Q3 2020 Covetrus Inc Earnings Call
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero under Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the call.
Brent over to your host Mr., Nick Jansen, Vice President strategy and corporate development.
Thank you Ashley good afternoon, and thank you for joining us for our third quarter 2020 earnings Conference call. Joining me on today's call are Ben Walden, Our President and Chief Executive Officer, and Matthew Foulston, Our executive Vice President and Chief Financial Officer that in Matthew will begin with prepared remarks, and then we'll be happy to take your questions.
During today's conference call, we anticipate making projections and forward looking statements based on our current expectations. All statements other than statements of historical facts 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 expect believe should or similar terminology and the negative of these terms.
Forward looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties many of which are beyond our control, which could cause actual results to differ materially from those contemplated in these forward looking statements. These risks and uncertainties include those under the heading risk factors in our most recent annual report on form 10-K.
Quarterly report on form 10-Q, and other periodic reports filed with the Securities and Exchange Commission, which are available on the investors section of our website at IR Dot Com Vectrus dot com and on the Fccs website at Www Dot FCC docket.
Forward looking statements speak only as the date hereof and except as required by law, we undertake no obligation to update or revise these forward looking statements you can find this afternoon's press release announcing our third quarter 2020 results and the accompanying slide presentation for this call on IR Daqo Batra stuck on the.
The release and presentation also contains further information about the non-GAAP financial measures that we will discuss today.
Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results with that I will now turn it over to Brian by the highlights beginning on slide three.
Thanks, Nick and good afternoon, everyone. We hope everyone listening in on todays call remains well and is successfully managing through the stress and challenges created by COVID-19 as safely as possible.
On the call today, we will summarize our quarterly financial results.
You want our improving market position amid strong and resilient end markets detail. The progress we are making on executing on our strategic priorities highlight our recent investment in veterinary study groups and describe how we are positioning ourselves for success and growth in 2021 and beyond.
To start I want to emphasize how proud I am of our team across the globe to Covantas team has continued to rise to the challenge. Most recently, we successfully executed and delivered strong results during the third quarter. Despite continued headwinds created by the COVID-19 pandemic I'm thrilled at how we have.
Created a shared culture of success and how we have embodied our mission in everything we do always striving to support veterinarians and animal health professionals across the globe to manage and grow their businesses and deliver exceptional clinical care.
It is clear that our focused approach commitment to our team and our customers and our investment in service and innovation has served us well and enabled us to win new business and drive greater alignment with our strategic partners.
Our foundation is solid our industry is growing our differentiation in the market is evident and our outlook is bright.
Now turning to the numbers, we delivered 12% year over year organic net sales growth and 20% year over year adjusted EBITDA growth in Q3 and have increased our 2020 guidance again.
Importantly, our robust Q3 performance cut across all three business segments, where we not only grew adjusted EBITDA, but also expanded our adjusted EBITDA margins. This strong growth was accomplished without the incremental COVID-19 tailwind in our prescription management business that was present in the first half of the year.
Still our prescription management business was able to deliver net sales growth of 43% year over year, a number we are quite pleased with it.
This growth rate is now notably faster than our pre COVID-19 growth rates as our focus on customer engagement continues to gain steam.
We are encouraged by the progress. This business has made in scaling its operations, while significantly investing in pharmacy capacity and innovation during Q3 in preparation for another for track projected year, a strong growth in 2021.
Our progress and improved financial condition also enabled us to make an investment in veterinary study groups in October, which accelerates our strategy to strengthen our customer relationships.
Clearly there was a lot to be encouraged by in our fiscal third quarter and I'm proud of our team's efforts and accomplishments over the last 12 months, including definitely navigating our business operations during a global pandemic and yet there are still many growth opportunities for us in the year ahead, as we drive forward with our technology.
Gee enabled strategy.
These possibilities keep me optimistic about our future as we further synchronize our capabilities and 2021 and beyond.
Now briefly turning to our end market on slide four activity inside veterinary clinics in the U.S. remained strong throughout the third quarter tied to pent up demand and increased pet ownership and related spending during the pandemic with veterinary practice revenue growth rates now back to or above three calls at 19 level.
