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spk03: Good afternoon. My name is Anne, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Covetrous First Quarter 2021 Earnings Conference Call. I would now like to turn the call over to Mr. Nicholas Jansen, Vice President, Strategy and Corporate Development. Please go ahead.
spk09: Thank you, Anne. Good afternoon, and thank you for joining us for Covetrous' Q1 2021 Earnings Conference Call. Joining me on this afternoon's call are Ben Wolin, our President and Chief Executive Officer, and Matthew Folston, 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, 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 first quarter 2021 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.
spk10: Thanks, Nicholas. Good afternoon, everyone, and thanks for joining us today. I hope everyone remains safe and well. On the call this afternoon, we will discuss our strong Q1 financial results and the increase to our 2021 full-year guidance outline the progress we are making in driving sales in our higher-margin businesses, provide you with an update on some of the recent milestones tied to our strategic initiatives that we outlined earlier this year, and highlight our commitment to social responsibility and sustainability ahead of the launch of our first-ever ESG report scheduled to be released later in 2021. Starting on slide three with our quarterly highlights, Q1 was strong across nearly every metric in the business, including 4% year-over-year organic net sales growth or a more robust 12% when excluding the impact from the previously announced items impacting our UK and German distribution businesses. Importantly, our North America segment grew organic net sales 16% year-over-year. When looking at the broader market, we can see that The companion animal and market remained healthy during Q1, a continuation of the positive trend we have seen since shortly after the pandemic started, and our sales execution continues to drive above-market growth in many of our geographies with particularly strong performance in the U.S., as I just described. Importantly, we leveraged this positive top-line growth into 19% year-over-year adjusted EBITDA growth as we continue to drive above-average growth in our higher margin products and services and maintain cost discipline. We also had another strong quarter in prescription management, which delivered accelerated year-over-year same-store sales growth and the highest number of quarterly new gross practice enrollments on the platform in over 12 months. Additionally, we made good progress on our synchronization efforts during the quarter, with our aligned North American commercial organization driving increased adoption of the all-in Covetous solution. which represents approximately 10% of our combined U.S. customer base, or a 40 basis point improvement relative to the prior year. Revenue per all-in customer grew more than 20% year-over-year in Q1, or double the rate of growth of our average revenue per customer in the U.S. We continue to see a significant opportunity to drive deeper engagement with our customer base as we gain further traction with our commercial model which incentivizes our team to drive adoption of our portfolio of higher margin solutions. Finally, we also made significant progress on bringing new talent into the organization that will help accelerate our transformation efforts, including several new senior roles to Covetris. Link Wellborn as our Chief Veterinary Officer of North America, Deb Sharkey as our Chief Consumer Officer, and Pete Perrone as President, Strategic Partnerships. This list does not include several other critical hires in the areas of technology, brand, and consumer that we believe will strengthen our product roadmap and accelerate our progress against our strategic objectives. On this note, and as discussed on our year-end call back in early March, we are focused as an organization on accelerating the financial contribution of our higher margin businesses and investing in innovation to sustain our leadership position. As seen on slide four, we made good progress in delivering against this objective during Q1, where we drove double-digit year-over-year growth in net sales and gross profit in these categories in the first quarter when excluding the divested skill business in the prior year period. These growth rates were well in excess of the rest of our portfolio, and these businesses now collectively represent more than 40% of the company's consolidated gross profits. or nearly a 400 basis point year-over-year increase. We are encouraged by this trajectory and expect to see more progress in the quarters ahead as our recent strategic actions build momentum. And while distribution growth's profit was relatively flat year-over-year during the first quarter on a global basis, our businesses in North America and APAC and emerging markets did see growth, and we remain optimistic that the challenges in Europe are isolated and temporary. Prescription management, SmartPak, Cruza, and VI all had strong performances in Q1, and we expect to see further momentum in areas like Covetris-branded product and compounding as we progress through the balance of the year based on recent investments in innovation and capacity expansion plans for those businesses. As we drive innovation and continued growth in our existing portfolio of higher-margin businesses, we should expect continued gains in our consolidated gross margins. which expanded 40 basis points year over year during Q1 when excluding skill in the prior year period. We also believe that capital deployment can help further advance our growth and margin objectives. Clearly, the opportunity for ongoing consolidation in our market is high, and our global reach, software assets, and customer access put us in a position to create significant value through focused capital deployments. Opportunities where we can own more margin, strengthen our relationship with the customer, drive demand, and win with the pet owner are our primary areas of focus. Turning to slide five, I now want to highlight several of our recent operational highlights that support some of the strategic priorities we outlined earlier in the year. In Q1, we made significant progress on a couple of our larger capital projects that are currently underway. with the build-out of a