Q4 2021 Covetrus Inc Earnings Call
Good day and thank you for standing by at this time I would now like to welcome everyone to <unk> fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session.
You will need to press star one on the telephone keypad. If you require any further assistance. Please press star zero I would now like to turn the call over to your speaker today, Mr. Nicholas Jansen Vice President of Investor Relations. Please go ahead.
Thank you Anne and good afternoon. Thank you for joining us for mattresses Q4, and full year 2021 earnings conference call.
Joining me on this afternoon's call are Ben Wolin, 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 today's conference call, we anticipate making projections and other 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.
Forward looking statements may be identified with words, such as will expect.
The leaves should.
Similar terminology and the negative 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 with cause actual results to differ materially from those contemplated in these forward looking statements.
These risks and uncertainties include those under the heading risk factors in our most recent annual report on Form 10-K , 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 or on the SEC's website.
VW 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 can find this afternoon's release announcing our fourth quarter 2021, and full year 2021 results and the accompanying slide deck 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 will discuss today.
Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results.
With that I will now turn it over to Ben to provide the highlights beginning on slide three.
Thanks, Nick Good afternoon, everyone and thank you for joining us I hope everyone is safe given the turbulent times that we live in we have a lot of ground to cover so I'll dive right into my prepared remarks, starting on slide three.
Next week marks my second anniversary as the company's permanent CEO and while there is still much to be done to deliver conversant as full potential within the attractive and growing animal health market I am proud of all the progress. The team has made over the last two years in 2021, we accelerated our pace of innovation.
We strengthened our value proposition to our veterinary practice customers pet owners and manufacturer partners.
We continue to steadily forward towards our end goal of becoming the leading global technology enables veterinary health care solutions company.
Financially 2021 was also a successful year, where we delivered 5% year over year non-GAAP organic net sales growth, we increased non-GAAP adjusted EBITDA by 8% year over year, which was faster than net sales growth and we continue to scale, our technology solutions and proprietary brands on the <unk>.
<unk> I would highlight another year of success and our North American prescription management business, where we grew net sales, 24% year over year or 28% when normalized for an accounting change and we increased non-GAAP adjusted EBITDA by more than 90% year over year to 44.
Million.
A rather impressive outcome on top of what was a phenomenal 2020 for the business during the peak of the pandemic.
The financial success came despite some unanticipated headwinds in our UK and German markets and higher than planned corporate costs during the year, including the negative impact from FX on our intercompany loans and elevated costs.
Certain legal development.
Importantly, with many of these challenges now in the rearview mirror, we are in a healthy position to accelerate net sales and non-GAAP adjusted EBITDA growth in 2022, as we build upon our underlying financial momentum and monetize our innovation coming to market.
Turning to slide four.
As many of you have heard me say in the past at Prometric everything we do is centered on helping veterinarians drive better health and business outcomes, we exist to help our customers thrive.
As we have emphasized on this call we have the tools needed for a veterinarian to address their primary day to day challenges improve their practice workflow and continue to grow their business and our platform only got stronger in 2021.
We invested significantly in our practice management solutions, we acquired new capabilities to further strengthen the vessels have relationship we built and opened two new pharmacies and investment in consumer marketing to better position. The veterinarian for success amidst the increased competition from online retailers. We also launched new proprietary.
Products to support better clinical care and enhance our operational infrastructure to reduce our cost to serve while delivering added value to our veterinary practice customers.
Lastly, we transformed our commercial sales model to make it easier for our customers to partner with co matrix.
Turning to slide five now our enhanced value proposition in North America, where our platform is the most advanced is clearly resonating in the market North America net sales reached $2 7 billion in 2021 and have grown at a compound annual growth rate of 14% over the last two years.
Which is faster than the overall market growth during this corresponding timeframe.
And while the sales growth has been broad based we have delivered strong growth in the higher margin parts of the business, including prescription management and proprietary brand, which has led to a 21% CAGR in North America segment adjusted EBITDA.
In fact prescription management non-GAAP adjusted EBITDA has gone from a roughly breakeven business two years ago to $44 million in 2021 accounting for almost 60% of the growth of North America's segment profitability. During this same time period.
What really excites me. However is what we show on slide six in the presentation, which highlights how early we are in the process and driving our comprehensive all in solution for veterinarians and North America.
At the end of 2021 slightly more than 10% of our customers were closed all in customers using our overall services for supply chain practice management prescription management and compounding this increased by approximately 100 basis points year over year in 2021, and we have significant moment.
Entering 2022 with our new commercial go to market model for both independently operated and Corporately owned veterinarian practices.
