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spk09: Good day, everyone, and thank you for standing by. Welcome to the Covitrus Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. And after the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. And if you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, the Vice President of Investor Relations, Mr. Nicholas Janssen. Please, go ahead, sir.
spk06: Nicholas Janssen Thank you, Delphin. Good afternoon, and thank you for joining us for CoVetris' G3 2021 earnings conference call. With me on this afternoon's call are Ben Wolin, our President and Chief Executive Officer, and Matthew Polson, our Executive Vice President and Chief Financial Officer. Ben and Matthew will begin with prepared remarks, and then we will be happy to take your questions. During today's conference call, we anticipate making projections and other 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 expectations for future financial business, operational performance, and operating expenditures. Forward-looking statements may be identified with words such as will, expect, believe, should, or similar terminology. and the negative of these terms. Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward-looking statements. These risks and uncertainties include those under the heading risk factors in our most recent annual report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission which are available on the investor section of our website at ir.coventris.com and on the FCC's website at www.fcc.gov. Forward-looking statements speak only as the data hereof and, except as required by law, we undertake no obligation to update or revise these forward-looking statements. You can find this afternoon's press release announcing our third quarter 2021 results in the accompanying slide deck for this call on ir.coventris.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'll turn it over to Ben to provide the highlights beginning on slide three.
spk10: Thanks, Nick, and welcome back from your paternity leave. Good afternoon, everyone, and thanks for joining us today. I hope everyone is staying healthy, is getting vaccinated, and is gearing up for hopefully a more normal upcoming holiday season with family and friends. On this afternoon's call, I will briefly discuss some of the highlights in the quarter and then focus the rest of my prepared remarks on Covetous' broader technology strategy, which is a key pillar of the company's overall value proposition to our customers and a long-term driver of value creation for our shareholders. Now turning to the third quarter, Coventry's delivered solid performance in Q3 with good execution by the team as well as continued healthy end market demand. North America had another great quarter where non-GAAP organic net sales grew 12% year over year and non-GAAP adjusted EBITDA increased by 22% year over year to $55 million as our broader value proposition continues to resonate in the market With the exception of Germany and the UK, all other markets, our technology offerings and our proprietary brands delivered solid results, leading to a 10% year-over-year increase in total gross profit and 110 basis points increase in gross margin. Unfortunately, we did not have our historical flow through from gross profit to adjusted EBITDA due to $5 million of intercompany loan FX headwinds year over year, and $3 million of unanticipated legal fees tied to recent developments, which created an $8 million year over year headwind in corporate expense. One of the clear highlights of Q3 was the re-acceleration in net sales growth within our prescription management business in North America, where net sales increased 24% year over year. This compares favorably to the 19% year over year growth delivered in Q2. Encouragingly, the number of proactive prescriptions continues to increase and the visibility we have through increased adoption of our auto shift service continues to grow. And as with every quarter since going public, all cohorts going back to the original cohort in 2012 continue to grow double digits. And our most recent cohorts in 2019 and 2020 have ramped faster than any cohorts before them. We also showed excellent leverage in this business during Q3, where non-GAAP adjusted EBITDA more than doubled year over year and increased 18% sequentially. This business is now on pace to deliver more than $40 million in non-GAAP adjusted EBITDA in 2021, which compares to a break-even business just two short years ago. In the quarter, we delivered a 10% non-GAAP adjusted EBITDA margin in prescription management, which highlights the long-term potential for margin expansion for consolidated co-vestors as this business grows alongside our other high-margin solutions, including TIMS, Wellness Plan Administration, Communication Solutions, Payments Solutions, SmartPak, and our proprietary brands. As highlighted in earlier announcements, we took a major step forward on this portfolio during the third quarter through the acquisitions of VCP, the market-leading platform for wellness, and a point master, a provider of integrated communication solutions for veterinary practices. We are clearly investing in these new capabilities and in our next generation technology, and we see significant opportunity to scale the total portfolio as we leverage our channel access and our integrated ecosystem of solutions. Although we often focus on prescription management on these quarterly calls, it is important to note that with our recent growth, Our combined technology offering across prescription