Q2 2020 Covetrus Inc Earnings Call

At this time, all participants are to listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone keypad.

Please be advised today's conference is being recorded if you require further assistance. Please press star zero.

I want to hand, the call because what you must be prototype Nicholas Jansen Vice President Investor Relations. Please go ahead Sir.

Thank you again, good afternoon, and thank you for joining us for our second quarter 2020 earnings conference call on Nick Jansen, Vice President Investor Relations that could buttress joining me on today's call or spend more on our president and Chief Executive Officer, and Matthew Foulston, Our executive Vice President and Chief Financial Officer bending Matthew.

We'll 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 in operating expenditures forward looking statements maybe I'd.

Refied with words, such as we'll expect believes should or similar terminology and the negative it'd be storms.

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 could 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, and other periodic reports filed with the Securities and Exchange Commission, which are available on the Investor section of our web site at IR Dot Com Vectrus Dot com.

On the Fccs website at Www Dot FCC backup.

Forward looking statements speak only as the date your ROE and except as required by law, we undertake no obligation to update or revise these forward looking statements you.

You can find this afternoon's press release announcing our second quarter 2020 results in the accompanying slide presentation for this call on IR Daqo Vectrus dotcom.

We will continue to use our website to distribute important in time critical company information.

The press release in slide presentation also contain further information about the non-GAAP financial measures that we will discuss during this call. Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results with that I will now turn it over to bend to provide the highlights.

Thanks, Nick and good afternoon, everyone. We hope everyone listening in on today's call, it's safe and managing through the challenges created by this pandemic as well as possible.

I Hope you are also staying engaged with your community as we all commit to drive real and lasting social change.

To start today's call I would like to first acknowledge an express gratitude to all of the veterinarians an animal health professionals across the globe well the operated as an essential service. During these difficult times work extended hours and successfully pivoted their businesses all for the well being of their clients there.

Our passion is what drives our organization and keeps us energized even in these uncertain times.

I'm also proud to see our coke batteries team in action and they continue to adapt in response to cope with 19 uncertainties.

Drive forward with our mission and commitment to our customers and their clients and deliver exceptional results in the face of adversity.

Wow, there's still much work to do momentum is building inside our organization and I'm very optimistic about our future.

I will review three topics on todays call.

Our overall health as an organization the progress we're making on executing on our strategic priorities and how we are investing in our future as we look to build upon our momentum and focus on delivering long term sustainable growth.

As Nick said, if the opening of the call. We've included a presentation to accompany our prepared remarks, and I will be referencing those slides during my comments.

So starting with slide three and an update on our response to Kogut Nike.

First and foremost supporting the health and safety of our employees remain the top priority depending on mix has affected our entire global footprint and its impact continued to ebb and flow regionally.

Our business is monitored these trends and we have adjusted our protocols accordingly in adherence with local regulations and restrictions.

Our frontline workers that distribution centers and pharmacies executed extremely well during Q2 and our strong relationships with our supplier partners has enabled us to successfully serve our customers even in light of these challenging times and despite more than 60% of our workforce at its peak.

Working from home during Q2, our team work improved and we have reset our working norms to harness this momentum as we continue growing the business.

I was particularly proud of how the team rallied around our cost mitigation actions during Q2, including our voluntary pay reductions our commitment to each other and also to our customers and their clients never wavered during the pandemic and enabled us to continue to invest in service our teams capabilities and.

Innovation, despite the ongoing uncertainty created by poke at night.

As parts of the World continue to reopen we're taking a conservative approach informed by the realities of local conditions and local guidelines our plan support deliberately slow and gradual return of our employees to our offices and we are focused on building upon recent momentum, while keeping our team and our customers businesses.

Safe and healthy as possible.

As I will describe in some detail later in my remarks, we're focused on the path forward driving our technology enabled strategy and synchronizing our capabilities to take advantage of the opportunities ahead.

Now turning to the quarter on slide four.

