Jim Greffet - Head of Investor Relations Jeffrey Simmons - President and Chief Executive Officer Lucas Montarce - Acting Chief Financial Officer Todd Young - Executive Vice President and Chief Financial Officer Aaron Schacht - Executive Vice President of Innovation, Regulatory and Business Development

Christopher Schott - JPMorgan Chase & Co. David Risinger - Morgan Stanley Erin Wright - Credit Suisse Liav Abraham - Citigroup Umer Raffat - Evercore ISI Michael Ryskin - Bank of America Merrill Lynch Kathy Miner - Cowen & Co.

LLC Kevin Ellich - Craig-Hallum Capital Group LLC

Thank you, Melissa. Good morning.

Thank you for joining us for Elanco Animal Health’s Q3 2018 earnings call, our first as a publicly traded company. I am Jim Greffet, Head of Investor Relations.

Joining me on today’s call are Jeff Simmons, our President and Chief Executive Officer; Lucas Montarce, our acting Chief Financial Officer; Todd Young, our new CFO; and Aaron Schacht, our Executive Vice President of Innovation, Regulatory and Business Development. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations.

Our actual results could differ materially due to a number of factors, including those listed on Slide 2 and those outlined in our prospectus relating to our initial public offering filed with the Securities and Exchange Commission on September 1, 2018. Also as indicated in our recent prospectus filing, our financial statements for the first half of 2018 and prior years have been derived from the consolidated financial statements and accounting records of Eli Lilly and Company.

These include allocations for direct costs and indirect costs, which were attributed to the Animal Health business of Lilly. Some of these allocations for example are for certain support functions that were provided on a centralized basis within Lilly, such as expenses for certain aspects of business technology, facilities and other corporate functions.

Lilly will continue to provide some of these services to Elanco under the transitional services agreements or what you may hear us call TSAs. As we noted in prior filings, the combined financial statements for the first half of 2018 and prior years do not necessarily reflect what the results of operations would have been, had we operated as a standalone public company.

As a result, this can make comparisons to the prior year difficult in certain instances. Third quarter 2018 financial results also include allocations from Lilly.

For all periods starting with the fourth quarter 2018 and going forward, our results will be based on a direct cost associated with our standalone operations and not allocations. Those results will include costs related to the services we receive from Lilly under the TSAs I mentioned.

The information we provide about our products and pipeline is for the benefit of the investment community, it is not intended to be promotional and is not sufficient for prescribing decisions. You can find our press release, the slides referenced on this call and in investor workbook on elanco.com.

We will continue to use our site to distribute important and time critical company information. The slides in the press release also contain further information about the non-GAAP financial measures that we will discuss during this call.

In addition to providing our financial results, we intend to use our quarterly earnings calls to highlight key events and achievements as well as to comment on environmental factors relevant to the animal health industry and Elanco. After our prepared remarks, we will be happy to take your questions.

I'll now turn the call over to Jeff to provide the highlights.

Thanks Jim. Let me start by saying how much we appreciate your interest in our Company and support to the initial public offering.

We are well positioned as a standalone Company are in full execution mode and we believe our results this quarter reflect the strength of our business. I'd like to start by highlighting a few important themes from this quarter on Slide 3.

First, as you know we return to growth this year and are pleased to say we've accelerated that growth during Q3. We saw strong performance in our targeted growth categories and we continue delivering on our commitments to achieve a sustainable flow of innovation with new product approvals, several new launches, and in R&D collaboration.

Finally, our margin expansion efforts continue to progress. Ultimately, we met our expectations for delivery in our first quarter as a publicly traded company.

Slide 4 highlights the three pillars of the Elanco targeted value generating strategy. We will continue to come back to this highlighting the importance of our focused approach to the business.

First, portfolio as we have shared Elanco is driving the growth of our marketed portfolio of products where we are well positioned and can grow and build on our position with new innovation. The second pillar is innovation.

Using our unique robust model to deliver a consistent sustainable portfolio of innovation and executing on our productivity agenda to drive significant margin expansion and unlock value. This quarter, we have a number of key events across all pillars of the strategy, starting with the portfolio.

Our portfolio accounted for topline revenue of $761.1 million, an increase of 9% or 11% without the impact of foreign exchange. While most importantly revenue excluding strategic exits what we call core revenue grew 13% to $733.4 million or 15% without the impact of foreign exchange.

This performance is consistent with our expectations for the quarter. As a group, our targeted growth categories; Companion Animal Disease Prevention, Companion Animal Therapeutics and Future Protein & Health grew 19% in constant currency.

