Covetrus, Inc.
Q3 2019 Earnings Call Transcript

Published: 12 Nov 2019

[Operator:]

Good morning. My name is Jimmy and I will be your conference call operator today. At this time, I would like to welcome everyone to the Covetrus Third Quarter 2019 Earnings Conference Call. I would now like to turn the call over to Mr. Nicholas Jansen, Vice President of investor relations. Please go ahead.

[Nicholas Jansen:]

Thank you. Good morning, and thank you for joining us for Covetrus' Q3 2019 earnings call. I am Nicholas Jansen, Vice President Investor Relation. Joining me on today's call are Benjamin Wolin, our Acting President and Chief Executive Officer; and Christine Komola, our Executive Vice President and Chief Financial Officer. Ben and Christine will begin with prepared remarks and then we'll be happy to take your questions.During this 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, may, expect, plan, anticipate, upcoming, believe, estimate, 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, quarterly report on Form 10-Q, earnings press release on Form 8-K and other periodic reports filed with the Securities and Exchange Commission, which are available on the Investors section of our website at ir.covetrus.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.During this presentation, we will also provide certain pro forma results for the 3 and 9 months ended September 30, 2019, and 2018 to help investors understand the underlying trends in the business as if the merger of the animal health business of Henry Schein and Vets First Choice closed on December 31, 2017. Note however, the historical combined financial statements do not necessarily reflect what the results of operations would have been had we operated a combined company during this period as those results would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such information technology and infrastructure.You can find this morning's press release announcing our third quarter 2019 results on this call on ir.covetrus.com. We will continue to use our site to distribute important and time-critical company information. The press release also contains further information about the non-GAAP financial measures that we will discuss during this call. These non-GAAP financial measures exclude from our GAAP financial results certain non-cash or non-recurring items, such as costs directly associated with the spin-off in merger and the ongoing integration process, including certain infrastructure investment expenses, restructuring charges and goodwill impairment charges. We believe that in order to properly understand our short term and long term financial trends, investors may wish to consider the impact of these items as a supplement to financial performance measures determined in accordance with GAAP. Please refer to this morning's press release announcing our third quarter 2019 results for a reconciliation of these non-GAAP measures to our GAAP financial results.With that, I will now turn it over to Ben to provide the highlights.

[Benjamin Wolin:]

Thanks, Nick, and good morning everyone. It has been 3 weeks since I assumed my current role at Covetrus, and during that time, I have spent as much time as possible speaking with shareholders, employees, customers, partners, and clients to better understand our company, and how to build success for every one of our essential stakeholders going forward. While it's been a brief period of time, and there's much more work to do, I'd like to take the early parts of this call to talk with you about five core themes that I am focused on moving forward.First, all of us here need to acknowledge and take responsibility for the very difficult and challenging entry and early life we have had as a public company. We underestimated the sheer complexity of the transaction and the many competing priorities which drove increased spending and added an additional set of challenges to an already complex process. Clearly, some of these difficulties were self-inflicted missteps, and as a result there's plenty of responsibility to share for our performance as a public company this year. With that said, I want to make a clear statement that the Board, the executive leadership team, and the many employees across the globe with whom I visited since becoming CEO remain unified and fully committed to the promise and value that Covetrus model can and will deliver to our customers, manufacturers, partners, employees, and shareholders. For our customers, that value means using our unique and integrated supply chain, software, and technology capabilities to deliver clinical and financial success. For their clients, we can provide an improved experience and access. And for our manufacturers, this means unlocking new demand throughout the market. I'm confident that the global opportunity remains and we expect to deliver on that opportunity.Second, before we discuss results, I want to make it clear that we will be changing how we analyze and discuss the company and its progress going forward focusing internally and externally on simplicity and openness for our business. While the initial merger and early integration has been challenging, it is becoming clear to our team what the most critical financial drivers and metrics of our performance are, and we will work very hard to be open and clear in describing and discussing those metrics with you. By focusing on these drivers and providing greater clarity on the specific levers we have, we will promote increased accountability throughout the organization, enhance our execution, and in time we expect that we will deliver more consistent financial performance that meets our high standards and expectations.Third, we will identify and focus on the core drivers of our business and eliminate activities that are not central to our value proposition. There are too many projects, initiatives, and distractions, and frankly too many non-core assets from Legacy acquisitions. This will change. By concentrating on our key initiatives and our core businesses, we will drive more focus within our organization, free up resource capacity for innovations, and accelerate our balance sheet initiatives. To fast track this process, we have already brought in outside expertise to partner with us and emphasize the importance of moving quickly and executing, but in a way that delivers meaningful value to the organization.Fourth, for Covetrus to succeed, we need to focus on execution and innovation. Execution and innovation starts with a simple understanding that everything we do must both improve our customers' practice health and clinical success. This can only happen by ensuring that we are retaining and recruiting the best talent for our organization and ensuring that our incentives are appropriately aligned.My fifth and final theme; focusing on culture and talent will be part of everything we do. We will build a culture focused on customer-centricity, collaboration, trust, transparency, a shared vision, and a pursuit of clearly defined winning outcomes. We will promote and recruit the best talent that aligns with our culture, and we will work collaboratively to succeed.I will now hand it off to Christine to provide a detailed review of our third quarter 2019 results.

