Q1 2021 Covetrus Inc Earnings Call
[music].
Good afternoon. My name is Ann and I will be your conference operator for today at this time I would like to welcome everyone to the corporate share first quarter. Its on the Gen. One and earnings conference call.
I would now like to turn the call over to Mr. Nicholas Jansen, Vice President strategy and corporate development. Please go ahead.
Thank you and good afternoon, and thank you for joining us for <unk> Q1, 2020 One earnings conference call. Joining me on this afternoon's call are Ben Walden, Our President and Chief Executive Officer, and Matthew Foulston, Our executive Vice President and Chief Financial Officer, Ben and Matthew will begin with prepared remarks, and then we'll be happy to.
Take your questions during.
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 fact made during this conference call are forward looking including statements regarding management's expectations for future financial business and operational performance and operating expenditures.
Forward looking statements may be identified with words, such as well and expect believes 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 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 at IR Dot <unk> dot com and on the SEC's website at Www Dot SEC Dot Gov.
Forward looking statements speak only as of the date hereof and except as required by law, we undertake no obligation to update or revise these forward looking statements you.
You can find this afternoon's press release announcing our first quarter 2020 on our results and the accompanying slide deck for this.
For this call on IR Dot <unk> Dot com.
The release and presentation also contains 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'll now turn it over to Ben to provide the highlights beginning on slide three.
Thanks, Nicholas good afternoon, everyone and thanks for joining us today, I hope, everyone remains safe and well.
On this on the call. This afternoon, we will discuss our strong Q1 financial results.
And the increase to our 2021 full year guidance and outline the progress we are making and driving sales and our higher margin businesses provide you with an update on some of the recent milestones tied to our strategic initiatives that we outlined earlier this year and highlight our commitment to social responsibility and sustainability ahead of the launch of our first ever.
<unk> report scheduled to be released later in 2021.
Starting on slide three with our quarterly highlights Q.
Q1 was strong across nearly every metric and the business, including 4% year over year organic net sales growth or a more robust 12% when excluding the impact from the previously announced items impacting our UK and German distribution businesses Importantly, our North America segment grew organic net sales and <unk>.
<unk> percent year over year, when looking at the broader market, we can see that the companion animal and market remained healthy during Q1, a continuation of the positive trend we have seen since shortly after the pandemic started and our sales execution continues to drive above market growth and many of our geographies with particular.
The strong performance and the U S. As I just described.
Importantly, we leveraged this positive top line growth into 19% year over year adjusted EBITDA growth as we continue to drive above average growth and our higher margin products and services and maintained cost discipline. We also had another strong quarter and prescription management, which delivered accelerated year over year same.
Core sales growth and the highest number of quarterly new growth practice enrollments on the platform and over 12 months.
Additionally, we made good progress on our synchronization efforts during the quarter with our aligned North American commercial organization driving increased adoption of the all in cold that just solution, which represents approximately 10% of our combined U S customer base on a 40 basis basis point improvement relative to the.
Prior year.
Revenue per all and customer grew more than 20% year over year and Q1 are double the rate of growth of our average revenue per customer and the U S. We continue to see a significant opportunity to drive deeper engagement with our customer base as we gain further traction with our commercial model, which incentivize our team to drive adoption of our portfolio of higher margin.
Solutions.
Finally, we also made significant progress on bringing new talent into the organization that will help accelerate our transformation efforts, including several new senior roles to convert dress linked wellborn as our chief Veterinary officer of North America debt Sharkey as our Chief Consumer Officer, and P Perone as president strategic.
Nic partnerships.
This list is not include several other critical hires and the areas of technology brand and consumer that we believe will strengthen our product roadmap and accelerate our progress against our strategic objectives.
On this note and as discussed on our year end call back in early March we are focused as an organization on accelerating the financial contribution of our higher margin businesses and investing in innovation to sustain our leadership position.
And as seen on slide four we made good progress and delivering against this objective during Q1, where we drove double digit year over year growth and net sales and gross profit in these categories in the first quarter when excluding the divested skill business and the prior year period.
These growth rates were well in excess of the rest of our portfolio and these businesses now collectively represent more than 40% of the Companys consolidated gross profit are nearly a 400 basis point year over year increase.
We are encouraged by the trajectory and expect to see more progress and the quarters ahead as our recent strategic actions build momentum.
