Elanco Animal Health Incorporated (ELAN) Earnings Call Transcript

Good day, and welcome to Elanco Animal Health Reports Third Quarter 2026 results. [Operator Instructions] Please note, this call may be recorded. I would now like to turn the call over to Tiffany Kanaga, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Elanco Animal Health's Third 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 and 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 statements. 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 represent revenue growth excluding the impacts from royalty revenue and sales-based milestones that were 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.

Thanks, Tiffany. Good morning, everyone. Elanco delivered an outstanding third quarter, outperforming our commitments and growing revenue 11% on a reported basis or 9% in organic constant currency. We are growing the right way, with accelerating price up 4% and volume up 5%, reflecting the value created by our basket of innovation and our diverse portfolio. This translated to significant gross margin expansion, up 300 basis points and greater free cash flow, moving our net leverage ratio under the 3x milestone. Growth, innovation, cash, we are consistently executing along these 3 priorities, powered by our balanced business profile strategically built to produce results as industry and competition evolves, and we're just getting started with significant runway for share gains off a small base and large growing global markets. . As highlighted on Slide 4, Elanco exceeded the high end of guidance for revenue, adjusted EBITDA and adjusted EPS. Growth was led by international pet health, up 17% and U.S. pet health, up 13%, with positive contributions from global farm animal. In the third quarter, we saw strong veterinarian and pet owner demand for what we believe is best medicine innovation that we're bringing to the table. Synrelia once again led total Elanco growth with Credelio Quattro also a major contributor. Both brands achieved record market share in the U.S. in September. Our Big 6, led by Zenreli and Quattro helped drive $328 million of third quarter revenue from innovation, up 40% year-over-year. We are raising our full year innovation revenue target to $1.275 billion to reflect continued momentum for our basket of innovation on a stable base. Looking ahead, Elanco's entered into the final quarter of the year with continued momentum from a position of strength. We are meaningfully raising full year guidance by fully passing through the third quarter B. Moving into 2027, we anticipate building on this year's expected outperformance. We are recommitting to deliver our annual algorithm of mid-single-digit revenue growth, high-single-digit adjusted EBITDA growth and low-double-digit adjusted EPS growth, creating sustainable value for our customers and our shareholders. Turning to Slide 5. We break down the third quarter's 9% underlying organic constant currency revenue growth. AHV International, our acquisition, which closed April 30, contributed about 1 point of growth not included in the organic rate, and it further strengthens our global ruminant position. U.S. Pet Health 13% increase was led by our vet clinic sales of Quattro and Zenrelia with good growth in vaccines and pain and a strong overall price contribution. We are creating value for pet owners in the industry through our truly differentiated portfolio of innovation, driving market share and accelerating price gains and what we see as a responsible marketplace and competitive backdrop. We have observed some pockets of time-bound investments from competitors, which happens periodically in the animal health industry, consistent with past behavior. While these tactics may temporarily shift sales timing, our strength in the quarter and especially in September, is evidence of the attractiveness of our portfolio and there being no fundamental impact on the trajectory of our share gains and revenue from our innovative products. In U.S. retail year-to-date, we continue to see stable consumer demand for Seresto and the Advantage family. Third quarter Seresto sales were partially impacted by retailer inventory drawdown, while year-to-date consumption trends for the brand are slightly positive, smoothing out that dynamic. San rely and Quattro continue to achieve very robust growth outside the vet clinic. Putting it all together, U.S. Pet Health achieved 13% growth despite retail sales being slightly negative in the quarter. We expect our omnichannel leadership, new distribution points and OTC innovation to provide durable growth next year and beyond, allowing us to reach the 1/3 of pet owners that don't regularly visit the veterinarian. Moving to international pet health. We delivered 