Elanco (ELAN) 2. Çeyrek 2026 Kazanç Çağrı Transkripti

Elanco (ELAN) Q2 2026 Earnings Call Transcript

Motley Fool Transcribing, The Motley Fool

Wed, August 12, 2026 at 2:43 PM GMT+3 52 min read

• ELAN +2.02%

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DATE

Wednesday, Aug. 5, 2026 at 8:00 a.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer - Jeffrey Simmons

• Chief Financial Officer - Bob VanHimbergen

• Vice President of Investor Relations and ESG - Tiffany Kanaga

• Investor Relations - Beth Haney

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Elanco Animal Health Reports Second Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Tiffany Kanaga, Vice President of Investor Relations and ESG. Please go ahead.

Tiffany Kanaga: Good morning. Thank you for joining us for Elanco Animal Health's Second Quarter 2026 Earnings Call. I'm Tiffany Kanaga, Vice President of Investor Relations and ESG. Joining me on today's call are Jeff Simmons, our President and Chief Executive Officer; Bob VanHimbergen, our Chief Financial Officer; and Beth Haney 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 discussed in today's earnings press release as well as in 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 our 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. References to organic performance represents revenue growth, excluding the impacts from royalty revenue that was sold to a third party, foreign exchange rates and acquisitions and divestitures. After our prepared remarks, we will be happy to take your questions. I will now turn the call over to Jeff.

Jeffrey Simmons: Thanks, Tiffany. Good morning, everyone. Elanco's second quarter results demonstrate our momentum and leadership in the attractive durable animal health industry. I'd like to thank the global Elanco team for their disciplined execution and once again delivering on our commitments. As highlighted on Slide 4, we achieved 8% organic constant currency revenue growth, outperforming the high end of guidance for revenue, adjusted EBITDA and adjusted EPS, allowing us to once again raise our guidance for the year. Growth was led by the U.S. Pet Health and U.S. Farm Animal, each up 11%, followed by International Pet Health up 9%, and we saw strong contributions from both price and volume.

Elanco's diverse portfolio and omnichannel approach provide a strategic advantage with commercial execution across species and geographies. In the U.S. Pet Health, we continue to achieve share gains across all 4 major categories: derm, para, osteoarthritis pain and vaccines. Zenrelia, our newest blockbuster after reaching that milestone in July, was the largest contributor to second quarter total Elanco growth, closely followed by Credelio Quattro. In Farm Animal, the other half of Elanco revenues, we added to our leading position in the U.S. We grew nicely in international and saw global ruminants up 17% on a reported basis.

Our big 6 led by Zenrelia and Quattro helped drive $340 million of second quarter revenue from innovation on top of a stable base. Our differentiated portfolio creates clear value, while our strong commercial success is also attracting top industry talent, allowing us to further enhance our sales team and distribution partnerships. With significant runway ahead for the Big 6, we are raising our full year innovation revenue target to $1.25 billion. Our robust top-line growth plus faster-than-expected margin expansion and working capital discipline have driven down our net leverage ratio more rapidly than planned. We are improving our year-end net leverage target to approximately 3x, down from a range of 3 to 3.2x previously.

With our solid first half performance and business momentum, we are raising our top and bottom line full year outlook. We now expect organic constant currency growth of 6% to 7% adjusted EBITDA of $1.01 billion to $1.035 billion, representing 13% growth at the midpoint and adjusted EPS of $1.10 to $1.16, representing 20% growth at the midpoint. Our consistent delivery demonstrates our IPP strategy is working to expand our industry and at the same time, gain share across key markets and now also improve Elanco's profitability. While there has been much focus on U.S. vet visit volumes, we have consistently demonstrated that innovation and omnichannel leadership can drive strong growth in the U.S. Pet Health market.

Stepping back, our positive results are clearly not aligned with secular declines in vet visits. This is about changing pet owner buying behaviors, not about vet visits. Very importantly, Elanco is bringing highly valued innovation into an industry-leading omnichannel capability, while there is more diversity in consumer spending that matches our broad access to the pet owner. For example, our data indicates that vet home delivery sales are growing nearly twice as fast as in-clinic sales. Combined across channels, we see a growing U.S. Pet Health industry up mid-single digits for the trailing 4 quarters through Q1 with resilient pet owner spend and rational pricing.

In summary, Elanco is growing even faster through our comprehensive portfolio of differentiated innovative products and omnichannel execution. Simply said, the durable pet health market is growing and the pet owner is simply shifting behaviors like in most consumer markets. Looking more closely at the second quarter revenue performance on Slide 5, we break down the 8% underlying organic constant currency revenue growth. Our recently closed acquisition, AHV International contributed about 0.5 point of growth not included in the organic rate, building on our global ruminant success. U.S. Pet Health's 11% increase reflects a strong growth, both inside the vet clinic, online and at retail as well as in both prescription and OTC products.

In the clinic, we achieved robust double-digit growth with our basket of innovation led by Zenrelia and Quattro, outperforming on top of a stable base. And the new launches also benefited the greater portfolio, including vaccines and pain. At retail, our OTC parasiticide portfolio performed well, building on our leadership position. Seresto and The Advantage Family both experienced good consumption growth in a mature market, reflecting strong trends for our products and supported by expanded in-store availability with Costco and Dollar General as new customers. Additionally, while building off a small base, Zenrelia and Quattro are growing rapidly in alternative channels. Moving to International Pet Health. We delivered 9% organic constant currency revenue growth driven by Zenrelia, AdTab and Credelio.

While Zenrelia has reached blockbuster status globally, we expect it to attain this goal in both the U.S. and separately International Pet Health, where it is quickly capturing share in the $850 million international derm market. U.S. Farm Animal increased 11% in the quarter with continued growth across all species. Our cattle portfolio led the way as robust consumer demand for high-quality sustainable animal protein continues to outpace inflation at retail. International Farm Animal grew 2% in organic constant currency, reflecting previously mentioned timing of certain shipments in Q1 2026, primarily to the Middle East.