And while distribution gross profit was relatively flat year over year during the first quarter on a global basis. Our business is in North America, and APAC and emerging markets did see growth and we remain optimistic that the challenges in Europe are isolated and temporary.
Okay.
Prescription management Smart Pak cruiser and V. On all had strong performances in Q1, and we expect to see further momentum and areas like <unk> branded product and compounding as we progress through the balance of the year based on recent investments and innovation and capacity expansion plans for those businesses and.
And as we drive innovation and continued growth and our existing portfolio of higher margin businesses. We should expect continued gains and our consolidated gross margin, which expanded 40 basis points year over year during Q1, when excluding scale and the prior year period.
We also believe that capital deployment can help further advance our growth and margin objectives, clearly the opportunity for ongoing consolidation and our market is high and our global reach and software assets and customer access put us and are positioned to create significant value through focused capital deployment.
Opportunities, where we can own more margin and strengthen our relationship with the customer drive demand and win with the pet owner our primary areas of focus.
Turning to slide five I now want to highlight several of our recent operational highlights that support some of the strategic priorities, we outlined earlier and the year in Q1, we made significant progress on a couple of our larger capital projects that are currently under underway with the build out of a brand new state of the art compounding and <unk>.
Three be outsourcing facility nearing completion, and Arizona and anticipated to be opened by the end of the second quarter.
As a reminder, this project to design and is designed to significantly enhance our operating capacity and increase our commercialization capability for office use and patient specific medications.
We also continue to rollout and new technology, and our distribution centers across the U S, which will provide several key benefits for our customers, while providing significant efficiencies and working capital benefits from <unk>, and our new pharmacy, and Texas to support large animals opened in March providing access to a new growth opportunity and the small.
But growing vertical for the company.
Our recent investments and our consumer organization also started to pay initial dividends during the first quarter, where we deployed new marketing capabilities and tested new preventative messaging to pet owners that drove a 26% year over year increase in the number of new pet parents to the prescription management platform and Q1.
These incremental investments exceeded our return thresholds for lifetime value and further support our goal to deliver 30% to 40% net sales growth and our prescription management business and 2021. We've also seen great retention of the buyers acquired last year. During the COVID-19, pandemic and we continue to see healthy enrollment and growth and our auto ship.
<unk>, which provides the underlying foundation for our sales trajectory.
Additionally, the team continues to optimize the consumer experience on the storefront, which has improved site navigation and checkout for pet parents, and and dry and is driving encouraging conversion metrics and the addition of certain conventions branded and proprietary product skus onto the storefront also serves as an incremental opportunity as we do.
<unk> future adoption of our own products and before turning to software and our consumer team has also done a tremendous job driving growth and our <unk> E Commerce business Smart Pak, where subscriptions grew an impressive 9% year over year during the first quarter.
Moving to our technology solutions, we are now ready for the full launch of built in E prescribing capabilities inside of our App and Mark and EBIT practice on software systems, which is a major milestone for the company as we look to drive tighter integration and improved functionality between our prescription management and practice management software systems.
Combining this added functionality with our investments to make it easier to upgrade to our latest software versions and provides the added value to our existing software customers and should unlock new revenue opportunities from <unk>, including in areas like credit card processing.
We're also making great progress on the build out of our next generation cloud based software solution, which we continue to target for Q4 launch with the additional functionality rolling out throughout 2022.
This new product offering will streamline technology solutions for the veterinary practice support greater prescription compliance simplified pet owner engagement and improve how and practice manages its inventory while creating added visibility into practice performance. We believe this new platform will drive significant value for our customers and.
For <unk>.
Finally on slide six with <unk> now being public for a little over two years and with our first ever ESG report set to be released later this year I thought this would be a good time for us to share some of the good progress we are making with respect to all our global ESG initiatives currently underway and provide an update on the comps.
And his commitment to sustainability, social responsibility and good governance.
As a global animal health company with a mission to advance the world of Veterinary Medicine, we are dedicated to providing ethical sustainable and socially responsible solutions that improve the lives of our employees customers and partners while positively impacting the communities we serve.
Over the past year, we have found ourselves living and a time that reminds us of the importance of community support and the need for organizations and individuals to simply do good one of our core values.
We then go back just the spirit of social responsibility has always been strong and all the time, we are developing new ways for COVID-19 just to better serve its various stakeholders from our longstanding support of animal shelters and assistance dog programs to our team's resolve during moments of crisis like the Australia and Bush fires and now COVID-19 <unk>.