17% organic constant currency revenue growth, driven by Zenrelia and AD TAP. Synrelia is rapidly approaching blockbuster status in international pet health alone with ample room to grow into key category leadership in $850 million international derm market. U.S. farm animal increased 7% in the quarter or 10%, including HV. Growth was led by cattle with good contributions from beef and dairy. And for the rest of the portfolio, swine was positive, more than offsetting a decline in poultry vaccines. International farm animal grew 1% in organic constant currency or 4%, including HV and FX, also reflecting strength in ruminants with notable demand in LatAm. Poultry and swine were negative in the quarter, but combined for positive year-to-date growth. Regional farm cycles may create incremental quarter-on-quarter volatility ahead. but our expectations for accelerating global protein consumption underpin long-term value for the business. Turning to Slide 6. We delivered $328 million of innovation revenue in the third quarter, led by continued momentum for our big 6 in aggregate. We are raising our anticipated innovation contribution for 2026, and we are running ahead of our ambition to double the big between 2025 and 2028. I -- this accelerated pace of innovation sales reflects a competitive advantage in the marketplace that we expect to sustain. It's built on rapid globalization, medically differentiated products with low market share in large categories, our growing commercial strength, data-driven brand investments that are driving increasing brand loyalty and differentiated distribution partnerships. Let's further discuss the progress of our major innovation products on Slide 7, starting with Zenrelia. It's an accelerating success story, well exceeding our expectations across geographies even as competition increases. The third quarter was Zenrelia's biggest yet in both the U.S. and international with this special product providing its largest ever contribution to total Elanco revenue dollar growth. Efficacy is the clear driver behind ZynRELIA's momentum, creating substantial value for veterinarians and pet owners and translating into strong growth and share gains. Market demand drove U.S. sales to more than double in the quarter versus last year. That clinic penetration climbed to approximately 19,000 or 2/3 of the total clinic base with steady month-to-month gains even as new competition entered. U.S. JAK market share improved 7 points year-on-year, ending on a record high in September, driven by new users and sticky repeat orders and increased penetration in existing clinics. The average U.S. sales per clinic increased 8% from Q2 to Q3, even with new clinics and a competitive entrant. Summing up the performance in the U.S., yes, this quarter was increasingly competitive, but Zenrelia's momentum is stronger than ever. Our expanded sales team is seeing interest in our differentiated medicines, superseding marketplace noise. Our strategy is working, and we don't see that changing. Zenrelia grew even faster internationally than in the U.S. in the third quarter and year-to-date. Growth has accelerated in Europe the market with 3 JAK1 products for the longest period. Notably, Zenrelia gained 10 share points in Europe in the first half of 2026, the latest available data. This is 5x the competitive entrant driven by higher customer satisfaction with the product. Zenrellia is now in 48 countries outside the U.S., all without label restrictions. We continue to drive significant share gains across key geographies. For example, Zenrelia has continued to build on its market-leading position in Brazil and has also achieved over 40% share in Japan. Globally, efficacy remains the differentiator, creating this remarkable performance and long-term growth potential. On to our second derm innovation, befrena. Demand continues to build. We have just opened up access to befrena to all customers. So our sales team can sell to every clinic, including large corporate accounts. we expect to fill all outstanding orders by next week and to move befrena from a phased launch to a full-scale national launch in the first quarter. Befrena is already showing what our derm portfolio can do together. About 20% of clinics, which have purchased Befrena have never used Zenrelia, unlocking a new door for Zenrelia. On supply, we're now making befrena continually with more than 30 commercial batches produced. We have finished the manufacturing expansion and process scale-up and our larger scale test runs have gone well. Although befrena did not materially contribute to Q3's 13% growth in U.S. pet health, we expect it to be a major revenue growth driver in 2027 with the potential to be the single largest contributor to U.S. pet health growth next year. Next, on