While our company in the animal health community at large faced adversity as a result to covert 19 are focused approach and our commitment to our employees our customers and innovation enabled us to build upon recent momentum and to deliver strong quarterly results.

This included 5% year over year organic net sales growth and 19% year over year adjusted EBITDA growth in Q2.

Both of which significantly exceeded external expectations.

Our strong performance cut across all business segments and reflected the quicker than expected end market recovery across most of our geography.

From an execution standpoint, I, specifically want to highlight our organic net sales growth in our distribution businesses and accelerated contribution from our prescription management business early benefits from recently implemented sourcing initiative and disciplined cost management, including certain cobot 19 related actions.

Now turning to our end market.

See an on slide five after the challenging month of April, especially the first half of April the U.S. market for veterinary services recovered nicely in may and accelerate in the June as cobot 19 related impacts lessened and a pent up demand from appointments that were postponed during late March and April we were we schedule.

Additionally, a stronger flea and tick season also contributed to the elevated growth versus the prior year.

June was a particularly strong month for cope actress as the marketplace and industry segment trends were at or near pre cobot 19 levels I dynamic.

That largely continued through July Wow, there still is a week to week volatility, particularly in markets experiencing the second wave of Corona virus cases.

And there are many unknowns as we head into the fall we've been encouraged by the resiliency of consumer demand and the animal health community at large keeping us cautiously optimistic about the overall end market backdrop for our business through the second half of this year.

Additionally, the emerging trends tied to the pandemic, including veterinarians embracing technology to stay connected to pet owners are central to our core strategy positioning us well for the future.

Turning to slide six we outlined four priorities earlier this year to drive our strategy forward, one, creating a high performing customer centric culture to maximizing effectiveness and efficiency three driving proprietary products and solutions and for expanding global Kate.

Abilities in developing sourcing excellent.

During Q2, we took substantial steps as an organization to deliver on these it on these priorities and while there's still a ways to go to realize that potential I'm pleased with the progress to date the energy inside our organization and the momentum were seeing across our business in a number of areas.

First building a shared culture of success and retaining and recruiting talent has and will continue to be a critical focus of ours and we made notable progress on this front during the second quarter.

For example, our recently completed employee organizational Health Index survey highlighted the success, we have made within the organization over the last eight months with our health score moving from below the Fiftyth percentile to being just shy of the top cortile among more than 1000 global companies. This is a rather remarkable increase in such a short period of time.

We will harnessed this momentum and continue to build grow and improve how we work together and how we coordinate our capabilities as a team.

We also added several senior leaders to crucial roles, all whom have significant experience in driving growth and transformation as we'd love to accelerate our efforts.

Second our commitment to improve effectiveness and efficiency, while delivering more consistent and profitable performance in our North America distribution businesses continued during the second quarter. Despite the Kogut 19 headwinds in Q2, our distribution business delivered 2% organic net sales growth despite it.

D. A steep decline in April and external third party data indicates our U.S. market share was relatively stable during the quarter a testament to the progress we have made as weve refocused our efforts on this business.

And this focus is see not only in U.S. distribution, but across all facets of our organization and we were able to drive organic gross profit dollar growth in Q2, while also reducing our adjusted operating expense versus the prior year.

Cost containment and resource allocation remain key priorities for our team.

Another highlight I would point out is accelerating same store sales growth and profit contribution delivered by our prescription management business covert 19, certainly accelerated the positive trend our internal engagement efforts are delivering however, the 37% same store year over year net sales growth achieved in Q2.

And the robots performance out of our 2019 and 20 net plenty 20 cohorts as compared to prior years showcased the significant opportunity we have in growing our customers market opportunity and driving incremental demand for our supplier partners on this point I would add that we also achieved significant milestone in mid July when we serve.

I've got 1 million pet owner in 2020 on behalf of our customers, which compares to 920000 pet owner clients. He served for all of 2019.

Undoubtedly some of the cobot 19 related growth will subside, but we believe that there has been an incremental positive shift towards the online channel and to our prescription management business. We're enthusiastic about the durability of new clients, who are now buying through their veterinarians online store fronts powered by called mattress.