In the Companion Animal Therapeutics category, we reintroduced the 100 milligram presentation of Galliprant which provides a more convenient dosing approach for large dogs. Galliprant growth continues and in August more clinics in the U.S.

dispensed at least one dose of Galliprant more than any other branded NSAID. In the Companion Animal Disease Prevention category Credelio and Interceptor Plus continue to perform well.

Credelio’s exceeded our expectations for new clinic adoption year-to-date and growth of vaccines also accelerated in the quarter. Future Protein & Health increased by 2% in constant currency this quarter, influenced by quarterly purchase patterns in 2018.

The 9% growth year-to-date is above the overall market and normalizes for this quarterly purchasing pattern. On the innovation front, our second pillar, we are launching a portfolio of innovation.

Three new products a year since 2015 and have plans to deliver a consistent sustainable flow of innovation going forward. Aaron Schacht, our Executive VP of R&D Regulatory and Business Development is with us today and can further expand on any of these highlights.

In Q3 this recently launched innovation grew 81% over the same quarter last year to $67.9 million in revenue. You can see the seasonality impact in Q3 each year associated with the use patterns of parasiticides and Aqua products.

As we look at the comparison to the same quarter last year and the significant year-over-year growth, our overall launched innovation is tracking to our expectations. You can see this detail in Slide 5.

During the quarter, we launched Prevacent. This fully Elanco developed vaccine prevents porcine reproductive and respiratory syndrome in piglets two weeks or older.

In the Future Protein & Health category, we launched a nutritional health product for poultry called Correlink in Asia. This product is a tailored blend of probiotics designed to meet the assessed disease challenges within a specific poultry flock or operation.

Correlink underscores our commitment to advance alternatives to medically important antibiotics. To-date since our launch of the Elanco eight-point Antibiotic Stewardship plan, we’ve introduced into our pipeline 16 of the 25 committed antibiotic alternatives.

We also have a key line extension. We're launching Credelio for cats in Europe.

This is the first approval of an oral, tick and flea chewable tablet for cats. The Norwegian Medicines Agency has requested additional data on Imvixa.

And after review, we've decided to withdraw the application for marketing authorization in Norway, while we work with the Agency to register this product. We are very confident in Imvixa’s value and performance given the results in Chile and are working diligently to bring this innovation to Norway.

We continue to pursue the registrations currently under review and Canada and the United States to address the significant challenges of sea lice for salmon producers. While this is a near-term alteration to our assumptions, this event does not change our expectations for the overall business.

In business development, we entered into an R&D and commercialization collaboration with Novozymes, to develop nutritional health products for cattle. This collaboration expands our growing nutritional health capabilities in the cattle, identifying and developing new products to help manage the animal's microbiome, control infections and reduce gut inflammation is a key focus for Elanco as we bring alternatives to decrease the need for medically important antibiotics.

Turning to our third pillar productivity, efforts continue with results across pricing and manufacturing to drive gross margin expansion in the quarter. Our value based pricing approach is showing results with a 4% price growth versus Q3 of 2017.

We completed the sale of the Larchwood, Iowa manufacturing facility and we continued our lean manufacturing efforts by advancing the implementation of the spend control tower to additional manufacturing sites. Transitioning over to Slide 6, this summarizes the constant currency growth of targeted categories for the quarter and year-to-date.

You can see all categories contribute positively to our growth, offset by the impact of strategic exits. While some of the growth rates in Q3 are quite large due to purchasing patterns, the year-to-date results are more in line with our goals and strategy.

This demonstrates our strategy is performing as expected and we are tracking towards our goals. Now I'll turn the call over to Lucas to review our Q3 results in more detail and to provide our financial guidance for 2018.

Thanks Jeff. Slide 7 summarize our GAAP results, while Slide 8 describes the items considering the adjusted financials.

Slide 15 to 19 in the appendix provides a summary of the adjustment made to the GAAP results to arrive at our adjusted presentation. I will focus my comments on our adjusted measures to provide insights into the underlying trends in our business.

So please refer to today's earnings press release for a detailed description of the year-on-year changes in our third quarter GAAP results. Looking at the adjusted measures on Slide 9, you will see total Elanco revenue grew 9% in the quarter.

As Jeff mentioned earlier, core revenue increased 13%. Core revenue exclude a strategic exits, which our businesses that we have exited or we have made a decision to exit.

The revenue growth this quarter was driven by the update of new products, performance of mature products and favorability of purchasing pattern from last year. Gross margin as a percentage of revenue was 51% an improvement of 400 basis points over last year.