brand-new, state-of-the-art compounding and 503B outsourcing facility nearing completion in Arizona and anticipated to be open by the end of the second quarter. As a reminder, this project is designed to significantly enhance our operating capacity and increase our commercialization capability for office use and patient-specific medications. We also continue to roll out new technology in our distribution centers across the U.S., which will provide several key benefits for our customers while providing significant efficiencies and working capital benefits for Covetris. And our new pharmacy in Texas to support large animals opened in March, providing access to a new growth opportunity in this small but growing vertical for the company. Our recent investments in our consumer organization also started to pay initial dividends during the first quarter. where we deployed new marketing capabilities and tested new preventative messaging to pet owners that drove a 26% year-over-year increase in the number of new pet parents to the prescription management platform in Q1. These incremental investments exceeded our return thresholds for lifetime value and further support our goal to deliver 30% to 40% net sales growth in our prescription management business in 2021. We've also seen great retention of the buyers acquired last year during the COVID-19 pandemic, and we continue to see healthy enrollment and growth in our auto-ship services, which provides the underlying foundation for our sales trajectory. Additionally, the team continues to optimize the consumer experience on the storefront, which has improved site navigation and checkout for pet parents and is driving encouraging conversion metrics. The addition of certain Covetous-branded and proprietary product SKUs onto the storefront also serves as an incremental opportunity as we drive future adoption of our own products. And before turning to software, our consumer team has also done a tremendous job driving growth in our equine e-commerce business, SmartPak, where subscriptions grew an impressive 9% year-over-year during the first quarter. Moving to our technology solutions, we are now ready for the full launch of built-in e-prescribing capabilities inside our Avamark and eVet practice software systems, which is a major milestone for the company as we look to drive tighter integration and improve functionality between our prescription management and practice management software systems. Combining this added functionality with our investments to make it easier to upgrade to our latest software versions provides added value to our existing software customers, and should unlock new revenue opportunities for Covetris, including in areas like credit card processing. We're also making great progress on the build-out of our next-generation cloud-based software solution, which we continue to target for Q4 launch, with the additional functionality rolling out throughout 2022. 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 performance. We believe this new platform will drive significant value for our customers and for Covetris. Finally, on slide six, with Covetris now being public for a little over two years and with our first ever ESG report set to be released later this year, I thought this would be a good time for us to share some of the good progress we are making with respect to all our global ESG initiatives currently underway and provide an update on the company's commitment to sustainability, social responsibility, and good governance. As a global animal health company with a mission to advance the world of veterinary medicine, we are dedicated to providing ethical, sustainable, and socially responsible solutions that improve the lives of our employees, customers, and partners while positively impacting the communities we serve. Over the past year, we have found ourselves living in a time that reminds us of the importance of community support and the need for organizations and individuals to simply do good, one of our core values. Within Covetris, the spirit of social responsibility has always been strong, and all the time we are developing new ways for Covetris to better serve its various stakeholders. From our longstanding support of animal shelters and assistance dog programs, To our teams resolved during moments of crisis like the Australian bushfires and now COVID-19, Covetris is making a difference all around the world. We've also committed to cataloging and benchmarking our own environmental footprint and building resilience to climate impacts into some of our business models in order to improve sustainability and to reduce our collective environmental impact. This also includes our company's commitment to drive real and lasting change. taking affirmative steps to garner support of an anti-racist, diverse, inclusive, and equitable culture at Covetris. To drive this change, we have devoted dedicated resources and defined a new global diversity and inclusion governance and community set up inside the organization. And as part of our path forward, we have made five commitments. First, to have a diverse workforce that is demographically reflective of our society at all levels. Second, to do good by changing both Covetris and the industry we work within. Three, to foster diversity and inclusion for all employees throughout extensive training across the company. Four, to create a workplace of inclusion and belonging with the launch of new employee resource groups. And fifth, to be transparent and be publicly accountable for a more diverse workforce at all levels like we are doing here today. This is our initial commitment to not only do good, but to be better, and we will keep you informed of our progress in the quarters and years ahead. In summary, our foundation is solid, our market positioning is improving, and we continue to make good progress on many of our strategic initiatives, which gives us the added confidence to increase our full-year 2021 guidance for organic net sales growth and adjusted EBITDA. And I am so proud of the resilience of our team and their desire to drive real and lasting change and to deliver better outcomes for our customers and their clients, which makes me increasingly optimistic about the trajectory of our business and our opportunity moving forward. I will now turn the call over to Matthew to provide more details on the financials.