management, global software services, and SmartPak is now at nearly $800 million in annual sales and approaching $100 million in non-gap-adjusted EBITDA. That is a substantial technology business in almost any industry. This provides a great segue to slide four and the opportunity ahead for Covetris. At the company, everything we do is centered on helping veterinarians drive better health and business outcomes. While investors have come to appreciate the steady growth and scale of our in-clinic supply chain and proprietary product businesses around the world, our unique value proposition to our customer base stems from our portfolio of technology solutions that drive efficiency, revenue growth, and better pet health as we strengthen our relationships with our customers and their pet parents. Let me explain how this actually works. Today, at a Covetris-powered practice, a pet parent begins their journey by booking an appointment via Covetris' online booking tool. This appointment is followed up with text and email reminders from our communication platform. Once at the practice, a veterinarian manages this patient using our industry-leading practice information management system, or PIMS, which provides medical record storage, treatment paths, and workload solutions. Straight out of the PIMS and right at the point of care, veterinarians can now proactively prescribe medication and have that medication delivered via our prescription management solution straight to the pet owner's home. Via the same e-commerce solution, pet parents can also sign up to use auto-shift programs and receive personalized medication from our compounding pharmacy. To drive compliance and provide financial visibility to pet parents, a co-vetches practice can now enable care plans via our wellness plan administration solution, creating a subscription relationship with a pet parent. Back at home, pet parents can shop online with their veterinarian, manage their prescription, and communicate with their veterinarian via our telehealth platform. It is this connected practice that allows the veterinarian to run an effective and profitable business. This portfolio that drives the connected practice has already seen significant upgrades over the last nine months and will continue to improve over the next year. Some of the highlights include, first, the launch of our next-generation cloud-based TEM solutions, which are now live in Australia and launching in beta in the U.S. this quarter. Second, significant enhancements to our integrations with diagnostic and imaging partners. Third, continued improvements to our leading on-premise TEM solutions, Avamark and Inframed. Fourth, tight integration of VCT's wellness plan administration software into PIMS and our e-commerce solutions, further strengthening the vet-to-pet relationship. And fifth, a complete blending of prescription management and PIMS to support data interoperability, improved workflow, and a better standard of care, a true operating system for the practice. With such a substantial technology business, it's hard to say that we are just at the beginning of our technology journey, but it's true. Over the coming quarters and years, Covetris will continue to enhance our solutions, all with the intent of helping veterinarians succeed. With strong in-market growth and the industry's leading technology platform, it's clear that our future is bright. Now, I'll turn the call over to Matthew to discuss our Q3 financial results.
spk02: Thanks, Ben. Good afternoon, everyone, and thanks for joining us today. I will now review our third quarter 2021 financial results and provide additional commentary on our full year expectations. The focus of my comments will be on our non-GAAP results where applicable. Please refer to today's press release for a more detailed description of our third quarter 2021 GAAP financial results and reconciliations of non-GAAP measures to GAAP results. Starting on slide six, consolidated non-GAAP organic net sales increased 3% year-over-year and non-GAAP-adjusted EBITDA decreased 2% year-over-year to 58 million. The previously disclosed challenges in our UK and German businesses, as well as unanticipated FX and legal-related costs in corporate, negatively impacted consolidated results and masked another quarter of strong performance in our North America and APAC and emerging market segments. We encouragingly delivered 110 basis points of year-over-year gross margin improvement during the third quarter, including positive trends across all three of the company's operating segments. And we continued to scale prescription management, where non-GAAP adjusted EBITDA more than doubled versus the prior year period. Additionally, underlying cash generation was strong, with $45 million of free cash flow in Q3, Net leverage picked up modestly in Q3 because of the M&A activity that Ben referred to earlier. We anticipate returning to our targeted three to three and a half terms net leverage range in Q4. Now turn to the details on slide seven. Devetris net sales were 1.16 billion in Q3, an increase of 3% year over year on both the reported and non-GAAP organic basis. reflecting healthy companion animal and market demand across many of the company's markets against a backdrop of more challenging year-over-year comparisons as we lack the surge in volume during the second half of last year tied to COVID-19 market dynamics. The previously disclosed challenges in our UK and German markets continue to impact year-over-year results. with non-GAAP organic net sales growth negatively impacted by approximately 