Hey, good afternoon, everybody. My name is Erin Wright. I'm the lead healthcare services analyst at Morgan Stanley. We're happy to have with us today Elanco Animal Health. We have the management team here. We have Jeff Simmons, the CEO, with us up on the podium here, and then also Todd Young in the audience, the CFO, and IR, Katy Grissom as well, who leads up the IR effort there. So happy to have you. Glad you can come, and welcome. I think, you know, I'll hand it to you for just some intro remarks if you want to give those, and then we can hop right into Q&A. Great. Thank you, everybody. Thanks for the interest in Elanco. So, I think the headline is we are at an inflection point as a company, second largest independent animal health company. Next year will be our 70th year as a company, longest-standing brand in front of farmers, vets, and pet owners, and we really are coming into kind of a historical time. We set it up with a return to growth this second half, coming off from a good couple quarters of consistent delivery, beat and raise on the last quarter. As we kind of turn, I think what excites us is not just a return to growth, but our strategy is working. And I'll start with innovation. Innovation, we have, you know, innovation launched since 2021. We've seen $210 million-$250 million of innovation driven by a couple really great innovations, Experior in cattle. We'll see it at $60 million-$70 million run rate. Parvovirus, deadliest virus in puppies, actually with a monoclonal antibody and a retail product called AdTab. So t hree to four nice products driving growth with three blockbusters that I can say today, right now, even since our earnings call, are all we believe the FDA has what they need, set up on the Animal Drug User Fee Act, that we'll be progressing towards a path for three blockbuster products in the first half of 2024. That's what will drive that inflection point to really drive increased growth and margins. Those being a broad-spectrum parasiticide, Credelio Quattro, differentiated, a differentiated JAK inhibitor, an atopic dermatitis in a $1.3 billion derm market, and Bovaer, a new market, where it's actually methane reduction in cattle, which we can come back and talk about. So that's, that's the innovation. More we can talk through that. That'll be the big, big driver and probably our most historical year ever and our seventieth year around innovation. Secondly is just our portfolio, and I would say is we've seen sequential improvement on a more durable, diverse portfolio. We've had a lot of, you know, challenges in different parts of our portfolio, and what I'd say today is we're seeing a lot more durability, more stabilizing in that portfolio, incremental improvement. You can really look at it as farm, pet, international, US, and each one of those four segments, we see some of the best leadership we've had, best capabilities, best pricing, and a lot of things that are driving even innovation in all four of those quadrants. Lastly is productivity. We hit a big milestone in April, where we've got one ERP system standing up, coming out of Lilly, integrating Bayer, one IT system, over $1 billion in investment to do all of that. That's complete, and I would say the last couple of months has really represented a simpler Elanco, a more stabilized, and really a lot of levers to be able to get us more productivity. We're past the big $120 million or so one-time expenses, and large expenses will go down to under $20 million. So again, I think our innovation, portfolio, and productivity strategy, reaching the world's animals, is working and coming into probably a pretty big inflection point as a company. So that's where we are. Great. Yeah, so we're facing this unprecedented level of innovation at Elanco. I think that that's important because that's been kind of a part of the thesis since even the IPO is that, you know, we wanted to see the innovation and start to see that come to fruition. We're now on the cusp of that. So you've shared with us the $600 million-$700 million of innovation contribution by 2025. Can you talk a little bit about that cadence just more broadly, and then we can get into product-specific dynamics? But how should we think about the cadence of that? That's not a net number, but, you know hopefully that that's all, you know, to some extent, incremental. Yeah. So we, when we launched a kind of Bayer plus Elanco in December of 2020, we said, between that period and 2025 is actually $500 million-$600 million. We acquired Kindred, $600 million-$700 million. We've stayed consistent to that. So, you know, what's driven that has been some nice innovations around feline diabetes with Bexacat, a broadening, growing pain portfolio, some non-antibiotic poultry products. And now we're starting to get to the more substantial ones, the blockbusters, led by Experior, Parvovirus, our first monoclonal antibody. So doing the math, this year we'll have between $210-$250 million of new innovations since that starting point, January 