Covetrus, Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good afternoon. My name is Ann, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Covetrus 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.

[Nicholas Jansen:]

Thank you, Ann. Good afternoon and thank you for joining us for Covetrus's Q1 2021 earnings conference call. Joining me on this afternoon's call are; Ben Wolin, our President and Chief Executive Officer; and Matthew Foulston, 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.

[Ben Wolin:]

Thanks, Nicholas. Good afternoon, everyone and thanks for joining us today. I hope everyone remains safe and well. On this - 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 3, 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.

[Matthew Foulston:]

Thanks, Ben. Good afternoon, everyone and 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 8, Q1 was another strong quarter for Covetrus with 4% year-over-year organic net sales growth and $57 million in adjusted EBITDA, both of which eclipsed the 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 markets 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, ecommerce 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, the 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 9, Covetrus 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 port 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 scil 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 improvements during the quarter due to the mix of revenue delivered in Q1. Turning to Slide 13, on 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 for the recognition of certain manufacturer incentives, which are now reflected as a reduction in cost of goods sold versus previously included is the net sales 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, the quarter 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 a 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 the 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. Our 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 Kruuse 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 transitions 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 Covetrus 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 market segment on Slide 15. Our team delivered 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 continue 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 GAAP 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 31st, 2021, which was lower compared to $290 million at December 31st, 2020, primarily reflecting seasonal cash flow use. We ended Q1 with approximately $510 million in available liquidity and with 2.4 times 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 million to $255 million for 2021, an increase of $5 million from our previous guidance. This outlook reflects stronger results to be 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 the investors of the specific cost actions taken in Q2 2020 because of the onset of the COVID-19 pandemic, as well as the spike in 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 to slightly below the 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, the midpoint of the outlook and continued steady progress against our long-term adjusted EBITDA margin expansion goals. With that, I would now turn the call back over to Ben for some brief closing remarks.

[Ben Wolin:]

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.

[Nicholas Jansen:]

Thanks, Ben. Now we'll begin the Q&A section of our conference call. We want to take as many questions as possible, so we asked you to limit them to two and then reenter the queue should you have additional one. So, Ann, please provide instructions and we are then ready to take the first question.

[Operator:]

Thank you. Our first question comes from the line of John Kreger from William Blair. Your line is now open.

[John Kreger:]

Hey guys, thanks. Ben, can you still elaborate a little bit more on what your plan is to get Europe back into a growth mode? I think Matthew just said it's 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?

[Ben Wolin:]

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, I've 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, you know, point out, though, you know, in terms of kind of quality of revenue and value to the business, you know, despite the 12% decrease in revenue, you had a 17% increase in EBITDA in the quarter. So, while you know, you're never happy about revenue going the wrong way, certainly from, you know, margin profile and type of revenue, 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.

[John Kreger:]

Great, thanks. So 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?

[Ben Wolin:]

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, Kruuse, Vi, proprietary product, technology, all of that is growing, the margin profile that is obviously significantly higher than, say, distribution revenue in the UK. So if anything, we could have margin expansion over time, as the mix changes in Europe. And while it won't get, you know, APAC or US overnight, that certainly is the long-term aspiration.

[John Kreger:]

Sounds good. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Jon Block from Stifel. Sir, please go ahead.

[Jon Block:]

Great, thanks. And good afternoon. Ben, this one for you. Slide 4 is just very helpful and helpful breaking out the gross profit from third-party products versus you know proprietary. If I remember the slide, I think proprietary was 23%-ish of sales and almost 2x, the gross profit dollars. 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 months to 24 months? I know, you have the long-term margin aspirations, but I believe, you know, 10%, up from almost 2x or 5%. But if we were to get more granular, how do we think about that bar chart maybe evolving in coming quarters?

[Ben Wolin:]

Yeah, absolutely. You know, I would say from you know, 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.

