Full Press Release Details
Investor Contact: Tiffany Kanaga (302) 897-0668
Media Contact: Colleen Parr Dekker (317) 989-7011 or colleen_parr_dekker@elanco.com
Elanco Animal Health
Reports 2020 Second Quarter Results
GREENFIELD, Ind. (July 30, 2020) - Elanco Animal
Health Incorporated (NYSE: ELAN) today reported its financial results for the second quarter of 2020. The performance reflects
the reduction of channel inventory and lower levels of demand resulting from the COVID-19 pandemic. Elanco's innovation, portfolio,
and productivity strategy continues to be the focus, and its long-term industry fundamentals and durability remain intact.
"Our team has diligently navigated the challenges during
the second quarter. While our performance was significantly affected by actions to reduce channel inventory and by pandemic-related
impacts, our efforts are already yielding results, including better competitive positioning and greater financial flexibility,"
said Jeff Simmons, president and chief executive officer at Elanco. "With a disciplined focus on execution, we have completed
the channel inventory reduction in line with expectations, delivered 2 percent price growth across the portfolio, reaccelerated
growth of our innovation portfolio driven by increased market share for recent companion animal launches, and effectively managed
operating expenses and cash during this volatile time. Additionally, we have completed all activities necessary to close the Bayer
Animal Health transaction in the coming days."
In the second quarter, Elanco completed the previously communicated
channel inventory reduction, moving to inventory levels across the world and across species that represent the minimum necessary
to allow our distributors to maintain strong service levels with their end customers. This created an approximate $100 million
revenue decrease in the period, with approximately $45 million from U.S. Companion Animal, $45 million from U.S. Food Animal, and
$10 million from our International business. We do not anticipate further reductions in overall channel inventory levels. Our relationships
with distributor partners remain strong and mutually beneficial. Our U.S. Companion Animal distributors are key partners as we
collaborate to execute portfolio campaigns and maximize each party's strengths to deliver on solid underlying demand in vet clinics.
As anticipated, the COVID-19 pandemic had a meaningful impact
on the global business, representing an estimated headwind to revenue of approximately $75 to $85 million in the second quarter,
based on changes as compared to our underlying business trends. Our global food animal products felt the majority of the impact
as processing plant closures, reduced food service demand, and pressured producer economics affected all three major species. On
the companion animal side, brands administered in the clinic, notably vaccines, and international markets saw the most impact in
the quarter. In the U.S., veterinary clinic traffic and corresponding revenue showed recovery in the latter part of the quarter
coming off historic lows in late March and early April. In international markets, vet clinic traffic levels remained depressed
throughout the quarter, but began to show positive signs of recovery, notably in Europe in June. We expect that the second quarter
represents the most severe impact from the pandemic for both companion animals and livestock this year.
Working Capital and Balance Sheet
Elanco continues to focus on driving improvements in net working
capital. As part of the channel inventory reduction, payment terms for our U.S. distributors have been brought to 60 days, contributing
to an improvement in receivables.
As of June 30, 2020, cash and cash equivalents on the balance
sheet was $1.4 billion, an improvement of $185 million over the first quarter of 2020. In the quarter, we completed the sale of
our Australia facility, generating $55.1 million in cash. After closing the Bayer Animal Health transaction, a new $750 million
revolving credit facility will replace the existing facility. The baseline covenant EBITDA for the new facility will be calculated
as the last four quarters of pro forma EBITDA, inclusive of the second quarter of 2020 for both Elanco and Bayer. This amount will
be calculated in conjunction with the close of the deal.
We remain on track to close the acquisition
in the coming days. We have made significant progress since our last earnings, including:
"We have completed all the necessary milestones and are
ready to close the transaction," Simmons said. "Bayer's performance brings momentum into the close and we look forward
to welcoming our new colleagues to the Elanco team. Through extensive collaboration between Bayer, Elanco, and TCS, we have confidence
in our systems' transition plan, and we believe we are prepared and well equipped to minimize any disruption during the transition
period and to quickly address any potential challenges we might face."
