Covetrus, Inc. (CVET) Q2 2019 Earnings Call Transcript

Covetrus Inc. (CVET)
Q2 2019 Earnings Call
August 13, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Covetrus Second Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press * then 0 on your touchtone telephone. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Nicholas Jansen, Vice President of Investor Relations. Sir, you may begin.

Nicholas Jansen -- Vice President of Investor Relations

Thank you, Nicolle. Good morning. Thank you for joining us for Covetrus's Q2 2019 Earnings Call. Joining me on today's call are Benjamin Shaw, our President and Chief Executive Officer, and Christine Komola, our Executive Vice President and Chief Financial Officer. Ben and Christine will begin with prepared remarks and then we'll be happy to take your questions.

During this 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, operational performance, and operating expenditures. Forward-looking statements may be identified with words such as will, may, expect, plan, anticipate, upcoming, believe, estimate, 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 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-kK, quarterly report on Form 10-Q and other periodic reports filed with the Securities and Exchange Commission which are available on the Investors section of our website at www.covetrus.com and on the SEC's website at www.sec.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. During this presentation we will also provide certain pro forma results for the three- and six-month ended June 30th, 2019 and 2018 to help investors understand the underlying trends in the business as of the merger of the animal health business of Henry Schein and Vet's First Choice closed on December 31, 2017. Note, however, the historical combined financial statements do not necessarily reflect what the results of operations would have had we operated as a combined company as those results would depend on a number of factors including the chosen organizational structure, what functions were outsourced and performed by employees and strategic decisions made in areas such as information technology and infrastructure.

You can find this morning's press release announcing our second-quarter 2019 results and the slides referenced on the call at ir.covetrus.com. We will continue to use our site to distribute important and time-critical information. The slides and the press release also contain further information about the non-GAAP financial measures that we will discuss during this call. These non-GAAP financial measures exclude certain non-cash or non-recurring items such as costs directly associated with the spin-off and merger and the ongoing integration process, including certain infrastructure investment expenses from our GAAP financial results. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to consider the impact of these items as a supplement to financial performance measures determined in accordance with GAAP. Please refer to this morning's press release announcing our second-quarter 2019 results for a reconciliation of these non-GAAP performance measures to our GAAP financial results.

With that, I will now turn it over to Ben to provide the highlights.

Benjamin Shaw -- President and Chief Executive Officer

Thanks, Nick, and good morning, everyone. Today I'll begin with some observations on second-quarter 2019 which is our first full quarter as Covetrus. I'll discuss our progress on strategic growth drivers, provide perspectives on near-term market dynamics, and outline investments we're making to successfully complete the separation from Henry Schein.

Covetrus is a powerful new platform that empowers veterinarian customers across the globe to unlock new health and financial outcomes. The integration of our market-leading practice management software, prescription and deployment management capabilities, along with our inventory management and supply chain services is a compelling value proposition for the veterinarian market. Our platform promises to streamline workflow, improve client engagement, accelerate sales, and improve practice performance on a global basis and all in the time when customers are increasingly demanding a new way to engage the channel and to meet changing client expectations.

Covetrus has been very well-received by customers and manufacture partners as evidenced by strong customer engagement, new customer acquisition, and improved customer satisfaction scores over the last couple of months. We look forward to building on that momentum. As we think about our transformation, we are measuring success during this period based on the following. First, completing our separation from Henry Schein and exiting TSAs in a seamless manner. Second, delivering on our brand promise and enhanced value proposition for our global veterinary community that puts veterinarians at the center of everything that we do. Third, leveraging our strong market position to accelerate the adoption of our platform in North America, Europe, and APAC. And lastly, driving innovation and deeper integration in our platform, putting us in a position to unlock new value for our customers and manufacturer partners over the long-term.

As I reflect on Q2, which is summarized on slide 5, we've made significant early progress in executing against all of these objectives and we're delivering on our vision for an integrated ecosystem of capabilities and services. We've aligned our commercial teams and corporate culture across the organization. And we've started the process of integrating the combined infrastructure to accelerate our ability to unlock the power of this platform. As an example, we've made significant investments in Q2 to enhance our practice management software and our prescription management capabilities for the immediate benefit of customers. We also delivered on early value capture work and remained on pace to unlock more than $100 million of run-rate EBITDA by the end of year three. Our technology platform is gaining momentum in the market and we're confident in our ability to drive new growth and value for our customers globally.

That said, Q2 was impacted by challenges in North America and the UK. In the US we saw moderating sub traffic in veterinary practices and declining sales of veterinary products purchased in distribution and resold to their clients. We also saw unusual inventory activity in the UK related to Brexit. At the same time, Covetrus has significantly accelerated investments tied to our separation from Henry Schein and the build-out of infrastructure that supports completion of the cargo. These dynamics are offsetting the good progress we have made to date and are creating a delay in the transformation timeline we previously discussed. Christine will discuss our updated outlook later in her prepared remarks.

Our conviction and our strategy remain extremely high as the rapid evolution of the market are accelerating the need for our platform and integrated value proposition. Our technology platform, which includes Vet's First Choice and our practice management software portfolio, witnessed faster pro forma year over year sales growth in Q2 versus Q1. Our platform now represents more than 9% of the company's net sales as compared to 7% of pro forma sales in the prior year. These sales are growing much faster than the rest of our business year to date as we leverage the expanded sales force, larger customer base, and deliver significant new enhancements that further differentiate our capabilities. We're in the early innings of this Covetrus journey. With strong growth in new customers, the accelerating pace of engagement of users on our platform gives us great confidence in the long-term opportunity.