2021. It was about $100 million a year ago, so we're seeing it ramp nicely. We see over the next couple of years, we'll see that achieve that $600 million-$700 million. There will be some cannibalization in para, some in cattle with the beta agonist, but as a whole, we see that growing. Again, starting next year, we'll see the increased growth coming from Experior, Parvo, things we already have combined with some of the new big blockbusters. Let's start with Atopic Dermatitis. So for the JAK inhibitor, all the data is with the FDA for review. Can you give us an update on that timeline at this point? How comfortable you are with the visibility there, the strategy in terms of taking that to market? Will you establish those minimum volume commitments with distributors to enhance that visibility, or how will you work with distribution or other partners? Yep. to help capture share? Sorry, there's a lot in there. Yeah, so second largest market, besides outside of parasiticides, is derm, atopic dermatitis. It's about $1.3 billion, growing high single digits, been growing even double digit, but it's predicted to grow at high single digit. It only has two real compounds of significance there. One is a JAK and one is an atopic dermatitis monoclonal antibody. What we would tell you is, it's the number one reason people take a dog to the vet, is an itching dog and kind of self-diagnose himself. Most of the labels show it's far from 100%, you know, effectiveness on the label today. So that kind of shows that there's an opportunity right there. And so we are bringing a JAK initially, followed by our own IL-31, short-acting and long-acting compounds. So we've made the submission on a differentiated JAK to go into this marketplace. If you look at ADUFA and the Animal Drug User Fee Act, that's what gives you that 180 days, a path towards a first half product approval. I would say that if you kind of step back and look at that market, they've had those products a while, and we believe that it's gonna be, one, the level of differentiation. Two, is really looking at, you know, the approach to the marketplace. So we've brought in some of the best know-how in animal health launching and pets with Tim Bennington that ran Zoetis US and launched Simparica Trio and had Apoquel and Cytopoint. We've also recently hired Shawn Hooker, the head of marketing for BI, probably one of the best marketing minds. And, you know, coming, coming because of this portfolio, coming because of the culture, you know, the launch strategy will involve everything from DTC and promotion, but also share of voice. And I think the other thing just to share since our earnings call is we've announced a 25% expansion in our U.S. pet health sales force. We'll add about 75 reps, should be one of the largest pet health sales forces now in the marketplace and in the top tier. And we're doing that because of what we see with the potential of this innovation and what we currently have. Share of voice will be a key factor in this launch. What about differentiation? How should we think about it? Yeah. You mentioned effectiveness- Yeah for instance, as being one area that could be addressed. Yeah. Could it also be safety, particularly with the JAK, in terms of what shows up in Apoquel, and then also on the IL-31? Yeah. So we've talked about the differentiation in our parasiticide. I'll come to that in a minute. We've not given the specifics on our differentiation for competitive reasons until we get a little closer, but, you know, differentiation in our market either comes back to efficacy, safety, or administration. And again, I think this market opens up to that. You know, the other aspect I think is, you know, derm has been that one category, as you look at the major players, because you don't have it. Going into whether it's corporate vets or going into the offering to the marketplace, you've got to have para, you've got to have pain, you've got to have therapy and bios, but without derm, you've had some loss of leverage. We'll be, we think, one of two companies now that have that portfolio, that will also play in the ramp rate and the share taking in this marketplace as well. the IL-31 under the jurisdiction of the USDA- Right. -which is a little bit different, so it's a little bit... timeline was a little pushed out, but at the same time, it's usually quicker turnaround times net, net for USDA. What is- what are they looking for? What's different? Yeah, that we've, you know, moved that at the earnings call. We've said, first of all, that it is a differentiated product, so that's new information that we believe our IL-31 short-acting is differentiated. Again, not giving the specific details, but we're excited about that. And this is really a USDA requirement, really for the monoclonal antibody class. They wanted more dogs, more doses, and so this was not anything we believe relative to our package. It was more around the platform class change. The new timeline is 2025? 