Elanco Animal Health Inc (ELAN) Q2 2022 Earnings Summary

Executive Summary

Q2 2022 delivered revenue of $1.177B (-8% reported, -4% CER) with adjusted EPS $0.36 and adjusted EBITDA $300M (25.5% margin), showing margin expansion despite top-line pressure .
Full-year 2022 guidance was cut by ~$220M at the midpoint (revenue now $4.465–$4.550B; adj. EBITDA $1.060–$1.100B; adj. EPS $1.06–$1.13), driven by stronger USD, slower China recovery, supply-chain constraints, and competitive/pricing headwinds; timeline to 60% gross margin and 31% adj. EBITDA margin extended (update in 2023) .
Management sees return to constant-currency sales growth in Q4 and introduced Q3 guidance (revenue $1.010–$1.060B; adj. EBITDA $175–$215M; adj. EPS $0.12–$0.18) .
Near-term catalysts center on guidance reset and margin timeline extension (negative), offset by ongoing productivity gains and pipeline progress (ZORBIUM launch; submissions for broad-spectrum parasiticide and dermatology assets; feline diabetes in-licensing) .

What Went Well and What Went Wrong

What Went Well

Margin expansion: Gross margin up ~190 bps to 58.9% and adjusted EBITDA margin up to 25.5%, driven by manufacturing productivity, pricing, and FX on international inventories .
Strong cash generation and deleveraging: Operating cash flow $312M (incl. $124M swap benefit) and net leverage improved to 5.3x (vs. 5.6x in Q1) .
Pipeline momentum: Launch of ZORBIUM for feline pain (5,000 clinic placements in month one), filings planned for parasiticide and dermatology assets; in-licensed first-in-class feline diabetes product under FDA review .

Management quotes:

“Adjusted EBITDA 3% and adjusted EPS 29%, despite the revenue decline of 4% in constant currency… adjusted EPS of $0.36 and adjusted EBITDA of $300 million.”
“We remain committed to 60% gross margin and 31% adjusted EBITDA margin, and we'll provide an update on timing in 2023.”
“We believe our late-stage assets are differentiated… we remain on-track for seven approvals in 2022.”

What Went Wrong

China recovery slower than expected; pet health and farm animal softness led to guidance cut (China now expected to decline ~1% CC in 2022 vs. prior +22%) .
Supply-chain and input cost inflation persisted; freight/logistics and supplier constraints impacted availability of smaller international farm animal products .
Competitive pressure and pricing realization issues in US vet-based parasiticides (Trifexis, Interceptor Plus) and retail lowered price contribution and sales; Seresto season softer with lower retail inventories, central/eastern Europe disruption .

Financial Results

Metric	Q4 2021	Q1 2022	Q2 2022
Revenue ($USD Millions)	$1,113	$1,225	$1,177
Reported EPS ($)	$0.21	$0.10	$(0.04)
Adjusted EPS ($)	$0.21	$0.36	$0.36
Adjusted EBITDA ($USD Millions)	$212	$339	$300
Adjusted EBITDA Margin (%)	19.0%	27.7%	25.5%
Gross Margin (%)	54.0%	58.4%	58.9%

Segment breakdown (by quarter):

Segment ($USD Millions)	Q1 2022	Q2 2022
Pet Health	$639	$612
Farm Animal	$569	$553
Contract Manufacturing	$17	$12
Cattle	$247	$248
Poultry	$180	$174
Swine	$99	$89
Aqua	$43	$42

Key KPIs:

KPI	Q4 2021	Q1 2022	Q2 2022
Operating Cash Flow ($USD Millions)	$223	$(62)	$312
Net Debt ($USD Millions)	$5,763	$5,870	$5,630
Net Leverage (x adj. EBITDA)	5.5x	5.6x	5.3x
Price Growth (company/portfolio)	N/A	~2% (Q1)	~1% (Q2)

Notes:

Q2 CER revenue -4%; FX headwind ~$56M in quarter .
Pet Health Q2: Advantage family $137M (-3% CER) and Seresto $113M (-6% CER) .
Gross margin expansion driven by manufacturing productivity, price, and FX on inventories; partially offset by inflation and unfavorable mix .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($B)	FY 2022	$4.700–$4.755	$4.465–$4.550	Lowered
Adjusted EBITDA ($B)	FY 2022	$1.125–$1.165	$1.060–$1.100	Lowered
Adjusted EPS ($)	FY 2022	$1.15–$1.21	$1.06–$1.13	Lowered
Reported EPS ($)	FY 2022	$0.02–$0.09	$(0.10)–$(0.03)	Lowered
FX Headwind ($M)	FY 2022	~$140	~$205	Increased
Tax Rate (%)	FY 2022	~25–26	~25–26 (unchanged)	Maintained
Q3 Revenue ($B)	Q3 2022	N/A	$1.010–$1.060	Introduced
Q3 Adjusted EPS ($)	Q3 2022	N/A	$0.12–$0.18	Introduced
Margin Targets	LT	60% GM (2023), 31% adj. EBITDA (2024)	Timeline extended; update in 2023	Extended