Yes.
This positive trend is generally continued through the month of October Adair.
Additionally, it is becoming more apparent that COVID-19, and social distancing has further strengthened the human companion animal bond, which bodes well for the future growth rate of our category.
These same trends are also occurring globally with many of our international markets seeing strong growth. During Q3, following the pandemic driven slow down in Q2.
Well there are still many unknowns as we learn of new shutdowns in emerging Karina virus cases to start Q4 across many of our geographies around the world. We're still encouraged by the resiliency of consumer demand and the animal health community today.
Uh huh.
Regardless of short term ebbs and flows it is clear that the long term trajectory of the global companion animal market is on a strong footing and we remain enthusiastic about our differentiated portfolio capabilities.
Our unique value proposition positions us to capitalize on the tailwinds and emerging trends in the market.
Turning to slide five we outlined four priorities earlier this year to drive our strategy forward overall, I'm pleased with our progress and execution the energy inside the company and the momentum we are seeing across our business.
First dry.
Driving our new way of working along with retaining and recruiting the best talent has and will continue to be a critical focus of ours.
During Q3 for example, we added several senior leaders in crucial roles to support businesses needs.
Additionally to drive real and lasting change and in support of an anti racist diverse inclusive and equitable culture at Twelvex risk. We have now devoted dedicated resources and launched a new global diversity and inclusion or deny governance and community program at the company. This includes establishing a global advisory.
Board and the naming and naming a number of global business Global business unit and region will be an i. leaders dedicated to driving forward with our commitments focusing on strategic deny areas and ensuring local support.
In August we also launched the call veterans hardship fund to help our colleagues at COVID-19 illness related hardship I'm convinced we can make our company our industry and our society, a better place to be and I'm energized by the passion our team has in driving our mission forward.
Second we expanded adjusted EBITDA margins across all of our business segments. During the quarter as we continue to make progress on our commitment to drive focus improve effectiveness and increase efficiency throughout the organization cost containment and resource allocation remain key priorities for our team as.
We are committed to taking concrete action to drive long term margin expansion across our business. One example of this would be our recent decision to exit our distribution operations in France Wow.
While we will maintain our technology footprint in France, the distribution business had gross margins well below our corporate average and it was losing money given our lack of scale in the market. While this was a difficult decision to make it what is the correct. One as we are focused on investing in markets and businesses that can help accelerate the companys growth returns.
And margin profile long term.
Differentiating our capabilities and driving our proprietary products and solutions was our third strategic area of focus and I would highlight another quarter of solid net sales performance and profit contribution delivered by a prescription management business.
As we expected and described on our Q2 call. The COVID-19 related demand that benefited our first half results slowed in Q3 as veterinary clinics and specialty retail stores opened up more broadly as shutdown restriction to ease across most states. However.
However year over year net sales growth of 40.3% during the quarter was still in excess of what we experienced in 2019 and in early 2020 prior to COVID-19, demonstrating the underlying strength of the online channel and our street strategic positioning within it.
In addition, we delivered 23% year over year same store sales growth during the third quarter compared to 16% growth for all of 2019, highlighting the success of our customer engagement initiatives that we launched this year and showcasing the significant opportunity, we still have been growing our customers market prospects and dry.
Having incremental demand for our supplier partners.
With deeper engagement and continued manufacturer support of the online channel. We believe we can sustain this elevated level of same store sales growth annually over the medium term.
I would like to point out that this robust same store sales growth happened during a quarter. When we also delivered strong distribution sales as clinics were ordering more products from us to service increase patient activity inside their practices. This signals that these two channels in clinic and online can be complementary with the plan.
On helping our customers strengthen their class client relationships improve medical care and prescription compliance and grow their businesses.
Moving to our final strategic priority globalize.
During the third quarter, we finalize the framework for our next generation practice management software roadmap, where we plan to embed prescription management client communications and various other third party application inside the PIMS, creating a singular platform experience for our customers the development of this unified cloud.
Based solution is expected to take 12 to 18 months to complete we also furthered our progress on the technical development work to bring prescription management to Australia, and New Zealand in the second half of 2021, we have a significant distribution in software footprint in these markets and these customers are eager for us to bring E commerce and prescription manager.