Year-to-date growth of 7% shows the strong underlying fundamentals that demonstrate the global nature of the protein revolution, reinforcing the long-term value of the Farm Animal business. Turning to Slide 6. We delivered $340 million of innovation revenue in the second quarter. With growth across all of the Big 6, our broader basket of innovation outperformed expectations. As a result, we are raising our anticipated innovation contribution for 2026 by another $50 million to approximately $1.25 billion, reflecting many large products growing and gaining share in key growing global markets. Let's further discuss the progress of our major innovation products on Slide 7, starting with our newest blockbuster, Zenrelia.

With over 2.5 million dogs now treated, Zenrelia's growth trajectory, both in the U.S. and internationally has accelerated further and continues to surpass our expectations with rapid share gains in the $2.2 billion and growing global dermatology market. Zenrelia's momentum is driven by its strong efficacy differentiation. June was Zenrelia's largest month yet despite new competition in the quarter with U.S. penetration climbing to approximately 18,000 vet clinics. That's greater than 60% of the total clinic base with a reorder rate maintained at over 80%. Our U.S. JAK market share improved 9 points year-on-year and also gained versus Q1, reflecting these new purchasers.

Importantly, we are seeing increasing use of first-line treatment, now to over 40% of users, demonstrating growing belief that Zenrelia is the first choice for derm treatment for many veterinarians. Outside the U.S., Zenrelia is now in 47 countries, all without label restrictions. We continue to drive significant share gains across key geographies. For example, Zenrelia has built on its market-leading position in Brazil and gained #1 JAK status now in France. In Europe, we continue to outperform the competitive entrant with JAK market share as high as 40% plus. As we've previously shared, Zenrelia performed well in a head-to-head study against the market incumbent.

This strong performance is also clear in a new study commissioned by the competitive entrant that compares the efficacy of available JAK inhibitors in a laboratory model. The results reflect our real-world experience that Zenrelia's efficacy is a game changer. On to our second derm innovation, Befrena, which soft launched in May ahead of the allergy season. Commercial product has shipped to approximately 1,400 U.S. clinics with strong early feedback. We are ramping capacity to meet higher customer demand that is double the size of our expectations with weekly increases in supply. Given the robust demand, we anticipate supply reaching unconstrained levels in early 2027.

A phased launch is typical for monoclonal antibodies or mAb products as we scale our bioreactors with the anticipated manufacturing ramp-up. Overall, we're pleased with Befrena's very early momentum and ability to increase our competitiveness, especially with corporates. Next, on Credelio Quattro. We are excited by further acceleration of dollar share gains and broad-spectrum dispensing sales from U.S. clinics. Quattro's market share increased 4 points in Q2 on top of the 3 points in Q1. We rapidly expanded the number of clinics that carry Quattro to over half of the U.S. base today, up 10 points since Q1. That's an increase of approximately 3,000 clinics.

We achieved this significant penetration as a direct result of our strategic brand investments year-to-date, helping veterinarians and pet owners gain appreciation for the 4 dimensions of differentiation that make Quattro what we believe is best medicine. The speed of tick kill is proving especially relevant to pet owners today. As the Wall Street Journal and others have recently reported, black-legged tick populations are expanding and Lyme disease cases are rising as a result. Quattro is resonating with pet owners who want robust protection for their pets and themselves with our newly published data, again, showing faster speed of black-legged tick kill than the leading competitors.

This combines with Quattro's first FDA conditional approval for the treatment of New World Screwworm in dogs, all to represent powerful examples of life-cycle management to build on our differentiation. Like Zenrelia, Quattro's momentum accelerated during the quarter with June also as the product's largest month ever. We're seeing strong pet owner demand activated by DTC activities where we continue to make high return on investments. Our targeted media approach and industry-leading position with reps and distributors differentiate Elanco and drive our share of voice in the pet health marketplace. Together, we're taking this differentiated product to new heights with runway for significant share gains ahead.

We continue to track Kynetec Puppy Index as an important leading indicator where Quattro ranks highest versus other broad-spectrum endectos. Globally, we are confident Quattro can lead the Credelio family to become our largest product family ever. So far this year, Quattro is launched in Australia, Canada and Japan. The EU and the U.K. are next in the nearly $800 million international broad-spectrum market, which is growing double digits. Finally, our international OTC parasiticide AdTab has continued its rapid climb toward blockbuster status with sales up more than 30%. AdTab is the fastest-growing brand in the nearly $600 million OTC ecto category in Europe with success also supported by data-driven, high-return DTC investments. Moving to Farm Animal.

Experior grew double digits in the quarter. This growth plus the benefit to our cattle portfolio have helped power another quarter of double-digit U.S. Farm Animal results. We expect Experior to continue to grow and provide portfolio synergies with multiple levers from extending days of use, continued adoption and price. However, we anticipate moderating growth rates against challenging comparisons. Lastly, on Bovaer, our expectations and trajectory are consistent with our last update as we continue to see demand from CPG companies that supports sustained interest and consistent [ cow ] numbers.

Bovaer achieved good year-over-year growth in the quarter, albeit off a small base, and we're investing in long-term initiatives for this potential blockbuster to enhance the product value and demonstrate user flexibility. For the balance of 2026, we continue to expect growth at a measured pace. Moving now to Slide 8. We provide recent highlights across the 3 parts of our consistent IPP strategy, innovation, portfolio and productivity. Starting with innovation. We've had meaningful progress since our December Investor Day with the Next Wave portfolio growing and progressing without attrition. We now have even higher confidence behind the 5 to 6 blockbuster potential innovations expected through 2031.

Ellen and the R&D team have increased the number and value of projects in development and the overall probability. This is driven by a few specific things that are working very well. We built a project-centered organization and established a one-of-a-kind innovation execution capability that leverages the potential of AI and has an optimized global footprint combined with strategic partnerships in clinical and technical development and most of all, a stable, engaged, highly capable and experienced team of scientists who are laser-focused on progressing the Next Wave portfolio and refilling the pipeline. We are working hard to ensure a consistent flow of blockbuster potential innovations through the end of this decade and well into the next.