[Christine Komola:]

Thanks, Ben. Good morning, everyone, and thank you for joining us today. I will focus most of my third quarter result comments on our pro forma non-GAAP measures 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 third quarter results in accordance with GAAP. Covetrus GAAP net sales were just over $1 billion in Q3 or a 10% year-over-year increase. Non-GAAP pro forma organic net sales increased 5% year-over-year in Q3. As a reminder, pro forma net organic sales growth includes a full quarter of Vets First Choice in both periods, excludes the impact of foreign exchange fluctuations and M&A and normalizes for net sales adjustments for manufacturer switches from direct to agency sales in the United States, which can impact year-over-year comparisons.These results include the impact from the previously announced customer loss in North America and the impact within APAC tied to a manufacturer moving to a direct sales model in Q4 2018. Normalizing for those 2 events, underlying pro forma organic net sales growth would have been nearly 8% in Q3, a little bit more than 4% year-to-date.Moving to our operating segment net sales performance, North America pro forma organic net sales increased 4% year-over-year in Q3. The previously announced loss of a supply chain customer earlier this year negatively impacted organic growth in Q3 by 4%. Our supply chain pro forma organic net sales growth increased 1% year-over-year in Q3, or 5% when the previously announced customer loss is excluded. Total Vets First Choice net sales increased 36% to $72 million in Q3 versus 30% year-over-year growth last quarter, and we ended Q3 with approximately 9,700 practices on the platform.Turning to Europe; pro forma organic net sales increased 6% year-over-year in Q3. Our U.K. pro forma organic net sales, which is our largest market in Europe increased 5% year-over-year. Our U.K. business is beginning to benefit from the expansion of our relationship with the largest corporate group in Europe, which we announced on our Q2 call. We also experienced healthy pro forma organic net sales growth in most of our European markets, including solid performance from our businesses operating in Ireland, Czech Republic, and Belgium.Moving on to APAC and emerging markets; our team delivered a 3% year-over-year increase in pro forma organic net sales in Q3, which is a further acceleration relative to our first half of the year results. I think it's important to note that this growth more than compensated for the negative 8% year-over-year sales impact resulting from a manufacturer that rents to direct sales model in this market in Q4 last year, normalizing for that event, the APAC and emerging markets segment group doubled digits year-over-year, driven by continued growth in the number of customers served.Turning to consolidated gross margin; our GAAP gross margin was 19.4% in Q3 versus 18% in the prior period. If Vets First Choice is included in the prior period, gross margin as a percentage of net sales would have been relatively flat year-over-year. Growth in our higher gross margin technology businesses offset the impact from customer consolidation, changes in manufacturer margins and then negative mix of sales both from a product and a geographic perspective. Our GAAP selling, general and administration expenses were $260 million during Q3. This includes our one-time costs as well as the additional ramping of reoccurring operating expenses tied to our infrastructure investments. We implemented certain cost-saving measures in Q3 to help offset some of the higher than expected SG&A tied to being a new public company. Longer term, we will continue to look for ways to further reduce cost and complexity and simplify our organization.As you are probably aware, during our Q2 earnings call, we revised our full year adjusted EBITDA guidance, which in turn contributed to a sustained decline in our share price and market capitalization. These events triggered an interim goodwill impairment review based on GAAP. Based on our analysis, we determined that the carrying value of our reporting units, some of which were based on the initial evaluation at the time of the spin-off and acquisition in early February, exceeded their fair market value. As a result, we recorded a non-cash goodwill impairment charge, totaling $939 million in Q3 that is included in our GAAP operating results.Pro forma adjusted EBITDA, which excludes items like goodwill impairment, spin-off and merger-related expenses, and share-based compensation among other things, was $49 million in Q3 versus $51 million in the prior year. Changes in foreign exchange rates negatively impacted adjusted EBITDA by $1 million year-over-year. Q3 adjusted EBITDA, excluding the impact of foreign exchange, declined modestly year-over-year on a pro forma basis, as a result of higher SG&A expense which offset growth in gross profit. Adjusted EBITDA declined versus Q2, which is consistent with the typical seasonality of our businesses, but also reflects the incremental spending on infrastructure related to the first half of the year. While our pro forma year-over-year results benefited from the scaling of legacy Vets First Choice and was aided by the year-over-year value capture benefit that I will discuss in a minute, we continued to see gross margin pressure across many of our supply chain businesses despite the improved sales performance during the quarter, a trend that might continue in the near term.Turning to value capture; we exited Q3 at a $10 million run rate and incremental EBITDA with