This increase was primarily due to favorable net realized price, product mix and the result of the manufacturing productivity agenda. Total operating expenses decreased 7%, reflecting our actions to improve our cost structure.

Marketing, selling and administrative expenses decreased 8% due to continue productivity initiatives, cost control measures across their business and timing of marketing investment. R&D expenses decreased 5% primarily driven by timing of certain projects within the year.

The combination of sales growth and operating expenses savings produce an operating income increase of $81.7 million or 117% compared to Q3 2017, resulting in an operating margin of 20% for the quarter. Our tax rate was 22.3%.

At the bottom line, net income increased 108% to $107.4 million. We achieved the significant earning growth by delivering nearly double-digit revenue growth while improving our margins and reducing our operating expenses.

The right side of the slide details the same adjusted measures for September year-to-date. Moving to Slide 10, let's take a look at the effect of price, rate and volume on revenue growth.

This quarter, the effect of foreign exchange was at 2% headwind overall, excluding these, our core revenue growth on a performance basis was 15%. Volume growth was 11%, while price growth was 4%.

On the Slide, you can see the breakdown of our revenue across our four categories. I will focus on performance growth, which removes that impact of foreign exchange.

Companion Animal Disease Prevention, which includes parasiticide and vaccine, grew 35% in the quarter, 22% from volume and 13% from price. These results were driven by growth in Trifexis from higher realized price as well as a favorable comparison to prior year, including and anticipated stock out in Q3, 2017, which shifted sales to the second quarter.

They continued uptake of Interceptor Plus and Credelio and an increased sales of certain vaccines from new customer agreements. Companion Animal Therapeutics grew 28% in the quarter, 21% from volume and 7% from price, driven by their introduction of Galliprant 100 milligram presentation for large dogs, continued overall growth of the product and realized price increase.

Future Protein & Health grew 2% in the quarter, 3% from price offset by a 1% volume decline driven by growth in aqua vaccines and nutritionals, partially offset by current year international purchasing pattern in poultry. Now that year-to-date growth in Future Protein & Health is 9%.

Ruminants & Swine grew 9% in the quarter all from volume. Growth was driven mainly by U.S.

and international purchasing patterns in both the current and prior year and the performance of key mature brands and out cattle vaccine. Now that year-to-date growth in Ruminants & Swine is 2% consistent with our expectations.

The Slide 11, provides a breakdown of our performance in the U.S. and internationally.

Turning to our financial guidance for the full-year 2018 on the Slide 12, we project revenue to be between $3.05 billion to $3.08 billion. These translate to earnings per diluted share calculated on a GAAP basis to be between $0.31 to $0.33 on an adjusted basis and adjusted basis between $1.14 to $1.16.

Now I will turn the call back over to Jeff to review some macro trends that we are monitoring.

Thanks, Lucas. As part of our efforts to be a good partner for you, we'd like to provide our thoughts on a couple Animal Health topics.

We will do this is a way to keep you updated and give you our perspective. We think this is important as we build our investor relationship.

The two topics for this quarter are number one, the reauthorization of the Animal Drug User Fee ACT, ADUFA and trade in tariffs. ADUFA is Animal Health’s version of human pharma’s Prescription Drug User Fee Act, PDUFA.

ADUFA was created in 2003 and recently reauthorized for the fourth time. So the U.S.

FDA can collect fees to insure the resources necessary for timely review and approval of animal medications. The new legislation contains improvements to keep standards high and reduce the time to market.

The most important improvement in the FDA process allows the agency to grant conditional approval to products where additional time is needed to collect efficacy data once the safety of the product has been demonstrated. This will allow us to innovate in areas where veterinarians currently have no approved medicines for treating serious or life threatening diseases in animals.

As a leader and innovator in animal health, Elanco supports PDUFA IV as a science-based predictable regulatory process that enables innovation. Turning to the second animal health topic of trade and tariffs.

Trade and tariffs are dynamic and we are monitoring them closely, while year-to-date exports of U.S. beef, pork and poultry are all higher than this time last year.

The expectation among our customers was for greater levels of growth. New pork and poultry capacity was intended to partly meet some of this global demand that is now facing an impact from trade policy.

Continued retaliation from Mexico and Canada on pork and beef are having an impact as well as the pending implementation of the new Trans-Pacific partnership without the U.S. We are encouraged by last month's announcement that the U.S.

is exploring three separate trade agreements with Japan, the UK and the EU. Fewer tariff and non-tariff barriers to trade is beneficial for all of our customers and for Elanco.