Today, our basket of innovation is driving our broad-based growth. This can be seen in global ruminants, our fastest-growing species as innovation fortified our beef and dairy portfolio, up 12% in the quarter on an organic constant currency basis or 17%, including AHV and FX. Our Pet Health launches are powering growth with U.S. corporate account sales, adding 300 new corporate clinics with year-to-date sales ahead of total U.S. Pet Health. Innovation is also driving pricing gains, up 2% in Q2 for total Elanco. We are on track for full year acceleration from 2025, including a back-half-step-up from customer mix. Finally, we continue to pay down debt faster than planned and strengthen our balance sheet.

At 3.1x net leverage in Q2, we are now approaching the under 3x landmark, enabling greater capital allocation flexibility. This opportunity is enabled by productivity gains with gross margin expansion in the second quarter, up 80 basis points and Elanco Ascend on track to drive meaningful efficiencies and margin improvement in 2026 and beyond. I firmly believe we are just the start of the next era of value creation for Elanco as our consistent execution, along with growth, innovation and cash will add to our momentum and leadership in Animal Health. With that, I'll pass it to Bob to provide more on the second quarter results and financial guidance.

Robert VanHimbergen: Thank you, Jeff, and good morning, everyone. My comments today will focus on our adjusted results for the second quarter. Please refer to today's earnings press release for the details of our reported year-over-year results. Starting on Slide 10. We delivered $1.368 billion in revenue, up 10% on a reported basis. Organic constant currency revenue grew 8%, driven by a 6% increase in volume and a 2% contribution from price. Slide 11 provides revenue from the 4 quadrants of our business. Total Pet Health revenue grew 11% in organic constant currency. Our U.S. business increased 11% with strong momentum in both vet and retail channels. Performance was led by strong demand for innovation, specifically Zenrelia and Credelio Quattro.

In Retail OTC, Seresto led top-line growth in the quarter. Internationally, Pet Health revenue increased 9% in constant currency, led by the continued momentum of Zenrelia and AdTab. Our Farm Animal business delivered 5% growth in organic constant currency. In the U.S., organic revenue increased 11%, reflecting broad strength across all 3 species. Beef cattle led the quarter, supported by Experior. Our International Farm business grew 2% in organic constant currency with both ruminants and poultry contributing. As a reminder, results were impacted by accelerated shipments to the Middle East earlier this year. So it's important to view the quadrant growth on a year-to-date basis, which is up 7%. Moving to Slide 12.

Adjusted gross margin reached 58.1% this quarter, an 80 basis point improvement versus the same period last year. The outperformance was driven by a favorable product mix benefit and Elanco Ascend acceleration that more than offset the anticipated inventory cost pressures. Looking ahead to the second half, we are well positioned for continued margin expansion, supported by the sustained momentum of our U.S. Pet Health business and early contributions from Elanco Ascend. Operating expenses were up 10% in constant currency over the same period last year, reflecting our commitment to strategic growth. This increase was driven by targeted DTC support for our new product launches and ongoing R&D initiatives.

We view these as high-return investments that align directly with our strategic vision that are expected to drive long-term value. Interest expense for the quarter totaled $44 million, consistent with our expectations. On Slide 13, we show an adjusted EBITDA year-over-year comparison for the quarter. Adjusted EBITDA was $288 million, an increase of $50 million or 21%. Adjusted EPS was $0.34, a 31% increase year-over-year. Slide 14 highlights our ongoing commitment to balance sheet discipline. Our strong operational performance and a decrease of approximately $90 million of net debt have resulted in a 0.5 turn reduction in leverage since the start of the year. We are closing in on our target of sub 3x next year.

This is a key milestone that will unlock greater capital allocation flexibility as we pursue our long-term target of 2 to 2.5x. Moving on to financial guidance, starting on Slide 16. Our strong second quarter performance allows us to both raise our full year outlook and continue to invest in our innovation products, driving market share gains while expanding the total industry. We are increasing the midpoint of our organic constant currency revenue growth expectation with the range now at 6% to 7%, up from 5% to 7%. We expect revenue dollars of $5.09 billion to $5.14 billion, which includes a $60 million year-over-year tailwind from favorable foreign exchange rates, most of which was realized in the first half.

Additionally, our recent acquisition of AHV International is expected to contribute approximately 1 percentage point to total reported growth for full year 2026. Guidance for adjusted EBITDA increases approximately $32 million to 13% growth at the midpoint, capturing our quarterly beat and approximately $6 million of incremental investment in our innovative launches. For adjusted EPS, we are raising our guidance by $0.07 at the midpoint, bringing the new range to $1.10 to $1.16, up 20% at the midpoint. Finally, we updated year-end cash and balance sheet expectations and now anticipate a net leverage ratio of approximately 3x by year-end. Turning to Slide 18. You will see the primary drivers within our guidance ranges are unchanged from our previous update.

Our guidance reflects a balanced view of the competitive external environment and growth opportunities within our portfolio and Elanco Ascend, our multiyear productivity and cost savings agenda. Now let's discuss Elanco Ascend. Since launching at the start of the year, we have outpaced our initial milestones as we work towards delivering $200 million to $250 million in total adjusted EBITDA savings by 2030, net of inflation and program reinvestment. We built Elanco Ascend on 4 strategic pillars: procurement, price, organizational optimization and automation. Last quarter, I shared an update on our AI-driven automation progress. Today, I will highlight procurement. Our team is doing exceptional work identifying global suppliers that deliver high-quality materials at a significantly lower cost.

