Good morning, my name is Joanne; I will be your conference operator today. At this time I would like to welcome everyone to the conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Thank you. Katy Grissom, you may begin your conference.

Good morning. Thank you for joining us for Elanco Animal Health, Fourth Quarter and Full Year 2021 Earnings Call. I’m Katy Grissom, Head of Investor Relations. Joining me on today’s call are Jeff Simmons, our President and Chief Executive Officer. Todd Young, our Chief Financial Officer, Ellen de Brabander, our Executive Vice President of Innovation and Regulatory Affairs and Scott Purucker from Investor Relations. The slides referenced during this call are available on the investor relations section of Elanco.com. Today’s discussion will include forward-looking statements. These statements are based on our current assumptions and expectations and are subject to risks and uncertainties that could cause actual results to differ materially from our forecasts. 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 statements. Our remarks today will focus on non-GAAP financial measures. Reconciliations of these non-GAAP measures are included in the appendix of today’s slides and then the earnings press release. After our prepared remarks, we’ll be happy to take your questions. I’ll now turn the call over to Jeff.

Thanks, Katy. Good morning, everyone. Today, we look forward to sharing our fourth quarter and full year results as well as introducing our financial guidance for the first quarter and full year of 2022. Additionally, as you heard, we’re excited to have Ellen with us today. She’ll share a brief update on our pipeline and the progress she’s made since joining the team last October. While the world continued to adapt to the COVID-19 pandemic and its challenges in 2021, at Elanco it underscored the significance of what we do. The role of pets as our constant companions has never been more significant and ready access to sustainable affordable protein remains top of mind. We remain optimistic and confident in the importance of our industry and the valuable role of veterinarians, farmers and pet owners and caring for animals. Starting on slide 4. The Elanco story is one of building, delivering and strengthening. We are building a global leader in the attractive animal health industry. We are consistently delivering while taking actions to further strengthen our company and our value proposition. 2021 marked our third full year as a public company. Since the IPO, we have made strategic decisions, including acquisitions of Bayer Animal Health and KindredBio positioning Elanco for long-term delivery and value creation. We’ve instilled a relentless focus toward ongoing corporate simplification, building a fit for purpose animal health company as we have completed the full separation from Lilly and continued our integration of Bayer. With the fourth quarter of 2021, we are reporting our first full year as a combined company with Bayer compared to when Elanco went public today, we are more diverse, more global with more comprehensive product portfolios. We have also improved our revenue mix balanced between pet health and farm animal and US…

Thank you, Jeff. On slide 9, I will cover our 2022 innovation expectations and share with you, why I believe this organization is well-positioned to deliver on our existing pipeline and feel our pipeline is early stage as to ensure innovation remains a key growth driver for Elanco over time. And while our 2021 were more stated toward farm animal, the expected approvals in 2022, will be skewed more towards our pet health business in spaces such as pain, parasiticides, farm virus and vaccines. In January, we received FDA approval for Zorbium, a long acting post operative transdermal PE product for kids that is expected to launch midyear. Later this year, we expect approvals for an extended duration topical Ectoparasiticide for both dogs and cats, called AdvantageXD. We are excited to bring this legacy Elanco innovation to market under the legacy Bayer Advantage brand and to provide a new and innovative option for pet owners. These OTC products fall into one of the parasiticide target innovation areas described during the 2022 Investor Day. Credelio Plus, the broad spectrum parasiticide we launched last year outside the US and AdvantageXD this year, we remain committed to our intention to deliver one parasiticide innovation on average per year through 2025. Overall, the outlook provided at the 2020 Investor Day, we expect to receive approval for a launch at least seven new products in major markets in 2022. And additionally, I’m further driving projects and lifecycle management and geographic expansion to support the global durable growth of our current portfolio a shift of deference already earlier. Looking deeper into the development pipeline, we expect 2022 to also be a productive year for regulatory submissions and progress of our late stage assets. Overall, we expect to make five to seven submissions to regulatory authorities in…

