First Quarter
2021 Results
2
Safe harbor provision and non-GAAP reconciliation
Forward-Looking Statements
This presentation contains certain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We may, in some cases use terms such as "predicts," "believes," "potential," "continue," "anticipates," "estimates," "expects," "plans," "intends," "may," "could," "might," "likely," "will," "should," or other words that convey uncertainty of the future events or outcomes to identify these forward-looking statements. Such statements are subject to numerous risks and uncertainties, and actual results could differ materially from those anticipated due to a number of factors including, but not limited to, the effect of health epidemics, including the COVID-19 pandemic, on our business and the success of any measures we have taken or may take in the future in response thereto, including our ability to continue operations at our distribution centers and pharmacies; the ability to successfully integrate operations and employees; the ability to continue to execute on our strategic plan; the ability to retain key personnel; the ability to achieve performance targets, including managing our growth effectively; the ability to manage relationships with our supplier and distributor network, including negotiating acceptable pricing and other terms with these partners; the ability to attract and retain customers in a price sensitive environment; the ability to maintain quality standards in our technology product offerings as well as associated customer service interactions to minimize loss of existing Customers and attract new Customers; changes in financial markets, interest rates, and foreign currency exchange rates; changes in the legislative landscape in which we operate,
including potential corporate tax reform, and our ability to adapt to those changes as well as adaptation by the third-parties we are dependent upon for supply and distribution; the impact of litigation; the impact of accounting pronouncements, seasonality of our business, leases, expenses, interest expense, and debt; sufficiency of cash and access to liquidity; cybersecurity risks, including risk associated with our dependence on third party service providers as a large portion of our workforce is working from home; and those additional risks discussed under the heading "Risk Factors" in our Annual Report on Form 10-K filed on March 1, 2021, our Quarterly Report on Form 10-Q to be filed on May 6, 2021 and in our other SEC filings.
Our forward-looking statements are based on current beliefs and expectations of our management team and, except as required by law, we undertake no obligations to make any revisions to the forward-looking statements contained in this presentation or to update them to reflect events or circumstances occurring after the date of this presentation, whether as a result of new information, future developments or otherwise. Investors are cautioned not to place undue reliance on these forward-looking statements.
Non-GAAP Reconciliation
This presentation contains non-GAAP financial measures. Management uses these measures in the management of our business and believes that they are useful to investors in evaluating our ongoing operating results and trends. These non-GAAP financial measures have limitations as an analytic tool and should not be considered in isolation or as a substitute for net income or any other measure of financial performance reported in accordance with GAAP. Covetrus’ non-GAAP measures may be calculated differently than similarly named measures reported by other companies. In addition, using non-GAAP measures may have limited value as they exclude certain items that may have a material impact on reported financial results and cash flows. Reconciliation of these non-GAAP measures to the most comparable GAAP measures are included in the Appendix to this presentation. When analyzing Covetrus' performance, it is important to evaluate each adjustment in the reconciliation tables and use adjusted measures in addition to, and not as an alternative to, GAAP measures.
This presentation also contains certain forward-looking non-GAAP financial measures. The Company has not reconciled its non-GAAP adjusted EBITDA guidance, including non-GAAP adjusted EBITDA to free cash flow conversion guidance, to GAAP net income because the reconciling items between such GAAP and non-GAAP financial measures, including share-based compensation expense, separation program costs, foreign exchange and other special items tied to the formation of Covetrus, cannot be reasonably predicted due to the uncertainty and inherent difficulty predicting the occurrence, the financial impact, and the periods in which the non-GAAP adjustments may be recognized and therefore is not available without unreasonable effort. The Company has not reconciled its non-GAAP organic net sales growth guidance because the extent to which certain items would be expected to impact GAAP measures but would not impact non-GAAP measures cannot be predicted with a reasonable degree of certainty, including the effect of acquisitions, divestitures, and the foreign exchange fluctuations, and accordingly the reconciliation is not available without unreasonable efforts. The information needed to reconcile these metrics could have a material impact on the related projections. For more information regarding the non-GAAP financial measures discussed in this presentation please see the Appendix.
