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Covetrus, Inc. (NASDAQ:CVET)
Q4 2019 Earnings Call
Mar 3, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Covetrus 4Q '19 Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

It is now my pleasure to introduce, Vice President of Investor Relations, Nicholas Jansen.

Nicholas Jansen -- Vice President of Investor Relations

Thank you, Andrew. Good afternoon, and thank you for joining us for Covetrus' Q4 2019 earnings call. Joining me on today's call are Ben Wolin, our President and Chief Executive Officer; and Stuart Gleichenhaus, our Interim Chief Financial Officer. Ben and Stuart 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 and operational performance and operating expenditures, our plans to reduce our net debt and our business strategy, and timing and impact of transactions.

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-K, quarterly reports on Form 10-Q, and other periodic reports filed with the SEC which are available on the Investors section of our website at ir.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 months and fiscal year ended December 2019 and 2018 to help investors understand the underlying trends in the business as if 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 been 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 or performed by employees, allocations of certain corporate and shared expenses, and strategic decisions made in areas such as information technology and infrastructure.

You can find this afternoon's press release announcing our fourth quarter and full year 2019 results on this call on ir.covetrus.com. We will continue to use our site to distribute important and time-critical company information. The press release also contains further information about the non-GAAP financial measures that we will discuss during this call.

These non-GAAP financial measures exclude from our GAAP financial results, certain non-cash or special items such as costs directly associated with the spin-off and merger and the ongoing integration process, including certain infrastructure investment expenses, separation program costs, executive severance, and goodwill impairment charges. 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 afternoon's press release announcing our fourth quarter and full year 2019 results for a reconciliation of these non-GAAP measures to our GAAP financial results.

And with that, I will now turn the call over to Ben to provide the highlights.

Benjamin Wolin -- President and Chief Executive Officer

Thanks, Nick. And good afternoon everyone. It has now been a little more than four months since I assumed the role of Acting CEO at Covetrus. And as we announced today, I will now be taking on those responsibilities on a permanent basis. We have a lot to get through and I do not want to spend too much time on that, but I will say this. We have a solid organization and culture here that are only getting stronger, and I look forward to working with this team.

Looking back at the last several months, we have taken a number of significant steps as a company. We focused the organization on core drivers of our business, supported and strengthened the platform and emphasized a culture that will deliver on the opportunity Covetrus has in the animal health marketplace. I'll discuss those further in a few minutes but first, I want to take the opportunity to provide you with a better sense of what I've learned in this initial period, and how I see the company moving forward from here.

This time has revealed a lot about this company and its people. The most important lesson is that we have a talented, passionate and hard-working team that is focused on executing and delivering value to our customers, business partners, manufacturers and shareholders. It also highlighted the growing pains we have faced over the past year, as well as the challenges and hard work that still remain for us to deliver on the attractive opportunity presented by this market. It is clear to me that the team has a deep desire to succeed and possesses the ability to overcome those challenges.

The willingness of everyone to embrace this change has helped us focus the business and begin making the needed improvements that will allow us to successfully execute our plans moving forward. To achieve our goals, we will continue to emphasize the core themes that I shared with you on our last call, relentlessly focusing on the core drivers of our business, emphasizing innovation and execution and continuously building a culture of success. These are the foundation for both our strategy and new way of working, and I believe that by continuing to focus and execute while strengthening the platform we will build on the significant initial steps we have taken as an organization.

Some of these action plans are already in process. Over the last several months, we have enhanced our execution and increased accountability within the organization. This sharper focus was evident in our Q4 results, which exceeded the high end of our guidance we established back in mid-November for both net sales and adjusted EBITDA. And importantly, we improved the pace and our approach to integration, focused our investments on the core drivers of our business, and begin to eliminate activities, projects and initiatives that were not central to our core drivers. This was the key message delivered during our third quarter conference call and our Q4 results reflect the early benefit of this approach.

We also implemented certain leadership changes in Q4 and early 2020. This included combining our software and prescription management business units to drive tighter integration of our teams under one leader, Georgia Wraight, and to begin to deliver a unified product roadmap that will help enhance workflow for veterinary practices. Mike Ellis and David Hinton, two of our most tenured animal health executives, also now have additional responsibilities to help execute our strategic plan in North America and our refocus global sourcing organization. Additionally, we made a significant change in our finance team with Stuart Gleichenhaus stepping in as CFO on an interim basis to help us deliver against several critical short-term priorities. Retaining and recruiting talent has and will continue to be a critical focus as it is paramount to building a shared culture of success.