Thanks Ellen. Slide 11 summarizes our financial performance highlights for the fourth quarter of 2021, including our reported net income and earnings per share. This is our first apples-to-apples comparison for a full quarter since closing the Bayer acquisition in the middle of the third quarter of 2020. On slides 31 to 33 in the appendix, you can find a summary of the adjustments made to the reported results to arrive at our adjusted presentation. I’ll focus my comments on our fourth quarter adjusted measures in order to provide insights on the underlying trends in our business. So please refer to today’s earnings press release for a detailed description of the year-over-year changes in our reported results. Looking at the adjusted measures on slide 12, revenue in the fourth quarter was $1.113 billion a year-over-year decline of 2%. When we guided for the fourth quarter last November, we shared that revenue growth would be unfavorably impacted by approximately $60 million of unique items related to customer purchasing patterns and short-term competitors stock outs in 2020 and excellent products and reduce contract manufacturing impacting our 2021 results. On slide 13, we have depicted ourselves growth excluding these items and the FX impacts representing growth of approximately 4% in the quarter driven by innovation and portfolio growth in pet health, poultry and Aqua partially offset by pressure in our China’s swine business. A breakdown of the region species and price rate volume results for the quarter can be found on slides 25 and 26. As we look beyond revenue in our fourth quarter results, our productivity efforts drove improvement. We increased our adjusted gross margin to 54%, an increase of 130 basis points compared to the fourth quarter of last year. This gross margin improvement came from our continued productivity efforts, improved…

Thanks Todd. To summarize Elanco delivered a strong 2021. Financially, we exceeded the expectations in our long-term growth algorithm with five quarters of delivery since closing the Bayer acquisition. We simplified our global sales and marketing operations and optimized our manufacturing and R&D site footprints. We went live on our own independent technology infrastructure and shared service center network. We also progressed our internal pipeline and added additional pet blockbuster candidates for the acquisition of KindredBio. And finally, we issued our first ESG summary in June of last year and earlier this year, we shared that we expect introduce an performance metric into our short-term compensation to drive capital optimization and further align employee and shareholder interest. It’s working. Our IPP strategy is delivering. The results of our productivity are showing through. Elanco was a stronger company. These actions along with the addition of Ellen and Bobby to our experienced leadership team have set Elanco up for another strong year in 22 as we continue to build, strengthen and deliver on our value proposition in this durable animal health industry and we look forward to engaging with you all throughout the year. With that, I’ll turn it over to Katy to moderate the Q&A.

Thanks, Jeff. We’ll have Jeff, Todd and Ellen available for the Q&A today. 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.

Your first question comes from the line of Erin Wright from Morgan Stanley. Your line is open.

Great, thanks. You spoke to double-digit EBITDA growth in early January. But the lower half of the range today doesn’t quite hit that mark. I get the midpoint does, but what are some of the swing factors that get you to the high versus low into that range? And is there some conservatism there? Or has anything changed relative to your expectations in early January and on the two blockbuster submissions in pet health in parasiticides and DERM? Can you speak to the geographies of focus for those products and will the parasiticide product be a free tick hardware and triple combination product in the US and will these be before the all important flea and tick season in 2023? Thanks.

All right, Todd, if you want to take the first question on EBITDA and then we will go to Ellen.

Thanks, Erin, for your question. Our reference early in the year was to our expected midpoint, so no change on our EBITDA expectations. You’re right now, we do have some FX headwinds, we’d be 12% at the midpoint in constant currency as provided in the bridge. We’ve got about 20 million, to 25 million FX headwinds to the EBITDA numbers from this respect to what could drive us higher or lower clearly, there’s a lot of moving pieces globally right now, as we all know, it’s very dynamic. We feel confident in this plan and our ability to deliver it over time. With that, I’ll hand it to Ellen, to address your R&D question.

