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 Fourth Quarter and Full Year 2023 Results
Fourth Quarter 2023 Financial Results
Revenue of $1,035 million
Reported Net Loss of $141 million, Adjusted Net Income of $39 million
Adjusted EBITDA of $165 million or 15.9% of Revenue
Reported EPS of $(0.29), Adjusted EPS of $0.08
Net leverage ratio of 5.6x Adjusted EBITDA
Full Year 2023 Financial Results
Revenue of $4,417 million
Reported Net Loss of $1,231 million, Adjusted Net Income of $439 million
Adjusted EBITDA of $979 million or 22.2% of Revenue
Reported EPS of $(2.50), Adjusted EPS of $0.89
Full Year 2024 Guidance
Revenue of $4,450 to $4,540 million
Reported Net Loss of $17 to $62 million, Adjusted EBITDA of $960 to $1,010 million
Reported EPS of $(0.12) to $(0.03), Adjusted EPS of $0.87 to $0.95
Guidance includes full year contribution of the company's aqua business and does not consider contribution from expected launches of three blockbuster-potential products
Announced strategic restructuring impacting approximately 420 personnel, resulting in a charge to 2024 reported results of $50 to $55 million and generating approximately $30 to $35 million in annualized savings, which the company plans to reinvest in more significant value creation opportunities
GREENFIELD, IN (February 26, 2024) - Elanco Animal Health Incorporated (NYSE ELAN) today reported its financial results for the fourth quarter and full year 2023 and provided initial guidance both for the first quarter and full year 2024.
"Elanco ended 2023 with momentum, returning to constant currency revenue growth for the full year and delivering 5% growth in the fourth quarter, primarily driven by our farm animal business, innovation revenue and price growth," said Jeff Simmons, President and CEO of Elanco Animal Health. While we exceeded our sales expectations and demonstrated strong operating expense management in the fourth quarter, adjusted EBITDA was adversely impacted by approximately $18 million of unexpected items, primarily the significant devaluation of the Argentinian peso that occurred in December of 2023. Over the past year, we have enhanced our commercial infrastructure to support future growth, doubled year over year innovation sales, returned to revenue growth and taken actions to accelerate debt paydown.
Simmons continued, "As we look at 2024, we expect our existing portfolio to deliver constant currency revenue growth of 1% to 3%, with both pet health and farm animal expected to contribute to growth. We remain encouraged by our three late-stage pipeline products under regulatory review that have a path toward approval in the first half of 2024 and would be additive to our topline expectations in the second half of the year. Continuing our efforts to improve efficiency, today we announced a strategic restructuring to continue the shift of our investments into more
significant value creation areas. We are investing to enhance our launch efforts, prioritizing cash flow improvements and meaningfully reducing leverage, from both our improving free cash flow and the expected sale of our aqua business. We believe that the investments we are making in 2024 will provide the foundation to enable sustained revenue growth over the medium and long term."
Financial Highlights
| Fourth Quarter Results (dollars in millions, except per share amounts) | 2023 | 2022 | Change (%) | CC Change (1) (%) | ||
| Pet Health | $416 | $420 | (1) | % | (1) | % |
| Farm Animal | $610 | $552 | 10 | % | 10 | % |
| Cattle | $249 | $222 | 12 | % | 11 | % |
| Poultry | $220 | $187 | 18 | % | 19 | % |
| Swine | $98 | $100 | (2) | % | (3) | % |
| Aqua | $43 | $43 | 0 | % | (5) | % |
| Contract Manufacturing | $9 | $13 | (31) | % | (28) | % |
| Total Revenue | $1,035 | $985 | 5 | % | 5 | % |
| Reported Net Loss | $(141) | $(55) | (156) | % | ||
| Adjusted EBITDA | $165 | $172 | (4) | % | ||
| Reported EPS | $(0.29) | $(0.11) | (164) | % | ||
| Adjusted EPS | $0.08 | $0.19 | (58) | % |
| Full Year Results (dollars in millions, except per share amounts) | 2023 | 2022 | Change (%) | CC Change (1) (%) | ||
| Pet Health | $2,104 | $2,138 | (2) | % | (1) | % |
| Farm Animal | $2,271 | $2,219 | 2 | % | 4 | % |
| Cattle | $949 | $944 | 1 | % | 2 | % |
| Poultry | $765 | $716 | 7 | % | 10 | % |
| Swine | $382 | $384 | (1) | % | 1 | % |
| Aqua | $175 | $175 | 0 | % | (2) | % |
| Contract Manufacturing | $42 | $54 | (22) | % | (21) | % |
| Total Revenue | $4,417 | $4,411 | 0 | % | 1 | % |
| Reported Net Loss | $(1,231) | $(78) | ||||
| Adjusted EBITDA | $979 | $1,017 | (4) | % | ||
| Reported EPS | $(2.50) | $(0.16) | ||||
| Adjusted EPS | $0.89 | $1.11 | (20) | % |
(1) CC Constant Currency, representing the growth rate excluding the impact of foreign exchange rates.
