Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the co Vectrus Fourq 19 earnings Conference call. At this time, all participants are in listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised to todays conference is being recorded if you require any further assistance. Please press star zero.
It is now my pleasure to introduce vice President of Investor Relations Nicholas Jansen.
Thank you Andrew good afternoon, and thank you for joining us for Covestor since Q4 2019 earnings call.
Joining me on today's call or bad one, our president and Chief Executive Officer, and Stuart Glickenhaus, Our interim Chief Financial Officer, then Stuart 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 and operational performance in operating expenditures, our plans to reduce our net debt in our business strategy and timing impact of transactions forward looking statements may be identified with words, such as well may expect plan until.
The pay upcoming but leave 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.
You 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 reports on form 10-Q, and other periodic reports filed with the FCC, which are available on the Investor section of our website at IR Daqo Vectrus dot com and on yet he sees website at www Dot FCC Dot 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 three months in fiscal year ended December 2019, and 2018 to help investors understand the underlying trends in the business as if the merger of the animal health business at Henry Schein invest first choice closed on December 30, Onest 2017 note. However, the historic combined financial can.
Statements do not necessarily reflect what the results of operations would have been how do we operated as a combined company as those results would depend on a number of factors, including the chose an organizational structure well functions, where outsourcer performed by employees allocations of certain corporate and sharing expenses and strategic decisions made in areas such as information technology and it.
Infrastructure.
You can find this afternoon's press release announcing our fourth quarter and full year 2019 results on this call on IR Daqo Vectrus Dotcom, 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.
Our GAAP financial results certain noncash or special items, such as cost directly associated with the spinoff in merger and the ongoing integration process, including certain infrastructure investment expenses separation program costs executive severance and goodwill impairment charges. We we believe that in order to properly understand our short term and long term financial trends investor.
As may wish to consider the impact of these items at the supplement the financial performance measures determined in accordance with gap.
Please refer to this afternoon's press release announcing our fourth quarter and full year 2019 results for a reconciliation of these non-GAAP measures to our GAAP financial results and with that I will now turn the call over to ban to provide highlights.
Thanks, Nick and good afternoon, everyone. It has now been a little more than four months since I assumed the role of acting CEO ACA Vectrus and as we announced today I will now be taking on those responsibilities on a permanent basis, we have a lot to get through and I do not want to spend too much time on that but I will say.
Hey this.
We have a solid organization and culture here that are only getting stronger and I look forward to working with this team.
Looking back at the last several months, we've taken a number of significant steps as a company we focus the organization on core drivers of our business supported and strengthen the platform and emphasize the culture that will deliver on the opportunity Covantas has in the animal health marketplace.
Ill discuss those further in a few minutes, but first wants to take the opportunity to provide you with a better sense of what I've learned in this initial period and how I see the company moving forward from here.
This time has revealed a lot about this company and its people. The most important lessons that we have a talented passionate and hardworking team that is focused on executing and delivering value to our customers business partners manufactures and shareholders.
It also highlighted the growing pains, we've faced over the past year as well as the challenges and hard work that still remain for us to deliver on the attractive opportunity presented by this market.
It is clear to me that the team has a deep desire to succeed and possesses the ability to overcome those challenges the willingness of everyone to embrace. This change has helped us focus the business and begin making the needed improvements that will allow us to successfully execute our plans moving forward.
To achieve our goals, we will continue to emphasize the core themes that I shared with you on our last call relentlessly focusing on the core drivers of our business, emphasizing innovation and execution and continuously building a culture of success.
These are the foundation for both our strategy and new wave working and I believe that by continuing to focus and execute while strengthening the platform. We will build on the significant initial steps we've taken as an organization.
Some of these action plans are already in process over the last several months, we've enhanced our execution and increased accountability within the organization. This sharper focus was evident in our Q4 results, which exceeded the high end of our guidance. We established back in mid November for both net sales and adjusted EBITDA.
And importantly, we improved the pace and our approach the integration focused our investments on the core drivers of our business and began to eliminate activities projects and initiatives that were not central to our core drivers.
This was a key message delivered during our third quarter conference call and our Q4 results reflect the early benefit of this approach.
We also implemented certain leadership changes in Q4 and early 2020. This included combining our software and prescription management business units to drive tighter integration of our teams under one leader, Georgia rate and to begin to deliver a unified product roadmap that will help enhance workflow for veterinary practice.
