us materially. The reviewers are all in place. That dialogue is going forward. On that language change, yes, the data's been with the CVM for some time. We expect an answer.

It is on an ADUFA-type timeline as we get into the second half of this year. Again, we stand by the science, and we'll continue to work with the CVM on this. I think it also is demonstrated out in the field, as I highlighted in my comments, the efficacy of Zenrelia continues to resonate as we move from 8,000 clinics to 11,000 clinics. We're in 35% of the clinics today. In the less restricted markets outside of the U.S., it's ramping really well. We're in three key markets. We got three major markets coming in the second half, which will also be part of Todd's point of the increased ramping of revenue in the second half as well. Yes, we're very happy with where we stand today with the CVM, and we'll continue to work with them going forward. Thank you.

Operator 1 (participant)

Your next questions comes from the line of Micheal Ruskin from Bank of America.

Michael Ruskin (Analyst)

Great. Thanks for taking the question, guys, and congrats to the strong start to the year. I'm going to pick up where John just left off on the innovation front. You sound really positive on all the innovation updates. You talked about Zenrelia, talked about Quattro. $198 million in the first quarter is certainly well ahead of where we had you. I realize there's some seasonality with some of these products in terms of comparing the animal in the first half of the year, but still, given these are newer, you still think they would ramp through the year. Could you just walk us through the difference between that and the raising the full year innovation by $20 million? I think you'd be able to raise even more.

Just sort of what you saw, if you could parse out the jump to $198 million in the first quarter and just the thought process for the rest of the year.

Jon Block (Analyst)

Yeah, thank you, Michael. I appreciate the question because I think that's when you look to Elanco, this is what really differentiates us, is in my 35 years, I've never had a slide like we just showed on six major innovations and another one coming in IL-31. What I think has maybe been misunderstood in the past or last year is the basket of the six innovations overall, holistically. What I would tell you is that's what's driving the growth, is what we're calling the big six, soon to become the big seven, major products and major markets that are going to be globalizing with really low cannibalization.

We're seeing that play out more so in Q1 than any other quarter, and we continue to see it ramping going forward. I don't want to get ahead of ourselves. We're in launch mode, and as Todd said, we're in the northern hemisphere parasiticide season, and that's key. I would note a few that I would just highlight since the last quarter, and that's Credelio Quattro, to build on some of Todd's comments. I mean, we believe, one, the marketplace continues to get bigger. The majority of puppy starts are in this segment of broad spectrum Endecto. This is the biggest animal health segment growing the fastest, and we believe that this has the potential to be the best product. Here are the proof points that I would lean in on because we do think this is the biggest material driver going forward.

That acceptance to Todd's point, I mean, a $10 share is ahead of our expectation. Two-thirds of that shift is coming from the competition and new starts, and the cannibalization is more favorable than we thought. The second is the differentiation that Todd said. I would highlight, I think another element of differentiation that's coming unsolicited by vets and pet owners is the palatability of the product. We think that is definitely we're entering new clinics with Credelio Quattro. It's helping the total portfolio, and we have a special product in Credelio Quattro, and we're going to globalize that product, as we've said. I'll point also to Experior. We highlighted, Michael, for the first time what we believe the size that the market can be for Experior in Canada and the U.S. As we've highlighted, a 200% growth in cattle numbers, more dose, more days.

It's a sticky product that's adding a lot of value right now as cattle numbers are still down and ramping. We will be bringing that product into geo-expansion, into a couple new markets in the second half of this year as well. It's the basket of innovation. It's also Credelio. The franchise overall for Credelio is another key driver. Look, we're an execution story, and we are going to lean in, and we are going to invest pretty significantly on these launches in the second quarter, as Todd mentioned, driving some of the EBITDA hole.

Michael Ruskin (Analyst)

Okay. I mean, you kind of preempted my second question talking about Quattro, but I'll still dig into that. That 10% dollar share, that really stuck out to us. Given we know what Simparica Trio reported, we've got a pretty good sense of where NexGard PLUS is.

