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spk02: Good morning, ladies and gentlemen, and welcome to the COVID Charge 4 Quarter 2020 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 touchstone telephone. As a reminder, this conference call is being recorded. I would then like to turn the conference over to your host, Mr. Nick Jansen, Vice President Strategy and Corporate Development. Please go ahead.
spk07: Thank you, Jerome. Good morning, and thank you for joining us for Covetris' Q4 and full year 2020 earnings conference call. Joining me on today's call are Ben Wolin, our President and Chief Executive Officer, and Matthew Folson, 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 in 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 and other periodic reports filed with the Securities and Exchange Commission, which are available on the Investors section of our website at ir.covetris.com. and on the SEC's website at www.sec.gov. Forward-looking statements speak only as of the date hereof and accept as required by law. We undertake no obligation to update or revise these forward-looking statements. You can find this morning's press release announcing our fourth quarter and full year 2020 results in the accompanying slide deck 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.
spk06: Thanks, Nick. Good morning, everyone, and thanks for joining us today. I hope everyone is staying safe, and I'm looking forward to the day, hopefully sometime later this year, when we all can spend time again together in person. On the call this morning, we will provide an update on the state of the companion animal and market, highlight our stronger-than-expected Q4 and full-year 2020 financial results, detail our investment, growth, and margin priorities for the upcoming year, and outline why we think 2021 will be another period of growth and operational progress as we capitalize on the opportunity in front of us. Now, starting on slide three with our perspectives on the current state of the companion animal and market. As many of you may already know, The companion animal industry is a growing market and has proven to be quite resilient despite the disruption that COVID-19 has caused around the world. Increased pet adoptions, the ongoing humanization of pets, innovation around enhanced standards of care, and the expansion of new service channels have raised global demand for our products and services. Our U.S. internal data confirms veterinarians were as busy as ever in the second half of 2020 with double-digit practice revenue growth, fueled by a moderate increase in new clients and higher spending per visit. COVID-19, in many ways, accelerated the already favorable end market backdrop and helped our market positioning, which we believe will continue through 2021. Certainly, there will be months and or quarters where we might face challenging comparisons versus 2020 activity, but the underlying factors driving our market endure, and we are well positioned to capitalize on this opportunity in the years ahead. This strong end market backdrop coupled with our improved sales execution and enhanced focus and operating discipline was clearly evident in driving our full year numbers in 2020 as seen on slide four. We delivered 10% year-over-year pro forma organic net sales growth and 13% year-over-year adjusted EBITDA growth in 2020 with our business trajectory accelerating in the back half of the year. Our robust performance was spread across all three of our business segments, where we not only grew adjusted EBITDA, but also expanded our segment adjusted EBITDA margins. Our prescription management business increased pro forma net sales by 50% year over year and meaningfully improved its profitability. We also made solid progress increasing sales of our Covetous branded and proprietary brand portfolio. which combined are now in excess of $325 million, with gross margins that are approximately double our consolidated average. I'll speak more on this opportunity later in my prepared remarks. Finally, the financial progress we made this year also enabled us to meaningfully improve our balance sheet with net leverage now at approximately 3.5 times, which affords us flexibility as we think about funding organic growth and external investment opportunities entering 2021. Obviously, 2020 was a year like none other with the COVID-19 pandemic, yet I am so proud of how our team responded and exceeded expectations across nearly all elements of our strategic plan as seen on slide five. First and foremost, we invested in our people, which led to significant improvements in our organizational health scores. An engaged and motivated workforce translates into better operational performance. That, in turn, helped us attract talent to help drive our transformation forward. We increased our distribution market share in the U.S. and in certain international markets as we focused the company on the core drivers of our business. We sold non-core assets and exited our French distribution business to streamline our company and focus on markets where we have greater opportunities. We also successfully exited all of our TSAs, providing us direct operational control in many of our international markets. We delivered robust prescription management net sales growth as we successfully executed our customer and client engagement strategies launched at the start of 2020. And lastly, we established global sourcing capabilities to drive our Covetris branded and proprietary brand product strategy entering 2021. Clearly, there were a significant number of accomplishments to be proud of, and this was evident in our better-than-expected fourth quarter results. As we look forward and turning to slide six, we