Elanco Animal Health Reports Second Quarter 2024 Results
Source: The DairyNews
Elanco Animal Health Incorporated (NYSE: ELAN) today reported financial results for the second quarter of 2024, provided guidance for the third quarter of 2024, and updated guidance for the full year 2024.
"Elanco made significant progress on the three strategic outcomes of our IPP strategy in the second quarter – grow revenue, deliver innovation and improve cash. The second quarter represents our fourth consecutive quarter of underlying constant currency revenue growth, with 4% year-to-date growth driven by both pet health and farm animal. Our portfolio continues to strengthen with contributions from new products as a key factor in our base stabilization and overall growth, led by Experior, Adtab and Credelio Plus. Our first half results have allowed us to raise our full year revenue guidance and maintain our adjusted EBITDA guidance, excluding aqua, and maintain adjusted EPS guidance with lower interest and tax expense fully offsetting aqua," said Jeff Simmons, Elanco President and CEO. "We are pleased with the meaningful progress to reduce our leverage following the completion of the aqua transaction. We are encouraged by our late-stage pipeline progress, including the completion of the FDA review of Bovaer and the final FDA submission for Zenrelia, keeping us on track towards the expected $600 to $700 million of revenue contribution in 2025. Looking forward, we remain confident in the blockbuster potential of Bovaer, Zenrelia and Credelio Quattro, and expect their contribution will improve profitability and operating cash flow to drive continued deleveraging and increased value creation over time."
Innovation revenue was $209 million in the first half of 2024 and the company now expects $400 to $450 million from this group of products for the full year 2024, as updated in late June.
For Bovaer, a first-in-class methane reducing feed ingredient for dairy cattle, the U.S. Food and Drug Administration (FDA) completed its comprehensive, multi-year review in May 2024. Commercial activities are underway, and we expect producers to begin feeding the product in the third quarter.
The company completed the sale of its aqua business on July 9, 2024. Proceeds from the sale and year to date operating cash flow have allowed the company to pay down approximately $1.3B in gross debt through August 8, 2024.
The company released its 2023 Environmental, Social and Governance Report, demonstrating progress in the sustainability of its internal operations and customer collaborations.
Financial Results
In April 2023, the company completed the successful integration of the legacy Bayer Animal Health business into Elanco's ERP system and shared service center network. As a result of the integration, the company communicated commercial shipping blackout periods impacting April 2023 (the "ERP Blackout"). As reported last year, the company believes the first quarter of 2023 benefited from approximately $90 to $110 million of customer purchases of legacy Bayer Animal Health products that were shifted from the second quarter of 2023. This estimated shift meaningfully impacted the reported growth rates for the second quarter of 2024.
In the second quarter of 2024, revenue was $1,184 million, an increase of 12% on a reported basis, or 13% when excluding the unfavorable impact of foreign exchange rates compared to the second quarter of 2023. The ERP Blackout positively impacted growth by an estimated 9% to 10%.
Pet Health revenue was $579 million, an increase of 12% on a reported basis, or 13% when excluding the unfavorable impact of foreign exchange rates, with a 3% increase from price, compared to the second quarter of 2023. Excluding the estimated 13 to 14 percentage point tailwind from the ERP Blackout, year over year decline in the second quarter was primarily driven by continued competitive pressure on certain products in the U.S. veterinary channel and purchasing patterns of U.S. retailers impacting over-the-counter products, partially offset by sales of new products and improved demand for retail parasiticide products in certain European markets, including Spain.
The Advantage® Family of products, inclusive of AdTab, contributed $131 million, an increase of 29% excluding the impact from foreign exchange rates, with an estimated 27 percentage point tailwind from the ERP Blackout. Seresto® revenue was $103 million, an increase of 51% excluding the impact from foreign exchange rates, with an estimated 53 percentage point tailwind from the ERP Blackout.