Credelio Quattro, we are very pleased with another good quarter of dollar share gains and broad spectrum dispensing sales from the U.S. clinics. Quattro's market share increased 9 points in Q3 year-over-year. We have continued aggressive clinic expansion, reaching about 55% of the U.S. base today, up 15 points since Q1. That's an increase of approximately 4,500 clinics in just 2 quarters. reflecting strong veterinarian and pet owner demand for the 4 dimensions of differentiation that make Quattro what we believe is best medicine. Like Zenrelia, Quattro exited the quarter with strength as September was the largest month of Q3, reaching its highest market share ever. Strategic DTC efforts activated demand into the later months of what we see as becoming a prolonged season. Remember that ticks remain active as long as temperatures are above freezing. Speed of tick kill isn't just a clinical metric. It's a household safety requirement, and Quattro's exceptional speed is resonating strongly with pet owners. Quattros momentum is carried through the typical seasonality to make this Elanco's largest U.S. pet health product, surpassing Seresto on a trailing 4-quarter basis, and we're just getting started. -- with very limited global share compared to the 2 incumbent franchises exceeding $1 billion each. There is ample room for many years of Credelio Quattro growth through market expansion, deeper clinic penetration, market share gains within the clinic, research demonstrating differentiation and global expansion. There is a significant upside outside the U.S., which we expect to help Credelio family become our largest global product family ever. So far this year, Quattro was launched in Australia, Canada and Japan. Yesterday, we received a positive opinion for expansion into the EU, the largest geography in the $800 million international broad-spectrum market, which is growing double digits. We expect to launch Credelio Quattro in Europe in Q1 2027 in time for the season. Turning to AdTab. This market-leading international OTC parasiticide is positioned to be Elanco's next blockbuster. Sales grew more than 40% in the third quarter. AdTab continues to be the fastest-growing major brand in the nearly $600 million OTC Acto category in Europe. Moving to farm animal, Experior has driven strong cattle portfolio synergies year-to-date. We anticipate Experior to continue to grow and lift the broader portfolio with multiple levers from extending days of use, continued adoption and price. At the same time, we do expect moderating growth rates against challenging comparisons. Lastly, on Bovaer, our expectations and trajectory are unchanged from our last update. Year-to-date growth is good, but off a small base, with continued demand from CPG companies that supports relatively consistent cattle numbers. we are investing in long-term initiatives to enhance the product value and demonstrate user flexibility. Moving to Slide 8. We provide recent highlights across the 3 parts of our IPP strategy, innovation, portfolio and productivity. Let's start with innovation. The commercial success of the Big 6 proves that innovation is what drives value and growth in the animal health industry and we are progressing our next wave portfolio without attrition from the 15-plus projects outlined last December. Our pipeline is significantly greater probability, speed and value since our December 2025 Investor Day, driving our increased confidence behind the 5 to 6 blockbuster potential innovations expected through 2031. Next, portfolio, which provides Elanco's diverse broad-based growth. Global ruminants is a clear example as our fastest-growing species year-to-date, up 12% on an organic constant currency basis or 17%, including HV and FX. Global pet health portfolios also have benefited from recent innovation launches, lifting U.S. pain, vaccines and therapeutics, up double digits and driving the EU, Asia and LatAm each up double digits. Finally, productivity. Through price mix in Elanco Ascend, we achieved significant gross margin expansion in the third quarter, up 300 basis points. Our strong results and working capital discipline have generated free cash flow, tracking ahead of pace in our 3-year algorithm for $1 billion through 2028. It has also allowed us to pay down debt faster than planned with another $216 million in the quarter. At 2.9x net leverage at the end of Q3, we've accelerated capital allocation flexibility. This is an important milestone representing years of consistent execution along our priorities of growth, innovation and cash, and it opens up new opportunities to drive meaningful long-term value. With that, I'll pass it to Bob to provide more on our third quarter results, financial guidance and early considerations for 2027.

