Covetrus, Inc.

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.

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.

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.