Making a difference all around the world.
We are also committed to cataloging and benchmarking our own environmental footprint and building resilience to climate impacts into some of our business models in order to improve sustainability and to reduce our collective environmental impact.
This also includes our company's commitment to drive real and lasting change taking affirmative steps to garner support of and anti racist diverse inclusive and equitable culture and covert dress.
And to drive this change we have devoted dedicated resources and defined a new global diversity and inclusion governance and community setup inside the organization.
And as part of our path forward, we have made five commitments.
And to have a diverse workforce that is demographically reflective of our society at all levels.
Second to do good by changing both <unk> and the industry, we work with them.
Three to foster diversity and inclusion for all employees throughout extensive training across the company for to create a workplace of inclusion and belonging with a launch of a new employee resource groups and fifth to be transparent and be publicly accountable for a more diverse workforce at all levels like we are due.
And here today.
This is our initial commitment to not only do good but to be better and we will keep you informed of our progress in the quarters and years ahead.
In summary, our foundation is solid our market positioning is improving and we continue to make good progress on many of our strategic initiatives, which gives us the added confidence to increase our full year 2021 guidance for organic net sales growth and adjusted EBITDA.
And I am so proud of the resilience of our team and their desire to drive real and lasting change and to deliver better outcomes for our customers and their clients, which makes me increasingly optimistic about the trajectory of our business and our opportunity moving forward.
I'll now turn the call over to Matthew to provide more details on the financials.
Thanks, Ben Good afternoon, everyone. Thanks for joining us today I will now review, our first quarter 2021 financial results and provide additional details on a positive revision to our 2021 outlook.
The focus of my comments will be on a 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 first quarter 2021 GAAP results.
As summarized on slide eight Q1 was another strong quarter for <unk> with 4% year over year organic net sales growth and $57 million and adjusted EBITDA, both of which eclipsed expectations as we continue to successfully execute against our strategy and deliver strong.
Long results and and end market that continues to see above trend growth.
And this was particularly evident and our North America, and APAC and emerging market segments.
And in many of our businesses and Europe.
As Ben mentioned, our continued focus on driving double digit net sales growth and a portfolio of higher margin technology E Commerce and proprietary products, which now collectively represent 43% of our consolidated gross profit.
And also help fuel 70 basis points of year over year, adjusted EBITDA and margin expansion during Q1.
Finally, while our reported net debt to last 12 months adjusted EBITDA ratio did increase a modest amount as compared to year end levels to three seven times given the normal seasonal cash outflows, we typically see in our business during Q1.
Use of cash during the quarter did improve versus the prior year period.
And we remain on track to deliver on our targeted 30% to 40% adjusted EBITDA to free cash flow conversion in 2021.
Turning to the details on slide nine <unk> net sales were approximately $1 1 billion and Q1.
And increase of 3% year over year.
Organic year over year net sales growth was 4% during the first quarter.
<unk> and healthy companion animal and market.
Strong sales execution and continued growth and prescription management.
These positive trends were partially offset by the difficult comparison, we had and the prior year when we experienced approximately approximately $35 million.
And inventory stocking, but pulled forward demand into Q1 out of Q2 because of the onset of COVID-19.
As well as the headwinds previously disclosed in our UK and German markets.
Excluding these two markets total company pro forma organic net sales increased 12% year over year, highlighting the underlying health of our overall business.
Turning to slide 10.
Consolidated non-GAAP adjusted EBITDA was $57 million for the first quarter of 2021.
<unk> to $48 million from the prior year period.
The 19% year over year improvement reflected positive contributions from all three segments, particularly in North America, as well as a modest FX tailwind, which more than offset the impact from the divestiture of skill and growth and overhead as we complete the final build out of <unk>.
The infrastructure necessary to support our independence as a public company.
I would also mentioned that the COVID-19, and inventory stocking demand pull forward.
And March 2020 created an additional $4 million of adjusted EBITDA headwind year over year during Q1 and.
In other words and the year over year improvement and adjusted EBITDA was even more impressive than the headline.
Moving to our quarterly commentary from our operating segments beginning on slide 11.
North America, net sales increased 15% year over year, and Q1, and 16% year over year on an organic basis.