Thank you, Jeff, and good morning, everyone. My comments today will focus on our adjusted results for the third quarter. Please refer to today's earnings press release for details of our reported year-over-year results. Starting on Slide 10. We delivered $1.265 billion in revenue, representing an increase of 11% on a reported basis. Organic constant currency revenue growth was 9% with 5% from volume and 4% from price. Slide 11 provides revenue from the 4 quadrants of our business. Total pet health revenue increased 14% in organic constant currency. Our U.S. business achieved 13% growth, driven by strong momentum in the vet channel and continued demand for ZONRElIa and Credelio Cuatro. . Internationally, Pet Health revenue grew 17% in constant currency, driven by the strong demand for ZONRELIA across multiple geographies with strength in Europe, Japan, Brazil and Canada. Globally, our farm animal business grew 4% in organic constant currency, led by the U.S. business at 7%. Results were driven by strong growth in the ruminant portfolio. Turning to Slide 12. We adjusted gross margin expanded to 56.1% this quarter, representing a 300 basis point increase over the prior year. The outperformance was driven by pricing and favorable product mix, specifically in U.S. pet health and global ruminants. These factors and our intensified productivity efforts more than offset the impact of inflation related inventory costs. Operating expenses increased 12% in constant currency, in line with our expectations. Consistent with our long-term strategic objectives, the increased investment in marketing, up 18%, is focused on targeted DTC support for our new product launches. We are also progressing our innovation pipeline while Lanco Ascent is resulting in discipline around G&A expenses, up only 2%. These investments are showing strong returns in share and long-term brand loyalty. Interest expense for the quarter totaled $41 million, consistent with our expectations. On Slide 13, we show an adjusted EBITDA year-over-year comparison for the quarter. Adjusted EBITDA was $243 million an increase of $45 million or 23%. Adjusted EPS was $0.27, a 42% increase year-over-year. Slides 14 and 15 highlight our strengthening balance sheet. During the quarter, we lowered gross debt by $216 million, bringing our year-to-date total reduction to $317 million. This execution reflects our strong operational performance and improved working capital management. Additionally, we are tracking ahead of schedule toward our cumulative free cash flow target of $1 billion by 2028, with free cash flow reaching $362 million as of the end of the third quarter. Quarter-end net leverage was 2.9x, outperforming our previous guidance. Achieving the sub-3x milestone accelerates our capital allocation flexibility as we advance toward our target of 2 to 2.5x. Turning to our financial guidance on Slide 17. Driven by our strong third quarter performance and confidence in our momentum for the remainder of the year, we are fully flowing through our third quarter beat into our updated full year outlook. We now expect organic constant currency revenue growth of approximately 8%, up from the previous range of 6% to 7%. This translates to reported revenue of $5.15 billion to $5.18 billion, with our assumption for foreign exchange tailwinds and AHV international contributions remaining unchanged. Our adjusted EBITDA outlook increases by approximately $35 million or 17% growth at the midpoint. For adjusted EPS, we are raising our guidance by $0.06 at the midpoint, bringing the new range to $1.17 to $1.20, representing 26% growth at the midpoint. With our updated year-end cash and balance sheet expectations, we expect a net leverage ratio of approximately 2.9x. We continue to advance our Lanco Ascent productivity initiatives, targeting $200 million to $250 million and total adjusted EBITDA savings by 2030. In the third quarter, we launched a proprietary AI-driven regulatory submission tool in R&D. By utilizing a human in the loop framework, this system accelerates our speed to market and unlocks resource capacity. AI is also now integrated into our discovery activities and is expected to improve lead quality and refill rates for our innovation pipeline. Productivity initiatives like these combined with the growth of our innovation portfolio, position us to deliver substantial margin improvement and ultimately, long-term shareholder value. Moving to our fourth quarter guidance on Slide 19. On a reported basis, we expect revenue between $1.19 billion and $1.215 billion, representing organic constant currency growth of 4% to 6%. Operating expenses are expected to increase approximately 11% in constant currency to support our innovation launches and R&D investments. As a result, we anticipate adjusted EBITDA of $185 million to $200 million and adjusted EPS between $0.16 and $0.19. On Slide 20, we highlight the momentum across our U.S. pet health business. We remain confident in delivering high-single-digit to low-double-digit growth in the fourth quarter despite challenging comparisons. Growth was driven by continued uptake of Zenrelia and Credelio Quattro, contributions from Befrena and significant corporate account growth. For the full year, we continue to expect the U.S. Pet Health business to achieve at least high-single-digit revenue growth. Slide 21 offers an early perspective on the key headwinds and tailwinds we anticipate for 2027. We remain committed to the annual algorithm that we introduced at our December 2025 Investor Day, which spans through 2028, aiming to deliver mid-single-digit organic constant currency revenue growth, high-single-digit adjusted EBITDA growth and low double-digit adjusted EPS growth. Broadly across our business, we expect continued sustainable growth as our innovative products scale globally on top of a stable base with ample room for pricing contributions. Our increasingly competitive portfolio positions us well to capture and defend market share while we navigate competitive dynamics. In pet health, we expect our befrena launch to be a meaningful driver of top line growth. Andy's NREL label improvement represents upside to our annual algorithm, but is less important given the product's momentum. We also see sustained demand across our leading OTC brands, partly offset primarily in the first quarter by Costco's nonrenewal. In Farm Animal, we expect to extend our leadership position across cattle and poultry. We expect accelerating global annual protein consumption to serve as a consistent tailwind for our farm portfolio balanced against regional farm animal cycles. Remember that Q1 2027 will lap a benefit from customer-driven accelerated shipments primarily to the Middle East. These accelerated shipments contributed 1 percentage point of growth for total Lanco in Q1 2026. Turning to margin. We expect accelerating contributions from Elanco Ascend as automation and productivity initiatives drive structural gains throughout our global footprint. Ascend benefits plus those naturally captured from increased scale are expected to provide overall margin tailwinds. As a partial offset, we do anticipate a gross margin headwind from significant but dilutive befrena volume growth as well as persistent inflation pressures. Overall, we expect nice improvements in both adjusted gross margin and adjusted EBITDA in 2027 that track to our algorithm commitments. Lastly, we expect our strengthening financial profile and accelerating cash flow to unlock accretive capital deployment opportunities, enhancing shareholder value. Now I'll hand it back to Jeff for closing comments.