We don't see any material near-term impact to our business from trade and tariffs as we have a global business. We will monitor how trade will impact the economic conditions of our customers going into 2019.

In summary, there are a few key themes I hope you see in this quarter's results. First, we met our expectations in our first quarter as a publicly traded company.

We have return to growth and that growth accelerated in Q3 driven by our targeted value generating strategy. We are seeing success with our focused approach in the growth categories.

Innovation is delivering and our newly launched products continue to grow and perform well. Yet it's important to keep these results in perspective on some one-time events and unique 2017 purchasing patterns which create favorable year-on-year comparison this quarter.

Finally, much work remains. For Elanco, we are focused on our customers and the execution and acceleration of our strategic plan.

Before moving to Q&A, I'd like to reiterate my gratitude to Lucas for guiding us through the IPO process as our acting CFO. Lucas has worked tirelessly to guide Elanco’s transformation over the last 18 months.

We thank him for his service to Elanco. We wish him the best as he returns to Lilly as the CFO of Lilly’s International business unit.

And I am pleased to introduce Todd Young as the Elanco’s new CFO. Todd’s deep financial expertise combined with his pharmaceutical industry knowledge make him an excellent addition to Elanco at this exciting time in our company's history.

Todd and Lucas are already working closely and will through year end to ensure a smooth transition. This concludes our prepared remarks, and now I'll turn the call over to Jim to moderate the Q&A session.

Thanks Jeff. We want to take as many questions as possible so we ask that you limit them to two or a question in two parts.

So Melissa, we are ready, if you could provide instructions for the Q&A session and then we are ready to take the first question.

Great. Thanks very much for the questions.

Just had two here. A little bit of clarification on the 3Q results.

So the first one was the future protein and health business. I think the growth slowed a bit this quarter from what seemed like very strong results earlier in the year.

Can you just elaborate a bit more on the dynamics we're seeing with that?

Great. Chris, good questions.

Jeff, why don't you talk about the overall future protein and health, and then Lucas, you can add on with specifics if needed. And then Lucas, we also have some normalizations for the Companion Animal Therapeutics to try to tease that out.

Thanks Chris for the questions. Overall, I'll just start by saying, we continue to see great fundamentals, the protein demand is really being led by poultry and that's both broilers and eggs as well as salmon or aqua.

So the underlying fundamentals of the business, the economics globally continue to remain strong. And as we've mentioned, as we’re out on the road, we continue to have leading solutions, whether that's salmonella and poultry and coccidiosis or sea lice and pancreas disease.

So overall at a high level, we feel very good. I would point Chris, probably more to the year-to-date, the 9% year-to-date performance.

We have seen some of the slowing is really representative of some purchasing patterns primarily in the international business.

So to your second question, in terms of the Q3 growth in Companion Animal Therapeutics as you highlighted is 28%, 21% from volume and 7% from price. The strong volume growth can be attributed to the introduction of the Galliprant 100 milligrams.

So certainly, once you normalize by that the overall growth actually is 18% for the quarter, 7% from price and 11% from volume. Just to compare versus last quarter, actually Q2 growth was 15%.

So you see actually again, mid double-digit growth again both quarters that's basically the trends that we're seeing in Companion Animal Therapeutics.

Great, thanks very much. Quick follow-up on the Galliprant, you read the 100 milligram, is that just a one-time step up or is that as the product comes back that that's more of a sustainable level of sales?

Yes, Chris, I think certainly – yes, because there wasn't much inventory in the system. I think there needs to be a replenishment of the pool, so to speak.

There continues to be good pull through demand there. So there might be a little bit of a lump, but the underlying fundamentals of that product are still pretty strong in the flow through as well.

Okay. Thanks so much.

Melissa, next question.

Yes. Thanks very much and congrats on the performance.

I have two questions please. First, with respect to the Companion Animal price figures in one of your slides, it indicates that price is up about 8% to 9% year-to-date across Companion Animal.

Could you just provide a little bit of color on how that's calculated and how much you actually raised price versus how much Elanco benefited from positive mix shift? And then my second question is, with respect to the fourth quarter guidance, it implies that EBITDA will be flat to slightly down versus the third quarter's reported $152 million despite an expected improvement in revenue sequentially.

Could you just provide some perspective on that? Thank you.

Choosing lots of numbers in those questions, so Lucas, you want start?

Yes. Thank you for your question, David.