Turning to progress on our long-term value creation plan beginning on slide 6. We successfully exited another 11 TSAs in Q2 and are on track with the remaining 9 TSAs for 2019. Our team has done a great job of identifying the right strategies to navigate the transition process and we're accelerating certain investments to pull forward the timeline for several high-priority TSAs. Although these actions are resulting in Covetrus having additional infrastructure expense and duplicitous costs in the near-term as we create replacement functions, we continue to believe these efforts will result in enhanced service levels, improved operational effectiveness, and will result in a successful winddown of our reliance on these TSAs.

From a commercial perspective, our global teams are now aligned and coordinated in our global market efforts. This alignment has already helped us win new business and resulted in the expansion of a number of key new relationships in Q2. These wins are projected to serve as a tailwind entering 2020 as these customers ramp in engagement.

Turning to slide 7, our North America commercial team remains extremely focused on driving the rapid adoption of our proactive prescription and appointment management platform and our practice management software. This has been our top priority since day one and we're seeing momentum across all leading indicators. Enrollments in our prescription management platform increased nearly 20% sequentially as we benefit from early efforts from our combined North America sales team who now represent a combined value proposition. We ended Q2 with more than 8,700 practices on our prescription management platform and enjoy a healthy pipeline of additional new practice partners we expect to enroll in the second half of this year. Importantly, the quality of these new enrollments onto our prescription platform in the first half of the year supports our enthusiasm for the opportunity that lies ahead. We're experiencing faster sales activation times with the support of our expanded account management team. That is the shortening of onboarding time from enrollment to sales generation.

Quarterly activations increased by more than 40% sequentially during Q2, faster than the sequential enrollment growth in the quarter. As we accelerate our efforts, we're not only driving new enrollments but also converting these accounts to sales generating accounts more efficiently. Of note, 2019 accounts that have a full quarter of sales in the platform and were signed up by our expanded account management team generated 50% higher sales in the first 90 days versus our historical cohorts. For example, one of our many success stories thus far is a practice in the southeast of the US which was onboarding in late firs quarter as a result of strong long-term legacy supply chain relationships. The account has generated more than $60,000 in net sales since launch, highlighting the magnitude of the opportunity within the large and growing customer base.

Another example is a practice in the Midwest of the US that our supply chain team converted from a competing online pharmacy service. The first two months of net sales by this practice averaged approximately $10,000 per month utilizing our platform as it compared to less than $5,000 in the competitor's service for all of 2018. As the last example, a small group practice that signed up in Q1 in Texas generated more than $25,000 in net sales in the first full quarter out of the gate of the platform, while at the same time growing in-office sales for the benefit of our supply chain relationship. These and multiple other customer success stories are highlighting the power of our platform, the significant competitive differentiation we have in the market, an ability to drive insights, deeper client engagement, improved service, better practice workflow versus the competitive peer group.

As a reminder, one standard practice that has been on-boarded to our prescription management platform is a predictable ramp up in utilization as these customers create new active recommendations. Those prescriptions are filled and refilled, and clients subscribe to other ship services. And then veterinarians can renew those subscriptions in subsequent periods, like year two, year three, year four. With this in mind, we believe we are well-positioned to see the ramp in utilization and top-line sales acceleration planned for these newly onboarded practices. We reiterate our guidance to deliver more than 3,000 prescription management practice enrollments for 2019 and the end year with greater than 10,000 practices on our prescription management platform. Looking beyond 2019, we're working toward the international launch of our prescription management platform which is progressing as planned and is a top priority.

In addition to driving new enrollments, we're keenly focused on accelerating proactive prescription management activity from existing customers. New initiated therapies grew 57% year over year in Q2 an acceleration versus Q1 year over year growth rates which will empower customers to drive new active recommendations for prescription medications. This increased focus on proactive client engagements enables us to drive sustainable double-digit growth from existing veterinary customers enrolled in 2017 or earlier, which is akin to same-store sales. Same-store sales growth was 16% year over year in Q2 which exceeded expectations. Total prescription platform net sales increased 46% year over year in Q2, which is also 22% growth above or record Q1 2019 net sales.

We're really pleased by this trajectory and expect to maintain strong momentum heading to the second half of this year. Faster sales growth and the broadening scale of our high-margin technology platform is contributing to underlying profitability gains and gross margin expansion. We also made great progress in growing the number of customers using our portfolio of practice management software systems. The number of net new customers added during the second quarter under our cloud-based practice management software increased 20% versus the same quarter last year. Currently, our cloud-based installation base represents 8.2% of our total PIMs customers which is an increase of more than 200 basis points year over year and 70 basis points sequentially.

We also continue seeing strong growth in our legacy client-server customer base as well. Importantly, we delivered major signature enhancements for legacy client-server software in Q2 including our market-leading AVImark and ImproMed practice management systems which really strengthened our competitive position while improving system performance and enhancing workflow. We're excited to bring even more innovation to the market in the second half of this year.

We believe our leadership position in practice management software has strategic implications as we seek to deliver new coordinated prescription, appointment, and inventory management solutions in 2019 and beyond. Deep integrations with PIMs and leveraging insights to improve medical and service compliance is a core focus as we continue to unlock new category growth, improve practice profitability, and further differentiate Covetrus from its competitors.