700 basis points. While these markets have stabilized operationally, we have not yet seen a recovery in sales volume, which has impacted profitability. We will be taking further action on this front near term to better align our cost structure. Moving to slide eight. Consolidated Q3 Covetra's gross profit increased 10% year-over-year, with gross margin of 18.6%, expanding 110 basis points versus prior year period. Encouragingly, gross margin expanded in all three of the company segments. The underlying margin strength was driven by healthy growth in the company's technology, e-commerce, and proprietary products and services, where gross profit increased 23% year-over-year, led by strong performance in prescription management. Collectively, these businesses now represent 45% of the company's consolidated gross profit, an increase of 400 basis points versus the prior year period, and approximately 200 basis points from the second quarter of this year. Turning to slide nine, Non-GAAP adjusted EBITDA was 58 million for the third quarter of 2021 compared to 59 million in the prior year period. The 2% year-over-year decrease reflected a declining profitability in Europe due to a combined $6 million negative impact from the challenges in the UK and in Germany, as well as higher corporate expenses including a 5 million negative impact year-over-year from changes in foreign exchange on intercompany loans that are included in our non-GAAP results, and a 3 million year-over-year increase in legal professional fees tied to recent developments. These headwinds more than offset another strong quarter of growth and margin expansion in North America and APAC emerging markets. Non-gap adjusted EBITDA margins were 5% during Q3, a 20 basis point year-over-year decline reflected of the headwinds in corporate just listed. I would also highlight incremental freight headwinds encountered during the quarter that have now been repriced into our product offerings for Q4, and an additional $1 to $2 million impact year-over-year from the rebound of certain sales and marketing expenses primarily travel and entertainment, as COVID-19 restrictions have eased and trade shows have restarted in person once again. Moving to our operating segments, beginning on slide 10. North America net sales increased 13% year-over-year in Q3 on a reported basis and 12% year-over-year on a non-GAAP organic basis. Segment-adjusted EBITDA increased 22% year-over-year in Q3, with segment-adjusted EBITDA margins expanding to 60 basis points versus the prior year period, reflecting the increased contribution from higher profitability-generating areas of the business, including prescription management and Covetras-branded products and incremental operating expense leverage. Drilling deeper into the North American segment trends, starting on slide 11, our supply chain non-GAF organic net sales increased an impressive 11% year-over-year in Q3, on top of what was a robust prior year period growth rate of 10%, reflective of strong sales execution in a healthy companion animal end market, as well as continued strength in our equine business, SmartPak. Supply chain non-GAAP adjusted EBITDA increased to $34 million for the third quarter, compared to $31 million in the prior year period, with the strong top line growth partially offset by increased freight costs and labor pressures. Moving to software services, the business continues to form well and now includes the very modest contribution from our VCP acquisition back in July. We expect additional investments near term towards that platform and the building out of our suite of next generation technology solutions, including our new cloud-based practice management software that Ben highlighted earlier in his remarks. With these launches anticipated to accelerate the trajectory of our software net sales in the second half of next year and beyond. Turning to slide 12, and our prescription management business in North America. While supply chain constraints for certain product categories, particularly diet and food, remain, we were pleased with the overall re-acceleration in growth in that business during Q3, with net sales of 129 million, up 24% year-over-year, or 26% when excluding the headwind from our changing corporate policy related to how we recognize and report certain manufacturer incentives, which are now included as a reduction to cost of goods sold. Same-store sales also bounced back to 20% year-over-year growth, reflecting continued strong engagement by our existing network of veterinary practice customers and their pet owner clients. Year-to-date, prescription management net sales are up 25% year-over-year, or approximately 27% year over year when excluding the accounting change. Of note, when excluding prescription diet sales in both periods, prescription management net sales have increased 30% year over year, highlighting the underlying health of the business. Encouragingly, we saw signs of stabilization in the prescription diet food category exiting Q3. This combined with the anticipated sales we drive for our customers during cyber weekend marketing activities should enable a solid finish to the year. In total, full year 2021 prescription management year-over-year net sales should increase by approximately 25% or 28% excluding the accounting change. Turning to profitability. Q3 prescription management non-GAAP adjusted EBITDA was $13 million or more than double the $6 million reported in the prior year quarter. This represents a 10% non-GAAP adjusted EBITDA margin during the quarter and reflects the team's overall focus