Covetrus, Inc.

Good afternoon, ladies and gentlemen, and welcome to the CoVetris Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Nick Jansen, Vice President, Strategy and Corporate Development.

Thank you, Ashley. Good afternoon, and thank you for joining us for our third quarter 2020 earnings conference call. Joining me on today's call are Ben Wolin, our President and Chief Executive Officer, and Matthew Fulston, our Executive Vice President and Chief Financial Officer. Ben and Matthew will begin with prepared remarks, and then we'll be happy to take your questions. During today's conference call, we anticipate making projections and forward-looking statements based on our current expectations. All statements other than statements of historical fact made during this conference call are forward-looking, including statements regarding management's expectations for future financial business, operational performance, and operating expenditures. Forward-looking statements may be identified with words such as will, expect, believes, should, or similar terminology, and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These risks and uncertainties include those under the heading Risk Factors in our most recent annual report on Form 10-K, quarterly report on Form 10-Q, and other periodic reports filed with the Securities and Exchange Commission. which are available on the Investors section of our website at ir.covetrous.com and on the SEC's website at www.sec.gov. Forward-looking statements speak only as the data hereof, and except as required by law, we undertake no obligation to update or revise these forward-looking statements. You can find this afternoon's press release announcing our third quarter 2020 results in the accompanying slide presentation for this call on ir.covetrous.com. The release and presentation also contain further information about the non-GAAP financial measures that we will discuss today. Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results. With that, I will now turn it over to Ben to provide the highlights beginning on slide three.

Thanks, Nick, and good afternoon, everyone. We hope everyone listening in on today's call remains well and is successfully managing through the stress and challenges created by COVID-19 and as safely as possible. On the call today, we will summarize our quarterly financial results, update you on our improving market position amidst strong and resilient end markets, detail the progress we are making on executing on our strategic priorities, highlight our recent investment in veterinary study groups, and describe how we are positioning ourselves for success and growth in 2021 and beyond. To start, I want to emphasize how proud I am of our team. Across the globe, the Covetris team has continued to rise to the challenge. Most recently, we successfully executed and delivered strong results during the third quarter, despite continued headwinds created by the COVID-19 pandemic. I am thrilled at how we have created a shared culture of success and how we have embodied our mission in everything we do. always striving to support veterinarians and animal health professionals across the globe to manage and grow their businesses and deliver exceptional clinical care. It is clear that our focused approach, commitment to our team and our customers, and our investment in service and innovation has served us well and enabled us to win new business and drive greater alignment with our strategic partners. Our foundation is solid, our industry is growing, our differentiation in the market is evident, and our outlook is bright. Now, turning to the numbers, we delivered 12% year-over-year organic net sales growth and 20% year-over-year adjusted EBITDA growth in Q3 and have increased our 2020 guidance again. Importantly, our robust Q3 performance cut across all three business segments, where we not only grew adjusted EBITDA, but also expanded our adjusted EBITDA margins. This strong growth was accomplished without the incremental COVID-19 tailwind in our prescription management business that was present in the first half of the year. Still, our prescription management business was able to deliver net sales growth of 43% year over year, a number we are quite pleased with. This growth rate is notably faster than our pre-COVID-19 growth rates as our focus on customer engagement continues to gain steam. We are encouraged by the progress this business has made in scaling its operations while significantly investing in pharmacy capacity and innovation during Q3 in preparation for another projected year of strong growth in 2021. Our progress and improved financial condition also enabled us to make an investment in veterinary study groups in October, which accelerates our strategy to strengthen our customer relationships. Clearly, there was a lot to be encouraged by in our fiscal third quarter, and I'm proud of our team's efforts and accomplishments over the last 12 months, including deftly navigating our business operations during a global pandemic. And yet, There are still many growth opportunities for us in the year ahead as we drive forward with our technology-enabled strategy. These possibilities keep me optimistic about our future as we further synchronize our capabilities in 2021 and beyond. Now, briefly turning to our end market on slide four. Activity inside veterinary clinics in the