2025. Okay. First half, second half, or? We didn't- Okay ... give specifics on that. All right. That's fair. So now let's switch gears to parasiticides. So what's the timeline for approval now and launch for Quattro? It was exciting you gave us some more detail on the most recent- Yeah ...call about the differentiation of that product. Can you give us a little bit more information on how it stacks up relative to the competition and where it is in the timeline? Yeah. So we've got good experience with broad-spectrum parasiticides. We've got Credelio Plus outside the U.S., which, you know, provides, you know, a very strong portfolio. This is a submission made for in the U.S. So since our earnings call, we can say that, though, that submission has been completed. It's been going for a while with a staggered submission. So on an Animal Drug User Fee Act, that gives you kind of that 180-day clock until, you know, our next, our next update. So, that gives us a path. What we highlighted with this product, a little bit more differentiation. So Quattro is this is the first product in this class, in this area, in, inside the vet clinic with four active ingredients. With those four active ingredients, we'll have flea and tick control like others, but we'll have differentiated coverage, especially in the intestinal worms, so heartworm, roundworm, and tapeworm. So we'll see broader coverage. We think that will be important. It'll be different. The other is that, since our announcement, even in the second quarter, we highlighted, given that there's another product in the class, that we intend from our data package and believe that we'll be able to have efficacy on heartworms in the first month, and some of the others takes six months. So we think that's another key factor around efficacy and differentiation. How are you thinking about sort of, have you been, or what's your initial take on the more recent competitor launch in the combination space? Has anything surprised you in terms of their approach or their tactics or anything that you can learn from as you launch yours? Yeah, I don't know if I'll get into those details other than to say that I think the, you know, what you do see in the pet market, this is a common question from investors, is when innovation comes, and you see this in para and derm and pain, and it's been consistent. We see it even happening as this one's rolling out. You know, you usually do not differentiate on price. Actually, you price to a premium. People like new stuff. So this product priced to the premium in the market. Second thing you see is the market gets bigger. So actually, you know, there's an interest, so, you know, everyone's driving compliance, driving new users. So we're gonna see, I think, the market get bigger. That's the second factor. And then everyone starts to use different aspects of share voice. Do you use distribution? How much DTC versus digital do you use? These are all the factors that I think will come into play. Thinking about sort of the timeline here and your approach to launch and your limitations as well as opportunities around the FDA approval and the cycle there, will VMX 2024 be a very meaningful year for you, or is that more so 2025? I think 2024 will be a meaningful year. I don't know if it'll need to be related directly to a convention, or to a show, but I do believe that, when you look at having, you know, a differentiated derm product and the second company into derm, you know, combined with broad-spectrum parasiticide, I think we have a nice opportunity. At the same time, I'd really highlight too, Erin, that, you know, our parvovirus monoclonal antibody, you know, you've got up to 900 dogs a day that get this deadly virus, and if they're not treated correctly, 91% die. And we've seen we're two months kind of into this launch. It's been successful. But how this is actually helping us as an entree is it's taken us into many more clinics, 30,000 clinics in the U.S., many more clinics that maybe weren't normally seeing us because, you know, they now have the first treatment against this deadly virus. And I think that's been a big factor as well as, you know, we're now in feline diabetes, first-in-class, first SGLT2, and a really new novel pain product. So that's opening doors, that's testing the muscle of launch, preparing, and now we're increasing our sales force by 25%. All of these things attribute to, I think, proof points about what 2024 can be for Elanco. Okay, great. And then, well, also a little bit on 2024. You have an $80 million headwind associated with parasiticide competition in 2023. Like, what then continues into 2024 on that front? Do you think some of that has already played out and, and we're kind of at a level steady state to some extent, or how should we think about that, as you launch your product as well? Yeah. So we've given a number starting the year between $80 million-$100 million of really U.S. vet clinic competition that falls really in, you know, not just para and pain and the competitions coming there, but even in otitis, you