Thanks, Todd and thanks for the question on the pipeline assets. Indeed, we are quite excited not only with the pipeline, but also with the progress we are making with the key projects in the pipeline. And we plan indeed to do the submissions of up to two new potential innovations with differentiated blockbuster potential later this year in the pet parasiticide field and in the Derm field. For now, we can actually not give more specifics on the individual assets. But the only thing I can share is that indeed we’re excited this to progress we are seeing so far have these differentiated potential blockbusters.

And I’ll pick up I mean, our no question, our focus will be on the US market followed by the other major pet markets, West European Japan, Australia, but to US is our primary focus.

Great. We’ll take the next caller.

Your next question comes from the line of Michael Ryskin with Bank of America. Your line is open.

Great, thanks for taking my question. And congrats on the quarter and guide. I want to start on the innovation side of things. I think you call it out that the innovation portfolio contributed $41 million in the fourth quarter and that’s the products you launched in 2021. And yet, you’re guiding to $120 to $160 in 22. So maybe there’s some strong seasonality there. But just given how we see new products launched, if you hit 41 in the last quarter, shouldn’t that be sort of a steady run rate going forward? And then particularly given there’s incremental launches on top of that this coming year? So why isn’t that, why would that number come in a little bit higher? And then for the follow up, maybe one for Todd, on the gross margin guide. Your comments on 57, 58 this year, and yet you’re still reiterating 60% neck the following year. So 200 to 300 bips gross margin expansion next year, but just talk through the moving pieces what makes this year a little bit less in terms of margin expansion, and next year down much more? Thanks.

Great. Thanks Michael. We’ll let Todd address those.

Sure, Mike. Appreciate the question. There is some seasonality with respect to the pole three season, and how that plays in Q4 the incremental growth in next year at the $48 million to $88 million allow, that’ll be on the uptick of Experior. We’re really excited by the foundation that’s laid and the continued growth of our cattle portfolio. As we become more and more important to our customers and our products beyond just the novel solutions we provide including the new uplink, up look, calculator all very big. So that’s a big part of the innovation that clearly excited for Credelio Plus outside the US where we have all the broad triple combination product there in Australia, Japan and the EU. With respect to the margin again, we’ve all called out the inflation because that’s certainly something that has impacted us more than what was expected, when we gave out our initial guidance at our 2020 Investor day. We’ve been able to overcome that with better than planned performance in 2021 and we’re still tracking to continued uptake in 2022, despite those inflationary pressures, as we focus on taking incremental price versus historical expectations as well as continuing to drive, synergy and value capture initiatives. So overall, we feel good on how we’re tracking, as well as the procurement and manufacturing quality savings the team is driving.

We will go the next caller.

Your next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open.

Hi, good morning. Thanks for the questions. Maybe following on Mike’s questions on margins. Looking at just the long-term EBITDA margin target of 31% by 24 the guidance for this year is for a margin rate in the low 24% range. The synergy walk that you provided was helpful, I think kind of 100 million incremental in 23 and 24. I think that adds about 200 basis points to margin. So it seems like there’s still kind of meaningful underlying improvement implied in that 31% guidance. So could you maybe just help us think about what drives that? And then my follow up, Jeff is on Galliprant. I think you had said you expected to grow double digits in 22. You also alluded to the competitive launch in OA in the EU as a headwind, I guess maybe what have you seen so far around that? And are you still expecting Galliprant to grow in the EU this year, despite that competitive entry? Thank you.

Great. Thanks, Nate. Todd, you want to take the first question on margin and then we will go to Jeff.

Sure. Yes, the EBITDA range and the sales range at 24 to 24.6 would be continue to step up from what we’ve done here in 2021. There are some inflation headwinds that we would expect to come out by the time we get to 2024 that would provide incremental. We’ve also run higher legal fees then historical that also can come out. And then just the natural continued growth in sales while we hold our cost of manufacturing splat will drive that incremental, gross margin that’ll also then flow through to the EBITDA margin. So we feel great about the year we had in 2021 ahead of that earlier expectations and still feel like we’re very much tracking to the 31% commitment we have for 2024.

