Good morning. My name is Rob, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Elanco Animal Health's First Quarter 2022 Earnings Conference Call. 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. Thank you. Katy Grissom, Head of Investor Relations. You may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health's First Quarter 2022 Earnings Call. I'm Katy Grissom, Head of Investor Relations. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Todd Young, our Chief Financial Officer; and Scott Purucker 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 section discussed in today's earnings press release, as well as our latest 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 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. After our prepared remarks, we'll be happy to take your questions. I'll now turn the call over to Jeff.

Thanks, Katy. Good morning, everyone. Elanco is off to a strong start in 2022 as we continue building, delivering, and strengthening our company. The first quarter marked another consistent quarter of delivery with our key three metrics, revenue, adjusted EBITDA, and adjusted earnings per share all exceeding the midpoint of our guidance. We remain well positioned as a leader in the durable animal health industry and have taken important actions to streamline our organization for continued delivery, even in an increasingly challenging environment. Since our last earnings call, several macro dynamics have intensified from the strengthening U.S. dollar and continued cost inflation to emerging situations with the war in Ukraine and COVID protective measures in China. Today, we are updating our guidance for revenue, adjusted EBITDA, and adjusted EPS to reflect changes in foreign exchange rates since last February. We remain confident in our constant currency revenue growth outlook of 2% to 3% for the year and we are encouraged by the foundation we are building for Elanco's next area of growth. Reviewing our key financial metrics on Slide 4, we delivered 2% constant currency revenue growth in the first quarter despite the increasingly volatile macro environment. Adjusted EBITDA margin was 27.7%, and we delivered adjusted EPS of $0.36. Our portfolio delivered at the high end of our guidance with $1.225 billion of revenue, including pet health growth of 2% and farm animal growth of 1% at constant currency. Several key factors drove this growth. First, our focus brands with growth led by poultry and aqua as well as key pet health brands, Seresto, Credelio, and Galliprant. These helped drive a 4% constant currency growth in our international business despite the expected challenges in the swine market in China. Next, price. Price improved 2% in the quarter, and we expect it will accelerate in the second half of 2022. And finally, our innovation products are tracking in line with our expectations for the year with positive results for Zoe Shield and strong indicators for Experior. Before we cover our updated expectations for the year, on Slide 5, I believe it's important to remember why animal health is such a durable business and how the industry and Elanco remain well positioned for sustained value creation in today's macro environment. First, protein and pets have proven to be essential. The role of pets as our constant companions has increased our expectation of care. With respect to protein, the availability and affordability of sustainable protein is no longer taken for granted and is growing at historical levels. This Animal Health business is diverse, spread across the global economy, five major species groups, and multiple therapeutic classes, all providing numerous avenues to deliver growth and value to customers while limiting dependency on any one specific dimension. And finally, this remains almost entirely a cash-pay business, where innovation and value-added services are rewarded by customers. I would specifically point to a few key trends watching this year. First is the improving pet owner experience, which transformed during COVID. While vet visits are normalizing, the transition to omnichannel and direct-to-door purchasing, both through e-commerce and the veterinarian, has improved convenience and compliance and is supporting higher pet owner spend. A recent Elanco survey showed one-third of pet owners expect to spend more on their pets in 2022. This is especially true of younger generations, with nearly half of Gen Z indicating they expect to increase their spending on pet care. Next, with underlying pet ownership above pre-pandemic levels, we believe this higher base, along with improved expectations of care will continue to drive industry growth going forward. And finally, the pet industry has historically demonstrated resiliency in inflationary times. On the farm animal side, we continue to see strong long-term protein demand despite higher protein prices. Increasing global GDP and shifting diets are driving a significant increase in demand for animal protein this decade compared to the last decade. In the near term, post-pandemic stabilization of food service demand in most parts of the world is driving improvement, notably in poultry and salmon markets. Importantly, we continue to see producer profitability across most species despite increasing input costs. In times of elevated feed costs, Elanco's portfolio is highly valued by our customers as it supports improved feed conversion and efficiency. While macro factors could have short-term cross-industry impacts, overall, the underlying fundamentals in animal health remain strong, and Elanco remains well positioned to deliver in today's environment and over the long-term. With this industry backdrop, we continue to expect 2% to 3% constant currency revenue growth for 2022. On Slide 6, while we have adjusted our guidance for continued strength in the U.S. dollar, the underlying revenue assumptions we shared in February remain largely intact. Focused brands, pricing, international and innovation will continue to support growth for the year, while competitive and generic pressure primarily on our defended brands, softness in China swine and year-over-year step down in contract manufacturing were expected headwinds. Emerging macro pressures in Ukraine and China and certain stock-outs in the U.S. retail are expected to negatively impact the business primarily in the second quarter. For the full year, we expect to offset these incremental headwinds with strong performance in poultry and aqua, incremental growth in pet health, focused brands in Europe and price growth above our initial expectations, especially in international markets. Importantly, Seresto continues to be a key growth driver and is off to a strong start, growing 6% year-over-year in the first quarter. Our new consumer campaign for the brand is driving credibility and positive brand sentiment and is outperforming our KPIs for impressions and engagement rates. We continue to invest in the robust activation plans for the brand, optimizing the depth and breadth of our direct-to-consumer exposure and doubling down on e-commerce with incremental spend in targeted areas to drive conversion. Overall, we are pleased with our positioning and continue to see a nice runway of growth for Seresto. On innovation, our launch products are gaining traction in the market, and we continue to expect a contribution of $120 million to $160 million for the year. For Experior, as we see the increased focus on environmental sustainability and a growing validation of the product's value proposition, all major packers are now evaluating or fully accepting Experior fed cattle. As a result, we're seeing strong producer demand pivot from trial to full feed yard use, including several of the country's largest cattle feeders. In addition to our revenue expectations, we're updating our guidance for adjusted EBITDA and adjusted EPS to reflect the strengthening U.S. dollar, but remain committed to our year-end net leverage target. Our consistent delivery against our company-wide productivity initiatives and the decisive actions we took to simplify the organization provide confidence in our ability to mitigate the impact of increasing cost inflation on our global business. Finally, on Slide 7, I'd like to highlight progress and actions we're taking to build the foundation for the next era of growth at Elanco. On near-term innovation, we've already received five of at least seven expected portfolio-enhancing approvals in major markets for the year, primarily in pet health. Dr. Ellen de Brabander and her highly capable team are very encouraged by the pipeline progress we made in the first quarter, including achieving two major milestones that advance our late-stage dermatology and parasiticide development programs. We continue to expect to make five to seven regulatory submissions in major markets in 2022 with up to two being differentiated pet health, potential blockbusters in the U.S. in dermatology and parasites. Additionally, we added another potential blockbuster to our longer-term pipeline with our recent strategic alliance with DSM to develop, manufacture, and commercialize Bovaer in the U.S. Based on dozens of published studies, DSM has proven Bovaer to be a revolutionary methane reducing product for beef and dairy cattle already approved in several international markets, including Europe. Once approved in the U.S., we expect Bovaer to have blockbuster revenue potential in excess of $200 million annually with initial contribution by mid-decade. We believe livestock sustainability is the next frontier of innovation and the next new material farm animal market. The alliance with DSM further strengthens our leadership position in transforming the space, and we expect it will be foundational to Elanco's next area of growth. And finally, we completed the carve-out of our microbiome platform and pipeline by launching Bio Medit under the direction of Aaron Shot. This was a great outcome for all parties, and we wish Aaron and the team at Biometic great success. Now I'll hand it over to Todd to provide more color on our first quarter results and outlook.