Yes.
Mike Ellis and David hitting two of our most tenured animal health executives also now have additional responsibilities to help execute our strategic plan in North America, and our refocus global sourcing organization.
Additionally, we made a significant change in our finance team with steward glickenhaus stepping in as CFO on an interim basis to help us deliver against several critical short term priorities retaining and recruiting talent has and will continue to be a critical focus as it is paramount to building a shared culture.
A success.
Additionally, we with the support of the third party. We brought in during Q4 have identified meaningful opportunities to not only improve our organizational health, but to also deliver enhancements to our commercial and sourcing strategies. We are optimistic around the possibilities and benefits that these initiatives could deliver later this year and.
Beyond as we execute on these initiatives.
We also made progress on our efforts to streamline our focus and divest noncore assets with the pending sale a skill animal health animal care for $125 million and the announced joint venture in Spain with dish of that.
Significantly enhancing our financial flexibility and reducing complexity in our TSH exit strategy for Spain.
And while Stuart will provide more details in his prepared remarks I'm pleased to also report that we have successfully amended our credit facility late last week delaying the step down of our net leverage covenant by one year until the second quarter of 2021.
While we are confident that our 2020 outlook would have supported the terms in our previous credit agreement the amendment as well as the anticipated skill animal care proceeds provides us with even greater flexibility to execute our strategy as well as to continue to invest in the business for future growth.
Something that has not changed through this effort is our commitment to our customers and innovations we're focused on delivering better experiences and outcomes, which includes relentlessly advancing our customer successes. We're also intently focused on leveraging technology across all facets of our business to lower costs improved service and delivered.
Greater value back to our customers manufactures and partners and we believe additional investment in support and product capabilities strengthens our ability to drive deeper engagement with our sizable customer base.
As we think about 2020, we will build on these steps we will continue to streamline and focus on the core drivers of our business in order to improve effectiveness and efficiency and to seek to deliver more consistent and profitable performance, particularly in North America.
Reducing our cost to serve and better managing overhead are critical priorities as we look to deliver operational improvement and build momentum into the second half of the year and our investments in global sourcing will lay the foundation for margin enhancement and reinvestment in the years ahead.
We will also invest in our team and organizational and operational culture and to learn and better understand the needs of our customers and manufacturer partners in order to bring our collection of capabilities together in an integrated value proposition. This foundational focus will make a smarter and stronger as a team and enable us to more effectively deliver on the global ops.
Unity moving forward.
We're prioritizing and also making investments in our higher margin proprietary products and solutions. In 2020. This includes leveraging our customer access to provide more solutions for their compounding and specialty pharma service needs, which is an increasing customer and pet owner need that drives a fast growing market where.
We are already an industry leader.
We also are making it easier for our customers and their clients to engage on a prescription management platform in 2020, and we're focused on driving even greater utilization as we more effectively leverage our manufacturer partners, our software integration and workflow the ecommerce experience and our marketing capabilities to provide even greater value to all.
Stakeholders.
We expect these initiatives will accelerate same store sales beyond the 16% achieved on the platform in 2019 overtime and based on Investor feedback, we're committed to providing more disclosure on these efforts and other parts of the business beginning in Q1.
In summary, our mission, our strategic priorities and our 2020 plans are now sharper and focus.
There's still much work to be done to fulfill the promise and value. The commit the coverage model can and will deliver these past few months have demonstrated that the approach. We are taking can yield positive results for all of our stakeholders.
Continuing to enhance our culture, an organization and relentlessly executing on our priorities. We will collaboratively we will work collaboratively towards growth and success in 2020 and beyond.
I'll now hand, the call off the Stuart to provide a detailed review of our Q4 and full year 2019 results and our 2020 financial guidance.
Thanks, Ben and good afternoon to everyone. Thank you all for joining us today.
I will focus my comments for the fourth quarter in the full year 2019 on our non-GAAP pro forma results when applicable as these items provides the most insight into the underlying trends impacting our businesses. Please refer to todays press release for more detailed description of our Q4 2019 and full year gap finance.
The results for veterans net sales were just over $1.0 billion in Q4, and approximately $4 billion for the full year 2018.
Non-GAAP pro forma organic net sales increased 4% year over year in Q4, and 3% year over year in 2019, as a reminder, non-GAAP pro forma organic sales growth includes that's first choice in both periods.