Numbers may not add due to rounding.
Fourth Quarter Results
In the fourth quarter of 2023, revenue was $1,035 million, an increase of 5% on both a reported and constant currency basis, compared with the fourth quarter of 2022.
Pet Health revenue was $416 million, a decrease of 1% on both a reported and constant currency basis, with a 3% increase from price in the quarter. The year over year constant currency decline in the fourth quarter was primarily driven by continued competitive pressure on certain products in the U.S. veterinary channel, partially offset by increased price, increased contribution from innovation products, and increased demand for Seresto globally compared to the fourth quarter of 2022. The Advantage Family of products and Seresto contributed revenue of $75 million and $42 million, respectively.
Farm Animal revenue was $610 million, an increase of 10% on both a reported and constant currency basis, with a 4% increase from price. The year over year constant currency growth in the fourth quarter was primarily driven by strength in poultry globally, revenue from new products, led by Experior , strong global demand for Rumensin , resupply of cattle vaccines in the quarter and increased price, partially offset by continued declines in international swine and sheep.
Gross profit was $519 million, or 50.1% of revenue in the fourth quarter of 2023. Gross profit as a percent of revenue declined 440 bps, primarily driven by planned reduced throughput at certain manufacturing sites in an effort to reduce balance sheet inventory and improve cash conversion, unfavorable manufacturing performance including inflation, and higher affiliate expenses including a recently implemented higher import duty rate in Argentina, partially offset by increased price.
Total operating expense was $371 million for the fourth quarter of 2023. Marketing, selling and administrative expenses decreased 3% to $292 million, and research and development expenses decreased 1% to $79 million. The decrease in total operating expenses was primarily driven by lower promotional spend and savings associated with the completion of the ERP system implementation in the second quarter of 2023, partially offset by higher employee related expenses.
Asset impairment, restructuring, and other special charges were $36 million in the fourth quarter of 2023, compared to $32 million in the fourth quarter of 2022. Charges recorded in the fourth quarter of 2023 primarily related to a $26 million non-cash write-down of an asset associated with a long-term manufacturing and supply agreement, and, to a lesser degree, costs associated with the implementation of new systems, programs, and processes due to the integration of Bayer. Charges recorded in the fourth quarter of 2022 primarily related to costs associated with the implementation of new systems, programs, and processes due to the integration of Bayer.
Net interest expense was $67 million on both a reported and adjusted basis in the fourth quarter of 2023, an increase of 8% on a reported basis and 10% on an adjusted basis as compared to the fourth quarter of 2022. The increase was driven by the impact of higher interest rates.
Other expense was $34 million in the fourth quarter of 2023 on a reported basis, compared to $21 million in the fourth quarter of 2022. Other expense recorded in the fourth quarter of 2023 included a $12.5 million accrual for a possible resolution or settlement relating to a previously disclosed matter with the SEC, as well as the impact from foreign currency transaction losses, which were most prominent for our Argentina subsidiary. Other expense recorded in the fourth quarter of 2022 primarily consisted of the impact from foreign currency transaction losses.
The reported effective tax rate was negative 11.1% in the fourth quarter of 2023 compared to 39.2% in the fourth quarter of 2022. The effective tax rate in the fourth quarter of 2023 was impacted by a net increase in the valuation allowances recorded on certain deferred tax assets and unfavorable return to provisions adjustments, partially offset by the benefit of certain refundable state income tax credits. The adjusted effective tax rate was 39.7% in the fourth quarter of 2023 as compared to negative 23.8% in the fourth quarter of 2022.
Net loss for the fourth quarter of 2023 was $141 million and $0.29 per diluted share on a reported basis, compared with a net loss of $55 million and $0.11 per diluted share for the same period in 2022. On an adjusted basis, net income for the fourth quarter of 2023 was $39 million, as compared to $94 million for the fourth quarter of 2022, or $0.08 per diluted share, as compared to $0.19 per diluted share for the same period in 2022.
Adjusted EBITDA was $165 million in the fourth quarter of 2023, a decrease of 4% compared to the fourth quarter of 2022. Adjusted EBITDA as a percent of revenue was 15.9% compared with 17.5% for the fourth quarter of 2022, a decrease of 160 basis points.
Working Capital and Balance Sheet
Cash provided by operations was $157 million in the fourth quarter of 2023 compared to $13 million in the fourth quarter of 2022. The increase in cash from operations in the fourth quarter of 2023 reflects improvements in net working capital, specifically inventory and more efficient collections, partially offset by lower net income compared to the fourth quarter of 2022.