And capabilities into their practices to help them compete more effectively and grow their businesses.
Now turning to slide six I would like to spend the next few minutes discussing our recent strategic investment in veterinary study groups, the leading provider of peer to peer learning experiences for veterinary practice leaders in North America.
The SG manages a family of more than 50 veterinary management groups or V. MTS in the United States and Canada with these groups comprising more than 1100 members, who together on more than 1500 veterinary practices. This.
This expanded relationship brought together two highly complementary organizations each dedicated to veterinary practices and committed to driving enhanced patient care empowering veterinarians to run better businesses and advocating for the veterinary profession.
We anticipate our deeper partnership along with our scale and portfolio of solutions will provide tangible improvements to VMT membership benefits overtime as well as help BSG identify potential new members that would benefit from the VMT experience.
The investment also serves an opportunity for us to accelerate our strategy to drive increased customer alignment and engagement similar to what we did when we acquired PXI VAT in the U.S. and the Premier buying group in the UK several years ago.
These investments are highly successful for Fourq of address let's see ESI net sales and adjusted EBITDA for example, growing in excess of 40% and 50% respectively. Since our deeper partnership was formed back in late 2016.
And while Matthew will provide more detail on our capital allocation strategy later in the prepared remarks VSD is consistent with our philosophy at looking for investments in the veterinary channel that are accretive add scale offer new avenues for driving our proprietary products and solutions and enhance our overall growth and margin profile.
In short we are enthusiastic about the growth process prospects of DSG as we work together to build upon their long standing success in the marketplace and drive new value for their members.
Finally, turning to slide seven let me address how we are positioning co batches for growth in 2021 and beyond.
We are focused on improving our commercial effectiveness in order to create greater strategic and financial alignment with our customers in support of our goal of making it even easier and more profitable for them to do business with Coke batteries and in 2021, we will work hard to continue to drive increased alignment across our commercial teams disappear.
A more seamless and technology enabled end to end experience for our customers, which we believe drives better health care outcomes efficiency and revenue growth for their practices.
Greater teamwork and enhance collaboration will also help us secure new business expand our share of wallet and reduce our cost to serve.
Supporting our proprietary brands and compounding businesses and executing against our platform engagement strategies in North America should also improve our margins and afford us the opportunity to further invest in our growth initiatives.
We will focus in 2021 on helping our veterinary practice partners leverage technology to market their businesses more effectively and to deliver an enhanced consumer experience. These.
These customer investments will provide a halo like effect for co vectrus as increased activity inside the practice supports growth in our distribution business and an improved pet owner experience on the prescription management platform should drive increased adoption engagement for the online pharmacy service.
As a reminder, approximately 5% of our customers clients currently shop on their online storefront highlighting the significant growth still available to us as we make it easier for the pet owner to shop on their veterinarians web site.
We also have the opportunity to improve engagement with a one and a half million unique pet owners, we have provided service to year to date.
Lastly, I would highlight our ongoing investment in B to B E Commerce, and new software integrations and partnerships, which are designed to make it easier and more seamless to order product some cover mattress, including our proprietary products. This and our investment in sourcing excellence will enable us to provide greater value to our customers while also enhancing our margins.
Overtime.
Overall, I'm very enthusiastic about our ability to drive the business forward 2020 has been a foundational year and are focused on the core drivers of our business are now ingrained into our day to day operations, we are making investments to support our momentum and are confident in our ability to drive growth in 2021.
And beyond.
I will now turn the call over to Matthew to provide a financial review of our third quarter. Thanks.
Thanks, Ben Good afternoon, everyone and thanks for joining US today I will now review, our third quarter 2020 financial results discuss our outlook for full year 2020, and provide some preliminary thoughts for 2021.
The focus of my comments will be on our non-GAAP results, where applicable as these items provide the most insight into the underlying trends impacting our businesses.
Please refer to todays press release for a more detailed description of our second quarter GAAP results.
As summarized on slide nine Q3 was another strong quarter for Cabana Trust with all three reporting segments contributing to our significant growth on outperformance versus external net sales and adjusted EBITDA expectations for the quarter.