Excludes the impact of foreign exchange fluctuations and M&A and normalizes for net sales adjustments the manufacturer switches from direct to agency sales in the us which can impact our year over year comparisons.
These results include the impact from the previously announced customer loss in North America, and the impact in APAC Asia Pacific that is tied to a manufacturer moving to a direct sales model during the fourth quarter of 2018.
Normalizing for these two events underlying pro forma organic net sales growth would have approached 7% in Q4 and 5% for the full year 2019.
Moving to our operating segment net sales performance North America pro forma organic net sales increased 2% year over year in both Q4 and the full year 2019.
The previously announced loss of a supply chain customer negatively impacted North America organic growth by 4% in Q4 and 3% for the full year.
Our supply chain pro forma organic net sales growth decreased modestly year over year Q4 or increased 2% when the previously announced customer loss is excluded.
Overall veterinary practice patient visit growth was modestly softer in Q4 versus Q3 in North America.
But in general to market remains stable and growing for all of 2019, our supply chain pro forma organic net sales growth in North America would have increased 2% when excluding the impact from this specific customer loss.
Total that's first choice net sales increased 37% year over year to $74 million in Q4, and 33% year over year to $270 million in 2019.
We ended 2018 with more than 10200 practices on our prescription measurable platform, achieving our goal of ending the year with at least 10000 practices.
Beyond new enrollments, we continue to have success in driving growth from our existing customer base and as Ben mentioned, we delivered approximately 16% year over year same store sales growth in 2019 importantly, all of our cohorts, which dates back to 2012 continued to grow double digits year over year during 2009.
Yes.
Turning to Europe pro forma organic net sales increased 7% year over year in Q4, and 4% year over year for the full year 2019.
Our UK pro forma organic net sales, which is our largest European market increased 5% year over year in Q4.
Our UK business continues to benefit from the expansion of our relationship with a large corporate group, which we announced on our Q2 2019 call as well as continued solid execution by the team.
We also experienced healthy pro form organic net sales growth and most of our other European markets, including strong performances from our businesses operating in Ireland, Poland and the Czech Republic.
Moving onto APAC and the emerging markets our team delivered 8% year over year increase in pro for organic net sales in Q4 and 2% for the full year 2019.
Normalizing for the impact of a manufacturer that went to a direct sales model in this market in November 2018, the APAC in emerging markets segment grew 12% year over year, Q4, and 8% for the full year 2019.
Driven by continued growth and the number of customers served and strong performance in New Zealand in Brazil. Overall, this team continues to execute well and deliver robust financial results.
Before moving to the rest of the piano I wanted to share that our form 10-K, which will be filed soon will also provide details on our annual net sales for business lines by geography, including supply chain software in prescription management, which we hope the investment community will find useful we remain committed to delivering increased transparency.
In the core drivers of our business.
Turning to the consolidated gross margin our GAAP gross margin was 18.7% in Q4 versus 17.6% in the prior year period.
In Q4, we change the classification of shipping expense at the legacy bets first choice business.
Selling general and administrative expense to cost of goods sold to be consistent with the rest of our business.
In Q4, the classification represented a approximately $7 million shift from selling general administrative expense to cost of goods sold expense and for the first nine months of 2019. The classification represented a $16 million shift there was no impact on adjusted EBITDA on it.
Pro forma basis, which excludes the classification change and includes bets first choice for the prior year period, our gross margin would have been 19.4% in Q4 2019 as compared to 19.0% in the prior year.
For the full year 2018, the pro forma gross margin would have been 19.3% as compared to 19.4% in the prior year as growth in our higher margin services, including our prescription management platform and proprietary products were offset by moderate margin pressure in supply chain.
Our GAAP selling general and administrative expenses were $214 billion during the fourth quarter of 2019 and $808 million during the full year 2019.
This includes the impact of the separation and merger certain special items in the ramping of operating expenses tied to infrastructure investments and the cost of being a standalone public companies.
Non-GAAP adjusted EBITDA was $47 million for the fourth quarter of 2019 versus 52 billion in the prior year period on a non-GAAP pro forma basis.
The 10% year over year decrease on a non-GAAP pro forma basis was driven by an increase in the corporate selling general and administrative expenses lower North American supply chain profitability, a 3 million dollar headwinds in Europe tied to certain general and administrative benefits in the prior year.