on driving increased profitability after several quarters of increased investment. On an LTN basis and normalizing for the legal charge in Q4 2020, we converted approximately 11% of the year-over-year dollar growth in prescription management net sales to non-GAAP adjusted EBITDA. We continue to target approximately 15% flow through for all of 21, despite the duplicate costs from opening our new compounding pharmacy in Grandview and the ongoing diet headwind we have previously discussed. Turning to our Europe business segment on slide 13, Non-GAAP organic net sales decreased 11% year-over-year in Q3, reflecting the previously disclosed challenges we are experiencing in the UK and German markets, which negatively impacted organic growth by 19%, and are more than offsetting healthy veterinary demand fundamentals across the rest of our European markets. Our businesses operating in Ireland, the Netherlands and Czech Republic once again were notable contributors to our results, with strong performance of proprietary brands in a number of our markets as well. We are taking concrete actions to address the UK and German challenges, including leadership changes and cost cutting and expect those markets to return to growth in 2022 as we anniversary the headwinds and benefit from renewed commercial efforts in these markets. Turning to profitability, our Europe segment adjusted EBITDA in Q3 decreased 16% year-over-year to 16 million, with margins defining 20 basis points year-over-year to 4.5%. The UK and German markets represented a combined $6 million euro per year negative impact to profitability in Q3. These challenges more than offset the growth seen in the rest of Europe and the benefits from increased penetration in proprietary brands. Moving on to our APAC and emerging markets segment on slide 14, our team delivered a 4% euro per year increase in non-GAAP organic net sales in Q3 on top of the exceptional 16% organic growth rate reported in the prior year period, reflecting another quarter of strong sales execution despite the challenging comparisons. Australia and Brazil delivered healthy, high single-digit, year-over-year, non-gap organic net sales growth during Q3. Segment-adjusted EBITDA increased 25% year-over-year during Q3, and segment-adjusted EBITDA margins expanded by 120 basis points year-over-year, driven by 40 basis points of gross margin expansion and the ongoing operating leverage from stronger net sales. Now turning to the balance sheet on slide 15, we generated $45 million in free cash flow in the third quarter, although our net leverage kicked up for 3.8 terms as a result of the $81 million spent on the two acquisitions completed in Q3. We ended the quarter with $485 million in available liquidity and approximately 1.9 terms of headroom under our net leverage covenant as defined in our credit agreement. We expect our net leverage will come back within our targeted range by year-end, driven by growth in adjusted EBITDA during Q4 and normal seasonality of our cash flows. Now turning to our 2021 guidance, as outlined on slide 16. We continue to forecast non-GAAP organic net sales growth of 5% to 6%. The outlook includes slightly higher net sales than previously expected in North America and APAC and emoji markets, with Europe continuing to be impacted by the challenges in the UK and in Germany. As a reminder, these two markets are expected to negatively impact Devetris' consolidated organic net sales growth in 2021 by approximately 600 basis points. Looking at non-GAAP adjusted EBITDA, our outlook also remains unchanged at $245 to $255 million, but now includes the added legal professional fees and FX headwinds experienced during the third quarter. As we look at year-over-year growth in adjusted EBITDA for the fourth quarter, we anticipate another quarter of healthy growth in North America, where we expect continued strong performance in prescription management profitability, including the non-repeat of last year's legal expense and improved results in supply chain. This growth is partially offset by increased corporate costs reflecting the non-repeat of favorable effects in the prior year period. We are also monitoring the vaccine mandate in the U.S. and the potential disruption that may have on our business and our supply chain partners. We have not yet incorporated this into our output, given the many unknowns at this stage. Looking ahead, it's too early to comment on our detailed 2022 plans, but based on the available information we have today, we are preliminarily targeting an overall modest acceleration in non-GAAP organic net sales growth, and non-GAAP adjusted EBITDA growth in 2022 versus our anticipated 2021 growth rates. This is driven by the lacking of the specific challenges in our UK and German markets, which collectively are expected to negatively impact 2021 non-GAAP adjusted EBITDA by more than 15 million year-over-year. Additionally, we anticipate continued healthy growth in net sales and profitability in prescription management and an improvement in our software growth outlook with multiple new products coming to market in 2022. We also anticipate general stability in our supply chain businesses around the globe with continued focus on growing our higher margin proprietary brands. Some of this growth will be offset by higher freight costs, continued labor market tightness, and the return of discretionary spend as global economies reopen. We will provide additional detail on our 2022 outlook early next year. With that, I will now turn the call back over to Ben for some brief closing remarks.