spk05: Thanks, Ben. Good afternoon, everyone. Thanks for joining us today. I will now review our first quarter 2021 financial results. and provide additional details on our positive revision to our 2021 outlook. 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 first quarter 2021 GAAP results. As summarized on slide eight, Q1 was another strong quarter for Covetris. with 4% year-over-year organic net sales growth and $57 million in adjusted EBITDA, both of which eclipsed expectations as we continue to successfully execute against our strategy and deliver strong results in an end market that continues to see above-trend growth. This was particularly evident in our North America and APAC and emerging market segments and in many of our businesses in Europe. As Ben mentioned, our continued focus on driving double-digit net sales growth in our portfolio of higher margin technology, e-commerce and proprietary products, which now collectively represent 43% of our consolidated gross profit, also helped fuel 70 basis points of year-over-year adjusted EBITDA margin expansion during Q1. Finally, while our reported net debt to last 12 months adjusted EBITDA ratio did increase a modest amount as compared to year-end levels to 3.7 times, given the normal seasonal cash outflows we typically see in our business during Q1. Our use of cash during the quarter did improve versus the prior year period, and we remain on track to deliver our targeted 30% to 40% adjusted EBITDA to free cash flow conversion in 2021. Turning to the details on slide nine, Covetras net sales were approximately 1.1 billion in Q1, an increase of 3% year-over-year. Organic year-over-year net sales growth was 4% during the first quarter, reflecting a healthy companion animal end market, strong sales execution, and continued growth in prescription management. These positive trends were partially offset by the difficult comparison we had in the prior year when we experienced approximately $35 million in inventory stocking that poured forward demand into Q1 out of Q2 because of the onset of COVID-19, as well as the headwinds previously disclosed in our UK and German markets. Excluding these two markets, total company pro forma organic net sales increased 12% year over year highlighting the underlying health of our overall business. Turning to slide 10, consolidated non-GAAP adjusted EBITDA was $57 million for the first quarter of 2021, compared to $48 million for the prior year period. The 19% year-over-year improvement reflected positive contributions from all three segments, particularly in North America, as well as a modest FX tailwind which more than offset the impact from the divestiture of skill and growth in overhead as we complete the final build-out of the infrastructure necessary to support our independence as a public company. I would also mention that the COVID-19 inventory stocking demand pull forward, witnessed in March 2020, created an additional $4 million of adjusted EBITDA headwind year over year during Q1. In other words, The year-over-year improvement in adjusted EBITDA was even more impressive than the headline. Moving to our quarterly commentary for our operating segments, beginning on slide 11. North America net sales increased 15% year-over-year in Q1 and 16% year-over-year on an organic basis. Segment adjusted EBITDA increased 27% year-over-year in Q1 with segment-adjusted EBITDA margins expanding 70 basis points versus the prior year. Positive leverage of double-digit net sales growth in our supply chain business and mid-30% net sales growth in prescription management contributed to our segment margin expansion during Q1. Drilling deeper into North American segment trends starting on slide 12, Our supply chain organic net sales increased 13% year-over-year in Q1, reflective of healthy end-market demand, our improved market position in distribution, and continued momentum in SmartPak. Supply chain adjusted EBITDA increased to $37 million compared to $30 million in the prior year period as the company was able to deliver operating leverage off the robust net sales performance during the first quarter. Our North American software business was generally stable from a net sales perspective, but we were able to drive year-over-year gross margin and adjusted EBITDA improvement during the quarter due to the mix of revenue delivered in Q1. Turning to slide 13 and our prescription management business in North America. During the first quarter of 2021, net sales increased 33% year-over-year to $112 million and we ended the quarter with more than 11,400 practices on the platform. We added approximately 300 net new enrollments during the first quarter of 2021, compared to 200 net additions during the fourth quarter of 2020. Our aligned commercial organization helped drive the sequential improvement in net additions, and we have a strong funnel of additional prospects heading into the second half of the year. The 33% year-over-year net sales growth delivered in Q1 was modestly ahead of the commentary that we laid out on our Q4 earnings conference call back in March and includes an approximate 300 basis point headwind from a change in corporate policy tied to the recognition of certain manufacturer incentives, which are now reflected as a reduction in cost of goods sold versus previously included as net sales growth. and a 400 basis point headwind from two fewer selling days year over year. In other words, the underlying trends in this business remain quite strong. In fact, March 2021 net sales of 46 million increased 40% year over year, despite the policy change and the challenging comparison created by the beginning of the COVID-19 demand spike in the prior year period. While Q2 faces an even more difficult year-over-year comparison, our recent results keep us optimistic regarding the trajectory for this business. And we remain on track to deliver against our outlook that called for first half 2021 prescription management net sales growth to be at the low end of the 30% to 40% forecasted range for the full year year-over-year growth. Same store prescription management platform net