All in customers in North America generate more than six times in sale and our distribution only customers with transactional gross margin more than 250 basis points higher.
As we continue to invest in innovation, we see our penetration rate with all and customers moving higher and providing a strong foundation for above average market growth in the years ahead.
Importantly, in our Europe , and APAC and emerging market segment, we have a growing portfolio of proprietary brand burgeoning software business and a newly aligned global commercial strategy that bodes well for us replicating our U S success overseas in the future our recent financial success in our APAC and emerging market.
<unk> provides a glimpse of the opportunity as our Australian market is the furthest along outside the U S on their comprehensive all in journey.
Another way to look at the progress we are making in driving our higher margin solutions can be seen on slide seven were 44% of our 2021 gross profit is now coming from the company's technology E Commerce and proprietary products and services across our segments.
This is an improvement of 300 basis points year over year as gross profit of these solutions increased 16% year over year, which is five times faster than the growth in our third.
Third party product distribution.
As more and more of our supply chain customers expand their buying to these higher margin solutions and adopt other new innovative offerings, we are bringing to market in 2022, and beyond which I will detail. Shortly we should continue to see consolidated gross margin expansion consistent with the 50 basis point improvement delivered in <unk>.
'twenty one.
Moving to slide eight I am very excited about our upcoming launch of <unk> pulse in North America, and new innovative cloud based veterinary operating system.
As we call it that is United a comprehensive suite of Covid just applications rely on daily by veterinary practices in the U S to one secure easy to use cloud platform driving improved efficiencies and business operations animal health and client experiences.
With that just Paul veterinarians will be able to create renew and improve prescription communicate with clients and co workers personalized business dashboards manage pet care plan and customize the preferred 33rd party apps all from one central operating system to fit their practices.
This product launch is the culmination of almost two years of significant investment along with great partnerships with the veterinary community to bring best in class platform to market, which drive increased efficiencies and delivers a new standard of care practice management.
First of all we now have more than 1000 data customers using the new platform and expect.
More than 2000 customers by the end of Q2 of this year, assuming no significant disruption to the productivity of our software teams based in the Ukraine.
While the financial impact from the launch of pulse is modest in the very short term, we estimate pulp customers that leverage the full suite of applications could deliver a three <unk> increase in sales to come back to this versus a legacy software customer.
While we are enthusiastic about the pending launch of the pulse Pos in the U S. I would be remiss not to highlight a number of the other new innovations planned for 2022. These include first our FERC. Our first international cloud based practice management solution ascend offered in the U K, Australia and New Zealand.
New features added to along with deeper integration of DCT and report into our leading on Prem software solution Abbot market <unk> and third our next generation E Commerce storefront for prescription management customers that will be rolling out in late Q4 of this year. This next generation storefront will.
<unk> improve the consumer experience, while enhancing our ability to drive increased revenue for our veterinary practice customers, who consumer engagement optimization.
More to come on this significant opportunity as we approach launch later this year.
This provides a good segue to our other strategic priorities for 2022 as outlined on slide nine.
These priorities include one continuing to optimize our integrated go to market strategy secured new business and grow our net sales faster than the overall market.
Driving significant adoption of our tech platform in 'twenty, two which will translate into accelerated software net sales growth and another year of 20 plus percent net sales growth in prescription management in North America third increasing our investment in consumer marketing and technology capabilities to further strengthen.
The vets and pet relationship fourth restoring profitable growth in Europe with the recent cost actions taken in the UK and in Germany fifth enhancing our proprietary brand strategy through the additions of new and proven talent, including a recent hire says our franca and new product development launches and six lastly, leveraging our <unk>.
Corporate infrastructure for growth as we have reached the necessary base without further investment to support the business moving forward.
By bringing the six strategic priorities together not only do we expect to help our veterinarian described better outcome, but we believe this success will accelerate our business and market opportunities.
<unk> increased adoption and usage of our platform owning more margin and delivering innovation to our customers and their client positions commensurate for another great year in 2022.
I will now turn the call over to Matthew to discuss our financials in more detail.
Thanks, Dan Good afternoon, everyone and thanks for joining us today.
I will now review, our fourth quarter and full year 2021 financial results and provide additional commentary on our initial 2022 expectations.
The focus of my comments will be on a non-GAAP results where applicable.
Please refer to today's press release for a more detailed description of our fourth quarter and full year 2021, GAAP financial results and reconciliations of non-GAAP measures to the GAAP results.
Starting on slide 11, some brief financial highlights for the fourth quarter.
Q4, non-GAAP organic net sales increased 2% year over year, and non-GAAP adjusted EBITDA increased 13% year over year to $63 million.