Robust end market demand a strong operating execution and the continued scaling of our fast growing prescription management business drove a 20% year over year increase in adjusted EBITDA and fueled 40 basis points of year over year adjusted EBITDA margin.
During the third quarter.
Additionally.
With strong earnings and ample liquidity the team connect more strategically with respect to capital deployment, including our investment in BSG, which Ben described earlier.
Turning to the details on starting at the top of the income statement on slide 10.
Thats US net sales were approximately 1.13 billion in Q3.
An increase of 11% year over year on a reported basis.
Organic year over year net sales growth was 12% during the third quarter roughly.
Reflecting healthy companion animal market trends.
That are tracking at or above pre COVID-19 levels across many of our major geographies improving sales execution a market position in a number of our key markets and the positive trajectory about prescription management business.
In fact, the 12% organic year over year net sales growth delivered during Q3 was the strongest in the company's history.
Im reflects broad base momentum across all businesses.
Turning to slide 11.
Solid items non-GAAP adjusted EBITDA was 59 million for the third quarter of 2021st is $49 million in the prior year.
20% year over year improvement reflected increased contributions from all of our segments, even as we made investments in the business and certain costs was slowly add it back in Q3 as cobot related cost containment measures east.
Moving to our operating segments beginning on slide 12.
North America organic net sales increased 14% year over year in Q3.
Segment, adjusted EBITDA increased 15% year over year with segment adjusted EBITDA margin, expanding 10 basis points versus the prior year.
Strong organic net sales growth in our distribution business and another quarter of greater than 40% net sales for prescription management business contributed to our positive performance.
Drilling deeper into North American segment trends, our distribution business organic net sales increased approximately 10% year over year in Q3 roughly.
Reflective of healthy end market demand and our improved market position.
External third party data indicate that the U.S. distribution business experienced continued improvement in companion animal market share during the third quarter relative to the prior year reflective about better execution over the last 12 months.
Our software business in North America also delivered modestly increase revenue and profitability year over year during Q3.
With strong performance in our credit card processing business tied to increased patient volume side apartment practices.
Turning to slide 13, now prescription management business in North America.
During the third quarter of 2020, net sales increased 43% year over year to $104 million and we.
We ended the quarter closing in on nearly 11000 practices on the platform.
As we expected net sales growth decelerated from the record growth rates witnessed in March and Q2.
Reflecting COVID-19 peak E commerce demand.
However, the 43% year over year prescription management net sales growth tracked above our pre co that trajectory as the business continues to benefit from new customer and client engagement strategies.
Encouragingly, we have not yet seen any behavior differences between those pet owners, who began shopping on events online store from pellet by competitors. During code is nine same as compared to prior cohorts, providing a foundation for future growth in the quarters ahead.
In aggregate on without a coat at 19 tailwind like last quarter.
Same store prescription management platform net sales defined as veterinary practices enrolled on the platform in 2018 or earlier increased 23% year over year. During Q3, which was well ahead of our historical mid teens same store sales growth trajectory.
We're also seeing strong performance out of that 2019 cohort with.
With average first year revenue for practice of nearly $20000 for those practices for the full year of data.
This is a 20% increase over our previous high watermark for first year revenue without 2015.
34% increase as compared to 2018 cohort.
This reflects more engaged and productive enrollments since the merger closed.
Importantly, the early data out about 2020 kozel would suggest similar successes.
We're also very pleased with how the prescription management business is scaling.
With Q3, adjusted EBITDAR of $6 million or a 4 million improvement versus the prior year.
As anticipated adjusted EBITDA declined sequentially as COVID-19 cost measures were raised and we invested in pharmacy operations, the pet owner experience and technology enhancements to advance our market leading position.
Yes, a date.
20% of the year over year dollar growth in net sales has dropped down to adjusted EBITDA and.
And we continue to target, 15% to 20% on a rolling 12 months basis.
That still allows room for significant investment back into the business.
Turning to our European business segments Slide 14 will.
Organic net sales increased 8% year over year in Q3, reflecting COVID-19 recovery in many of our markets as well as another quarter of strong sales execution by our European team.