sales defined as veterinary practices enrolled on the platform in 2019 or earlier, increased 30% year-over-year during Q1, which was an acceleration from Q4 and full-year 2020 levels, aided by the inclusion of our sizable and highly productive 2019 cohort entering the same store base. All cohorts once again experienced double-digit year-over-year net sales growth during the first quarter, We also continue to make progress in scaling the financial performance of our prescription management business, with Q1 adjusted EBITDA of $6 million, a $2 million improvement versus the prior year. Over the last 12 months, and when adjusted for the legal reserve taken in the fourth quarter of 2020, 15% of the year-over-year dollar growth in net sales has converted to adjusted EBITDA in our prescription management business. While we certainly face a challenging year-over-year comparison during Q2 for adjusted EBITDA in this business, given the mismatch of higher revenue and reduced expenses in the prior year because of COVID-19 market dynamics and certain temporary cost actions taken by the company in response to the uncertainty last year, we remain committed to converting at least 15% of the year-over-year dollar growth in net sales to adjusted EBITDA for this business for the full year of 2021. Turning to our European business on slide 14, organic net sales decreased 12% year-over-year in Q1, reflecting the previously disclosed headwinds in the UK and in Germany, and the difficult comps from the prior year period from COVID-19 inventory stocking, which more than offset strength in our businesses operating in Netherlands, Ireland, and Belgium. We also had very strong performance in our proprietary brands businesses of Cruiser and VI, where organic net sales increased double digits year over year. Encouragingly, we have made good progress in Germany in stabilizing our customer base and improving our service levels following the challenged 3PL transition during Q4. which gives us confidence that we can begin to return to growth in that market in the second half of the year. Turning to profitability, European segment adjusted EBITDA in Q1 increased 17% year over year to 21 million, with margins expanding 150 basis points year over year to 5.8%. The European team did an outstanding job managing expenses considering the sales challenges in the UK, and the business also benefited from the strength in Covetrous branded and proprietary brand sales, which enabled a 3 million year-over-year increase in segment-adjusted EBITDA, despite net sales declining 65 million year-over-year due to the aforementioned headwinds. Moving on to our APAC and emerging markets segment on slide 15, Our team delivered a 7% year-over-year increase in organic net sales in Q1, reflecting another quarter of strong sales execution, particularly in our Brazilian and Australian markets. We also delivered strong results in proprietary products in our small but rapidly growing business in China. This growth was particularly impressive considering the difficult year-over-year growth comparison from the prior year. which included COVID-19 inventory stocking benefits. Gross margins expanded 140 basis points year-over-year in Q1 as we continued to make good progress driving our proprietary products. Segment-adjusted EBITDA increased 43% year-over-year during Q1, and margins expanded by 150 basis points year-over-year, driven by gross margin improvement, and the positive operating leverage from better-than-expected net sales, which more than offset the headwind from the COVID-19 inventory stocking benefit that occurred in the prior year. Turning briefly back to our consolidated results, Q1 gap net loss was $16 million, or a loss of $0.11 per diluted share, versus a net loss of $33 million, or a loss of $0.30 per diluted share in the prior year period. Non-GAAP adjusted net income, which excludes special items as well as acquisition-related intangibles, amortization, and other items, was $29 million during Q1 versus $20 million in the prior year period. Now, quickly turning to our balance sheet on slide 16, our reported net leverage at the end of the first quarter was 3.7 times as compared to the 3.5 times at the end of the year. Our cash balance was approximately $211 million at March 31, 2021, which was lower compared to $290 million at December 31, 2020, primarily reflecting seasonal cash flow use. We ended Q1 with approximately $510 million in available liquidity and with 2.4 turns of headroom under our net leverage covenant as defined in our credit agreement. Our cash position provides ample financial flexibility to pursue our internal and external growth initiatives, and we remain committed to driving 30% to 40% conversion of adjusted EBITDA to free cash flow in 2021. Now, turning to our 2021 guidance, as outlined on slide 17, we are now forecasting organic net sales growth of 4% to 5%, and adjusted EBITDA in the range of $245 to $255 million for 2021, an increase of $5 million from our previous guidance. This outlook reflects stronger results than we originally forecasted in Q1 and the momentum we have in many of our markets, which is reflected in the increased organic net sales growth in all three of our segments. This increase is balanced by the uncertainties still lingering associated with the ongoing pandemic. While we do not provide specific quarterly guidance, we remind investors of the specific cost actions taken in Q2 2020 because of the onset of the COVID-19 pandemic, as well as the spiking growth in our prescription management business, which alongside recent investments creates a challenging year-over-year comparison for the quarter. With this in mind, we expect Q2 2021 adjusted EBITDA to be flat slightly below prior year levels before returning to year-over-year growth in the second half of the year. Our increased full-year 2021 adjusted EBITDA guidance implies 11% year-over-year growth at the midpoint of the outlook and continued steady progress against our long-term adjusted EBITDA margin expansion goals. With that, I will now turn the call back over to Ben for some brief closing remarks.