As of December 31, 2023, Elanco's net leverage ratio was 5.6x adjusted EBITDA, down slightly from 5.7x as of September 30, 2023.
For further detail of non-GAAP measures, see the Reconciliation of GAAP Reported to Selected Non-GAAP Adjusted Information tables later in this press release.
Select Business Highlights Since the Last Earnings Call
Announced sale of aqua business to Merck Animal Health for approximately $1.3 billion, with the transaction expected to close around midyear. The company plans to use expected after-tax proceeds of $1.05 billion to $1.1 billion for debt paydown. With the proceeds and expected improvement in free cash flow from the business, Elanco expects to end 2024 with net debt to adjusted EBITDA in the mid-4x range, and end 2025 in the high-3x to low-4x range.
Completed capacity expansion for supply of Canine Parvovirus Monoclonal Antibody (CPMA).
Completed regulatory submissions for approval of Zenrelia in several markets including the European Union, United Kingdom and Australia.
Announced restructuring intended to reallocate resources to more significant value creation opportunities, which is expected to
Shift resources from Farm Animal to Pet Health across the international business as the company drives adoption of innovation products and prepares to globalize its potential blockbuster products currently under regulatory review
Capitalize on efficiencies resulting from our completed ERP system integration and concentrate roles into strategic locations
Transition our business models to distribution or other third-party models in certain markets, notably Argentina
Result in net savings of $20 to $25 million primarily in compensation and benefits in 2024, which is expected to be reinvested in areas with greater earnings potential, annualizing to $30 to $35 million of savings in 2025 and beyond and,
Result in charges of $50 to $55 million, including $40 to $45 million for severance in connection with the restructuring of approximately 420 personnel, to be recorded in the first quarter of 2024. The estimated cash impact is expected to be $30 million to $35 million in 2024, and approximately $10 million in 2025.
Elanco is providing financial guidance for the full year 2024, summarized in the following table, subject to the assumptions described below
| 2024 Full Year (dollars in millions, except per share amounts) | Guidance | ||
| Revenue | $4,450 | to | $4,540 |
| Reported Net Loss | $(62) | to | $(17) |
| Adjusted EBITDA | $960 | to | $1,010 |
| Reported Loss per Share | $(0.12) | to | $(0.03) |
| Adjusted Earnings per Share | $0.87 | to | $0.95 |
The company anticipates revenue between $4,450 million and $4,540 million, with a headwind of approximately $5 million from the unfavorable impact of foreign exchange rates compared to prior year, resulting in expected constant currency revenue growth of 1% to 3%, with growth expected in both pet health and farm animal. The guidance includes the full year contribution of the company's aqua business and does not consider contribution from expected launches of new products (Credelio QuattroTM, ZenreliaTM, Bovaer ) in 2024. Constant currency growth in 2024 is expected to be driven by increased price, increased sales of launched innovation products and increased OTC pet retail demand globally, partially offset by continued competitive pressure in the U.S. pet health veterinary market and strategic business model changes including changes to go-to-market models in certain countries, exiting low margin distribution agreements, and expiring contract manufacturing agreements.
2024 guidance includes a slight decline in gross margin, as benefits from revenue growth are expected to be more than offset by the impact of actions to reduce manufacturing throughput to reduce balance sheet inventory and improve net working capital. The gross margin headwinds from the plant slowdowns the company experienced in the second half of 2023 are expected to continue in the first half of 2024, improve in the third quarter and shift to a tailwind in the fourth quarter of 2024.
Operating expenses are expected to increase 2% to 4% in 2024 driven by higher employee related expenses and increased investment in commercial capabilities to support our pet health business globally, primarily in the first half of the year. The restructuring announced today is expected to deliver savings primarily in the second half of the year.
"Elanco is taking actions to improve our earnings potential and leverage profile. In 2024, the cadence of gross margin and operating expense dynamics within the year are expected to result in a decline in the first half the year and increase in the second half of the year for both adjusted EBITDA and adjusted EPS," said Todd Young, Executive Vice President and CFO of Elanco Animal Health. Improvement in net working capital and reduced project cash costs are expected to meaningfully improve our cash for debt paydown to $280 to $320 million in 2024. This, paired with the anticipated proceeds from the sale of the aqua business, is expected to allow us to reduce leverage to the mid-4x range by the end of the year.