The sustainability of deeper engagement and awareness of our demand generation capabilities by our customers and the increase partnerships. We now have with manufacturers will embracing the all my channel.

Importantly, our prescription management business continues to scale their operations. During this period of rapid growth with adjusted EBITDA more than doubling from Q1.

With the strong growth we're seeing in this business. We're further investing in service and innovation, while expanding expanding our pharmacy capacity in Q3 to catch up with increased demand.

We're also making progress on many of the global initiatives, we have impart embarked on earlier this year in partnership with our third party advisor, including some promising early returns on our sourcing initiatives.

As we further centralize and coordinate purchasing activity and leverage our global scale, we expect to improve our operating efficiency moving forward.

We also continue to advance and make progress progress on the technical development work needed to expand the prescription management platform outside the United States as we continue to see significant interest from our customers and suppliers in those markets during covert Nike.

Now turning to slide seven let me address how we are investing in our future to further establish our position as the leading technology enabled services company in the animal health industry.

Wow near term uncertainty tied to cope with 19 still exists and there's still plenty of work to do to further develop our core product and service offerings. We are using our enhanced teamwork and collaboration market momentum and strong first half and half results to invest more time in energy planning on the next phase of.

Our three year plan synchronization of our technology enabled services and products.

This includes tighter coordination between our prescription management and practice management software capabilities as we look to deliver a unified cloud based product solution to the market.

This integration.

When coupled with our other investments in E Commerce inventory management and warehouse systems and enhanced distribution capabilities will support a coordinated technology enabled end to end experience for our customers with a focus on driving better healthcare outcomes efficiency and revenue growth for veterinarians across.

The globe.

This completes solution will not only propel our customers business forward, but also drive incremental demand for our manufacturer partners as we seek to further enable their omni channel strategies and expand their market prospects.

I'm enthusiastic about our ability to drive the business forward as we are entering the next phase of our strategic plan with continued focus on building a shared Carl culture of success driving efficiencies and executing against the core business drivers that are now ingrained into our day to day operating model.

As we deliver on our objectives and continue to scale. Our operations, we will have the opportunity to allocate greater resources towards driving our growth agenda with the goal of making it even easier.

And more profitable to do business with Kovacs Russ I.

Additionally, with our improved liquidity position, we can now become more opportunistic in our approach to capital deployment, all with the focus of adding scale and deepening our relationships with our customers in closing.

Our team is motivated our industry is resilient our strategy is clear and our business has momentum.

We are confident in our path forward as we head into the second half of 2020 with visibility and optimism that the foundation, we haven't place puts us in a position to the to deliver our long term opportunity.

I will now turn the call over to Matthew to provide a financial review of our second quarter.

Good afternoon, everyone. Thanks for joining us today.

My first two plus one since joining the bat trust.

I want to meet virtually with many of you looking forward to the day, where I can <unk> with all about right.

Current and prospective shareholders.

They called Us Mpos.

I'm really excited by the opportunity to the Bad Trust as we build on the momentum in our business.

Deliver on our financial.

Shareholders.

I will now review second quarter 2000 2020 results.

Let's focus on my comments will be non-GAAP results, where applicable as these items provides the most insight into the underlying trends impacting how businesses.

Please refer to todays press release for a more detailed description of the second quarter GAAP results.

It's been mentioned on summarized on slide nine.

Q2 was a strong quarter veterans across nearly all financial metrics as we significantly exceeded external net sales and adjusted EBITDA our expectations.

Our operating execution.

Measure response to code at 19.

Accelerating grows we didn't know marching prescription management business drove a significant improvement in adjusted EBITDA unskilled 90 basis points of year over year adjusted EBITDA margin expansion.

Importantly.

Financial condition meaningfully improved as we ended Q2 was more than $700 million and available liquidity and net leverage three in the home turns.

Turning to the details on starting at the top of the income statement on slide 10.