Thank you, Jeff, and good morning, everyone. Today, I'll focus my comments on our first quarter adjusted measures in order to provide insights on the underlying trends in our business, 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 9. As Jeff mentioned, we had a strong start to the year with revenue of $1.225 billion, delivering 2% constant currency growth driven by a 2% increase from price, primarily in pet health. Foreign exchange rates provided a headwind of $36 million in the quarter or 3%, slightly above our expectations. Slide 10 breaks down our revenue performance by species and Slide 11 provides revenue by region in the quarter. For pet health, we grew 2% at constant currency for the quarter, led by our international business, which grew 8% at constant currency. Globally, Seresto contributed $161 million in revenue, growing 6% on a reported basis, and Credelio grew double digits, while earlier generation parasiticides declined in the U.S. The Advantage family contributed $137 million in the quarter, an overall decline of 5%, with growth in several international markets more than offset by a decline in the U.S. Multiple dynamics impacted the performance in the U.S., including declining vet sales of prescription products, Advantage Multi, and supply chain input challenges for items like paper and packaging, impacting our ability to supply retailers. In some cases, this caused stock-outs at retail. We expect this to be resolved late in the second quarter as we are already seeing improvements in the paper supply situation. On the farm animal side, the business grew 1% at constant currency, driven by improving end market prices and innovation in poultry and robust growth for aqua, which included some phasing from Q2, partially offset by the continued and expected pressure in the China swine market in the quarter. Additionally, after growing mid-single digits on a pro forma basis in 2021, our global cattle business declined 3% in constant currency in the first quarter of 2022, primarily driven by generic competition impacting price on several key brands. Slide 12 further summarizes our financial performance highlights for the first quarter. Aligned with the decrease in reported sales, adjusted gross margin was 58.4%, a decline of 80 basis points compared to the first quarter of 2021. While price and mix largely offset each other, the unfavorable impact of approximately $30 million of year-over-year inflation was partially offset by approximately $25 million in manufacturing productivity improvements. Given the structural nature of our price and productivity improvements, we expect their benefits to sustain over time. We continue to experience constrained supply of certain raw materials and other important manufacturing inputs as well as labor shortages at several of our contract manufacturers. This created disruption in our ability to efficiently run our manufacturing operations from an absorption perspective, providing a headwind to our gross margin expansion and limited supply for a few select products in our U.S. retail channel, including certain Advantage family SKUs. Our commercial, manufacturing, and supply chain teams are working closer than ever to prioritize SKUs in key markets. David Urbanek, our Head of Manufacturing and Quality, and his organization have been working tirelessly for nearly two years to mitigate supply challenges for Elanco and our customers. We are deeply appreciative of this team's relentless focus to maintain supply while continuously improving manufacturing efficiency, reducing overhead costs, and driving procurement savings. Operating expenses for the quarter were $401 million, a reduction of 8% year-over-year and 5% sequentially compared to the fourth quarter of 2021. The impact of foreign exchange was approximately $10 million favorable in the first quarter or a 2% benefit year-over-year. This improvement highlights our disciplined execution of last November's restructuring and demonstrates our ability to sustain synergies, while more than offsetting inflation and continuing to invest in key strategic priorities. Our R&D spend was in line with expectations as we concentrated investments going into this year and prioritize our pet health blockbuster development pipeline. Interest expense was $52 million in the quarter, a year-over-year decline of 15%, driven by the repayment of our 2021 senior notes last August. The non-GAAP effective tax rate was 30% for the quarter compared to our initial expectations of 23% to 24% for the year, which reduced our EPS by approximately $0.04 versus those expectations. The higher-than-expected first quarter tax rate was driven by the 2017 U.S. tax law change that became effective in 2022, requiring the capitalization of certain R&D expenses. This impacted our tax rate by approximately 10 percentage points. For the full year, we now expect our tax rate to be approximately 25% to 26% to reflect this change in U.S. tax law. Adjusted net income was $177 million and adjusted EPS was $0.36 for the quarter, both declining 3%, partly driven by the U.S. tax law change. Adjusted EBITDA was $339 million in the quarter or 27.7% of revenue, representing a modest expansion of 10 basis points, despite the headwinds of inflation felt on both the gross profit and operating expense lines and the revenue headwind from foreign exchange rates. Additionally, I'll take the opportunity to highlight our positive GAAP net income and EPS performance in the quarter. As we continue building and strengthening the Elanco business, we are reducing the GAAP expenses associated with the restructuring, integration, and our independent company stand-up. As we shared in February, we are in the process of integrating the legacy Bayer business processes into the Elanco ERP system and operating network. This is the last significant integration activity and remains on track to be completed by the third quarter of 2023. We expect to file our 10-Q in the coming days, but let's move to the balance sheet and cash flow metrics on Slide 13. We ended the quarter with $5.87 billion in net debt, slightly higher than at the end of the fourth quarter of 2021 as the first quarter has heavier cash outlays due to the timing of annual compensation