Full Press Release Details
Investor Contact: Kathryn Grissom (317) 273-9284 or kathryn.grissom@elancoah.com
Media Contact: Colleen Parr Dekker (317) 989-7011 or colleen.dekker@elancoah.com
Elanco Animal Health Reports First Quarter 2023
GREENFIELD, Ind (May 9, 2023)
- Elanco Animal Health Incorporated (NYSE: ELAN) today reported financial results for the first quarter of 2023, provided guidance for
the second quarter of 2023, and raised the bottom-end of guidance for the full year 2023.
"Elanco delivered sequentially improved underlying business performance
in the first quarter driven by recovering business conditions and actions we have taken to strengthen our commercial positioning, notably
in U.S. Pet Health driven by improved share of voice, physical availability, price and innovation. In April, we achieved a major milestone
with the successful integration of the Bayer Animal Health business into our ERP system, with the first quarter benefiting from customers
shifting their purchases ahead of our system blackout. We expect lower revenue in the second quarter as a result of this shift,"
said Jeff Simmons, Elanco president and CEO. "I am very pleased with the progress on Seresto as we continue to align with the EPA
on its recommended stewardship actions supporting the continued registration of Seresto. We received USDA conditional approval for our
breakthrough Canine Parvovirus Monoclonal Antibody treatment and initiated USDA submission for our IL-31 monoclonal antibody for canine
"The combination of advancing innovation, reducing uncertainty
with the successful ERP integration and increased confidence in our U.S. Pet Health and international poultry businesses, allow us to
confidently raise the bottom end of our first half and full year 2023 guidance for our key metrics. We are focused on delivering an expected
return to top-line growth in the second half of the year, while also dedicating resources as we prepare to bring up to four additional
potential blockbuster products to market in 2024."
Financial Highlights
| First Quarter Results (dollars in millions, except per share amounts) | 2023 | 2022 | Change (%) | CC Change (1) (%) | ||||||||||||
| Pet Health | $ | 675 | $ | 640 | 5 | % | 8 | % | ||||||||
| Farm Animal | $ | 573 | $ | 569 | 1 | % | 5 | % | ||||||||
| Cattle | $ | 248 | $ | 247 | 0 | % | 4 | % | ||||||||
| Poultry | $ | 183 | $ | 180 | 2 | % | 6 | % | ||||||||
| Swine | $ | 102 | $ | 99 | 3 | % | 9 | % | ||||||||
| Aqua | $ | 40 | $ | 43 | (7 | )% | (5 | )% | ||||||||
| Contract Manufacturing | $ | 9 | $ | 17 | (47 | )% | (41 | )% | ||||||||
| Total Revenue | $ | 1,257 | $ | 1,226 | 3 | % | 6 | % | ||||||||
| Reported Net Income | $ | 103 | $ | 51 | 102 | % | ||||||||||
| Adjusted EBITDA | $ | 379 | $ | 338 | 12 | % | ||||||||||
| Reported EPS | $ | 0.21 | $ | 0.10 | 110 | % | ||||||||||
| Adjusted EPS | $ | 0.45 | $ | 0.36 | 25 | % |
(1) CC = Constant Currency, representing the growth
rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
In the first quarter of 2023, revenue was $1,257 million, an increase
of 3% on a reported basis, or an increase of 6% excluding the unfavorable impact from foreign exchange rates, compared to the first quarter
of 2022. Revenue in the period benefited from customer purchases of legacy Bayer Animal Health products that the company believes were
shifted from the second quarter of 2023 into the first quarter as a result of communicated commercial shipping blackout periods in April resulting
from the company's ERP system integration (the "ERP Blackout"). The company estimates $90 million to $110 million of
revenue benefit in the first quarter, or an estimated 7 to 9 percentage point benefit to growth, as a result of the ERP Blackout. The
system integration was executed in line with the company's expectations with all affiliates and sites resuming normal operations
throughout April, including production, order taking and product shipping to customers. The U.S. market resumed shipments on April 10,
while other affiliates resumed commercial operations in a staged approach through April 27. Beyond the ERP Blackout, an improving
global environment and positive outcomes from actions the company has taken to strengthen market positioning drove sequential improvement
in the underlying business in the first quarter compared to the 7% constant currency decline in the fourth quarter of 2022.
The following table summarizes the estimated impact from the ERP Blackout
on Pet Health and Farm Animal revenue:
| First Quarter Results (dollars in millions) | 2023 | CC Change (1) (%) | Estimated ERP Blackout Impact (%) | Estimated ERP Blackout Impact ($) | ||||||||||||
| Pet Health | $ | 675 | 8 | % | 10% to 12% | $65 to $80 | ||||||||||
| Farm Animal | $ | 573 | 5 | % | 4% to 5% | $25 to $30 | ||||||||||
| Contract Manufacturing | $ | 9 | (41 | )% | -% | $ | - | |||||||||
| Total Revenue | $ | 1,257 | 6 | % | 7% to 9% | $90 to $110 |
Pet Health revenue was $675 million, a 5% increase on a reported
basis or 8% excluding the unfavorable impact from foreign exchange rates, with a 5% increase from price, compared to the first quarter
of 2022. Excluding the estimated ERP Blackout impact, the decline in the first quarter was primarily driven by supply constraints for
certain vaccines, continued competitive pressure on certain parasiticide products and declines in retail products notably in Europe, partially
offset by improved price and innovation launches. While the underlying Pet Health business has not yet returned to growth (excluding the
estimated ERP Blackout benefit), the business improved sequentially from the 11% constant currency decline in the fourth quarter of 2022.