And Nate relative to Galliprant it did become our latest blockbuster in 2021 meeting our expectations. We do expect, as you said, it will grow double digit in 2022. A couple things that I would notice we do see pain, one of the largest pet health markets, probably behind parasiticide and Derm, to be one of the faster growing markets. Elanco comes into that with the largest portfolio overall. And we see Galliprant being very competitive with value from home treatment to the safety profile, and the unique offering. I think what happens is you look at the EU market, I think that the interesting data is the EU market expanded over 30% in the fourth quarter, so new innovation is going to expand the pain market. We continue to focus on differentiation, first line treatment, and also portfolio selling overall to the veterinarians, not just in Europe, but across the globe. So again, expect double digit coming into this year and expect some nice growth, including our new products Zorbium as we bring that into the pain portfolio as well.

Great. We’ll take the next question.

Your next question comes from the line of Chris Schott from JPMorgan. Your line is open.

Great. Thanks so much. For me just can you elaborate a little bit more on the defend brands? It seems like those outperformed in 2021 and returning a sense of what enabled that outperformance and how sustainable could that be as we look out to 2022. And then on the two blockbusters I know you’re not going to go into full details but can you comment if these are as clinically I guess at this point, and you’re moving forward to the filing? Or is there still key clinical or registrational data that we’re waiting on? Just trying to get sense of the profile, but are these largely products that will be at some point filing and moving forward? Thanks so much.

Great. Let’s start with Jeff on the defend brands. And then we go to Ellen.

Chris, great questions. As we said during our investor day with this growth algorithm, we’re concentrating different strategies against these different categories. And with defend we put a concentrated focus on three brands. And there are some commonalities there. But one is we are looking at them, we are defending them in the appropriate markets where we believe it’s the right thing to do to defend. So I’ll start with Advantage the Advantage family, a concentrate a real focus effort on that whole brand family that is still we believe a very valuable brand of pet owners. It was led with an increased investment, reps and promotion in China with the advocate product. And that was one of the fastest growing products in the overall China market overall, all competitors involved. So I think we’ll continue to expand and use that. As Ellen mentioned, we’re going to continue to leverage that Advantage brand is we bring a new product to market actually in Elanco compound with now a Bayer brand advantage and leveraging that with AdvantageXD. It’s very simple, it is differentiated. It is selling value beyond product, and really leveraging our total portfolio. And we saw Rumensin grow against a COVID compare, but we continue to see that that product is going to be a very strong product for us especially as corn prices increase and the importance of performance products. And then Trifexis again, we’re containing it, we’re leveraging into the market segments we know we said it’s a little over 130 million in size. We do see that you know erosion will come to that brand as well as Conformis from the competition that we noted a $16 million total erosion but again overall defend brand strategy is working.

And Ellen on the blockbusters.

Yes. Thanks. We pre-planned, we expect to make submissions for up to two differentiated potential pet health blockbusters later this year. And right now I can tell you these are complex projects. A lot of work is happening in federal, both the studies are still in flight or some of them are important the final stages and are preparing the dossiers. So they are not fully de-risked. But as said, we are expecting the submissions later this year for up to two of these potential differentiated pet health blockbusters.

Good. We will take the next question.

Your next question comes from the line of Umer Raffat from Evercore ISI. Your line is open.

Hi guys, thanks for taking my call. Two here if I may. First I know you are guiding to 80 to 120 million EBITDA growth into 2022. But of that 80 to 120, it looks like about 60 million is coming from the restructuring announcement in November 2021, where I think you guys eliminated 20% of the leadership team. So I guess the question is this, as we think about the growth, the margin growth beyond 2022 what substantial additional actions have to happen to deliver such gross margin growth in 2023 and beyond? Or would a more tempered inflation plus your existing efforts be sufficient to drive that EBITDA growth in 2023 and beyond? And then secondly, and this ties into the EBITDA growth as well should we be expecting revenue acceleration, perhaps 5% plus into 2023, as you potentially launched your JAK inhibitor plus at a second key blockbuster? Or would that not really impact the numbers of 2024? Thank you.