Thanks, Bob. Our third quarter reaffirms our IPP strategy with Elanco well positioned to deliver an algorithm in 2027 and beyond. As I close on Slide 23, let me address how Elanco is deliberately built to not just execute but thrive across market cycles and competitive environments. First, pricing. Innovation creates clear value for pet owners and our basket of innovation drove Elanco global pet health price up 5% in Q3, above expectations. At the same time, volume was robust at 9%. There can be no doubt we are winning through medical differentiation, not discounting. While we've observed some pockets of time-bound activity in the industry, it is a typical dynamic with an overall responsible competitive backdrop. Best medicine drives loyalty for pet owners, not price. . So regardless of any short-term and shortsighted competitor conduct, let me be clear that Elanco has not, will not and does not expect a need for our participation and aggressive price competition to grow and gain share. Our consistent quarterly delivery the last 2 years has proven this point. what will win share is clear, best medicine and big growing markets, growing share of voice and a globalizing basket of innovation. Second, channel shift and pet ownership. Elanco has consistently shown that innovation drives strong growth in the overall U.S. pet health market. At the same time, changing pet owner buying behaviors as consumers prioritize convenience underscore the importance of omnichannel leadership. Elanco's results have decoupled from vet visit volumes or Puppy cohorts as we bring our comprehensive portfolio of differentiated products and strong share of voice with an omnichannel advantage to drive our industry-leading pet health growth with a long runway ahead. Third, pet owner spend, which remains resilient as a protected budget item with pets at the center of the family. Our latest survey work across over 1,500 U.S. pet owners detailed in our press release issued this morning, reinforces the thesis of durable growing pet health spend today and expected into the future. Industry vet channel revenue is up low-single digits year-to-date, reinforcing our proprietary research. Moreover, the U.S. consumer has shown resilience, evidenced by solid trends in monthly retail sales and credit card data, even as gas prices and interest rates have risen. Finally, U.S. pet health is just 1/3 of the diverse animal health industry expected to grow at mid-single-digit CAGR to $60 billion in the next decade. The durability is clear in 2026 as 9 out of 10 top animal health companies grew global revenue in the first half, with trends extending into the third quarter. and we believe no one is more central to society's needs for pets and protein than Elanco, with our balanced profile and all 4 businesses growing in Q3 and year-to-date. Our October pet owner survey on Slide 24 underscores what we're seeing in the marketplace and is remarkable in the consistency of the results throughout 2026. Pet Health is fundamentally protected from economic pressure. 93% of pet owners maintained or increased spending in the past 3 months and plan to keep doing so. Yet where they're spending is clearly shifting towards more convenient options. Pet owners prioritize their pet health, and that gives our business exceptional resilience. Turning to Slide 25. We expect Elanco's innovation to drive many years of material share gains in large growing global markets. We have made rapid progress to gain a foothold in the broad spectrum endecto and derm with each market over $2 billion in size. This is just beginning as these charts are representative of our limited market position, significant white space provides a multiyear path for continued high-quality growth through medical differentiation, share of voice, clinical penetration, preference within those clinics and globalization. Wrapping up on Slide 26. I believe no other animal health company is as well positioned as Elanco. We believe our differentiated innovation and durable business model provide a compelling investment opportunity. We have a long runway to win share, while the markets continue to grow. Consistent, reliable growth is already fueling margin expansion and accelerating cash flow as demonstrated in the third quarter. with a clear path to significant value creation throughout the rest of the decade. With that, I'll turn it over to Tiffany to moderate the Q&A.