Strong performance in North America, and APAC and emerging market segments led the way and more than offset the 4 million dollar collective headwind in Europe from the previously disclosed challenges in the UK and in Germany.
We delivered 50 basis points of year over year gross margin improvement in Q4, and another 10 basis points of adjusted operating expense leverage.
<unk> and 60 basis points of Euro the year non-GAAP adjusted EBITDA margin expansion.
Five 6%.
Additionally, our net leverage improved modestly during the fourth quarter of 2021, when we generated another $22 million and free cash flow, which enabled us to prepay 30 million about acquired 2022 term loan principal amortization payments in December .
Now turning to the consolidated details on slide 12.
So that's just net sales were $1 one $2 billion in Q4.
Typically flat versus the prior year and an increase of 2% year over year on a non-GAAP organic basis against the challenging 12% growth comparison from the prior year period.
The previously disclosed items.
German market.
<unk> two impact year over year comparison.
With non-GAAP organic net sales growth negatively impacted by approximately 700 basis points.
Encouragingly, Germany operations have started to stabilize and actually come back to positive sales growth in Q4.
North America continues to deliver exceptional results with another quarter of double digit year over year growth in non-GAAP organic net sales.
Turning to slide 13.
Consolidated non-GAAP adjusted EBITDA of $63 million for the fourth quarter of 2021 compares.
Compared to $56 million in the prior year period.
The 13% year over year growth was driven by strong double digit growth in our North America, and APAC and emerging markets segment.
Which more than offset the moderate decline in Europe , driven by the UK and Germany challenges.
FX losses on intercompany loans higher legal costs also were a drag on year over year growth, but much lower than we experienced during the third quarter.
non-GAAP adjusted EBIT margins were five 6% during Q4 60 basis point year over year improvement.
But the strength in North America, and APAC and emerging markets.
We were pleased with the margin expansion deliberate fuel in the fourth quarter, particularly considering increased supply chain disruption and cost pressures.
Variance in the quarter across many of our businesses.
Driven by primarily the army crop area.
Our full year 2021 slide 14.
<unk> non-GAAP adjusted EBITDA increased 8% year over year $244 million led by 43% growth in APAC and emerging markets.
19% growth in North America.
Europe was flattish year over year, despite a $19 million collective headwinds from the challenges in our UK and German markets, which highlights the strength of the rest of the European operations, particularly.
All three brands.
While corporate expense increased $29 million year over year, approximately 50% of that increase with some anticipated negative foreign exchange impacts primarily company loans.
It is not expected to repeat in 2022 now that we have put in place hedges to reduce our economic exposure to FX volatility on these loans.
Encouragingly, we were still able to deliver 10 basis points of non-GAAP adjusted EBITDA margin expansion in 2021.
Despite these unanticipated headwinds.
Our underlying financial momentum.
Recent cost actions taken in Europe .
Lastly, corporate expenses provide increased visibility into our.
Our outlook for accelerating non-GAAP adjusted EBITDA growth in 2022.
Moving to our operating segments beginning on slide 15.
North America net sales increased 11% year over year in Q4 on both the reported and non-GAAP organic basis.
Adjusted EBITDA increased 27% year over year in Q4 with segment adjusted EBITDA margin expanding 110 basis points.
Versus the prior year period, reflecting the increased contributions from higher margin areas of the business, including prescription management and Quebec Trust branded products we.
We were pleased with the margin expansion deliberate here in the fourth quarter, particularly considering higher than expected only chrome driven supply chain disruptions experienced in the quarter, including increased freight expense.
Encouragingly, we delivered another quarter of market share gains in our supply chain business and 22% year over year net sales growth and prescription management.
Excluding the accounting change that we have previously discussed prescription management net sales increased 25% year over year during the fourth quarter and 28% for the full year.
Importantly, we delivered significant operating leverage in prescription management during Q4 with non-GAAP , adjusted EBITDA, increasing $12 million year over year to $14 million.
For the full year 2021 prescription management non-GAAP adjusted EBITDA was $44 million.
Nearly double 2021 levels of $23 million.
This equates to.
22% flow through of incremental net sales into incremental non-GAAP adjusted EBITDA in 2021, representing the second consecutive year of meeting or exceeding our 15% to 20% conversion exploration.
Encouragingly 'twenty two is off to a strong start and prescription management.
Sales increased by 30 plus percent year over year in January and are trending well in February .
Turning to our Europe segment on slide 13 non.
non-GAAP organic net sales decreased 13% year over year in Q4, reflecting the previously disclosed challenges we are experiencing in the UK and German markets, which negatively impacted organic growth by 17%.