Results that did not recur in 2019, and a $1 million overall negative impact from changes in foreign exchange.
These headwinds offset the year over year improvement in bets first choice profitability.
The modest contribution from 2019 acquisitions.
And underlying organic growth in APAC in emerging markets during the fourth quarter of 2019.
On a segment adjusted EBITDA basis.
North America, and APAC in emerging markets witnessed year over year growth, while Europe declined year over year as a result or foreign exchange in the DNA dynamics just described.
For the full year non-GAAP pro forma adjusted EBITDA.
Was $200 million in 2019 versus $219 million for the full year 2018.
Looking at the rest of the income statement, we had approximately $11 million in net interest expense in Q4, our Q4 GAAP net loss was $37 million or a loss per share of 33 cents per diluted share and $1 billion or a loss of $9.50 per.
Diluted share for the full year 2019.
Non-GAAP adjusted net income was $20 million during Q4 versus $21 million on a pro forma basis in the prior year period.
For the full year 2019, non-GAAP pro forma adjusted net income was $82 million versus $94 million in the prior year impacted by the aforementioned decline in non-GAAP pro forma adjusted EBITDA in 2019.
Turning to the balance sheet and cash flow metrics curve interest generated $103 million in cash flow from operations during 2019, and 64 million in non-GAAP free cash flow when subtracting net purchases of property and equipment.
$39 million, we ended Q4, 2019 with $130 million in cash and cash equivalents $1.2 billion and debt and no borrowings against our $300 million revolving credit facility.
Our net leverage ratio as defined by our credit agreement stood at approximately 4.6 times for the trailing 12 months ended December 30, Onest 2019, well inside the 5.5 times covenant.
And as Ben mentioned earlier late last week, we entered into an amended agreement with our syndicate of lenders regarding the step down of our net debt to adjusted EBITDA ratio Covenant that was scheduled to go into effect for the quarter ended June 32020.
Under the amended terms, we have pushed out the step down of our net leverage covenant for one four year with the dropped to 5.0 times net debt to bank defined adjusted EBITDA now beginning with the fourth with a quarter ended June Thirtyth 2021.
Additional details of this amendment will be included in our annual form 10-K.
We plan to file.
Today.
Also subsequent to quarter end, we announced a definitive agreement to sell our skill animal health care business to Heska for $125 million. The transaction is expected to close on or about April 1st and we plan to use 60 million of the net proceeds to pay down debt, including the.
Repayment of our.
Dead on March 30, Onest, including the prepayment of the remaining quarters of the year Q2 through Q4 quarterly under the credit agreement for.
Mandatory required principal amortization payments the balance of the cash will be used for general corporate purposes, including reinvesting back into the business.
Turning to our 2020 guidance, which assumes a second quarter close for both the skill animal health care divestiture and the joint venture with distributed as a and no significant supply chain disruption or economic impact related to the novel Court.
Core note Kuroda virus disease, 2018, or co bid night team, we forecast that our 2020 net sales of 4.0 to 5 billion to 4.1 to 5 billion. So repeating that again 4.0 to 5 billion to 4.1 to 5 billion forecast.
20, net sales embedded in this outlook is non-GAAP pro forma organic net sales growth of 3% to 5%.
Current foreign exchange rates and the impact from our M&A activity in 2019, and the previously announced 2020 transactions.
Our outlook incorporates modest expectations for our North American supply chain business continued strong performance in our prescription measure of platform and healthy underlying organic trends outside the U.S.
Turning to adjusted EBITDA, we are forecasting Twentytwenty non-GAAP adjusted EBITDA in the range of $190 million to $195 million, so $190 million to $195 million in 2019, our non-GAAP pro forma adjusted EBITDA, excluding the sky.
Bill animal care business was approximately $193 million.
The midpoint of our 2020 adjusted EBITDA guidance reflects relatively flattish year over year growth over the pro forma 2019 results when excluding the skill animal care business before going into the details I just wanted to reiterate our commitment to delivering against the expectations, we set forth to the investment community.
As we seek to continue to build investor confidence after a more challenging start out of the gate.
Underlying growth at the segment level for all our geographies in 2020 is offset by the timing impact from corporate overhead investments in 2019 associated with running a standalone business, which did not begin to ramp until late Q2 2018.