A recent win includes securing an additional API source for a Big 6 innovation, which directly improves our margins and strengthens our supply chain resilience. I'm excited by how the organization is truly leaning in and engagement is translating to results. The global Elanco team is executing on an expanding pipeline of Ascend opportunities, which gives me a high degree of confidence in our ability to deliver long-term gross margin improvement and stronger cash flows on a lower cost base. When you pair that agenda with our growing portfolio of high-margin innovations, we believe the path to a longer-term 60% gross margin is clear. Moving to our third quarter guidance presented on Slide 19.

On a reported basis, we expect $1.195 billion to $1.22 billion in revenue, representing organic constant currency revenue growth of 5% to 7%. The year-over-year increase in operating expenses, primarily related to launch investments is expected to be approximately 11% in constant currency. As a result, we anticipate adjusted EBITDA of $200 million to $250 million (sic) [ $215 million ] and adjusted EPS of $0.19 to $0.22. Finally, on Slide 20, we highlight the acceleration in U.S. Pet Health growth with expectations for continued robust gains in the second half of the year.

We are confident in driving high single-digit to low double-digit growth despite challenging comparisons, driven by strong momentum for Zenrelia and Credelio Quattro, contributions from Befrena and significant corporate account growth. For the full year, we expect the U.S. Pet Health business to achieve at least high single-digit revenue growth, once again leading the industry. Now I'll hand it back to Jeff for closing comments.

Jeffrey Simmons: Thanks, Bob. Elanco is clearly winning through our differentiated innovation, our comprehensive portfolio and our diverse go-to-market model, along with our commercial execution. Our strong year-to-date results underscore Elanco's long-term opportunity. As I close on Slide 21, let me address the 3 broader U.S. pet health industry questions that we have heard. Have prices, the consumer and the market remain durable? The answer all around is yes, with many proof points highlighted on this slide. The U.S. pet health industry grew 5% in 2025, led by derm and the broad-spectrum parasiticides. After a weather-related speed bump in early 2026, we've seen a strong market rebound starting in March, also evident in Elanco's results.

Across a holistic omnichannel view, the industry is well positioned for continued growth in 2026. Vet channel revenue is up low single digits year-to-date. We see solid consumption trends at retail with OTC flea and tick category up more than 4% year-to-date and alternative channel prescriptions growing very rapidly. Additionally, there's generally stable pet ownership. Demand for pet health has always been broader than a singular metric like vet visits and even more so today. Pet owner spend remains resilient as the expectation of care has never been greater with pets at the center of the family.

A number of recent studies, including our own conducted at the end of May, showed that pet health and wellness remain an absolute priority for pet owners as a protected budget item. 95% of surveyed owners said they would not cut spending on pet health and 90% expect to maintain or increase spending over the next year. Consumer spend is clearly changing, favoring highly accessible and convenient purchasing channels. Finally, on pricing. This is a market that responds to value and differentiation, and that's where we're leaning in. In fact, at the start of 2026, our innovation allowed us to implement our largest price increase in the U.S. market in 5 years. Price accelerated in Q2 in our U.S.

Pet Health business, and we expect continued acceleration in the back half of the year. Stepping back, it's also important to keep a global perspective. The U.S. pet health market is just 1/3 of the global animal health industry with farm animal driving 10% growth in 2025. Moving to Slide 22. We expect total animal health to expand from $40 billion to $60 billion in annual revenue into the next decade, driven by a fundamental increase in global protein consumption, international humanization of pets and pet owners seeking increased care, convenience and value. In my many years in animal health, I've seen this industry show reliable growth even in times of economic challenge.

Animal Health provides consistent long-term growth because we're at the center of society's most important needs with pets and protein. Turning to Elanco specifically on Slide 23. Our charge is clear: keep innovating, keep delivering, keep making life better for animals. Elanco has 4 key drivers of value creation through the rest of the decade, providing a compelling investment opportunity. First, growth. We have consistent growth across businesses and geography. The Big 6 offer significant runway ahead, expected to double in size over the next 3 years. Importantly, our growth is not dependent on a single product or 2. Meaningful differentiation is driving share gains in large growing markets with globalization largely just beginning. Second, innovation.

We have increased confidence in our robust pipeline that is progressing without attrition since our December Investor Day, on track to provide 5 to 6 blockbuster potential innovations by 2031. Our R&D engine is stronger than ever with a highly engaged team and stable leadership and a collaborative project-centered matrix structure. We know we cannot have an air pocket in our pipeline. We have built a robust organization that is moving faster and more efficiently than I've seen in my career to deliver a consistent flow of high-impact innovation. We're excited to share updates with you in the quarters and years ahead. Third, we have an accelerating cash and margin profile.

We've increased our full year adjusted EBITDA margin guidance to approximately 75 basis points year-over-year improvement, including 50 basis points of gross margin benefit. This expansion is happening while we're also driving strategic DTC investments to accelerate market share gains. And we're just getting started. Elanco Ascend is gaining traction faster than anticipated, driving strong early results and becoming embedded in our culture. Improved productivity is accelerating our free cash flow to fuel our rapid continued reduction of our net leverage ratio and increased capital allocation flexibility. Finally, Elanco's profile is purposely balanced to align with an evolving growing industry. We have diverse exposure split between Farm Animal and Pet Health and U.S. and International.

We have a pet health leadership in retail and vet clinic innovation. Elanco is strategically built for the next decade of animal health value creation with strong alignment to the fundamental drivers across pets and protein. I believe no other animal health company is so well positioned to consistently execute to transform and grow the industry and create long-term value for our customers, communities and you, our shareholders. With that, I'll turn it over to Tiffany to moderate the Q&A.

Tiffany Kanaga: Thanks, Jeff. We'd like to take questions from as many callers as possible, so we ask that you limit yourself to one question and one follow-up. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller.

Operator: [Operator Instructions] Our first question comes from Glen Santangelo with Barclays.