know, some of the generic players. We would say we're tracking to that or a little bit favorable, positive to the Elanco side on that competition. I think we're seeing our overall portfolio in the U.S. vet market stabilize, U.S. pet health return to growth in the second quarter, and a lot of that's attributed to the stability. So, you know, we see innovation and a stronger portfolio being something that, you know, we'll see some of these factors play, but our guide that we have so far for the rest of 2023 attributes to that competition that's coming. And you mentioned the canine parvo mAb and your launch there, and that sounds exciting. And what are your-- what are you learning about that type of market, that type of product- Yeah ... especially as you kind of go forward with or move forward with IL-31 as well? Yeah, we're supply limited right now, so we're in a smaller bioreactor in our monoclonal antibody facility. But we are ramping up and have said we'll be at a 10x increase, that's our intention, by the fourth quarter of this year. So be able to roll in this year will be, you know, small numbers, $5 million-$7 million initially, but our focus isn't necessarily on the numbers as much as ensuring positive experience, making sure that efficacy protocol is, you know, tied very tightly, and making sure that there's high awareness of parvovirus. It's a conditional approval, so awareness really matters. This is the only treatment for this virus, and then next year, it'll be, we believe it'll be ramping. The thing I think that's the biggest thing we've learned, right now, vet clinic capacity is an issue. This product helps get dogs in and out faster, making efficiency a lot better for the clinics, and that's been... And then being able to save puppies' lives creates a lot of, a lot of brand loyalty to the vet as well. I wanted to ask on Bovaer, how you're thinking about- Yeah ... how meaningful that could be in terms of timing and magnitude of contributions. Yeah, Bovaer is what we believe is the next major market in animal health. If we've got a $35 billion-$40 billion market, we believe that methane reduction, enteric in the animal, methane reduction is the next and up to $2 billion market. So we see Bovaer in the U.S. being as much as $200 million. And I think there's four kind of, I wanna say, building blocks to make Bovaer successful, even starting next year, and we're really building and shaping this market. So you know, the first thing is, and we're gonna start in dairy farms. So this is a feed ingredient that will actually inhibit methane, you know, you know, production inside the rumen of a cow.... So there's four things that are needed. One is the dairy farmer needs to have the data and the data analytics to be able to capture and track what he's doing. We're loading dairy farmers on every week to be able to do that. Second is you gotta have a certified protocol from SCS, an independent body, and we're working on not only getting Bovaer approved, but other products in our portfolio. Then you need an independent company to monetize the carbon. We spun out a company this year. Tyson's funded it, DSM, the dairy industry has, to where actually a Nestlé or a Danone can actually buy the carbon. And that's the fourth thing, which is getting CPG companies to actually wanna buy those carbon credits. Those four pieces are coming together nicely. We found a CMO to make the product before building a plant, and it's our intention, we're on a path to have the first kind of major FDA methane reduction product approved in the first half of 2024. So the key building blocks are in place. The submission is in, and we're tracking for a first half 2024 approval. A lot is going on in the first half of 2024, to say the least. Let's talk a little bit about commercialization and just what investments need to be made at this point. Yeah. And how do we think about that in terms of the timing of those investments? Are you front-loading a lot of that now, or is there still a lot more to come in 2024? Yeah. So our guide for the second half, we had a, you know, strong second quarter, but the guide actually attributed some to actually the increase into the sales force and some of the things that we're doing. So our plan is to do that so that they're in place, they're in their territories, they've got the relationships with their customers when we're getting ready to launch. So that's why we're doing some of that in the second half of this year. That's key. You know, we're looking at all the key elements from our distribution relationships to the use of the digital technology that we're already launching these products on. That will be key. And then how we actually approach the different segments of the market, from the small clinics, the GPs, to the corporate clinics. All, all of those are factors, Erin, that we'll be looking at as we go into the first half of the year. Look, it's gonna be a tension for Elanco on we want to launch with no regrets. We wanna take market share. We've got