Farm Animal revenue was $594 million, an increase of 13% on a reported basis, or 14% when excluding the unfavorable impact of foreign exchange rates, with a 4% increase from price, compared to the second quarter of 2023. Excluding the estimated 5 percentage point tailwind from the ERP Blackout, the year over year growth in the second quarter was primarily driven by strength in U.S. cattle, led by Experior and resupply of vaccines, and poultry sales globally, partially offset by declines in certain aqua products.
Gross profit was $689 million, or 58.2% of revenue in the second quarter of 2024 with a 70-basis point decline in gross profit as a percent of revenue compared to the second quarter of 2023. The decline was primarily driven by planned reduced throughput at certain manufacturing sites to reduce balance sheet inventory and improve operating cash flow, sales mix, and inflation, partially offset by the impact of the ERP Blackout and increased pricing. The company estimates the change in gross profit as a percent of revenue was positively impacted by 150 to 220 basis points from the ERP Blackout compared to the second quarter of 2023.
The company is updating 2024 financial guidance to reflect the second quarter overperformance and updated expectations for the second half of the year, including the expected contribution from Bovaer and Zenrelia and the removal of the aqua business. Removing the expectations for the aqua business drove a guidance reduction of $107 million of revenue, $60 million of adjusted EBITDA, and $0.08 of adjusted EPS.
The company now anticipates revenue between $4.41 billion and $4.46 billion, with a headwind of approximately $30 million from the unfavorable impact of foreign exchange rates compared to the prior year. Excluding further contributions from the aqua business, the updated guidance reflects expected organic constant currency revenue growth of 3% to 4%, up from 2% to 3% in May, with improved expectations from new products compared to the May guidance.
The company now anticipates adjusted EBITDA of $900 million to $940 million, maintaining guidance from May excluding the aqua business. The organic business includes second half contribution from Bovaer and Zenrelia, offset by expected higher manufacturing losses and increased investment in product launches in the second half of the year compared to the May guidance.
The company now anticipates adjusted EPS of $0.88 to $0.96, reflecting the divestiture of the aqua business, and lower interest expense (approximately $0.06) as a result of debt paydown from the aqua sale proceeds and a lower tax rate.
"Our efforts to improve operating cash flow and focus on deleveraging are being realized. In early July, we successfully closed the sale of our aqua business as expected. With cash flow from operations and transaction proceeds subsequent to the end of the second quarter we have paid down approximately $1.3 billion of debt this year, with gross debt down to $4.5 billion," said Todd Young, Executive Vice President and CFO of Elanco Animal Health. "I am proud of the cross-functional approach we have taken to diagnose, evaluate and deliver solutions to improve processes, reduce balance sheet inventory, and positively impact cash flow. Additionally, with the completion of our stand-up and integration phase, we are positioned to make additional progress to reduce leverage."
Innovation revenue was $209 million in the first half of 2024 and the company now expects $400 to $450 million from this group of products for the full year 2024, as updated in late June.
For Bovaer, a first-in-class methane reducing feed ingredient for dairy cattle, the U.S. Food and Drug Administration (FDA) completed its comprehensive, multi-year review in May 2024. Commercial activities are underway, and we expect producers to begin feeding the product in the third quarter.
The company completed the sale of its aqua business on July 9, 2024. Proceeds from the sale and year to date operating cash flow have allowed the company to pay down approximately $1.3B in gross debt through August 8, 2024.
The company released its 2023 Environmental, Social and Governance Report, demonstrating progress in the sustainability of its internal operations and customer collaborations.
Financial Results
In April 2023, the company completed the successful integration of the legacy Bayer Animal Health business into Elanco's ERP system and shared service center network. As a result of the integration, the company communicated commercial shipping blackout periods impacting April 2023 (the "ERP Blackout"). As reported last year, the company believes the first quarter of 2023 benefited from approximately $90 to $110 million of customer purchases of legacy Bayer Animal Health products that were shifted from the second quarter of 2023. This estimated shift meaningfully impacted the reported growth rates for the second quarter of 2024.