More than offset healthy veterinary demand levels and strong execution across the rest of our European markets.
Our businesses operating in Ireland, Poland, Switzerland, Romania.
Notable contributors helped offset these headwinds during the quarter.
On a positive note, Germany return to year over year net sales growth during the fourth quarter a good sign entering 2022, particularly with our recent cost cutting measures now in place.
Turning to profitability.
Europe segment adjusted EBITDA in Q4 increased 22% year over year to $14 million with margins declining 30 basis points year over year to four 2%.
The combined UK and German markets accounted for the entire decline in profitability in Q4.
A difficult year over year comparison, and proprietary brands also impacted growth metrics during the quarter.
Moving on to our APAC and emerging markets segment on slide seven.
Our team delivered 5% year over year growth in non-GAAP organic net sales in Q4.
<unk> another quarter of strong sales execution.
LNG in comparison.
Some incremental.
Pandemic restrictions in several of these markets.
Australia delivered healthy 7% year over year non-GAAP organic net sales growth during Q4.
Alongside more modest growth.
New Zealand and Brazilian markets in the quarter.
Segment, adjusted EBITDA increased 22% year over year here in Q4.
Segment, adjusted EBITDA margin expanded by 130 basis points year over year.
Driven by ongoing operating leverage from healthy net sales growth.
Now turning to the balance sheet on slide 18, we.
We generated $22 million in free cash flow in Q4 of $42 million for the full year 2021.
We executed strategic inventory purchases during the quarter ahead of anticipated price increases.
Which impacted our cash flow generation during the fourth quarter, but should provide incremental margin during the first half of 2022.
We ended the year with more than $480 million.
Liquidity.
He is comprised of cash and cash equivalents and availability under our revolving credit facility.
Approximately one six tons of headroom under our net leverage covenant as defined in our credit agreement.
As I mentioned earlier, we prepaid $30 million of our class of 2022 term loan principal amortization payments in December which combined with a lower bank leverage will reduce interest costs this upcoming year.
Now turning to our detailed 2022 guidance that's outlined on slide 19.
We forecast non-GAAP organic net sales growth of 7%.
The outlook includes 10% to 11% growth in North America, alongside the continued adoption of our <unk> platform.
We had a 4% growth in Europe as we anniversary the 2021 challenges in the UK and Germany.
6% to 7% growth in APAC and emerging markets.
Our global outlook assumes market growth rates above pre COVID-19 levels.
The robust growth in <unk>.
Both 2020, and 2021, and then market conditions normalize.
Looking at non-GAAP , adjusted EBITDA outlook of $270 million to $280 million remaining remains unchanged versus our preliminary outlook released at the Jpmorgan Healthcare conference earlier, this year and reflects 11% to 15% year over year growth in <unk>.
Acceleration versus the compound annual break deliberate.
Two years.
This is driven by the lapping of the specific challenges in our UK and German markets.
The non repeat of certain hedge.
Corporate costs.
We anticipate over 20% growth in net sales and continued growth in profitability and prescription management.
And an improvement in our software growth outlook with multiple new products coming to market in 2022.
We also anticipate general stability.
And our supply chain businesses around the globe.
With continued focus on growing our higher margin proprietary brands.
Some of this growth will be offset by higher freight costs continued labor market tightness on the return of discretionary spending.
<unk> economy for Yoplait.
We also continue to monitor the Russia, Ukraine situation on the downstream impact that might have on the global supply chain and some of our European markets.
Not factored anything explicit into our outlook at this time given the current state of affairs.
Finally, while we do not provide specific quarterly guidance given the timing of that Europe cost cutting action.
The fact that some of the global supply chain challenges emerged in the second half of 2021.
We do expect year over year, non-GAAP , adjusted EBITDA growth rates to be stronger in the second half of 2022 with Q1 2022 growth rates expected to be flattish year over year.
With that I'll now turn the call back over to Ben for some brief closing remarks.
Thanks, Matthew in clothing and outlined on slide 20, we have a solid foundation in place a clear plan and visibility looking forward to deliver accelerated growth in 2022, our end market is attractive and durable and we are aggressively investing in our.
Our platform to enhance our value proposition secure new business and to accelerate our end market opportunity.
We are also focused on driving our core versus branded and proprietary product portfolio and streamlining operations to deliver increased efficiencies, while reinvesting back into our tech platform I am confident in our strategy and encouraged by the momentum we have in the core drivers of our business.
We're still not early innings of the journey towards the company's long term goals of above market net sales growth in annual non-GAAP adjusted EBITDA margin expansion, but I believe we have a solid blueprint and the team to execute it as we drive sustainable shareholder value creation. This concludes our prepared remarks, and I'll now turn the call back over to Nicholas.