3
Delivered +4% y/y organic net sales growth; healthy underlying performance in most of
the Company’s markets, including robust double-digit net sales growth in North America
Reported $57M in consolidated adjusted EBITDA, +19% y/y, including y/y growth in all
three of the Company’s segments; expanded adjusted EBITDA margins by +70 bps y/y
Ended Q1 2021 with >11,400 practices on the prescription management platform, an
~300 increase vs. year-end levels; delivered record net sales of $112 million, +33% y/y
Increased the percent of Covetrus “all-in” customers by 40 bps y/y in North America as
the Company continues to make progress in its synchronization efforts
Hired several leaders to accelerate the Company’s efforts, including Chief Veterinary
Officer for North America, Chief Consumer Officer and President, Strategic Partnerships
4
Accelerating contribution from our higher margin businesses
Accelerating gross profit dollar contribution tied to Technology,
eCommerce and Proprietary Products
** Excludes contribution from the divested scil animal care business in 1Q 2020. Technology, eCommerce and Proprietary Products includes prescription management (including compounding), software services, SmartPak and Covetrus-branded products and proprietary brands (Kruuse, Vi, and Calibra). Distribution of Third-Party Products includes global distribution of third-party products.
$ in millions
$119
$120
$77
$90
$0
$50
$100
$150
$200
$250
1Q 2020
1Q 2021
Gross Profit from Technology, eCommerce and Proprietary Products Gross Profit from Distribution of Third-Party Products
$196
18.7% GM
$210
19.1% GM
39% of total
43% of total
61% of total
57% of total
39% of total
43% of total
31% of total
29% of total
29% of total
29% of total
•
Delivered healthy double-digit organic net
sales and gross profit growth in our higher
margin businesses in Q1 2021
-
These businesses now collectively represent 23% of
net sales and 43% of gross profit vs. 20% and 39%,
respectively, in the prior year
•
Steady results in distribution gross profit, with
growth in North America and APAC &
Emerging Markets offset by the previously
disclosed headwinds in the U.K. / Germany
•
Consolidated gross margins increased 40 bps
y/y adjusted for the scil divestiture as our mix
of net sales continues to shift towards our
higher margin businesses
7% y/y
17% y/y
5
Making progress on strategic initiatives
Pharmacy Innovation &
Warehouse Productivity
Technology
Solutions
Consumer
Marketing
•
Went live with WMS technology at
three U.S. distribution centers in Q1,
six more remaining in 2021
•
Made significant progress in the
build-out of the new Grandview
compounding facility, scheduled to
go-live in Q2 2021
•
Launched new U.S. large animal
pharmacy service in March 2021
•
Invested in new marketing
messaging that drove a 26%
year-over-year increase in the number of
new pet parents to the prescription
management platform in Q1
•
Improved website navigation and
checkout experience for pet parents
•
Delivered 9% y/y growth in the
number of subscriptions in our
SmartPak business
•
Readied for the full launch of built-in
e-prescribing capabilities inside
AVImark and eVetPractice,
scheduled to release in May 2021
•
Made progress on Easy Update
functionality to accelerate adoption
of our latest versions of software
•
Established new payment
integrations in our portfolio of
international software assets
6
•
Covetrus is proposing to eliminate supermajority voting
requirements at the 2021 Annual Meeting
•
Our Board will remain classified until the 2022 Annual Meeting.
Thereafter, each Director will be elected annually and will hold
office for a one-year term until the next annual meeting
Committed to sustainability, social responsibility and good
governance
Our response to the COVID-19 pandemic:
•
Deployed free telemedicine capabilities
•
Manufactured & donated hand sanitizer & PPE
•
Launched employee hardship fund
•
Sponsored customer webinars for COVID-19 support
Our investment in diversity & inclusion:
•
Unconscious bias training
•
New employee resource groups
•
Sponsorship of scholarships and
non-profits for underrepresented minorities
Our environmental
initiatives:
•
Conserving energy at our facilities
•
Minimizing waste
•
Increasing recycling
•
Eliminating single-use plastics
•
Cleaning-up local communities
Our charitable giving
& social engagement:
•