Additionally, we with the support of the third-party we brought in during Q4 have identified meaningful opportunities to not only improve our organizational health but to also deliver enhancements to our commercial and sourcing strategies. We are optimistic around the possibilities and benefits that these initiatives could deliver later this year and beyond as we execute on these initiatives. We also made progress on our efforts to streamline our focus and divest non-core assets with the pending sale of scil animal health -- scil animal care for $125 million, and the announced joint venture in Spain with Distrivet, significantly enhancing our financial flexibility and reducing complexity in our TSA exit strategy for Spain.

And while Stuart will provide more details in his prepared remarks, I'm pleased to also report that we have successfully amended our credit facility late last week, delaying the step down of our net leverage covenant by one year until the second quarter of 2021. While we are confident that our 2020 outlook would have supported the terms in our previous credit agreement, the amendment as well as the anticipated scil animal care proceeds provides us with even greater flexibility to execute our strategy, as well as to continue to invest in the business for future growth.

Something that has not changed through this effort is our commitment to our customers and innovations. We are focused on delivering better experiences and outcomes, which includes relentlessly advancing our customer successes. We are also intently focused on leveraging technology across all facets of our business to lower costs, improve service and deliver greater value back to our customers, manufacturers and partners, and we believe additional investment in support and product capability strengthens our ability to drive deeper engagement with our sizable customer base.

As we think about 2020, we will build on these steps. We will continue to streamline and focus on the core drivers of our business in order to improve effectiveness and efficiency and to seek to deliver more consistent and profitable performance, particularly in North America. Reducing our cost to serve and better managing overhead are critical priorities as we look to deliver operational improvement and build momentum into the second half of the year. And our investments in global sourcing will lay the foundation for margin enhancement and reinvestment in the years ahead. We will also invest in our team and organizational and operational culture and to learn and better understand the needs of our customers and manufacturer partners in order to bring our collection of capabilities together in an integrated value proposition.

This foundational focus will make us smarter and stronger as a team and enable us to more effectively deliver on the global opportunity, moving forward. We are prioritizing and also making investments in our higher-margin proprietary products and solutions in 2020. This includes leveraging our customer access to provide more solutions for their compounding and specialty pharma service needs, which is an increase in customer and pet owner need that drives a fast-growing market where we are already an industry leader.

We also are making it easier for our customers and their clients to engage on our prescription management platform in 2020 and we are focused on driving even greater utilization as we more effectively leverage our manufacturer partners, our software integration and workflow, the e-commerce experience and our marketing capabilities to provide even greater value to all stakeholders.

We expect these initiatives will accelerate same-store sales beyond the 16% achieved on the platform in 2019 over time and based on investor feedback, we are committed to providing more disclosure on these efforts in other parts of the business beginning in Q1.

In summary, our mission, our strategic priorities and our 2020 plans are now sharper and focused. While there is still much work to be done to fulfill the promise and value, the Covetrus model can and will deliver. These past few months have demonstrated that the approach we are taking can yield positive results for all of our stakeholders. By continuing to enhance our culture and organization and relentlessly executing on our priorities, we will work collaboratively toward growth and success in 2020 and beyond.

I will now hand the call off to Stuart to provide a detailed review of our Q4 and full year 2019 results and our 2020 financial guidance.

Stuart Gleichenhaus -- Interim Chief Financial Officer

Thanks, Ben. And good afternoon to everyone. Thank you all for joining us today. I will focus my comments for the fourth quarter and the full year 2019 on our non-GAAP pro forma results when applicable, as these items provide the most insight into the underlying trends impacting our businesses. Please refer to today's press release for a more detailed description of our Q4 2019 and full-year GAAP financial results.

Covetrus net sales were just over $1.0 billion in Q4 and approximately $4 billion for the full year 2019. Non-GAAP pro forma organic net sales increased 4% year-over-year in Q4, and 3% year-over-year in 2019. As a reminder, non-GAAP pro forma organic sales growth includes Vets First Choice in both periods, excludes the impact of foreign exchange fluctuations and M&A and normalizes for net sales adjustments for manufacturer switches from direct to agency sales in the US, which can impact our year-over-year comparisons.

These results include the impact from the previously announced customer loss in North America and the impact in APAC, Asia Pacific that is, tied to a manufacturer moving to a direct sales model during the fourth quarter of 2018. Normalizing for these two events, underlying pro forma organic net sales growth would have approached 7% in Q4 and 5% for the full year of 2019.