Maybe starting with the first one about a price, as you highlighted again, there is an 8% growth in a year-to-date in Companion Animal Preventions that is heavily attributed to price for us, but you have also as we cover during the Analyst Day, we have a companion of margin recapture that we have done basically of changing the contracts in the U.S. So that's also a driver.

That is again, very much one-time event that is happening in 2018. On the third one you also mentioned mix.

We have again within that – with again the re-introduction of Credelio and Interceptor Plus. There is a component of mix.

So those are the three drivers that we see in terms of price. All together that 3% that you see at the bottom, 2 percentage points is coming from truly list price increases, 1 percentage points is coming from that margin recap year-to-date, moving forward long term, that our expectation is at 2% basically combining the two businesses.

Now going into the EBITDA question for Q4, what you see actually in terms of gross sales, but will continue to grow into the fourth quarter. What you seen at EBITDA level is basically the interest expense basically playing out for the full quarter.

Then you have as well, again the combination of step-up of expenses that is taking place of timing that we have seen in Q3 that you see basically in step-up taking place into Q4. So since you've grounded it on EBITDA, step-up in interest won't be a big impact.

The timing of expenses is one, yes, correct.

Yep. Dave, you'll also notice that the same phenomenon obviously just from math, you'll see it in the earnings per share there.

If you do the forced out at the mid point, the earnings per share and the fourth quarter is less than what we delivered in the third. For all the reasons, Lucas just said, as well as the step-up and interest that will have in the fourth quarter.

Yes, thank you.

Melissa, next question.

Great, thanks. You spoke to the higher realized price on Trifexis and can you speak to kind of your broader competitive positioning in the Companion Animal Therapeutics segment and how initial update for – our uptake for Credelio is and how you expect to be positioned in parasiticide over the next several years?

And then also my second part of the question is, where do you stand with [indiscernible] CMO as well as manufacturing rationalization? Can you remind us where you're at in terms of the near-term cost structure initiatives here and what has been accomplished in the quarter and the magnitude of margin expansion as we head into 2019?

Thanks.

Great, Jeff, do you want to…?

Absolutely, Aaron. Thanks for the question.

So as we've talked about our Companion Animal Prevention spaces and parasiticide space, we feel very good about a broad portfolio that offers products, both to the veterinarian as well as even outside of the veterinarian. But if you look at our portfolio, we have positioned, Trifexis with the heartworm and flea oral continues to have loyal users, continues to be dogs that do not have and are not really in the presence of conditions that bring ticks.

So you've seen both urban markets as well as the southeast of in the United States. So we continue to build our segmentation and targeted marketing in those areas.

Then when you look at Credelio and Interceptor Plus, I mean you're seeing tremendous growth with Interceptor Plus given its breadth across the numerous worms and coverage there as well as great administration and acceptance by the dog. And when you combine that also with Credelio coming in with tick and flea, we're not only seeing, good safety, good efficacy, but also the ability for that younger puppy to come on to the product.

So again, differentiated portfolio we're very focused on segmenting and understanding and working with that veterinarian to target the appropriate pet owner relative to these different products. But again, we continue across the Trifexis, Credelio, Interceptor Plus, a nice portfolio and a nice set of differentiated solutions for the veterinarian.

Well talk about the productivity…?

Yes. So on the productivity, the agendas we've shared is extremely comprehensive as we've shared.

Our goal was to get our footprint as quickly as possible to the right size. The sale of Larchwood was one of the key – last key moves we needed to get the footprint in the right place.

And we're excited that that product could be sold. And we will transition that manufacturing to our four dodge plant.

Now our focus is heavily Aaron on the key elements of looking at our SKUs and rationalizing appropriately, procurement and pricing. And as I mentioned, some of the control tower spend aspects and lean that we've now put in the majority of our manufacturing plan.

So it becomes now one of execution and a less of a footprint.

Melissa, next question?

Thank you.

Thanks Erin.

Good morning. A couple of questions, firstly, you mentioned the opportunity for Credelio in cats.

Can you just elaborates on this a little bit – to a little bit about the competitive environment and what your outlook is for this indication? And then a secondly just following on the previous question, can you just remind us where you are in the development of a broad spectrum and ectoparasite that targets to ticks, fleas and wounds?

Thank you very much.

Let’s welcome Aaron to the party [indiscernible].

Yes, sure. Thanks Liav.

Good morning. Thanks for the question on Credelio for cats.

We are excited about introducing this product Credelio. Lotilaner is the active ingredient, the same active ingredient as it goes into the dogs.

This will be the first oral flea and tick combination available for cats in the EU. There's another product that's available as a spot on.