spk10: Thanks, Matthew. In closing, and as outlined on slide 18, we're off to a very strong start in 2021 on the heels of what was a very successful 2020. We have a solid foundation in place and a clear plan to accelerate the contribution of our higher margin businesses. And we are investing heavily in new capabilities to accelerate our growth and deliver against our strategy and believe we are well positioned to drive improved outcomes for our customers and their clients to successfully capitalize on the opportunities ahead. We are in the early innings of delivering against our long-term goals and see a path to significant shareholder value creation as we work to drive growth, expand adjusted EBITDA margins, and improve free cash flow generation. This concludes our prepared remarks, and I will now turn the call back over to Nick to moderate the Q&A session.
spk09: Thanks, Ben. Now we begin the Q&A section of our conference call. We want to take as many questions as possible, so we ask you to limit them to two and then reenter the queue should you have additional ones. So, Anne, please provide instructions, and we are then ready to take the first question.
spk03: Thank you. As a reminder, to ask a question, you will need to press star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Our first question comes from the line of John Cragger from William Blair. Your line is now open.
spk11: Hey, guys. Thanks. Ben, can you just elaborate a little bit more on what your plan is to get Europe back into a growth mode? I think Matthew just said you expect it to be down about 10% for the year. Do you think it can be sort of comparable to Asia or North America next year?
spk10: Yeah, John, it's a good question. I think if you look at Europe, obviously we have two very specific issues, one in the UK and one in Germany. The rest of Europe is growing. I think as it relates to those specific issues, Germany... I think we have a light at the end of the tunnel, have resolved our operational issues and are starting to market and acquire or reacquire customers, I would say, and expect that that will start to grow here in the back half of the year. In terms of the UK, you know, that business, you know, has stabilized but isn't going to be a grower here in the short term until we, you know, move into 2022. And, you know, of course, I would just probably – Point out, though, in terms of quality of revenue and value to the business, despite the 12% decrease in revenue, you had a 17% increase in EBITDA in the quarter. So while you're never happy about revenue going the wrong way, certainly from a margin profile and type of revenue standpoint, you know, we were happy with our ability to manage the business and get growth in the key areas that are going to provide long-term value to the business.
spk11: Great. Thanks. And my follow-up is actually, you just touched on it. Do you think that 5.8% EBITDA margin in Europe is sustainable as you go through the year and into next year?
spk10: Yeah, I believe so. I mean, again, it really comes down to the mix and the quality of the revenue. So you You know, I mentioned in my prepared remarks, Cruza, VI, proprietary products, technology, all of that is growing. The margin profile of that is obviously significantly higher than, say, distribution revenue in the U.K. So, if anything, we should have margin expansion over time as the mix changes in Europe. And while it won't get to, you know, APAC or U.S. overnight, that certainly is a long-term aspiration.
spk11: Sounds good. Thank you.
spk03: Thank you. Our next question comes from the line of John Block from Stiefel. Sir, please go ahead.
spk04: Great, thanks, and good afternoon. Ben, first one for you. Slide four is just very helpful in helping breaking out the gross profit from third-party products versus proprietary products. If I remember this slide, I think proprietary was 23-ish percent of sales and almost 2x the gross profit dollar. So that seems to be, you know, a big part of the story for you guys and where you want to go. Are there goals on where you want some of these statistics over the next 12 to 24 months? I know you have the long-term margin aspirations of, I believe, you know, 10% up from almost 2x of 5%. But if we get more granular, how do we think about that bar chart maybe evolving in coming quarters?
spk10: Yeah, absolutely. You know, I would say from, you know, an overall margin complexion, you know, we'd want to certainly be, you know, moving into north of 20% next year. And long term, you know, we'd like the proprietary products to make up, you know, almost the inverse of what it is today. So, you know, 60% versus 40%. And while we haven't given a timeframe to get there, we certainly think given the mix of products and the momentum that we have that that is a realistic goal to achieve.