Janssen to moderate the Q&A session.
Thanks Ben.
We will get our Q&A session now so we want to take as many questions as possible. So we ask you limit them to two and then reenter the queue should we have additional ones.
And can you. Please provide instructions and we are ready to take the first question.
Yes, Sir as a reminder, every one to ask a question you will need to press star one on your telephone keypad again Thats Star then the number one on your telephone keypad. Thank you and please stand by all the compile the Q&A roster.
Your first question comes from the line of Jon Block from Stifel. Your line is open.
Thanks, guys good afternoon.
First question the fourth quarter of 2021, the North American supply chain revenue was up I think roughly $40 million year over year, but EBITDA for North American supply chain.
It's down about $1 million year over year. So Matthew I think you will need to fleet you called that out maybe just the thought for <unk>.
<unk> thousand 22, North American supply chain.
EBITDA grow with some of these increased cost pressures that youre, calling out what we think about North America, but 2022, do we think about EBITDA predominantly driven by the prescription management business.
That's a great question.
It'll be the prescription management business will be a big contributor in 2022.
I would say the situation, we and everyone else space in Q4 was pretty.
Unique in terms of having not just increased freight pricing pressure, but also massive absenteeism driven by the crop area and when we have some we have a spike in temp labor productivity drops and we just struggled to get the shipments out we ended up missing a couple of rebates.
So I think.
Q4, a little bit of a perfect storm in a little bit worse, and you ought to expect flowing forward.
Fair enough. Thanks.
And then second question better Matthew the gross adds were prescription management of bidding.
It might be fair to see somewhat modest over the past couple of quarters to be clear. The sales growth has still been tremendous and I know the same store growth has been tremendous but can you just talk to how we should think about new store growth versus same store sales growth in 2022 here in North America, and maybe Thats, a decent segue into sort of a timing.
National prescription management your thoughts there and could that be a 2023 of that thanks guys.
Yes. Thanks.
John I'll take that Matthew.
Look I think if you look backwards two years ago, we were very <unk>.
Deliberate and vocal about our focus on driving utilization of the platform. We had reached a pretty significant market penetration almost a third of the customers in the U S. But as you know, we only had about 4% of clinics consumers transacting on the.
Our platform and so that 4% is now grown almost 50% and with some customer cohorts, even higher than that and Thats. What really has fueled the growth from say $200 million of revenue north of $500 million of revenue in 2021, I think some of that.
Same mentality and focus will exist in 2022.
When you think about a lot of our focus on things like Paul.
Much of that is about driving better workflow and as a result more that initiated.
Scripps is on the platform. So the lion's share of the volume increase in 2022 is going to come from.
Greater and greater utilization and Matthew mentioned that 30% growth number in January . So obviously well ahead of the overall, 20% plus number that we gave as part of guidance.
That's where the majority of that growth is going to come we still will pick up new accounts.
We would expect that to be in the 5% to 10% range.
Over the next 12 months or so but in terms of.
Really propelling the business forward and where the market opportunity is again, just all <unk>.
Mostly focused on driving greater and greater utilization.
And any comments on international bone from a funding perspective.
Yes, no no new updates there.
No.
On international we are making a lot of progress on our cloud based solution in the UK, Australia, and New Zealand, which lays the foundation for being able to do that but.
But no new news on that front John .
Very helpful. Thanks.
Your next question comes from the line of John Kreger from William Blair. Your line is open.
Hey, guys. Thanks, I was hoping you might be able to give us.
A little bit more perspective on where you see sort of market trends going.
I noticed some of your claims data and sales data probably gives you a good insight just curious if from your perspective trends like patient traffic spending per visit are kind of still in sort of post COVID-19 sort of normalization phase or are we stable and what kind of assumptions are you making for 'twenty two.
Yes, John .
Thanks for the question.
It has been fairly stable on the end market side of things now for a couple of quarters.
In the in the deck that we provided to get a good sense of.
Some of the growth rates that we're anticipating so you know in the U S still high single digit growth a little bit more modulate. It internationally I think the biggest issue honestly is capacity.
With our customers.
And I'm sure you see this from covering other companies and just being out in the market.
Wait times to get into a hospital driven by staffing.
Staffing limitation.
Driving the huge.
A huge part of the business dynamic. So I think if you just look at the back half of 'twenty one.
We anticipate similar growth rates for our 2022 with the biggest gating factor honestly be customer capacity.
Okay, great. Thank you that's helpful and then the other.