That's a pretty impressive one cue. I guess the footnote there is it's 10% of clinic sales versus sort of sell-out. Is there any reason you think that should differ dramatically? I guess I'm just trying to kind of ask how much pre-stocking may there have been from vets in that first quarter because you would think that that 10% should just grow over time, and that can get to a pretty healthy number for the full year. Just talk about the in-clinic versus out-clinic sales there. Thanks.

Todd Young (CFO)

Yeah, Michael, you're thinking about it correctly. It's a great start. We're getting it onto the shelves of a lot of vet clinics. That's where we're getting that 10% dollar share from distribution into the vet clinics. As we mentioned in the prepared remarks, we feel pretty good. We've got pretty lean inventories at the distribution.

They had multiple orders during the course of the quarter, and now we're really making these investments we talked about in Q2 to have the consumer as excited as the vets are about this great product. With that, we do expect to start to get that outbound sales to be growing and taking share with consumers as well. There is a little bit of the timing there, but we're really pleased with what Bobby Modi and his team did executing across the U.S. to launch Credelio Quattro with a great start.

Michael Ruskin (Analyst)

Thanks. I'll leave it at that.

Operator 1 (participant)

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

Andrea Alfonso (Analyst)

Thanks so much, everyone, for taking the question.

I really appreciate all the color that you've provided so far in Zenrelia, but just probing a little bit more on what you've seen in the quarter-to-quarter ramp. Particularly curious about you discussed rates, but curious about kind of the makeup of order sizes of initial orders versus reorders. If you could sort of discuss the receptivity and uptake for the specialists versus the general vets. If I may build on just sort of the question that Michael just raised, would you be able to characterize whether maybe Zenrelia or Quattro was the relatively greater driver of the $20 million increase in innovation revenue expectations? Thanks so much.

Jeff Simmons (President and CEO)

Yeah, I'll take the first one, Todd. You can grab the second one. Thank you, Andrea, for the question.

Look, as we look at Zenrelia, the first thing we do is we step back and see a market that's going to probably eclipse $2 billion. It continues to grow beyond what everyone's expecting. I mean, it's a double-digit growth market. It's global, and we're excited about Zenrelia. We're excited about IL-31 that's staying on track for a late 2025 approval. And as you know, we've got a few other key assets here in the rest of the decade that we're coming into it. Overall, the derm market continues to be robust, resilient, and continues to grow, and we're ramping, as we've said. The key thing is get into formularies and to lean into these clinics. Every month, we have an increased number of clinics that are using Zenrelia in their formulary permanently.

I think the message, the headline, and the buzz in the industry from Brazil and Japan back to the U.S. is the efficacy of this product. It's outstanding efficacy. It's been put in some of the toughest cases, and it's performed. We are ramping up use. I think I would point to a couple of statistics, and that is that this 26% of vets that are not using as we come into the derm season are expecting to use. That's where we're targeting our focus. Our investment's a little bit more in the ground game than in DTC, where we're doing tech-to-tech sessions, as well as the sampling program is working. We're getting good conversion when people sample it, when they put dogs on it. They then move it into more of a mainstay product.

Our challenge is ultimately about moving more clinics from a second-line treatment or a tough-case treatment to first-line treatment. We believe the derm season that we're coming into is really important. Remember that we see when you look at the derm season, we're coming into the months. We just come out of the lowest season, and July-September, there's 25% more volume than it is in the low months. We have to lean in here and actually get increased use. Most of that investment, though, is going to be more in the sampling and the tech-to-tech. We are looking for continued less restrictive labels in the big market of Europe, U.K., and Australia. $600-$700 million market outside the U.S. that we'll be entering heavily in the biggest markets in the second half of this year. Todd?

Todd Young (CFO)

Andrea, on your question of what's driving the raise on innovation, it's really the complete portfolio. I mean, I think we've talked a lot here on AdTab and the strength we're seeing in Europe, the growth of Credelio Quattro outside the U.S. You throw in Experior, continuing adding more and more cows on Bovaer, Quattro, and Zenrelia. Overall, we're really pleased with the complete portfolio across the globe.

Operator 1 (participant)

Your next question comes from a line of Brandon Vazquez from William Blair. Your line is open.