Glen Santangelo: Jeff, I just want to start out talking about your prepared remarks. You specifically called out Zenrelia and Quattro as being the biggest contributors to growth. And my question is really on the pricing environment around those drugs. You've commented or the company has commented several times about price increases across the portfolio being greater in 2026 versus the past couple of years. But given the concerns we hear from investors around the competitive landscape and pricing generally, can you comment on what you're seeing specifically with respect to pricing in Para and derm? And then maybe I'll just ask my follow-up. This is for Bob.

I'm trying to reconcile the EBITDA margins comparing what we saw in the first half of the year versus your expectations for the back half. Considering the strength that you have in the innovation portfolio, it seems like this improved mix and pricing should continue to be a tailwind for you in the back half. You have obviously more conservative expectations. Maybe there's some seasonality and some other investments in there that I'm not thinking about. And I'll stop there.

Jeffrey Simmons: Thanks, Glen, for the question. I will point to Slide 21 just on the 3 common themes we've heard and why we wanted to really put up some key data points. But we continue to see industry growth, a resilient pet owner and durable price. And let me double down on price and your question. Look, we see a marketplace that's remained responsible on pricing. Again, with portfolio value and differentiation, you can take price. That's why the industry has seen 2% plus over 30 years. We're seeing no change. If anything, in Q2, probably been more responsible.

I'll point to just in the last 2 weeks, we've seen a competitor actually mid-season take a MAP price increase, which shows, hey, they believe that a pet owner is resilient and will spend and that, hey, pricing is not where you're going to get changes. I would say specifically in derm, and the broad-spectrum parasiticides, we're seeing strong double-digit outside the U.S. growth in the U.S. continues to grow. Derm and broad spectrum have lessened, but it's still low single to mid-single-digit growth that we've seen here in Q2. So overall, we're seeing price acceleration in our U.S. Pet Health from Q1 to Q2. It will continue to accelerate in the second half.

Where I see competition is there's different plays relative to spend to get share. Spend is going up to get share. And we actually -- our share of voice and our competitiveness has increased. We've added competitive reps, multimedia and more importantly, distribution kind of on our side, where we've seen some competition actually play margin and decrease and restructure and cut reps. So I think our competitive position is stronger, price remains responsible and the markets are very durable.

Robert VanHimbergen: Yes. Maybe I would just add a couple of points to that. And then, Glen, I'll get to your second question. But pricing in the quarter, again, was just right in line with our expectations. We saw a great balance of pricing between Pet Health at 2% as well as Farm. And I'd highlight pricing from quarter-to-quarter can be and is influenced by both customer and product mix, but we've got a high degree of confidence in the second half seeing that acceleration on pricing. So then on your second question, Glen, on margins. And maybe I'll just give you color across both gross margins and EBITDA margins.

But starting with gross margins, we are estimating gross margin expansion of 50 basis points year-over-year. That's up a bit from the 40 that we had previously guided. And it is driven from the second half with productivity. Procurement is doing a fantastic job with the supply base and then volumes. This is partially offset by the first half, which we saw muted growth from inflationary pressures and the high cost of inventory flowing through. And so that is flushed out. But the U.S. Pet business had a fantastic second quarter, and we expect that to continue here in the second half. As I mentioned and Jeff has mentioned, we do see pricing accelerating in the second half as well.

And then finally, our basket of innovation continues to grow. And as that brings higher margins than the corporate average, we'll see that benefit. Now I want to highlight a couple of things. One, we are still seeing inflation above historical levels. And then number two, as we think about EBITDA margins, we are going to continue to invest in DTC to drive market share gains. I can tell you there is a very high correlation with data-driven decisions that we see, but a high correlation between the DTC spend and the market shares that we've picked up here in Q1 and Q2, particularly in Credelio Quattro.

We spent a lot of time with Bobby Modi and his marketing team on investments and the results. And again, you've seen it in Q1, Q2. And we're going to continue to invest in these product launches, and you see that step up here in Q3, Q4. But you highlighted this as well, and this is absolutely true. There is a phasing to the business. Our business is more first half weighted versus second half. So there is some seasonality in there. But listen, I want to leave you with this.

Longer term, we are very confident in our ability to improve gross margins and EBITDA margins as we continue to see a favorable mix and the benefits from Elanco Ascend coming in.

Operator: Our next question comes from Jon Block with Stifel.

Jonathan Block: So Jeff or Bob, the 8% organic constant currency is roughly $100 million of dollar growth, if I've got that correct, year-over-year. You called out Zenrelia and CQ as the 2 biggest drivers of that $100 million. Can you just provide some sort of a framework? In other words, are those 2 about half of that $100 million on a year-over-year basis in terms of growth, more than half, less than half? I think, obviously, key products for you that continue to do really well. We're just trying to get a better sense for the level of contribution.

Robert VanHimbergen: Yes. So Jon, so listen, as I think about -- I probably won't give you numbers, and we think about this as the basket of innovation growing well. But listen, we saw growth across the entire portfolio, right? So we did see our basket innovation go $340 million. That's on a stable base, again, stable base. We view as up or down low single digits. And in the first half, we saw strength in Q1 and actually growth in Q1. Q2 was a little bit more balanced, down 1%, but year-to-date, we're still up on our core business. But listen, we saw quality growth across the entire portfolio. In the U.S., again, up 11%.

And yes, Zenrelia and Quattro were the leaders. Outside the U.S., we continue to see strong performance from Zenrelia. AdTab grew over 30% internationally and then the Credelio family performed well. And then on the Farm side, listen, in the U.S., we grew 11% growth across all species. I'd say solid growth from Experior and Rumensin. And then outside the U.S., 2% growth. But as I highlighted in my prepared remarks, we did have some timing between Q2 and Q1. So it's important to look at that as a year-to-date number, which grew 7%.

Jonathan Block: Okay. Got it. That was good color. And then I'll pivot for the second question. Jeff, it was good to hear the demand trends, the early demand trends for Befrena. Maybe you can tell us where those successes are coming from. Are those, call it, Zenrelia accounts that are giving you a little bit of a running start into atopic derm? Is it traction with the corporates? And how do we think about the worldwide opportunity for Befrena that can start to take hold next year in 27?