payments. We expect to end the year with a net leverage ratio of less than 4.75 times. In the first quarter, our operating cash flow was negative $62 million. While we continue to reduce DSOs globally, we had a significant year-over-year reduction in accounts payables and other liabilities as a back-office vendor processes continue to gain efficiency. Additionally, in the first quarter of this year, we had higher compensation payments, partially due to having a full year of bonus payments for legacy Bayer employees and higher severance payments as compared to the first quarter of 2021. Finally, in April, we tendered $406 million of the $750 million of outstanding senior notes due in August of 2023. A significant portion of this debt was refinanced by increasing our Term Loan A with Farm Credit by $250 million. Now let's transition to our updated outlook for 2022 on Slide 15. Today, we are updating our full year guidance for revenue, adjusted EBITDA and adjusted EPS to reflect foreign exchange rate assumptions as of early May. For the full year, we now expect revenue to be between $4.7 billion and $4.755 billion with constant currency growth still expected to be 2% to 3%. The impact from foreign exchange rates is now expected to be a headwind of approximately $140 million for the full year, incrementally $45 million above our February projections were now a 3 percentage point drag on reported growth year-over-year. While our first quarter results were not materially impacted by the war in Ukraine or COVID-19 protective measures in China, we do expect some impact, primarily in the second quarter in China, but acknowledge there's a significant uncertainty given the volatile and evolving nature of the situations. In 2021, Russia and Ukraine collectively represented less than 2% of our global business. We continue to operate in the region, providing essential health care products for animals despite an increasingly challenging environment and our decision to stop promotional spend. With respect to China, the increased protective measures around COVID-19 are impacting consumer access to goods and services. In the first quarter, our pet health business in the country grew double digits, but momentum has slowed across the industry through April and into May. While we foresee some headwinds in the second quarter as a result, we believe it will be temporary in nature, and our pet health business in China will still grow meaningfully for the year. On the farm animal side, restrictions in major population centers in China are limiting social gatherings and food service consumption, exacerbating the already imbalanced supply and demand for pork. Sale prices continue to be the leading indicator we are watching and producers are expected to remain unprofitable through the first half of the year. We remain cautiously optimistic about improvements in the second half, but now expect a more gradual slope of recovery. Jeff shared our confidence about several areas expected to counterbalance the potential headwinds I just described, including improved price expectations, especially in international markets, performance in poultry and aqua, and contributions from our key focus brands, primarily in international parasiticides. Moving down the income statement, we are also updating adjusted EBITDA and adjusted EPS for FX. We now expect adjusted EBITDA of $1.125 billion to $1.165 billion and adjusted EPS of $1.15 to $1.21. This guidance reflects continued execution of our manufacturing productivity agenda, which is delivering real improvements to our cost structure, allowing us to absorb the increased impact of inflation. On the operating expense side, we are leveraging our reset cost base as evidenced by our year-over-year and sequential decline in expenses in the first quarter. The higher tax rate expectations for the full year are offset by lower share count expectations, which allow us to maintain our full year EPS expectations outside of the impact from FX. Finally, we are introducing guidance for the second quarter of 2022 on Slide 16. We expect revenue of $1.16 billion to $1.20 billion, adjusted EBITDA between $245 million and $275 million, and adjusted EPS between $0.22 and $0.28. On Slide 17, we've provided further detail on the top line expectations for the second quarter. At the midpoint of our revenue guidance for the second quarter, we are projecting a 4 percentage point decline at constant currency. Our initial guidance in February expected a 1 percentage point of growth at constant currency, with portfolio and innovation growth of 3%, offset by a 2 percentage point decline as a result of known headwinds, primarily from the step-down in contract manufacturing, known competitive and generic pressures, and the weakness in the China swine business year-over-year. Since February, the emerging macro pressures impacting our business in China, Ukraine and Russia, along with the stock-outs in our U.S. retail channel and quarter-to-quarter phasing in aqua are expected to provide an incremental 5 percentage points of headwind in the quarter. Additionally, as a reminder, the second quarter is our highest sales and marketing investment quarter as we ramp up our promotional spend for our parasiticide business in the U.S. and Europe. Finally, on Slide 18, I'd like to provide some additional context on our expectations for the second half of the year. I wanted to comment on expected performance in the first six months of 2022 compared with the second six months. Our implied second half guidance includes accelerating sales growth and accelerating profitability. We are confident in the second half acceleration for several reasons. The improvement of year-over-year unfavorable comparisons across many parts of our business, including contract manufacturing. The benefit of our pricing actions early in the year that will accelerate in the second half, as well as the increasing contribution from innovation; and finally, the accelerated growth in China from the easing of COVID restrictions. Additionally, supporting the profitability acceleration, we expect to continue capturing lower operating expenses year-over-year in the back half. With that, I'll hand it back to Jeff for closing comments.