So we offer a different administration method, different convenience for owners, preferences there, and we're obviously excited about the efficacy that it provides in a continuous read through of the safety profile of this molecule. And so we're looking forward to see how the marketplace responds to that, but expect obviously that product to take a good place in the tool kit for veterinarians to treat cats.

Your second question was around a broad spectrum and ecto product. First, let's start with what it will take probably to achieve the concept of a product like that.

In most cases, you're probably considering combining three or four distinct medicines, one that covers the ectoparasites, like the current set of products, flea and tick, and then maybe two or three more that provides the broad spectrum coverage for the ectoparasites, heartworm, and then the various different GI nematodes, and intestinal parasites that present. And again, you're going to have differences across geography, so in one envisioning of the product, you're going to want to try to get all the coverage and maybe in another way of thinking about the market, you might want to break that down.

The challenge is the same regardless of what final composition you end on, and that is combining three or four different medicines in a palatable, readily manufacturable format that will achieve all the expectations of safety and efficacy for the various different regulatory enterprises across the globe. And so this is not an easy thing to accomplish.

I think we'll see this field develop and grow. All of the key players will be active.

We are active. We have a lot of good active ingredients that we think will be good substrate for pursuing such a product like this.

And I would just point to the two products we have today, Credelio, which does a great job for flea and tick and then Interceptor Plus or Milbemax in Europe, which does a great job for broad spectrum. Endoparasitic coverage is really the standard that any future product ought to try to aspire to.

And we'll look forward to try to build on that and obviously look forward to a lot of competitive effort in this area.

Great, Aaron. Melissa, can we move forward to the next question?

Thanks for taking my question. My question was, first just the seasonality on the new launches.

I feel like Galliprant we know grew pretty nicely quarter-over-quarter. So just wanted to understand the non-Galliprant new launches?

What sort of happened from Q2 to Q3? And then secondly, and if you bear with me on this, on margin expansion, would it be possible to really drill down some of the key line items that we know are changing?

So for example, perhaps putting some dollar numbers around, we know manufacturing headcounts already gone from 3,500 to 2,330 going down to 2,100 in the next couple of years. What's the dollar impact of that?

And same on the CMOs, we know it went from 200 to 120, it's going to go down to 80. What's the dollar impact of that?

And then manufacturing sites. Thank you very much.

Lucas, do you want to start there and we can probably hand off a little bit for the different things. So maybe you could start about the seasonality that we see on the slide of new product growth.

Certainly. Again, thank you for the question Umer.

Maybe just to highlight again that what you see in Q3 is a heavy impact of the seasonality in particular the flea and tick season in the U.S. that's taking place in Q2.

Remember maybe comparing versus prior year that we brought to the market DC or Credelio that is our own flea and tick product. So you see a heavy impact of that that is driven by Credelio.

Again, the products inside of market is growing nicely and very much in line with our expectations, but you see that seasonality playing out. That's the major driver that you see basically in Q3, but is very much aligned with our expectations for year-to-date and our expectations for the full-year.

Umer, it’s Jim. Let me start a little bit on the margin expansion questions.

I'll answer it in a more systematic sort of way since we haven't teased out all of the quantified bits that you described. Although, it's a good question, and it sort of leads us into a forward-looking view of the future that we want to avoid for this setting.

I'd say overall you saw the improvement in the gross margin this quarter and we cited the reasons why with price and mix and the productivity initiatives that have already been put in place and the savings that you see there. Quarter-to-quarter, there will be lumpiness as we see overall mix and the seasonality of the business and some of the purchasing patterns that can influence.

Overall, we think across the window of time, our gross margin as it sits today will improve above where it is as we see the benefit of a lot of the manufacturing productivity initiatives and footprint rationalization that we've done throughout the organization. We'd like to look at it as a portfolio.

Period-to-period, some of those initiatives will be more important than others, so in certain periods that will be a mixed impact that overcomes the other moving parts. As we move through, we'll see the long-term benefit of the rationalizations, the procurement, the SKUs, and the CMOs that we continue to strive to reduce.

So we think that portfolio of things puts us on the right trajectory at a macro level.

Thank you. And good luck Lucas.

We’ll miss him too. But we welcome Todd very much.

Next question, Melissa.

Thanks. Congrats on the quarter, guys.

I want to follow-up on an earlier question, try to dig a little bit deeper into some of the details you provided on the moving parts in a quarter. Generally, I want to focus on the price gains both on the quarter and year-to-date, I understand your commentary that you want to focus more on the year-to-date gains across the entire portfolio.