are focused on accelerating the contribution from our higher-margin businesses and investing in innovation to sustain our leadership position. To date, we have repositioned our portfolio of businesses. improved our execution and distribution, and delivered against some of our initial strategies for our higher margin products and solutions. While we certainly made good progress in 2020, increasing our overall sales mix and generating more gross profit from our higher margin businesses, which now collectively represent more than 40% of our total company gross profit, there is still significant room to increase both elements in 2021 and beyond as we execute against our priorities. For example, We recently combined our US sales and marketing organizations that we believe will significantly improve our North American commercial effectiveness in 2021. This has created greater strategic and financial alignment with our customers, which we believe will help us secure new business, grow our share of wallet, and reduce our cost to serve. We have also doubled down on our prescription management engagement strategies in 2021, and have also increased our focus on new enrollments to sustain the strong growth delivered in 2020. We are also investing heavily in technology and e-commerce and have added focus to our Covetous branded and proprietary products and solutions to enhance our value proposition. Through these actions, we anticipate making good progress in 2021 as we march towards our longer-term aspirations of delivering adjusted EBITDA margins that approach 10% as compared to the 5.2% adjusted EBITDA margin achieved in 2020. Drilling deeper and looking at the path to future margin expansion and shareholder value creation, you can see on slide 7 the North American gross margin and net sales trajectory of our proprietary products and solutions compared to traditional distribution of third-party products. Clearly, The profile dynamics of our proprietary products and solutions are significantly higher than traditional distribution, and we have now aligned our resources, including our sales compensation metrics, with value creation. As we drive engagement with all IncoVetris customers and increase the penetration of these higher margin products and solutions inside our existing base, we expect to see steady improvement in our consolidated margins. Importantly, approximately two-thirds of our 2021 CapEx budget is growth-oriented and focused on these higher-margin businesses as we are aggressively seeking to expand our market position in North America. And as we think about future M&A and capital deployment moving forward, we believe such activity will be heavily skewed towards advancing these growth and margin objectives. Clearly, the opportunity for consolidation in our market is high, and our global reach and customer access puts us in a position to create value through focused capital deployment. With our increased focus on our Covetous branded products, proprietary brands, and compounding solutions, I thought it would also be useful for investors if we were to talk more about some of the levers we are pulling in 2021 to work to accelerate our growth trajectory in these categories. as seen on slide eight. First, for Covetris branded products, we have launched several new commercial initiatives that have made it easier for veterinary practices during the ordering process to see the value they derive from these products versus alternatives. We have also launched several of these Covetris branded products on our prescription management platform, providing new savings, opportunities for pet owners seeking lower cost alternatives. Second, we have developed new sales and marketing programs that For our family of own brands, this includes VI, Cruza, Calibra, and SmartPak to accelerate our penetration in existing geographies and new markets. We've had significant success, for example, in driving adoption of VI and Cruza throughout Europe by leveraging our broad supply chain footprint in those markets, and we look to replicate this strategy in the U.S. in 2021 and beyond. We plan on making available later this year our market-leading brand of SmartPak supplements to horse owners, barn managers, and trainers in Canada with its strong equine sports tradition. Third, we have a funnel of new products and compounding solutions launching into the market over the next 6 to 12 months that can deliver Covetris-branded value and meet the needs of both customers and pet owners. And finally, we are opening the newest and most technologically advanced compounding pharmacy, and 503B outsourcing facility later this year, which is designed to significantly enhance our operating capacity and increase our commercialization capability for office use and patient-specific medications. In total, these investments offer us the opportunity to advance our customers' objectives and meaningfully accelerate the growth of our proprietary products and compounding solutions in 2021 and the years ahead. As we think through the roadmap of our technology investments on slide 9, 2021 will be an active year for us with a number of major milestones that will not only enhance our value proposition to our customers and their clients, but will also unlock significant sales growth for margin potential for Covetris. For example, while I already mentioned our new state-of-the-art compounding and outsourcing facility scheduled to open in Arizona in Q2, We also have a major pharmacy project underway in Maine that is expected to open in the second half of 2021, which will allow us the ability to deliver products more quickly to our veterinary practice customers and pet owners in the large northeast U.S. market. One of the bigger