While we do not provide specific quarterly guidance, we would point out that the first quarter Q1 represents our most difficult year over year comparisons given the timing of overhead investments last year and as a result, you should keep Q1 2020 adjusted EBITDA to approximately twice.
On T. percent of our full year outlook.
Keep in mind that our Q1 corporate overhead adjusted operating expenses in 2019 were approximately $3 million as compared to the average of $12 million per quarter over the balance of the year and continuing into this year.
This dynamic creates an approximate 10 million dollar headwind when compared to Q1 2020 results with the comparable year over year period.
We expect to drive better operating leverage from our corporate.
Adjusted operating expenses as we progress through the balance of the year.
Lastly, and is more disclosed in our form 10-K that will be filed shortly management has identified a new material weakness related to taxes caused by issues associated with the transition to establishing expanded in house capabilities. These issues impacted the implementation of the tax controls to review and analyze the company's income tax provision.
In in deferred income tax balances remediation plans for this issue as well as the information technology General controls identified last quarter are underway and further disclosed in our annual report for 2019 now I'll turn this back over to Ben for some brief closing remarks.
Thank you Stewart.
Before opening the call for questions I want to reiterate my excitement for the opportunity that we have ahead and these last four months of only solidified my thinking that we can build a formidable company in a large and growing end market.
We have demonstrated as a company in Q4 that we're making progress and that we on the right path forward Q4 also showed that we are still in the early stages of that process and that much hard work remains to be done as we seek to fulfill the promise of this company I'm energized by the team we have in place and I'm looking forward to charting the path.
This path and delivering on the commitments, we have set forth for all of our stakeholders in 2020 and beyond.
This concludes concludes our prepared remarks, and now I'll turn the call back over to Nick to moderate the Q in a fashion.
Thanks, Ben we want to take as many questions as possible. So we ask that you limit them to too and then reenter the queue should you have additional ones. So Andrew please provide instructions for the Q and a session and we are then ready to take the first question.
Certainly as a reminder to ask a question you will need to press star one on your telephone to.
To withdraw your question. Please press the pound key.
Please standby, while we compile the Q and a roster.
And our first question comes from the line of John Kreger with William Blair.
Hi, Thanks very much.
Ben and start I think you guys said that guidance does not reflect any corona virus impact can you just expand on what you're actually seeing.
As you've watched Q O Q1, our roll out have you seen any impact, particularly in Asia, but also on the us in Europe. Thanks.
Sure. Thank John Good afternoon. So yes current current guidance does not reflect any impact from.
Corona virus today, the impact has been minimal, but as you know, it's a very fluid situation thats changing day by day, and we are managing our monitoring the situation closely.
I think that.
We're we're first and foremost focused on the safety of our employees and our customers and our suppliers and so.
We are being crude in and how we manage the business.
Going forward, but to date, so far no material impact.
Great Thats helpful. Thank you and then my second question is.
Can you give us a sense about where you think you stand with us distribution operationally. It's it seems like that was where you had the key issues and 19, what Marty you need to do there too to get that business sort of back on its footing. Thanks.
Yes, so yes, the north American distribution businesses, one of the key areas that we had challenges with.
In 2019 I.
I think as I pointed out in the prepared remarks, we've made some leadership changes on that front.
And we had a decent quarter in Q4 that I would say was inline with our competitors and how the overall market.
Prepared.
Order to accelerate that business, we need to continue to focus on.
Executing and delivering against the core value proposition of.
Driving market share for our suppliers and providing excellent and reduce cost to serve back to our to our customers. So early days and as our guidance reflects.
I would say we have.
Modest economic expectations for that business, but also a business that we're expecting to have more stability out of in 2020.
Okay. Thank you.
Thank you.
And our next question comes from the line of Nathan Rich with Goldman Sachs.
Great. Thanks for the question.
And then maybe starting with the first platform I think you mentioned kind of potential to accelerate same store growth on that platform. It seems like you've also continued to see.
Add new practices as a platform. So I'd just be curious kind of.
We think about into 2020 and beyond kind of where what you see is the key opportunities.
For that business and if you have any comment on profitability. It sounds like we might get more disclosure starting in Q1, but could you help us think about how the profitability of that businesses has trended in 2019.
Sure thing so.
Nathan.
In terms of 2020 in our areas of focus we're very much focused on what we internally called engagement, which is getting active customers to continue to utilize our expand the use.