Segment, adjusted EBITDA increased 27% year over year and Q1 with.
With segment, adjusted EBITDA margins, expanding 70 basis points versus the prior year.
Positive leverage of double digit net sales growth and our supply chain business and mid 30% net sales growth and prescription management contributed to our segment margin expansion during Q1.
Drilling deeper into North American segment trends, starting on slide 12.
And our supply chain organic net sales increased 13% year over year, and Q1 and reflective of healthy end market demand.
And our improved market position and distribution and continued momentum and smart Pak <unk>.
Supply chain, adjusted EBITDA increased to $37 million compared to $30 million and the prior year period as the company was able to deliver operating leverage of the robust net sales performance during the first quarter.
On North American software business was generally stable from a net sales perspective, but we were able to drive year over year gross margin and adjusted EBITDA improvement during the quarter due to the mix of revenue delivered in Q1.
Turning to slide 13, and our prescription management business in North America.
During the first quarter of 2021, net sales increase increased 33% year over year to $112 million and we ended the quarter with more than 11004 hundred practices on the platform.
We added approximately 300 net new enrollments during the first quarter of 2021 compared to 200 net additions during the fourth quarter of 2020.
Our aligned commercial organization helped drive the sequential improvement and net additions and we have a strong funnel of additional prospects heading into the second half of the year.
The 33% year over year net sales growth delivered in Q1 was modestly ahead of the commentary that we laid out on our Q4 earnings conference call back in March and includes an approximate 300 basis point headwind from a change and corporate policy tied to the recognition of certain menu.
Factor and incentives, which are now reflected as a reduction and cost of goods sold versus previously included as net sales and a 400 basis point headwind from two fewer selling days year over year.
In other words, the underlying trends and this business remain quite strong.
In fact March 2021, net sales of $46 million increased 40% year over year, despite and the policy change and the challenging comparison created by the beginning of the COVID-19 demand spike and the prior year period.
While Q2 faces and even more difficult year over year comparison on our recent results keep us optimistic regarding the trajectory for this business and we.
We remain on track to deliver against and our outlook for first half 2021 prescription management and net sales growth to be at the low end of the 30% to 40% forecasted range for the full year year over year growth.
Same store prescription management platform net sales defined as veterinary practices enrolled on the platform and 2019 or earlier increased 30% year over year during Q1, which was an acceleration from Q4 and full year 2020 levels.
Slide the inclusion of a sizable and highly productive 2019 cohort entering the same store base.
All cohorts once again experienced double digit year over year net sales growth during the first quarter.
We also continue to make progress and scaling the financial performance of our prescription management business.
With Q1, adjusted EBITDA of $6 million.
A $2 million improvement versus the prior year.
Over the last 12 months and when adjusted for the legal reserve taken in the fourth quarter of 2020.
15% of the year over year dollar growth and net sales has converted to adjusted EBITDA and our prescription management business.
While we certainly face a challenging year over year comparison during Q2 for adjusted EBITDA and this business given the mismatch of higher revenue and reduced expenses and the prior year because of COVID-19 market dynamics and certain temporary cost actions taken by the company and response to the uncertainty.
Last year we.
We remain committed to converting at least 15% of the year over year dollar growth and net sales to adjusted EBITDA for this business for the full year of 2021.
On to our European business on Slide 14.
<unk> net sales decreased 12% year over year, and Q1, reflecting the previously disclosed headwinds and the UK and in Germany, and the difficult comps from the prior year period from COVID-19 inventory stocking.
And which more than offset strength in our business is operating and Netherlands, Ireland and Belgium.
We also had very strong performance and our proprietary brands businesses of cruiser and VII.
And where organic net sales increased double digits year over year.
Encouragingly, we have made good progress and Germany, and stabilizing our customer base and improving our service levels. Following the challenged three PL transition during Q4.
And it gives us confidence we can begin to return to growth and that market and the second half of the year.
Turning to profitability European segment, adjusted EBITDA in Q1 increased 17% year over year to $21 million with margins, expanding 150 basis points year over year to five 8%.
The European team did an outstanding job managing expenses, considering the sales challenges and the UK and the business also benefited from the strength and convert from branded and proprietary brand sales, which enabled a $3 million year over year increase and segment adjusted EBITDA Despite and.
Net sales decline and 65 million year over year due to the aforementioned headwinds.
