Q4 2020 Covetrus Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Covid charge fourth quarter 2020 earnings Conference 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 on your Touchtone telephone as a reminder of this conference call is being recorded I would like to turn the conference over chair of the House, Mr. Nick Johnson, Vice President strategy and corporate development. Please go ahead.

Thank you Jerome good morning, and thank you for joining us for cause of that your says Q4 and full year 2020 earnings Conference call. Joining me on today's call are bad Wallin, our president and Chief Executive Officer, and Matthew Foulston, Our executive Vice President and Chief Financial Officer.

And Matthew will begin with prepared remarks, and then we'll be happy to take your questions. During today's conference call and we anticipate making projections and forward looking statements based on our current expectations. All statements other than statements of historical fact made during this conference call are forward looking including statements regarding management's expectations for future financial business.

Operational performance and operating expenditures and forward looking statements may be identified with words, such as will expect the leaves should or similar terminology and the negative of the lease 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 and these forward looking statements. These risks and uncertainties include those under the heading risk factors and our most recent annual report on form 10-K, and other periodic reports filed with the Securities and Exchange Commission, which are available on the investors section of our website.

IR dot per veteran dot com and on the SEC's website at Www Dot SEC Dot Gov forward looking statements only 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 you can find this morning's press release announcing our fourth quarter and full year 2020 of <unk>.

And the accompanying slide deck for this call on IR docs, the ventures Dot com and the release and presentation also contain further information about the non-GAAP financial measures that we'll 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 Ben to provide the highlights beginning on slide three.

Thanks, Nick Good morning, everyone and thanks for joining us today, I hope, everyone and staying safe and I'm looking forward to the day hopefully sometime later this year. When we are when we all can spend time again together in person.

On the call. This morning, we will provide an update on the state of the companion animal and market highlight our stronger than expected Q4, and full year 2020 financial results detail, our investment growth and margin priorities for the upcoming year and outline why we think 'twenty and 'twenty, one will be another period of growth and operational progress.

And capitalize on the opportunity in front of us.

Now starting on slide three with our perspectives on the current state of the companion animal and market.

As many of you may already know the companion animal industry as a growing market and has proven to be quite resilient. Despite the disruption of COVID-19 has caused around the world and.

<unk> pet adoptions and the ongoing humanization of pets innovation around enhanced standards of care and the expansion of new service channels have raised global demand for our products and services our U S. Internal data confirms veterinarians, whereas the busy as ever in the second half of 2020 with double digit practice revenue growth fueled by a moderate <unk>.

<unk> and new clients and higher spending per visit.

COVID-19 in many ways accelerated the already favorable end market backdrop and help their market positioning, which we believe will continue through 2021, and certainly there will be months and are quarters, where we might face challenging comparisons versus 2020 activity, but the underlying factors driving our market in there and.

We are well positioned to capitalize on this opportunity and the years ahead.

This strong and market backdrop, coupled with our improved sales execution and enhanced focus and operating discipline was clearly evident and driving our full year numbers in 2020 as seen on slide four.

We delivered 10% year over year pro forma organic net sales growth and 13% year over year adjusted EBITDA growth in 2020, with our business trajectory accelerating in the back half of the year.

Our robust performance of spread across all three of our business segments, where we not only grew adjusted EBITDA, but also expanded our segment adjusted EBITDA margins, our prescription management business increased pro forma net sales by 50% year over year and meaningfully improved its profitability. We also made.

Solid progress increasing sales of our Covid, just branded and proprietary brand portfolio, which combined are now in excess of $325 million with gross margins that are approximately double our consolidated average.

I'll speak more on this opportunity later in my prepared remarks.

Finally, the financial progress we made this year also enabled us to meaningfully improve our balance sheet with net leverage now at approximately three five times, which affords us flexibility as we think about funding organic growth and external investment opportunities entering 2021.

Obviously 2020 was a year like none other with the COVID-19 pandemic.

So proud of how our team responded and exceeded expectations across nearly all elements of our strategic plan as seen on slide five first and foremost we invested in our people, which led to significant improvements and our organizational health scores.

And engaged and motivated workforce translates into better operational performance.

That in turn and helped us attract talent to help drive our transformation forward, we increased our distribution market share in the U S and in certain international markets as we focus the company on the core drivers of our business, we sold non core assets and exited our French distribution business to streamline our company and focus.