Moving to our operating segment net sales performance. North America pro forma organic net sales increased 2% year-over-year in both Q4 and the full year 2019. The previously announced loss of a supply chain customer negatively impacted North America organic growth by 4% in Q4 and 3% for the full year.

Our supply chain pro forma organic net sales growth decreased modestly year-over-year in Q4 or increased 2% when the previously announced customer loss is excluded. Overall veterinary practice patient visit growth was modestly softer in Q4 versus Q3 in North America but in general, the market remains stable and growing. For all of 2019, our supply chain pro forma organic net sales growth in North America would have increased 2% when excluding the impact from this specific customer loss.

Total Vets First Choice net sales increased 37% year-over-year to $74 million in Q4 and 33% year-over-year to $270 million in 2019. We ended 2019 with more than 10,200 practices on our prescription management platform achieving our goal of ending the year with at least 10,000 practices. Beyond new enrollments, we continue to have success in driving growth from our existing customer base and as Ben mentioned, we delivered approximately 16% year-over-year same-store sales growth in 2019.

Importantly, all of our cohorts, which date back to 2012, continued to grow double-digits year-over-year during 2019. Turning to Europe, pro forma organic net sales increased 7% year-over-year in Q4 and 4% year-over-year for the full year 2019. Our UK pro forma organic net sales, which is our largest European market increased 5% year-over-year in Q4. Our UK business continues to benefit from the expansion of our relationship with a large corporate group, which we announced on our Q2 2018 call as well as continued solid execution by the team. We also experienced healthy pro forma organic net sales growth in most of our other European markets, including strong performances from our businesses operating in Ireland, Poland and the Czech Republic.

Moving on to APAC and the emerging markets, our team delivered an 8% year-over-year increase in pro forma organic net sales in Q4 and 2% for the full year 2019. Normalizing for the impact of a manufacturer that went to a direct sales model in this market in November 2018, the APAC and Emerging Markets segment grew 12% year-over-year in Q4 and 8% for the full year 2019, driven by continued growth in the number of customers served and strong performance in New Zealand and Brazil. Overall, this team continues to execute well and deliver robust financial results.

Before moving to the rest of the P&L, I wanted to share that our Form 10-K, which will be filed soon will also provide details on our annual net sales for business lines by geography, including supply chain, software and prescription management, which we hope the investment community will find useful. We remain committed to delivering increased transparency on the core drivers of our business.

Turning to the consolidated gross margin. Our GAAP gross margin was 18.7% in Q4 versus 17.6% in the prior year period. In Q4, we changed the classification of shipping expense at the legacy Vets First Choice business from selling, general and administrative expense to cost of goods sold to be consistent with the rest of our business. In Q4 the classification represented approximately $7 million shift from selling, general and administrative expense to cost of goods sold expense, and for the first nine months of 2019 the classification represented a $16 million shift. There was no impact on adjusted EBITDA.

On a pro forma basis which excludes the classification change and includes Vets First Choice for the prior year period, our gross margin would have been 19.4% in Q4 2019 as compared to 19% in the prior year. For the full year 2019, the pro forma gross margin would have been 19.3% as compared to 19.4% in the prior year, as growth in our higher margin services, including our prescription management platform and proprietary products were offset by moderate margin pressure in supply chain.

Our GAAP selling, general and administrative expenses were $214 million during the fourth quarter of 2019, and $808 million during the full year 2019. This includes the impact of the separation and merger, certain special items, and the ramping of operating expenses tied to infrastructure investments and the cost of being a stand-alone public company.

Non-GAAP adjusted EBITDA was $47 million for the fourth quarter of 2019 versus $52 million in the prior year period on a non-GAAP pro forma basis. The 10% year-over-year decrease on a non-GAAP pro forma basis was driven by an increase in the corporate selling, general, and administrative expenses, lower North American supply chain profitability, a $3 million headwind in Europe tied to certain general and administrative benefits in the prior year results that did not recur in 2019, and a $1 million overall negative impact from changes in foreign exchange.

These headwinds offset the year-over-year improvement in Vets First Choice profitability, the modest contribution from 2019 acquisitions and underlying organic growth in APAC and Emerging Markets during the fourth quarter of 2019. On a segment adjusted EBITDA basis, North America and APAC and Emerging Markets witnessed year-over-year growth while Europe declined year-over-year as a result of foreign exchange and the G&A dynamics just described.