Thanks, Todd. As we finish up and consider the pushes and pulls in our market, I encourage us all to step back and put the world into perspective. The economic ripple effects and the personal toll of the war in Ukraine are significant. We condemn the war and are working daily to support our colleagues, customers, and the health and well-being of animals. Despite today's dynamic macro environment, the animal health industry and Elanco are well positioned for sustained value creation with continued positive industry trends. We are off to a strong start in 2022, with another consistent quarter of delivery. We are confident in our outlook for the year as the Elanco team is executing with excellence on the factors in our control. We are committed to delivering for our customers, building on our improved operational efficiency and diligently managing expenses while investing in the future growth of Elanco. I want to personally thank our Elanco colleagues for their extraordinary efforts and delivery thus far in 2022. With that, I'll turn it over to Katy to moderate the Q&A.

Thanks, Jeff. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

Great. Thanks so much for taking the questions. First on guidance, it does imply a meaningful ramp here in the second half. What does it assume in terms of the supply chain headwinds, China, the broader geopolitical headwinds in the second half? Do you think you've embedded sufficient buffers in there in your expectations at this point? And what is the high versus the low end of the range imply in terms of some of these headwinds persisting or potentially getting better? And then in terms of the long-term targets, excluding DSM, have you changed your long-term innovation contributions that you're thinking about here? And do you continue to view that your long term gross margin and EBITDA margin targets are still intact at this point?

Yes, sure. Thanks, Erin. Jeff, maybe you'll open with a little bit about Q2 and setting the stage and then long-term targets. And the question was about DSM too and how that impacts the innovation?

Yes, Todd can address the latter part of that. Thank you, Erin, for your question. To summarize our transition from Q1 to Q2, I believe we are seeing another quarter of steady performance. Our strategy is effective. We remain committed to our full-year guidance in constant currency, targeting 2% to 3% sales growth while also aiming for 4.75% leverage and $120 million to $160 million in innovations. The growth drivers that we identified will continue to be relevant throughout the year. We see improvement in our focus brands, particularly in aquaculture and poultry, which should gain momentum as we move into the second quarter and especially in the latter half of the year. Seresto is doing well, and both Credelio and Galliprant are experiencing double-digit growth. Internationally, we recorded 6% growth, with numerous affiliates thriving, reflecting durable diversity in that market. As Todd mentioned, the 2% price increases we implemented in Q1 will accelerate, particularly in the latter part of the year, alongside our innovations like Experior, Overshield, and the Credelio franchise. These fundamental aspects paired with improved margins and a streamlined organizational structure have resulted in one of our best execution quarters, evidenced by a sequential decline in overall operating expenses. I want to emphasize that in Q2, we accounted for contract manufacturing, the $60 million parasiticide competition, and the situation with Chinese swine. Furthermore, we observed some aqua phasing from Q2 shifting to Q1, particularly due to a strong salmon market where demand has been high as customers respond to favorable pricing and profitability, pulling some demand forward. The situation in Ukraine will also impact us for the rest of the year starting in Q2. Chinese lockdowns are affecting both the pork and pet markets, but we anticipate these effects will diminish in the second half. Additionally, we have been experiencing stock-outs in the U.S. pet health arena, especially with products like Advantage due to paper and packaging issues. While these challenges affected us in Q1 and will persist slightly into Q2, we believe they will be resolved soon, and this resolution is expected to stimulate growth. Looking ahead to the second half, the focus will be on our brands, particularly in poultry and aquaculture, alongside improved comparisons in EU pet health, ongoing price increases, our commitment to innovation, and the easing of lockdowns in China. We are confident in these projections. We are maintaining the same balanced planning approach that we've applied since our Investor Day, which will guide us in Q2 and the latter half of the year. This methodology has supported our consistent performance over the past six quarters. Todd, is there anything specific that I may have missed?