investments in technology solutions we are making in 2021 is the build-out of our unified cloud-based offering that will bring together our practice management software and our prescription management platform into one module. This new product offering will streamline technology solutions for the veterinary practice, support greater prescription compliance, simplify pet owner engagement, and improve how a practice manages its inventory while creating added visibility into practice management. This build-out will take 12-plus months to complete, but in the meantime, we'll continue to provide upgrades and improvements to our existing practice management software capabilities which are designed to make it easier for these practices to leverage our prescription management and client engagement services. For example, in Q4, we launched the initial functionality that allows veterinarians to create a prescription inside our Avamark and eVet practice management software solutions, and the general release will be available in Q1. We expect additional product features to be introduced to the market throughout 2021. Lastly, I would highlight a number of planned investments and technology enhancements in the consumer experience for pet owners buying products through our prescription management platform, including optimizing the user's journey and mobile experience to increase conversion rates, improving auto-ship management, and delivering better personalization and dynamic content. We are also investing in appointment management and other consumer initiatives that strengthen the connectivity between the veterinarian and the pet owner. We are also launching upgrades in 2021 to our B2B e-commerce platform experience for both distribution and compounding, and pursuing new software integrations and partnerships, which are designed to make it easier for our customers to seamlessly order products from Covetris, including our proprietary products and compounding solutions. Clearly, we had planned for a lot of operational capacity and innovation to bring to market in 2021, which puts Covetris ahead in a fantastic position to help our customers grow their businesses and aid our manufacturer partners to achieve their strategic objectives. Our team is energized by the momentum we have going for us in the market, and we look forward to another year of great success in 2021. I will now turn the call over to Matthew to provide more details on the financials. Thanks, Ben.
spk05: Good morning, everyone, and thanks for joining us today. I will now review our fourth quarter and full year 2020 financial results. and provide additional details on our 2021 guidance. The focus of my comments will be on our non-GAAP results where applicable, as these items provide the most insight into the underlying trends impacting our businesses. Please refer to today's press release for a more detailed description of our fourth quarter and full year 2020 GAAP results. As summarized on slide 11, We finished 2020 with momentum across our businesses, with all three reporting segments contributing to our growth and outperformance versus expectations for the fourth quarter. Favorable end market conditions and our strong operating execution drove a 19% year-over-year increase in adjusted EBITDA and fueled 30 basis points of year-over-year adjusted EBITDA margin expansion during the fourth quarter. Additionally, our net leverage ratio improved to 3.5 times, and we ended the year with approximately $590 million of liquidity, including $290 million in cash and cash equivalents on the balance sheet. Turning to the details and starting at the top of the income statement on slide 12, Govetra's net sales were approximately $1.12 billion in Q4. an increase of 11% year over year on a reported basis. Organic year over year net sales growth was 12% during the fourth quarter and 10% for the full year 2020, reflecting underlying healthy companion animal market trends that are tracking at or above pre-COVID-19 levels across our major geographies. Our improved sales execution and market position in a number of our key markets and the positive trajectory of our prescription management business. While there were some discrete items in Europe that will impact consolidated net sales growth in 2021, which I will detail later, we anticipate another year of strong underlying growth as we capitalize on positive end market conditions and execute our strategic priorities while still investing for growth. Turning to slide 13, Consolidated non-GAAP adjusted EBITDA was $56 million for the fourth quarter of 2020, compared to $47 million in the prior year. The 19% year-over-year improvement reflected strong contributions from our North America and APAC and emerging market segments, which more than offset the impact from the divestiture of skill and continued growth in overhead, as we complete the build-out of the infrastructure necessary to support our independence as a public company. For the full year 2020, as shown on slide 14, consolidated non-GAAP adjusted EBITDA was $226 million compared to our November guidance that called for $213 to $218 million in adjusted EBITDA and the $200 million reported in the prior year. that full year results came in significantly ahead of our initial 2020 guidance offered at this time last year, despite the uncertainty created by the COVID-19 pandemic. The 13% year-over-year growth reflected significant improvements in profitability in our prescription management business in North America, as well as the increased earnings contribution from our supply chain businesses in all three reporting segments, which reflected healthy top-line performance and the impact of cost containment actions. This growth was partially