Moving on to our APAC and emerging markets segment on slide 15 now.
And our team delivered a 7% year over year increase and organic net sales in Q1, reflecting another quarter of strong sales execution, particularly.
Particularly in our Brazilian and Australian markets.
We also delivered strong results and proprietary products and our small but rapidly growing business in China.
This growth was particularly impressive considering the difficult year over year growth comparison from the prior year.
Which included COVID-19 inventory stocking and benefits.
Gross margins expanded 140 basis points year over year and Q1.
We continue to make good progress driving on proprietary products.
Segment, adjusted EBITDA increased 43% year over year during Q1 and margins expanded by 150 basis points year over year.
Driven by gross margin improvement and the positive operating leverage from better than expected net sales.
Which more than offset the headwind from the COVID-19 inventory stocking benefit that occurred in the prior year.
Turning briefly back to our consolidated results Q1, GAAP net loss was $16 million or a loss of 11 cents per diluted share versus a net loss of $33 million or a loss of <unk> 30 per diluted share and the prior year period.
Non-GAAP adjusted net income, which excludes special items as well as acquisition related intangibles amortization and other items was $29 million during Q1 versus $20 million and the prior year period.
Now quickly turning to our balance sheet on slide 16, our.
Our reported net leverage at the end of the first quarter was three seven times as compared to the three and a half times at the end of the year on.
Our cash balance was approximately 211 million on March 31 2021.
Which was lower compared to $290 million at December 31, 2020, primarily reflecting seasonal cash and cash flow use.
While we do not provide specific quarterly guidance, we remind the investors of the specific cost actions taken in Q2 2020 because of the onset of the COVID-19 pandemic as well as the spiking growth and our prescription management business.
Which alongside recent investments creates a challenging year over year comparison for the quarter.
And the Q&A session.
Thanks, Ben now we begin the Q&A section of our conference call and we want to take as many questions as possible. So we ask you to limit them to two and then reenter the queue should you have additional ones. So and please provide instructions and we are there and ready to take the first question.
Thank you as a reminder to ask a question you will need to press star and the number one on your telephone keypad to withdraw your question. Please press the pound key.
Our first question comes from the line of John <unk> from William Blair. Your line is now open.
Hey, guys. Thanks.
And then can you just elaborate a little bit more on what your plan is to get Europe back into a growth mode. I think Matthew just said, it's you expect it to be down about 10% for the year.
Do you think it can be sort of comparable to Asia or North America next year.
Yes, John.
It's a good question.
Think if you look at Europe, obviously, we have two very specific issue is one and the U K and and one in Germany. The rest of Europe is is growing I think as it relates to those specific issues in Germany.
I think we have a light at the end of the tunnel have resolved our operational issues and are starting to market and acquire reacquire customers I would say and expect that that will start to grow here and the back half of the year.
In terms of the U K.
And that business has stabilized, but it isn't going to be a grower here and the short term until we.
Moving into 2022 and.
Of course, I would just probably.
Point out, though in terms of kind of quality of revenue and and value to the business. Despite the 12% decrease in revenue you had a 17% increase in EBITDA and a quarter. So while you are never happy about revenue going the wrong way certainly from a margin profile.
And type of revenue.
No.
We were happy with our ability to manage the business and get growth and the key areas that are going to provide long term value to the business.
Great. Thanks, and my follow ups actually you just touched on and do you think that five 8% EBITDA margin in Europe is sustainable as you go through the year and into next year.
Yeah, I believe so I mean again, it really comes down to the mix and the quality of the revenue so.
And I mentioned in my prepared remarks cruise VDI proprietary product technology all of that is growing the margin profile of that is obviously significantly higher than say distribution revenue and the U K.
So if anything we could have margin expansion over time.
As the mix changes in Europe.
And while it won't get to APAC, our U S overnight and that certainly is a long term aspiration.
It sounds good thank you.
Yeah.
Thank you. Our next question comes from the line of Jon Block from Stifel. Sir. Please go ahead.
Great Thanks, and good afternoon.
And the first one for you slide four is just very helpful and helpful. Breaking out the gross profit from third party products versus proprietary.
If I remember this Florida I think proprietary was 23 ish percent of sales and almost two extra gross profit dollars. So that seems to be a big part of the story for you guys and where you want to go or their goals on where you want some of the statistics over the next 12 to 24 months I know you have the long term.