And on markets, where we have greater opportunity.

We also successfully exited all of our TSA is providing us direct operational control and many of our international markets. We delivered robust prescription management and net sales growth as we successfully executed our customer and client engagement strategies launched at the start of 2020 and lastly, we.

Established global sourcing capabilities to drive our <unk> branded and proprietary brand product strategy entering 2021.

Clearly there were a significant number of accomplishments to be proud of and this was evident in our better than expected fourth quarter results.

As we look forward and turning to slide six we are focused on accelerating the contribution from our higher margin businesses and investing in innovation to sustain our leadership position to date, we have repositioned our portfolio of businesses improved our execution and distribution and delivered against some of our initial strategies for our higher.

Margin products and solutions, while we certainly made good progress in 2020, increasing our overall sales mix and generating more gross profit from our higher margin businesses, which now collectively represent more than 40% of our total company gross profit there is still significant room to increase both elements in 2021 and beyond.

As we execute against our priorities.

For example, we recently combined our U S sales and marketing organizations that we believe will significantly improve our north American commercial effectiveness in 2021 of.

This has created greater strategic and financial alignment with our customers, which we believe will help us secure new business grow our share of wallet and reduce our cost to serve.

We have also doubled down on our prescription management engagement strategies and 2021 and have also increased our focus on new enrollments to sustain the strong growth delivered in 2020.

We are also investing heavily in technology and e-commerce and of added focus to our <unk> branded and proprietary products and solutions to enhance our value proposition through these actions, we anticipate making good progress in 2021 as we march towards our longer term aspirations of delivering adjusted EBITDA margins that approach 10%.

And as compared to the five 2% adjusted EBITDA margin achieved in 2020.

Drilling deeper and looking at the past the future margin expansion and shareholder value creation, you can see on slide seven the North American gross margin and net sales trajectory of our proprietary products and solutions compared to traditional distribution of third party products clearly the profile of dynamics of our <unk>.

<unk> products and solutions are significantly higher than traditional distribution and we have now aligned our resources, including our sales compensation metrics with value creation.

As we drive engagement with all of <unk> customers and increase the penetration of these higher margin products and solutions inside of our existing base, we expect to see steady improvement and our consolidated margins.

Importantly, approximately two thirds of our 'twenty and 'twenty, one capex budget is growth oriented and focused on these higher margin businesses as we aggressive as we are aggressively seeking to expand our market position and North America, and as we think about future M&A and capital deployment and moving forward, we believe such activity.

We'll be heavily skewed towards advancing these growth and margin objectives.

Clearly the opportunity for consolidation on our market is high and our global reach and customer access puts us in a position to create value through focused capital deployment.

With our increased focus on our <unk> branded products proprietary brands and compounding solutions and thought it would also be useful for investors. If we were to talk more about some of the levers, we're pulling and 2021 to work to accelerate our growth trajectory in these categories as seen on slide eight.

First for the <unk> branded products, we have launched several new commercial initiatives that have made it easier for veterinary practices during the ordering process to see the value. They derive from these products versus alternatives. We have also launched several of these COVID-19 just branded products on our prescription management platform, providing new savings opportunities for pet owners seeking.

Lower cost alternatives.

Second we have developed new sales and marketing programs that for our family of owned brands and this includes the EI cruise, the Calabria, and smart Pak to accelerate our penetration in existing geographies and new markets.

We've had significant success for example, and driving adoption of the <unk> includes that throughout Europe by leveraging our broad supply chain footprint and those markets and we look to replicate this strategy and the U S in 2021 and beyond.

Additionally, we plan on making available later this year, our market leading brand of smart Pak supplements to horse owners barn managers and trainers and Canada with its strong equine sports tradition.

Third we have a funnel of new products and compounding solutions launching into the market over the next six months to 12 months that can deliver COVID-19, just branded value and meet the needs of both customers and pet owners and finally, we are opening the newest and most technologically advanced compounding pharmacy and 500.

<unk> outsourcing.

Our force outsourcing facility later this year, which is designed to significantly enhance our operating capacity and increase our commercialization capability for office use and patient specific medications and.

In total these investments offer us the opportunity to advance our customers' objectives and meaningfully accelerate the growth of our proprietary products and compounding solutions and 2021 and the years ahead.