spk10: Thanks, Matthew. In closing, and outlined on slide 17, we are aggressively investing in our tech platform to enhance our value propositions. to secure new business, and to accelerate our market opportunity. We are also very focused on driving our Covetras branded and proprietary product portfolio and streamlining operations to deliver increased efficiencies and to reinvest back into our platform. While Q3 certainly had some noise in our reported results, I'm confident in our strategy and the momentum we have in the core drivers of our business. We remain in the early innings of driving towards the company's long-term potential of above-market net sales growth and adjusted EBITDA margin expansion, and believe we are on the path to sustainable shareholder value creation as we execute our strategic plan. This concludes our prepared remarks, and I will now turn the call back over to Nicholas Janssen to moderate the Q&A session.
spk06: Thanks, Ben. And now we begin the Q&A section of our conference call. We want to take as many questions as possible from the analysts, so we ask that you limit them to two. Re-enter the queue should you have additional ones. So, Delphin, please provide instructions, and we are ready to take the first question. Operator, we're ready to take the first question.
spk09: Thank you. Here's our first question, John Krigger of William Blair.
spk07: Hey, thanks, guys. Maybe my first question, if you guys could just kind of go over some of the noise that had impacted your numbers in the last couple of quarters and where you think those items go in the fourth quarter. It sounded like you think the therapeutic food issue is maybe about to be alleviated, so if you could just clarify that. and what sort of assumptions you're making on that FX and legal cost item. Thanks.
spk02: Yeah, thanks, John. You know, on the therapeutic diet side, we saw things begin to stabilize as we exited Q3. I hate to count my chickens before they hatch because it's a fairly volatile situation, and when you've been as far behind as we had, it doesn't take much of a bomb to knock you off track. So I'd say we're mildly you know, positive on the outlook for that, but certainly not a return to normal in the immediate short term. We've still got quite a few skews on, you know, material back order, but better than we were. On the other two big items, we had some headwinds in the quarter on FX, on the intercompany loans. We assume in our guidance that we will not have a headwind or a tailwind in the coming quarter, so we're basically assuming exchange rates stay flat. And then the final one, the legal, we're expecting a sizable reduction in June 4 of legal expense. I think it's down $2 to $3 million as we pass through those largely one-time-time items.
spk07: That's helpful. Thanks. And then quick follow-up, Ben, I think right there at the end you said you're investing aggressively in the tech platform. should we assume that that spend in 22 is sort of tracking with revenue growth or maybe more aggressive? And what sort of specific product or products would you call out that we should be looking for?
spk10: Yeah, we've kind of remained consistent about driving both the top and the bottom line, so I don't think we're backing off of that basic thesis. But obviously, as the business gets bigger and as the opportunity becomes even more robust for us, we want to continue to invest in that platform. It's going to be a lot of the things that we mentioned in the past year, which is, you know, continued investment in our PIMs, both in the U.S. and internationally. We're excited that we're in market internationally with our kind of latest and greatest cloud version, as well as going to market in Q4 here in beta. We'll continue to focus on the integration of our prescription management into those PIMs platforms, which we're very excited about. And then some of the more recent areas, like our wellness plan administration, which through the acquisition of VCT, we feel like there's just tremendous runway there and are getting lots of positive support from customers. So the tech business, as I mentioned in the prepared remarks, is almost $800 million in revenue, but we feel like there's just tremendous market opportunity, general secular shifts, you know, in our favor going online, and it's right to invest in that opportunity. So it was great to see the reacceleration of the business in Q3 versus Q2. So we're feeling, you know, pretty bullish about the prospects for the tech platform and all of the things that surround it.
spk07: Sounds good. Thank you.
spk09: And our next question is from John Block from Steeple. Go ahead, sir.
spk04: Hi, guys. This is Tom Stephan on for John. Thanks for the questions. I want to start off with the 2022 preliminary guide on adjusted EBITDA. Matthew, I think you said, you know, the guide is for it to accelerate. So, you know, if it were to accelerate from the 10% growth implied in the guide for 2021 to call it 12%, 13%, for instance, you know, I think that'd be roughly $30 million of EBITDA dollar growth. I guess my question is, at a high level, how should we think about the contribution between prescription management and the rest of the business? Is it 50-50, or do you maybe have confidence in one area of the business over the other?