sequential progress aided by the procurement benefits and the initial savings from our new shipping contract, early contributions from our prescription management activations year-to-date and newly launched initiative to increase engagement with strategic customer accounts. In total, we remain on track to exit 2019 at our expected $20 million run rate EBITDA benefit, based on efficiency gains realized from recent business unit integrations in late Q3. That said, we acknowledge this run rate benefit has been more challenging to achieve than initially anticipated and has been more dependent on cost-saving measures and less though on the originally planned revenue synergies. The global opportunity remains and we are committed to delivering against the $100 million target. That said, we acknowledge the target may take longer than anticipated to achieve.Looking at the rest of the income statement we had approximately $15 million in that interest expense in Q3. Our GAAP net loss was $906 million for a loss of $8.09 per diluted earnings per share as a result of the aforementioned non-cash, goodwill impairment charge booked during the quarter. Our pro forma adjusted net income as seen on our non-gap reconciliation was $19 million versus $21 million in the prior year. Please know that our pro forma adjusted net income for all periods now adds back amortization of acquired intangibles for all legacy acquisition versus our previously disclosure of only adding back amortization of acquired intangibles for the Vets First Choice acquisition. This decision was made to align our external reporting with the way we look and manage the business.Turning to the balance sheet and cash flow metrics. Covetrus generated $33 million in cash flow from operations during the first 9 months of 2019 and $3 million and non-GAAP free cash flow. Then when subtracting net purchases of property and equipment of $30 million. For the full year, we now expect $50 million in capital expenditures, including our infrastructure investments versus the prior forecast of $50 million to $60 million, as we have prioritized spending on our highest return projects to reduce our capital commitments. We ended Q3 with $68 million in cash and cash equivalents on the balance sheet, $1.2 billion in long term debt and no borrowings against our $300 million revolver credit facility. Our cash on the balance sheet increased $13 million sequentially, despite paying the last $40 million owed to Henry Schein during the merger agreement which occurred during this quarter. We remain focused on cash flow generation as we prepare for fiscal 2020.Our net leverage ratio is defined by our credit agreement stood at approximately 4.3x for the trailing 12 months into September 30, 2019, inside the 5.5x covenant. The net leverage covenant drops to 5.0x next year and will be in effect for the trailing 12 months period ending June 30, 2020. As you are aware, our credit agreement permits adjustments to EBITDA for certain items, including consideration for our run rate value capture, as we expect to realize over the next 12 months. We remain committed to deleveraging and we will look for opportunities to do so beyond the mandatory $15 million quarterly term loan amortization payments that begin in the first quarter of 2020. As then mentioned earlier, by streamlining our organizational focus, we look to enhance our financial flexibility moving forward, including de-leveraging as appropriate.Finally, turning to our full year guidance, we continue to forecast non-GAAP pro forma organic net sales growth of low single digits, which is consistent with our 2% growth achieved year-to-date in our prior forecast. Note the expected negative impact from the previously disclosed customer in North America and the impact of our one-time manufacturer moving to a direct sales model in APAC in October 2018 remains unchanged at about 2% in 2019.As we embark on our path forward and excess current - and access the current trends and where we stand through the first 9 months of the year, we believe it's appropriate to update our 2019 non-GAAP pro forma adjusted EBITDA outlook. We're now forecasting 2019 non-GAAP pro forma organic EBITDA in the range of $190 million to $196 million. As we're currently in the process of our bottom-ups planning for 2020, we will not be discussing our 2020 outlook at this time, and expect to provide our guidance for the next year on our Q4 conference call.Our team is focused on executing against our core pillars in order to put us in a better position for a stronger sustained earnings growth in the year ahead. Lastly, as more fully disclosed in our form 10-Q that will be filed later today, management has identified deficiencies on our internal control over financial reporting relating to the operation of information technology, general controls in the area of logistical security, and change management. The aggregate impact of these is the risk of failure of automated, controlled, and other controls that rely on data from these applications primarily and change management and logical security functions.The material weakness did not result in any identified misstatements in the current period, consolidated financial statements nor in any restatements of consolidated financial statements, previously reported, and there were no changes in previously reported financial results.We've begun to develop a remediation plan for this material weakness, which will be remediated and disclosed in our annual report of 2019.Now, I turn it back over to Ben for some brief closing remarks.