spk04: Got it. Thanks for that. And then, Matthew, second question for you. You know, the 1Q21 EBITDA beat handily. You walked up the guidance, but the corporate still seemed like a pretty big anchor. And it seemed like, you know, the beat, I don't even know, maybe the raise would have been bigger. The corporate, I think, was up $8 million year over year. If I annualize that, it's like a $30 million drag. And I get it. It could be a little chunky, but... If I remember correctly, last quarter you thought corporate wasn't going to be a big step up in 21 versus 20. Is this a timing thing, or did something change where corporate is going to be a little bit higher in 21, yet you're still able to walk up the guy? Thanks, guys.
spk05: Yeah, no, great question. And there's some complexity within there, and you absolutely shouldn't multiply it by four. There's two things in there. One is there's a combination of a couple of million bucks of FX on interco notes, which you should view as one time and not repeating and could easily go the other way on us. And then secondly, there was about a million and a half of short-term incentive. You know, this year we think we have a pretty good line of sight to delivering on our internal commitments. As you can imagine, last year our outlook was quite a bit rockier. and firmed up as we got deeper into COVID, so we hadn't accrued quite as much. So getting on for half of that eight is unique circumstantial.
spk09: Perfect. Thanks for the call.
spk03: Thank you. Our next question comes from the line of Nathan Rich from Goldman Sachs. Your line is now open.
spk01: Hi. Good afternoon. Thanks for the question. Matt, if I could maybe start with your commentary on the prescription management business. It seemed like there were a couple of moving pieces that I just wanted to clarify. I think you had said there was an accounting change in terms of how you or where you place manufacturer incentives was about 300 basis points dragged to the prescription management growth and then another 400 basis point impact from the two fewer selling days. So normalizing for that would something closer to 40% be how we should be thinking about the growth of that business in the quarter. And I think you said March was a little bit north of that 40% range as well. So I just wanted to make sure I understood the moving pieces there. And then on margins for that business, Could you talk about how we should be thinking about the trajectory going forward? It seems like the margins have been around 5% to 6% the past few quarters. Do we start to see that accelerate, given that you've been investing a lot to support the growth of that business, maybe as you leverage those investments over the next several quarters? Should we see that margin improving? Thank you.
spk05: Yeah, let me take them in the order you suggested. You posed them and you got it completely right. The growth as reported was 33%. We moved some manufacturer incentives from revenue to Cox prospectively. We didn't go back and adjust the prior periods because of all the workload for relatively small impact to the total business. So that was a 300 basis point drag and the two selling days was about 400. So like for like, it was a 40% quarter, which we're extremely happy with. And then when you go back to the 33% we reported, it grew really strongly through the quarter. It started out slow and ended terrifically in March with 40%, even with the accounting dragging that number. So we were super pleased with that. Pivoting to the margins, you know, when you look at profits in that business sequentially, they were pretty much flat. And we took a decision late in the quarter to make some very discreet investments that we knew weren't going to pay back in the period. But with the extra granularity and precision with which we're targeting where we spend the money, we think the returns on it are going to be phenomenal. So it was a sort of late in quarter decision. We put about $1.3 million of extra investment in that dragged on the margin a bit. So we just see a lot of runway ahead here, and we think the growth is very valuable rather than driving the margin up in the short term. So we're going to constantly be fighting that balance, but generally within that commitment to drop 15% of the incremental revenue down to EBITDA.
spk01: Great, thank you. If I could just ask a quick one, shifting to the North America distribution business, another quarter of strong growth, I think up 13%. Obviously, the market's been very strong as well, but we'd just be curious to get your view on how you're performing relative to the market and what's driving that growth and how we should think about the outlook over the balance of the year as the comps do get tougher in the back half.
spk10: Yeah, I'll give some qualitative feedback, Nathan. So I think... You're right, very strong growth. Our channel checks, and I think from third-party data, shows us picking up market share vis-a-vis the competition. I think what's driving that is the all-in holistic solution that we provide. We clearly are the only company that brings together distribution, software, compounding, prescription management under one roof. And as we more and more focus on driving a better outcome, whether that be a healthcare outcome or a business outcome for the VET, I think that we are going to see more and more consolidation by us in the marketplace going forward.
spk01: Thanks for the questions.
spk03: Thank you. Our next question comes from the line of Erin Wright from Credit Suisse. Please go ahead.
spk02: Great. Thanks. Kind of a broader question on the prescription management business. And as we exit the pandemic here and we think about changing behaviors potentially at the consumer purchasing level, what are you doing differently potentially to enhance engagement across BFC? And did you get specifically, and sorry if I missed this, did you get specifically what your anticipated growth rate is for that business embedded in your guidance for the year? Thanks.