spk02: Yeah, I mean, we were super excited with the reacceleration of growth in prescription management in this quarter compared to the second. We were up from 18.8 to 24.4. And as Ben went through, all the cohorts are growing double digits. So we're super excited about the potential of that business. We're not ready to peg a number in terms of growth rates for that, but we would anticipate continued solid contribution and continuation
spk10: So the only other thing I'd add is if you just look at the two-year performance of that business, it's gone from break-even to $40 million of EBITDA. So you can just start to extrapolate and look at the growth rates currently and roll forward a year or two, and you can see how the business expands its margins over time.
spk04: Got it. That's helpful. And then kind of just as a follow-up there on prescription management, You know, the $13 million in EBITDA for the quarter was very solid. As were margins. Can you just elaborate a bit more on the drivers there? You know, kind of structurally, you know, to what extent do you feel the business is in the right position to potentially resume maybe that consistent 15% contribution margin? Can we kind of model that out moving forward or just any color there? Thanks, guys.
spk02: And I think one thing I... sort of say is we do always look at this over a rolling 12-month period because of the lumpiness and the bumpiness in the investments here. But we feel pretty good about the 15% for this year and a really strong fourth quarter coming up. And, you know, we think we'd be in that 15 to 20 range. As Ben said, there's so much growth opportunity here. I think we'll bias towards the low end rather than the high end because now's the time to grow. But we feel pretty comfortable about that.
spk10: Yeah, the only thing I would add to Matthew's comments is, you know, you're looking at a total pharmacy spend, you know, in the U.S. alone, north of $10 billion, growing very fast. You know, the prescription management business, $500 million this year. You know, we don't want to suboptimize the opportunity. we are committed to driving profitability out of that business, but we are going to invest when we see opportunity either directly into prescription management or really around the things that we think will drive it, like TEMs and wellness plans, appointment management, you know, all of those things contribute to the prescription management here going forward.
spk04: Got it. That's helpful.
spk10: Thanks, guys.
spk09: And for our next question, from Nathan Rich of Goldman Sachs. Go ahead, sir.
spk01: Thanks. Good afternoon. I wanted to stick with the prescription management business. I guess, you know, as you've started to see some of these supply issues ease, have you seen impacted customers come back? And, Ben, I don't know if you'd be willing to maybe comment on either the September or October sort of exit rates for that business as we think about trajectory into the fourth quarter. And relatedly, Was there any impact on practices that you could onboard onto the platform during this period of the supply disruption? Yeah.
spk10: Thanks, Nathan. So a couple of different ways of looking at it. I think the supply disruption was less of a clinic disruptor and more of a consumer disruptor, as you could imagine. And to put it in perspective, you know, our pharma business, on the platform this year will grow at double the rate of our diets business. And historically, those things used to grow, you know, kind of in line with one another. So you get a sense of the drag that, you know, diets has created for the business. I think in terms of exit rates and how we think about the near-term growth year, we feel like the Q3 growth rate is a pretty good marker for the Q4 growth rate. You know, there's just good trajectory in the business. And as, you know, both Matthew and I commented in our prepared remarks, you know, all the cohort data, the repeat purchase data, the proactive prescription data, all of that is really quite positive. So I think, you know, if you just look in the short term, we feel pretty good about how the business has performed and, you know, I think there was a lot of questions coming out of COVID. Was COVID a one-time phenomenon or, you know, how would the business grow? And so to be growing, you know, 25% on a year-over-year basis, even after COVID, so like that two-year stack of, you know, almost 67% in the quarter, it just makes us feel really both proud of the work that the team is doing and confident in our prospects going forward.
spk01: Great. Thanks. And then, Matt, maybe a follow-up for you. I just wanted to go back to the EBITDA step up in the fourth quarter. I think with the one-time items you called out, that would probably get you into the low end of the annual guidance range, if I'm doing the math correctly. So I guess, like, maybe outside of those items, what are sort of the key factors that kind of would get you to the midpoint or the high end of the range for the year? Thank you.