As we think through the roadmap of our technology investments on slide nine 2021 will be and active year for us where the number of major milestones that will not only enhance our value proposition to our customers and their clients, but will also unlock significant sales growth from margin potential for <unk>.

For example, while I already mentioned, our new state of the art compounding and outsourcing facilities scheduled to open in Arizona and Q2, we also of a major pharmacy project underway and main that is expected to open and the second half of 2021, which will allow us the ability to deliver products more quickly to our veterinary practice customers and pet owners in the large.

Northeast U S market.

One of the bigger investments and technology solutions, we are making in 'twenty and 'twenty. One is the build out of our unified cloud based offering that will bring together our practice management software and of prescription management platform into one module. This new product offering will streamline technology solutions for the veterinary practice support greater prescription compliance.

And simplified pet owner engagement and improve how of practice managers and inventory, while creating added visibility into practice management.

This build out will take 12 plus months the complete but in the meantime, we will continue to continue to provide upgrades and improvements to our existing practice management software capabilities, which are designed to make it easier for these practices to leverage our prescription management and client engagement services. For example in Q4, we launched the initial functionality the.

And it allows veterinarians to create a prescription inside our average mark and EBIT of practice practice management software solutions and the general release will be available in Q1, we expect additional product features to be introduced to the market throughout 2021.

Lastly, I would highlight a number of planned investments and technology enhancements and the consumer experience for pet owners buying products of our prescription management platform, including optimizing the user's journey and mobile experience to increase conversion rates, improving auto ship management, and delivering better personalization and dynamic cant.

And we.

We are also investing and appointment management and other consumer initiatives that strengthen the connectivity between the veterinarian and the pet owner. We are also launching upgrades and <unk> 'twenty 'twenty, one to our day to be E. Commerce platform experience for both distribution and compounding and pursuing new software integrations and partnerships, which are designed to make it easier for.

And our customers to seamlessly order products from <unk>, including our proprietary products and compounding solutions.

Clearly we have planned for a lot of operational capacity and innovation to bring to market in 2021, which puts covert tourists and a fantastic position to help our customers grow their businesses and eight of our manufacturer partners to achieve their strategic objectives. Our team is energized by the momentum we have going for us and the market and we look forward.

And to another year of great success in 2021.

I will now turn the call over to Matthew to provide more details on the financials. Thanks.

Thanks, Ben Good morning, everyone and thanks for joining US today I will now review on our fourth quarter and full year 2020 financial results and <unk>.

Additional details on our 2021 guidance.

And the focus of my comments will be on our non-GAAP results, where applicable as these items provide the most insight into the underlying trends impacting our businesses.

Please refer to today's press release for a more detailed description of our fourth quarter and full year 2020 GAAP results.

As summarized on slide 11, we finished 2020 with momentum across our businesses with all three reporting segments contributing to our growth and our.

Performance versus expectations for the fourth quarter.

Favorable and market conditions, and our strong operating execution drove a 19% year over year increase and adjusted EBITDA and fuel of 30 basis points of euro of the year adjusted EBITDA margin expansion.

During the fourth quarter.

Additionally, our net leverage ratio improved to three and a half times and we ended the year with approximately $590 million of liquidity.

Including $290 million and cash and cash equivalents on the balance sheet.

Turning to the details and starting at the top of the income statement on slide 12.

The veteran net sales were approximately 112 billion and Q4 and increase of 11% year over year on a reported basis.

Organic year over year net sales growth was 12% during the fourth quarter and 10% for the full year 2020.

The reflecting underlying healthy companion animal market trends that are tracking at or above pre COVID-19 levels across all major geographies and improved sales execution and market position and the number of our key markets on the positive trajectory of our prescription management business.

While there were some discrete items and Europe, but will impact consolidated net sales growth and 2021, which I will detail later, we have.

Anticipate another year of strong underlying growth as we capitalize on positive and market conditions and execute our strategic priorities, while still investing for growth.

Turning to slide 13.

Holiday to non-GAAP, adjusted EBITDA was $56 million for the fourth quarter of 2020 compared to $47 million and the prior year.

The 19% year over year improvement reflected strong contributions from our North America, and APAC and emerging market segments, which more than offset the impact from the divestiture of skill and continued.

<unk> growth and overhead as we complete the build out of the infrastructure necessary to support our independence as a public company.