Thanks, Jeff. We'd like to take questions from as many callers as possible. So we ask that you limit yourself to 1 question and 1 follow-up. Operator, please provide the instructions for the Q&A session, and then we'll take the first caller. .

[Operator Instructions] Our first question comes from John Block with Stifel.

Gross margin was up 300 bps year-over-year. So a really big step up. Maybe, Bob, if you can provide some color on the traction with gross margin, if you can. I don't know if you gave an implied 4Q. And then maybe more importantly, Jeff, any timing behind that 60% goal that you've thrown out there, less than 5 years, less than 3 years, but maybe some framing would be helpful. And then I'll just ask a quicker follow-up. .

Thanks for the question. Yes. So I'll give some color on margins. So Q3, as we highlighted, increased 300 basis points over the prior year, really read led by a couple of things. One, strong price number two, favorable mix with U.S. Pet Health and international Pet. And then number 3 are manufacturing improvements really with Elanco Ascend and that team focused on conversion cost. We are seeing productivity gains across the company with Elanco Ascend. The thing I'd highlight is we did flow through those higher inventory costs that I've highlighted in the past couple of quarters, that's now fully behind us. Now with that being said, we are not taking a victory lap. Opportunity exists to do more. And as we think about Elanco Ascend, not only through procurement and the 4 walls of our manufacturing facilities, but also through G&A. We'll see continued absorption benefits as we see volume improve and the natural mix benefits with our basket innovation growing as, again, those margins are accretive to our overall corporate average. Now as you think about really moving forward, let me just give you an update on Elanco Ascend. So I'm really, really pleased with the progress we've achieved so far in 2026. And you've seen the benefits come through in Q2 and Q3 as we've accelerated some of those projects. I've shared a couple of examples over the last few quarters about process improvements how we're leveraging AI and automation, not only within our shared service center, but also within R&D. And now we'll continue to focus on building stronger relationships with our strategic partners, particularly on the procurement side, and that has been a key priority. And so even this week, we've hosted our first ever supplier day. We've brought in over 70 of our key suppliers and strategic partners to discuss how we can better collaborate. I've personally sat in several of those meetings this week. And we know we're in an inflationary environment, but we are working together to collaborate and grow together and then push to offset some of that inflation. And I would highlight we're going to see margin enhancement over the next several years, both gross margin and EBITDA improvement because it is a total global Ascend program. We're seeing benefits not only from our procurement team, but we're seeing it in our manufacturing capabilities. We're seeing it in our R&D team who is more and more efficient and getting more throughput through their processes. We're seeing G&A effectiveness. And then even on cash flows, we don't talk a lot about cash flows with Ascend. But look at our trade working capital improvement in Q3 versus prior quarters and last year. So the key takeaway here, John, is that we're going to have several continued years of improvement in both gross margins, EBITDA margins and cash flows.

Your follow-up, Jon? .

Yes. I guess I'll be the 1 to ask is, can you just briefly touch on the cost going on renewal, maybe if you want to address why I don't think there's much revenue exposure there. If I've got this right, you just entered into that in 1Q '26. And I do think you called out you're still expecting retail growth '27 versus '26, but maybe just clean that up or frame that for us.

Yes. I'd just back up. Our retail business continues. Good strong underlying demand globally. You see the AdTab success. That's very close to becoming our next blockbuster. And our strategy that Bobby and the team have put together and Ramiro, adding distribution points, adding innovation, globalizing, it's continuing to be a really competitive advantage for us. We can meet and reach more pet owners where they want to shop than any other company. But Jon, as you can see, I mean, we're constantly adding distribution points, some stick. The majority have stuck with us and some will ebb and flow year-to-year. We expect a long-term relationship with Costco, but we do expect them to pull back next year. That impact is mostly going to be in Q1, going to be offset by other distribution partners that we picked up. So again, I feel real good about the overall retail business. .

Our next question comes from Glen Santangelo with Barclays.