offset by the aforementioned increase in corporate overhead to support our transformation as a new public company and the lost earnings contribution from the divestiture of skilled animal care. Additionally, there was also a several million dollar year-over-year headwind in 2020 tied to increased bonus accruals compared to 2019 given our stronger financial performance that exceeded internal expectations. Moving to our quarterly commentary for our operating segments, beginning on slide 15. North American net sales increased 17% year-over-year on both the reported and organic basis in Q4, and segment-adjusted EBITDA increased 25% year-over-year this with segment-adjusted EBITDA margins expanding 50 basis points versus the prior year. Strong net sales growth in our supply chain business and another quarter of greater than 40% net sales growth in prescription management contributed to our positive performance in the fourth quarter compared to the prior year. Drilling deeper into North American segment trends, starting on slide 16, Our supply chain business organic net sales increased approximately 14% year-over-year in Q4 and 7% for the full year, reflective of healthy end market demand and our improved market position. External third-party data indicated that our U.S. distribution business grew companion animal market share during the fourth quarter relative to the prior year, driven by new account wins our better execution over the last 12 months, as well as the benefit from certain manufacturers reducing the number of distributor relationships they utilize in the U.S. market. Encouragingly, we were able to leverage our improved market position and double-digit organic net sales growth to deliver a significant improvement in profitability, with supply chain adjusted EBITDA increasing to $37 million compared to $26 million in the prior year period. Our North American software business was generally stable during the quarter and for the full year. As Ben mentioned earlier, we are making significant investments in our software capabilities that we expect to drive growth in 2022 and beyond. Turning to slide 17 and our prescription management business in North America. During the fourth quarter of 2020, net sales increased 46% year-over-year to $107 million, and we ended the year with more than 11,100 practices on the platform. Of note, we added approximately 200 net new enrollments during the fourth quarter of 2020, compared to 50 net additions during the third quarter. We have a funnel of good customer prospects and an aligned sales force to drive an increased number of practice enrollments in 2021. The 46% year-over-year prescription management net sales growth delivered in Q4 was an acceleration over third-quarter growth rates and once again tracked above our pre-COVID-19 trajectory as the business continues to benefit from new customer and client engagement strategies. Same-store prescription management platform net sales defined as veterinary practices enrolled on the platform in 2018 or earlier, increased 26% year over year during Q4 and 28% for the full year, which was well ahead of the 16% year over year same store sales growth reported in 2019. Impressively, all cohorts experienced double digit year over year net sales growth for the year and the 2019 cohort had the most productive first year in company history. Encouragingly, the early full-year data on the 2020 cohort suggests similar strength as our 2019 cohort. We also continue to make progress in scaling the financial performance of our prescription management business, with Q4 adjusted EBITDA of $2 million, or $6 million when excluding a $4 million legal reserve taken during the quarter for historic litigation at Legacy Vets First Choice, giving us a $3 million underlying improvement versus the prior year. For the full year, and when adjusted for the legal reserve, 19% of the year-over-year dollar growth in pro forma net sales dropped down to adjusted EBITDA, which is at the high end of our 15% to 20% target on a rolling 12-month basis. As a reminder, investments tend to be lumpy quarter to quarter, and therefore we believe looking at this metric over a 12-month period is the best way to evaluate our success in driving disciplined growth in this business. Turning to our European business segment on slide 18, Organic net sales increased 5% year-over-year in Q4 and 6% for the full year, reflecting end-market growth and strong sales execution by our European team, despite the challenges presented by COVID-19. We had healthy Q4 organic net sales performance from our businesses operating in the Netherlands, Ireland and Romania. Strength in these markets helped offset significant weakness in Germany and France. As a reminder, our 3PL transition in Germany has not been as smooth as anticipated, and we exited our low-margin supply chain business in France at the end of the year, given market challenges. These two items will collectively reduce 2021 revenue by more than 70 million relative to 2020 levels. Turning to profitability, European segment adjusted EBITDA in Q4 was flat year-over-year at 18 million, with margins declining 10 basis points year-over-year to 4.5%. It's important to note that if we exclude the impact of the divestiture of skill, the noise around our JV in Spain, and the impact of FX, European segment adjusted EBITDA increased 15% year-over-year and margins expanded 40 basis points, reflecting solid underlying operating leverage on mid-single-digit organic net sales growth. Moving on to our APAC and emerging markets segment on slide 19, our team delivered a 14% year-over-year increase in organic net sales for both Q4 and full year 2020, maintaining our recent momentum and reflecting our strong