Of the platform, while we've made nice progress at 16% year over year same store sales growth. We certainly believe that we can achieve more than that when we.
Shifting the majority of our attention to engaging our existing customers that of course doesn't mean that we're not going to have new customers enroll and we would expect total net enrollments to increase on a year over year basis, but the majority of the organization's focus is really on.
Utilization of the platform and we believe frankly that better utilization of from on the platform of existing customers will only make enrollment of new customers easier and more cost efficient going forward.
In terms of your second question around profitability I'd say in planning 19, we were profitable but it was.
De Minimis.
In the in the Big scheme of things.
Given the overall EBITDA of.
Of the business.
But there is.
Clearly a focus of our business of improving.
Or proving out that incremental revenue can flow through to EBITDA.
In 2020.
Great. Thanks, and if I could just a quick follow up on on margins. It seems like the guidance for 2020 assumes margins are roughly flat to kind of where they ended.
2019, so just be curious the kind of you talked about.
You know opportunities to kind of streamline operations I notice you didn't mention cost synergies, specifically, but could you maybe just talk through opportunities you see on the cost side and maybe balance of any investments you need to make on the business than anything factors, we should keep in mind as we think about the margin outlook for 2020. Thank you.
Sure.
So a couple of thoughts on on margins.
Yes, you're right, we're expecting margins remain largely consistent.
From 19 to 20.
There's a couple of different components.
When you think about the overall blended margin.
So increasing prescription management of the former Vets first choice platform is a margin improvement for the business.
Which is offset by potential margin compression.
Other areas the business largely driven by customer or manufacturer consolidation I think however, you know what the what we are focused on from an operational standpoint is getting more efficient either from how we organize ourselves or how we source.
Product from our suppliers to offset some of those margin headwinds that could occur in 2020.
Thank you.
Thank you and our next question comes from the line of Aaron right with Credit Suisse.
Great. Thank has there been any changes in your vendor relationships that are built into expectations for 2020, any sort of eating fee or buy sell relationships that have changed and then can you quantify offer the opportunity associated with a long contribution rationalization and their distributor relationship and how much you that their transaction could.
No benefit you as well or any other vendor relationship dynamic.
Okay. Thanks.
Yes, Hi, Aaron nice to hear from you.
No significant changes.
With our suppliers.
In terms of.
How we do business with them.
In terms of specifically along codes.
Solid Asian of their distributors, obviously, we are pleased.
To continue to expand how we do business with them. However.
It's not a.
Huge number of distributors, nor a huge piece of the of the business. So.
Marginal pick up.
I'd always good to like I said expand our business was one of our key suppliers.
And at this point what is your guidance assuming turns at the North American market growth in demand trend do you anticipate stabilization over the course of 2020 and how are you thinking also about the competitive landscape that at this juncture, particularly as it relates to the alternative channels.
Yes, so we are looking for stability.
In in 2020 and growth pretty much in line with while we experienced in the back half of 2019.
In terms of alternative channels are just even come competition within the distribution.
Market, we feel well positioned and believe we have a unique set of assets.
Obviously, we need to execute and get the benefit of the combined asset to really differentiate our business over time.
But we're looking forward to a year in which.
Execution starts to sell off in the numbers.
And we can report out on that success in future quarters to come.
Okay, great. Thank you.
Thank you and our next question comes from the line of Jon Block with Stifel.
Hey, guys good afternoon.
The more simple one first maybe even just the timing of the Vmc rollout in international markets is that something that we might see in late 2020, or you all about sort of engagement and that might wait until 2021.
Hey, John.
We're very focused on engagement on the vast first choice platform as well as making sure that were up operating with excellence across all of our business. So one of the areas that we slowed down on was rollout of the platform and I would not anticipate any launching in 2020, although.
I would expect to see capital spend against I would call laying the foundation for that opportunity in the future.
Okay, Great very helpful. And then in the increased transparency is great.
I think in the past you did give a lot about value capture and details there, but you also talked about simplifying the organization in the targets with Wall Street. So I'm. Just curious are you going to break those out any more going forward and then sort of part two to that same question is with a flattish 2020 margins, but I'm guessing some synergy capture.
Doesn't imply compression for the underlying business and maybe you can just expand upon that thanks guys.
Sure thing so as I said either in prepared remarks are an individual meeting.