Supporting The Pet Fund and
other animal shelters &
non-profit organizations globally
•
Providing product donations to
veterinary schools
Our commitment to good governance:
Including Board composition and independence,
shareholder rights, and global ethics and compliance
Covetrus will be issuing its first-ever Environmental, Social & Governance (ESG) report during the second
half of 2021, including details on:
8
Q1 2021 financial highlights
•
Delivered $1.1B in net sales, +3% y/y; organic net sales growth of +4% y/y, with healthy
growth in both North America and APAC & Emerging Markets
•
Increased consolidated adjusted EBITDA by +19% y/y to $57M despite a challenging y/y
comparison tied to COVID-19 related inventory stocking dynamics
•
Expanded consolidated adjusted EBITDA margin by +70 bps y/y to 5.2%
*
as we drove
double-digit growth in our portfolio of higher margin products and solutions
•
Grew adjusted EBITDA and expanded adjusted EBITDA margins in all three segments
•
Maintained financial flexibility, with net debt to LTM adjusted EBITDA of 3.7x
•
Ended the first quarter with approximately $510M in available liquidity, including $211M in
cash and cash equivalents on the balance sheet
9
-1%
5%
4%
10%
5%
12%
12%
4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Q2 2019
Q3 2019
Q4 2019
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Healthy underlying organic net sales growth during Q1 2021,
including double-digit organic growth in North America
16% organic net
sales growth
-12% organic net
sales growth
7% organic net
sales growth
North America
Europe
APAC & Emerging Markets
+4% y/y organic net sales growth in Q1 2021, healthy underlying trends
excluding the previously disclosed headwinds in the U.K. and Germany
$1.1B in net sales in Q1 2020, +3% y/y reported
growth and +4% y/y organic net sales growth
12% (ex-UK,
Germany)
10
$48
$3
($1)
$11
$2
$2
($8)
$57
$35
$40
$45
$50
$55
$60
$65
$70
Q1 2021 consolidated adjusted EBITDA increased 19% y/y,
adjusted EBITDA margins expanded +70 bps y/y
$ in millions, numbers may not add up due to rounding
4.5%
Margin
**5.2%
Margin
**Q1 2020
Foreign
Exchange
America
North
*
Europe
*
APAC &
Emerging
Markets
*
Corporate
Overhead
Q1 2021
** Consolidated adjusted EBITDA margin defined as consolidated adjusted EBITDA divided by consolidated net sales
+70 bps y/y
scil
divestiture
* Excluding the y/y impact from the divestiture of scil animal care and the change in foreign exchange rates; the above chart and y/y growth may not match the reported segment adjusted EBITDA figures elsewhere in this presentation as those numbers are not normalized for M&A and divestiture activity or foreign exchange rates
11
North America Q1 2021 financial snapshot
•
$635M in net sales (+15% y/y, +16% y/y organic)
and $52M in segment adjusted EBITDA (+27% y/y)
•
Healthy underlying end-market growth for
veterinary practices during Q1 2021 despite
weather-related headwinds during February 2021
•
An increase in our U.S. companion animal
distribution market share in Q1 vs. prior year
*
•
+33% y/y net sales growth in prescription
management off a challenging +47% y/y comp
•
North America segment adjusted EBITDA increased
27% y/y and segment margin expanded +70 bps y/y,
driven by mix and operating expense leverage
$446
$503
$20
$20
$84
$112
$350
$400
$450
$500
$550
$600
$650
$700
Q1 2020
Q1 2021
Supply Chain Services ** Software Services Prescription Management
North America net sales growth of +15% y/y, +16% y/y organic
$41
$52
7.5%
8.2%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
$35
$40
$45
$50
$55
$60
Q1 2020
Q1 2021
Adjusted EBITDA
Margin***
North America segment adjusted EBITDA growth of +27% y/y
$ in millions, numbers may not add up due to rounding
$ in millions
* According to independent third-party data ** After intercompany eliminations
$550M
**$635M
**** **
12
North America Supply Chain Services continues to deliver
strong growth; Software Services trends remain steady
Supply Chain Services net sales
*$ in millions
Supply Chain Services y/y organic net sales growth
**$446
$473
$494
$480
$503
$350
$400
$450
$500
$550
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 20211%
2%
10%
14%
13%
-5%
0%
5%
10%
15%
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021* Includes our North American distribution and specialty products business and SmartPak and is after intercompany eliminations ** After intercompany eliminations