Brandon Vazquez (Analyst)

Hey, everyone. Thanks for taking the question. Maybe I want to hit on the innovation guidance again. I can appreciate you typically don't give kind of the revenue buckets, which is fine, but maybe can you just talk to us about what are the top three?

I'll take another stab at asking this question and put it what are the top three revenue contributors to that innovation bucket in 2025? Just to give investors kind of a little bit of a snippet of what we should be focusing on as the real growth drivers within that segment. I had a follow-up. Thanks.

Todd Young (CFO)

Yeah. I mean, as a reminder, Experior went over $100 million last year. It got HEPP approval in November. If you want just the biggest dollar driver, I will give you that. That's Experior. José Simas and the team here and U.S. Cattle and the team in Canada are really making inroads, and we're winning in U.S. Farm Animal. You can see it's 17% growth in Q1. It continued to have great growth last year. It's adding Bovaer to the dairy portfolio.

That team is really executing well and is the big driver. The number one product, Brandon, from a dollar perspective is Experior. Again, we're not going to get into each of the individual ones, but with the start that Credelio Quattro has had, it is capturing more than we expected, and that is going to be a big play just given it is the best product on the market. It just kills everything, and it kills it fast, and it has sustainability. We believe that's going to be the differentiator and really excited for customers to keep getting Credelio Quattro on their dogs. Every dog wants to be a Quattro dog. Brandon,

Jeff Simmons (President and CEO)

I would also just say another note that I know we had investor questions a year and a half ago about the base business.

I would point to a couple of things that I like to see. I've been a lot in the field the last three months. Innovations in each portfolio are making the base stronger. We had a good quarter in Europe with Seresto and AdTab, or excuse me, Seresto and the A family because of AdTab. Rumensin continues to do very well because of Bovaer and Experior, both in dairy and beef. Credelio Quattro, as I mentioned, has taken 500 clinics and are buying additional Elanco products like Galliprant and other products that they've never purchased before. What excites me too is our base is as strong as it's been because our portfolios are getting better because of the innovation. I would point to that because that was a common question we got a lot last year and even earlier than that.

Brandon Vazquez (Analyst)

Great. That's super helpful.

One follow-up here quickly is just this has just been hard to gauge, and other competitors have been talking about it as well. Just spend a minute on the macro environment. I know you had a little bit of volatility Q1 in retail. Again, others had seen that too, so not overly surprising, but expectations on how things are holding up so far on the consumer side of things and expectations on how that's trending into the rest of the year. Thanks, guys.

Jeff Simmons (President and CEO)

Yeah. I'll make a couple of comments, Todd. If there's anything else, I think I want to emphasize the headline is Elanco is an execution story. We're not a pet visit, a dependent story.

I really point to, yes, we need to be continuing to look at this as a durable market, but we do need to continue to monitor consumers and spend in the economy, and we're doing that. I would say that given where we stand today with our omnichannel capabilities that we've set up, our innovation that we're launching, all the stuff that's happening with compliance and dropshipping and all of our expertise that we got from Bayer Animal Health, our company, and the globalization we're taking, those are the things that will drive Elanco going forward. We're quite insulated from a worry of a 1%-2% change in a pet visit. We think that all of this leads to our ability to take price where we can, make vets and farmers more money, and continue to have compliance grow.

I will also highlight one other key trend that I think is important that does not get talked about enough, just as Todd mentioned on Experior, but as leaders in farm animal, animal protein, and this whole making America and really making the world healthy, animal protein is on the uptake. We have seen some initial statistics here as we look at 2024 going into 2025, and we are spending a lot of time in the boardrooms of our major protein companies around the world because we see a big opportunity. The dairy industry has just announced a $10 billion U.S. investment in dairy products because of protein. Last year, they hit a record of $104 billion in animal protein here in the U.S., while plant-based meat saw a 20% decline. On average, Americans ate nearly 7% more meat last year than before the pandemic.

Helping our customers with regulatory, with pathways for more use, with innovation, and ultimately what we do, making protein more valuable and healthy and more abundant and affordable for consumers, that is a trend that I do not think we have pointed to and what excites us about our farm animal business as we go forward.