George and aspirations of I believe 10% up from almost two extra 5%, but if and when you get more granular how do we think about that bar chart, maybe a volume evolving and coming quarters.
Yeah, absolutely I would say from.
Overall margin complex and we'd want to certainly be moving into north of 20% net.
Next year and long term, we'd like the proprietary products to make up almost the inverse of what it is today, so 60% versus 40% and while we haven't given a timeframe to get there. We certainly think given the mix of products and the momentum that we have that that is a realistic goal to achieve.
Uh huh.
Got it.
Thanks for that and then your second question for you and the ones you 'twenty, one EBITDA beat handily.
All of the guidance, but the corporate still seem like a pretty big anchor and it seemed like the beat and I don't even know maybe the raise would have been bigger the corporate I think was up 8 million and year over year.
Annualize that it's like a $30 million drag and I get it and it could be a little chunky, but.
Remember correctly last quarter, you thought corporate wasn't going to be a big step up in 'twenty one versus 'twenty is this just a timing thing or did something change where corporate is going to be a little bit higher and 21, yet youre still able to walk up the got thanks guys.
Yes, no great question and there's some complexity within there and you absolutely shouldn't multiply it by four.
There's two things in there one is there is a combination of a.
A couple of million Bucks of FX on into co notes.
Which you should view as one time and not repeating and could easily go the other way on US and then secondly, there was about $1 million and a half of short term incentive.
This year, we think we have a pretty good line of sight to delivering on our internal commitments as you can imagine last year and our outlook was quite a bit rockier and firmed up as we got deeper into COVID-19 and so we haven't accrued quite up quite as much. So.
Getting on for half of that is.
Is is unique circumstantial.
Perfect. Thanks for the color.
Thank you. Our next question comes from the line of Nathan Rich from Goldman Sachs. Your line is now open.
Hi, good afternoon, and thanks for the questions.
And that if I could maybe start with your commentary on the prescription management business. It seemed like there are a couple of moving pieces and I. Just wanted to clarify I think you had said there was an accounting change in terms of how you.
Or where you place manufacturer incentives was about 300 basis points drag to the prescription management growth and then another 400 basis point impact from the two fewer selling days, so normalizing for that would something.
Closer to 40% and B, how we should be thinking about the growth of that business.
In the quarter and I think you said March was a little bit north of that 40%.
And as well so I just wanted to make sure I understood the moving pieces there.
And then on margins for that business.
Could you talk about how we should be thinking about the trajectory going forward. It seems like the margins have been around 5% to 6% of the past few quarters do we start to see that accelerate.
Given that you've been investing a lot to support the growth of that business, maybe as you leverage those investments.
Over the next several quarters should we see that margin improving thank you.
Yes, let me take them and the order you Hugh.
You posed them and you've got it completely right.
The growth as reported was 33% we moved some.
Manufacturer incentives from revenue to Cox prospectively, we didn't go back and adjusted the prior periods because of all the workloads.
And a relatively small impact to the total business. So that was a 300 basis point drag on the two selling days was about 400, so like for like it was a 40% quarter, which we're extremely happy with and.
And when you look at go back to the 33% we reported it grew really strongly through the quarter started out slow and.
And then did terrifically and March with with 40%, even with the accounting drag and that number. So we were super pleased with that.
Pivoted and pivoting to the margins.
When you look at profit and that business sequentially, they were pretty much flat and we.
A decision on late in the quarter to make some very discrete investments, we knew won't going to payback and the period.
But with the extra.
Alright, well granularity and precision with which we are targeting where we spend the money.
We think the returns on it and I'm going to be phenomenal. So it was a sort of late in quarter decision and we put about 1 million three of extra investment and that dragged on the margin a bit so.
We just see a lot of runway ahead here and.
We think the growth is very valuable rather than driving the margin up and the short term. So we're going to constantly be fighting that balance, but generally within that commitment to drop 15% of the incremental revenue down to EBITDA.
Great Great. Thank you if I could just ask a quick one shifting to the North America distribution business and another quarter of strong.
Strong growth I think up 13%, obviously the market has been very strong as well, but would just be curious to get your view on how you're performing relative to the market and what's driving that growth and and how we should think about the outlook over the balance of the year as the comps get tougher and the back half.
Yeah, I'll give some qualitative feedback and so I think.
You're right very strong growth, our channel checks and I think from third party data.