But if you look, if you sort of break it out, Ruminants & Swine flat price for the quarter and for the year, and the low single-digit price gains in Protein & Health is broadly in line with what we would have expect from those product classes. But you're still seeing 13% price in disease prevention for the quarter, 8% for the year.

I mean given what we know about what's in those portfolios? Can you talk about how sustainable that is going forward, and I realized from this could be catch up for 2017, but especially on a product like Trifexis, where you're increasingly going to be seeing more and more competition from new products.

Just trying to parse out from the catch-up versus prior years? And then I have a follow-up question.

Great. Mike, it’s Jim.

I'll offer some thoughts because there is a nuance, and this is – I think Lilly does it the same way, but it's an important way that you think about price rate, volume calculations. So remember that in companion animal disease prevention, especially Lucas talked about the purchasing patterns with Trifexis.

The way we calculate price rate volume, especially the price piece is a current year volume over prior year volume time’s current year price. So in instances where you have a higher price and large swings in volume, that difference shows a lot in price.

And you can see that in the 13% in the disease prevention area, and it's a function of math. You need to set the static element of that equation in one point or another and we choose to do it as I just described.

So there is some inflation in price there because, especially of the stocking issue on Trifexis. That is part of the reason why Lucas had talked about the overall picture and the price we see to the portfolio is we diced the products into groups and quarters and year-to-date.

There can be lumpiness across the portfolio with things like what I just described, which is a somewhat unique instance to this quarter. So when you normalize for those things, the pricing schemes, the pricing numbers that we see are consistent with the list prices we're taking, the margin recapture in the overall mix of the portfolio.

Yes, Jim, I would just build on, as we've shared pretty openly, we see going medium and long-term, looking at price in the area of about 2% continues to be what we built our plans on. And what are some of the fundamentals critical?

I would say 30 years in animal health of fundamentals really haven't changed. You need to keep innovating and that's what you're seeing here, a representation of a lot of innovation coming in.

Two is offering portfolio of solutions to bigger problems. And then I think just the whole lifecycle management and bringing new innovation to existing products, and example of Credelio cats or Galliprant 100 are examples of that.

So portfolio, innovation, lifecycle management in the targeted countries where you can get that value is what creates that sustainable price and the fundamentals. We feel very good about that.

And again keep your eyes on that 2% as we look at medium and long-term. Did you have a follow-up question, mike?

Yes, thanks. I appreciate the color.

And I want to also want to talk real quick on the Novozymes collaboration and some of the other opportunities there. Just how should we think about your ability to do further partnerships for their deals?

You already have a few ongoing and just how should we think about that part of the business strategy given you are obviously very focused on the internal improvement in the margin progress as well?

Yeah. Maybe Aaron, you can talk about Novozymes and then Lucas, you can talk about overall capital allocation and how we think about partnering in general.

Sure. Thanks, Jim and thanks, Michael for the question.

We're excited about the collaboration that we've just begun with Novozymes. They are a world leader in a fermentation, microbial fermentation product development, and bring a lot of technology and product development expertise to what we believe is a very strong position historically and medicated feed additives and now with our nutritional health business and orientation towards, really reinventing a medicated feed additives and focusing on nutrition and health simultaneously.

There are technologies will help advance us in the field of cattle, probiotics and prebiotics, enzymes, and we're very excited about the fit of the culture, the match of the teams and the prospects for new innovation coming from that collaboration.

Maybe in terms of follow-up, in terms of capital allocation, again, you've heard loud and clear from us that again our priorities will continue to basically find our R&D investment and capital investment as well. Again, we will also make sure that we continue to allocate cash flow to basically return to our target leverage by 2020 of 2.5 to 2.75.

We were also debt-to-EBITDA that those are our priorities for the moment. We will explore again, type of collaborations that will enable us to continue to accelerate our growth into the future.

By the way, we'll find those within again, our operating budgets.

Melissa, we’re ready for the next question.

Thank you. Good morning.

Just a couple of questions, first, could you, when you talked a little bit about trading terrorists before could you tell us if there are any specific events upcoming which could provide some greater clarity? And also what percentage of Elanco revenue is shipment to China?

And the second question is, given that Future Protein and Ruminants & Swine or such a big part of the business? Can you share for us your outlook for some of the species trends market wide as we go through the end of 2018 and into 2019?

So specifically for cattle and poultry and swine. Thank you.

Yes, there's a lot there Kathy. I think we're in today's a good representation here in the United States that there's a lot of dynamics going on in the external world with what's happening with the election.