We find the value capture metric a bit arbitrary because it forces you to try to allocate savings to one activity versus the other and you spend a lot of time trying to come up with whether that year.
Underlying business or some of new activity and so while we decided where we're going to.
Not give a value capture number but instead just focus on the overall company EBITDA and our and our progress against delivering against that EBITDA target.
That doesn't mean that there aren't synergy opportunities and that we arent very focused on finding those opportunities whether it be on the sourcing side of the business where.
We see a lot of progress, especially if thats first choice continues to expand and take advantage of the North America.
Buying power I should say.
And certainly other other areas of focus in terms of the outlook and and the implied compression.
Gross margins, we expect to remain relatively consistent from 19 to 20, the big Delta from an EBITDA margin would be the corporate overhead.
Overhang, especially when you're looking at a year over year basis from Q1 to Q1, so as Stuart mentioned in his prepared remarks that corporate overhead expenses almost $10 million greater.
In Q1, 20 versus Q1 of 19 and Thats not reflective of in the increase in span from the back half of 19 to 20, it really is consistent with that with that trend.
But for a variety of reasons on a pro forma basis the.
Q1, corporate overhead number was greatly reduced.
And under representative of the real what was.
Actually required on a go forward basis.
Great. Thanks, guys.
Thank you.
And our next question comes from the line of David Westenberg with Guggenheim.
Hi, Thanks for taking my question. So I just on the guidance I appreciate the young give quarterly revenue guidance, but as I'm looking at last year I'm looking at kind of the first half Q1 Q2.
It looks like there was negative growth there versus the back half of the year. So the temptation in terms of modeling has to go with where the easiest revenue cancer. So maybe if you can give us a little bit of color on how we should think about cadence.
No I'm not looking for anything quarterly here I'm, just kind of thinking about.
Yes, how we should be modeling.
The way.
That indicated 2020, thank you.
Yes so.
I think one if you take a step back and look at a different component parts of the business.
Which I think is maybe a more useful way of thinking about.
Our growth.
In in the U.S., we're very much looking at stability.
On annualized basis certainly on.
Any individual period, you could see some volatility, but where we're expecting.
A stable revenue.
Based in Europe, and a APAC.
I think we will continue to see.
Growth coming from those businesses in line with the growth that we saw last year and.
Good about the early progress in in 2020, and then Thats first choice, we're expecting to see growth.
Continuing in line with what we experienced last year and as as Stuart mentioned in the prepared remarks, close, especially nice to see was in Q4.
Growth rate of 37%, which was higher than the annual growth rate of 33%. So we saw an acceleration on a larger revenue base.
Which a lot of companies.
Can't deal, especially when they hit scale sell.
Thats, how we think you should be thinking about the different.
Revenue growth rates for the various businesses.
Thanks, Ed just little can get a continuation of errands question around corporate and.
I appreciate there's no specific corporate or new accounts to call out for 2020, but can you maybe talk about if there has been a change in terms of corporate strategy and then this doesnt necessarily mean refer to corporate strategy, but can you talk about how things are going in terms of integrate.
One of legacy that's first choice with legacy Henry Schein is that.
Helping leverage with with.
With corporate groups and just customers in general Thank you.
Yes so.
Yes, and falling at the Aaron Aaron's question in your question.
We've we've seen stability on the supplier side and stability on the.
Customer side, especially with corporate so no major changes there as well.
I think that we have.
We have always to go to be honest on both getting the value of a combined.
Asset as it relates to our customers as well as deeply.
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Deeply aligning with our our customers are integrating with our customers in a way that.
It is really unlocking new new potential so right now I would characterize our businesses, where we have gotten some of the benefit of being together, but largely we are still transacting along the way that we did when they were separate entities and that is my expectation for.
A lot of 2020 that that will still remain the same as we continue to focus on driving the individual value.
And really kind of accelerating into 2021, starting to synchronize those businesses as we figure out the exact right commercial strategy and how we partner with our customers to to unlock value for both of us.
Thank you for taking the questions I'll ask the rest offline.
Thank you and our next question comes from the line of Andrew Cooper with Raymond James.
Thanks, guys a lot faster so I'll be quick but.
I guess, when we think about shifting the focus of its first choice and going more towards reaping the benefits of the.