sales executions. We continue to see strong double-digit growth in Australia and Brazil, with more modest growth rates in New Zealand. Gross margins expanded 90 basis points year over year in Q4, as we continue to make good progress driving our proprietary products. Segment-adjusted EBITDA increased 80% year over year during Q4, and margins expanded by 280 basis points year over year. driven by gross margin improvement and the positive operating leverage from better-than-expected net sales, as well as strong cost discipline. Turning briefly back to our consolidated results, Q4 gap net loss was $4 million, or a loss of $0.04 per diluted share. Non-gap adjusted net income, which excludes special items, as well as acquisition-related intangibles amortization and other items, was 28 million during Q4 versus 20 million in the prior year period. Now turning to our balance sheet on slide 20. Our reported net leverage at the end of the fourth quarter was three and a half terms as compared to 3.6 terms at the end of the third quarter and now sits at the top end of our long-term targeted range of three to three and a half times. Our cash balance dropped to approximately 290 million at December 31, 2020, as compared to 355 million on September 30, 2020, primarily reflecting our decision to prepay the 60 million in term loan principal amortization for 2021 in December of last year, which will reduce our interest expense by more than $600,000 this year. Underlying cash generation was positive during Q4, and the improvement in adjusted EBITDA year over year enabled the sequential improvement in our net leverage ratio at year end. We ended Q4 with nearly $590 million in available liquidity and with 2.3 turns of headroom under our net leverage covenant as defined in our credit agreement. With our balance sheet now in a much stronger position, we have flexibility in 2021 to fund both internal investments and pursue external growth opportunities. Now turning to our 2021 guidance, as outlined on slide 21, we continue to forecast adjusted EBITDA in the range of 240 to 250 million for 2021. This outlook balances the underlying momentum we have across many of our businesses entering the year with planned investments to support future growth as well as the impact of discrete challenges in Europe. Additionally, our outlook assumes an end market growth rate that is closer to the historical trend line of mid-single digits versus the above trend growth rates seen in many of our markets in 2020 driven by COVID-19. With this market framework in mind, Our year-over-year organic net sales growth is expected to be 2.5% to 3.5% in 2021. This includes strong net sales performance in North America, which is expected to grow low teens year-over-year organically, including 30% to 40% year-over-year growth in prescription management and mid-to-high single-digit year-over-year growth in supply chains. Europe is expected to decline low teens year-over-year in 2021 on an organic growth basis. This includes an approximate 30% year-over-year sales decline in the UK tied to a manufacturer and customer loss and the continued challenges in Germany tied to our ongoing 3PL transition, which we forecast will reduce net sales in that market by nearly 20%. Excluding these two markets, our European segment is expected to grow low to mid single digits and in line with market growth rates for the region. APAC and emerging markets is also expected to grow in the low to mid single digits year over year in 2021 on an organic basis off a challenging year over year comparison. In total, and when excluding the discrete headwinds in the UK and Germany, Our organic year-over-year net sales growth in 2021 is expected to be in the high single digits, which is more reflective of our long-term growth opportunity. Other elements of our 2021 guidance, including capital expenditures of 55 to 65 million, of which approximately two-thirds is focused on growth, and adjusted EBITDA to free cash flow conversion between 30 and 40 percent, which is an improvement versus 2020 performance as we cycle through some of the more significant one-time cash costs tied to our transformation. We continue to target 50% adjusted EBIT data free cash flow conversion over the longer term. And as we think about the quarterly cadence for 2021, we expect the first half of the year to reflect more challenging year-over-year comparisons given the temporary cost containment actions implemented last year during the height of the COVID-19 uncertainty, the timing of certain investments in 2020, and the spike in net sales seen in our prescription management business tied to the start of the pandemic last year. Additionally, the first quarter of 2021 has two fewer selling days year over year, has faced some incremental weather-related headwinds, and we'll face a more difficult comparison as a result of the COVID-19 inventory stocking dynamics during March of 2020 in many of our international markets. Lastly, we anticipate growth in our prescription management business to track towards the lower end of our 30% to 40% year-over-year growth target in the first half of 2021 and the higher end of the target in the second half of the year reflective of the COVID-19-related year-over-year comparison dynamics just described, as well as certain discrete factors such as major supplier shortages in therapeutic diets and some shipping challenges at our primary carrier in the first quarter. Taking these aggregate net sales items, as well as the timing of certain investments into consideration, we expect adjusted EBITDA in the first half of the year to approximate 45%, of our full year 2021 guidance. With that, I'll now turn the call back over to Ben for some brief closing remarks.