But I would say this at a very high level, what we see is today probably nothing is eminent are going happen here soon on trade it's going to impact our customers directly. I think you need to look at it.

And we're monitoring as we go into 2019 is the overall economic, state and trade being one of those factors. So as I've shared, there was capacity built in pork and poultry.

Would the expectancy that they were going to have more export markets and that's hindered that a little bit. But I would look at, as we go into 2019, we see cattle recovering, some mostly beef cattle, poultry and swine will be, I think overall globally in pretty sound state.

So then it all comes down to, the grain crops and the amount of inventory and what prices do on grains, the inventories of protein and the price on protein, and then trades impacts on that. So no trade event we see here in the near-term or medium-term that, that is going to impact things negatively or positively.

Of course, we got to watch the China, Asia piece, I think going forward. So that's number one.

I think as you look at – I think the other question was just around future trends. As I mentioned, we’re going to watch, I think the economics especially, but I think the U.S.

protein farmers the most. I think as you look at Elanco’s business, we don't see anything in the shorter medium term that's going to impact our business or forecast materially.

We've got a large Companion Animal business. Our growth drivers are in poultry and aqua.

And most of our businesses is in disease prevention and treatment that isn't driven as much on the economics of the producer. So we feel pretty insulated relative to the short and medium term.

I think we just cannot forget, I think the underlying demand and we seeing it played out as I've mentioned a lot. There's still a need for 75% more protein by 2050 and those dynamics continue to play out, whether it's domestic production growing in Asia and Latin America or just the dependency on trade, but this protein demand, we continue to see the fundamentals of that driving our customers in a significant way.

On the exports to China. Kathy, it's a good question.

The level of detail we haven't disclosed, so we can't provide color there.

Maybe Jeff will provide some perspective on, again, you may see in the slide that again, 50% of our business is U.S., 50% of our business is OUS. And we mentioned already that we have basically business in 90 countries with presence in 50 countries approximately.

So just to give you an idea about, again, the level of business is heavily basically distributed and diversified OUS not providing a lot of exposure to any specific country.

Melissa, do we have more questions?

Good morning. Thanks for taking my questions.

I guess starting off with the comment about the OUS exposure, do you think being in 90 countries and presence in 50 is the right number? And can you talk about kind of where that might go as you start rationalizing your portfolio?

And then second question is your go-to-market strategy. Jeff, could you provide some commentary on your internal sales force and your use of distribution on a go-forward basis?

Thank you.

Great. Lucas, do you want to talk about the overall country exposure and the objectives there?

Well certainly. We were very public about this and intentional about this strategy.

We actually proceed to this talk basically concentrating our presence. We were in the – with processing actually a roughly 60 country and we are reducing that to less than 50 countries.

So we are well ahead on that agenda to concentrate, not only on reducing number of SKUs and the number of products, but also concentrate our presence and leverage the use of distribution in other countries that will basically provide us that, again expertise and presence when we don't have it. So I will turn it to Jeff for the second part of the question.

Yes, great question Kevin. So no question, you see a theme through everything that we've talked about Elanco is we're very focused value generating strategy focused on these three segments that we talked about our categories.

As Lucas just mentioned, we're working really hard to continue to focusing on the geographies that we need to. And we were doing is designing our salesforce to target the highest value, most critical customers.

But let me be clear, distribution has played and will play a key role as we go forward. A few areas that we use distribution the most for, number one is the share of voice to launch products.

They're able to increase our share of voice, increase our call frequency when we're launching products especially that are sales that maybe are a little bit more complex like we see in Companion Animal Therapy. Secondly, as we see them helping us with smaller markets, markets that were not concentrated on and lastly is even smaller kind of SKUs that are a little bit less strategic.

So and we continue to see a distribution playing a role there. We're constantly evaluating the value and the value that they're adding and the cost that they add to us, and I think that dialogue is very productive and is probably as live [as it’s been].

Thank you. End of Q&A

Great, I think that brings us – Melissa, I don't believe we have more questions. So Jeff, I think you had some closing comments.

Can you wrap this up?

Yes. Hey, thank you very much for your time and your interest in our Company.

Most importantly, your support as we begin this journey as a public company. We look forward to building a long-term relationship with you.

We're pleased with the acceleration of Elanco’s growth and meeting our expectation for the quarter. We liked the broad-based results we're seeing from our targeted strategy and will continue to drive our margin expansion agenda and accelerate the execution of our strategic plan.

If you have any questions, we didn't answer, please reach out to Jim. Have a great day.