Supply Chain Services adjusted EBITDA
$20
$19
$20
$19
$20
$7
$7
$8
$7
$9
$0
$5
$10
$15
$20
$25
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021Net Sales
Adjusted EBITDA
Software Services net sales and adjusted EBITDA
$30
$37
$31
$37
$37
$10
$15
$20
$25
$30
$35
$40
$45
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 202113
$4
$11
$6
$2
$6
$0
$4
$8
$12
$16
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021North America Prescription Management net sales up +33%
y/y in Q1 2021; all cohorts, once again, grew double-digits y/y
Prescription Management net sales
$84
$110
$104
$107
$112
$60
$70
$80
$90
$100
$110
$120
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021Prescription Management practices on the platform
$ in millions 47% 66% 43% 46% 33% 74% 96% 79% 83% 80% 25% 37% 23% 26% 30%
0%
20%
40%
60%
80%
100%
120%
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021Y/Y Growth Two-Year Stacked Same-Store Sales Y/Y Growth
Prescription Management y/y net sales growth
Prescription Management adjusted EBITDA
$ in millions
* During Q4 2020, the Company incurred a $4M legal reserve related to historic litigation at Vets First Choice
$6
*10,000
10,200
10,400
10,600
10,800
11,000
11,200
11,400
11,600
Q1 2020 Q2 2020 Q3 2020 Q4 2020 Q1 2021 ~10,900 >10,900 >11,100 >11,400 >10,50014
$422
$361
$300
$330
$360
$390
$420
$450
Q1 2020
Q1 2021
Europe Q1 2021 financial snapshot
•
$361M in net sales (-14% y/y, -12% y/y organic) and $21M
in segment adjusted EBITDA (+17% y/y)
•
Difficult y/y comparison tied to the divestiture of scil
animal care and the inventory stocking dynamic in several
European markets related to COVID-19 in March 2020
•
Strong y/y organic net sales growth in proprietary brands
(Kruuse, Vi) and in the Netherlands, Ireland and Belgium
•
Previously disclosed challenges in the U.K. (-36% y/y
organic) and Germany (-44% y/y organic) weighed
significantly on consolidated European growth rates
•
Excluding the U.K. and Germany, pro forma European
organic net sales growth was 7% in Q1 2021
•
Europe segment adjusted EBITDA increased 17% y/y and
segment margin expanded 150 bps y/y on improved sales
mix and impact from recent cost actions
Europe net sales growth of -14% y/y, -12% y/y organic
$18
$21
4.3%
5.8%
2.5%
3.5%
4.5%
5.5%
6.5%
$10
$15
$20
$25
$30
Q1 2020
Q1 2021
Adjusted EBITDA
Margin*
Europe segment adjusted EBITDA growth of 17% y/y
$ in millions
$ in millions
15
$7
$10
7.4%
8.9%
2.0%
4.0%
6.0%
8.0%
10.0%
$2
$4
$6
$8
$10
$12
Q1 2020
Q1 2021
Adjusted EBITDA
Margin*
APAC & Emerging Markets Q1 2021 financial snapshot
•
$112M in net sales (+18% y/y, +7% y/y organic)
and $10M in segment adjusted EBITDA (+43% y/y)
•
Strong performance y/y despite the difficult
comps related to the COVID-19 inventory stocking
dynamic in March 2020
•
Healthy y/y growth in both Brazil and Australia
continued during Q1 2021
•
Gross margins (not shown) expanded 140 bps y/y,
aided by continued growth in proprietary brands
•
Segment adjusted EBITDA increased 43% y/y, with
segment margins expanding +150 bps y/y on
improving gross margin, mix and volume leverage
$95
$112
$80
$90
$100
$110
$120
Q1 2020
Q1 2021
APAC & Emerging Markets net sales growth of +18% y/y, +7% y/y organic
APAC & Emerging Markets segment adjusted EBITDA growth of +43% y/y
$ in millions
$ in millions
16
•
Free cash flow of $(72)M in Q1 2021 as compared to $(87)M in Q1 2020
•
Ended Q1 2021 with reported LTM net leverage of 3.7x and approximately $510M in liquidity
•
Guidance of 30% to 40% conversion of adjusted EBITDA to Free Cash Flow
*
is unchanged
at September 30, 2020
at December 31, 2020
at March 31, 2021
As Reported Net Debt (A)
$792M
$797M
$875M
As Reported LTM Adjusted EBITDA (B)
$217M
$226M
$235M
As Reported LTM Net Leverage (A / B)
3.6x
3.5x
3.7x
Liquidity (Cash + Revolver Capacity
**)
$654M
$589M
$509M
Credit Agreement Defined Net Leverage
***3.6x
3.2x
3.1x
Headroom vs. Leverage Covenant
****1.9x
2.3x
2.4x
Seasonal Q1 cash use improved y/y, full-year target on track
* Free Cash Flow is the cash the Company generates through its operations, less the cost of expenditures on property and equipment.
** The amount available for borrowing under the revolving line of credit as of March 31, 2021 was approximately $298 million, subject to covenant restrictions.