For the full year 2020 as shown on slide 14, consolidated non-GAAP adjusted EBITDA was $226 million compared to our November guidance. The court court for 213% to $218 million and adjusted EBITDA and the $200 million reported in the price.

The year.

I would also note the full year results came in significantly ahead of our initial 2020 guidance offered at this time last year. Despite the uncertainty created by the COVID-19 pandemic.

The 13% year over year growth reflected significant improvements and profitability and our prescription management business in North America as well as the increased earnings contribution from our supply chain businesses and all three reporting segments, which reflected healthy top line performance and the impact of cost containment.

And actions.

This growth was partially offset by the aforementioned increase and corporate overhead to support our transformation.

As the new public company on the last earnings contribution from the divestiture of skill animal care.

Additionally, there was also of several million dollars year over year headwind in 2020 tied to increased bonus accruals compared to 2019, given our stronger financial performance that exceeded internal expectations.

Moving to our quarterly commentary from our operating segments beginning on slide 15.

North America net sales increased 17% year over year on both the reported and organic basis in Q4 and segment adjusted EBITDA increased 25% year over year with segment adjusted EBITDA margins, expanding 50 basis points versus the prior year.

Strong net sales growth and our supply chain business and another quarter of greater than 40% net sales growth and prescription management contributed to our positive performance in the fourth quarter compared to the prior year.

Drilling deeper into North American segment trends, starting on slide 16, our supply chain business organic net sales increased approximately 14% year over year, and Q4 and 7% for the full year reflective of healthy end market demand and our improved market position.

External third party data indicate that the U S distribution business grew companion animal market share during the fourth quarter relative to the prior year, driven by new account wins or better execution over the last 12 months as well as the benefit from certain manufacturers.

Reducing the number of distributor relationships so utilize in the U S market.

Encouragingly, we were able to leverage our improved market position and double digit organic net sales growth to deliver a significant improvement and profitability with supply chain adjusted EBITDA increasing to $37 million.

Compared to $26 million and the prior year period.

And North American software business was generally stable during the quarter and for the full year.

Ben mentioned earlier, we are making significant investments and our software capabilities that we expect to drive growth and 2022 and beyond.

Turning to slide 17, and on prescription management business in North America.

During the fourth quarter of 2020, net sales increased 46% year over year to $107 million and.

And we ended the year with more than 11100 of practices on the platform of.

Of note we added approximately 200 net new enrollments during the fourth quarter of 2020.

Compared to 50 net additions during the third quarter.

We have a funnel of good customer prospects and the non aligned sales force to drive an increased number of practice enrollments in 2021.

And the 46% year over year prescription management and net sales growth delivered in Q4 was an acceleration over third quarter growth rates and once again tracked above our pre COVID-19.

The 19 trajectory as.

And as the business continues to benefit from new customer and client engagement strategies.

Same store prescription management platform net sales defined as veterinary practices enrolled on the platform and 2018 or earlier increased 26% euro per year during Q4, and 28% for the full year, which was well ahead of the 16% year over year same.

Store sales growth reported in 2019.

Impressively, all cohorts experienced double digit year over year net sales growth for the year and.

And the 2019 cohort has the most productive first year in company history.

Encouragingly the early full year of data on the 2020 cohort suggests similar strength is now 2019 cohort.

We also continue to make progress and scaling the financial performance of our prescription management business.

With Q4, adjusted EBITDA of $2 million or 6 million when excluding a $4 million legal reserve taken during the quarter. The historic litigation legacy Vets first choice.

Giving us the $3 million of underlying improvement versus the prior year.

For the full year and when adjusted for the legal reserve of 19% of the year over year dollar growth and pro forma net sales dropped down to adjusted EBITDA, which is at the high end of about 15% to 20% target on a rolling 12 months basis.

As a reminder, investments tend to be lumpy quarter to quarter and therefore, we believe looking at this metric over a 12 months period is the best way to evaluate our success and driving disciplined growth and this business.

Turning to our European business segment on Slide 18.

Organic net sales increased 5% year over year, and Q4, and 6% for the full year, reflecting and market growth and strong sales execution by our European team. Despite the challenges presented by COVID-19.

We had healthy Q4 organic net sales performance from our businesses operating in the Netherlands, Ireland and Romania.

The strength in these markets helped to offset significant weakness in Germany and France.

As a reminder, and of three PL transition and Germany has not been as smooth as anticipated and we exited a low margin and supply chain business in France at the end of the year given market challenges.