Drivers of guidance reduction: incremental ~$65M FX headwind; $100–$120M macro (China Covid, supply chain disruptions, global slowdown); $40–$50M company-specific (pricing realization, innovation ramp, US parasiticides) .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2021)	Previous Mentions (Q1 2022)	Current Period (Q2 2022)	Trend
China recovery	China contributed >1 pt of growth in 2021; expecting continued growth	Expected acceleration in H2; cautious swine recovery	Now expecting ~1% CC decline in 2022; recovery slower; pet health and poultry pressured	Negative vs expectations
Supply chain	Raw material constraints noted; mitigation ongoing	Paper/packaging issues affecting retail; expected resolution by Q2	Freight/logistics and inputs still constrained; impacting smaller products internationally	Persistent headwind
Pricing	Targeting >2% price in 2022	Achieved ~2% price in Q1; plan acceleration in H2	Q2 ~1% price; mid‑year increases taken to improve H2; retail trade funds shifted from OpEx to gross-to-net	Mixed; H2 expected better
Parasiticides competition	US legacy brands under pressure (Trifexis, Advantage Multi)	$60M FY headwind expected	Pressure closer to $75–$80M; largely dogs; cats (Seresto, Credelio) strong	Worsening
Margin targets	60% GM by 2023; 31% adj. EBITDA by 2024	Tracking despite inflation	Timeline extended due to inflation, supply chain, China; still expanding margins in 2022–2024	Timeline pushed
Innovation	7+ launches in 2022; late-stage derm/parasiticide progressing	Two major milestones; DSM Bovaer alliance	ZORBIUM launched; filings planned; feline diabetes in-licensed; “heartworm threshold” crossed	Positive momentum
Sustainability (Experior, Bovaer)	Experior adoption ramp; sustainability toolkit	DSM Bovaer alliance; blockbuster potential mid‑decade	Experior ramp behind plan; still expected to be blockbuster; major 2023 driver	Near-term timing delayed
FX	2022 headwind ~$95M (Feb)	Updated to ~$140M (May)	Now ~$205M headwind (Aug)	Worsened

Management Commentary

“We expect to return to constant currency sales growth in the fourth quarter of this year.” – Jeff Simmons, CEO
“We are reducing our full year sales guidance… a $220 million reduction… $65 million FX… $100–$120 million macro… $40–$50 million company-specific.” – Jeff Simmons, CEO
“Adjusted EBITDA between $1.06 billion and $1.1 billion… adjusted EPS of $1.06 to $1.13 for 2022.” – Todd Young, CFO
“We believe our broad spectrum parasiticide product has crossed the so-called 'heartworm threshold'… and we licensed a first-in-class feline diabetes product.” – Company press release
“Gross margin and EBITDA expansion will continue in 2023 and 2024, though the timeline to 60% and 31% is extended.” – Todd Young, CFO

Q&A Highlights

Guidance conservatism and drivers: Management embedded slower China rebound, continued supply-chain constraints, and retail trade fund investments; price expected to step up H2 but Q2 realized lower due to competitive BRD (Increxxa) and retail strategy shift .
Innovation ramp risk vs $600–$700M by 2025: Experior adoption is behind plan but confidence increased; pet health blockbusters probabilities up; feline diabetes adds new space .
Seresto outlook: Softer season in US and central/eastern Europe; strong international; 95% repurchase intent in US research; omni-channel and digital strategy to support growth .
Parasiticides strategy: Retail trade funds shift was EBITDA positive; broad-spectrum asset crossing the heartworm threshold positions for competitive efficacy; differentiated claims expected .
Farm animal dynamics: Poultry and aqua strength; swine in China volatile; beef feedlot dynamics supportive of feed-yard volumes in H2, herd rebuild a multi-year process .

Estimates Context

S&P Global consensus EPS and revenue estimates for Q2 2022 and prior quarters were unavailable at the time of this report due to data access limits. As a result, explicit comparisons to consensus are not provided. Any future estimate comparisons will be anchored to S&P Global data when accessible.

Key Takeaways for Investors

Margin resilience continues despite revenue pressure: Productivity and pricing offset inflation/mix, with Q2 gross margin 58.9% and adj. EBITDA margin 25.5%—a key support for valuation amidst top-line variability .
Guidance reset lowers near-term expectations: FY revenue/EBITDA/EPS cut and margin timeline extension are negative catalysts; watch Q3 delivery and Q4 CC growth inflection for sentiment stabilization .
China and FX are primary swing factors: Guidance embeds slower China pace and larger FX headwind (~$205M); incremental recovery or USD moderation would be upside drivers .
Pet Health portfolio bifurcation: Legacy dog parasiticides under pressure; cats (Seresto, Credelio) and pain (ZORBIUM) provide offsets; retail trade funds may boost EBITDA but weigh net sales—monitor H2 price realization .
Experior timing vs confidence: Adoption ramp slipped, but management cites accelerating cattle starts and 2023 accretion to growth and margins; track feed-yard usage trends and packer acceptance .
Balance sheet improving: Net leverage improved to 5.3x; plan to ~5.0x by year-end; cash flow supported by swap settlement but will reverse over four years—adjust for normalization in models .
Pipeline catalysts: Filings for broad-spectrum parasiticide and dermatology assets in coming months; feline diabetes approval expected within 12 months—potential medium-term growth accelerants .