Jeffrey Simmons: Yes. Thanks, Jon. Look, I'll just back up and say derm, we're excited. When I look at Befrena coming in and joining Zenrelia and then look at Ellen's pipeline, we've highlighted during the Investor Day, we see ourselves continuing to grow and become more of a leader in derm for the rest of the decade. So -- and derm continues to grow nicely, double digit outside the U.S., as you know. And the Zenrelia success is definitely going to pull Befrena. So look, we did the survey, Jon, and it showed 83% of veterinarians in the U.S. wanted to use Befrena. Very clearly, we're seeing that come through.

Bobby's expectations of demand from Q1 to Q2, it's more than doubled on Befrena. So we're being very careful. We're using a gating demand system because once you start a dog on Befrena, you're going to want to keep them on. So we're gating that demand. Supply is stepping up every week. And you know the monoclonal phasing as we move the bioreactors up in size, all of that's going to help margins. It's going to help quantity. And so that demand is going to become, we think, more unconstrained and fully into the marketplace as we go into 2027 on the early side. So -- and yes, the Zenrelia has opened the door.

Look at that first-line treatment at 40% in more than half the clinics without question, that is where we're seeing Befrena come in. Befrena will be a key unlock, we think, for a lot more corporates. But at this point in time, we've not leaned in as much with corporates yet because that unlocks a lot more demand, and that will be part of the gating system. So look for this to be a nice key driver for '27 growth as we go in. And then I just think, think Elanco global derm, multiple products, derm leadership by the end of the decade is our focus.

Operator: Our next question comes from Daniel Clark with Leerink.

Daniel Christopher Clark: I wanted to ask about the 40% first-line usage in Zenrelia in about half the clinics that you've highlighted. I mean how, I guess, how high do you kind of think that can go given the trajectory that you've seen? And what are the -- what's the messaging that you're really leaning on to drive first-line usage?

Jeffrey Simmons: Yes. Thank you very much for the question. Yes, I think it's probably one of the bigger proof points of the quarter for Zenrelia. Zenrelia, our #1 contributor for growth for the entire company. The expectations of this product continue to grow. Manufacturing stays at 24/7, 47 countries internationally that's really driving growth. I just think that the veterinary community come out of the AVMA convention here this past month. And you just look, I mean, they're very connected globally. So when they see 47 countries, they see the 2.5 million dogs. I think the first-line treatment up to 40% demonstrates there is a vet confidence in this product.

There's a desire to satisfy that pet owner right away, and they believe that Zenrelia is that option. And we believe, from our perspective, this is best medicine right now in a market that wants a pet owner to be satisfied when they come in with a itching dog. So we continue to see that climb. We continue to see Zenrelia's leadership grow. And as we just addressed with Jon, Befrena will help Zenrelia, Zenrelia will help Befrena. So -- and again, I think the international growth is really in the early innings as well. So that's where we stand, a very, very strong quarter with Zenrelia.

Daniel Christopher Clark: Great. And then just a quick follow-up. Any update on the time line with the additional study and sort of what you're doing with the FDA on the label front?

Jeffrey Simmons: Yes. No new study is progressing as planned, nothing new to report. Again, it's a time research is in process, and we anticipate submitting the data as planned to the FDA by no later than the end of the year.

Operator: And our next question comes from Michael Ryskin with Bank of America.

Michael Ryskin: Congrats on the quarter and strong results. I'll stick with Zenrelia and Quattro specifically. You really continue to talk up share gains, share gains, share gains in terms of clinic penetration, in terms of market share, both for Zenrelia year-over-year, quarter-over-quarter, it looks like Quattro accelerated. I kind of want to get into how much runway there is there? I mean I think you're still obviously very, very early in both launches. You're still breaking into what effectively has been a monopoly in both markets. A lot of this is going to be clinics placing initial orders sort of setting you up as that alternative or is that other vendor out there.

But when you think about peak market share opportunity, anything you could say in terms of how much momentum you think you still have, how much runway you still have? It feels pretty safe through the rest of '26, but we love to talk about '27, '28 and just sort of the runway you see there.

Jeffrey Simmons: Yes. Thank you, Michael. There's no question, as I highlighted, the next big era unlock for Elanco value first is the long runway we see for all Big 6 blockbusters coming. But specifically to Quattro and Zenrelia, I'll start with Quattro. I mean, Bobby said in the Investor Day, more clinics, more share and new puppy starts. And all 3 of those metrics are green and they're moving forward. To pick up close to 3,000 clinics pretty much in a quarter thereabouts, that is a significant ramp. And now we doubled down on the penetration within that clinic. I'm going to point to one thing just on Quattro.

And again, Ellen and the team, just life cycle management, you've probably seen. I mean, the tick awareness and the linkage to Lyme disease, a recent Wall Street Journal article, many media reports, even the New World Screwworm and the worry of any tick bite with dogs this black-legged tick, we have set out our second new research study on this showing competitive advantage on speed to kill. That's an example of a catalyst to drive Quattro to come into a clinic and become first line, first choice. So I think that differentiation is getting solidified. It's getting widened, and we see best medicine. So -- and then as you look at, it's really just getting started internationally.

Romero is out traveling right now in Australia and Japan, where we're launching and Europe and U.K. is up next. As you know, that's a big $850 million market. And I would say the same with Zenrelia. The news is coming. It's outstanding. And look, new research, I point a competitive study, the second head-to-head is out there with all 3 JAKs. And all I would say is when you look at that study, any KOL or vet that sees it around the world is seeing, hey, Zenrelia efficacy is demonstrated in research and it's demonstrated in the 47 countries. I'm really proud of the French team becoming #1 right now in the Q1 with Zenrelia.

So long runway, Jon (sic) [ Michael ], I see ahead. And both markets are growing -- the 2 markets are growing double digit outside the U.S.