These two items will collectively reduce 2021 revenue by more than $70 million relative to 2020 levels.

Turning to profitability.

European segment adjusted EBITDA in Q4 was flat year over year $18 million with margins declining 10 basis points year over year to four and 5%.

It's important to note that if we exclude the impact of the divestiture of skill the noise surround our JV and Spain and the impact of FX European segment, adjusted EBITDA increased 15% year over year and margins expanded 40 basis points, reflecting solid underlying opera.

<unk> leverage on mid single digit organic net sales growth.

Yes.

Moving on to our APAC and emerging markets segment on slide 19.

Team delivered a 14% year over year increase and organic net sales for both Q4 and full year 2020, maintaining our recent momentum and reflecting our strong sales execution.

We continue to see strong double digit growth and Australia, and Brazil with more modest growth rates and the New Zealand.

Gross margins expanded 90 basis points year over year and Q4, as we continued to make good progress driving our proprietary products.

Segment, adjusted EBITDA increased 80% year over year during Q4 on.

Margins expanded by 280 basis points year over year drill.

Driven by gross margin improvement and the positive operating leverage from better than expected net sales as well as strong cost discipline.

Turning briefly back to our consolidated results Q4, GAAP net loss was 4 million or a loss of four cents per diluted share.

Non-GAAP adjusted net income, which excludes special items as well as acquisition related intangibles amortization and other items was $28 million during Q4 versus $20 million and the prior year period.

Now turning to our balance sheet on slide 20.

Our reported net leverage at the end of the fourth quarter was three and a half tons as composed of the throughput as compared to three six times at the end of the third quarter.

And now sits at the top end of our long term targeted range of three to three and a half times.

And our cash balance dropped to approximately 290 million of December 31, and 2020 as compared to $355 million on September 32020, primarily reflecting our decision to prepay the $60 million and term loan principal amortization for 2021 in December.

<unk> of last year.

And which will reduce our interest expense by more than $600000. This year.

Underlying cash generation was positive during Q4 on the improvement and adjusted EBITDA year over year enabled the sequential improvement and our net leverage ratio at year end.

We ended Q4 with nearly $590 million and available liquidity and with two three tons of headroom under our net leverage covenant as defined in our credit agreement.

With our balance sheet now and a much stronger position, we have flexibility in 2021 to fund both internal investments and pursue external growth opportunities.

Now turning to our 2021 guidance and as outlined on slide 21, we continue to forecast adjusted EBITDA and the range of $240 million to $250 million for 2021.

This outlook balances the underlying momentum we have across many of our businesses entering the year with planned investments to support future growth as well as the impact of discrete challenges in Europe.

Additionally, our outlook assumes and end market growth rate that is closer to the historical trend line of mid single digits versus the above trend growth rates seen in many of our markets in 2020, driven by COVID-19.

With this market framework in mind.

The year organic net sales growth is expected to be two and a half the three and 5% from 2021.

This includes strong net sales performance in North America, which is expected to grow low teens year over year organically, including 30% to 40% year over year growth and prescription management.

And mid to high single digit year over year growth and supply chain.

Europe Europe is expected to decline low teens year over year and 2021 on on organic growth basis.

This includes an approximate 30% year over year sales decline and the UK tied to a manufacturer and customer loss and the continued challenges and Germany tied to our ongoing <unk> transition, which we forecast will reduce net sales and that market by nearly 20%.

Excluding these two markets European segment is expected to grow low to mid single digits and in line with market growth rates for the region.

APAC and emerging markets is also expected to grow and the low to mid single digits zero of the year in 2021 on on organic basis off of challenging year over year comparison.

In total on one excluding the discrete headwinds and the UK and Germany are organic year over year net sales growth and 2021 is expected to be and the high single digits, which is more reflective of our long term growth opportunity.

Other elements of our 2021 guidance, including capital expenditures of $55 million to $65 million of which approximately two thirds is focused on growth.

And adjusted EBITDA to free cash flow conversion between 30% and 40%, which is an improvement versus 2020 performance as we cycle through some of the most significant one time cash costs tied to our transformation.

We continue to target, 50% adjusted EBITDA to free cash flow conversion over the longer term.

And as we think about the quarterly cadence for 2021, we expect the first half of the year to reflect more challenging year over year comparisons given the temporary cost containment actions implemented last year during the height of the COVID-19 uncertainty the timing of certain investments in 2020.

