Animal health company tightens channel inventory by $60 million in first quarter, directly resulting in negative performance
Elanco Animal Health Inc. reported a 10% decrease in total revenue during the first quarter of 2020, compared with its 2019 first quarter performance ($657.7 million vs. $731.1 million), driven largely by the global impact of the novel coronavirus (COVID-19) pandemic.
“In the first quarter, the COVID pandemic created significant working capital and liquidity pressures and uncertainty on near-term and customer demand for our distributors, prompting reductions in the amount of inventory they hold,” said Jeff Simmons, Elanco president and CEO. “This unprecedented event also created a tipping point in the changes we were executing in our distribution approach.”
Simmons attributed the first quarter decrease directly to its $60 million reduction in channel inventory carried by its four commercial distribution partners in the U.S. companion animal space.
“While distribution will continue to play a role in the future, our analysis shows our internal demand generation efforts are superior to distributors — especially with new clinic placements for our products — and higher inventory levels are not driving demand as they had in the past,” he said.
Elanco anticipates it will further tighten channel inventory across all business areas further reducing between $80 million to $100 million — mainly during the second quarter of 2020 — as it “applies these new tactics across the business and geographies.”
“The decrease in channel inventory is a structural change that will improve our working capital and maximize our operational flexibility in the current environment and beyond,” Simmons said. “While the actions we are taking with our commercial partners negatively impact our reported sales performance in the near term, these changes will strengthen our position, optimize our promotional approach and enable us to direct investment to the internal commercial activities that drive demand for our products over the long term.”
He noted that while structural and strategic consolidation plans were already underway, the pandemic accelerated the changes.
Bayer acquisition update and a look at the food animal sector
The earnings call also offered some additional highlights:
Food animal future protein and health: Revenue increased 8% for the quarter, driven by increased volume and price. Growth was driven by continued strong demand in the international poultry and aqua portfolios, in addition to anticipatory buying by direct customers in international export markets to ensure continuity of supply ahead of potential COVID-19 pandemic disruptions.
Ruminants and swine: Revenue decreased 8% for the quarter, driven by deceased volume and price, and unfavorable impact from foreign exchange rates. The decrease was driven by expected impacts from headwinds for Rumensin and Paylean, the continued replenishment of sterile injectable products from its contract manufacturing partner and actions to reduce inventory levels. Sales also benefited from anticipatory buying.
No supply chain disruptions: The company has not experienced COVID-19-related disruptions to inputs or its supply of products. It does not anticipate delays to its manufacturing productivity agenda or innovation timelines.
United States: Elanco’s U.S. portfolio experienced flat to slightly negative outbound sales from distribution.
International: Chinese demand for poultry, aqua and swine products drove growth — as did anticipatory purchases. Large, corporate Chinese swine operations have shown positive signs of recovery via their repopulation efforts.
Additional Elanco/COVID-19 news
In March, “uncertainty of the duration and magnitude of impacts from” COVID-19 prompted the company to withdraw its 2020 revenue and earnings guidance.
Despite the negative impacts of the pandemic, Elanco is working to support the fight against the virus and support those impacted directly by its fallout. Elanco donated 1,000 vials of viral transport media (VTM), a preservative solution that keeps a virus active until it can be tested, to a health center in Fort Dodge, Iowa. The Elanco Foundation pledged more than $700,000 to help fight rising food insecurity challenges brought on by the COVID-19 pandemic.
View our continuing coverage of the novel coronavirus (COVID-19) pandemic.