Elanco Animal Health Incorporated (ELAN) Earnings

Management highlights

### Core Strategy Progress - The firm's IPP (Innovation, Portfolio, Productivity) strategy is delivering consistent results, with top-line growth, market share gains, and improved profitability. - The multi-year productivity program Elanco Ascend is outpacing initial milestones, on track to deliver $200 million to $250 million in total adjusted EBITDA savings by 2030; recent progress includes securing a new lower-cost API source for one of the big six innovation products, improving margins and supply chain resilience. ### Product Innovation and Commercial Execution - Zenrelia, the firm's dermatology treatment for dogs, reached blockbuster status in July 2026, with over 2.5 million dogs treated globally; it has 60% penetration of U.S. vet clinics, a greater than 80% reorder rate, and 40% of users now use it as a first-line treatment, with rapid share gains in the $2.2 billion growing global dermatology market. - Credelio Quatro, the broad-spectrum parasiticide, gained 4 percentage points of U.S. market share in Q2 (adding 3 points in Q1), and is now carried by over half of U.S. vet clinics, up 10 percentage points since Q1; strong data on tick kill speed is resonating with pet owners amid expanding tick populations and rising Lyme disease rates. - Bafrena, the new monoclonal antibody dermatology product, soft-launched in May 2026, with demand already doubling expectations; supply is ramping gradually, and unconstrained supply is expected in early 2027. - AdTab, the international OTC parasiticide, is on track to become the next blockbuster, growing more than 30% year-over-year and leading its category in Europe. - Omni-channel distribution is a key strategic advantage: the firm is capturing shifting pet owner buying behavior, with home delivery sales growing nearly twice as fast as in-clinic sales, and new retail partnerships with Costco and Dollar General expanding access. ### Market and Industry Context - The U.S. pet health market is resilient and growing mid-single digits, despite concerns over vet visit volumes; pet health spending is a protected budget priority, with 95% of surveyed owners reporting they will not cut pet health spending, and 90% planning to maintain or increase spending. - The long-term global animal health industry is projected to grow from $40 billion to $60 billion in annual revenue by the end of the decade, driven by rising global protein consumption and pet humanization trends. ### Balance Sheet Progress - Net debt decreased by approximately $90 million in the first half of 2026, cutting the net leverage ratio by 0.5 turns to 3.1x at the end of Q2, reaching leverage targets faster than planned.

Guidance

- Full year 2026 organic constant currency revenue growth guidance is raised to 6-7%, up from the prior 5-7% range; total reported revenue is expected to be $5.09 billion to $5.14 billion, including a $60 million foreign exchange tailwind and ~1 percentage point of growth contribution from the AHV International acquisition. - Full year adjusted EBITDA guidance is raised to $1.01 billion to $1.035 billion, representing 13% growth at the midpoint, an increase of ~$32 million from prior guidance, after accounting for $6 million in incremental innovation launch investments. - Full year adjusted EPS guidance is raised to $1.10 to $1.16, representing 20% growth at the midpoint, a 7 cent increase at the midpoint from prior guidance. - Full year 2026 innovation revenue guidance is raised by $50 million to $1.25 billion. - Year-end 2026 net leverage ratio guidance is lowered to approximately 3x, down from the prior 3x to 3.2x range, with a long-term target of 2x to 2.5x. - Q3 2026 guidance calls for reported revenue of $1.195 billion to $1.22 billion, with organic constant currency growth of 5% to 7%, adjusted EBITDA of $200 million to $250 million, and adjusted EPS of 19 cents to 22 cents. - Full year U.S. Pet Health is expected to deliver at least high single-digit revenue growth, outpacing industry peers.