Operator 1 (participant)

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

Hey, this is Katarina on for Chris. Thank you so much for taking our questions. First question is just around tariffs. As you think about mitigating impact kind of in the medium term, do you think there is an ability to offset some of the potential tariff pressure via price increases? Do you think that is something that the market can absorb or do you expect any price action to meaningfully impact demand, particularly, I guess, on the pet side?

Second question is just on Zenrelia. Can you remind us how you're thinking about the launch of the product in Europe? We kind of expect a similar step of an investment ahead of that launch. How quickly do you think it could ramp in that geography? Maybe anything you can say on what the European label could look like if you had any discussions with the regulators? Thank you.

Todd Young (CFO)

Sure. Katarina, your question on tariffs, we already are taking some price in certain markets. As we said, China has been one where we are looking at those inbound tariffs and offsetting some of that impact with price. Certainly, in the U.S. market, we're looking at that and considering the right way to do that in a value-based manner that we remain competitive.

Again, lots of uncertainty in the world with respect to the tariffs, what retaliatory tariffs might look like. We do have a global manufacturing footprint, and with that, it puts in some positives in certain markets and negatives in other markets. Overall, that is the benefit of our global diversified portfolio across both farm and pet. It is something we will pay attention to. Right now, consumers are continuing to take care of their pets as they always do, and we fully expect that. It is something we are very focused on as a company.

Jeff Simmons (President and CEO)

On Zenrelia, just in Europe and the U.K. as well as Australia, markets that we have submissions in, we are in the final stage of the regulatory processes. Of course, every country is a little bit different. We are managing and responding to questions along the way.

We continue to have confidence in a less restrictive label outside of the U.S., but we will continue to work closely and monitor that. We do have our key teams in Europe already trained through the first phase. We've got our sales forces right-sized, following very much a similar playbook as the U.S. We have that all in place. Yes, there will be a variable cost that will increase as we have and what we're doing right now with AdTab. We'll do some of that with Zenrelia as we get into the second half and expect to launch this product again with no regrets because it's a major market. International derm is growing as fast or faster than the U.S., and it's a $600 million-$700 million market. We know that Zenrelia, as we watch it in Brazil, Japan, Canada, has great potential in these markets. Thank you.

Operator 1 (participant)

Your next question comes from a line of Navante from BNP Paribas. Your line is open.

Hi, good morning. I had a question on the strong, sorry, on the U.S. retail environment. We know that the latest indicator is a strong U.S. retail environment. Can you discuss the drivers in addition to the cold weather of that challenging U.S. retail environment for Elanco in January-February? And also, if you can discuss what you're seeing in terms of positive trends in March-April for your key franchises.

Todd Young (CFO)

Yeah. And Navante, I think the key difference there is Zoetis was speaking to the retail RX market. Chewy, Amazon's just coming with pet retail. That is really about driving auto ship, driving compliance. We are seeing really great success there. A lot of Galliprant goes through that. It is just easy to get your product continuous. That part is very strong.

Our focus in the over-the-counter market where Zoetis doesn't have any products is a little different. It's much more consumer. You heard a lot of the cold weather, the foot traffic down. That was indicated when we showed down 21% for those products in the first two months of the year, but then rebounding in March, rebounding in April. Overall, we feel like that is never going to be a double-digit sort of growth area because we need to bring innovation there. It is a consistent player of very high-margin products that provides a lot of cash flow for us. We feel good about what the team's doing to execute and feel like we've gotten out of the cold weather. Seresto collars will be getting purchased to prevent fleas and ticks across the U.S. and Europe.

Jeff Simmons (President and CEO)

I'd build on too.

is a lot of buzz about Amazon. Just to highlight, our strategy does not change. We are centered on physical availability. We picked up in the first quarter 48,000 more distribution points, which we brought this capability in from Bayer. We built on it with a lot of new expertise. We have got Blair Snyder out in California, many others that we brought in from the CPG industry. Amazon has and is one of the largest customers for Elanco because of our pet retail business. As they get into RX, it is a platform that requires unique capabilities. We are familiar with those. We work with them every day. We look forward to expanding into the RX business with Amazon.