Yes, I just wanted to sort of talk about 2 areas of pushback that we sort of get Jeff. And I just want to get your quick take on it. It feels like a lot of people are concerned that maybe a long coil doing well today, maybe in the midst of sort of the peak share shift. And I know in your prepared remarks, you talked about some of the improvements you made in your commercial infrastructure. Maybe could you just talk about how that could continue to benefit you in 2027? And then secondly, everyone is concerned about the macro. There's always conversations around the decline in vet visits since coved really. So the question is, is anything getting worse in your mind? And I'm just trying to contextualize those 2 areas of pushback relative to the initial 2027 revenue stake that you sort of put in the ground. So any comments around those will be helpful, and I'll stop there.

Yes. Thanks, Glen. Look, at a high level, and we put out this market research this morning, I think that -- I'll take your second question first. I mean, we believe that visits are not the lead economic indicator of pet health. We believe it is all about the willingness to spend and convenience. And the market research was very clear today that we shared that's been consistent in our February, May surveys and now the October survey is that we've got over 90% of pet owners, and it's been consistent all year that are protecting are going to spend the same amount or spend more going forward. And that's represented in the 9 out of 10 companies that have actually been there. So we say that's the lead economic indicator. It's not vet visits. That visits, we believe, is more a result of a changing buying behavior of people going more outside the clinic. That's the answer. Look, we put in Slide 25. We continue to try to be very transparent. That's representative of scale of the 2 major markets that I really got to call out, Glen, on the marketplace. And I'll just make a couple of comments because I think these details really matter. Animal Health continues to be extremely durable and here's the data very quickly. Animal Health markets growing mid-single digit, farms up 8%, pets up 2, internationals faster than the U.S. the 9 out of 10 companies that I mentioned in innovation is the differentiator between those companies. specifically, yes, the U.S. pet health market has slowed, but let's double-click on the 2 major markets that we're playing in that are represented on Slide 25, broad spectrum endecto and derm. And broad-spectrum anddecto, some interesting dynamics and data here. One, broad spectrum endecto parasiticide is growing mid-single digit in the U.S., double-digit outside the U.S. Interesting dynamic in this market is really there's been a shift. There's kind of a changing of the guard. The top 3 products, Trio, NexGard Plus and Bravecto, trailing 12 months have lost 10 points of share Meanwhile, new innovation, over 70% of that new innovation is Quattro has picked up 9 points of share, all while the market is growing. So really, we're excited that we got 3 $1 billion competitors, and we're demonstrating best medicine to these players. We've got a long runway to grow. Market is growing. We got a small share -- and this has been 1 of the most durable markets even during this downturn. Second is derm. Derm growing high single digit internationally. Thus innovation is growing the markets, both in Para and derm, it is. U.S. revenue is down or flat in derm, but more dogs in the U.S. are on for derm than they were a year ago. And recent Vetco data showed that actually U.S. derm doses are up double digit in the U.S. So the market's expanding, launch offers and onetime gross to nets maybe have made the market temporarily become flat in the U.S., but we see great share opportunities for us. So Glen, long runway. We're committing today to continue our algorithm in 2027, and we're confident in that. You saw Bob's pluses and minuses relative to the year. We feel very good going into next year.

Our next question comes from Matt Delator with Goldman Sachs. .

Congrats on all the progress. Maybe just another on the outlook for 2027. Obviously, you're seeing strong momentum across key product launches and you reiterated the long-term growth algorithm. But could you speak a little further about how we should think about the breakdown of that mid-single-digit top line between pet and farm next year? I realize you called out the harder comps for farms. So assume pet above that and maybe form a little bit below. And then maybe just on pet specifically in the context of clearly a really strong quarter. on both price and volume, but also the broader market dynamics. Is there just anything you can share in terms of how we should think about the split between price and volume next year for pet.

Yes. Thanks, Matt. So I'd love to provide some color on what we see going into 2027. And I will expect and then do expect Pet to outperform versus farm as we do get back to a mid-single-digit growth farm in 2027, especially really with some tough comps in 2026. But let me provide just a couple of comments overall in 2027. And Slide 21 in our deck really shows some of the pushes and pulls. But we have a tremendous amount of clarity going into the year. We finished our business plan. We'll be sharing that with the Board here in a couple of weeks, but a high degree of confidence, and that's why we're sticking with our algorithm that we laid out in Investor Day in December 2025 with mid-single-digit growth, high-single-digit EBITDA growth and low-double-digit EPS growth and I continue to expect net leverage to improve throughout the year. We'll see a normal spike up in Q1. That's normal with our timing of cash flows, but leverage will continue to improve throughout 2027. And our strategy is working, creating growth, innovation and cash. Jeff highlighted in his remarks at the Big 6, we're ahead of schedule, and we expect the Big 6 to double in evenues by 2028. I've provided color on Elanco Ascend, but we're just getting started with margin expansion on that front as well. So a lot of confidence going into the year and look forward to sharing more details with you all in February when we give formal guidance.