U.S. remains strong and throughout the third quarter tied to pent-up demand and increased pet ownership and related spending during the pandemic, with veterinary practice revenue growth rates now back to or above pre-COVID-19 levels. This positive trend has generally continued through the month of October. Additionally, it is becoming more apparent that COVID-19 and social distancing has further strengthened the human-companion-animal bond, which bodes well for the future growth rate of our category. These same trends are also occurring globally with many of our international markets seeing strong growth during Q3 following the pandemic-driven slowdown in Q2. While there are still many unknowns as we learn of new shutdowns and emerging coronavirus cases to start Q4 across many of our geographies around the world, we are still encouraged by the resiliency of consumer demand and the animal health community to date. Regardless of short-term ebbs and flows, It is clear that the long-term trajectory of the global companion animal market is on a strong footing, and we remain enthusiastic about our differentiated portfolio of capabilities. Our unique value proposition positions us to capitalize on the tailwinds and emerging trends in the market. Turning to slide five, we outlined four priorities earlier this year to drive our strategy forward. Overall, I'm pleased with our progress and execution. the energy inside the company, and the momentum we are seeing across our business. First, driving our new way of working along with retaining and recruiting the best talent has and will continue to be a critical focus of ours. During Q3, for example, we added several senior leaders in crucial roles to support businesses' needs. Additionally, to drive real and lasting change, and in support of an anti-racist, diverse, inclusive, and equitable culture at Covetris, we have now devoted dedicated resources and launched a new global diversity and inclusion, or D&I, governance and community program at the company. This includes establishing a global advisory board and naming a number of global business unit and regional D&I leaders dedicated to driving forward with our commitments focusing on strategic D&I areas, and ensuring local support. In August, we also launched the CoVetris Hardship Fund to help our colleagues with COVID-19 illness-related hardship. I am convinced we can make our company, our industry, and our society a better place to be, and I'm energized by the passion our team has in driving our mission forward. Second, we expanded adjusted EBITDA margins across all of our business segments during the quarter as we continue to make progress on our commitment to drive focus, improve effectiveness, and increase efficiency throughout the organization. Cost containment and resource allocation remain key priorities for our team as we are committed to taking concrete action to drive long-term margin expansion across our business. One example of this would be our recent decision to exit our distribution operations in France. While we will maintain our technology footprint in France, the distribution business had gross margins well below our corporate average and was losing money given our lack of scale in the market. While this was a difficult decision to make, it was the correct one as we are focused on investing in markets and businesses that can help accelerate the company's growth, returns, and margin profile long-term. Differentiating our capabilities and driving our proprietary products and solutions was our third strategic area of focus, and I would highlight another quarter of solid net sales performance and profit contribution delivered by our prescription management business. As we expected and described on our Q2 call, the COVID-19-related demand that benefited our first half results slowed in Q3 as veterinary clinics and specialty retail stores opened up more broadly as shutdown restrictions eased across most states. However, year-over-year net sales growth of 43% during the quarter was still in excess of what we experienced in 2019 and in early 2020 prior to COVID-19, demonstrating the underlying strength of the online channel and our strategic positioning within it. In addition, we delivered 23% year-over-year same-store sales growth during the third quarter compared to 16% growth for all of 2019, highlighting the success of our customer engagement initiatives that we launched this year and showcasing the significant opportunity we still have in growing our customers' market prospects and driving incremental demand for our supplier partners. With deeper engagement and continued manufacturer support of the online channel, we believe we can sustain this elevated level of same-store sales growth annually over the medium term. I would like to point out that this robust same-store sales growth happened during a quarter when we also delivered strong distribution sales as clinics were ordering more products from us to service increased patient activity inside their practices. This signals that these two channels, in-clinic and online, can be complementary, with the platform helping our customers strengthen their client relationships, improve medical care and prescription compliance, and grow their businesses. Moving to our final strategic priority, Globalize. During the third quarter, we finalized the framework for our next-generation practice