spk06: Thanks, Matthew. In closing, and as outlined on slide 22, we have a solid foundation in place after delivering a very successful 2020, and we have good visibility and a clear plan for our efforts to deliver another strong year in 2021. Our end market is healthy and has proven durable throughout COVID-19. And our differentiated value proposition is resonating in the marketplace, which is giving us confidence to further invest in people and innovation to advance customers' growth objectives. We are confident in our strategy and believe we are well-positioned to deliver improved outcomes for our customers, their clients, and our manufacturer partners and create shareholder value as we capitalize on our opportunity and expand our margins. This concludes our prepared remarks, and I will now turn the call back over to Nicholas Jansen to moderate the Q&A session. Thanks, Ben.
spk07: Now we begin the Q&A section of our call. We want to take as many questions as possible, so we ask you to limit them to two and then re-answer the queue should you have an additional one. So, Jerome, please provide instructions, and we are ready to take the first question.
spk02: Ladies and gentlemen, If you have a question at this time, please press tar, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of John Crager with William Blair. Your line is open.
spk08: Hi, thanks very much. Hey, guys. Ben, could you talk a little bit more about how you're going to address some of the issues that you've mentioned in Germany in particular? How long will it take to get that fixed, and when would you expect growth in that region to normalize?
spk06: Yeah, thanks, John. Good to hear from you. The team has obviously been very focused on that, and we're disappointed with how challenging the transition was. It has started to get better really in Q4 and early into Q1, but I expect it will still be challenging through the first half of 2021. But we do think that, you know, our market position, you know, will be able to be, you know, will start to grow again, you know, in the back half of next year, of this coming year, sorry.
spk08: Got it. Thank you. And then you outlined – Sounds like you're investing in compounding with some new fulfillment assets. Any plans to take that to Europe or Asia?
spk06: Yeah, I think in the long term, that's certainly an opportunity. There's obviously, as you know, different regulatory environments in those different countries. I think for now, at least in the short term, the focus is squarely on North America when it comes to compounding. We feel like We really are in a unique place given our sales access, our prescription management platform, our investment in facilities, product development. So I think that that can be a big growth driver both on the top and bottom line in 2021 for us.
spk05: Okay. Thank you.
spk02: Your next question comes from the line of Balaji Prasad with Barclays. Your line is open.
spk04: Hi, good morning, and congratulations on the results. A couple of questions from me. Firstly, on the operating margin side, I find it interesting that APAC and EM at 7.9% is higher than North America at 7.4%. So can you help us understand this dynamics and also try to get a sense of the underlying EBITDA or optimal EBITDA for both of these regions? Secondly, on VSG, are you in a position to provide some update now since your investment, any operational changes done, and anything in terms of tangible progress or changes that we can see in the near term? Thank you. Sure thing.
spk06: I'll have Matthew answer the first part of your questions on APAC operating margins, and I'll handle the second part of the question on VSG.
spk05: Yeah, I think we enjoy a really nice market position in APAC. We've got a fantastic team down there that's been really delivering tremendously for the last 18 months. And in fact, we see nothing but, you know, further opportunity down in that region as we think about the possibility of taking the prescription management platform down there. So I think that's an area where you'll see us focus and we're really proud of the performance. We talked a lot about the work we need to do to improve our margins across the board and drive that EBITDA margin closer towards 10% over time. A lot of what Ben talked about is our focus in those key areas on that slide around prescription management, around the proprietary brands, and around compounding where we do enjoy those premium margins. And that's where the focus of our investments and our efforts are. Yep.