In the second quarter of 2024, revenue was $1,184 million, an increase of 12% on a reported basis, or 13% when excluding the unfavorable impact of foreign exchange rates compared to the second quarter of 2023. The ERP Blackout positively impacted growth by an estimated 9% to 10%.
Pet Health revenue was $579 million, an increase of 12% on a reported basis, or 13% when excluding the unfavorable impact of foreign exchange rates, with a 3% increase from price, compared to the second quarter of 2023. Excluding the estimated 13 to 14 percentage point tailwind from the ERP Blackout, year over year decline in the second quarter was primarily driven by continued competitive pressure on certain products in the U.S. veterinary channel and purchasing patterns of U.S. retailers impacting over-the-counter products, partially offset by sales of new products and improved demand for retail parasiticide products in certain European markets, including Spain.
The Advantage® Family of products, inclusive of AdTab, contributed $131 million, an increase of 29% excluding the impact from foreign exchange rates, with an estimated 27 percentage point tailwind from the ERP Blackout. Seresto® revenue was $103 million, an increase of 51% excluding the impact from foreign exchange rates, with an estimated 53 percentage point tailwind from the ERP Blackout.
Farm Animal revenue was $594 million, an increase of 13% on a reported basis, or 14% when excluding the unfavorable impact of foreign exchange rates, with a 4% increase from price, compared to the second quarter of 2023. Excluding the estimated 5 percentage point tailwind from the ERP Blackout, the year over year growth in the second quarter was primarily driven by strength in U.S. cattle, led by Experior and resupply of vaccines, and poultry sales globally, partially offset by declines in certain aqua products.
Gross profit was $689 million, or 58.2% of revenue in the second quarter of 2024 with a 70-basis point decline in gross profit as a percent of revenue compared to the second quarter of 2023. The decline was primarily driven by planned reduced throughput at certain manufacturing sites to reduce balance sheet inventory and improve operating cash flow, sales mix, and inflation, partially offset by the impact of the ERP Blackout and increased pricing. The company estimates the change in gross profit as a percent of revenue was positively impacted by 150 to 220 basis points from the ERP Blackout compared to the second quarter of 2023.
The company is updating 2024 financial guidance to reflect the second quarter overperformance and updated expectations for the second half of the year, including the expected contribution from Bovaer and Zenrelia and the removal of the aqua business. Removing the expectations for the aqua business drove a guidance reduction of $107 million of revenue, $60 million of adjusted EBITDA, and $0.08 of adjusted EPS.
The company now anticipates revenue between $4.41 billion and $4.46 billion, with a headwind of approximately $30 million from the unfavorable impact of foreign exchange rates compared to the prior year. Excluding further contributions from the aqua business, the updated guidance reflects expected organic constant currency revenue growth of 3% to 4%, up from 2% to 3% in May, with improved expectations from new products compared to the May guidance.
The company now anticipates adjusted EBITDA of $900 million to $940 million, maintaining guidance from May excluding the aqua business. The organic business includes second half contribution from Bovaer and Zenrelia, offset by expected higher manufacturing losses and increased investment in product launches in the second half of the year compared to the May guidance.
The company now anticipates adjusted EPS of $0.88 to $0.96, reflecting the divestiture of the aqua business, and lower interest expense (approximately $0.06) as a result of debt paydown from the aqua sale proceeds and a lower tax rate.
"Our efforts to improve operating cash flow and focus on deleveraging are being realized. In early July, we successfully closed the sale of our aqua business as expected. With cash flow from operations and transaction proceeds subsequent to the end of the second quarter we have paid down approximately $1.3 billion of debt this year, with gross debt down to $4.5 billion," said Todd Young, Executive Vice President and CFO of Elanco Animal Health. "I am proud of the cross-functional approach we have taken to diagnose, evaluate and deliver solutions to improve processes, reduce balance sheet inventory, and positively impact cash flow. Additionally, with the completion of our stand-up and integration phase, we are positioned to make additional progress to reduce leverage."