Ultimately, this is all about serving veterinarians and pet owners, giving them the products they want, where they want to shop, at the price points that they want to shop at. We have got the best portfolio and global pet to do that.

Thank you. That is very helpful. Maybe a follow-up on pricing, if you could discuss your pricing expectations for the year.

Todd Young (CFO)

Yeah. We continue to expect about 2% price for the full year. That is across the total global business and obviously varies between different areas of the business globally.

Thank you.

Operator 1 (participant)

Your next question comes from a line of Michael DiFiore from Evercore ISI. Your line is open.

Michael DiFiore (Analyst)

Hey, guys. Thanks so much for taking my question and congrats on such a strong launch to the year. It is two for me. Just want to revisit the Zenrelia label change request.

It seems like it's progressing quicker than initially expected. Do you still view this requested change potentially taking a few years to materialize? If you could comment on and give any color on vets' willingness to use first-line. I know it's been a short while, but given the progress, has there been any change in their willingness to use first-line based on what you're hearing in the field? I have a follow-up. Thank you.

Jeff Simmons (President and CEO)

Yes, Michael. Just for clarity, nothing's changed. We've had a two-stream approach with the CVM and working with them. One is on the language changes that are maybe more moderate to the label today, which we believe is important. We've submitted the data. That's on an ADUFA-type timeline. Those timelines, we started doing that immediately as soon as we got the response on the first label.

That work stream is all progressing. Again, we should have an answer to that in the second half of the year. The other one is we've started dogs on a larger trial that would be more of a full, bigger label change. That is going to take much longer. That is going to be, as we've said, beyond definitely one year, maybe closer to two years. What we're seeing with the product, it is a good investment to do for the longevity of the product overall.

Todd Young (CFO)

Mike, just one of the reasons it takes longer, because I know we got this discussion at your conference, is we have to have one-year-old puppies that are unvaccinated and healthy to do the trial. You can't do it in a year because you don't have one-year-old puppies until you've gone at least a year.

That is why it takes a longer time to do the clinical work on the unvaccinated dogs. That is good [crosstalk].

Jeff Simmons (President and CEO)

To your second question, absolutely. We are seeing a nice ramp. As I mentioned, there are more veterinarians every month that are getting comfortable to bring Zenrelia into first-line or what I would call into their formulary to say, "Hey, it is option A, B, or C," and we are in that. We are in that portfolio of options. We want more. The two big drivers to get veterinarians comfortable are other veterinarians and key opinion leaders visiting with them, sharing the data, spending time with them, and a tech-to-tech dialogue, followed with a sampling program where vets can try this in different cases. Those are the two lead indicators.

You combine that with the derm season that's coming, we believe we'll continue to see more vets move this to a first-line treatment. The efficacy is the prevailing narrative out there in the industry right now on how well Zenrelia is doing in all cases and all situations.

Michael DiFiore (Analyst)

Got it. And just my quick follow-up just on Experior. Just noticed that based on the USDA ag data, Cattle on Feed seems to be below last year's levels. But again, Experior seems to be a significant growth driver. Could you maybe explain this discrepancy and add any color on less Cattle on Feed, but Experior performing so strongly?

Todd Young (CFO)

It's really the market position, Mike. I mean, Experior continues just to be so important to that feedlot owner and the economics for them. And as a reminder, we added the heifer clearance. And so that's a big driver of the uplift.

That was 40% of the cattle. Yes, we've got low Cattle on Feed. That's going to be a tailwind when that reverses as part of the cattle cycle in the years to come. It really is that expanded market from heifers that helps us offset the lower Cattle on Feed numbers from a year ago while having Experior continue to ramp.

Michael DiFiore (Analyst)

Great. Thanks so much.

Your final question comes from a line of Aaron Wright from Morgan Stanley. Your line is open.