spk06: And Balaji, you know, as it relates to VSG, obviously we're about one quarter into that acquisition so far. So good. You know, it really is a great asset, uniquely positioned as a, you know, study group partner for the veterinary industry. And in the coming quarters, what investors as well as the ESG members should come to expect is more and more innovation coming out of Covetris that is brought to them in a unique fashion, whether that's bringing things like prescription management and compounding combined with distribution together with them in a unique selling model. So it's still early, but we're cautiously optimistic about the progress that we can make on that front.
spk04: Thank you.
spk02: Your next question comes from the line of John Block with Spiffle. Your line is open.
spk03: Great. Thanks, guys. Good morning. Long first one, and I'll try to keep the second one tighter. But for the quarter, the $56 million versus $47 million in adjusted EBITDA, so up $9 million. But I just want to make sure. Skill was a $3 million headwind, and the $4 million legal – Matthew, is in the $56 million, call it, and then maybe it depends on how we want to count bonus payments. I guess what I'm trying to get out there is normalized. Do we think about year-over-year growth closer to 30% plus versus what you guys printed? And then a tack on to that is how do we think about the corporate overhead in 21 versus 20? I think that was a pretty big $22 million headwind in 2020. Thanks.
spk05: Yeah. Let me start with the legal reserve. That is in that number and was a headwind. And obviously, as you mentioned, skill was another drag on earnings. So Q4 was a positive surprise for us. We had strength in all three markets beyond what we expected. I think when the markets go into deeper lockdown, it seems to drive more activity with people and their animals. And And we were pleasantly surprised across all three markets in the fourth quarter.
spk03: Okay, great. And for that, Charlie, the follow-up, just for the 21, how we think about corporate in terms of the year-over-year, Edwin?
spk05: Yeah, I don't think you'll see anything really material in corporate. It'll be a few million, nothing like the progress we had to make in getting off those 72 TSAs in 2020, which took a lot of stand-up of corporate capability.
spk03: Got it. Perfect. And then sort of a longer-term question, Ben, if you could just talk to you, I think you alluded to the 10% long-term adjusted EBITDA margins that you threw out there. Maybe if you could talk to the timing behind that and the construct. In other words, do we think about a supply chain and software biz of call it 7% to 8% or high single digits or prescription management 15% plus, and then when you wait the two out, you arrive at a 10% bogey. Thanks for your time.
spk06: Yeah, I think it really is reflective of a revenue mix shift that is already occurring inside of the business. In my prepared remarks, I mentioned that gross profit on a total basis is now You know, 40% of that gross profit is coming from products and services that are unique to the company, whether that be proprietary brands or compounding or prescription management. So the driver of going from 5% to 10% adjusted EBITDA margin is that increased penetration of those unique services. We do think, you know, distribution revenue will continue to grow, but certainly not grow at the pace of those other efforts. In terms of timing, you know, it's a multi-year ambition, but we think that every year that we can make steady progress in that direction, and I think 2020 was reflective of a kind of first step on that path.
spk03: Perfect. Thanks for your time, guys.
spk06: Yep.
spk02: Your next question comes from the line of David Wessenberg with Guggenheim. Your line is open.
spk09: Hi Ian, thanks for taking the question and congrats on a really great year here. Can you talk about the prescription management potential in Europe? I know early in the acquisition rationale it was about the revenue synergy about building on the Covetris or the legacy Henry Schein business there and how that kind of might help you in terms of your growth in kind of a tough macro in Europe.
spk06: Yeah, you know, clearly there's long-term opportunity all over the world, I think, for prescription management. I mean, generally the value proposition is one that we think can resonate in every market. You know, for the company, what we're balancing is just obviously a white-hot opportunity here in the U.S. and, you know, how much capital we should invest in the short term against, you know, international expansion versus U.S., So I do think that, you know, it can help us in a market like the U.K., which we mentioned is under pressure in terms of, you know, our value either to customers or manufacturers. But I think in terms of the P&L, you know, we don't expect, you know, significant impact in 2021 on any international expansion.