Michael Ryskin: Okay. Okay. And then related to that, if I could, on the incremental investments you talked about in the second half, I think you touched on it in an earlier answer in terms of you're seeing really good payoff with DTC. And so you're going to take some of the outsized earnings you're seeing, some of the top line benefit you're seeing and reinvest it back to support these growth drivers. I kind of see those 2 moving up in lockstep, right, as the products get bigger and as the ramp continues, you're going to invest more to support more growth. Where do you see the biggest payoff in DTC spend?

How much runway is there on that front, right, on the investment side? How long until you sort of hit a steady state in terms of the dollar amounts you need to invest to support these? Or do you just see kind of growing throughout the rest of this year, next year and beyond? So like what's the right level until you've kind of hit saturation on that?

Robert VanHimbergen: Yes. So it's a great question, Michael. And listen, like I asked that as well. And again, like I'll reiterate the time I spend with Bobby and his team and looking at data, and I can't emphasize enough the direct correlation we can see with the OpEx spend in DTC and the market share gains. It's just unbelievable data and data that both Bobby and I would say we've never seen this correlation before in our careers.

So we're going to continue to use data to make the decisions, and it's hard to put a time frame on that, but really pleased with the 3 points of Quattro growth we saw in market share growth we saw in Q1 and the 4 points in Q2. And so listen, like we're just going to keep going there and grow that top line with market share gains. And when we get to a point we don't see the return, that's where we'll scale it back.

Operator: Our next question comes from Umer Raffat with Evercore ISI.

Umer Raffat: Congrats on all the execution on top-line growth. On all the execution on top line growth. I wanted to focus on OpEx for a quick second. So top line is up 8% organically in 2Q and OpEx is up 10%. So I guess my question to you is not even so much on operating leverage. It's really what are your plans on OpEx going forward in general? I realize we should continue to expect top line growth, but how much operating leverage should we truly be expecting? And on an absolute basis, is the OpEx build-out complete? Or is it going to continue to go up mid- to high single digits over the next couple of years year-over-year as well?

Robert VanHimbergen: Yes. So great question. And listen, I think a lot of the OpEx is particularly tied to the DTC Umer. And so listen, like we're going to keep that OpEx investment. But certainly, we do see leverage continue to improve, I'd say, as we move out through 2027.Listen, one of the major contributors to '27 margin growth and beyond and you think about the algorithm that we gave at Investor Day, but it's Project Ascend, all right? And so what Project Ascend is going to do is not only fund a lot of the OpEx, but it's also going to drop to the bottom line. And listen, like I think we're at a new level with Ascend here recently.

Really pleased, as I mentioned in my prepared remarks, with the acceleration of projects across the OpEx as well as what's happening in the 4 walls. We have a highly engaged team and a great cadence of reporting and meetings. But listen, the granularity is at a new level. And so what I expect to see moving forward is continued improvement in operating margins and really funding some of that OpEx. But I think you'll start seeing leverage here improve here in 2027 and beyond.

Operator: Our next question comes from Brandon Vazquez with William Blair.

Brandon Vazquez: And congrats on a nice quarter here. One, I think, Jeff, you had briefly mentioned this, but maybe something that I get a lot of questions from investors on that might be helpful to go over is just what's the response from competitors in the market? You guys are clearly doing well. You have a good innovation cycle here. What are they doing to try to take share? Maybe you could just talk about that a little bit.

Jeffrey Simmons: Yes. I think overall, a durable market that I said after the January, February weather bump, we've seen a rebound in the market. So I think the markets are robust. You're seeing that in the results the pet and protein trends. I mean I'd point to our ruminants up 17%. I mean, the cattle, the dairy business. So I think the overall global market, remember, U.S. pet health is about 1/3 of the market. The other 2/3 really start to look at international pet and protein as big drivers as we go from this $40 billion industry to $60 billion. I think that's important. But yes, when you get into some of the competitive spaces, there's a combination of things.

One is it's selling the portfolio. I think that's important. It's really direct -- this direct marketing is getting more sophisticated. It's less TV advertising and a lot more direct to specific niches and using today's technology that I think is working. And that's where I see the most is a lot of competitive spend to target in niche markets. We like where we are with our reps. We've got one of the largest teams in the industry with the best relationship, a real call out to our distribution partners and what they've done. So -- it's competitive, but it's durable, and I don't think there's -- and it's been very responsible in the marketplace.

We sell our portfolios in this industry, and that's what we're doing.

Brandon Vazquez: Okay. Great. And Jeff, I don't ask you enough on farm animals, but let me ask on Farm side. Experior continues to do well, still up double digits, but you're getting more penetrated into the TAM that you guys have outlined between Experior and Bovaer, maybe just level set us where are you on kind of TAM penetration there? What should we think about for any potential catalysts or the -- what we should expect growth rates in that -- those 2 products to be?

Jeffrey Simmons: Yes. They're going to continue to be growth drivers second half as well as into next year. No question, the ruminant market, both beef and dairy, got a beef shortage globally, and that's going to be there for a while. And when there's this high demand for all protein groups, a healthy animal is a productive animal. Our value proposition in farm animal continues to climb when the economics are strong, that makes more affordable protein for the consumer. So all those trends are positive for us. I'd point to probably ruminants and poultry, as we said in our Investor Day, is where we're going to lean in heavily.

Bovaer and Experior going to -- Experior is going to have tougher compares, but still going to be a nice growth driver as it globalizes and we get more days on use here in the U.S. And Bovaer, small base, but will continue to climb. We love the farmer value and the farmer retention on Bovaer in the U.S. dairy industry, and that will climb as well and be growth drivers in 2027.

Operator: Our next question comes from David Westenberg with Piper Sandler.