On the Spike and net sales seen in our prescription management business tied to the start of the pandemic last year and.

Additionally, the first quarter of 2021 has too few two fewer selling days year over year has faced some incremental weather related headwinds and we will face a more difficult comparison as the <unk>.

Result of the COVID-19 inventory stocking dynamics during March of 2020, and many of our international markets.

Lastly, we anticipate growth and on prescription management business to track towards the lower end of our 30% to 40% year over year of growth target and the first half of 'twenty, one and the higher end of the target and the second half of the year.

Reflective of the COVID-19 related year over year comparison dynamics just described.

And as well as certain discrete factors such as major supplier shortages and therapeutic diets and some shipping challenges at a primary carrier and the first quarter.

Taking these aggregate net sales of items as well as the timing of certain investments into consideration we expect.

The adjusted EBITDA and the first half of the year to approximate 45% of our full year 2021 guidance.

With that I'll now turn the call back over the Pan for some brief closing remarks.

Thanks, Matthew in closing and as outlined on Slide 22, we have a solid foundation in place after delivering a very successful 2020, and we have good visibility and a clear plan for our efforts to deliver another strong year in 2021.

The end market is healthy and it's proven durable throughout COVID-19.

And our differentiated value proposition is resonating in the marketplace, which is giving us confidence to further invest in people and the innovation to advance some of these growth objectives.

We are confident and our strategy and believe we are well positioned to deliver improved outcomes for our customers their clients and our manufacturer partners and create shareholder value as we capitalize on our opportunity and expand our margin.

This concludes our prepared remarks, and I'll now turn the call back over to Nicholas Jansen to moderate the Q&A session.

Thanks, Ben now we begin the Q&A section of our call we want to think of as many questions as possible. So we ask you to limit then the two and then reenter the queue should you have an additional one so jerome please provide instructions and we are ready to take the first question.

Ladies and gentlemen, if you have a question at this time, Please press star and the number of one key on your Touchstone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key your first question comes from the line of John Kreger with William Blair.

Sir your line's open.

Hi, Thanks, very much hey, guys.

Ben could you talk a little bit more about how youre going to address some of the issues that you've mentioned in Germany in particular.

And how long and will it take to get that fixed and when would you expect.

Growth in that region to normalize.

Yeah. Thanks, John good to hear from you.

The team has obviously been very focused on that and we're disappointed with how challenging the transition.

And was.

It has started to get better really in Q4 and early into into Q1, but I expect it will still be challenging through the first half of 'twenty and 'twenty, one, but we do think that our market position.

And we'll be able to be.

And we will start to grow again.

In the in the back half of next year of this coming year sorry.

Got it. Thank you and then you outlined.

It sounds like Youre investing and compounding with some new fulfillment assets.

Any plans to take that too to Europe or Asia.

Yes, I think and in the long term that's certainly an opportunity. There is obviously as you know different regulatory environments in those different countries I think for now at least and the short term.

The focus is squarely on North America, and when it comes to compounding we feel like.

We really are in the unique place given our sales access our prescription management platform.

Our investment and facilities product development. So I think that that can be of big growth driver both on the top and bottom line in 2021 for us.

Okay. Thank you.

Your next question comes from the line of the La <unk> Prasad with Barclays. Your line's open.

Hi, good morning, and congratulations on results couple of questions from me Firstly on the operating margin side.

Interesting that APAC and the <unk> nine percentage is higher than North America zone, 4%. So can you help us understand the dynamics and.

And also try to get a sense of the underlying EBITDA of our optimal EBITDA for both of these regions.

Secondly on <unk> are you in a position to provide some update now since share investment any operational changes done on anything.

And anything on in terms of tangible progress on changes that they can see and the near term. Thank you.

Sure thing.

All of the Matthew answer the the first part of your questions on APAC operating margins and I'll handle the second part of the question on BSG.

Yes, I think we enjoy a really nice market position and APAC, we've got a fantastic team down there thats been really delivering tremendously for the last 18 months on the in fact, we see nothing but further opportunity down in that region. As we think about the possibility of taking the prescription management platform down there.

So I think that's a.

On area, where youll see us focus and we're really proud of the performance.

We talked a lot about the the work we need to do to improve our margins across the board and drive the EBITDA margin.