The Vectrus net sales were approximately $1.03 billion in Q2.

Togut 19.

Negative impact on that sales during the month of April when many of those customers experienced declining client visits.

So global nations going to slow the spread of code.

Additionally, as previously disclosed.

Customer inventory stock piling activity that occurred in several international month.

So much in connection with coded minds.

Hold for more than $30 million submit sales into Q1 from future.

However.

Customers across most about geography.

Again to see an improving operating environment in the latter half of April and this trend continued through the balance of Q2.

With performance during the month of June.

Particularly strong that's been mom rig count, but to at or near those at 19 levels.

The end market recovery.

Strong sales execution on the above trend growth deliberate in prescription management.

They want us to move to deliver 5% year over year knowledge gap organic net sales growth.

In one of the more challenging quarters in recent memory.

The global business community.

Turning to slide 11.

Total company consolidated non-GAAP adjusted EBIT.

$63 million for the second quarter of 2020.

This is 53 million in the prior year period.

The 19% year over year improvement was driven by an increasing contribution.

From a high on margin services, including prescription management.

And cost containment measures implemented during the quarter in response to code at 19 uncertainties.

Excluding the skill animal care business.

Vested on April one.

The deconsolidation of the Spanish business and the negative impact of foreign exchange non-GAAP, adjusted EBITDA increased 25% year over year.

Reflective of the meaningful progress we have made across our businesses.

Focused on executing against our strategic initiatives.

Cost containment measures.

Moving to our operating segment performance beginning on slide 12.

North America organic net sales increased 10% year over year in Q2.

Segment, adjusted EBITDA increased 28% year over year with margins.

And with 30 basis points versus the prior year.

The combination of above trend prescription management froze.

Continued stability in our distribution sales and disciplined expense management growth the improved during the second quarter.

Drilling deeper into North American segment trends.

You should business organic net sales increased 2% year over year in Q2 with improving trends in may and strong performance in June offsetting the sales decline witnessed in April.

To code at 19.

Notwithstanding the him so that 19 <unk> yeah.

We believe that quarterly results demonstrated another quarter of stability and underlying business dynamics.

And external third party data indicated that distribution business market share was unchanged during the quarter.

Following the more challenging 2018 and 29 team.

The distribution team continues to execute well.

Now focused approach is paying dividends, because we work with our customers to drive their businesses forward films.

<unk>.

Now software business.

Well, so successfully manage through the Dusty created by code at 90.

Hi, good outcomes delivered alongside telemedicine launch in April.

Turning to slide 13.

With the acceleration in gross profit contribution from friction management whole legacy bets first choice.

We thought it would be impactful for investors to better understand and the significant progress. This business has made since the merger in February of 29 thing.

During the second quarter of 2020, net sales increased 66% year over year.

110 million and we ended June with approximately 10900 is on out prescription management platform.

Prescription management.

Continued to benefit from the launch of new customer clients and get some strategy.

And the business for the strike.

Above its positive trend line in Q2 fusion covalently team.

As he calamos scripts medications spiked amidst the pandemic.

In the aggregate.

Same store prescriptions management platform sales.

Finders veterinary practices enrolled on the platform in 2018 earlier increased 37 year over year during Q2, an acceleration versus the Q1 year over year gross rate of 25%.

We're also seeing strong performance out of a 20.

2020 Cold War.

Which are on pace to be almost hits cohorts based on their term revenue ramp and customer funding base.

It is clear the strong relationships to that distribution sales reps with their clients is resulting in more engaged productive.

<unk>.

We're also very pleased with how the forest management businesses scaling.

Q2, adjusted EBITDAR of 11 million, a 12 million dollar improvement versus the modest loss in the prior year.

7 million dollar improvement sequentially.

We plan on investing in this business in the second half of 2020.

Position us for further growth in 21 and beyond.

Turning to our European business segment on Slide 14.

Organic net sales decreased 2% year over year in Q2 as code at 19 disruption on the pull forward. Some much of an estimated $27 million of expected April nets items impacted results during the quarter.