management software roadmap, where we plan to embed prescription management, client communications, and various other third-party applications inside the PIMS, creating a singular platform experience for our customers. The development of this unified cloud-based solution is expected to take 12 to 18 months to complete. We also furthered our progress on the technical development work to bring prescription management to Australia and New Zealand in the second half of 2021. We have a significant distribution and software footprint in these markets, and these customers are eager for us to bring e-commerce and prescription management capabilities into their practices to help them compete more effectively and grow their businesses. Now, turning to slide six. I would like to spend the next few minutes discussing a recent strategic investment in veterinary study groups, the leading provider of peer-to-peer learning experiences for veterinary practice leaders in North America. VSG manages a family of more than 50 veterinary management groups, or VMGs, in the United States and Canada, with these groups comprising more than 1,100 members who together own more than 1,500 veterinary practices. This expanded relationship brought together two highly complementary organizations, each dedicated to veterinary practices and committed to driving enhanced patient care, empowering veterinarians to run better businesses and advocating for the veterinary professions. We anticipate our deeper partnership, along with our scale and portfolio of solutions, will provide tangible improvements to VMG membership benefits over time, as well as help VSG identify potential new members that would benefit from the VMG experience. The investment also serves an opportunity for us to accelerate our strategy to drive increased customer alignment and engagement, similar to what we did when we acquired PSI Vet in the U.S. and the premier buying group in the U.K. several years ago. These investments were highly successful for Covetris. with PSI net sales and adjusted EBITDA, for example, growing in excess of 40% and 50%, respectively, since our deeper partnership was formed back in late 2016. And while Matthew will provide more detail on our capital allocation strategy later in the prepared remarks, VSC is consistent with our philosophy of looking for investments in the veterinary channel that are accretive, add scale, offer new avenues for driving our proprietary products and solutions, and enhance our overall growth and margin profile. In short, we are enthusiastic about the growth prospects of VSG as we work together to build upon their longstanding success in the marketplace and drive new value for their members. Finally, turning to slide seven, let me address how we are positioning Covetris for growth in 2021 and beyond. We are focused on improving our commercial effectiveness in order to create greater strategic and financial alignment with our customers in support of our goal of making it even easier and more profitable for them to do business with Covetris. And in 2021, we will work hard to continue to drive increased alignment across our commercial teams to support a more seamless and technology-enabled end-to-end experience for our customers, which we believe drives better healthcare outcomes, efficiency, and revenue growth for their practices. Greater teamwork and enhanced collaboration will also help us secure new business, expand our share of wallet, and reduce our cost to serve. Supporting our proprietary brands and compounding businesses and executing against our platform engagement strategies in North America should also improve our margins and afford us the opportunity to further invest in our growth initiatives. We will focus in 2021 on helping our veterinary practice partners leverage technology to market their businesses more effectively and to deliver an enhanced consumer experience. These customer investments will provide a halo-like effect for Covetris as increased activity inside the practice supports growth in our distribution business and an improved pet owner experience on the prescription management platform should drive increased adoption and engagement for the online pharmacy service. As a reminder, Approximately 5% of our customers' clients currently shop on their online storefront, highlighting the significant growth still available to us as we make it easier for the pet owner to shop on their veterinarian's website. We also have the opportunity to improve engagement with the 1.5 million unique pet owners we have provided service to year to date. Lastly, I would highlight our ongoing investment in B2B e-commerce and new software integrations and partnerships which are designed to make it easier and more seamless to order products from Covetris, including our proprietary products. This and our investment in sourcing excellence will enable us to provide greater value to our customers while also enhancing our margins over time. Overall, I'm very enthusiastic about our ability to drive the business forward. 2020 has been a foundational year, and our focus on the core drivers of our business are now ingrained into our day-to-day operations. We are making investments to support our momentum and are confident in our ability to drive growth in 2021 and beyond. I will now turn the call over to Matthew to provide a financial review of our third quarter.