Todd, you want to get a start on EBITDA?

Sure. Thanks for the question Umer. Yes, we have a lot of benefits flowing from the restructuring, those are helping to offset inflation, while we continue to drive ourselves growth and productivity across the entire gross margin platform. So that is in play. From the standpoint of improving EBITDA most of the actions have been taken as we analyze a lot of our benefits. The one thing to note is we call that we are integrating Bayer ERP system that’s currently run with our partner business consulting into ours that will provide incremental synergies that drive that forward. And then we do expect some mitigation from the inflationary side to also drive that. But a lot of this is really the underlying efforts we have. We’re not expecting another significant restructuring, though there will be some impacts once we finalize that integration of the systems and business processes in the middle of 2023. So overall we feel good about how the business is looking. And certainly growth of innovation products like Experior that have a very above average corporate average margin profile will also help drive that increasing EBITDA profitability.

And Umer, I’ll just pick up on that. I mean, no question, in addition to all of that, continued growth of innovation brands and focus brands and price will continue to be contributors to that margin expansion. What I would just say is, we outlined in December 2022, this growth algorithm Umer, relative to the different categories of products, and it is working, we saw in our pro forma basis 7%, constant currency 5. And what we’re seeing here is, we’re off to a good start year one. We believe that no question innovation will be a key driver, we’re more than doubling innovation this year, the focus brands have strength. Last year’s innovation will be the biggest contributors, all of these things are the aspects we believe, we think price and our digital enablement will help China and geo expansion will also be a big driver. So not going to give a future forecast. But we do believe strongly in the growth algorithm and the durable, diverse sustainable growth that we’re getting from our business. So it was represented in 2021. All of that leads to stay into our commitments that we highlighted in December last year.

We’ll get ready to take the next caller. I’ll just mention, we’ll probably go a couple minutes over I know we still have several in the queue. So we spoke a bit long, and we started a few minutes late. So we can go ahead to the next caller as well.

Your next question comes from the line of Jon Block with Stifel. Your line is open.

Good morning, guys. Maybe just a couple of price. I believe it was 2% in 2021. But I don’t think that’s a pro forma number. So Todd, is there a pro forma number to think about for price? And more importantly, how do we think about pricing in 22? I know you guys said higher. Is that 3%? Is it 6%? Maybe just some way to think about it for the year. And then Jeff, the plans for reacceleration in sales in 2022 that you called out. What’s the primary driver for that? Is it opening it up to the vets? I think you also mentioned some advertiser new markets and just maybe a clarity question if a product’s going to the distributors to sell it to the vet practices is there any sort of inventory build that has or will take place that we should be aware of? Thanks, guys.

Thanks for the question Jon. The 2% for the full year that’s pretty solid. The difficulties on a pro forma basis gets harder as you know as we included the most of Bayer and volume for most of the year, but generally speaking the twos in line. With respect to other price increases we have increased price in both vet channel as well as at retail and then also on our farm animal products already with list price increases to start the year. Those will be intended to be higher than that historical 2% number we’ve had, but we’re not getting into specifics, as it varies by product line. Clearly there are some OTC products, where we’ve got a little bit more pricing power, and then in the farm animal side it can be pretty competitive. And at that point our value beyond product really helps drive our overall portfolio as we continue to take market share in US farm.

Jeff on Seresto.

Yes, Seresto just again, it met our expectations, Jon, as I highlighted in 2021, with a challenging compare in 2020. And we have activated a lot of efforts, probably some of the maybe highest activity against Seresto, in a long time for the brand going into 2022. And again, I’ll just hit, it’s ultimately about putting the product in more geography and more channels with more access to the pet owners. We continue to see tremendously high loyalty and return use to this product. And we will continue to support that with DTC increased digital shelf space. And then yes, more consumer channels and more geography. Relative to the US move. Yes, there will be a very small incremental increase, I think that clinics will take on maybe less retail product, OTC product inventories, compared to scripted products. But our goal here is veterinarians, as pet owners come in with that loyalty to Seresto in the segments that it serves for the first time putting this into our distributors’ hands and putting it into clinics it’s just another channel to allow more access in a Buy Sell arrangement versus a different arrangement. So we believe that’s also going to be a key driver to Seresto expanded use and, again, growth in 2022.