Closer towards 10% over time and a lot of what Ben talked about is our focus in those key areas on that slide around prescription management around the proprietary brands and around compounding where we do enjoy those.

Premium margins, and that's where the focus of our investments and our efforts on.

And the largely you know as it relates to <unk>, obviously, we're about one quarter into the.

That acquisition so far.

Oh good.

It really is a great asset uniquely positioned as the study group partner offer the veterinary industry.

And in the coming quarters, what investors as well as ESG members had come to expect as more and more innovation coming out of <unk> that is brought to them and a unique fashion and whether thats, bringing things like prescription management and compounding combined with distribution together with them and are you.

<unk> selling model so.

It's still early but we're cautiously optimistic about the progress that we can make on that front.

Thank you.

Yeah.

Your next question comes from the line of Jon Block with Stifel. Your line is open.

Great. Thanks, guys. Good morning, first one and I'll try to keep the second one and tighter but for the quarter of the 56 million versus 47, and adjusted EBITDA of 9 million, but just want to make sure kind of skill was the 3 million headwind and the 4 million of legal.

Matthew is in the 56 million call. It and then maybe it depends on how we want to count bonus payments I guess, what I'm trying to get out there is normalized and we think about year over year growth closer to 30% plus versus what you guys printed and then of tack on to that is how do we think about the corporate overhead and 21 versus <unk>.

I think that was a pretty big $22 million headwind in 2020. Thanks.

Let me start with the legal reserve that is and that number and was a headwind.

Sure.

And obviously as you mentioned skill was another drag on earnings. So Q4 was a positive surprise for US we had strength and all three markets.

Beyond what we expected I think.

One of the.

And the market's going too deep of lockdown, it seems to drive more activity with people and their animals and.

And we well we were pleasantly surprised across all three markets and the in.

And the fourth quarter.

Okay, great and if that's true.

The follow up just from the 21 and how we think about corporate in terms of the the year over year headwind.

Yes.

I don't think Youll see anything really material and cooperated with me up a few million dollars nothing like the the progress we have to make and get enough of those 72 <unk> in 2020 of which took a lot of standup of corporate capability.

Got it perfect and then sort of of a longer term question. Ben If you could just talk to you I think you alluded to the the 10% long term adjusted EBITDA margins that you threw out there maybe if you could talk to the timing behind that and the.

The construct in other words can we think about our supply chain and the software bears of call it 7% and 8% of our high single digits.

Prescription management, and 15% plus and then when you weight. The two out you arrive at the 10% bogey. Thanks for your time.

Yes, I think the.

It really is reflective of our revenue mix shifts.

And is already occurring inside of the business in my prepared remarks, I mentioned and that gross profit on a total basis is now.

40% of that gross profit is coming from products and services that are unique to the company whether that be proprietary brands of compounding of prescription management. So the driver of going from 5% to 10% adjusted EBITDA margin is that increased.

Penetration of those unique services, we do think distribution revenue will continue to grow but certainly not grow at the pace of the.

The other efforts in terms of timing.

The year ambition, but we think that every year that we can make steady progress in that direction and I think 'twenty and 'twenty was reflective of kind of first step our first step on that path.

Perfect. Thanks for your time guys.

Yes.

Your next question comes from the line of David Westenburg.

And with Guggenheim Your line is open.

Hi, and thanks for taking the question and congrats on the on it.

The great year here.

So could you talk about the prescription management and potential and in Europe, I know early and the acquisition rationale. It was about the revenue synergy about building on the <unk> are there.

On the legacy of Henry Schein business, there and how that kind of.

Might help you.

In terms of your growth and kind of.

Tough macro and Europe.

Yeah.

Clearly there is long term opportunity all over the world I think for prescription management I mean generally the value proposition is one that we think can resonate.

And every market for the company what we're balancing is just obviously of white hot opportunity here in the U S and how much capital we should invest in the short term against international expansion versus the U S opportunity. So I do think that it can help us in.

A market like the UK, which we mentioned is under pressure in terms of our value of either to customers or manufacturers.

But I think in terms of the P&L, we don't expect a significantly impact in 2021 on any international expansion.

Got it alright.

Thank you very much and then how should we think about the <unk>.

Move to the cloud and <unk>.

And then strategically how we should think about the <unk> business should we still think about this as kind of a bridge between distribution and prescription management and maybe that was how I thought about it and not necessarily and you thought about in terms of the launch of volume.