And Matt, I would just make 1 comment. I think price is a measure of value, right? So if you're discounting, you probably have a value product challenge. Our representation of 5% growth in pet is, I think, medical differentiation proven out in the marketplace. We have very really no major customer has left a Credelio Quattro and gone to a product, say, with 3 active ingredients. So we're retaining customers, we're able to take price because it represents value. And then when you jump over why we still feel good about price even in farm animal is today, our value proposition with this protein demand, they're as great as they've ever been. So it gives us some price leverage also on the farm animal side. .

Our next question comes from Erin Wright with Morgan Stanley..

Great. Outside of what you saw, I guess, at retail and some of the relationship dynamics there, I guess I'm trying to parse out how you think about the quarterly progression from a stocking destocking standpoint across the core business. Anything at distributors to call out and any sort of changes we should anticipate as you kind of enter those new distributor relationships into next year in terms of pricing promotion dynamics, any new tactics that you're kind of taking on that front as we head into next year, that would be great.

Yes, Erin, we're again, very consistent in clinic, out of clinic demand is matching days of inventories remained very steady. No changes relative to that at all. Again, there's spotty different places where there's competition, but it's nothing unusual. We see really a responsible backdrop overall in the marketplace. So as a whole, again, we're winning with best medicine. We're winning with share of voice. Our targeted media is building brand loyalty. We're starting to really see that brand loyalty grow, which is going to create a stickiness and long-term growth in some of these big products that we have. and that's really been the essence. Today, we've got more share of voice, more stability, which you and I have talked about and our teams than we've ever had more expertise. We just finished to survey the highest engagement score since the IPO across Elanco -- and while we see some of our competitors restructuring and downsizing, our share of voice is up substantially, and that's a factor we haven't talked a lot about that I think is playing out. When you put best medicine, share of voice and brand loyalty together, we've got competitive advantage, and we see a long runway of share taking ahead here. So I hope that helps.

I guess a clarification, like was there a stocking benefit at all in the quarter and across the core business.

Yes, Erin, simple answer is no. We haven't had any stocking -- unusual stocking since I've been here, and it's been, what, 6 quarters or so. Nothing in Q3, very clean quarter. Q4, expect very clean and into '27 same thing.

Our next question comes from Umer Raffat with Evercore.

So I was looking at some of the Credelio Quattro commentary. And I recall you had mentioned a 3-point gain in market share back in 1Q and another 4-point gain back in 2Q, meaning those alone was about 7 points in gain. I'm assuming it was something comparable to last year in 4Q as well. So knowing that, that in the last 3 quarters, prior to 3Q, you had gained something like 8 to 9 points in market share. I was a little surprised to see that the Credelio Quattro market share gain year-over-year is 9 points because that's sort of the number I had in market share gain by the end of was the market share flat 3Q versus 2Q? And if you could just speak to what the sales trend was quarter-over-quarter? I realized you said it was the strongest September, but I just want to sort of put the market share in perspective.

Yes. Thank you, Umer. First of all, as we highlighted, we did see share gain there is less switching. So there's dollar share in clinic share. So what I would say, I would highlight is there's a lot less switching late Q3 into Q4 as corporates are and all clinics are switching less, getting ready for actually the next season. So where we've seen the growth is actually inside the clinics as we're continuing to grow actually use inside the clinic. So again, we see tremendous demand for the product. We see a 2027 that's going to bring not just share growth, but overall market growth, as I mentioned, in this payroll market, we've got 3 $1 billion competitors that were showing best medicine against. So again, it's common late in the year as you get into the late fall winter that you're going to see a little bit less of that and less switching overall. So -- and market share, I mean, if I emphasize it did grow sequentially quarter-to-quarter.

Our next question comes from Brandon Vasquez with William Blair. .