Turning to value capture, which is presented on slide 9. We exited Q2 with a $4 million of incremental EBITDA run rate largely tied to our initial procurement activities. Importantly, we expect that our new shipping contract, which we signed in Q2 and goes into effect in Q3, will deliver more than $25 million in savings over a multi-year contract. Work is also under way on our global supply chain capabilities as we seek to optimize our logistics network worldwide in support of 2020 value capture objectives, while in the process of building out pharmacy capabilities inside our North America distribution centers. I think this is a really great example of how we intend to leverage our combined capabilities and fixed infrastructure to both reduce costs and improve service levels. Such initiatives, combined with the robust year to date enrollments, put us on track to achieve our run rate value capture targets by the end of this year. In total, we remain committed to delivering the anticipated $100 million in run-rate value capture by the end of the third year of Covetrus.

Turn to slide 10. While we have made progress on a number of items since early February, it is clear that a slow down in the North American animal health market is undermining early gains from our transformation efforts. Slowing patient visits to the veterinary practice and increased competition have put incremental pressure on our in-office supply chain business in North America relative to our initial expectations of mid-single-digit industry growth as we've seen in 2017 and 2018. Our manufacturer partners are also recording decelerating growth in the US in Q2 and market data from nearly 5,000 practices confirms sales growth of products purchased through distribution and resold by veterinarians to their clients declined 1.2% year over year in Q2, which is 50 basis points lower than the growth rate those practices experienced in Q1 and the positive 2.3% in Q last year.

Please note that Covetrus does not sell to customers outside the veterinary channel in North America which impacts comparisons to data published by some of our competitors and some manufacturers. While we expect the rapid growth of technology services and our differentiated value proposition to continue to support an above-market growth trajectory for Covetrus in North America long-term, we believe it's prudent to reset our near-term growth outlook in the second half of this year based on the recent trends. Long-term, we remain very bullish on the overall health of the channel, the role the veterinary will continue to play globally, and our strong market leadership position.

Notwithstanding market dynamics, we're focused on new customer acquisition, enhancing our account management capabilities, and acceleration market penetration for our differentiated technology platform. We continue to believe our platform is well-aligned with where the veterinary market is headed in North America and around the world and we expect to increase our share of wallet and to expand the category overall to help drive compliance.

With that, I'll turn it over to Christine to review our 2Q 2019 results and provide additional color on our updated guidance for this year.

Christine Komola -- Executive Vice President and Chief Financial Officer

Thanks, Ben. Good morning, everyone, and thank you for joining us today. I'd like to echo the comments made by Ben that we remain encouraged by the progress made thus far in driving our long-term Covetrus transformation and the strength of our technology platform in the second quarter which remains our strategic long-term driver of accelerated net sales growth and margin expansions. While market dynamics and infrastructure investments are creating a delay in the timing of the transformation, we remain confident in our value proposition and our ability to execute against our long-term priorities which in turn should drive sustainable growth and shareholder value creation over time.

Now, turning to the second-quarter financials. Slides 11 and 12 provide details on our GAAP results as well as the adjustments we make to arrive at our non-GAAP results. I will focus my comments on our adjusted measures to provide insights into the underlying trends of our business. Please refer to today's press release for a detailed prescription of the year over year changes in our GAAP results.

Looking at slide 13, total Covetrus net sales were slightly over $1 billion in Q2. On a pro forma basis, which includes Vet's First Choice in the prior year, net sales declined 4% in Q2, of which foreign exchange effects were a 3% headwind. Non-GAAP pro forma organic net sales declined 1%. As Ben mentioned in his comments, net sales growth this quarter was affected by the market slowdown in North America and Brexit related disruption in the UK which was partially offset by strength in our prescription management platform. Results also include the impact from the previously announced customer loss in North America prior to the formation of Covetrus and the impact in APAC tied to the manufacturer moving to a direct sales model in Q4 2018. Normalizing for these, underlying pro forma organic growth would have been 2% in Q2 and 3% year to date.

Our GAAP gross margin was 19.8% in Q2 versus 18.2% in the prior year. If Vet's First Choice was included in the prior-year period, gross margin as a percentage of sales would have improved 40 basis points year over year. The improvement in the quarter was driven by sales mix, the increased contribution from our higher prescription management software and specialty businesses. Our GAAP SG&A expenses were $205 million during the second quarter of 2019. Pro forma corporate expenses ramped up in Q2 due to infrastructure investment timing and our efforts to accelerate the exit from a certain transition services agreement, which resulted in certain duplicative costs being incurred. Specifically, such expenses were redundant with the TSA agreements as we prepared to transition responsibility to our internal teams which have the short-term effect of us double paying for the same service. As we get further and further into the transformation over the next 12 months, we expect to see a reduction in our duplicative expenses captured in the P&L today.

It is worth noting that our Q2 results also include $4 million of operating expense, $2 million of which are recurring tied to our infrastructure investments which were expenses previously not contemplated in our prior outlook and were instead included in the estimated $100 million one-time infrastructure investments discussed at our Covetrus Capital Markets Day.

Adjusted EBITDA, which excludes special items and share-based compensation, was $53 million versus $62 million in the prior year on a pro forma basis. The year over year decline was driven by continued investments in the platform and the top-line shortfalls we discussed earlier. Changes in foreign exchange also impacted EBITDA by $2 million year over year. As we discussed in our Q1 earnings call, our results did include a step up in R&D which impacted our year over year comparison.

While Q2 adjusted EBITDA improved sequentially, similar to as we discussed in our last quarter's call, the magnitude of that improvement fell short of our internal expectations due to the North America slowdown, Brexit related disruptions, and the higher spend on infrastructure investments and TSA exits, some of which is timing. Notwithstanding, we were encouraged by the improvement in profitability by our technology platform as these operations continue to accelerate their growth and their contributions.