We had healthy Q3 organic net sales performance from that business is operating in Ireland, the Netherlands and Belgium.
In the UK, our largest European market net sales increased by more than 10% organically year over year as the co that 19 recovery in that market that started in late Q2 continued throughout the third quarter.
Strength in these markets helped offset weakness in Germany, and France, with our French distribution business continuing to suffer from a lack of scale in a very competitive market.
Given this challenge we have made the decision to close out distribution operations in France.
Prioritized, our efforts and our all the European markets, where we have momentum and opportunity to profitably grow share.
Turning to profitability European segment, adjusted EBITDA increased 27% year over year to 19 million with margins expanding 80 basis points year over year to 4.7%.
Reflecting strong operating leverage and good expense control.
Moving onto our APAC and emerging market segment on slide 15.
Our team delivered a 16% year over year increase in organic net sales in Q3 building.
Building on our recent momentum on reflecting strong sales execution.
Similar to last quarter, we saw notable strength in Australia, and Brazil with recent customer wins driving the accelerated performance.
New Zealand return to year over year organic net sales growth in Q3, but is still tracking below pre code at 19 growth rates.
Segment, adjusted EBITDA increased 60% year over year during Q3 on margins expanded by more than 200 basis points year over year driven.
Driven by the operating leverage from better than expected net sales activity as well as continued cost discipline.
Turning briefly back to our consolidated results Q3, GAAP net loss was $35 million or a loss of 33 cents per diluted share.
Non-GAAP adjusted net income, which excludes special items as well as acquisition intangibles amortization and other items was $30 million in Q2 versus $19 million in the prior year period.
Now turning to our balance sheet on slide 16.
Our reported net leverage at the end of the third quarter was 3.6 times as compared to the 3.5 times at the end of the second quarter as working capital increase versus Q2 levels, primarily tied to inventory buying to support higher sales activity.
This resulted in a cash balance dropping to approximately $355 million at the end of September.
However, the significant improvement in adjusted EBITDA year over year provided a nearly corresponding offset in the net leverage calculation.
We ended the third quarter with more than $650 million and available liquidity on with 1.9 turns of headroom under our net leverage covenant defined in our credit agreement.
Now turning to our guidance as outlined on slide 17.
We forecast adjusted EBITDA in the range of 213 to 218 million for 2020, which compares to our prior outlook of $200 million to $210 million.
This is the second the increased guidance since the start of the year.
This outlook presumes no new Nigel Elms tied to code 19 in Q4 and no substantial changes to the current environment.
As we think about the fourth quarter, our outlook factors in the planned investments in people technology advancements and capacity to support our growth plans in 2021, particularly prescription management.
Additionally, we expect higher shipping costs in Q4, as a result of COVID-19 related surcharges.
We anticipate moderate disruption in Europe tied to our Threepl transition in Germany in October which has created some short term challenges for our business in that market.
We also remind investors. The Q4 2019 results included skill, which generated 3 million and adjusted EBITDA and there is also a 2 million dollar euro the headwind tied to higher bonus accruals given our strong operating performance this year.
Adjusting for these impacts the underlying business continues to show healthy earnings growth.
While the animal health category is clearly outperformed in 2020. This still remain a number of code at 19 related uncertainties around the world, which is keeping us conservative with how we manage and approach the business.
Given this on where we are in our 2021 planning process, we are not yet able to provide specific guidance for the upcoming fiscal year.
However, based on our preliminary assessment of some of the critical moving pieces for 2021, we are currently targeting approximately 10% to 15% adjusted EBITDA growth in 2021 from the midpoint of our 2020 guidance.
This is an acceleration in the rate of growth expected for 2020 and compares favorably to the current consensus growth outlook of 10%.
Note that this early 2021 preliminary assessment does not include any material incremental COVID-19 impacts.
Key Tailwinds for 2021, including include an increasing contribution from a prescription management business ongoing supply chain share gains.
Modest accretion from our BSG investment on.
And the benefit from certain cost reduction initiatives headway.
Headwinds include further investments necessary to support innovation and to deliver a better practice and pet owner experience increased head count to complete the build out of our corporate functions menu.