The aqua transaction is expected to close around midyear 2024. In 2023, the aqua business contributed approximately $175 million in revenue and approximately $92 million in adjusted EBITDA, excluding the allocation of corporate costs. The expected debt payment with proceeds from the sale of the aqua business is expected to result in reduced interest expense of approximately $65 million, or $0.11 of EPS, annually. The company expects to update guidance on its quarterly cadence once the transaction has closed.
| 2024 First Quarter (dollars in millions, except per share amounts) | Guidance | ||
| Revenue | $1,160 | to | $1,185 |
| Reported Net Loss | $(34) | to | $(13) |
| Adjusted EBITDA | $255 | to | $275 |
| Reported Loss per Share | $(0.07) | to | $(0.03) |
| Adjusted Earnings per Share | $0.25 | to | $0.28 |
As previously reported in 2023, as a result of the ERP system go-live in April 2023, the company experienced sales order processing blackout periods on legacy Bayer products in the second quarter of 2023. As a result, the company reported a shift of approximately $90 million to $110 million of revenue, $70 million to $90 million of adjusted EBITDA and $0.11 to $0.14 of adjusted EPS into the first quarter of 2023 that would otherwise have been expected in the second quarter of 2023. This significant shift in timing in 2023 impacts the growth rates implied from the company's guidance for the first quarter of 2024.
In the first quarter, the company expects revenue between $1,160 million and $1,185 million, with a headwind of approximately $5 million from the impact of foreign exchange rates compared to prior year. Excluding the estimated impact of the ERP system integration, the company expects constant currency revenue growth of 1% to 3%.
The financial guidance reflects foreign exchange rates as of the beginning of February. Further details on guidance, including GAAP reported to non-GAAP adjusted reconciliations, are included in the financial tables of this press release and will be discussed on the company's conference call this morning.
WEBCAST CONFERENCE CALL DETAILS
Elanco will host a webcast and conference call at 8 00 a.m. Eastern Time today, during which company executives will review fourth quarter and full year 2023 financial and operational results, provide financial guidance for the full year and first quarter of 2024, and respond to questions from analysts. Investors, analysts, members of the media and the public may access the live webcast and accompanying slides by visiting the Elanco website at https investor.elanco.com and selecting Events and Presentations. A replay of the webcast will be archived and made available a few hours after the event on the company's website, at https investor.elanco.com investor events-and-presentations.
Elanco Animal Health Incorporated (NYSE ELAN) is a global leader in animal health dedicated to innovating and delivering products and services to prevent and treat disease in farm animals and pets, creating value for farmers, pet owners, veterinarians, stakeholders and society as a whole. With nearly 70 years of animal health heritage, we are committed to helping our customers improve the health of animals in their care, while also making a meaningful
impact on our local and global communities. At Elanco, we are driven by our vision of Food and Companionship Enriching Life and our Elanco Healthy Purpose - all to advance the health of animals, people, the planet and our enterprise. Learn more at www.elanco.com.
Cautionary Statement Regarding Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements concerning product launches and revenue from such products, our 2024 full year and first quarter guidance and long-term expectations, our expectations regarding debt levels, and expectations regarding our industry and our operations, performance and financial condition, and including, in particular, statements relating to our business, growth strategies, distribution strategies, product development efforts and future expenses.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important risk factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including but not limited to the following
operating in a highly competitive industry
the success of our research and development (R D) and licensing efforts
the impact of disruptive innovations and advances in veterinary medical practices, animal health technologies and alternatives to animal-derived protein
competition from generic products that may be viewed as more cost-effective
changes in regulatory restrictions on the use of antibiotics in farm animals
an outbreak of infectious disease carried by farm animals
risks related to the evaluation of animals
consolidation of our customers and distributors
the impact of increased or decreased sales into our distribution channels resulting in fluctuation in our revenues
our dependence on the success of our top products
our ability to complete acquisitions and divestitures and successfully integrate the businesses we acquire
our ability to implement our business strategies or achieve targeted cost efficiencies and gross margin improvements
manufacturing problems and capacity imbalances
fluctuations in inventory levels in our distribution channels
risks related to the use of artificial intelligence (AI) in our business
our dependence on sophisticated information technology and infrastructure and the impact of breaches of our information technology systems
the impact of weather conditions, including those related to climate change, and the availability of natural resources
demand, supply and operational challenges associated with the effects of a human disease outbreak, epidemic, pandemic or other widespread public health concern
the loss of key personnel or highly skilled employees
adverse effects of labor disputes, strikes and or work stoppages
the effect of our substantial indebtedness on our business, including restrictions in our debt agreements that limit our operating flexibility, changes in our credit ratings that lead to higher borrowing expenses and may restrict access to credit and changes in interest rates that may adversely affect our earnings and cash flows
changes in interest rates
risks related to the write-down of goodwill or identifiable intangible assets
the lack of availability or significant increases in the cost of raw materials
risks related to our presence in foreign markets
risks related to currency rate fluctuations
risks related to underfunded pension plan liabilities