[Benjamin Wolin:]

Thank you, Christine. Before opening the call for questions, I just want to say one more thing. I've only been here for three weeks and obviously there's a tremendous amount of work to be done to fulfill our promise. But I also feel that there's a tremendous amount of opportunity here. It's a large and growing market. We have the asset and a powerful platform with a large user base and some real significant opportunities to innovate. I'm excited about this opportunity. I'm excited about working with the people here, and I look forward to continuing to speak with all of you as we start this new path forward.This concludes our prepared remarks, and now I will turn it over to Nick to moderate the Q&A session.

[Nicholas Jansen:]

Thanks, Ben. We want to take as many questions as possible, so we ask you that you limit to two and then reenter the queue should you have additional ones. So Jimmy, please provide instructions for the Q&A session, and we're then ready to take the first question.

[Operator:]

[Operator Instructions] Our first question comes from John Kreger with William Blair. Your line is now open.

[JohnKreger:]

Hi, thanks very much. Ben, thanks for those initial comments. Can you maybe just review the gross margin pressures that I think you guys touched on briefly in the call, just elaborate are you seeing that globally or is it in a particular region, just give us some more detail? Thanks.

[Benjamin Wolin:]

Sure thing, John, you're welcome. Good to meet you. So, just in terms of, you know, gross margin, you know, the end market for us continue to remain healthy. But as you know, over the last year, we've continued to see consolidation both on the manufacturer side as well as on the end-customer front, and that has been where we're seeing the gross margin pressure. I don't think it's been any different from - sequentially from quarter-to-quarter. In terms of moving forward, we're acutely aware that we need to have a great unified platform that will allow us to address those type of pressures and bring real value to our customers and our manufacturers.

[JohnKreger:]

Great, thanks. And then, I know you don't want to talk about 2020 but can you give us an update on when you think you can take the prescription management platform outside the US? Thanks.

[Benjamin Wolin:]

Sure thing. So, it's a little bit premature for me to give specific plans around the expansion of the platform, but we are laser focused on driving value for our customers through the expansion of that platform both in the U. S. and abroad. In terms of a specific timetable, it's a little bit early for me to set any markers out there.

[JohnKreger:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Jon Block with Stifel. Your line is now open.

[JonathanBlock:]

Thanks. Good morning. Just a couple from me. I think in the start of the remarks, you talked about the complexities of the business and the $100 million value capture that may take longer than that three-year window. I think you also, Ben, alluded to some potential sales or divestitures that could occur in noncore assets, so just taking a step back, what do these variables mean for the original goals of call that long term double digit growth in adjusted EBITDA for the company? Do those two variables weigh on those long term targets? And then I've got a follow-up. Thanks.

[Benjamin Wolin:]

Sure thing. So, thanks for the question. You know, in terms of the long-term goals of the business, both strategically as well as financially, I think all of that remains intact, you know, obviously we're behind, you know, schedule in our first year. And I think, really, the complexity of the transaction, the amount that we tried to do in year one, clearly slowed us down. So, I don't think anything has changed in terms of looking at different ways to delever on the balance sheet, obviously makes sense given the position that we're in, but we would only do that in areas where we think it is noncore and wouldn't take away from our future opportunity.

[JonathanBlock:]

Got it, very helpful, and then just a pivot, you know, in the past couple of quarters, you gave some very helpful metrics on sort of the purchases that were occurring in the veterinary practice and highlighting some of the moves that we saw out of the practice into the alternative channels. That was accelerating, I think, from 1Q to 2Q, do you have those metrics for 3Q or maybe just at a high level taking a step back, that it sort of stabilized this particular quarter, you know, your revenue growth seemed to certainly strengthen and come in above expectations? Thanks, guys.

[Benjamin Wolin:]

Yes, so without getting into detail, I'd say at a high level, the market was slightly better in Q3, and as you pointed out from the results, we saw stability in the quarter and that was reflected in the financial performance.