Manufacture a changes in the UK that will significantly reduce net sales in that market, but below corporate average margin higher.
Higher employee costs as code at 19 cost containment measures have been relaxed and more normalized levels of travel.
We will look to provide official guidance. When we report Q4 results in late February or early March next year.
With our balance sheet now in better shape tied to the strategic actions, we have taken this year I.
I thought it would also be useful to outline our capital allocation priorities and how we think about leverage and capital deployment moving forward.
This can be found on slide 18 of the deck.
We target reported net leverage in the range of three to three and half times over the long term.
A level, we believe is appropriate given the stability of our business on the inherent free cash flow generation of the company.
Which should approach 50% of adjusted EBITDA over time, particularly now that some of the major onetime cost the formation of interests are winding down.
As we think about capital deployment, we will continue to pay down debt as required by the mandatory amortization schedule and we'll look to selectively deploy the balance of our available capital into internal growth projects and potential tuck in M&A transactions, all with an eye towards our strategic focus.
Yes areas.
Compounding software on proprietary products and solutions.
We would opportunistically consider larger scale M&A, but always with an eye towards generating double digit returns by the end of year three post transaction date and getting back to a targeted net leverage range within 12 to 18 months of any potential future transactions.
In all situations ill focus would be on higher growth and all higher margin acquisition targets.
Finally, before handing the call back over to Ben I want to provide a brief update on our 7.5% series a convertible preferred stock slide 19.
With the doubling of our stock price since issuing the preferred stock we were able to convert approximately two thirds of those shares into common stock in September.
Which saved us $12 million in annual cash dividend payments.
We are currently seeking shareholder approval to convert the remaining shares of preferred stock into shares of common stock with a special shareholders meeting scheduled for next week.
If successful we will save an additional 6.8 million in annual dividend payments and our pro forma common shares outstanding would be approximately $136 million with no preferred shares remaining outstanding.
With that I'll now turn the call back over to Ben for some brief closing remarks.
Thanks, Matthew in closing and as outlined on slide 20, our end market is strong and is proven durable during COVID-19.
And our value proposition is clearly resonating in the marketplace, which is giving us confidence to further invest in people and innovation to advance our customers growth objectives.
We are confident in our strategy, which is centered around winning with veterinarian winning with the veterinarian and the pet owner on behalf of the veterinarian and we now have a strong foundation in place that we can leverage moving forward.
We enter the last quarter of 2020 with good visibility and are cautiously optimistic about our growth prospects in 2021 and beyond.
This concludes our prepared remarks, and I will now turn the call back over to Nicholas Jansen to moderate the QNX session.
Thanks, Ben now we began the QNX section of our call we want to take as many questions as possible.
After you limit them to two and reenter the queue should you have additional ones. So Ashley please provide instructions and we are ready to take the first question.
At this time if you have a question. Please press Star then the number one on your telephone keypad and your first question comes from John Kreger with William Blair.
Hi, Thanks very much.
Then you mentioned the exit of the the distribution and in France can you just size that.
Top and bottom line impact for for next year.
Sure John good to hear from you.
The business nominal impact on on the bottom line.
And you know us.
Several hundred million dollars on on the top line.
Great. Thanks, and then I think you mentioned earlier in the call a decision on sort of to move to a cloud based.
Integrated Thames for the non US business can you just kind of elaborate on that a little bit more and does that change your plan for rolling out prescription management ex us. Thanks.
Yes, and John to clarify our long term vision is to move.
Move to cloud base technology for the Tams globally, not just ex us.
We will of course continue to maintain upgrade and improve the existing on Prem.
Products and services, but we definitely see that in terms of new customers in the market that will migrate to a cloud base plan I think in addition to that.
The benefit isn't just a more maintainable.
You know up piece of software that can be easily upgraded but it's also a software that allows us to integrate in prescription management appointment management and a host of other services. So it really fits as kind of the operating system and the foundation of what we have and is a great gateway for the other parts of our business.
And again just to clarify does that change the timeline to roll prescription management out ex us.
No. It does not we are still scheduled to do that in the back half of 21, great. Thank you.