differentiated assets in the largest pet health markets and this new methane market, so we're not going to, you know, do this half-heartedly. That will be tension against our continued growth on the EBITDA line as we go into 2024. And again, we'll guide in February when we're into our launching of our 2024 guidance. Those are the key aspects. As we think about, and I'll use your word, but attention into 2024- Yeah. What about, like, the manufacturing dynamics that you were mentioning in the most recent quarter? Does that continue? Just some of the dynamics, the implied... I guess, what I'm trying to get at is the implied second half EBITDA target was slightly curtailed on, on just mix, manufacturing dynamics, investments that you were talking about. Yeah. What else continues into 2024? Yeah. So let me first just box the second half of 2023. We were significantly over kind of a beat and raise on all lines for the full year. In the second half, though, there was some take-back of EBITDA relative to the forecast in the rest of 2023, and that came really from the standpoint of, one, the increased sales force. Two, these are strategic decisions, slowing down a couple of our plants and to decrease kind of some internal active ingredient inventory to improve net working capital, which is something we wanted to do. And then there's just a little bit of some plays off from our last guide in that second half around more poultry, which is a lower mix, and vaccine supply. Those are things and some increased operating expense. So that's what caused the second half EBITDA, some takeback of that this year. As to answer your specific question, going into 2024, I think it's gonna be—we're gonna have less one-time costs, but we are gonna see, you know, some increased investment, and we're gonna continue to see, you know, lower manufacturing volumes in some plants that are gonna actually, you know, impact margins playing off from the launch costs as well. Switching to more of the top line in the second half, how should we think about the quarterly cadence there, in terms of kind of what? I guess you modestly increased that target for the year, but what does that imply, I guess? Yeah for the third and fourth quarter? I think I would look at just the sequential improvement in the business by more durable portfolios. Second half last year, -5% as a company. First half this year, -1%. You know, we're zero to plus three in the second half, so midpoint, 1.5%. And our intention really is that that's gonna be driven by innovation growth, price growth, better vaccine supply will be a factor, and poultry and aqua, they continue to remain strong. And then longer term, I mean, you're doing a lot from an innovation perspective- Yeah -to both diversify the mix and add new innovative products. I mean, when does top-line growth get to that more consistent state, and when do you reach the mid- to high-single-digit long-term growth that's consistent with the industry? Yeah. I think if you look at animal health, what makes it attractive is durable portfolios. We've gone through a stage where we had some innovation gap. You need durable portfolios with constant innovation. We're coming into that era. I think, though, the industry has averaged more mid-single digit than high single digit, unless you have a pop of some major innovation over a short period of time. So what I would say is we are setting Elanco up to be a solid mid-single-digit company, that may have some seasons of higher growth, but that mid-single digit will be driven by a more durable portfolio, larger innovations than we've had in the past, as well as incremental innovation, and probably a price capability and management that can get price like we've never had before either. We're tracking to better than 3% this year, and we believe that price capability will play a key role as we go forward. But again, the era we're coming into is major markets with differentiated major innovation, and that's why we will, you know, have our number one focus is launch really, really well. Yeah, that's definitely why we wanted to start there, but I will- Yeah ... Will end on fundamentals. If you could kind of give us- Yeah ... a sense of what's going on from a companion animal perspective. We're still seeing pressure from a vet visit perspective, still seeing elevated pricing. That's somewhat offsetting. Mm-hmm. How are you thinking about sort of the consumer experience at both the vet clinic level and at the retail level- Yeah ... what you're seeing in the market, and just health of the overall companion animal space? Yeah. So maybe we split them, but I would say, you know, Elanco, again, the broadest company relative to inside the vet clinic, outside the vet clinic. Average numbers, about a third of all pet owners don't go to the vet clinic. They're buying either online or buying in retail, and, we're number one in that category, actually taking share. And what we've seen here is, you know, being in more shelves at more price points, physical