Organic net sales in the first off with plenty increased 5% year over year, reflecting a healthy market position and the strong sales execution a European team delivered during the first half of the year.

The pain Bennett.

We have strong Q2 net sales performance from our businesses operating in Romania, Poland and the Netherlands.

In the UK largest European market.

Sales declined 11% organically year over year during the second quarter as the country's recovery from code that 19 has lagged other European markets due to the duration of block Dalmatians.

However, we did experience better sales late in Q2.

I remain optimistic about prospects in this market.

As well as all of the other markets throughout Europe for the balance of the yeah.

Turning to profitability.

Appealed segment, adjusted EBITDA decreased 16% year over year.

Excluding FX and the school divestiture.

Adjusted EBITDA was relatively unchanged year over year.

The modest M&A contribution and cost containment efforts offset the code at 19 cells disruption.

The Q1 pull forward and $3 million.

Moving onto out right back in emerging markets segment as presented on slide 15.

Now team delivered 4% year over year increase in organic net sales in Q2.

Despite an estimated $7 million customer stocking pull forward that occurred in March in connection with Covance 19.

In the first half of 2020 organic net sales increased 12% year over year and reflect the momentum. The region has generated assisting continues to execute well and deliver a robust financial results.

During Q2, we saw notable strengths in Australia and Brazil.

Which offset weakness in New Zealand given the looked at how measures implemented in that market.

Segment, adjusted EBITDA increased 25% year over year during Q2.

Driven by strong operating leverage from head on the next spring.

Sales activity.

On the benefit from cost actions taken in response to cobot 19.

Growth was even stronger when normalizing for the estimated 1 million dollar EBITDA pulled forward into Q1 related to the inventory stocking activity.

Total company Q2, GAAP net income was 54 million or 40 cents per diluted share.

Which includes the benefit of a $70 million.

Getting from the sale of the skill animal health business, but closed in early April.

Non-GAAP adjusted net.

Which excludes the aforementioned gains as well as other special items during the quarter.

$30 million during Q2.

It is 24 million in the prior year period.

Turning to my balance sheet on slide 16.

We meaningfully strengths on the Companys financial and liquidity position during the second quarter.

The sale of skill animal health business.

The issuance of perpetual convertible preferred stock.

Oh, which combined.

Added almost 350 million in cash to the company.

As a result of these actions and strong working capital management during Q2.

Net debt at the end of June improved by $440 million.

We ended the first quarter.

Our reported net leverage at the end of second quarter was three and a half times.

Pits, a 5.9 times in the first quarter.

Additionally, we ended the second quarter with more than $700 million in available liquidity.

Compared to 305 million into the first quarter.

With 1.7 tons of headroom on drown net leverage covenant.

Hi, my own credit agreement.

Finally on slide 17, as we look ahead, we continue to balance short term on so it's easy to cope with not thing.

The potential impact on our customers and their clients.

Without designed to build upon our recent momentum and to make the investments needed to execute our strategy and accelerate our sales and profit trajectory.

With this framework in mine, we now anticipate adjusted EBIT in the range of $2 million to $210 million for 20 plenty.

Which is $10 million to $15 million above our co did not outlook issued in early March before we withdrew guidance in April amidst the initial on certain days and then.

This guidance presumes no new major lockdowns trying to close in marine saying.

Any substantial changes to the current environment.

And the animal care remains an essential business.

It does incorporate the normalization of certain expenses.

Eliminated or reduced or deferred in Q.

Given the significant uncertainty at the start of the global endemic.

Additionally, the growth in prescription management, we are making certain investments in people and capacity support its trajectory.

Our underlying assumptions I can also the year also includes stability in our global distribution businesses.

A gradual returned to more mobile travel activity.

Benaissance benefits to our sourcing initiatives.

I'll now turn the call back over to Ben for some brief closing.

Thanks, Matthew Great first call.