[Jon Block:]

Got it. Thanks for that. And then, Matthew, you know second question for you. You know, the 1Q '21 EBITDA beat handily. You walked up the guidance, but the corporate still seem like a pretty big anchor. And it seems like, you know - and I don't even know, maybe the raise would have been bigger. But 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 you know, if I remember correctly, last quarter, you thought corporate wasn't going to be a big step up in '21 versus '20. This is 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.

[Matthew Foulston:]

Yeah, now great question. And there's some complexity within there and you absolutely should multiply it by 4. There's two things in there. One is, there's a combination of a couple of million bucks of FX on interquote 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 $1.5 million 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 haven't improved quite as much. So, getting on the half of that eight is unique circumstantial.

[Jon Block:]

Perfect. Thanks for the color.

[Operator:]

Thank you. Our next question comes from the line of Nathan Rich from Goldman Sachs. Your line is now open.

[Nathan Rich:]

Hi, good afternoon and thanks for the questions. Matt, if I could maybe start with your commentary on the Prescription Management businesses, it seemed like there are 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 drag to the Prescription Management growth, and then another 400 basis point impact from the two fewer selling days. So normalizing for that would something you know, 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.

[Matthew Foulston:]

Yeah, let me take them in the order you posed them and you got it completely right. The growth that's reported was 33%. We moved some manufacturer incentives from revenue to COGS prospectively, we didn't go back and adjust the prior periods because of all the workload for, you know, 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 look - go back to the 33% we reported, it grew really strongly through the quarter, started out slow and ended terrifically in March with 40% even with the accounting drag in 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 discrete investments that we knew weren't going to pay back in the period. But with the extra, what's the right word, granularity and precision with which we're targeting where we spend the money, we think the returns 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, that dragged on the margin a bit. So yeah, 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.

[Nathan Rich:]

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 just to 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?

[Matthew Foulston:]

Yeah, I'll give some qualitative feedback, Nathan. So I think you're right, very strong growth, our channel tax 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'd 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.

[Nathan Rich:]

Thanks for the .

[Operator:]

Thank you. Our next question comes from the line of Erin Wright from Credit Suisse. Please go ahead.

[Erin Wright:]

Hey, 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 VFC? And did you get specifically, I'm sorry if I missed it. Did you get specifically what your anticipated growth rate is for that business embedded in your guidance for the year? Thanks.

[Ben Wolin:]

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, 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, you know, but the veterinarian as we do a better and better job of selling value and extending, you know, the revenue opportunity for a vet outside the clinic, we're getting more and more activation within those practices. So we saw, you know, a pretty nice uptick in terms of the number of practices that were proactively prescribing, marketing and, you know, adopting the platform in the last, you know, 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'd be a parasiticide or compounded medication. And we don't expect that trend to slow down in any way. And as we, you know, 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.

[Erin Wright:]

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 capability that AVImark and will that be meaningful for you in terms of in terms of increasing customer engagement overall?

[Ben Wolin:]

Yeah, absolutely. I think if you look at our, you know, 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, you know, whether that'd be for the customer or the consumer. So we announced, you know, recently, the full rollout of Prescription Management embedded into AVImark, and that just makes it one less step, one less obstacle for the veterinarian when you know, driving any 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 this is making it more and more compelling for both the vet and the pet parent.

[Erin Wright:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from the line of Elliot Wilbur from Raymond James. Please go ahead.

[Elliot Wilbur:]

Thanks. Good afternoon. A question for, Ben, I guess. You know with respect to the gross profit contribution from your higher margin segments, technology, commerce and proprietary products, looks like the margin there's about 35% roughly, can you provide some specific commentary in terms of the relative contribution of the branded products portfolio when compounding businesses versus the tech and e-commerce, and then just sticking about the longer-term contribution from your new 503B compounding facility? I don't know if you've ever talked about sort of, you know, what you think be the incremental revenue opportunities associated with that, but maybe just some commentary there with respect to capacity, technical capabilities and you know how that business once at scale could impact the overall margin profile of your higher margin segments. Thanks.

[Matthew Foulston:]

Yeah. You're welcome. Elliot, could you ask the question again, I'm a little - I just want to make sure I'm answering the right question in terms of, were you asking about this split of gross profit between technology and proprietary brands are the different margin profiles.