Turning to the rest of the income statement. We had approximately $14 million in net interest expense which was primarily interest on our $1.2 billion term loan offset by interest income from our cash deposits. Our GAAP net loss was $10 million or a loss of $0.09 per diluted earnings per share. Pro forma adjusted net income as seen on our non-GAAP reconciliation was a positive $14 million.

Moving to our business segment performance on slide 14, North America pro forma organic net sales were flat year over year. As previously announced, loss of a customer weighed heavily on organic growth in Q2 by 3%. Sequentially higher year over year growth for prescription management, including our specialty pharmacy business was offset by the US market slowdown. We expect our rapid growth in prescription management to continue in the second half of 2019 as we are aided by increased visibility into growth in auto-ship services, activated enrollments, and we are encouraged by the number of new corporate account wins in Q2 which should help us continue to outpace overall market growth.

Turning to our European segment on slide 15. While pro forma organic net sales were impacted by Brexit related dynamics in the quarter, we are optimistic about our market position and the enthusiasm for the launch of our platform in this market in 2020. Specifically, pro forma organic net sales in Europe declined 1% in Q2 with a new paid down year over year 4% as the pre-Brexit inventory buildup by our veterinary and practice customers unbound more significantly than expected during the quarter. Outside of the UK, we saw good organic growth in most European markets including a solid performance from our businesses operating in Ireland, Belgium, and the Czech Republic.

Importantly for the segment, we recently secured a new multi-year contract with one of the largest corporate groups in Europe. We believe our strategic position as the only Pan-European player in the market creates a compelling value proposition and competitive advantage for us. This specific contract should drive an acceleration in organic growth in Europe in the second half of 2019. We also continue to see strong results from our specialty businesses and were particularly pleased with our instrument placement at a scale which is our veterinarian diagnostic business that generates approximately $80 million in annual sales. We are continuously looking to drive increased adoption of our proprietary brand not only throughout our European customer base but also across our business operations in North America, APAC, and the emerging markets.

As seen on slide 16, APAC and emerging markets business experienced a 1% decline in pro forma organic net sales in Q2. However, it is important to remember that a manufacturer went to direct sales model in this market in Q4 last year which negatively impacted our businesses sales growth by 8% year over year. Normalizing for this, this segment grew at the high single digits an acceleration from last quarter as our team has quickly replaced the business with new sales opportunities. Our success has been aided by new customers, a new exclusive manufacturer partnership, and the cross-selling of our software business. We expect our overall value proposition within the market to further accelerate with the launch of prescription management in the upcoming years.

Turning to the balance sheet and cash flow metrics. Covetrus generated $3 million in cash from operations during the first six months of 2019 and -$18 million in non-GAAP free cash flow when subtracting net purchases of fixed assets of $21 million. For the full year, we expect $50 million to $60 million in capital expenditures including our infrastructure investments. We ended Q2 with $55 million in cash and cash equivalence on the balance sheet, $1.2 billion in long-term debt, and no borrowing against our $300 million revolving credit facility. Our leverage ratio as defined by our credit agreement sits at 4.3 times for the trailing 12 months ending June 30, 2019. As our credit agreement permits adjustments to EBITDA for certain special items as well as considering our value capture that we expect to realize over the next 12 months. As a reminder, we remain committed to deleveraging in addition to the mandatory $15 million quarterly long-term amortization payments that begin in the first quarter of 2020.

On slide 17, I want to provide an update on the previously disclosed infrastructure investments tied to TSA exits and standardizing certain core functions. Significant work has been completed to redefine plan infrastructure investments that associated with certain TSA exit strategies which include DPL business requirements, RFT processes, etcetera. Based on this work, we reiterate our expectation for approximately $100 million one-time spend over the next three years and we now estimate that $40 million of this spending will occur in 2019. This spending also reflects $10 million to $15 million in reoccurring operating expenses, $2 million of which we have incurred in Q2 that will now become part of our adjusted EBITDA presentation on a go-forward basis.

Finally, turning to our full-year guidance on slide 18. We now project non-GAAP pro forma organic net sales growth of low single-digits versus our previous 3% to 5% growth expectation and the 1% growth rate we've achieved year to date. The update in our pro forma organic net sales growth guidance reflects the reduction of our market growth rate assumption in North America and the Brexit related disruptions to our UK business. We continue to believe that the rapid growth in our prescription management platform and the momentum in the number of new customer wins will enable Covetrus to outperform market growth rates in 2019. Note that the expected impact from the previously disclosed loss of a customer in North America and the impact of one manufacturer moving to a direct sales model in APAC in October of 2018 remains unchanged at more than 2% in 2019.

Also, foreign exchange fluctuations could result in an approximately 2% headwind to reported non-GAAP pro forma net sales growth for 2019 should rates remain unchanged from the end of Q2. Given the market headwinds on forecasted net sales growth and the infrastructure investments previously discussed, we now project 2019 non-GAAP pro forma adjusted EBITDA to be at least $200 million. This compares to a range of $235 million to $250 million of non-GAAP pro forma adjusted EBITDA previously announced. Importantly, our forecasted value capture remains on track for the run rate targets that we discussed earlier as we reiterate our guidance for more than 3,000 enrollments onto our prescription management platform. As I've mentioned before, we will continuously look for ways to improve free cash flow conversion and we remain committed to deleveraging the balance sheet as previously discussed.

I will now turn it back over to Ben for some brief closing remarks.