Erin, just to add on your one question of high versus low on that second half guide. We have made an assumption that China does reopen and that, that pulls our pet health business that's going to be more challenged in Q2 from the lockdowns, but that improves in the second half. Again, we've all been watching COVID across the globe over the last couple of years. We know there's high spikes. It comes back down, and that's the one assumption to just call out there. The other bit, FX rates were of early May. So that's roughly a EUR105 given that's the big number. We're not making the call on future dollar strength or weakness, but rather just using those rates. And so there's always volatility that will come on that end.

Yes. And Todd, maybe finish on the DSM announcement and how that's impacting our innovation or not impacting our innovation assumptions going forward?

Yes. Thanks, Katy, for that reminder. DSM, we've assumed mid-decade on that. So no impact on our revenue expectations out to 2025. So the $600 million to $700 million of innovation sales still holds as part of that guidance.

Great. Thanks for taking the question. For the first one, I want to touch on Seresto specifically. You had 6% growth. So it's not to see a return to positive growth in the quarter, but that is on a negative 10% comp from last year. So I think we'd have hoped to see a slightly bigger result. Are you still seeing sort of some of the wind down from the really robust numbers you're putting up during COVID? Or are you potentially seeing an impact in customer demand as a result of the continued news flow around Seresto and the health concerns there? What are your goals for Seresto this year and longer term? And then for the follow-up question on price, just following up on the previous point. Price accounted for essentially all of the growth in the first quarter, and you're planning on taking more. Are you assuming any volume growth in the second half? And are you at all worried that the continued price increases could have a negative impact on volume demand for customers? Thanks.

Jeff, do you want to start with Seresto and then we'll go to price with Todd?

Yes, Michael, thank you. Great question. No, Seresto, it did return to growth in both the U.S. and international. It's been balanced growth across the board. The lead indicators are giving us a lot of confidence on the lag indicators. And I would say that it's meeting our expectations at this point in time, and that would be globally as well. A couple of comments I would make is we are investing heavily, Michael, and media advertising, as I mentioned in my comments, it's all about really more awareness, more channels. It's now in the U.S. vet channel for the first time in distributors and more geography. And I think also I would note this eight-month collar when you look at economics, this actually provides increasing value, which has even allowed us to take some price as well. So when we look going forward, where this product is in a good place relative to awareness, it's growing I would also call out Bobby Modi has joined and leading, as you know, our U.S. pet health. He's brought a lot of experience in retail brand awareness, really building on our current retail team, omnichannel, and pricing. So at this point in time, we see Seresto meeting our expectations and a key driver for the rest of this year and longer term, as we've said, with more channels, more awareness, more geography, and life cycle management, we see Seresto with quite a long runway of growth. Maybe, Todd, you want to pick up on the second question.

Sure. Mike, great to hear from you. One thing to add on Seresto, the 6% growth is at reported dollars. And so Q1 is the biggest quarter for Seresto in Europe. And so as you saw in the slides, international pet health grew 8% on a constant currency basis. So while we don't break it out at the product level, Seresto would have been much faster on a constant currency basis with respect to our year-over-year comparable. With respect to the question on volume, as we look at yes, price is going to continue to accelerate. Total sales are going to accelerate at constant currency in the back half. That's the waterfall that we walked through there. And with that, there will be additional volume growth China swine had a big negative impact on volume as we would have expected. And then as we look at the overall parasiticide competition in the U.S. on those legacy brands, Advantage Multi, which is a prescription product in the vet clinic, Trifexis, Comfortis, all of those had volume challenges offset by the pricing across the entire portfolio.

Hi, good morning. Thanks for your questions. Regarding China, it was anticipated to add about 100 basis points to constant currency growth this year. I'd like to know your updated expectations, particularly how the challenges in the swine markets compared to what you expected. Also, in terms of pet health, do you foresee any recovery in sales as lockdowns are lifted? How should we view that and what are your assumptions for the latter half of the year? Additionally, I have a brief follow-up on your earlier remarks about pet health stock-outs, particularly with Advantage. Are you expecting a restocking effect as supply constraints begin to ease? Do you believe you'll have enough product available for the flea and tick season this year? Thank you.

Thanks, Nate. I'll let Todd start off here with China and then follow-up on pet health.

Nate, thank you for the question and give you how we're thinking about it today. As we start, the 1% growth in China overall is going to be a little lighter than that this year in constant currency because of the timing on things. As we think about China swine, we originally planned for a quicker bounce back in the second half. We've got a more gradual slope to that now assumed, and that's part of the reason for the slightly slower growth in China overall. With respect to the pet health business, we do expect that as the second half improves from a COVID restriction base, that will pull and catch up some of the phasing of pet health from Q2 out into the back half of the year, which is driving some of the back half acceleration. As we think about stock-outs in the U.S. overall, we are going to have some impact there. That's been baked in, especially in Q2, the challenges we get product back. And we certainly are. There was a paper strike with workers in Finland that's been resolved, that's helping on our supply chain constraints, there's a timing issue. So we are going to have a little impact. That's why we've got the Q2 down. And again, as we look at full year, will you say, well, how do you accelerate then, Todd? And it's really about that poultry and aqua growth that continues to be very strong, continued price and then those China restrictions. So again, overall, yes, some impact here in Q2. We've tried to be very transparent on how much that is, but confidence that the back half recovers and gets stronger to deliver on the second half constant currency numbers.