For the full year, non-GAAP pro forma adjusted EBITDA was $200 million in 2019 versus $219 million for the full year 2018. Looking at the rest of the income statement, we had approximately $11 million in net interest expense in Q4. Our Q4 GAAP net loss was $37 million or a loss per share of $0.33 per diluted share, and $1 billion or a loss of $9.50 per diluted share for the full year 2019. Non-GAAP adjusted net income was $20 million during Q4 versus $21 million on a pro forma basis in the prior year period. For the full year 2019, non-GAAP pro forma adjusted net income was $82 million versus $94 million in the prior year impacted by the aforementioned decline in non-GAAP pro forma adjusted EBITDA in 2019.

Turning to the balance sheet and cash flow metrics, Covetrus generated $103 million in cash flow from operations during 2019, and $64 million in non-GAAP free cash flow when subtracting net purchases of property and equipment of $39 million. We ended Q4 2019 with $130 million in cash and cash equivalents, $1.2 billion in debt, and no borrowings against our $300 million revolving credit facility. Our net leverage ratio as defined by our credit agreement stood at approximately 4.6 times for the trailing 12 months ended December 31, 2019, well inside the 5.5 times covenant.

And as Ben mentioned earlier, late last week we entered into an amended agreement with our syndicate of lenders regarding the step down of our net debt to adjusted EBITDA ratio covenant that was scheduled to go into effect for the quarter ended June 30, 2020. Under the amended terms, we have pushed out the step down of our net leverage covenant for one full year with the drop to 5.0 times net debt to bank defined adjusted EBITDA, now beginning with the quarter ended June 30, 2021. Additional details of this amendment will be included in our Annual Form 10-K that we plan to file today.

Also subsequent to quarter end, we announced a definitive agreement to sell our scil animal healthcare business to Heska for $125 million. The transaction is expected to close on or about April 1, and we plan to use $60 million of the net proceeds to pay down debt including the payment of our debt on March 31, and including the prepayment of the remaining quarters of the year Q2 to Q4, quarterly under the credit agreement for mandatory required principal amortization payments. The balance of the cash will be used for general corporate purposes including reinvesting back into the business.

Turning to our 2020 guidance, which assumes a second quarter close for both the scil animal healthcare divestiture and the joint venture with Distrivet SA, and no significant supply chain disruption or economic impact related to the novel coronavirus disease 2019 or COVID-19, we forecast that our 2020 net sales of $4.025 billion to $4.125 billion. So repeating that again, $4.025 billion to $4.125 billion forecast 2020 net sales. Embedded in this outlook is non-GAAP pro forma organic net sales growth of 3% to 5% current foreign exchange rates and the impact from our M&A activity in 2019, and the previously announced 2020 transactions.

Our outlook incorporates modest expectations for our North American supply chain business, continued strong performance in our prescription management platform, and healthy underlying organic trends outside the US.

Turning to adjusted EBITDA. We are forecasting 2020 non-GAAP adjusted EBITDA in the range of $190 million $195 million, so $190 million to $195 million. In 2019, our non-GAAP pro forma adjusted EBITDA excluding the scil animal care business was approximately $193 million. The midpoint of our 2020 adjusted EBITDA guidance reflects relatively flattish year-over-year growth over the pro forma 2019 results when excluding the scil animal care business.

Before going into the details, I just wanted to reiterate our commitment to delivering against the expectations we set forth to the investment community as we seek to continue to build investor confidence after a more challenging start out of the gate. Underlying growth at the segment level for all our geographies in 2020 is offset by the timing impact from corporate overhead investments in 2019 associated with running a stand-alone business which did not begin to ramp until late Q2 2019.

While we do not provide specific quarterly guidance, we would point out that the first quarter, Q1, represents our most difficult year-over-year comparisons given the timing of overhead investments last year. And as a result, you should keep Q1 2020 adjusted EBITDA to approximately 20% of our full-year outlook. Keep this in mind that our Q1 corporate overhead adjusted operating expenses in 2019 were approximately $3 million as compared to the average of $12 million per quarter over the balance of the year and continuing into this year. This dynamic creates an approximate $10 million headwind when compared to Q1 2020 results with a comparable year-over-year period.

We expect to drive better operating leverage from our corporate adjusted operating expenses as we progress through the balance of the year. Lastly, and as more disclosed in our Form 10-K that will be filed shortly, management has identified a new material weakness related to taxes caused by issues associated with the transition to establishing expanded in-house capabilities. These issues impacted the implementation of the tax controls to review and analyze the company's income tax provision and deferred income tax balances, remediation plans for this issue as well as the information technology, general controls identified last quarter are under way and further disclosed in our annual report for 2019.