spk02: Yeah, I think when we look at the improvement, we talked about the noise when I was answering that first question, which was really the FX and the legal stuff. But we've also got a pretty strong improvement in North America, which is a combo of prescription management and supply chain. And one of the phenomenons we've got is in Q3, I would say freight cost inflation got a bit ahead of pricing. And we took that pricing late in the quarter, and we think those two will be matched up in Q4, so we won't have that during, which will help us out. I think we'll be up a million or so in Europe and AMAC combined.
spk01: Thanks for the questions.
spk09: And for the next question, Elliot Willoughby of Raymond James. Go ahead.
spk08: Thanks. Good afternoon. Question for Ben. Maybe within the North American supply chain business, can you just talk a little bit more specifically about the performance of CVET-branded proprietary products within that segment? I know last call you had talked about fairly significant cadence of new product launches and also some geographic expansion there, but just wondering how that business is performed within the context of the overall segment. And for Matt, I guess, can you just remind us when we're talking about the UK and German challenges exactly what you're referring to and which of those may have had a more negative impact than the other in terms of performance and with respect to some of the steps you're taking in terms of cost management? Is that something that can be done immediately so that the implementation of those steps will in fact start to benefit numbers in the early part of 2022? Or is this something that has to be a little bit more managed so it doesn't impact top line trends? Thanks.
spk10: Yeah, thanks, Elliot. So you had a couple questions in there. Why don't I start with the proprietary brand growth in North America and globally, and then Matthew can talk about some of the areas that we need to, you know, clearly improve upon. You know, from a North America standpoint, the team just all around, you know, did an awesome job, I would say, you know, north of 10% growth in totality. And I think you're really just seeing the benefit of this combined go-to-market team that can sell across proprietary products, infinite third-party technology solutions, wellness plans, et cetera. Specifically on the proprietary brands, you saw a growth rate 50% higher than the total average, so high teens. And a lot of that just comes from, again, strong effort by both the customer-facing team in North America as well as the global team that manages proprietary brands on a global basis. So we're super bullish there. There's a great slide in the presentation, slide eight, which shows the mix of our business on a year-over-year basis. And you can see that for the products that we control, our technology and our proprietary brands You know, we had 23% year-over-year growth, and it now represents 45% of the total GDP in the business versus 41% just a year ago. So, you know, to be doing that on such a large-scale number, which is about, you know, $215 million, we're just – Really, really excited to be closer and closer to kind of the 50% magic number that we've been pushing towards of getting our own products to represent 50% of GT. So just really excellent execution, and I think a sign that we're just picking up share in North America specifically on all in-planning business, whether it be third-party or our own brands. And then Matthew can speak about the specific – Challenges and when we're focused on and probably give a sense of timing, you know on the rebound there Yeah, let me take these separately because they're very separate issues.
spk02: I'll talk a bit about Germany first And it actually occurred first and just to refresh your memory Germany was the last of the 72 TSAs that we had to get off as part of the separation from Henry Schein and we effectively came off of that TSA in October of last year, right in the middle of the pandemic. But what that actually involved was getting out of a shared warehousing situation with Henry Schein into a new third party logistics provider, supplier and warehouse, which was pretty difficult and done in pretty difficult circumstances. As we mentioned on previous calls, the execution of that was to put it kindly, and our service levels to customers were really, really unacceptable. It resulted in a lot of lost sales starting last October. So in terms of timing, we are now beginning to lap that. So we anticipate going forward that there's not a sales headwind in Germany, although we far from fixed the problem and aligned the cost structure. In the UK the situation there really revolves around two things that are related. We lost a manufacturer and then as a result of losing that manufacturer we lost a customer and it had a pretty severe impact on revenue and that started in the first quarter of this year. So the lapping of that is going to take us a little bit longer. big reductions in revenue and we need to make corresponding adjustments to our cost structure. We're working on that as we speak and I would imagine having plans in place by year end, obviously in certain markets the consultative process around making adjustments to the cost structure can take a little bit longer than expected. but certainly no later than mid-first quarter. We ought to have that behind us and be operating in the way we'd like to go forward. In terms of magnitude, I'd say the UK is just a little bit bigger than Germany. It was a much bigger market for us, so that's weighing on us just a little more. Hopefully that got your questions, Elliot.
spk08: Yes, great. Then I guess just As a follow-up to the cost question, how do you think about these moves in terms of potentially impacting the top line and sort of manage through that possibility?