You gave us some intriguing stats on the sort of all in customers and.
What you think pulse can do can you just how are you going to drive that better integration and adoption across your customer base is it.
Is there a financial incentive is it sort of the.
Youre going to motivate your own Salesforce just elaborate on what the plan is to sort of drive that adoption beyond the 10%.
Yes sure thing.
Theres really two.
Main levers to drive that adoption rate. The first is just.
E ease of doing business with us through the integration of the various platforms. So when you think about weather.
Whether it be Paul or greater integration into add Marc in for Matt.
So much of the adoption of additional solutions comes from data interoperability enhanced workflows.
And so whether that'd be compounding of prescription management, our appointment management any of those add on solutions.
Just get a lot better and easier to use when they're integrated so I think there's just kind of overall.
The ease of using the platform, which should drive drive adoption. The second which you alluded to is really on the sales and marketing front.
And so.
We're now one year.
Our unified sales approach as you know we ripped off abandoned at the end of Q4 last year and went to an account manager specialist model one face to the customer and so that is like any large scale salesforce change always a work in progress but.
Really pleased with the result, and I think you see that in the prepared remarks. If you just look at North America topline growth.
Three year CAGR of almost 14% ahead of where the market is not that would not have impossible. If it werent for the combined efforts are the efforts are going.
Through our combined sales force so.
A lot of optimization unless it goes Eric getting incentive right getting packaging right.
Feel like there's just a ton of running room and obviously the data is pretty compelling when you get it right.
Great. Thank you very much.
Your next question comes from the line of Nathan Rich from Goldman Sachs. Your line is open.
Hi, good afternoon, thanks for the questions.
I wanted to start with the prescription management margins and how we should think about that going forward.
I think you had previously talked about targeting.
Targeting kind of incremental margins in the high teens I think the last two quarters, though looking at <unk> and <unk> were well above that at about 30%. So could you maybe just talk about what drove the margins that you saw in Rx management in the back half of this year and how youre thinking about that playing out for 2022.
Sort of the math you would you like to fill that out.
Yes, absolutely.
<unk> consistently said that we've been targeting dropdown from incremental revenue to adjusted EBITDA.
One 8% range.
And as you rightly pointed out in the back half of the year was really strong.
I think.
<unk>.
We got a big tailwind in Q4 from a non repeat of that legal seven month, we had the year before which was about 4 million. So I think thats artificially stronghold.
With that we will take it to the bank.
I do think going forward that 15% to 20 is the right way to model it.
As long as we're in that range of.
Or at a minimum close to that 15 will be very happy.
Okay.
Great and then.
I wanted to go back to the organic growth guidance.
Obviously, a lot of focus on inflation in the market. So I was wondering if you can maybe comment on how much price increases you're seeing.
From suppliers and how much of that might be reflected in the organic growth guidance in may.
Matthew if you can maybe just talk about in a little more detail, how what freight and wage costs have trended relative to your expectations. Now there were a couple of months into the year.
Yes, let me let me start with.
Great.
We continue to see upward pressure on freight and by and large as you can see from the margin performance, we are managing to get it covered with <unk>.
Price, but I would tell you the pace of those change it spills like little waste catching up so we do suffer a bit.
Lag.
Issue there.
So we really have a little bit of a timing problem, but essentially we're pushing pricing through to get that covered.
Labor very tight labor market as we said fourth quarter was very difficult with all the crawling and all that.
Not counting that.
Pat.
But we're continuing to manage attrition rates remain high.
Inflation in the low to mid single digits.
On labor.
I don't know if you want to talk a bit about pricing.
<unk>.
Yes, Nathan I think.
Yes.
We have seen.
Expect kind of mid to high single digit price increases from suppliers as you know that get.
Largely pass through or almost entirely pass through.
On onset of customers and then onto consumers.
We don't have perfect insight as a number of price increases that occurred during the year, but we would expect it to be similar to previous year, where it's somewhere between one two or three price increases depending on the manufacturer and the product line, but cumulatively I would expect mid to high single digits.
On a on a price increase.
Basis.
Thanks, that's really helpful.
Next question from the line of Erin Wright from Morgan Stanley . Your line is open.
Okay, just a follow up to that question, but on the price increases and mid to high single digit price increases that youre seeing that compares to.
Q, what historically have you seen that and then did you have.
Guidance of flat I guess any major changes to your vendor relationships our access to products for instance, the expanded terrestrial relationship with <unk>.
Are there any major changes in bi versus agency relationships that are influencing topline and margin trend.
Yes, so erinn.
I think the price increases are.