Now, I'll turn this back over to Ben for some brief closing remarks.

Benjamin Wolin -- President and Chief Executive Officer

Thank you, Stuart. Before opening the call for questions, I want to reiterate my excitement for the opportunity that we have ahead and these last four months have only solidified my thinking that we can build a formidable company in a large and growing end market. We've demonstrated as a company in Q4 that we are making progress and that we are on the right path forward. Q4 also showed that we are still in the early stages of that process and that much hard work remains to be done as we seek to fulfill the promise of this company. I'm energized by the team we have in place, and I'm looking forward to charting the path -- this path and delivering on the commitments we have set forth for all of our stakeholders in 2020 and beyond.

This concludes our prepared remarks and now I will turn the call back over to Nick to moderate the Q&A session.

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. So Andrew, please provide instructions for the Q&A session. And we are then ready to take the first question.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of John Kreger with William Blair.

John Kreger -- William Blair -- Analyst

Hi, thanks very much, Ben and Stuart, I think you guys said that guidance does not reflect any coronavirus impact. Can you just expand on what you're actually seeing as you've watched Q1 rollout? Have you seen any impact, particularly in Asia, but also in the US and Europe. Thanks.

Benjamin Wolin -- President and Chief Executive Officer

Sure thing. John, good afternoon. So yes, current guidance does not reflect any impact from coronavirus. To-date the impact has been minimal but as you know it's a very fluid situation that's changing day by day. And we are managing or monitoring the situation closely. I think that we're first and foremost focused on the safety of our employees and our customers and our suppliers and so we are being prudent in how we manage the business going forward but to date so far no material impact.

John Kreger -- William Blair -- Analyst

Great, that's helpful. Thank you. And then my second question is, can you give us a sense about where you think you stand with the US distribution operationally, it seems like that was where you have the key issues in '19, what more do you need to do there to get that business sort of back on its full footing? Thanks.

Benjamin Wolin -- President and Chief Executive Officer

Thanks. Yeah. So yes, the North American distribution business is one of the key areas that we had challenges with in 2019. I think as I pointed out in the prepared remarks, we've made some leadership changes on that front. And we had a decent quarter in Q4 that I would say was in line with our competitors and how the overall market prepared. In order to accelerate that business, we need to continue to focus on executing and delivering against the core value proposition of driving market share for our suppliers and providing exit and reduce cost to serve back to our customers. So early days, and as our guidance reflects, I would say we have modest expectations for that business, but also a business that we're expecting to have more stability out of in 2020.

John Kreger -- William Blair -- Analyst

Okay, thank you.

Operator

Thank you. And our next question comes from the line of Nathan Rich with Goldman Sachs.

Nathan Rich -- Goldman Sachs -- Analyst

Great, thanks for the question. Ben maybe starting with the Vets First platform, I think you mentioned kind of potential to accelerate same-store growth on that platform. It seems like you've also continued to see to add new practices of the platform. So I'd just be curious kind of as we think about into 2020 and beyond, kind of what you see as the key opportunities for that business and if you have any comment on profitability. It sounds like we might get more disclosure starting in Q1, but could you help us think about how the profitability of that business has trended in 2019?

Benjamin Wolin -- President and Chief Executive Officer

Sure thing. So, Nathan in terms of 2020 in our areas of focus, we're very much focused on what we internally called engagement, which is getting active customers to continue to utilize or expand the use of the platform. While we've made nice progress at 16% year-over-year same-store sales growth, we certainly believe that we can achieve more than that when we shift the majority of our attention to engaging our existing customers. That, of course, doesn't mean that we're not going to have new customers enroll and we would expect total net enrollments to increase on a year-over-year basis, but the majority of the organization's focus is really on utilization of the platform.

And we believe frankly that better utilization on the platform of existing customers will only make enrollment of new customers easier and more cost-efficient going forward. In terms of your second question around profitability, I'd say in 2019 we were profitable, but it was de minimis in the big scheme of things, given the overall EBITDA of the business. But there is clearly a focus of our business of improving or proving out that incremental revenue can flow through to EBITDA in 2020.