Term strategic.

Use of your of your.

Very high market share in the.

Pins.

And obviously, that's my last question yes.

Yes, no I think it's a good way to think about the business. It's clearly kind of of Nexus for the other parts of the business and while it hasnt been a big top line grow our it's obviously, a very significant EBITDA contributor and on top of that it's a real gateway to our other products and services. So one of the things that we mentioned and the in the script.

We are now surfacing prescription management opportunities embedded into ABA, Mark and EBIT practice, and Thats, just kind of one of many different things that we look to do in terms of using our <unk> footprint to drive adoption of other <unk> products and services. So the.

The investment and the cloud is really all about both on modernization of that system, which should be of benefit to both our customers in terms of ease of use maintain ability access to upgrades as well as and ability for the company to do faster integration of various products and services across the full of excess family.

<unk>.

Thank you.

Your next question comes from the line of Nathan Rich with.

Goldman Sachs Your line's open.

Hi, good morning, Thanks for taking the questions.

I guess I wanted to start off with the EBITDA guidance.

And trying to kind of marry it with the topline outlook that you gave it seems like.

When we think about the growth and the prescription management business that seems to be the primary driver of the EBITDA growth year over year and I guess.

Matt I guess I'd be curious just the kind of get your view on when you look at kind of the <unk>.

Underlying businesses across the different regions.

Do you feel like the the kind of growth and kind of North America, and APAC is kind of balanced by the headwinds that you called out in Europe. So we should think of that kind of the supply chain business is relatively flattish and.

The prescription management business is kind of driving the incremental growth and EBITDA year over year, if that makes sense.

Yes, I think in a general sense, that's a good way to look at it clearly.

Shopping down 20% of the incremental revenue to EBITDA and that business is we've consistently shown now is on.

And nice driver of profit going forward.

We think the distribution business is going to be strong and in North America, and we think it will be pretty strong again and in APAC and Europe does present, a bit of a drag here both in the UK and Germany as Ben said earlier, we think we can see a path of the things improving and Germany in the back half, but I think.

That's sort of the broad.

Strokes and you've got it right.

Okay, that's helpful and.

And then maybe looking a little bit longer term.

It's interesting the the slide that you guys had on sort of the incremental gross margin across the different businesses.

And when we think about like the software services business that growth seems to have been relatively flattish I guess, what do you feel like it's going to take to drive growth in that segment.

And what type of growth do you think is a reasonable kind of over the long term.

If you can grow that business, obviously very accretive from a margin standpoint. So we'll just be curious to get your outlook for that segment there.

Yes.

2020 was such an interesting year on so many fronts I think on products and services that required the customer to make significant changes to their business.

We saw a huge pullback.

And I think you hear about that from other peers and our in our category as well so software clearly fits into that category and I think that we're just not in a position to.

Want to make large wholesale changes to their practice. So we do think that business can.

<unk> re accelerate into kind of of mid single digits grower I would also just point out though that for us and David.

Westenburg kind of alluded to this and his questioning the.

The pins is really the great gateway to other parts of the business. So like in the U S, where we're close to <unk>.

60% market share.

And for that business and with the prescription management.

And sitting at around a third.

And of market share the combination of those two software assets together from an end user standpoint provided a great on ramp for prescription management and so when I evaluate the success of that business I think about both.

On a standalone basis, how much revenue and EBITDA as of the producing as well as its ability to drive other incremental products and services.

Co veteran and certainly in 2020 and 2019, we would have never had the prescription management growth that we did if it were and for the installed base of our of our payments business.

Makes sense. Thank you.

Yep.

Again, ladies and gentlemen, if you have a question at this time. Please press star and then the number one key on your Touchtone telephone. If your question has been answered argue of its starting to move yourself from the queue. Please press the pound key.

And I'm showing no further questions at this time I would like to turn the conference back to Nick Jansen.

Thank you so much Jerome and thanks for everyone for attending today's call.

And we hope to connected with the all of you and the coming months at several Investor conferences, We will talk to you and thank you.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.

And <unk>.

[music].

And then.

And.

[music].

Range.

[music].

The.

And.

And.

And please.

Good day.

And.

The.

And.

Yes.

And.

Good day.

And.

And.

Okay.

[music].

The.

And.

Yes.