Thanks, we’ll take the next question.

Your next question comes from the line of Elliot Wilbur. Your line is open.

Thanks. Good morning. Question for Jeff and/or Todd. I guess just with respect to your overall top line outlook for the year anything you can say specifically, in terms of anticipated relative performance of the various segments and individual species within the farm animal segment, in terms of anticipated year-on-year growth? How are those individual segments expected perform versus your overall top line outlook of two t2% o 3%? And where we see the strongest growth kind of within the farm animal segment? And then follow up question for Todd, relatively strong cash flow conversion for the full year. I think the numbers 94%, 95% in terms of adjusted net income, cash flow conversion, is that sort of the new norm for the company outside of just maybe some seasonal swings and working capital around year end? Thanks.

Yes, real quick, I would say overall our growth is, we look at it at a high level innovation brands, as we mentioned, will be a key driver price. Our focus brands, especially as we think about Credelio, Interceptor Plus, Galliprant and then China, those will be some of the major material drivers offset by the CMO, some FX and parasiticide, concentrated competitiveness in the US. As you look at the species overall, again, pet health we see strong even though the numbers are flattening a persistence there is positive. We think wellness and visits being up spend being up the overall experience is improved. We see a strong fundamental pet market in 2022. We see poultry and aqua recovering from the COVID situation better economics in countries internationally has helped both of those markets as well as return to restaurant purchasing for the salmon market. And then I would say in the cattle market, the market has tightened, supplies have tightened, exports are strong, especially coming out of the US that’s going to drive price up and we believe our performance driven portfolio supports that nicely. And then swine really is one of overall a pretty stable market, with headwinds probably still in the first half more from an economic perspective, not a African swine fever perspective in China. So contain challenges in the first half. We see recovery and a second half of China’s swine.

Thank you for the question on the operating cash flow. Yes we’re thrilled with the 223 million. We did in Q4 that 94% conversion of net income to operating cash for the full year feels to be in a range that we expect to continue to deliver. I think as we look out over the next couple of years that acceleration and operating cash flow is a very key component flow is a very key component of our strategy as we continue to de-lever. And we only expect it to get better as we get beyond 2022 or it’ll be the last big year of one-off cash expenditures with the consolidation of the system as well as paying out the cash on severances from our latest restructuring. So overall, feeling very good about the cash flow generation and our net leverage improvements.

Thanks. We’ll take the last caller.

Your last question comes from the line of Noven Cai with Citi. Your line is open.

Hi, good morning. I have a follow up on the cash generation. Can you comment on the cash needs? So I know there’s some cost to integrate Bayer and Elanco SAP system? We listed them down in 2022 or remain significant and any guidance or comments on free cash flow expectations for this year?

Sure Noven. Thank you. Yes, we’re going to have about the same one off cash needs for the integration and the severance cost as we had in 2021. We’ve got it our assumptions on slide 37 at about $216 million. This all gets built into our operating cash flow, which we talked about on a GAAP basis. So with that, we do expect to have in the range of 450 billion to 500 billion of free cash to allow us to continue to reduce debt and get our net leverage to the 4.75 times we guided to today.

Alright, thanks. We’ll hand it back to Jeff to close.

Yes, thank you for the time and we appreciate your interest in Elanco. Again, a strong historical 2021. The integrations, IPP, and our overall strategy is working as a reference back to the Investor Day in 2020. We are on the trajectory. We’re exceeding some of those expectations and staying to our commitments as we go forward. Thanks for your interest. We look forward to engaging with you throughout the year.

This concludes today’s conference call. You may now disconnect.