Great. Thanks for [taking] me in here. On distributor stocking, we typically see parasiticide stocking. That typically happens in the March timeframe. Sometimes it slips more into April. I guess you called out the acceleration in March-April. You have a new product with Credelio Quattro. Presumably, there was initial stocking there just because it's a new product alone.

I guess, can you talk through some of the moving pieces in terms of the stocking, de-stocking dynamics in pet health? Can you quantify any sort of initial stocking, I guess, from a Quattro perspective?

Todd Young (CFO)

Yeah. The main stocking issue was last year when we put the Bayer products into distribution. Without that, the U.S. pet health business would have been up 8% in the quarter. I do not really think of it as a lot of stocking, Aaron, when the distributors ordered multiple times. I do not think in Q1 of next year we are going to be calling out that we are having to cover the initial stocking. It really was a really quick in and out to the vets.

As we said, getting 10% of sales out to vets from distribution meant that the distributors were having to keep stocking as their initial orders were not nearly good enough to fill the demand that they were getting from the vet clinics as our reps were out there really pulling that through. I think very little in the stocking dynamics in the sense that it will be proof this time a year from now when we are not calling out a stocking headwind on a year-over-year basis.

Aaron Wright (Analyst)

Okay. Okay. Great. Just wanted to clarify that. Then on, I guess, outside of innovation drivers like Experior, can you just speak to the underlying health of the livestock market and how we should think about the quarterly progression from here across that business?

Jeff Simmons (President and CEO)

Yeah. I think overall, if you look at Aaron, good question.

I think the headlines really, as we just highlighted, the cattle market that matters most to Elanco, beef, confined feed, you got low supply, high demand, good economics overall. On the poultry side, the global strength continues. The global numbers from Rabo and others, as you see, are 2.5-3% growth. We click along at that. You'll have poultry rotations inside of that that can impact quarter to quarter. As a whole, we continue to take share. We continue to innovate. The global poultry business is pretty resilient. There's talks of tariffs, but I think because it's so global, it's pretty insulated overall. Then swine, where we're really more North America, China-based, there's improved pricing that is expected, balanced overall. We see a stable market with a portfolio that can win within that stable market.

With the tailwind that buzzes in the boardrooms right now in protein, the opportunity in protein right now can be really positive. We are supportive of the administration and how we can continue to make animal protein in the center of this whole health movement and diet movement, which is really sustainable healthcare, is that it all starts with what you eat. I think it is a real opportunity. Those are the trends we see. Overall, pretty stable.

Todd Young (CFO)

Yeah. Just specifically on Elanco and international, we had headwinds here in Q1, a couple of points on international growth and farm animal from the Keystone recall from a year ago, as well as our exiting certain other lower-margin countries. That team of Romero Cabral and his organization is really executing well.

I expect that'll help the growth acceleration we will see in Q2 as we go up to 6% constant currency growth from the 4% in Q1.

Jeff Simmons (President and CEO)

Good. Let me just make a couple of quick closing comments. Thank you for your time. We're entering, no question, a much-awaited period of sustained growth and accelerated value creation. We're an execution story. The entire organization is focused on our three drivers of value: growth, innovation, cash. Q1 was one of the highest-quality quarters we've had in many years. Growth's accelerating, and we'll continue to accelerate the base and innovation. Innovation is a whole basket, as we just talked about, of innovation. We're raising our guide because of the diversity of that innovation in major markets. The whole company is really focused on cash and margins. We had our best quarter in a long time with manufacturing.

There's a lot of momentum in our manufacturing organization driving margins. It's exciting to see our cash-to-debt go from $150 to now $450-$500. I really want to emphasize tariffs. We've taken a prudent approach on the current state. Really, any future scenario we see is inside our guidance to make that clear for you. The positive tailwind of FX is going to be helpful. Thanks to our customers, vets, farmers, and pet owners for the time, the relationship. We are all about creating value for you. Thank you to our investors. We do believe we have a compelling value proposition. We're going to continue to execute against growth, innovation, and cash and create a whole lot of value for yourselves. Thanks for your time. We look forward to engaging with you here in Q2.

Operator 1 (participant)

This concludes today's conference call.

Thank you for your participation. You may now disconnect.