Nathan Rich -- Goldman Sachs -- Analyst

Great, thanks. If I could just ask a quick follow-up on margins, it seems like the guidance for 2020 assumes margins roughly flat to kind of where they ended 2019. So I'd just be curious kind of, you talked about opportunities to kind of streamline operations. I noticed you didn't mention cost synergies specifically, but could you maybe just talk through opportunities you see on the cost side and maybe balance with any investments you need to make on the business and any form factors we should keep in mind as we think about the margin outlook for 2020? Thank you.

Benjamin Wolin -- President and Chief Executive Officer

Sure. So a couple of thoughts on margins. Yes, you're right, we're expecting margins to remain largely consistent from 2019 to 2020. There is a couple of different components when you think about the overall blended margin, so increasing prescription management of the former Vets First Choice platform is a margin improvement for the business, which is offset by potential margin compression in other areas of the business, largely driven by customer or manufacturer consolidation. I think, however, what we are focused on from an operational standpoint is getting more efficient either from how we organize ourselves or how we source product from our suppliers to offset some of those margin headwinds that could occur in 2020.

Nathan Rich -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Erin Wright with Credit Suisse.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. Has there been any changes in your vendor relationships that are built into expectations for 2020? Any sort of agency or buy-sell relationships that have changed? And then can you quantify also the opportunity associated with along recent rationalization, their distributor relationships and how maybe the transaction could also benefit you as well or any other vendor relationship dynamics that you can speak to? Thanks.

Benjamin Wolin -- President and Chief Executive Officer

Yes. Hi, Erin. Nice to hear from you. No significant changes with our suppliers in terms of how we do business with them. In terms of specifically Elanco's consolidation of their distributors, obviously, we are pleased to continue to expand how we do business with them. However, it's not a huge number of distributors nor a huge piece of the business. So marginal pick up but always good to like I said, expand our business with one of our key suppliers.

Erin Wright -- Credit Suisse -- Analyst

At this point, what is your guidance assume in terms of the North American market growth and demand trends? Do you anticipate stabilization over the course of 2020 and how are you thinking also about the competitive landscape at this juncture, particularly as it relates to the alternative channels? Thanks.

Benjamin Wolin -- President and Chief Executive Officer

We are looking for stability in 2020 and growth pretty much in line with what we experienced in the back half of 2019. In terms of alternative channels or just even competition within the distribution market, we feel well-positioned and believe we have a unique set of assets. Obviously, we need to execute and get the benefit of the combined asset to really differentiate our business over time. But we are looking forward to a year in which execution starts to show up in the numbers and we can report out on that success in future quarters to come.

Erin Wright -- Credit Suisse -- Analyst

Okay, great. Thank you.

Operator

Thank you. And our next question comes from the line of Jon Block with Stifel.

Jon Block -- Stifel Nicolaus and Company, Inc. -- Analyst

Hey guys, good afternoon. The more simple one first maybe. Ben, just the timing of the VFC rollout in international markets, is that something that we might see in late 2020 or you all about sort of engagement and that might wait until 2021?

Benjamin Wolin -- President and Chief Executive Officer

Hey, Jon, we are very focused on engagement on the Vets First Choice platform as well as making sure that we're operating with excellence across all of our business so one of the areas that we slowed down on was rollout of the platform. And I would not anticipate any launch in 2020 although I would expect to see capital spend against I would call laying the foundation for that opportunity in the future.

Jon Block -- Stifel Nicolaus and Company, Inc. -- Analyst

Okay, great, very helpful. And then the increased transparency is great but I think even in the past you did give a lot about value capture in details there. But you also talked about simplifying the organization and targets with Wall Street. So I'm just curious, are you going to break those out anymore going forward? And then part two to that same question is with the flattish 2020 margins, but I'm guessing some synergy capture, does it imply compression for the underlying business? And maybe you can just expand upon that. Thanks, guys.

Benjamin Wolin -- President and Chief Executive Officer

Sure thing. So as I said either in prepared remarks or in individual meetings, we find the value capture metric a bit arbitrary because it forces you to try to allocate savings to one activity versus the other and you spend a lot of time trying to come up with whether your underlying business or some new activity. And so what we decided is we're going to not give a value capture number but instead just focus on the overall company EBITDA and our progress against delivering against that EBITDA target.

That doesn't mean that there aren't synergy opportunities and that we aren't very focused on finding those opportunities, whether it be on the sourcing side of the business where we see a lot of progress, especially if Vets First Choice continues to expand and take advantage of the North America buying power, I should say, and certainly other areas of focus. In terms of the outlook and the implied compression gross margins, we expect to remain relatively consistent from 2019 to 2020. The big delta from an EBITDA margin would be the corporate overhead -- overhang especially when you're looking at a year-over-year basis from Q1 to Q1.