Benjamin Shaw -- President and Chief Executive Officer

Thanks, Christine. In summary on slide 19, we're pleased with key aspects achieved so far of this large-scale transformation into a global industry leader and with how we are tracking toward strategic objectives. We are encouraged by the accelerated growth of platform enrollments and continue to believe our combined capabilities are compelling to veterinarian customers in the context of what is becoming a more challenging market environment for their practices. These are early days in our multi-year transformation process and we're very enthusiastic for our prospects. I'm confident that our team of more than 5,500 employees can deliver on our promise in years ahead. I'd like to personally thank each of our team members for all of the efforts to manage their complex transactions, drive new innovation for our evolving industry marketplace, and help establish core infrastructure to support long-term growth aspirations.

Our collective passion for the veterinary community and our ability to unlock significant value for our customers, their clients, and manufacture partners puts us in a unique position to drive long-term shareholder value creation.

This concludes our prepared remarks. I'd now like to turn it over to Nick to moderate Q&A discussions.

Nicholas Jansen -- Vice President of Investor Relations

Thanks, Ben. We want to take as many questions as possible so we ask that you limit them to two and then reenter the queue should you have additional ones.

Nicole, please provide instructions for the Q&A session and we are then ready to take the first question.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, if you have a question at this time, please press the * then 1 on your touchtone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the # key. To prevent any background noise, we ask that you mute your line once your question has been stated. As a reminder, that was * then 1 to ask a question.

Our first question comes from John Kreger from William Blair. Your line is now open.

John Kreger -- William Blair -- Analyst

Hi. Thank you very much. Christine, can you maybe just breakdown that unit? You've roughly taken your expectations for 2019 EBITDA down by about $40 million. Can you just break that down? How much of that is accelerated spending versus a more cautious view on the US, versus a more cautious view on the UK, or anything I might have missed? Thanks.

Christine Komola -- Executive Vice President and Chief Financial Officer

Sure. As we looked at the results that came in, the majority of it is based on the market down on North America. That's the primary driver. There are definitely overhead costs which are increasing and duplicative costs. That is also factored into it as well as we mentioned the IT infrastructure investments of between $10 million to $15 million. But the stress in the marketplace that we've seen is the primary driver in North America.

John Kreger -- William Blair -- Analyst

Thanks. And Ben, as you look at the more granular results out of North America, can you just give us more input on what you think is really going on? To what degree is this maybe a shift to other e-commerce channels versus just less traffic in the practice versus anything else? Thanks.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. Well, for several quarters in a row we've seen a slowdown relative to historical trends. We've seen a slowdown in the number of visits to veterinary practices which has impacted product sales out of the practice. We see continued and strong competition from alternative channels which give consumers a lot more options. And we also see manufacturer support for a broadening range of channels. I think the core issues we saw the market growth within clinic sales of veterinary products purchased and resold to pet owners decline for the third consecutive quarter. That's a surprise relative to a really strong finish in Q1 and a good start to Q2. That trend did continue from Q4, Q1 and now into Q2.

John Kreger -- William Blair -- Analyst

Thank you.

Benjamin Shaw -- President and Chief Executive Officer

Maybe the last comment would just be that we saw the impact across the board. So, not just in dispensed medication. We saw it in equipment sales. We saw it in a variety of products that are sold to practices. I just want to be clear that this was not just for dispensed medications, but we saw a slowdown in growth for visits which impacted all classes of products and services in the veterinary practice.

Operator

Thank you. Our next question comes from Erin Wright from Credit Suisse. Your line is now open.

Erin Wright -- Credit Suisse -- Analyst

Okay. I'll follow-up to that last question. In terms of the pressure you mentioned in North America, it's seemingly somewhat of a disconnect from other industry constituents. I was just curious if there was any sort of share shift going on among the distributors or can you speak to some of the changes in the competitive landscape that maybe you need to do whether it be manufacturers establishing direct relationships with the alternative channels and how that can impact you longer-term? Can you remind us where the Vet's First Choice platform can be positioned in all of this and help vets as an alternative and how quickly that can resonate with your customers or how quickly you can have an offset to this pressure?

Nicholas Jansen -- Vice President of Investor Relations

Erin, this is Nick. I'll provide a brief perspective on just the overall industry dynamics. We saw other third-party market data which suggests that veterinary clinics did decelerate Q2 to Q1. So, I don't think this is necessarily something that was specific to us. Some of the manufacturers also reported a slowing trend in the US in Q2 relative to Q1. I'll let Ben discuss the competitive dynamics.

Benjamin Shaw -- President and Chief Executive Officer

We feel like our value proposition, the Covetrus value proposition resonates very well in the market. We have strong new customer wins. We feel like we are in the share gaining mode. We described that not only in our online channels but in software and in our supply chain businesses. I really think there's never been a greater need for veterinarians for our prescription management capabilities and the integration that we're achieving with practice management software. This is giving veterinarians the tools they need to respond to changing market pressures and changing client expectations. So, we're seeing a big call to action for enrollment onto the platform. We think that's going to continue to be a source of momentum going through the second half of this year. We feel like we're ideally suited in the market to be able to help veterinarians respond to these pressures.

Erin Wright -- Credit Suisse -- Analyst

Okay. Thanks. And then in terms of your guidance, what does your guidance now assume in terms of underlying realized synergies for 2019 and how should we be thinking about it over the next several years here how those synergies and the timing there on in terms of realization of those? Thanks.

Christine Komola -- Executive Vice President and Chief Financial Officer

I'll take that one. We actually continue to feel very confident in our value capture momentum. As you heard earlier, we exited with a $4 million run rate this quarter. We are on target for $20 million run rate by the end of this year and fully committed to the $100 million by the end of year three. So, no change to that.