[Elliot Wilbur:]

Specifically different margin profiles. Differential between the branded products compounding versus tech and e-commerce and ultimately, where that could go as the compounding facility starts to become a bigger contributor to the overall revenue picture.

[Matthew Foulston:]

Yeah, short thing so I'll kind of break out a couple of different you know, profiles of you know, the 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 a Kruuse, you know, closer to 40%, you know, plus percent, you've got compounding, you know, 50%-plus and technology, even a slight nudge about that in the 55% to 60%. And so obviously, there's different growth rates and different market opportunities for those things. But you know, the whole blend the mix, obviously, is substantially better than, you know, third-party distribution. In terms of the 503B facility and the new, you know, investment in Grandview or Phoenix, Arizona, we really believe that that could be a game changer for the compounding business, not the front. From an operation 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 improved immensely. And I think from, you know, customer and marketing, you know, customer satisfaction standpoint, people can, you know, know that, you know, 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.

[Nicholas Jansen:]

Operator, you can move to the next question.

[Operator:]

Thank you. Our next question comes from the line of David Westenberg from Guggenheim. Your line is now open.

[David Westenberg:]

Hi. Thanks for taking the question. I want to just talk a little bit, I think it's kind of a continuation of Erin's question on the Prescription Management business. We are about to last 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 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 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 the lapping of that strange behavior.

[Matthew Foulston:]

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 going to be a challenge. If you take our comment about the annual growth, you know, between 30% and 40%, the way we see the first half together is that the low end of that range, and we see the second half at the high end of that range. So you can probably, you know, triangulate what we think the second quarter is going to be like and it's going to be a struggle with that kind of comp.

[David Westenberg:]

Got it. Okay, all right I'll take it as that. That's great. I appreciate the extra commentary. You know, on the initiatives, you talked about the consumer marketing effort, I think of Covetrus or more, you know, legacy vets first choice is kind of the back end of Prescription Management, where you're kind of marketing for the veterinarian. And you're kind of in that slide, I think it says something around the lines of increasing awareness in pet parents, is that increasing awareness of the of your brand specifically, can you give us a little bit more color on that brand engagement after that you're doing, just given the fact that like I think traditionally as vet's first choice around that paradigm, kind of vet's first choice is like the pushing the branded of veterinarian. So has there been any kind of changed 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.

[Matthew Foulston:]

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 request makes the purchase request the script versus 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.

[David Westenberg:]

Got it. Thank you very much for taking the questions.

[Operator:]

Thank you. Our next question comes from the line of Balaji Prasad from Barclays. Please go ahead.

[Balaji Prasad:]

Hi, good afternoon. So just following up on the earlier question on your explanation of the canons of growth of Prescription Management was helpful. Can you remind us of the drivers of EBITDA margin and the segment and as you lap the higher end of the range for H2, how should we think about EBITDA margins for the segment?

[Ben Wolin:]

Yeah, I think on a, you know, long-term basis, we think about 15% to 20% flow through to EBITDA on a trailing 12-month basis. And the real 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 dividends in the long-term. So we, you know, we're really balancing growth and profitability in this business, you know, to exit Q1 at a 40% year-over-year growth rate. And, you know, 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, you know, the next couple of year period.

[Matthew Foulston:]

I think the other thing is, when we look at the stickiness, you know, of these customers from 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.

[Balaji Prasad:]

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?

[Ben Wolin:]

You know, I think that you know, somewhere in the 50 bps range, is what we would be thinking, again, it's a bit qualitative from, you know, market tax and third-party data. But I think if you just go and look at maybe some of our competitors, you know, public announcements and look at our North America growth versus theirs. I think that's another way of triangulating that data.

[Balaji Prasad:]

Understood. Thank you.

[Operator:]

Thank you. I am showing no further questions at this time, I would now like to turn the conference back to Mr. Nicholas Jansen.

[Nicholas Jansen:]

Thank you, Ann 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 Stifel Jaws and Paws Conference in early June. Thanks. Have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.