Covetrus Announces Financial Results for First Quarter of 2021

Rhea-AI Summary

Covetrus (CVET) reported strong Q1 2021 results with net sales of $1.10 billion, a 3% increase compared to Q1 2020. Adjusted EBITDA rose 19% to $57 million, driven by healthy demand in North America and an improvement in operational efficiency. Net loss was narrower at $16 million, or $0.11 per diluted share, compared to a loss of $33 million in the prior year. Despite challenges in Europe, particularly in the U.K. and Germany, the company affirmed full-year adjusted EBITDA guidance of $245-$255 million, a $5 million increase from previous projections.

Positive

• Net sales increased 3% year-over-year to $1.10 billion.
• Adjusted EBITDA rose 19% to $57 million.
• Net loss improved to $16 million from $33 million.
• North America segment net sales increased 15% year-over-year.

Negative

• Europe segment net sales decreased 14% compared to the prior year.
• Negative free cash flow of $72 million.

Covetrus, Inc. (Nasdaq: CVET), a global leader in animal-health technology and services, today announced financial results for the first quarter of 2021, which ended March 31, 2021.

“The team delivered a strong start to 2021 and added strength to our foundation with healthy and profitable growth across each of the Company’s segments,” said Ben Wolin, Covetrus president and CEO. “We are driving momentum within the key areas of the business and investing in our team and new capabilities to further accelerate our strategic growth agenda. Covetrus is well positioned to uniquely service the animal health industry and our commitment to driving better care and outcomes for our veterinary practice customers and their clients will continue to benefit all of our stakeholders.”

Summary Operating Results (Unaudited)

		Three Months Ended March 31,
(In millions, except per share data)		2021				2020
Net sales		$	1,102			$	1,065
Income (loss) before taxes		$	(12	)		$	(35	)
Net income (loss) attributable to Covetrus		$	(16	)		$	(33	)
Diluted earnings (loss) per share (EPS)		$	(0.11	)		$	(0.30	)
Non-GAAP Measures: (a)
Organic year-over-year net sales growth		4		%
Adjusted EBITDA		$	57			$	48
Adjusted net income attributable to Covetrus		$	29			$	20

^(a) Non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information provided in accordance with GAAP. Reconciliations for non-GAAP financial items to the most directly comparable GAAP financial items are provided under Reconciliation of Non-GAAP Financial Measures at the end of this release.

First Quarter 2021 Results

Net sales for the first quarter of 2021 were $1.10 billion, an increase of 3% compared to the first quarter of 2020. Non-GAAP organic net sales, which adjusts for changes in foreign exchange and the impact from mergers, acquisitions and divestiture activity, increased 4% year-over-year, reflecting a healthy companion animal end-market, strong sales execution and strength in prescription management. These positive trends were partially offset by a difficult comparison from the prior year as a result of inventory stocking by some of the Company's customers in many of its international markets during the onset of COVID-19 as well as the previously disclosed headwinds in the Company's U.K. and German businesses.

Net loss attributable to Covetrus in the first quarter of 2021 was $16 million, or a loss of $0.11 per diluted share, which compared to a net loss attributable to Covetrus in the first quarter of 2020 of $33 million, or a loss of $0.30 per diluted share. The primary driver of the year-over-year improvement was an increase in gross profit from higher net sales, lower selling, general and administrative expenses and a decrease in interest expense as a result of the reduction in total debt outstanding as compared to the prior year.

Non-GAAP adjusted EBITDA was $57 million for the first quarter of 2021 versus $48 million in the prior year period. The 19% year-over-year increase reflected increased contribution from all of the Company's segments, particularly North America, which offset increased costs related to various corporate functions and the lost contribution from scil animal care, which was divested on April 1, 2020. Non-GAAP adjusted EBITDA margin was 5.2% for the first quarter of 2021, an increase of 70 basis points year-over-year.

Non-GAAP adjusted net income attributable to Covetrus was $29 million for the first quarter of 2021, compared to $20 million in the prior year period, driven by the same factors impacting non-GAAP adjusted EBITDA as well as a decrease in interest expense as a result of the reduction in total debt outstanding as compared to the prior year.

First Quarter 2021 Segment Financial Highlights

The Company’s operations are organized and reported by geography -- North America, Europe, and APAC & Emerging Markets.

North America

North America segment net sales for the first quarter ended March 31, 2021 of $635 million increased 15% compared to the same period of the prior year. Non-GAAP organic net sales increased 16% year-over-year. During the first quarter of 2021, supply chain non-GAAP organic net sales increased 13% year-over-year, driven by healthy companion animal end-market demand, distribution market share improvement and strong performance at SmartPak. Prescription management net sales increased 33% year-over-year as the business continues to see strong practice engagement and pet owner demand.

North America segment adjusted EBITDA for the first quarter ended March 31, 2021 of $52 million increased 27% compared to the same period of the prior year, reflecting positive operating leverage resulting from healthy net sales growth in the Company's supply chain business in North America during the first quarter as compared to prior year as well as increased contribution from prescription management as the Company continues to make progress in driving scale in this business. North America segment adjusted EBITDA margin was 8.2% for the first quarter of 2021, an increase of 70 basis points year-over-year.

Europe

Europe segment net sales for the first quarter ended March 31, 2021 of $361 million decreased 14% compared to the same period of the prior year. Non-GAAP organic net sales decreased 12% compared to the same period of the prior year, reflecting the previously disclosed headwinds in the U.K. and in Germany and the difficult comparisons from the prior year period from COVID-19 inventory stocking, which more than offset strength in the Company's businesses operating in the Netherlands, Ireland and Belgium as well as strong performance in the Company's proprietary brands, Kruuse and Vi.