Largely in line with previous years again as you know manufacturers are in different places in their own portfolios and have different opportunities. There. So it's not always the same from manufacturer to manufacturer product to product, but I think on average it.
Pretty.
Consistent with previous years.
In terms of our relationships with suppliers.
I think we're in a much different place than we were a year or two years ago.
Both in terms of when we have visibility to that and the nature of our relationship with those suppliers.
We are basically done with all of our suppliers.
And have come to terms with everybody a year ago, there was still a lack of visibility on that front.
Second the economics are basically the same again puts and takes across the different parts of the portfolio, but very similar to 2021 economics.
And in some cases, we have supplier and you mentioned some of them who are really leaning in to our capabilities a lot of that comes from having an omnichannel solution. We are clearly the only player in the market that is both local as well as can reach veterinarians.
In clinic and consumers online all under the same umbrella. So we feel very differentiated versus the other players out there in the market and I think thats starting to show up in how we work with.
Suppliers, not just the top floor, but really the top 10 or 15.
Our relationships are really I think have evolved and are excited about where we're heading headed on that front.
Okay, Great and then how should we be thinking about the year.
The 3% to 4% growth that you talked about in 2022 is that the right way to think about growth across that segment longer term what are some of those lingering headwinds embedded in the 2022 guidance.
How should we be thinking about the reorganization strategy and profitability across that segment and kind of your overall kind of tier two.
Bucket at this point.
Yes.
Matthew I'll start with just kind of end market dynamics and then you can talk about.
Bridging that to the guide and how.
The lapping of Germany, and UK Phi into the numbers. So in terms of the end market Aaron.
We expect your kind of mid single digit growth rates.
Again emerging markets within Europe growing faster.
And then some of the more traditional market.
And so.
That should be pretty similar to end market growth in the past.
Of course don't have a lot of visibility to what's going to happen here in the Ukraine, and whether thats going to create any short term instability in some of these markets but.
Absent that we expect to see mid single digit growth rates Matthew can talk about how you translate that into the guide for the full year.
Yes, just to give you a little bit history on what we've actually done physically.
New leadership in both of those markets, we took a modest restructuring charge in Q4.
<unk> the cost structure better aligned with revenue and as we said in the prepared remarks, Germany that return.
In the fourth quarter.
From a go forward perspective, the UK still has Q1 to lap.
U K is going to be a drag on the top and bottom line in Q1, but once we get into the second half the UK will stop being a <unk>.
Frank.
We talked about both of those markets being about a $19 million year over year drag in 2021.
Our hope is we get.
Leased half of that back in 2022.
In terms of year over year improvement.
Okay, alright, thank you so much.
As a reminder, everyone. If you would like to ask a question you May Press Star then one on your telephone keypad.
Your next question comes from the line of Ella.
Wilbur from Raymond James Your line is open.
Thanks, Good afternoon.
Maybe just.
Some additional questions around some of the performance trends you referred to with respect to 2022, specifically thinking about the strong start to the year in terms of our ex management any particular dynamic that you might call out there.
Believes may have led to the.
Better than expected.
Strong performance kind of in light of what's been a relatively slow start to the air lease in terms of the growth rate in overall vet clinic visits.
And I think you previously talked about some supply issues, particularly with respect to.
Dietary products that may have negatively impacted growth in the Rx management business I, just wanted to get an update on where that dynamic.
<unk> stands currently and then maybe Dan you've talked about some of the strong performance trends in the proprietary products business, particularly within the European segment, maybe just.
Provide a little bit more detail behind that in terms of what's driving that is it really geographic expansion share gains utilization new products any additional detail there would be helpful. Thanks.
Yeah. Thanks Elliot.
Why don't I take both of those questions on prescription management.
Obviously, we ended the year, well and we've kind of continued that trajectory going into into January in the first couple weeks of February here I would really attributed to strong execution by the team.
There's a lot of levers to pull here when you're marketing to consumers are improving integration with.
With our software.
Piece of our business to drive that utilization.
And so theres not one thing to point to there is just a lot of execution across the board that's showing up.
In the end number so really proud of that group and really excited to see how the rest of the year goes.
In terms of diet, you are right last year.
Especially in Q1.
And in the first half of the year, we really struggled.
With our major vendors there are major suppliers I should say.
With very significant product outages.
In Q4, and the beginning of the year that has really stabilized.
So diet is growing for the first time in many quarters now on pace with commercial pharmacy or above depending on the time period that you're looking at so feeling quite good about the progress there I would point out that the suppliers are not out of the woods, yet and I am sure.
You are a consumer of these products you are aware of the challenges if you're using.