*** Credit Agreement defined leverage is net debt as defined by the Company’s Credit Agreement divided by LTM consolidated EBITDA as defined by the Company’s Credit Agreement. Net debt as defined by the Company’s Credit Agreement is not the same as presented in the table above as the Credit Agreement allows for a maximum of only $125 million in cash and cash equivalents to be netted against consolidated total Company debt. Consolidated EBITDA as defined by the Company’s Credit Agreement is not the same as LTM adjusted EBITDA presented in the table above as the Credit Agreement allows for add-backs for certain public company costs and future benefits generated from cost savings initiatives, operating expense reductions, operating changes, improvements and synergies
17
$200
$226
$240
$245
$150
$175
$200
$225
$250
$275
2019
2020
Initial 2021
Guidance*
Updated 2021
Guidance
Our 2021 non-GAAP adjusted EBITDA guidance range is
increased to $245 million to $255 million
$ in millions
$250
Other Items:
•
4.0% to 5.0% y/y organic net sales
growth (vs. 2.5% to 3.5% previously)
-
North America: 12-14% y/y growth
(vs. low teens growth previously)
-
Europe: 9-11% y/y decline
(vs. low teens decline previously)
-
APAC & EM: 4-5% y/y growth
(vs. low to mid-single digit growth
previously)
•
$55M to $65M in Capex
(unchanged)
$255
18
•
Strong start to 2021 with a solid foundation in place
•
Building momentum in our higher margin businesses
•
Investing in new capabilities to accelerate growth
•
Poised to deliver further shareholder value
Looking ahead
COVETRUS PET
Watson, 2020
Q&A
20
Exhibit 1: Q1 2021 Non-GAAP reconciliation to organic
net sales growth
* Numbers in table may not foot or cross-foot due to rounding
Three Months Ended
March 31,
($ in millions)
2021
2020
Y/Y Growth
% Change
from FX
% Change from
Acquisitions
% Change from
Divestitures
Non-GAAP Organic
Net Sales Growth
Net sales:
$1,102
$1,065
3%
3%
-
(4)%
4%
North America
635
550
15%
-
-
(1)%
16%
Europe
361
422
(14)%
6%
-
(9)%
(12)%
APAC & Emerging Markets
112
95
18%
11%
-
-
7%
Eliminations
(6)
(2)
21
($ in millions)
Three Months Ended
March 31, 2021
Net income (loss) attributable to Covetrus, Inc. $(16)
Plus: Depreciation and amortization
43
Plus: Interest expense, net
9
Plus: Income tax (benefit) expense 4
EBITDA
$40
Plus: Share-based compensation
11
Plus: Strategic consulting
2
Plus: Transaction costs (a)
1
Plus: Formation of Covetrus (b) 2
Plus: Equity method investment and non-consolidated affiliates (c) 1
Adjusted EBITDA
$57
Exhibit 2: Q1 2021 Non-GAAP reconciliation to adjusted EBITDA
* Numbers in table may not foot or cross-foot due to rounding
(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures.
(b) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company.
(c) Includes the proportionate-share of the adjustments to EBITDA of consolidated and non-consolidated affiliates where Covetrus ownership is less than 100%.
22
($ in millions)
Three Months Ended
March 31, 2020
Net income (loss) attributable to Covetrus, Inc. $(33)
Plus: Depreciation and amortization
40
Plus: Interest expense, net
14
Plus: Income tax (benefit) expense (2)
EBITDA
$19
Plus: Share-based compensation 9
Plus: Strategic consulting
4
Plus: Transaction costs (a)
7
Plus: Separation programs and executive severance
1
Plus: IT infrastructure (b) 1
Plus: Formation of Covetrus (c) 6
Plus: Capital structure
1
Adjusted EBITDA
$48
Exhibit 3: Q1 2020 Non-GAAP reconciliation to adjusted EBITDA
* Numbers in table may not foot or cross-foot due to rounding
(a) Includes legal, accounting, tax, and other professional fees incurred in connection with acquisitions and divestitures. (b) Includes certain IT infrastructure expenses necessary to establish ourselves as a newly public company
(c) Includes professional and consulting fees, duplicative costs associated with transition service agreements, and other costs incurred in connection with the separation from Former Parent and establishing Covetrus as an independent public company.
23
Exhibit 4: Non-GAAP Free Cash Flow
Three Months Ended
March 31,
($ in millions)
2021
2020
Net cash provided by (used for) operating activities
$(59)
$(76)
Less: Purchases of property and equipment
(13)
(11)
Free cash flow
(72)
(87)
24