spk10: Yeah, so just taking the second question first, we said that 30 to 40% year-over-year growth was our anticipated guidance, and obviously, you know, we're right smack in the middle of that in Q1. In terms of, you know, the changing dynamic, I think when you look at the prescription management business, you really have to look at, you know, the two sides of the coin, what's going on with the veterinarian and what's going on with the consumer. With the veterinarian, as we do a better and better job of showing value and extending the revenue opportunity for a vet outside the clinic, we're getting more and more activation within those practices. So we saw a pretty nice uptick in terms of the number of practices that were proactively prescribing, marketing, and adopting the platform in the last quarter or so, and we expect that to continue. In terms of the consumer, we really see no going back on that front. Clearly, they value the convenience, whether that being able to communicate with their vet online or get something shipped to their home, whether that be a parasiticide or a compounded medication. And we don't expect that trend to slow down in any way. And as we continue to invest and focus, as I think Matthew outlined in some of his remarks, in our ability to refine how we market and communicate with a consumer, we think we're just going to get better and better at those consumer-initiated prescriptions and the retention of those consumers over time.
spk02: Okay. And then just elaborating on that a little bit more, I mean, can you speak to some of the opportunity around, like, the technology solution in terms of built-in e-prescribing capabilities at Avemark? And will that be meaningful for you in terms of increasing customer engagement overall?
spk10: Yeah, absolutely. If you look at our product roadmap, again, whether it's on-prem solutions or in the cloud or with appointment management, it's all about bringing these things together in a holistic solution, whether that be for the customer or the consumer. So we announced recently the full rollout of prescription management embedded into Avamark, and that just makes it one less step one less obstacle for the veterinarian when, you know, driving a need prescription. And that, you know, things like making recommended medication choices available to the vet, one-stop shopping for the consumer based on their PIMS data, all of the, you know, the integration or the synchronization of those solutions, we believe is just making it more and more compelling for both the vet and the pet parent.
spk02: Okay, great. Thank you.
spk03: Thank you. Our next question comes from the line of Elliott Wilbur from Raymond James. Please go ahead.
spk07: Thanks. Good afternoon. Question for Ben, I guess. With respect to the gross profit contribution from your higher margin segments, technology, commerce, and proprietary products, looks like the margin there is about 35% roughly. Can you provide some specific commentary in terms of the relative contribution of the branded products portfolio and compounding businesses versus the tech and e-commerce? And then just thinking about the longer-term contribution from your new 503B compounding facility, I don't know if you've ever talked about sort of what you think the incremental revenue opportunity is associated with that, but maybe just some commentary on there with respect to capacity, technical capabilities, and how that business, once at scale, could impact the overall margin profile of your higher margin segments. Thanks.
spk10: Yeah, you're welcome. Elliot, could you ask the question again? I just want to make sure I'm answering the right question in terms of, are you asking about the split of gross profit between technology and proprietary brands, or the different margin profiles?
spk07: specifically different margin profiles, differential between the brand and product compounding versus tech in e-commerce and ultimately where that could go as the compounding facility starts to become a bigger contributor to the overall revenue picture.
spk10: Yeah, so are things. So I'll kind of break out a couple of different you know, profiles of, you know, types of things. And I would say these are illustrative just because if you get into the detail at a SKU level, you know, it can start to vary. But, you know, you've got prescription management that is roughly around 30% gross margins. You've got, you know, end-to-end margin of a branded, you know, product like Acruza. you know, closer to 40, you know, plus percent. You've got compounding, you know, 50 plus percent. And technology, even a slight nudge about that in the 55 to 60 percent. And so, obviously, there's different growth rates and different market opportunities for those things. But, you know, the whole blend or the mix, obviously, is substantially better than, you know, third-party distribution. In terms of the 503B facility and the new investment in Grandview or Phoenix, Arizona, we really believe that that could be a game changer for the compounding business on lots of fronts. From an operations standpoint, our level of efficiency and capacity and quality control goes way up. So order to ship, ability to innovate, ability to scale with that business just improves immensely. And I think from a customer satisfaction standpoint, people can know that not only are we keeping up with the regulatory requirements inside of that business, but we're going to really have a best-of-breed solution out in the marketplace. So we're extremely excited for that investment to start paying dividends here in the back half of 2021. Okay.
spk09: Operator, you can move to the next question.
spk03: Thank you. Our next question comes from the line of David Westenberg from Guggenheim. Your line is now open.