Europe segment adjusted EBITDA for the first quarter ended March 31, 2021 of $21 million increased 17% compared to the same period of the prior year, reflecting increased contribution from the Company's proprietary brands and cost containment actions, which more than offset the sales headwinds in the U.K. and in Germany and the lost earnings contribution from scil animal care. Europe segment adjusted EBITDA margin was 5.8% for the first quarter of 2021, an increase of 150 basis points year-over-year.

APAC & Emerging Markets

APAC & Emerging Markets segment net sales for the first quarter ended March 31, 2021 of $112 million increased by 18% compared to the same period of the prior year. Non-GAAP organic net sales increased 7% compared to the same period of the prior year, reflecting healthy companion animal end-market demand and strong sales execution, particularly in Brazil and Australia.

APAC & Emerging Markets segment adjusted EBITDA for the first quarter ended March 31, 2021 of $10 million increased 43% compared to the same period of the prior 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 period. APAC & Emerging Markets segment adjusted EBITDA margin was 8.9% for the first quarter of 2021, an increase of 150 basis points year-over-year.

Financial Position and Liquidity

Covetrus used $59 million of net cash from operating activities during the three months ended March 31, 2021 as compared to $76 million during the prior year period. Free cash flow, a non-GAAP financial measure that is defined as cash flow from operating activities less purchases of property and equipment, was negative $72 million during the three months ended March 31, 2021 as compared to negative $87 million in the prior year period. The year-over-year improvement in free cash flow reflects the growth in operating earnings and lower cash interest expense, partially offset by an increase capital expenditures tied to several growth projects currently underway.

As of March 31, 2021, the Company had $211 million in cash and cash equivalents, $1,080 million in term loan debt, and no borrowings outstanding on its $300 million revolving credit facility. The Company ended the quarter with $509 million in available liquidity and was in compliance with the covenants in its credit agreement as of March 31, 2021.

2021 Financial Guidance

Covetrus’ full-year year 2021 financial guidance range is as follows:

• Adjusted EBITDA, a non-GAAP financial metric, of $245 million to $255 million, an increase of $5 million from the Company's prior guidance released on March 1, 2021.

The Company has not reconciled its non-GAAP adjusted EBITDA 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. For more information regarding the non-GAAP financial measures discussed in this release, please see the section titled Reconciliation of Non-GAAP Financial Measures for the reconciliations of GAAP financial measures to non-GAAP financial measures.

Conference Call

The Company will host a conference call to discuss these results and recent business trends at 4:30 p.m. ET on May 6, 2021. Participating in the conference call will be:

• Benjamin Wolin, president and chief executive officer
• Matthew Foulston, executive vice president and chief financial officer

To access the live webcast and the accompanying slide presentation, individuals can visit the Investor Relations page of the Covetrus website: https://ir.covetrus.com/investors/events-and-presentations. An archived edition of the earnings conference call will also be posted on the Covetrus website later that day and will remain available to interested parties via the same link for one year.

The conference call can also be accessed by dialing 866-789-2492 for U.S./Canada participants, or 409-937-8901 for international participants, and referencing confirmation code 5283607. A replay of the conference call will be available for two weeks through May 20, 2021 by dialing 855-859-2056 or 404-537-3406. The replay confirmation code is 5283607.

Upcoming Investor Events

Covetrus management will be attending the following investor conference during June:

• Stifel Virtual Jaws and Paws Conference on Wednesday, June 2, 2021

Audio webcasts will be available live and archived on the Company’s Investor Relations website at https://ir.covetrus.com/investors/events-and-presentations. A complete listing of upcoming events for the investment community is available on the Company’s Investor Relations website.

About Covetrus

Covetrus is a global animal-health technology and services company dedicated to empowering veterinary practice partners to drive improved health and financial outcomes. We are bringing together products, services, and technology into a single platform that connects our customers to the solutions and insights they need to work best. Our passion for the well-being of animals and those who care for them drives us to advance the world of veterinary medicine. Covetrus is headquartered in Portland, Maine with more than 5,500 employees serving over 100,000 customers around the globe. For more information about Covetrus visit https://covetrus.com/.

Forward-Looking Statements

This press release 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 release or to update them to reflect events or circumstances occurring after the date of this release, whether as a result of new information, future developments or otherwise. Investors are cautioned not to place undue reliance on these forward-looking statements.

COVETRUS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In millions, except share amounts)
	March 31, 2021				December 31, 2020
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	211			$	290
Accounts receivable, net of allowance of $5 and $5	518				507
Inventories, net	555				530
Other receivables	87				67
Prepaid expenses and other	51				37
Total current assets	1,422				1,431
Non-current assets:
Property and equipment, net of accumulated depreciation of $112 and $106	118				116

FAQ

What were Covetrus's financial results for Q1 2021?

Covetrus reported net sales of $1.10 billion for Q1 2021, a 3% increase year-over-year.

What is the adjusted EBITDA guidance for Covetrus in 2021?

Covetrus has increased its adjusted EBITDA guidance for 2021 to a range of $245 million to $255 million.

How did Covetrus's net loss change in Q1 2021?

The net loss for Q1 2021 was $16 million, a significant improvement from a $33 million loss in Q1 2020.

What challenges did Covetrus face in its European segment?

The European segment experienced a 14% decline in net sales due to headwinds in the U.K. and Germany.