Segment performance

Elanco Animal Health reported total Q2 2026 revenue of $1.368 billion, a 10% increase year-over-year on a reported basis, with 8% organic constant currency growth driven by 6% volume growth and 2% price growth. The firm operates four core segments: 1) U.S. Pet Health: 11% organic constant currency revenue growth, contributing the largest share of total growth led by new innovation products Zenrelia and Credelio Quatro; retail OTC products (led by Seresto and the Advantage family) also delivered strong consumption growth. 2) International Pet Health: 9% organic constant currency revenue growth, driven by Zenrelia, AdTab, and Credelio; Zenrelia is rapidly gaining share in the $850 million international dermatology market, and AdTab grew more than 30% year-over-year. 3) U.S. Farm Animal: 11% organic constant currency revenue growth, with broad strength across all species, led by the cattle portfolio and Xperia; global ruminants grew 17% on a reported basis. 4) International Farm Animal: 2% organic constant currency revenue growth, impacted by timing of shipments to the Middle East that were pulled forward into Q1 2026; year-to-date growth is 7%, reflecting strong underlying fundamentals. Adjusted gross margin for the quarter reached 58.1%, an 80 basis point improvement year-over-year; adjusted EBITDA was $288 million, a 21% increase; adjusted EPS was 34 cents, a 31% increase year-over-year. Innovation revenue for Q2 was $340 million, beating expectations.

Risks & headwinds

No material new risks were discussed in the call. Management acknowledged ongoing inflation above historical levels, and noted that competitive spending to gain market share has increased, though the firm's competitive position has strengthened amid competitor restructuring and rep focus on margins over share. The call referenced that all forward-looking statements are subject to general market and operational risks that could cause actual results to differ from forecasts, as detailed in prior SEC filings.

Analyst Q&A

• Q: How is pricing holding up in the dermatology and parasiticide categories, and why are EBITDA margin expectations more conservative for the second half despite strong innovation mix? /

  A: Management notes pricing remains durable and responsible in both categories, with low to mid single-digit price growth in Q2. Pricing acceleration is expected to continue in the second half of 2026. Competitors are increasing spending to gain share, but Elanco has grown its share of voice and competitive position as some competitors cut sales resources to protect margins. For margins, gross margin expansion is expected to accelerate in the second half as first half inflationary inventory costs clear, and productivity and favorable innovation mix deliver benefits. However, the firm is increasing high-return DTC investments to capture faster share gains for key new products, and the business has natural seasonality that makes it more first-half weighted. Longer term, margins are expected to continue improving from Ascend productivity gains. (498 characters)

• Q: How much of Elanco's year-over-year revenue growth comes from Zenrelia and Credelio Quatro, and what is the early traction for Bafrena? /

  A: Management declined to provide exact granular contribution numbers, but noted the entire portfolio delivered quality growth, with core base business up low single digits year-to-date. Zenrelia and Quattro are the clear growth leaders in U.S. pet health, with AdTab and the broader Credelio family delivering strong international growth, and solid growth across all U.S. farm animal species. Early Bafrena demand has already doubled expectations, with 83% of surveyed U.S. veterinarians reporting they want to use the product, and existing Zenrelia clinic penetration providing a strong running start. Supply is being gated and scaled gradually (standard for monoclonal antibody launches), with unconstrained supply expected in early 2027, and Bafrena on track to be a key growth driver in 2027. (592 characters)

• Q: How much runway remains for Zenrelia and Credelio Quarto to gain additional market share, and what is the outlook for DTC investment levels? /

  A: Management states both products are still very early in their lifecycle, with significant runway ahead. Quarto has added ~3,000 new clinics in Q2, with penetration growth and new puppy share gains just starting, and the upcoming European/UK launch in the $800 million international broad-spectrum market will drive additional growth. For Zenrelia, rising first-line usage and international expansion are just in early innings, with proven efficacy driving rapid share gains, including reaching number one JAK inhibitor status in France already. For DTC investment, there is a very strong direct correlation between DTC spend and market share gains for new products, so the firm will continue increasing investment as long as strong returns persist, only scaling back when returns diminish. (537 characters)

• Q: Is there any change to capital allocation strategy now that leverage is approaching the 3x target faster than planned? /

  A: Management confirms there is no change to the stated capital allocation strategy. Debt paydown remains the number one priority for free cash flow, with the firm still focused on reaching the sub-3x leverage milestone to unlock greater flexibility. The firm continues to make strategic investments in the business to support R&D, manufacturing, and commercial new product launches. Small tuck-in M&A will remain part of the long-term strategy, but there are no plans for large transformative acquisitions as the firm prioritizes deleveraging first. (365 characters)