spk02: Well, I think we're looking to do two things. One is to recover the top line slowly, but we're not going to get all of these customers back immediately, so it's going to take time. So the plan is to adjust the cost base, get the returns back towards where they used to be and where we need them to be, and if the top line responds quicker than we expect, that'll be growth.
spk06: Operator, can you move to our next question?
spk09: Our next question is coming from Erin Wright, Morgan Stanley.
spk03: Great, thanks. As you head into kind of 2020 or 2022 here and think about vendor negotiations, conversations with your manufacturer kind of partners here, do you anticipate any major shifts in access to product lines by cell versus agency relationships? Do you have any visibility yet on that front? I think you mentioned some access to new products maybe heading into next year, but anything else we should be thinking about?
spk10: Hey, Aaron. We don't anticipate any significant shift here. We're in the beginning of those conversations with the manufacturers, and I'd say the general message is I think people are excited about our omni-channel solution and the differentiation that we bring to the marketplace. Obviously, there's always puts and takes in these relationships, but I don't believe at this time that there's going to be any significant moves, positive or negative.
spk03: Okay, that's helpful. And then in terms of the prescription management business, I mean, should we be thinking about that still as a 30% to 40% grower longer term? And I guess it's more about retention and engagement than it is about adding new platform users, but I did notice it was, I guess, flat on retention. On a sequential basis, was there any sort of reason for that?
spk10: Thanks. Yeah, so I think, you know, we're not modeling or forecasting, you know, 30% to 40% growth. I think that, you know, the numbers in the mid-20s is kind of what we've been sticking to and what we think is appropriate. You know, part of it is just the law of large numbers here at the business scales. You know, growth is going to come from both new ads to the platform and engagement on the platform. If you look at the number of consumers on a practice basis, it's still a very small number. So we feel like there's lots of running room in the existing business. There's lots of running room for us to add new customers to the platform.
spk02: And I think if you look at practice ads and you look back at last year, we were flat in the same quarter. It's a tough time to get into practices and make that sell in the holiday season, but we'd expect that to pick back up again.
spk03: Okay, great. Thank you.
spk09: And for our next question, Balaji Prasad of Barclays. Go ahead.
spk05: Hi, good evening, and thanks for the question. So getting back to prescription management again, can you call out some of the big shifts, at least in terms of the conversations that you're having, and how we have to think about growth in the net ads? I mean, you just called out that you still think that there's going to be significant, and what's the pace that we can expect? And secondly, as I look at the EBITDA component and your guidance, did you say that you have taken the inflationary or supply chain advance fully into account in your pricing reset and so the guidance incorporates that fully? Thanks.
spk02: Do you want me to take the last one first, Ben, on free pricing? Yeah. Yeah. If there's a massive shock in Q4 in freight rates that we didn't see coming into it, we have a price for that. But we have a price for the rates we're incurring going in. So we think we're pretty covered in the guidance we've provided.
spk10: And then in terms of the first question about the types of conversations that we're having on prescription management, I think the general tenor in the market has been advanced from one where home delivery or prescription management was kind of a defensive solution to now one where veterinarians believe that they need to have a solution in order to, you know, compete with, you know, retail and other players. So we're excited by just the kind of general shift in the market. on that front, and we think that will be beneficial to the business over the long term, both in terms of the engagement on the platform as well as just new people willing to adopt the platform.
spk05: Thank you. If I can have a follow-up here, also on your trial lawsuit with Chewy. So I saw the response that you provided. You're commenting that Chewy has been suppressing competition Can you give any further updates on this and also let us know if you need to take any provisions to either make for a potential trial or settlement going forward?
spk10: Yeah, well, Balaji, you know, I obviously won't comment on active litigation, but what I will say is we feel very comfortable in our position. We know that we are well situated as we are the only business that is truly trying to drive a positive outcome for the veterinarian, whether that be a health care outcome or a business outcome, and that veterinarians are well within their rights to promote their own pharmacies. So we have been heartened to see the response in the marketplace from our customers who are waking up to the potential disintermediation that an online retailer like Chewy might provide.
spk05: Got it. Thank you. That's helpful.
spk09: Okay. At this point, we no longer have questions on the queue. And this concludes today's conference call. Thank you, everyone, for your participation. You may now all disconnect.
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