So Stuart mentioned in his prepared remarks that corporate overhead expense is almost $10 million greater in Q1 2020 versus Q1 of 2019 and that's not reflective of the increase in spend from the back half of 2019 to 2020. It really is consistent with that trend, but for a variety of reasons on a pro forma basis, the Q1 corporate overhead number was greatly reduced and under representative of what was actually required on a go-forward basis.

Jon Block -- Stifel Nicolaus and Company, Inc. -- Analyst

Great. Thanks, guys.

Operator

Thank you. And our next question comes from the line of David Westenberg with Guggenheim.

David Westenberg -- Guggenheim -- Analyst

Hi, thanks for taking my question. So just on the guidance. I appreciate you don't give quarterly revenue guidance, but as I'm looking at last year. I am looking at kind of the first half, Q1, Q2. It looks like there was negative growth there versus the back half of the year. So the temptation in terms of modeling is to go with where the easiest revenue comps are. So maybe if you can give us a little bit of color on how we should think about cadence. I'm not looking for anything quarterly here. I'm just thinking about how we should be modeling the way -- the cadence in 2020. Thank you.

Benjamin Wolin -- President and Chief Executive Officer

I think if you take a step back and look at the different component parts of the business, which I think is maybe a more useful way of thinking about our growth. In the US, we're very much looking at stability on an annualized basis. Certainly, on any individual period you could see some volatility, but we're expecting a stable revenue base. In Europe and APAC, I think we will continue to see growth coming from those businesses in line with the growth that we saw last year and feel good about the early progress in 2020.

And then Vets First Choice, we're expecting to see growth continuing in line with what we experienced last year. And as Stuart mentioned in the prepared remarks what was especially nice to see was in Q4 a growth rate of 37% which was higher than the annual growth rate of 33%. So we saw an acceleration on a larger revenue base, which a lot of companies can't do, especially when they hit scale. So that's how we think you should be thinking about the different revenue growth rates for the various businesses.

David Westenberg -- Guggenheim -- Analyst

Thanks. Just a little continuation of Erin's question around corporate. And I appreciate there is no specific corporate or new accounts to call out for 2020 but can you maybe talk about if there has been a change in terms of corporate strategy? And then this doesn't necessarily mean, refer to corporate strategy but can you talk about how things are going in terms of integration of legacy Vets First Choice with legacy Henry Schein? Is that helping leverage with corporate groups and just customers in general? Thank you.

Benjamin Wolin -- President and Chief Executive Officer

Yeah, so following up to Erin's question and your question, we've seen stability on the supplier side and stability on the customer side, especially with corporate. So no major changes there as well. I think that we have ways to go, to be honest, on both getting the value of a combined asset as it relates to our customers as well as deeply aligning with our customers or integrating with our customers in a way that is really unlocking new potential. So right now, I would characterize our business is where we have gotten some of the benefit of being together, but largely, we are still transacting along the way that we did when they were separate entities.

And that is my expectation for a lot of 2020 that that will still remain the same as we continue to focus on driving the individual value and really kind of accelerating into 2021 starting to synchronize those businesses as we figure out the exact right commercial strategy and how we partner with our customers to unlock value for both of us.

David Westenberg -- Guggenheim -- Analyst

Thank you for taking the question. I'll ask the rest offline.

Operator

Thank you. And our next question comes from the line of Andrew Cooper with Raymond James.

Andrew Cooper -- Raymond James -- Analyst

Thanks, guys. A lot has been asked already so I'll be quick. But I guess when we think about shifting the focus of Vets First Choice and going more toward reaping the benefits of the new accounts you've already added, how do we think about sort of what you're changing from a sales incentive perspective and how you take what was a really successful group of kind of hunters and turn them into farmers and how do you change those incentives? Any help there would be great.

Benjamin Wolin -- President and Chief Executive Officer

Happy to shed some light on that, Andrew. I think it's pretty simple, we're shifting the incentive structure to focus on engagement versus just new enrollments. As you know, new enrollment is great but in a sense, it's a free trial or it's really just the top of the funnel and until someone engages on the platform, you don't really drive any revenue both for your customer as well as for yourself. So a lot of the sales force and marketing team, it's taking the activity that they've learned through the years in terms of driving engagement by really making it the primary focus of the business and partnering with our customers in a deep way to drive volume for that business.