Benjamin Shaw -- President and Chief Executive Officer

Maybe I'll just add to that. I did acknowledge that we signed a multi-year new shipping contract that will generate $25 million of value capture for the multiple-year contract. And there are enrollments and the strong same-store sales growth experienced which exceeded our expectations are contributing to our bullish views on value capture.

Erin Wright -- Credit Suisse -- Analyst

Okay. Thank you.

Operator

Thank you. Your next question comes from Jon Block from Stifel. Your line is now open.

Jonathan Block -- Stifel -- Managing Director

Great. Thanks, guys, and good morning. This may build on the prior one or two questions. Ben or Christine, just in long-term growth targets of double-digit adjusted EBITDA growth. Is that still intact off of the much lower 2019 adjusted EBITDA base? How should we think about that target in the out years with some of the moving parts and market demand? And then I've got a follow-up.

Christine Komola -- Executive Vice President and Chief Financial Officer

Hi, Jon. We actually haven't changed our outlook at this point. We feel confident that those numbers still make sense. We are committed to them and we haven't changed anything for our long-term outlook.

Nicholas Jansen -- Vice President of Investor Relations

And Jon, just to follow-up, as you can imagine the value capture as we've previously communicated builds in 2020 into 2021 serving as a tailwind. And the prescription management platform will become a bigger piece of the overall pie as will our practice software assets which all come with a higher margin profile relative to the supply chain business.

Benjamin Shaw -- President and Chief Executive Officer

Can I just contribute to that? Not only stronger than expected same-store sales growth on the platform, but we also discussed enrollments grew 20% sequentially. Activations of accounts grew 40% sequentially. We're really encouraged by the strong performance in the market by our expanded account management base being able to drive enrollments and activations and achieve higher than historically expected first-quarter full sales from new accounts. So, that is going to continue to provide strong organic growth. It's particularly impressive given the backdrop of low single-digit market growth.

Jonathan Block -- Stifel -- Managing Director

Perfect. Thanks for that, guys. And that's actually a good segue to the second question which I hope some of these numbers are right. It looks like the number of North American practices joining the prescription management platform is roughly 700 for the quarter. I believe 1200 for the first half of the year. I think you reiterated 3,000 for all of 2019. So, can you talk to the ramp implied in the back part of 2019, if there was any seasonality that may have weighed on some of the figures in 2Q 2019? Thanks, guys.

Nicholas Jansen -- Vice President of Investor Relations

I'll provide some perspective on historical numbers and then Ben can talk about the future. As you saw in our registration statement last year, we ended 2017 with 5,100 practices on the platform. We said at the end of Q2 that we are roughly 6,000. So, if you view that 900 incremental relative to the 2,400 that we did last year, it was about 40% in the first half of the year and we're on track with that same type of dynamic with the 1,200 you discussed. Ben can talk about the enrollments in term of our account management team.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. Remember it's our first full quarter operating as Covetrus. We stood up and aligned our North America commercial organization. We had a really strong execution on both enrollment and activations in the second quarter. I think that set us up really well in the second half to continue to drive significant enrollment activity. We have a lot of confidence. We're seeing how it performs in that model and the success stories that our account managers have now witnessed has given everyone a lot of confidence about what this looks like. The overall backdrop of strong competition from online and alternative channels is just fueling the need for our platform and is going to continue to support a strong enrollment activity. We reiterate that we're really confident in that 3,000-enrollment target for this year.

Jonathan Block -- Stifel -- Managing Director

Thanks, guys.

Operator

Thank you. Your next question comes from Kevin Kedra from G. Research. Your line is now open.

Kevin Kedra -- G. Research -- Analyst

Hi. Thanks for taking the questions. Throughout the spin the IPO process we've seen the performance maturation, the EBITDA kind of shift downward over time. We're seeing another shift down with the outlook today. So, how can reassure investors and give us confidence that the company has hit a bottom or point of stabilization in this outlook for the full year and this is a point of growth from this current level? And then secondly, on auto-ship, I don't know if I missed it, but did you guys give a number or percentage of pet owners or pet parents that are using auto-ship? Where do you think that percentage can go and is that a valuable metric in looking at where the business is going?

Christine Komola -- Executive Vice President and Chief Financial Officer

Hi, Kevin. It's Christine. Let me start with our EBITDA guidance. As we said, the market really has a stress point right now. I don't think that this long-term market is at this low. I think that we will continue to gain share as we've been talking about with our platform and the technology businesses and the veterinarian opportunities. So, I think as we look forward this is really just the 2019 guidance. We feel confident in the numbers and the expectation, really focusing in on where the gaps are within the North America businesses. As you heard earlier, Europe and APAC continue to have strong, solid, good momentum within each one of those businesses. The veterinarian practices in each one of those businesses continue to gain share and momentum across the categories and to date have a multi-strategy in terms of gaining that customer relationship. So, we feel really good about those businesses.

I'll turn it over to Ben to talk more strategically about some of your specific questions on activation.

Benjamin Shaw -- President and Chief Executive Officer

I'll add just one comment on the shift. Also, at this point in the year, we have great visibility to the nature of our infrastructure investments. We exited 21 PSAs this year. We have 9 in the second half and we're at a point where we have detailed plans and an understanding of the level of infrastructure investment we need to make and how those costs break out in terms of one-time infrastructure investments and the recurring operating expenses. So, we just have a lot greater visibility and more detailed plans that we're now in an implementation mode. I think that gives us a lot more confidence than where we were in January providing approximately $100 million estimates of IT infrastructure investment. I think that's also important to your question.