Hi, thank you very much. I have two questions. First, regarding prices, you've mentioned a 2% price increase in the first quarter, which is expected to accelerate in the second half. Can you help quantify what we should expect in this regard? How much is the price increase helping to offset some of the challenges you've discussed? Second, about the pipeline, I noticed you referred to two major milestones for the late-stage pipeline in the slides. Should we assume that indicates you have registration-enabling data for those blockbuster filings targeted for 2022? Could you provide a bit more detail on what those milestones are?

Yes. Thanks, Chris. We'll start with Todd on pricing and then go to Jeff on pipeline.

Chris, we feel very optimistic about how our U.S. pet health business has managed price increases globally at retail and within clinics, even though we believe we initially priced slightly lower than some competitors. To address Nate's earlier question, we do not expect the price adjustments to negatively affect volume, thanks to our competitive value proposition. Looking ahead to the second half, we anticipate an acceleration in growth, although we will not be increasing from 2% to 5%. Instead, we expect a noticeable improvement beyond the 2% we experienced in Q1. Now, I'll hand it back to Jeff for an update on the pipeline.

Yes, Chris, thank you. Maybe just a few comments on innovation to put things in context, what I think is most important for you to understand is, one, a very productive Q1 in R&D overall. Ellen and her team received five of the seven key approvals already. And yes, we did want to note that two major milestones. For competitive reasons, we won't get into specific details, but one on a derm asset, one on the para, all of this driving as you look at it, driving ourselves closer to approvals in the marketplace, whether that's a mix of timing as well as probability. So key milestones, I kind of step back also and just emphasize, we're building this next era of growth and innovation, and this progress gives us excitement about that. These are differentiated assets. We do have a late-stage pipeline, as you know, Chris, that's heavier based on pet health blockbusters that are differentiated. And these milestones are just closer steps to move us there. I would also emphasize that bringing Bovaer in is just another contribution that will be probably more mid-decade, but it will be another product that's going to have potential in excess of $200 million and be something that's in a very differentiated position really starting the new marketplace. So that's the update. And again, overall, the innovation team is operating at an extremely high level right now.

Thank you for taking my question. Todd, to your point, if the price moves from 2% to around 3% to 4%, and stock-outs are resolved due to the end of paper and packaging supply issues, is Elanco able to meet full-year guidance if the China lockdowns persist and the challenges in Russia and Ukraine continue? Also, could you remind us about the channel inventory in the first quarter compared to the fourth quarter, and how you anticipate it will change for the rest of the year?

Sure, Umer. As we start with that question, thinking about the China, yes, we feel like we can hit our numbers. Now again, where we fall within our range is really what is driven by the China expectations as we just called out, right? We are assuming that picks up. If it doesn't pick up, all right, then there are going to be some sales. Maybe we have some other things that offset because it's a very dynamic world at the moment and things do change, but we feel good about our overall guidance and understand that assumption on China. So again, hopefully, that addresses kind of where you're asking in respect to the range. Channel inventory was consistent coming out of Q4. We've been consistent on our inventory with our distribution partners around the world since the end of Q2 of 2020, that hasn't changed, and we don't expect a change on that going forward either.

Umer, I would just build on Todd's point, I think you're looking at it the right way. There's an aggregate of pushes and pulls. Something that I would note on the push as well, positive is the poultry and aqua markets, as we've been noting, are rebounding and definitely driving growth, and we see them persisting. That will be another underlying fundamental. And as we mentioned in our comments, EU Pet Health is doing extremely well. Seresto, the Advantage family. So I think when we look at the aggregate, we feel very good about it. No question that the lessening of lockdowns is an assumption, but it is something that we could weather within the range with some of these other fundamentals in aggregate. So again, commitment to this overall full year guidance because of the mix that we have going into the second half.

Just picking up on one thing you also asked about Umer, we have assumed that the Ukraine and Russia situation negatively impacts us for the rest of 2022. So that isn't something that we expect to affect the range on guidance.

This is actually Michael Parolari on for Elliot. So first one, I guess, you might have mentioned this, apologies if I missed it, but just with the headwinds on the legacy parasiticides for the quarter. If you could just talk about how they stacked up against the full year expectations? Or were they like relatively in line with how you guys were previously looking at those? And then second one from me tied to the DSM deal. Just any details on regulatory submission approval timelines? Anything that we could look for there on the regulatory pipeline front, just to kind of see progression and how things are going? Thank you.

Great. Thanks. I'll turn it to Jeff both of those.