[JonathanBlock:]

Thank you.

[Operator:]

Thank you. Our next question comes from John Ransom with Raymond James. Your line is now open.

[JohnRansom:]

Hi. Good morning. Christine, maybe, could you take us through the 3Q, $49 million of adjusted EBITDA to the implied 4Q, and the 4Q EBITDA, it's a pretty big sequential step down, and it's not clear what's driving that? Thanks.

[ChristineKomola:]

Hi, John. Sure. I would say, you know, as we looked at our guidance, we do have a stable Q3, but having said that, we've just been talking about the pressures that we're seeing in margin, particularly around our customer segments, our infrastructure, the buildup of some of the overhead expenses that we've got. So, when we combine it all together, we just felt it was prudent to adjust our guidance accordingly.

[Benjamin Wolin:]

John, this is Ben. I'd also just add that, you know, obviously we're here in a moment where it's critical for the Management Team and the Company to rebuild trust with our investors in the analyst community, and so we wanted to make sure that going forward, we could have numbers that we could meet and exceed and felt like this was the appropriate expectation to set given where we are right now.

[JohnRansom:]

Okay. So as a follow-up to that. I mean, to be clear, should we model in an increase in sequential G&A or is there some other seasonality in the business around costs that we're not thinking of or is this - or are margins really going to fall off a cliff between 3Q and 4Q? It's just not clear where the - exactly where the pressures are? Thanks.

[ChristineKomola:]

Yes, I would say, as we've been talking about the increase in our overhead, as we build out our infrastructure, both on IT perspective as well as just the corporate overhead gets filled out.That is where I would focus. Gross margin hasn't changed dramatically, but those are the types of pressure that we're seeing.

[JohnRansom:]

Okay. Thank you.

[ChristineKomola:]

You're welcome.

[Operator:]

Thank you. And our next question comes from Erin Wright with Credit Suisse. Your line is now open.

[ErinWright:]

Great. Thanks. I guess, can you go into a little bit more detail on what you're seeing in the North American Companion business? Last quarter, there was pressure, you mentioned some stabilization now, but what changed from the second quarter experience?

[Benjamin Wolin:]

Sure thing. I think that really two things. One, you know, we saw stability in that segment, growth at the end market, from an end market perspective. And then just increased focus by our Team and our Organization about executing against our plan. As a result, I think you saw improved financials from Q2 to Q3.

[ErinWright:]

Okay, great. And then, this is kind of a two-part question, but on the distribution side of your business, I guess can you give us an update on your corporate relationships, particularly heading into 2020? Do you anticipate, I guess, any sort of changes in your corporate relationships next year? And then the second part of my question is on the vendor side. How are those conversations going? We're heading into another round of annual re-contracting here, are the conversations different, kind of, with your new Team in place, and how should we think about that heading into next year? Any sort of meaningful changes in rebate terms, agency shifts, anything like that we should be thinking about heading into next year? Thanks.

[Benjamin Wolin:]

Yes. So, in terms of both, the first and the second questions; you know, we're having very positive dialogues with both our corporate customers as well as our manufacturers. There's no specific news to report at this time, but we, as a business, are pretty focused on having a unified approach out there that combines distribution, software and technology to both drive the P&L of our customers and increase market share for our manufacturers So we feel good about where we're positioned, but obviously know that we have to execute in order to continue to drive the business.

[ErinWright:]

Okay. Thanks.

[Operator:]

Thank you. And our next question comes from David Westenberg with Guggenheim Securities. Your line is now open.

[DavidWestenberg:]

Hi, thanks for taking the question. I realize you're still drinking out of the fire hose, so we'll go kind of easy. So you kind of mentioned in your prepared remarks, changes in language. Can you talk about maybe some key performance indicators that you might be looking at help us track the business? I realize it's brand new, but you know just, what kind of figures should we be looking at in the next couple quarters and say, you know, now it's on track?

[Benjamin Wolin:]

Yes, sure thing. Well, first of all, thank you for going easy on me, David. I think that, you know, for us, that statement was really to reflect a new approach where we're both, being as transparent as possible with both our employees, our customers, and our investors. And we want to create a paradigm where everybody understands what direction that we're - what we're driving in. You know, as it comes to specific metrics, I'm not ready to roll out anything quite new, but obviously, I think some of those areas are going to be around our organic sales growth, our ability to engage our core customers, not just enroll them, as well as the health and growth of the distribution business.