Our prescription diet, but for us it's gotten much more stable and our ability to manage numerous appropriately.
I've gotten a lot better so.
That's kind of that RF management near term highlights in terms of the proprietary brand I would tell you that it's not.
What about new markets or new products quite yet that's in the coming attraction for now it's really about execution and focus in.
John .
I had asked about the combined sales force and how that can drive all in customer. It's the same concept here about focusing on proprietary brand.
We've just done a lot to get sales incentives.
Aligned around the value creators of the business and that's what's helping drive the growth of proprietary brands.
Ross the globe. So we're really excited about the opportunity there.
Excited about our new leadership understands our Frank and.
And we expect to see great things on proprietary brands in the quarter Tom.
Your next.
Question comes from the line of <unk> Prasad from Barclays. Your line is open.
Thank you hi, good evening.
Probably just a couple from my side.
Firstly on.
Collect transport I would like to have greater granularity around this especially your commentary around of estimating a three X increase in revenue from man fully come to their practice.
So help me understand what will the adoption curve look like and how can you drive this adoption curve and for a customer to reach that kind of a contribution for your revenues.
Three years or five is how does that play out.
And secondly, I think this is an extension to the previous response.
<unk>.
With regard to the proprietary brand.
What is the size of the business currently and for the incoming president what kind of Kpis throughout the segment over the next three to five years. Thanks, Peter Thank you.
Yes, thanks for lodging so in terms of cost.
<unk>.
The first of all we're obviously thrilled that we have 1000 customers and data.
And have visibility to two.
<unk> more than 2000 by the end of Q2.
So lots of.
Confidence.
In our ability to execute there as I'm sure you know from being around other technology business is getting to that scale of customers is no small feat.
What drives the revenue increase is really the utilization.
Of all of the different services that used to be sold in a kind of Ala carte or point solution basis.
Better now all bundled together in one complete veterinary operating system. So if.
If you think about what those things are beyond the electronic medical record you have appointment management client communications payment and other features that used to be.
Integrated in and you could choose it.
You might choose that you might not choose it.
Now you would still allow for choice, but the offering is just so compelling from an economic standpoint, as well as an ease of use standpoint.
That's what drives us to see that.
Pretty significant step up in revenue per customer when they adopt the veterinary operating system.
So.
Excited about that.
And we'll be excited to get back on the call with you guys in Q2 and give you an update on where we are on that front.
In terms of proprietary brands.
That business.
Just under half a billion dollars.
And we.
Obviously, it flows through our distribution business and flows through other channels, where we have access to customers, but it is predominantly coming from our own.
Our own channel.
In terms of Kpis, it's really about sales velocity.
Product margin.
And.
Overall end to end profitability on the bid on the portfolio that we have.
And then on the portfolio that we're building, it's going to be about new product launches and category introduction over the coming.
<unk> and <unk>.
So early days, but I think.
Something that we are going to increasingly focus on and communicate out against here at Codexis.
That's helpful. Thank you.
Next question from the line of Erin Wright from Morgan Stanley . Your line is open.
Hey, Thanks for taking my follow ups, how much uptake.
The prescription management offering across the corporate accounts is that an area of focus for you given maybe some of the conflicts of interest with the other prescription management player out there.
Could you just scenario I guess that you could increasingly target in terms of corporate accounts and then.
Just on that front since you are talking about it as well I mean does guidance imply any sort of changes in your corporate account relationships.
So within the U S and internationally.
Yes.
<unk>.
The guidance does not employ.
By any change in our corporate account relationships.
I think.
Those are in a good place.
We see continued opportunity as you know Aaron.
Yes.
I would split the corporate accounts into two basic models, one where they're tight centralized control.
They make one decision for a prescription.
Management provider and that gets deployed across all of the.
Local hospital.
Then there's the federation.
Where theres not as much tight control and local veterinarians are making their own decision I think what our feedback in the market is.
We have a superior solution and it shows up in the numbers.
The only limitation is just given how busy our customers are making any changes from a workflow standpoint are just hard.
But.
All indications are that we have the premier solution in the market and feel good about our market position and hope to build on it in the coming years.
Okay, great. Thank you.
There are no further questions at this time speakers you may continue for closing remarks.
We have no closing remarks at this time.
Thank you everyone. Thanks, everyone for joining.
Thank you alright. Thank you everyone. Today's conference call. Thank you all for participating you may now disconnect.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
Yes.
[music].
Yes.
[music].
Yes.
Yeah.
Yes.
[music].
Okay.
Okay.
[music].
Sure.
[music].
Yes.
[music].
Okay.
Okay.
[music].
Okay.
[music].
[music].
[music].