Thank you for your question, Michael. Regarding parasiticides, we still anticipate a full year impact of about $60 million as stated in our initial guidance. This expectation remains unchanged, with the brands affected being Trifexis, Comfortis, and to some extent, Advantage Multi. However, we are also seeing strong growth internationally with products like Credelio Plus, Advocate in China, and Seresto across various markets. In the U.S., we have a competitive portfolio with Seresto and the combination of Credelio and Interceptor Plus, which are both showing growth, especially Credelio Cat, making it the fastest-growing brand in its category right now. Our parasiticide strategy both in the U.S. and globally is in line with our expectations. Regarding Bovaer, we are enthusiastic about our partnership with DSM, as both companies share a vision for livestock sustainability on a global scale. We are currently engaging with regulatory bodies, and the product has already been approved in Europe, Brazil, Chile, and Australia. Therefore, it's approved in every major continent for cattle. We are actively working with the FDA to determine the quickest path to market. Given that Bovaer can reduce methane emissions by 30% in dairy and 50% in beef, it has the potential to make a significant impact on climate change this decade. We look forward to providing more updates as we continue to work with the regulatory body on Bovaer.

Good morning, everyone. Todd, the first question is for you. Is the gross margin guidance of 57% to 58% from last quarter still accurate? Can you share any insights on how that might change throughout the year? Additionally, what are your thoughts on reaching 60% in 2023? Are we starting to think ahead to next year? And Jeff, I have a follow-up for you regarding Galliprant. I would love to hear your perspective on that franchise over the next 12 to 24 months. There is certainly a strong competitor in the canine market that has been effective in expanding its presence. Are you observing any slowdown in the growth rate of Galliprant, particularly in Europe, where that competing product is more prevalent?

Great. Yes, I'll start with Todd on gross margin and then Jeff on Galliprant.

Thanks, Jon. As we look at gross margin this year, we're not changing our full year guidance on that front. The team is really doing a nice job of continuing to drive productivity across the footprint. And we're seeing pickups from a lot of the API procurement initiatives we've done three years ago, the low through the P&L today. I think you'll see a bigger pickup in the back half of the year just based on continued improvements on that plus, accelerating price is a positive on the gross margin front. With respect to the guidance expectations of 60% next year, we feel great about the execution we're doing in the face of significant inflation. We're up well over $100 million relative to when we set that initial target for our gross margin. And if not for that, we'd be up against that door to 60% here in 2022. So a lot of time you have to play as we view it, but really excited by the work our team is doing on this front on a global basis to continue to drive productivity and deal with lots of procurement challenges, supply chain challenges. But overall, we feel good about where we are on the execution front and look forward to continuing to march forward from here.

Yes, Jon, regarding Galliprant, thank you for the question. Here's our perspective on Galliprant. It experienced global growth this quarter, primarily driven by strong performance in the U.S. We expect it to grow in double digits in 2022, and it is meeting our expectations. We see a medium to long-term opportunity for continued growth, similar to the Seresto brand. There are some differences between the U.S. and EU markets regarding Galliprant. The U.S. has a more comprehensive label, a larger pain portfolio, and it has been on the market longer. We are implementing strategies in the EU to leverage our U.S. insights. Overall, we view Galliprant as a focused brand poised for strong double-digit growth moving forward while also expanding our pain portfolio. We believe that pain represents the third largest market in pet care, and innovations have driven the EU pain market to grow by 36% in 2021. More solutions will support this growth, as we've seen in parasiticides and dermatology. We're introducing ZORBIUM alongside Nocita and Onsior to strengthen our position in OA and surgical pain management as we advance. In summary, Galliprant is meeting our expectations, with continued growth and some differences between Europe and the U.S., and we believe it offers a unique value proposition compared to the innovations entering the market.

Hi, good morning, and thanks for taking questions. Two from my side, firstly, it's been a while since you acquired Kindred. Can you give an update on some of the pipeline from their side, which was on late stage, specifically looking at the parvovirus mab and the IL-31 mab and what the date is from you and what stage you? Secondly, getting to the compound animal side and parasiticides, clearly seeing some pressure there. What are the reasons for you to acquire Bayer, Merger Bayer was the old positioning? And I thought that should have helped you be relatively more resilient. I don't seem to see that in the numbers. So could you give an update on how this channel positioning helps you or not with the U.S. net visit trends that we're seeing?

Yes, Jeff, do you want to start on Kindred?

Yes. So I think, Balaji, thank you for the question. First of all, the assets are progressing nicely. We've integrated them into Ellen's R&D organization, bringing in the expertise, also the monoclonal antibody manufacturing that also came with the asset. So overall, it's doing very well. Expecting on parvo, again, complexities with everything from regulatory, manufacturing and commercializing, but again, currently, right now, it's our expectation we'll be bringing the parvo to the market later this year. And then the three derm assets, we're continuing to integrate and progress as rapidly as possible as well as to enter ointment erosion with assets that we had in our current pipeline. So again, tracking to our value propositions that we have differentiated assets and really bringing a monoclonal antibody capability into Elanco at another level.

And then on the health side, just the omnichannel and OTC.

Yes, Balaji, we always consider this market to be over $5 billion globally. We have been reviewing the overall Bayer situation with our Board. I can say there is a lot of synergy in our sales efforts, and we are seeing significant capability synergies. For instance, in China, we have greatly enhanced our pet health capabilities across Asia due to the Advocate brand. The next phase of growth is coming with Seresto. Internationally, we are performing well, with major affiliates in Europe from Elanco merging with Bayer's portfolio, which will serve as a growth accelerator in the second half for pet health in Europe. Particularly in retail, we are effectively leveraging our brand. Advantage XD is primarily an Elanco asset, illustrating another area of synergy. Currently, we are exceeding our expectations regarding our business case, largely in the national pet health, retail, and brand segments. We had anticipated competition, with $75 million last year and $60 million this year regarding Para, mostly impacting the legacy Elanco brands, with the exception of Advantage Multi, which had different results this quarter.