You asked about auto-ship. I think auto-ship can be a very useful metric to understand within our prescription management business. It affords a lot of predictability and a sense of recurring revenue. It helps us understand how we can be more planful and faster to service those customers. We have very high rates of auto-ship. A number of products we dispense are not auto-ship eligible. So, if we look at auto-ship eligible products, those continue to be very high rates of subscription, north of 70%. As a part of the growth that we've experienced year over year, more than 70% of that growth is from transactions that are on auto-ship. But just a reminder not all of the medications that we dispense are auto-ship eligible orders. Some of them are, for example, short-course antibiotics or acute care products that really do not have a refill profile. So, that's going to be more close kin to some of our food therapeutic diets, preventatives, maintenance, and chronic medications where you're going to see higher rates of auto-ship.

Kevin Kedra -- G. Research -- Analyst

Great. Thanks.

Operator

Thank you. Your next question comes from John Ranson from Raymond James. Your line is now open.

John Ranson -- Raymond James -- Analyst

Hi. Good morning. I just want to clarify the G&A. The $10 million to $15 million, is that basically an accounting change based on what you thought going in and doesn't represent a change in cash but would affect the P&L? I just want to make sure we understand that.

Christine Komola -- Executive Vice President and Chief Financial Officer

Sure, John. It is actually not a change in cash. That much I can confirm that. If you recall at our Capital Market Day, we identified the need for about $100 million over three years to invest into our infrastructure and to plan for the TSAs. As Ben mentioned just a few minutes ago, it really is focused on we now understand the components, the specific plans, what needs to happen. We've done business cases to define what should be truly one-time and what will be reoccurring and what will be capital for 2019 plan.

Benjamin Shaw -- President and Chief Executive Officer

So, yeah. It's kind of like an accounting clarification on how those expenses will be realized on the P&L.

John Ranson -- Raymond James -- Analyst

Right. I know you aren't giving a guide on 2020 and 2021, but as we think about trying to project G&A with all of these moving parts, using 2019 as a base could you at least give us a little bit of help in terms of how to think about G&A in the next two years?

Christine Komola -- Executive Vice President and Chief Financial Officer

We haven't given, as you said, specific guidance on it. I think it's fair to say approximately these reoccurring expenses as a percentage of the total is probably a reasonable estimate. We'll continue to provide more as we see more into the 2020 plan. But I think it's reasonable as an approximate rate.

Nicholas Jansen -- Vice President of Investor Relations

And John, as Ben mentioned in our prepared remarks, we're obviously looking to drive more efficiencies in our business as we think about just the market overall and some of the value capture activities we're exploring. Those are other things to consider as you think about the G&A buildup for 2020 and beyond.

Benjamin Shaw -- President and Chief Executive Officer

Yeah. As the spirit of these, these investments with strong business cases supporting them in many cases will get a bunch of lower cost and improved service. So, the yield on those investments we expect to be attractive.

John Ranson -- Raymond James -- Analyst

Okay. My second question is I think as we think about the legacy that's first business and the sales ramp from here, has anything changed in your view in terms of the cohort data onboarding of revenue? We think about it as $10,000 in the first year and $50,000 in the fifth year. Coming in at a high 20s low 30s contribution margin. You signed up so many new accounts recently. Have you seen anything in the data that says this new batch of customer looks any different than your historical cohorts?

Benjamin Shaw -- President and Chief Executive Officer

If anything, we're seeing some really positive signals there. The answer to your question is no, I don't see anything fundamentally different. But we did mention that accounts enrolled year to date activated much faster. So, we saw 20% sequential growth in enrollment but a 40% sequential growth in activation. So, the time from enrollment to first revenue has improved materially the function of our go-to-market. And the second point being that the quarterly revenue growth in the first full months of the quarter from new enrolled accounts by our expanded sales team had 50% higher growth in the first quarter than they did in prior historical cohorts. So, 2019 cohort is off to a very good start, well above historical expectations. I think that we exceeded our expectations for same-store sales growth in Q2 despite what was a difficult overall market.

So, we're really confident in the fundamentals of growth in new initiated therapy, the platform performance in refills and renewals, and in overall yield on prescriptions under management. We're really comfortable with enrollment to activation activity and we're liking what we're seeing in terms of first-quarter revenue from new cohorts relative to historical averages. Overall, across the board very consistent and healthy and in some cases better than what we had seen in the past.

John Ranson -- Raymond James -- Analyst

I guess what's odd to us is that you're clearly taking a share in this channel, but it looks like your growth is -- And I know there are one-off things with APAC and with losing an account. It's odd that you cite that customers are much more willing to buy through the distribution channel at the same time while you're taking share in the Vet's First Platform. So, those are the two. I guess it looks a little noisy to us. Kind of looking at why those two things would be occurring at the same time.

Benjamin Shaw -- President and Chief Executive Officer

Well, I think what we're saying is that traffic into the office has slowed and that's now a multi-quarter pattern. And the need for our ability to be very proactive in the way we attack that in both dispensed medication and front office services is coming at a time when veterinarians need help driving incremental revenues and addressing declining foot traffic. So, I think that the platform is demonstrating that its ability is to drive new category growth to improve on compliance level seen in the practice. It's coming at a time when they really need this level of support and engagement. So, I feel in a low of ways the market dynamics have created a lot of urgent need for our prescription and appointment management capabilities.