spk08: Hi. Thanks for taking the question. I want to talk a little bit. I think it's kind of a continuation of Aaron's question on the prescription management business. we are about to lap some just very interesting comps. And it's just hard for me to get really comfortable just around growth rates in the back half of the year, just given the fact that there has such strange comps. I don't mean to give kind of quarterly, ask for kind of quarterly guidance here, but is there any way you can give a kind of commentary around maybe what happened late March, early April, as we lap this kind of very strange, unique, circumstance in the prescription management business because, I mean, obviously everyone was ordering everything online at the time. You did highlight, you know, 300 new additional accounts, but it would just be interesting to hear this as we just see sort of that lapping of that strange behavior.
spk05: Yeah, let me take a crack at that, and then Ben may want to weigh in. But, you know, if you go back to Q2 of last year, the year-over-year growth in prescription management was 66%. So make no mistake, lapping that is gonna be a challenge. If you take our comment about the annual growth between 30 and 40%, the way we see the first half together is at the low end of that range, and we see the second half at the high end of that range. So you can probably triangulate what we think the second quarter's gonna be like, and it's gonna be a struggle with that kind of comp.
spk08: Got it. Okay. All right. I'll take it as that. Great. I appreciate the extra commentary. You know, on the initiatives, you talked about the consumer marketing effort. I think of Covetris or, you know, Legacy, Vets First Choice is kind of the back end of prescription management where you're kind of marketing for the veterinarian. You kind of, in that slide, I think it says something around the lines of increasing awareness in pet parents and Is that increasing awareness of your brand specifically? Can you give us a little bit more color on that brand engagement effort that you're doing, just given the fact that, like, I think traditionally as Vets First Choice or on that paradigm of kind of Vets First Choice is like the pushing the brand of the veterinarian. So has there been any kind of change in that paradigm? And kind of what are you doing with that marketing effort? And, you know, why do you think that's going to have such a good ROI? Thank you.
spk10: Yeah. No, nothing has changed. We're always working on behalf of our customers, the veterinarian. But what I would say is that if you look at the total prescriptions, the majority of them are what we call consumer-initiated. So there's an outbound communication or marketing to the consumer. The consumer makes the purchase request the scripts versus the a proactive prescription that's coming, you know, out of the PIMS at the, you know, point of care to the consumer from the vet. So when we talked about consumer marketing, what we're really referencing is marketing on behalf of the vet to the pet parent to drive awareness, engagement, and eventually conversion.
spk08: Got it. Thank you very much for taking the questions.
spk03: Thank you. Our next question comes from the line of Balaji Prasad from Barclays. Please go ahead.
spk06: Hi. Good afternoon. So just following up on the earlier question, your explanation of the cadence of growth for prescription management was helpful. Can you remind us of the drivers of Fibida margin in this segment? And as you lap the higher end of the range for H2, how should we think about EBITDA margins for the segment?
spk10: Yeah, I think on a long-term basis, we think about 15% to 20% flow through to EBITDA on a trailing 12-month basis. And the reason we talk about trailing 12 months is because, as Matthew mentioned in his prepared remarks, there can be times where we decide opportunistically to heavy up on marketing because we think we can acquire a consumer to, say, an auto ship program in a very profitable way. And so that might take down margin in the period, but pays dividend in the long term. So we're really balancing growth and profitability in this business. To exit Q1 at a 40% year-over-year growth rate, and to basically be at a $500 million plus run rate already and growing 30% to 40% is impressive, but we think we're really at the beginning of the journey there, and so we don't want to sub-optimize the business by squeezing out too much profit when we think there's a lot of consumer activity to go acquire here in the next couple of year period.
spk05: I think the other thing is when we look at the stickiness of these customers and these cohorts that go all the way back to 2012 and we're still getting double-digit growth. The value of the customer acquisition versus the short-term margin is pretty clear to us.
spk06: Understood. And in your other remarks, you called out market share gains in the distribution business. Is there any quantitative numbers that you can provide to us there?
spk10: You know, I think that somewhere in the 50 bps range is what we would be thinking. Again, it's a bit qualitative from market checks and third-party data, but I think if you just go and look at maybe some of our competitors' public announcements and look at our North America growth versus theirs, I think that's another way of triangulating that data. Thank you.
spk03: Thank you. As a reminder, again, to ask a question, you may need to press star then the number 1 on your telephone keypad. That's star 1 on your telephone. I am showing no further questions at this time. I would now like to turn the conference back to Mr. Nicholas Jansen.
spk09: Thank you, Anne, and thanks for everyone for joining today's call. We look forward to speaking with many of you in the coming weeks, including at a participation at the Stiefel, Jaws, and Pulse conference in early June. Thanks. Have a great day.
spk03: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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