[DavidWestenberg:]

Got it. All right, and then, just, maybe early on, do you - have you identified kind of maybe product lines that would be a core versus non-core? I realize it's very early and you know, anything that might help there would be good. Thank you.

[Benjamin Wolin:]

Sure thing. So, yes, it's premature that specifically identify different assets or specific areas of business, but I would say at the highest level, it's pretty clear that we need to continue to invest and innovate around the platform, and by platform, I'm really talking about the combination of supply chain, prescription management, and PIMS to drive the P&L of our reflective - of our customers as well as to increase market share and create market gains for our manufacturers. And anything that falls outside of that is really something that we're not interested in focusing on.

[DavidWestenberg:]

Thank you so much.

[Operator:]

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

[NathanRich:]

Thanks. And Ben, thanks for your comments to start the call. You mentioned revenue synergies coming in a little bit below expectations; could you maybe just dive into a little bit further detail in terms of what specifically has, kind of, underperformed relative to what you expected at the beginning of the year? Is it kind of sales on the Vets First Choice platform or the profitability of those sales, any details you could share would be great?

[BenjaminWolin:]

Thanks for the question, Nathan. So I think in general, if you just kind of go back to our entry into the public markets, we expected to see a very accelerated adoption of the platform, as well as, not just from an enrollment standpoint, but an engagement standpoint, and we are behind our original expectation. I think that doesn't take away from the real quality of results that we're seeing here in the near term. We're pretty pleased with where we ended up in totality from an enrollment standpoint, but at the end of the day we need to focus on that engagement and get customers to ramp. I think you're starting to see a little bit of that. The VFC business, as Christine pointed out in her remarks grew 36% on a year-over-year basis versus 30% in Q2, so we're starting to see some progress there, but obviously, significantly lower than our original expectation.

[NathanRich:]

Okay, great. Thanks. Thanks for that color. Christine, I just had a quick follow up for you on your earlier comments on the implied 4Q guidance and what you expect to see on the margin side. It sounded like you were pointing to some additional overhead costs. Are those additional investments that you're having to make in the business and just could you share kind of any detail on where you're seeing those additional costs?

[ChristineKomola:]

Sure, they are additional investments to set up the company. As we continue to set up the company that [indiscernible] those costs and building that is a big part of it. Seasonality also takes into effect. Our Q4 results are typically the lowest just because of seasonality year-over-year. And then the other piece that I would add as we think about our corporate overhead and we continue to build out those functions, the first half was just a slower ramp-up compared to the second half as people are more fully employed. The gross margins are not dramatically different. Sales trends seem to be stabilized as well. As you saw, we kind of build back up to where we had previously been, which is why we didn't change our sales guidance.

[NathanRich:]

Okay, thanks for the question.

[Operator:]

Thank you. And our next question comes from Kevin Kedra with G Research. Your line is now open.

[KevinKedra:]

Great, thanks for taking the questions. Maybe to build on that last one. As we think about - I know you said you don't want to give 2020 outlook at this point, but as we think about some of the drivers on that SG&A line for Q4 is that the way we should really be thinking about SG&A going forward what we're going to see in Q4 or are there certain elements that we should think as being either temporary or not fully placed in at this point?

[BenjaminWolin:]

Thanks, Kevin. So we're obviously not giving a 2020 number, but we are aggressively reevaluating our span across our corporate function as well as within the various business units. So it is not safe to model that forward.

[KevinKedra:]

Okay. And then you mentioned covenants, and those are going to drop down from I think 5.5x to 5x EBITDA. You guys seem to be at this point, safely under that, but how comfortable are you with where those covenants are? And have you had any discussions about maybe having those adjusted?

[ChristineKomola:]

At this point, we are still very comfortable with those. Our thinking and our planning allow us to both pay off the amortization that we've got on a quarterly basis and covenant is in good spot. So we don't expect any changes to happen. Bank relationships continue to remain strong. As we said, in our remarks, we are looking at all opportunities, including non-core asset sales as potential ways to further assure up our ability to hit the covenant requirements.

[KevinKedra:]

Thanks.

[Operator:]

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Ben Wolin for any closing remarks.

[Benjamin Wolin:]

Thank you, everyone, for the questions and the time today. I just wanted to reiterate that the board, the management team and all the employees across the globe are very excited about the future opportunity and know that if we are focused and prioritized that we can achieve the long term goals that we had set out to achieve when we initially went public. So thank you, everybody, for your time and look forward to speaking with you in person.

[Operator:]

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