availability. We're now in Lowe's and Tractor Supply and a lot of places Bayer was not. We're adding innovation, price points that are low, the low cost at Walmart to the higher kind of premium price in a Seresto. So that has paid off and increased share of voice through just bigger campaigns. So on the retail side, we've seen that market recover after 2022. We've seen, you know, people come back to that. It's a pretty seasonal market, but probably one of the best seasons we've seen in quite some time, even since owning the Bayer asset. So I think a resilient market that wants innovation and wants many price points and wants to shop where they want to shop. Inside the vet clinic, a lot of talk about visits. Visits are bouncing around from kind of flat to minus plus over the last six months. What I would say is our energy really is on the spend, on the quality of the visit. Every survey we take, expectation to spend more or continue to spend continues to remain consistent. So what you need to do is, you know, reach the vet, reach the pet owner with what they want. It's not as much of a price-sensitive issue; it's being able to give them what they want. Bringing more innovation, like diabetes and parvo, helps continue to make that spend resilient. On the livestock side, what are you looking at in terms of fundamentals? Yeah ... and if you could speak to that globally, too. Yeah. What's going on in China versus the US? Yeah ... and other markets as well? Poultry and aqua, probably the most stable, most resilient markets. There's a lot of positive trends. There's pockets, even here, you in the U.S., if you look at Tyson's and others, there's some challenges in poultry. But, you know, we're leaders in poultry, leaders in salmon, very resilient market, a lot of demand, a lot of movement of that protein around the world. Trade's pretty open, so pretty durable, you know, low single digit, pretty consistent growth. And again, protein demand overall, animal protein continues to, continues to grow. On beef, mostly U.S. beef here, feedyard, Australia, a few others, there's a shortage of beef. Probably be a three-year cycle where heads of cattle are down about 5%. So what they do to compensate is keep them in the feedyards longer. That plays well to our portfolio with feed additives that are used in the late stage of the cattle's life. Pigs, it's really two big markets. As Europe for us is less, U.S. and China. U.S., it's been, I would say, a challenging market in US pigs, but we see that maybe stabilizing as we get into the, you know, 2024 period. China's been a U-shaped recovery, not a V-shaped recovery. Elanco China will grow kind of mid-single digits for the year. Pigs will be a slower recovery. It's just under $20 right now. That break even's around $20. Okay. And then lastly, on capital deployment, you continue to chip away at the debt burden here. How do we think about that level now and then going into 2024? And obviously, things get better as those stand-up costs- Yeah ... do come down as well. And then also just on that front, like, two collaborations, licensing deals, maybe small M&A even, is that on your radar screen at this point? And then on the flip side of that, divestitures. A lot of energies, we say we're focused on returning the company to growth this half, all the innovation launches, and the third priority for all of us is, and all of our compensation's tied to a little bit of an EVA structure, you know, increasing free cash flow. And so, improving net working capital. You've heard Todd talk about this, so we're decreasing internal inventories, which are historically high for the industry. We're bringing those down kind of as much as we can to historical lower levels internally. And then we're looking across the board at everything from optimizing CapEx only really to the new product launches. And, you know, being as judicious as we can with one IT system, as you say, a whole lot less stand-up cost. You'll see a pretty significant material change from 2023 to 2024 in that area. So free cash flow will grow as we go into 2024. Anything else that you think, you know, investors will better understand, I guess, over the next 18 months? I think it's kind of obvious it's all on innovation and execution thereon, right? Yeah. I think Elanco is a company that is now set up on one system. We have now just left... You know, we've left Lilly, we've acquired Bayer. We're now on one system. You have got a stabilized, more simplified Elanco that can pull levers faster. Two is we're hiring the best know-how and talent, probably the best leadership team that we've ever had with the, you know, years of experience when you look at Tim Bettington and what Bobby's done in pet health, across the board. So we've got the right team in place, and the energy's all about growth and innovation, and we've, we've got what we need. We're, we're an execution story over the next 12 months to drive a lot of value. Okay, perfect. Thanks so much for your time. Thank you. Appreciate it.