Thank you. The Q1 SG&A and R&D numbers were the lowest in five quarters. I appreciate that there are many moving parts, which you've very nicely reviewed and that Elanco has aggressive cost control initiatives underway as well. But are those numbers sustainable in absolute terms? And if not, is SG&A or R&D more sustainable at the Q1 level than the other, for instance? And then secondly, if I might ask, the company has been consistent in saying it sees differentiation in its derm and parasiticide pipeline opportunities. What deficiencies do you see in the currently marketed products where there could be opportunities to improve?

Sure. Thanks for the question, Steve. As we look at overall execution across Elanco, the team is very focused on continuing to deliver and think about how to take costs down while doing that. And you see that in even just a 5% sequential improvement from Q4 of this past year to Q1 of this year. It will be a step up in Q2. I tried to call that out in my prepared remarks, but just a reminder, it is the time when we run the more TV ads and really publicize our parasiticide business during the season in both the U.S. and Europe. So on a sequential basis, it will be a step-up in Q2 versus Q1, but then dropping back down in Q3 and Q4. We're also getting a little tailwind. The strong dollar negatively impacts our top line, but does then provide a benefit on the SG&A, as we called out 2 percentage point pickup in Q1. So overall, we do feel this is sustainable. The R&D team is very focused, and across the board, we're looking at different ways to continue to drive value from an OpEx standpoint. And I'll flip it over to Jeff.

Yes, Steve, relative to the differentiation, when you look at these big classes that usually fall into three categories: one is efficacy, and second is just the whole ease of use or administration, and then last is the label and safety. I mean, I would say everything can kind of fall into those three categories. That leads to a value proposition; then the commercial approach could be another way to differentiate relative to channel marketing and overall approach to different segments of the marketplace.

I think we've got one more question in the queue, so we'll take that now.

Good morning. Thanks for taking the questions. My first one is on your product approvals. Specifically, you mentioned that Elanco has received five product approvals since the beginning of the year, mostly in pet health. And then expect at least 7 in 2022. So can you kind of talk about the highlights in your approvals and the inflated approvals for the year outside of the potential German parasiticide blockbuster? And then my second question is just on your sustainability types in livestock, specifically an initiative there. You have experienced now this DSM a lot? Kind of what does Elanco have their eyes on in terms of sustainability on that front next? Thanks.

Yes. Thanks. Jeff, do you want to take the first question on approvals and then sustainability portfolio as well?

Yes, Christine. So these are portfolio-enhancing approvals. I would note that the one that we're working on the most in the field right now that I would note is ZORBIUM, which is a pain product that will go into our fee line pain portfolio. Advantage XD is also another product that will be coming that has got an approval and again, take state approvals with EPA. So I'd note those, and there's a couple of others that we consider approvals in major markets that have bigger opportunities. The Credelio franchise continues to get approvals around the world as well. My comment on livestock sustainability is a few things here that I think are absolutely critical as you start to think about livestock sustainability; we see today this being the number one challenge that our livestock producers have, especially in major markets, with ESG growing as well as even consumers. One of the top reasons that consumers today will continue to consume or be challenged to continue to consume is the impact that animals have on the environment. We're finding one out of three beef consumers approximately today that are backing off or not eating beef; it's because of the impact on the environment, not necessarily the diet. So this is going right into a space of need. As you know, we have got the first FDA product approved Experior that's being received very well as people look at that sustainability value proposition. And the second is we're really looking at how we can help the producer track. That's going to be the most important thing is the producers benchmarked data, and that's the launching of a database that can help producers understand their footprint and the levers to reduce it. And then lastly, as people ask about value, the carbon market will be key. And that's some of the investment we made in a company called ACN, a company we've spun out that will actually help to sophisticate the carbon market, aggregate, certify, and monetize carbon credits. So the excitement we're seeing and the movement we've seen with Experior with the value-added tools, one of the reasons DSM came to the U.S., the largest cattle market, and selected Elanco where these capabilities was the connection we have. We see this market globally, 1 billion to 2 billion methane reduction, and again, we see the entire value chain from the retailers back to the packers and the producers all engaging at another level, and Bovaer will be transformational in this space and we see Washington very interested, of course, because this is a big part of the Biden administration's agenda, and look forward to working with them closely. So thank you.

All right. Thanks for all the questions today. I'll let Jeff close here.

Yes. Thank you, everybody. Thanks for a great dialogue here and the great questions. Elanco delivered another consistent quarter at the top end of our guidance range. We're off to a great start for the year. We are confident in our guidance for the year, updating our key metrics to reflect the current foreign exchange rate environment and, importantly, maintaining our constant currency revenue growth of 2% to 3%. Our innovation, very importantly, is progressing, and we remain diligently focused on executing our plans in these increasingly volatile times. Thank you for your interest in Elanco and your time. Have a great day today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.