spk09: Got it. All right. No, thank you very much. And then how do we think about the move to the cloud in PIMS and then strategically how we should think about the PIMS business? Should we still think about this as kind of a bridge between distribution and prescription management, or maybe that was how I thought about it and not necessarily how you thought about it in terms of a long-term strategic use of your very high market share in the PIMS? Obviously, that's my last question.
spk06: Yeah, no, I think it's a good way to think about the business. It's clearly kind of a nexus for the other parts of the business. And while it hasn't been a big top-line grower, it's obviously a very significant EBITDA contributor. And on top of that, it's a real gateway to our other products and services. So one of the things that we mentioned in the script is we are now – surfacing prescription management opportunities embedded into AvaMark and eVet practice. And that's just kind of one of many different things that we look to do in terms of using our PIMS footprint to drive adoption of other CoVetris products and services. So the investment in the cloud is really all about both a modernization of that system, which should be a benefit to both our customers in terms of ease of use, maintainability, access to upgrades, as well as an ability for the company to do faster integrations of various products and services across the Covetris family.
spk09: Thank you.
spk02: Your next question comes from the line of Nathan Rich with Goldman Sachs. Your line is open.
spk01: Hi, good morning. Thanks for taking the questions. I guess I wanted to start off with the EBITDA guidance and trying to kind of marry it with the top line outlook that you gave. It seems like when we think about the growth in the prescription management business, that seems to be the primary driver of the EBITDA growth year over year. And I guess, Matt, I guess I'd be curious just to kind of get your view when we look at kind of the underlying businesses across the different regions. Do you feel like that the kind of growth in kind of North America and APAC is kind of balanced by the headwinds that you called out in Europe? So we should think of that kind of the supply chain business as relatively flattish and the prescription management business as kind of driving the incremental growth in EBITDA year over year, if that makes sense.
spk05: Yeah, I think in a general sense, that's a good way to look at it. Clearly, you know, dropping down 20% of the incremental revenue to EBITDA in that business as we've consistently shown now, is a nice driver of profit going forward. We think the distribution business is going to be strong in North America, and we think it will be pretty strong again in APAC. Europe does present a bit of a drag here, both in the UK and Germany. As Ben said earlier, we think we can see a path to things improving in Germany in the back half. But I think that's sort of the broad... I think you got it right.
spk01: Okay, that's helpful. And, Ben, maybe looking a little bit longer term, it's interesting the slide that you guys had on sort of the incremental gross margin across the different businesses. When we think about like the software services business, you know, that growth seems to have been relatively flattish. I guess what do you feel like it's going to take to drive growth in that area? segment. And what type of growth do you think is reasonable kind of over the long term? Because if you can grow that business, obviously very accretive from a margin standpoint. So we'd just be curious to get your outlook for that segment there.
spk06: Yeah. 2020 was such an interesting year on so many fronts. I think on products and services that require the customer to make significant changes to their business, we saw a huge pullback. And I think you hear about that from other peers in our category as well. So software clearly fits into that category, and I think vets were just not in a position to want to make large wholesale changes to their practice. So we do think that business can re-accelerate into kind of a mid-single-digits grower. I would also just point out, though, that for us, and David Wessenberg kind of alluded to this in his questioning, the PIMS is really this great gateway to other parts of the business. So like in the U.S., where we're close to 60% market share for that business and with prescription management sitting at around a third of market share, the combination of those two software assets together from an end user standpoint provides this great on-ramp for prescription management. So when I evaluate the success of that business, I think about both it on a standalone basis, how much revenue and EBITDA is it producing, as well as its ability to drive other incremental products and services for co-veterans. And certainly in 2020 and 2019, we would have never had the prescription management growth that we did if it weren't for the install base of our PIMS business.
spk01: Makes sense. Thank you.
spk02: Again, ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. I'm showing no further question at this time. I would like to turn the conference back to Nick Jensen.
spk07: Thank you so much, Jerome, and thanks for everyone for attending today's call. We hope to connect with all of you in the coming months at several investor conferences. We'll talk soon. Thank you.
spk02: Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. May we all disconnect.
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