Before my closing remarks, I want to take a moment to announce that Nick Jansen, who so many of you on this call have worked with no. So well has recently been promoted to vice President strategy and corporate development. We are extremely enthusiastic that he has decided to take this newly created role where we can leverage deep understanding of the into.

I agree to shot to help shape our path forward.

I am excited about the additional contribution Nick will bring to our organization and we thank him for building out our Investor Relations program as a newly formed public company.

Over the next couple of months, Nick will be doing double duty until we recruit and onboard his replacement with the expectation that the transition will be complete by the end of this year.

In closing and that is outlined on slide 17, I am extremely proud of our teams exceptional efforts and accomplishments during Q2 to support our customers around the globe. During cobot 19, our strong second quarter financial results demonstrate our progress and our 2020 guidance.

So cases, the confidence we have in our business, while uncertainty tied to the global pandemic and the pace and recovery of our end market remain our continued investment in our organizational health innovation and customer success puts us in a strong position to capitalize on our strategic opportunities and to deliver shareholder value.

In the quarters and years ahead.

This concludes our prepared remarks, and I will now turn the call back over to Nick to moderate the QNX fashion.

Thanks, then for the kind words and I'm enthusiastic about the newly created role.

Now we began the QNX section of our conference call, 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 Ian please provide instructions and we are then ready to take the first question.

At this time, if you'd like tough question over the phone line. Please press Star then one on your telephone keypad.

He would like to remove yourself from the Q press the pound cheap. Thank you.

Your first question comes from line of John Kreger of William Blair. Your line is open.

Hi, Thanks, very much thanks, guys.

My question Ben is if you think about the just kind of the Tam opportunity and home delivery given the really good growth you guys have seen.

Can you give us a sense about how much of the market do you think today is still residing within traditional in clinic purchases versus what's already migrated to home delivery versus what's migrated let's say to the full kind of traditional ecommerce channel just trying to see how how far it's already moved versus where you guys thinking.

Could go over the longer term thanks.

Oh sure thing John and good to hear from you again.

I think that you know predominantly the market it is definitely still in clinic.

And so that there is tremendous opportunity for.

Yes, good fit all my prescription management at home delivery I would point out. However, you know that all of our data shows that when customer has implemented prescription management and utilizing it we're actually growing.

The market and that in clinic sales, they save stable and continues to grow and subscription management or online prescription management is really expanding their market opportunity. It are driving compliance with patients. So you know our view is it's not really cannibalistic, it's it's a opportunity to grow the pie.

And make sure that that Marion don't get Disintermediated by other channels, but in short tremendous running room from where the businesses. Both in terms of the number of customers. We address the number of engage customers that we have and just the adoption of the platform off from a global perspective.

Great. Thanks, and then one quick follow up the chart you should the U.S. market, which is very helpful.

From your perspective have we reached a normalization or do you think that we're still kind of seeing a little bit of a deceleration as we kind of move from June to July and August. Thank you yeah.

It's it's obviously a good hard to predict with with co bit you know, what we've seen as general stability.

In in July in early August obviously, there was a some pent up demand that occurred at the end of June and and kind of a burst of activity, but you know our take on the market is that we are at or slightly above a pre cobot levels.

Great. Thank you.

Operator next question.

[laughter].

Operator can you turn to the next question. Please.

Sorry, My language on you through next question comes from one of Jon Block of Stifel. Your line is open.

Great. Thanks, guys good afternoon.

Great numbers, maybe maybe I'll ask you a little bit up an obvious one, but I still want to dig into it a little bit the wantage Twentyx EBITDA was.

I believe 111 million versus 103 in one each 19, so caught up 8%.

I look at your guidance for the year, the midpoint of guidance implies to age 20 down.

I think roughly low single digits versus the back half a nine team can you just elaborate on that a little bit conservatism I think you alluded to investment I think skills, obviously rolling off but maybe you could just talk to why do you implied down Q3 percent QH versus the high single digit growth you guys experience in what are you keeping against the tough.

Backdrop.

Yeah, I mean, good question and you.