David Westenberg: I'm actually going to continue with that farm animal question. Just can you talk about how long herd expansion does support growth? I mean, how much of this would be, in fact, a multiyear driver? And then you kind of mentioned on the call, innovation, not desire for no air pockets and that innovation through 2031. Can you talk about how much of that could be in farm animal? You also kind of mentioned you're in the later launch cycles with Experior and Bovaer -- well, maybe not Bovaer, but 2, 3 years into it. So it would be great to hear how you could be growing in that '28, '29 time frame.

And if I can ask just one more sweeping into capital deployment. Now that you are approximately 3x or heading there, does this change your capital deployment strategy?

Jeffrey Simmons: Thanks, David. Yes. Look, I think just speaking specifically of the beef industry, yes, there -- we saw a tick up about 1% year-on-year in replacement cattle. So a rebuild, but much slower. The drought has definitely been a headwind. But look, I see overall beef demand right now is great globally. So the beneficiaries are Argentina and Brazil and other smaller markets, Canada, others. And I would just say this is going to be a really nice runway. At the same time, dairy and poultry specifically in places pork are taking advantage of it. There's a lot of innovation right now in dairy as an example, and we're seeing that. Our AHV acquisition has been integrated nicely.

So I see a real positive moving forward. Look, we see the industry 60% farm animal. This protein thing is going to be, I think, a positive bump for our industry. Elanco's leaders in the U.S. and other places. We're going to lean in pretty heavily. Ellen already has. She's got dedicated focus with these project teams that I mentioned. And our farm animal pipeline look for us, productivity, sustainability, disease treatment, food safety, vaccines, feed additives and other modalities are all moving very nicely. Ellen's farm animal innovation team is as robust as probably we've ever seen it in our history.

Robert VanHimbergen: Yes. And then on the capital allocation question, David, listen, no change to the strategy that we've outlined in the past. Debt paydown is still the #1 use of free cash flow right now. We'll continue to invest strategically in the business, supporting R&D, manufacturing as well as commercial launches. M&A is going to be a part of our midterm and long-term strategy, but think of these as smaller tuck-under opportunities. But as we get below that 3, as we've said before, that will unlock capital allocation flexibility. And right now, we're hyper focused on getting there.

Operator: And our next question comes from Chris Schott with JPMorgan.

Christopher Schott: So first one is just on AdTab. It seems like another good quarter for the product. Just elaborate a bit more on the trends that you're seeing, what's driving the strong uptake and how big you think that product can get over time? And second question is just on parasiticides and Credelio Quattro. Can you talk about the growth you're seeing for the broad-spectrum parasiticide category? I don't know if you have this data, but what percent of dogs are currently on a broad-spectrum product and where do you see that going over the next several years?

Jeffrey Simmons: Yes. Thank you for the questions. On AdTab, you've got a $600 million-plus market in Europe that is products that can be even scripted here in the U.S. that are retail there. And look, I think we said this is well on a path to be a blockbuster. It's #1 in the marketplace. It's grown double digits now for quite a few years in a row, a real credit to the European team and how they're launching the product, 30% growth this past quarter. Look, I think I'd point to AdTab as we put Advantage into the marketplace in 3 or 4 new SKUs globally, The Advantage brand loyalty is strong. Our launch capabilities are strong.

We see a really nice runway for this product. We'll have some tougher compares going forward, but look for this to become a blockbuster and continue to be a leading product in that $600 million market that continues to grow nicely. And I think it does demonstrate that pet owner that wants to shop in multiple places. AdTab is an example of that. And look, back to the broad spectrum, I'd point to, it's a $1.5 billion market. It's continuing to grow. It's going to grow double digit outside the U.S. We think it will be low mid-single digit here in the U.S. Price has been durable.

And look, we see Quattro, fastest-growing product in here, took 7 points of market share in the first half, and we continue to see this being best medicine and the most attractive animal health segment. And I see broad-spectrum oral dose continuing to be the top choice for parasiticides globally, and I'm really excited about the European launch coming up.

Operator: And our last question comes from Steve Dechert with KeyBanc Capital Markets.

Steven Dechert: I guess just on Zenrelia. I mean, it sounds like you're seeing really nice competitive win against NumelviI. Maybe just could you talk about what's driving that? Is there anything beyond just efficacy you can tell us?

Jeffrey Simmons: Yes. Zenrelia, as we mentioned, a really great quarter and the continued momentum. It all comes back to efficacy in the derm market, right? And that will be the story we're talking about in 2 years. And what I'm excited about is the whole portfolio that we have coming with Zenrelia and Befrena and the next products. But it's playing out in Europe where you see the multiple products. We've gained share. We continue to grow. We've seen up to 40% shares in Europe.

And I think even in the head-to-head study that was just released by a competitor that I mentioned, I think it just continues to demonstrate that, hey, we've got a differentiated product in our opinion that could be best medicine, and it's playing out in the field and anyone in the derm market, if you're going to compete, it's got to work. It's probably the most visible problem to a pet owner if it works or doesn't work and Zenrelia is playing well there. And I would point to a longer runway as we continue to globalize and launch this product.

Operator: This concludes the question-and-answer session. I would now like to turn it back to Jeff Simmons, CEO, for closing remarks.

Jeffrey Simmons: Thank you for the time and a real call out to the Elanco team for great execution. I want to just emphasize an approach that Bob and I and the team are taking. We've got a lot of potential in the future, and that was my closing comments in the earlier statements. But our approach is going to continue to be measured and balanced one quarter at a time. We'll continue to guide quarterly. We've got a 3-year algorithm out there. We'll look at our pushes and pulls overall, and we'll be very accessible to you as our shareholders in any questions that you have post these calls and between the earnings response.

And just know, yes, it is a dynamic marketplace, but our strategy is working. Innovation, portfolio and productivity is delivering growth, innovation and cash. And this first semester, this first 6 months was the best 6 months I've seen since our IPO, but it's been built over the last 6 years. Thank you for joining us today, and we look forward to continuing engaging with you as investors going forward. Have a great day.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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Elanco (ELAN) Q2 2026 Earnings Call Transcript was originally published by The Motley Fool