And I think one of the nice things if you look at our 10,000 plus customers, they obviously don't all perform the same. We have like a lot of businesses, a group of customers that are driving outsized proportion of revenue and it's those successes that we're modeling a lot of the engagement activity that we're focused on. So if we can get the bottom half of that 10,000 customers to look a lot more like the top half we're going to not only really ramp the revenue for the business but also help drive the profitability of our business in a pretty significant way.

Andrew Cooper -- Raymond James -- Analyst

Okay, that's helpful. And then lastly, when we think about, I think it was good to see the scil divestiture and will be good to see that closed, but as we think about sort of the asset base right now and taking that kind of step back and thinking about what needs to be there and what doesn't, is there anything else that comes out to mind and what should we be expecting from a timing perspective if there is anything? And then in terms of use of proceeds how to think about debt pay down pacing from that perspective?

Benjamin Wolin -- President and Chief Executive Officer

Yeah so I'll answer the first part of that question, and hand the second over to Stuart to address the use of proceeds. But so in terms of the asset base, nothing imminent to announce. We're obviously always focused on driving the right return for our shareholders but with the sale as well as the covenant amendment, we feel very comfortable where we are at and feel like we have the room to operate the business in the way that we want.

Over time we definitely want to decrease the net leverage ratio but for 2020 and 2021, we feel like we're in good shape and we'll continue to look opportunistically at opportunities to improve the balance sheet. I'll let Stuart really answer the question about use of proceeds and how we think about that going forward.

Stuart Gleichenhaus -- Interim Chief Financial Officer

Sure. With the scil transaction was a good example. We had $125 million gross proceeds on that after transaction fees, taxes and so on. It's less than that and we've chosen to an agreement with the banks to apply $60 million of that toward the reduction of the term debt. And in fact, we have prepaid or will pay early the remaining principal payments for the rest of the year, March 31, June 30, September, December of $15 million each against that. So it was a good use of proceeds for us in the short term. Also gave an immediate deleveraging effect for the lenders as well as the shareholders to see that.

And so that was a good example of what we chose to do in this particular transaction. As Ben mentioned there's not any other particular transaction right behind that. So there's really nothing to talk about or discuss about that, but we did think for all constituencies, it made sense to use some of the proceeds from scil to deleverage where we sat today.

Andrew Cooper -- Raymond James -- Analyst

Great. I appreciate it. Thanks, guys.

Stuart Gleichenhaus -- Interim Chief Financial Officer

Yeah.

Operator

Thank you. And our next question comes from the line of Erin Wright with Credit Suisse.

Erin Wright -- Credit Suisse -- Analyst

Great, thanks. I'm curious how successful you've been in converting agency sales to the VFC platform that presumably was a considerable component of the original VFC synergy opportunity. Is that something that's gaining any traction now or is that something that's more of a longer-term opportunity just given some of the differences in economics there for an agency sale across legacy Schein versus VFC? Thanks.

Benjamin Wolin -- President and Chief Executive Officer

No, I would say that there hasn't been tremendous traction there nor would I expect huge opportunity there going forward.

Erin Wright -- Credit Suisse -- Analyst

Okay, thanks. And then also, do you see a meaningful indirect I guess benefit from MAT pricing that was implemented across some of the alternative channels from competitors? How much is that influencing your profitability in the latest quarter, for instance, and how should we be thinking about that sort of dynamic as we head into -- I guess as we lap that MAT pricing implementation midway through this year? Thanks.

Benjamin Wolin -- President and Chief Executive Officer

Yeah. I would say it's hard to quantify the impact of MAT pricing on the business, but we certainly believe that it is beneficial to have more price parity between us and the other channels out there. In some cases, the platform is still priced higher on an individual product-by-product basis, but the price differential is much smaller even in those cases and so we don't believe that there is a large enough price delta to actually drive the consumer from one channel to the other. So I couldn't specifically say that MAT pricing drove any increase in profitability on the platform in the near term, but I also would say that it's certainly a net positive for the business and we expect it to continue to be so going forward.

Erin Wright -- Credit Suisse -- Analyst

Okay, great. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Nicholas Jansen -- Vice President of Investor Relations

Benjamin Wolin -- President and Chief Executive Officer

Stuart Gleichenhaus -- Interim Chief Financial Officer

John Kreger -- William Blair -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Jon Block -- Stifel Nicolaus and Company, Inc. -- Analyst

David Westenberg -- Guggenheim -- Analyst

Andrew Cooper -- Raymond James -- Analyst

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