The Advantage Family of products contributed $155 million,
an increase of 17% excluding the unfavorable impact from foreign exchange rates, with an estimated 16 percentage point benefit from the
ERP Blackout. Seresto revenue was $178 million, an increase of 14% excluding the unfavorable impact from foreign exchange rates, with
an estimated 23 percentage point benefit from the ERP Blackout. Excluding the estimated benefit from the ERP Blackout, both products grew
in the U.S., but declined outside the U.S.
Farm Animal revenue was $573 million, a 1% increase on a reported
basis or 5% excluding the unfavorable impact from foreign exchange rates, with a 5% increase from price compared to the first quarter
of 2022. Excluding the estimated ERP Blackout impact, the year over year change in the first quarter was primarily driven by strength
in Europe and Asia, led by poultry, innovation revenue and improved price, offset by poultry rotations in the US, generic pressure, timing
of Aqua purchases in the prior period and supply constraints for cattle vaccines in the U.S. Similar to the Pet Health business, Farm
Animal revenue improved sequentially from the 3% constant currency decline in the fourth quarter of 2022.
Contract Manufacturing revenue was $9 million, a decrease of
47% or 41% excluding the unfavorable impact from foreign exchange rates, driven primarily by disruptions in supply from the company's
vaccine manufacturing facility.
Reported gross profit was $763 million, or 60.7% of revenue, and adjusted
gross profit was $764 million, or 60.8% of revenue, in the first quarter of 2023. Reported gross profit as a percent of revenue increased
220 basis points. Adjusted gross profit as a percent of revenue improved 230 basis points, primarily driven by improved price and continued
productivity efforts across the company's manufacturing footprint, partially offset by inflation. The company estimates gross profit as
a percent of revenue benefited by an estimated 130 to 170 basis points from the estimated incremental $90 million to $110 million of legacy
Bayer Animal Health revenue from the ERP Blackout in the period, as the average gross margin of those products is greater than Elanco's
overall average gross margin.
Total operating expense was $408 million for the first quarter of 2023.
Marketing, selling and administrative expenses increased 1% to $327 million, and research and development expenses were flat at $81 million.
The increase in total operating expenses was primarily driven by higher employee related expenses, partially offset by a favorable impact
from foreign exchange rates.
Asset impairment, restructuring and other special charges were flat
at $40 million in the first quarter of 2023. Charges recorded in the first quarter of 2023 primarily related to costs associated with
the implementation of new systems, programs and processes due to the integration of Bayer Animal Health. The ERP system go-live was completed
in April 2023, with continued performance optimization expected over the next several quarters.
Reported and adjusted net interest expense was $64 million in the first
quarter of 2023, an increase of $12 million, compared to the first quarter of 2022. The impact of the partial repayment of the company's
senior notes in April 2022 was more than offset by the impact of rate increases on variable rate debt.
The reported effective tax rate decreased to 4.4% in the first quarter
of 2023 compared to 31.6% in the first quarter of 2022, primarily driven by the jurisdictional location of Elanco profits and refinements
in the calculation of required capitalization of certain R&D expenses. The adjusted effective tax rate decreased from 29.7% in the
first quarter of 2022 to 21.9% in the first quarter of 2023, primarily driven by the jurisdictional location of profits and certain unfavorable
return to provision adjustments that impacted the first quarter of 2022.
Net income for the first quarter of 2023 was $103 million and $0.21
per diluted share on a reported basis, compared with net income of $51 million and $0.10 per diluted share for the same period in 2022.
On an adjusted basis, net income for the first quarter of 2023 was $220 million, or $0.45 per diluted share, a 25% increase compared with
the same period in 2022. The company estimates adjusted EPS in the first quarter includes a $0.11 to $0.14 benefit from the ERP Blackout,
assuming a corporate consolidated tax rate of 21.9%.
Adjusted EBITDA was $379 million in the first quarter of 2023, a 12%
increase compared to the first quarter of 2022. Adjusted EBITDA as a percent of revenue was 30.2% compared with 27.6% for the first quarter
of 2022, an increase of 260 basis points. The company estimates adjusted EBITDA in the first quarter includes a $70 million to $90 million
benefit from the ERP Blackout, or a 370 to 460 basis point benefit in adjusted EBITDA as a percent of revenue.
The following table summarizes the estimated impact from the ERP Blackout
on Adjusted EBITDA and Adjusted EPS:
| First Quarter Results (dollars in millions, except per share amounts) | 2023 | Change (%) | Estimated ERP Blackout Impact | |||||||||
| Adjusted EBITDA | $ | 379 | 12 | % | $70 to $90 | |||||||
| Adjusted EPS | $ | 0.45 | 25 | % | $0.11 to $0.14 |
Working Capital and Balance Sheet
Cash used in operations was $145 million in the first quarter
of 2023 compared to $62 million in the first quarter of 2022. The decrease in cash from operations in the first quarter of 2023 reflects
increases in accounts receivable, cash interest and inventories, partially offset by higher net income.
As of March 31, 2023, Elanco's net leverage ratio was 5.4x
adjusted EBITDA, compared to 5.5x as of December 31, 2022.
"While we are pleased by the sequential improvements in first