Second Quarter Reported Results:
In the second quarter of 2020, total revenue was $586.3 million,
a decrease of 25 percent, or a decrease of 23 percent without the impact of foreign exchange rates, compared with the second quarter
of 2019. Revenue, excluding strategic exits, was $570.4 million, a decrease of 22 percent without the impact of foreign exchange
rates. Gross margin, as a percent of revenue, was 49.5 percent, a decline of 490 basis points as compared with the second quarter
of 2019. Total operating expense was $222.2 million, a decrease of 18 percent compared with the second quarter of 2019. Tax benefit
was $23.9 million in the second quarter of 2020. Net loss for the second quarter of 2020 was $53.2 million, or $0.13 per diluted
share, compared with net income of $35.9 million, or $0.10 per diluted share, for the same period in 2019.
Companion Animal Disease Prevention revenue decreased
21 percent for the quarter, driven by lower volume and, to a significantly lesser extent, unfavorable impact from foreign exchange
rates, partially offset by an increase in price. Without the impact of foreign exchange rates, the category decreased 20 percent.
The volume decline was the result of actions taken across brands to reduce channel inventory levels as well as reduced demand for
veterinary products as a result of the pandemic, primarily in U.S. vaccines and international markets. Underlying end user demand
for newer generation parasiticide products grew in the quarter as compared to the same period last year.
Companion Animal Therapeutics revenue decreased 6 percent
for the quarter, driven by lower volume and, to a significantly lesser extent, an unfavorable impact from foreign exchange rates,
partially offset by an increase in price. Without the impact of foreign exchange rates, the category decreased 5 percent. The volume
decline was the result of actions taken across brands to reduce channel inventory levels as well as reduced demand in veterinary
products as a result of the pandemic, primarily in veterinarian-administered products and international markets, offset by continued
growth of Galliprant across the globe and in alternative channels, plus the inclusion of sales for Entyce and Nocita
as a result of the acquisition of Aratana in the third quarter of 2019.
Food Animal Future Protein & Health revenue decreased
10 percent for the quarter, driven by lower volume and, to a lesser extent, unfavorable impact from foreign exchange rates, partially
offset by an increase in price. Without the impact of foreign exchange rates, the category decreased 6 percent. The volume decline
was driven by lower levels of demand due to impacts of the pandemic on global protein markets and the unwind of anticipatory buying
by direct customers in international export markets from the first quarter of 2020, partially offset by continued strong growth
in the aqua portfolio.
Food Animal Ruminants & Swine revenue decreased 42
percent for the quarter, driven by lower volume and, to a significantly lesser extent, unfavorable impact from foreign exchange
rates, partially offset by an increase in price. Without the impact of foreign exchange rates, the category decreased 40 percent.
The volume decrease was driven by lower levels of demand due to the impact of the pandemic on global protein markets, most notably
Optaflexx , the unwind of anticipatory buying by direct customers in international export markets, and actions taken
across brands to reduce channel inventory levels, most notably for Rumensin . Additionally, revenue was impacted
by generic competition for Rumensin and trade pressure affecting Paylean . These headwinds were
partially offset by increased demand in China's swine market as a result of favorable producer economics and positive efforts to
repopulate herds impacted by African Swine Fever in 2019.
Strategic Exits for this quarter represent contract manufacturing
relationships which are not long-term value drivers for the company. Revenue from Strategic Exits decreased 42 percent for the
quarter, and represented 3 percent of total revenue.
Gross profit was $290.4 million, or 49.5 percent of revenue,
in the second quarter of 2020 compared with $425.6 million, or 54.5 percent, for the second quarter of 2019. Gross margin as a
percent of revenue declined 490 basis points, primarily due to unfavorable product and geographic mix and deleverage of fixed manufacturing
costs across a lower revenue base, partially offset by continued improvements in manufacturing productivity and price.
Total operating expenses decreased $47.5 million in the second
quarter of 2020 compared with the second quarter of 2019. Marketing, selling and administrative expenses decreased 19 percent to
$162.8 million, due to disciplined cost management across the business as our operations have moved primarily virtual, adjustments
to variable pay expectations as a result of performance, and a decision to shift certain marketing expenses from the second quarter
into the third quarter of 2020. Research and development expenses decreased 14 percent to $59.4 million, or 10 percent of revenue,
due to disciplined cost management with less travel and fewer in-person meetings, adjustments to variable pay as a result of performance,
and a decision to shift project expenses from the second quarter to the third quarter for 2020. None of the shifted expenses negatively