No you hit the nail on that but the first one but the sale of skilled impacts is quite a bit more in the second how did it in the first we'll have if you round it up about a 5 million dollar headwind.

I'm not missing from L. numbers in the second Hall.

So think of compared to flat, what probably all five skill adjusted.

And then in the first quarter, you know, we had some well above trend growth and the prescription management business, which we anticipate will return more to trend in the backhaul.

Then we took a lot of cost actions in the first off that included tighten comps.

For one hey, matching and almost completely eliminate travel.

But.

We took the payback.

Out of the the second half to normal levels will restore the for a long train Matt.

So that will come in and I think gradually as we go through the back Oh I don't anticipate we stopped traveling more so the fitness spectrum and putting so a lot of those things that gave us the unless lifting Q1 won't be quite as well in the bank costs.

Got it I was very helpful.

Ben.

Longer term question and I mean looking out a couple of years.

Again, the EBITDA numbers Blue I guess, everyone away on our side, but all the year over year group unless I'm mistaken came actually a little bit over 100% from the prescription management business and maybe you can you can just talk to your conviction or ability to derive the leverage in the supply chain business.

We look out over the next couple of years is that something were.

Why is good.

Growth in you just derived most.

The future EBITDA off in prescription management or what do you think about your ability to scale supply chain longer term. Thanks guys.

Yeah.

Good question. Thanks, John.

So I think that you know when you look at the business, especially in Q2, you you had a pretty anomalous corridor with a pretty big give it in April. So actually did you know if you could look at it on a month by month basis as you came out of the trough.

In in North America, Europe, and Asia Pac you did start to see growth on an EBITDA basis and on a topline basis in in May and June and and we feel good about our ability to grow that business in the in the future I think that you know from the topline revenue standpoint, you know we.

I would expect a you know mid single low to mid single digits growth you know in the out years on the distribution business and as we get better.

From an efficiency standpoint, whether that be a cost to serve.

Our sourcing initiatives are taking advantage of our technology footprint. You know we believe that we can you know grow the EBITDA for that business overtime.

Very helpful. Thanks, guys.

Your next question comes from wind of return Rich of Goldman Sachs. Your line is open.

Good afternoon, Thank answer the question.

Then on the prescription management platform can you talk about how growth kind of trended across a quarter and and your expectations for the back half the year I think you kind of talked about you know maybe a little bit of normalization in the growth rate, but I'd just be kind of curious to get a little bit more color on how you're expecting that.

Business the trend over the balance of the year.

Yeah, Hi, there obviously was.

A frenzy of activity around April and May well, we saw extremely outsized growth, but what we're seeing is that customers on the platform and consumers on the platform. Our are getting retained and so we would expect not to see a those extreme peak levels that we saw in early Q2.

But that we would be at a growth rate higher than where we were pretty cove. It.

So if you think about you know growth rate in Q1 in Q4, where we were in the 30 Thirtys percentile range.

You know, we would expect to be above that you know closer to 40% like our higher but but certainly not in the 60% how that we saw in Q2.

That's helpful. And then just sticking with arc management on the margins can you talk about how you know how you feel about capacity in service levels right now and you talked about me due to invest in that business I think from a contribution margin standpoint, I think into second quarter was somewhere in the.

The high 20% range do you think you can kind of maintain contribution margins around those levels, while investing in the growth of the platform.

I'm, just kind of given given the sales that you've seen kind of shifted that channel.

Yeah.

Good question, So I think from a capacity standpoint, while there certainly was.

A slow down in early Q2, along with probably every other online retail are out there whether you are in our category or not a the team really did a great job of catching up in from a time from order to actually delivering the product has improved immensely and were on par with a car.

Petition and really we look at Amazon as the.

Tell whether for any kind of online transaction and feel like we're delivering at similar rates. So we feel good about that however, you know the business is continuing to grow it's not it's not flatlining as as I just suggested and as you asked I'm until we need to continue to invest.

In into the business this capacity not just for the back half of this year, but really for.