Shows us picking up market share vis vis competition and.
And then when you look at the prescription management business, you really have to look at.
Two sides of the coin, what's going on with the veterinarian and what's going on with the consumer the.
The veterinary and as we do a better and better job of showing value and extending the.
The revenue opportunity for a vet outside the clinic, we're getting more and more activation within those practices. So we saw a pretty nice uptick in terms of the number of practices that were proactively prescribing marketing and adopting the platform and the last quarter or so and we expect that to continue.
In terms of the consumer we really see no going back on that front and clearly they value the convenience whether that being able to communicate with that online or get something shipped to their home whether that be a fair set aside are compounded medication and we don't expect that trend slowdown in any way and.
And as we continue to invest and focus I think Matthew outlined and some of his remarks and our ability to refine how we market and communicate with a consumer we think we're just going to get better and better.
At those consumer initiated prescriptions and the retention of those consumers overtime.
Okay and then.
And on that a little bit.
He just wanted the opportunity around like the technology solution in terms of <unk> E prescribing capability that app, and Mark and and will that be meaningful for you in terms of and in terms of increasing customer engagement and Ross.
Yeah, absolutely and if you look at our our product roadmap again, whether it's on from solutions are in the cloud or with appointment management. It's all about bringing these things together and a holistic solution.
Whether that be for the customer or or the consumer so we announced.
Recently.
Full rollout of prescription management embedded into Abu Mark and that just makes it one one less staff one less obstacle for the veterinarian.
When driving and the prescription.
And that things like.
Making recommended medication choices available to the vet one stop shopping for the consumer based on their pin and to data all of the integration of the synchronization of those solutions. We believe this is making it more and more compelling for both of that and the pet parent.
Okay, great. Thank you.
Thank you. Our next question comes from the line is Elliott developers from Raymond Cheese. Please go ahead and.
Thanks, Good afternoon question for.
Then I guess.
With respect to the gross profit contribution from your higher margin segments technology e-commerce and proprietary products.
It looks like the margin there's about 35% roughly can you provide some specific commentary in terms of the relative contribution of the brand new product portfolio and compounding businesses versus the tech and E. Commerce, and then just thinking about the longer term contribution from your new fiber three b compounding from.
<unk> I don't know if you've ever talked about sort of what you think the the incremental revenue opportunities associated with that but maybe just some commentary there with respect to capacity technical capabilities and how that that business. Once it scale could impact the overall margin profile of your higher margin segments. Thanks.
You are welcome Elliot could you ask the question again.
And I just wanted to make sure I'm answering the right question in terms of are you asking about the split of gross profit between technology and proprietary rents are the different margin profiles.
Specifically different margin profiles differential between the branded products compounding versus tech and e-commerce and ultimately where.
Where that could go as the compounding facility starts to become a bigger contributor to the overall revenue picture.
Yeah sure thing, so I'll I'll kind of break out a couple of different.
Profiles of.
Types of things and and I would say these are a lobster, they've just because as you get into the detail at a skew level.
It can start to very but you've got prescription management that is roughly around 30% gross margin.
<unk> got and and margin of a branded product like a cruise.
Closer to 40 plus percent.
Dot com pounding.
Plus percent and technology, even a slight nudge about that and the $55 and 60% and.
So obviously, there's different growth rates and different market opportunities for those things.
But.
The whole blend and the mix, obviously is substantially better than third party distribution and.
In terms of the five of us and we'd be facility and the new.
Investment and Grand view or Phoenix, Arizona.
Really believe that that could be a game changed over the compounding business on knots and fronts from an operation standpoint, our level of efficiency and capacity and quality control goes way up so order to ship ability to innovate.
Ability to scale with that business just improve immensely.
And I think from our customer and marketing.
Customer satisfaction standpoint people can know that not only are we keeping up with the regulatory.
Requirements inside of that business, but we're going to really have a best of breed solution out in the marketplace. So we're extremely excited for that investment to start paying dividends here in the back half of 2021.
Operator, and you can move to the next question.
Thank you and our next question comes from the line of David West and break from Guggenheim.
Yeah. My name is now openings.
Hi, Thanks for taking the question and I wanted to talk a little bit I think it's kind of a continuation of Aaron's question on the prescription and management business and we are about to laps and just very interesting comps and.