Your next question comes from Jon Block with Stifel.
Great. Thanks, guys and good afternoon, I'll start of the North American distribution business I think you started stable market share again.
Maybe just your confidence that this is the new normal stable share, which seems to have been the case the past couple of quarters and.
With what you're willing to share we're willing to provide can you just talk to some of the changes that you made within the organization, which arguably helped stabilize the market share.
Yes, I think well first of all John good good to hear from you I think actually we.
We've seen a slight pickup in share if you look at the overall growth rate of the market in the stats that we had and then our growth rate in North America, you can see that the growth in North America exceeds the market growth. So we you know we feel good that we're actually probably have a slight expansion of share and you know while we still feel like we have a.
A lot of work to do and lots of opportunities in front of US we feel like there's a good stable foundation and there's this has now several quarters in a row, where we've either stabilized and held share or our expanded it. So we feel good about our position and how the.
The next year shaping up okay.
Okay fair enough maybe.
Better amount you on the next one of the prescription management.
What we call drop through step down from I think last quarter was a record at around 28% you guys certainly signaled that it'd be lower you are going to come up with some investments to move to low double digits up.
Still 20% year to date and I think that you might have mentioned, 15% to 20% drop through going forward. Maybe a two part question you know whats the delta between a 15% drop through to 20% drop through going forward is that strictly just a function of the top line and then do we think that.
About it being closer to the lower band the 15% over the next handful of quarters as arguably you put in place some investments in front of the international launch thanks, guys.
Yes.
It's Matthew I did mention our drop through over time in that 15% to 20% range and I think it really relates to the calendarization of investments they won't be completely linear with the way the toplines moving so we will put some cost and revenue will catch up that may get a little bit ahead, and then we'll put some more cost and.
But thats why we catch that objective to stay between that band on a sort of rolling 12 month average.
Okay fair enough I'll take the rest offline thanks guys.
Your next question comes from Nathan Rich with Goldman Sachs.
Hi, good afternoon. Thanks for the questions. Appreciate all the detail this gave on the call.
Maybe starting with the initial outlook for 2021.
Can you maybe at a high level just kind of talk about.
Your assumptions for revenue and margins next year, you kind of pointed to conservatism and consensus.
With where it stands now just curious.
From your standpoint, what do you see that more on the top line or more margins are both just a little extra color there would be helpful.
I think it's really going to be a blend of a combination of both we still see robust topline market environment here as Ben just mentioned I think shares been picking up a little bit where we can measure it.
Obviously, we've got strong aspirations for the prescription management side of the business and continuing to grow that.
But also cost managements and important part of this and as you know distribution is a game of pennies and operational excellence is going to be key for us. So I think you should look to a blend of both in terms of driving those.
Those numbers that we were indicating for next year.
Okay, Great and then maybe a quick follow up you talked about targeting the free cash flow conversion.
50% of EBITDA longer term when do you think we start to see free cash flow normalize obviously.
Obviously, you called out some kind of onetime crusher this year, but as we think about 2021 would you expect to kind of be closer to that target level.
In that timeframe. Thank you.
Yes, I would think of as sort of being clear of the things impinge on that systemically by the time, we get into 2022 will still be carrying into the start of next year.
Some onetime costs and startup costs that that.
Our little abnormal.
But but I do think this year has been particularly choppy with the.
The huge spikes in demand and then the slacking slackening off and it's been a really tricky environment to manage working capital I would think you know with our hopes for a while.
For what we think about next year for the broader economy, but things are a little smoother smoother as we move to the end of the pandemic and I would think we can manage that working capital in a much more linear fashion. So you should see as much choppy quarter to quarter move.
Great. Thanks for the question.
Your next question comes from David Westenberg with you can time security.
Hi, This is John Peterson on for David Westenberg. Thanks for taking my questions. The first one is that we've been seeing large order sizes embed clinics do you think theres any stocking behaviors from a pet owners.
Yes, John good.
Good to hear from you I don't think so not not in this most recent quarter maybe in Q2, you saw a lift the consumer buying a little bit ahead of.
You know there their needs so maybe instead of buying one month supply they about two months supply.