Counts you've already added how do we think about sort of what you're changing from a sales incentive perspective, and how you take what was it really successful group of kind of hunters and turn them into farmers and how you change those incentives any any help there would be great.
Yes happy to said some light on that Andrew I think it's pretty simple, we're shifting the incentive structure to focus on.
Engagement.
Versus just new enrollments as you know a new enrollment is great, but an incentive to free time trial or it's really just the top of the funnel and until someone engages on the platform you don't really drive.
The revenue, but for your customer as well as for yourself.
So a lot of the Salesforce and marketing team.
It's taking the activity that they've learned through the years in terms of driving engagement, but really making it the primary focus of of the business and partnering with our customers.
In a in a deep way to drive volume for that business and I think one of the nice thing. If you look at our 10000 plus customers. They obviously done all perform the same we have.
You know like like a lot of businesses.
On a group of customers that are driving outsized.
Proportion of of revenue and it's those successes that we're modeling a lot of the engagement activity that we're focused on.
So if we can get the bottom half of that 10000 customers look a lot more like the top half.
We're going to not only.
Really ramped the revenue for the business, but also helped drive the profitability of our business in a pretty significant way.
Okay. That's helpful. And then lastly, when we think about I think it was it was good to see the skilled divestiture and will be good to see that close but as we think about sort of asset base right now and.
Taking that kind of stepped back and thinking about what needs to be there and what does and is there anything else that jumpstarts mine and what should we be expecting from a.
Timing perspective, if there is anything and then.
In terms of use of proceeds.
How to think about sort of debt paydown pacing from that perspective.
Yes, all all answer the first part of that question, then hand, the second over to Stuart to address the use of proceeds but.
So in terms of the asset base, nothing imminent to announce where obviously always focused on driving the right.
Return for our our shareholders, but with the sale as well as the.
Covenant Amendment, we feel very comfortable where we are at.
And feel like we have the room to operate the business in the way that we won.
Overtime, we definitely want to decrease the net leverage ratio, but for 2020 and 2021, we feel like we're in good shape and and we will continue to look.
Opportunistically at opportunities to improve the balance sheet I'll, let Stuart really answer the question about use of proceeds and how we think about that going forward sure with the skilled transaction was a good example, we had $125 million gross proceeds on that after transactions fees taxes on its less.
That.
And we've chosen to an agreement with the banks to apply 60 million of that towards the reduction of.
The term debt in an effect, we we have prepaid or will pay early the remaining principal payments for the rest of the year Marchthirty Onest June 30 September December of 15 million each against that so it was a good use of proceeds for us in the short term also.
Gave an immediate de leveraging effect.
For the lenders as well as the shareholders to see that and so that was a good example of what we chose during this particular transaction as Ben mentioned, there's not any other particularly transaction right behind that so there's really nothing to talk about a discuss about that but we did think for all constituencies that made sense to.
Use some of the proceeds from skill to deleverage.
Where we set today.
Great I appreciate it thanks guys.
Thank you and our next question comes from the line of Aaron right with Credit Suisse.
Great. Thanks, I'm curious how successful you've been in converting agency sales to the DSP platform that presumably was a considerable component of the original.
Yes, the synergy opportunity is that something that gaining any traction now or is that something that's more of a longer term opportunity just given some of the differences in economics, there for any detail.
Legacy Shine versus DST. Thanks.
No I would say that there hasn't been tremendous traction there nor.
What I expect huge huge opportunity there going forward.
Okay. Thanks, and then also you see a meaningful incorrect I guess benefit from that pricing that was implemented across some of the alternative channels from competitors. How much is that endpoint senior profitability in the late quarter for instance, and how should we be thinking about that sort of dynamic etsy heading to you.
I guess as we lap that not pricing implementation midway through this year. Thanks.
Yes.
I would say, it's hard to quantify the impact of map pricing on the business, but we certainly believe.
That is beneficial to have.
More price parity between us and the other channels.
Out there in some cases the platform is still priced higher.
On an individual product by product basis, but the price differential is much smaller even in those cases and so we don't believe that there is a large enough price delta to asking drive the consumer from one one channel.
To the other so I couldn't specifically say that map pricing drove any increase in profitability on the platform.
In the in the near term.
But I also would say that it's certainly a net positive for the for the business and we expected to continue to be so going forward.
Okay, great. Thank you.
Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation and you may now disconnect.
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Yes.
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