It's just hard for me to get really comfortable just around growth rates and the back half of the year just given the fact that there has such and such strange cards I don't mean to give kind of quarterly ask for kind of quarterly.
Guidance here, but is there any way you can give and kind of commentary around b what happened late March.
Early April as we laughed this kind of.
Every strange unique circumstance and the prescription and mix could you repeat business because I mean, obviously, everyone was ordering everything on line at the time you did highlight 300, new additional accounts, but it would just be interesting to hear this as as we.
Just see a quarter of a guy lapping of that strange behavior.
Yeah, Let me take a crack at that and then and then they went away and but.
And if you go back to Q2 of last year or the year over year growth and prescription management was 66% so and make no mistake left thing that is going to be it's going to be a challenge if you'd take hell comment about the annual growth between 30 and 40% the way we see the first half together.
Is that the low and a that range and we see the second half of the high end of that range. So you can you can probably triangulate.
What we think the second quarter is going to be like and it's going to be a struggle with that kind of a cult.
Yeah.
Got it okay.
Alright, I'll I'll take it as that on that great I appreciate the extra commentary on.
On the initiatives you talked about the consumer marketing effort I think of COVID-19 curious or <unk> legacy that's first choices kind of on the back and a prescription management, where you're kind of marketing for the veterinarian.
And you kind of and that site and I think it says something around the lines of increasing awareness and pet parents is increasing awareness of your brand specifically can you give us a little bit more color on.
On that Brandon engagement after that you're doing just given the fact that like I think traditionally is that's best first choice or on that paradigm kind of experts choices like the.
Pushing the branded a on there and so is there been any kind of changed and that paradigm and.
And kind of what are you doing with that marketing effort and why why why do you think that's going to have such a good Roy and thank you.
Yeah, No nothing has changed we're always working on behalf of our of our customers the veterinarian, but what I would say is that if you look at the.
Total prescriptions the majority of them are what we call consumer initiated so there's and outbound communication or marketing to the consumer the consumer request makes the purchase request the script versus a proactive prescription that's coming out of the pins at the point of care to to the.
To the consumer from from the vet. So when we talked about consumer marketing, what we're really referencing is marketing on behalf of the vet to the parent to drive awareness engagement and eventually conversion.
Got it thank you very much for taking the questions.
Thank you. Our next question comes from the line hasn't been Lucky Pesade, Sir and Barclays.
Please go ahead.
And.
Good afternoon so.
Just falling off on the earlier cushion on your explanation of the curtains of growth for prescription management was helpful. Can you remind us of the drivers of EBITDA margin and this segment and as you lap the higher end of the range for edge to how should we think about duvida margin for this for this segment.
<unk>.
Yes, I think on on long term basis, we think about 15% to 20% flow through.
Two two EBITDA on a trailing 12 month basis and really the reason we talked about failing 12 months is Matthew mentioned and is prepared remarks, there can be times, where we decide opportunistically to heavy up on marketing because of that we think we can acquire.
A consumer to say and auto ship program and a very profitable way and so that might take down margin and the period paid dividend in the long term.
So we were really balancing growth and profitability and this business.
To exit Q1 at a 40% year over year growth rate and.
Basically be at $500 million, plus run right already and growing 30% to 40% is impressive but we think we're really at the beginning of the journey there and so we don't want a sub optimize the business by squeezing out too much profit when we think there's a lot of consumer activity to go acquire here in.
The next couple of year period.
I think the other thing is when we look at the stickiness of these customers on these cohorts that go all the way back to 2012 and was still get and double digit growth value of the customer acquisition versus the short term margin is pretty clear to us.
And stood on other remoxy called out market share gains on the and the distribution business is there.
Any quantitative numbers on it can provide tools there.
I think so.
Somewhere and the 50 bps range is what we would be thinking again, it's a bit qualitative from market checks and third party data, but I think if you just go and look at maybe some of our competitors public.
Public announcements and look at our North America growth versus.
There is I think that's another way of Triangulating that data.
And thank you.
Thank you is there a reminder, again to ask a question you may need to press start and and number one on your television and Keith and that Star one on your telephone.
I am showing no further questions at this time I would now let's turn the conference back and Mister Nicholas Janson.
Thank you and and and thanks for everyone for joining today's call. We look forward to speaking with many of you and the coming weeks and putting it a participation at the the steeple jaws and pulse conference and early June Thanks have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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