But certainly in the most recent corridor, we look at that.
Average order value as an example, and see a pretty normalized number versus the.
Beginning of the year and last year.
Okay, Great and also sorry, if I missed it but could you remind me of any one time items in the fourth quarter last year.
I think you know just in terms of.
Kind of year over year comp I think you know the two things that map you highlighted one with the skill.
That skill within our business at that point in time, it's about 3 million of EBITDA and then last year. We also.
Underachieved the original plan.
And had some $2 million of bonus question.
Our $2 million last of bonus versus a fully achieve plan are expected to be fully planned. This year. So you've got to basically about $5 million Delta of E.
EBITDA that was in Q.
Q4, 2019 that wouldn't be in Q4 of 2020.
All right great. Thank you.
Hi, again pretty question. Please press star didn't number one and our telephone keypad.
And your next question comes from Andrew Cooper with Raymond James.
Hi, guys. Thanks for the questions Lockhart, even been asked so maybe just one on.
You know that the incremental investment in capacity expansion and prescription management, obviously, not a surprise, but just curious any color you could give on on how or if covidien sort of some of the accelerated growth. We've seen the last two quarters has has shifted any timelines or or any way you think about sort of reinvesting in that business.
Relative to where you were thinking in say a.
February.
Uh huh.
No I mean, if anything cove, it reinforced our desire to invest in that business.
The value proposition is clear the consumer response is great.
So if anything we just have more conviction.
And the investments really fall into two main categories. There is on the operation side of pharmacies.
And systems and then second really is on the technology side to make the process both smooth there for that as well as some of their for the pet owner. So we expect to continue to invest in that business over time.
The only thing I'd add is that spike in demand was so acute in the second quarter.
We will.
Doing everything we possibly could to meet customer customer demand and probably slowed down some of those investments in the quarter just because we were focused on the customer not the the future. Fortunately, we got that back in balance now with these more normalized growth rates.
Okay. That's helpful and then maybe just one more.
You know as we think about I think the comment on on the UK change from one of the manufacturer just any more color you could give there and then.
Any any change in tone in terms of conversations with some of the manufacturers as we're getting too low.
Lapping more of the go directs in the alternative channels and sort of things settling out a little bit we've had some M&A. So just what's the latest and greatest as as you have those conversations any shift in sort of the town from from your side or their side frankly, particularly around preventive is where I think there's been some new products and things like that that think about as well.
Yeah, I think you know in the UK, we anticipated that.
That change occurring earlier in the year and as you know.
UK, probably our lowest margin business globally. So you know, we don't love the revenue headwind, but it doesn't have a significant impact on the EBITDA side of things.
In terms of.
You're kind of general question about tone, we feel good about our position with manufacturers.
And.
Continued evidence that on the parasiticide side of things that manufacturers will continue to work with distributors and are increasingly reliant on our ecommerce solution and the online channel in general.
Great I appreciate the time.
And again for any questions. Please press Star then the number one entered telephone keypad.
Hi.
And you do have a question from John Kreger with William Blair.
Hi, again, guys I don't think you talked about the specialty pharmacy business can you just give us an update on how that's going and.
Where that stands relative to more of a.
Non us rollout of prescription management. Thank you.
Im glad they let you back in the queue John.
As we said in the past we are.
Definitely focused on the compounding business.
It's important component.
Of.
Our North America, offering it's growing faster than the total business in North America.
It's higher margin than the rest of the business in North America. So it will continue to be a primary focus here in the us.
There definitely are opportunities internationally.
But it is a different regulatory environment and a less mature market.
So I would say the majority of the effort on that front is going to be.
In the U.S. and we feel like we just have a great position given.
Our scale.
And our platform, where a lot of that compounding business is running through on a patient specific basis. So it's a real differentiated offering versus the competition in the market and one that we will continue to push hard on in 2021.
Great. Thank you.
And there are no further questions at this time I will now hand, the call back to Nick Jansen for closing remarks.
Thanks, everyone for joining today, we'll be looking forward to catching up with all of you should have a great night.
That concludes today's conference. Thank you for your participation you may now disconnect.