2021, and 2022. So you know that is what provides a little bit of that drag on.

Back half EBITDA, and but we want to take advantage of the momentum we have and really build that business for the long term.

Makes sense thanks for the questions.

Your next question comes from line of entry Cooper of Raymond James Your line is open.

Thanks, guys, just the I guess, starting with one sort of on prescription management here and the growth rates like you talked about I mean is there anything we should think about in terms of.

You know folks that are ordering in the two Q time period that are on maybe six months cycles and we don't have the same pressing move that would imply you know that a little bit of that deceleration because by my math just to take to.

Stay flat with the two acute dollar amount you're talking about something thats into the 50 50 plus percent range. So any sort of moving parts as we think about.

Russia people that maybe ordered and in Twoq when they weren't leaving the house versus how we think about what that might look like in Threeq you any any comment there would be would be useful.

Yeah, I think there's a combination of factors I think there definitely was you know some pent up demand and we saw.

You know kind of a a rush to stock up by the consumer. We also saw a very healthy companion animal category. It here in the U.S., which.

Some of our peers like so as an IDEXX you know talked about in their own results.

And I think as we just look forward and look at our kind of near term you know July in early August resolved, we know that it's going to dissipate a bit but a lot of those you know our expectation and early data as a lot of those consumers from Q2 will perform like previous cohorts of of consumers and that will.

Have sustained you know really positive.

Head of coat kind of pre Cove. It performance here in the back half and into 2021.

Okay. That's helpful and then.

To the distribution side.

You know I I guess, maybe just the latest thinking and this is probably a question you're tired of answering but obviously you had a a big transaction close in terms of the customer base that manufacturer base for you I mean, you've had an exciting new products.

The preventive side, so kind of the latest update on on those two would be great and if you've seen anything or expect sort of any any changes from those whether its opportunity.

With with Elanco, there or sort of how you view that.

As we think about it.

In the most recent period will be great.

Yeah, I think if you look at the first half performance and we mentioned this in the prepared remarks that.

You know, we feel like we held our market share.

Here in the first half, which is an improvement from 19 and then he team are we definitely lost market share. It seems like a robust market going forward a competitive won with some of the new product introductions.

Yes, definitely some movements here with some of the suppliers as you know a lack of has bulked up but in general we feel I would say optimistic about the environment for distributors here in the back half and going into 21.

Great I'll stop there thanks, Ben Yep.

Okay, and if you'd like to asked a question over the phone lines. Please press Star then one on your telephone keypad. Your next question comes from line of Kevin teacher of GE Research. Your line is open.

Hi, Thanks for taking questions.

First a.

I want to ask about the you mentioned your international expansion opportunity and really how should we be thinking about that not only in terms of timelines, but geographic for rollout. That's something that you expect to try and take a country by country basis at this point or.

Could we expect a broader rollout across a your.

Yup.

I'm sure thing so.

It'll definitely be a country by country roll out I'm focused on both.

Europe as well as the APAC region. We're building the foundation of that right now and would expect to have some.

Some solutions at market in 2021, I think from a piano impact in 21, it would actually.

You know be a slight negative as we continue to invest and and build out the commercial capabilities there.

And would start to contribute in 2000 2020 and 2022.

Great. Thanks, and then.

Clarification on the.

The slide on liquidity and.

Leverage traditionally.

Your report it leverage was usually about a half turn into a turn higher than what it was under the credit agreements.

First in Q2, I'm wondering if that's just a function of cash balances there's something else.

Going on there.

Yes, the all that the definition of.

Rich.

The contribution for Ash I think it's about $25 million, so cash above that doesn't help lower your leverage on that the debt covenants. So we get all the relationship between what I'll call. The street calculation on the bank Covenant Kelk.

Okay, great. Thanks.

There are no further questions over the phone lines at this time I turn the call back over to presenters.

Okay.

Thank you offer listening in on the conference call. You May now disconnect hope everyone as well thank you.

Thank you everyone.

You should consider conference filling in a disconnect.

[music].