Christine Komola -- Executive Vice President and Chief Financial Officer

And John, I just want to add that in that as we looked at the visits, this isn't just our visits. This is several thousand third-party resources that have identified this trend of the slowing business. It's not specific to us or anything like that. Just to be clear, that trend is from external sources.

John Ranson -- Raymond James -- Analyst

Sure. Okay. Thank you.

Benjamin Shaw -- President and Chief Executive Officer

Thanks, John.

Operator

Thank you. Your last question comes from David Westenberg from Guggenheim Securities. Your line is now open.

David Westenberg -- Guggenheim -- Analyst

Hi. Thanks for taking the questions. We're starting to hear companies like PetMeds and Chewy also talking about compliance. Do you believe that it is a response to you and do you think that's a sustainable kind of business model or business strategy given the fact that it's not necessarily through the veterinary channel?

Benjamin Shaw -- President and Chief Executive Officer

I don't think that unless you have the trust of the veterinarian to really understand the days on therapy for an individual patient for an individual medication. You're able to understand both the online dispensing and in-office services. They are positioned to really complete the picture of what compliance for a patient looks like. I think that's why our strong partnership with veterinarians and our ability to have great insights to the state of care both in-office and online for any individual patient is allowing us to have accuracy and be able to prove the impact of proactivity relative to driving days on therapy.

I think that auto-ship as a predictor of possible compliance gains in our experience is tricky. I think it's more relevant for food type services. I'm not really sure that clients are going to stop feeding their dogs just because they're not on auto-ship. So, I'm not sure auto-ship in the food context is really a great predictor of improvement in compliance. But I think in order to be able to make claims regarding medical compliance, you really have to be in the position to have the log data, have a three-year view of patient care, and be able to study and understand both in-office dispensing and online capabilities. That's why I think our deep integration with PIMs, the high trust relationship we form with veterinarians allows us a position to create those insights and to document the impact that services are having across a wide variety of types of medical compliance for dispensed products as well as in-office services.

So, we're really confident in the way in which we track that information. It's very transparent and very clear to veterinarians what that is. Many manufacturers have studied that. We've put out many white papers and third-party reviewed studies that have demonstrated the impact of our platform in driving compliance. But no, I don't believe that auto-ship alone is a fair study of medical compliance benefit.

David Westenberg -- Guggenheim -- Analyst

And if I could ask a mandatory question on Zoetis Triple. It does represent kind of a channel shifting event or at least maybe a change in prescription from Legacy Bravecto and Nexguard. So, do you see this as an opportunity or a threat right now in terms of where prescriptions are at given the fact that it probably does represent a channel shopping event?

Benjamin Shaw -- President and Chief Executive Officer

I don't think we're in a position to comment about what the impact of these future products will be in the category. We certainly have very strong relationships with these manufacturers. We believe that our platform is capable of driving strong engagement both online and in-office. That as a longtime trust partner we believe a multi-channel strategy to support both in-office visits and driving in-office care but also to drive client engagement and click to buy capabilities are really going to be a powerful capability set not just for veterinarians but for manufacturers. I think it's too early to talk about future programs and how that might impact it. It's something we'd be happy to follow up on in future discussions.

David Westenberg -- Guggenheim -- Analyst

If I could just squeeze in one more on the distribution business. Did you give any metrics around growth ex the customer lost and just generally speaking is there any way it changes in the way with slower volumes in the last couple quarters? Is there any change in the way that you think about the distribution business generally, just macro generally in distribution? If there is any change in the way that you think about distribution, is there maybe opportunities for pivots? I realize I took a little bit more than my allotted questions. I apologize for that.

Benjamin Shaw -- President and Chief Executive Officer

Well, we think the business is very stable. We think we have very good relationships. We think that the integration of our supply chain and inventory management capabilities with practice management software is going to be a really important value proposition to customers. Being able to have better ordering and receiving capabilities and just streamline workflow in the practice we think is a really significant benefit. And as we've started to roll out those capabilities we announced in Q2, we think that's a really great differentiator. We're really confident in the long-term outlook of what that looks like. We think that we provide terrific value to small business owners and veterinary practices in managing very complex inventory management needs. And so, we feel like we're building on our share position. We feel like we offer a very competitive value proposition and very differentiated in our abilities to manage both online, in-office, and deep connectivity.

We feel really confident in our market share position. Albeit, we earn that business every day. It's a services business. We have high-quality competitors in the market, and we earn it every day all day to make sure that we're delivering on right service levels, great account management. Our veterinarians have choices and we appreciate their loyalty to our offering.

Christine Komola -- Executive Vice President and Chief Financial Officer

And David, I would add there haven't been any fundamental changes in any customers or any of the rest of the business itself. So, in terms of metrics, there hasn't been any fundamental change. In many ways, the distribution channel is also benefiting from the value capture results that we've had. So, nothing fundamentally different in the models that we have today.

David Westenberg -- Guggenheim -- Analyst

Thank you very much.

Operator

Thank you. That concludes today's question and answers session. Ladies and gentlemen, thank you for participating in today's Covetrus conference call. This does conclude today's program. You may all disconnect. Have a great day.

Duration: 61 minutes

Call participants:

Nicholas Jansen -- Vice President of Investor Relations

Benjamin Shaw -- President and Chief Executive Officer

Christine Komola -- Executive Vice President and Chief Financial Officer

John Kreger -- William Blair -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Jonathan Block -- Stifel -- Managing Director

Kevin Kedra -- G. Research -- Analyst

John Ranson -- Raymond James -- Analyst

David Westenberg -- Guggenheim -- Analyst

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