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Covetrus, Inc. (NASDAQ:CVET)
Q2 2020 Earnings Call
Aug 11, 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 Q2 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nicholas Jansen, Vice President of Investor Relations. Please go ahead, sir.

Nicholas Jansen -- Vice President of Investor Relation

Thank you, Ian. Good afternoon,and thank you for joining us for our second quarter 2020 earnings conference call. I'm Nick Jansen, Vice President, Investor Relations at Covetrus. Joining me on today's call are Ben Wolin, our President and Chief Executive Officer; and Matthew Foulston, our Executive Vice President and Chief Financial Officer. Ben and Matthew will begin with prepared remarks, and then we'll be happy to take your questions.

During 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, expect, believes, should, 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 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 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.

You can find this afternoon's press release announcing our second quarter 2020 results and the accompanying slide presentation for this call on ir.covetrus.com. We will continue to use our website to distribute important and time-critical company information. The press release and slide presentation also contain further information about the non-GAAP financial measures that we will discuss during this call. Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results.

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

Benjamin Wolin -- President and Chief Executive Officer

Thanks Nick, and good afternoon, everyone. We hope everyone listening in on today's call is safe and managing through the challenges created by this pandemic as well as possible. I hope you are also staying engaged with your community as we all commit to drive real and lasting social change.

To start today's call, I would like to first acknowledge and express gratitude to all of the veterinarians and animal health professionals across the globe who have operated as an essential service during these difficult times, worked extended hours and successfully pivoted their businesses, all for the well-being of their clients. Their passion is what drives our organization and keeps us energized even in these uncertain times.

I'm also proud to see our Covetrus team in action as they continue to adapt and respond to COVID-19 uncertainties, drive forward with our mission and commitment to our customers and their clients, and deliver exceptional results in the face of adversity. While there is still much work to do, momentum is building inside our organization, and I'm very optimistic about our future.

I will review three topics on today's call: our overall health as an organization, the progress we are making on executing on our strategic priorities, and how we are investing in our future as we look to build upon our momentum and focus on delivering long-term sustainable growth. As Nick said at the opening of the call, we've included a presentation to accompany our prepared remarks, and I will be referencing those slides during my comments.

So starting with Slide 3 and an update on our response to COVID-19. First and foremost, supporting the health and safety of our employees remains the top priority. The pandemic has affected our entire global footprint, and its impact continues to ebb and flow regionally. Our business has monitored these trends and we have adjusted our protocols accordingly in adherence with local regulations and restrictions. Our front line workers at distribution centers and pharmacies executed extremely well during Q2. And our strong relationships with our supplier partners has enabled us to successfully serve our customers, even in light of these challenging times. And despite more than 60% of our workforce at its peak working from home during Q2, our teamwork improved, and we have reset our working norms to harness this momentum as we continue growing the business.

I was particularly proud of how the team rallied around our cost mitigation actions during Q2, including our voluntary pay reductions. Our commitment to each other and also to our customers and their clients never wavered during the pandemic and enabled us to continue to invest in service, our team's capabilities and innovation despite the ongoing uncertainties created by COVID-19.

As parts of the world continue to reopen, we are taking a conservative approach, informed by the realities of local conditions and local guidelines. Our plans support a deliberately slow and gradual return of our employees to our offices, as we are focused on building upon recent momentum, while keeping our team and our customers' businesses as safe and healthy as possible. As I will describe in some detail later in my remarks, we are focused on the path forward, driving our technology-enabled strategy and synchronizing our capabilities to take advantage of the opportunities ahead.

Now, turning to the quarter on Slide 4, while our company and the animal health community at large faced adversity as a result of COVID-19, our focused approach and our commitment to our employees, our customers and innovation enabled us to build upon recent momentum and to deliver strong quarterly results. This included 5% year-over-year organic net sales growth and 19% year-over-year adjusted EBITDA growth in Q2, both of which significantly exceeded external expectations. Our strong performance cut across all business segments and reflected the quicker than expected end market recovery across most of our geographies. From an execution standpoint, I specifically want to highlight our organic net sales growth in our distribution businesses, an accelerated contribution from our prescription management business, early benefits from recently implemented sourcing initiatives, and disciplined cost management, including certain COVID-19-related actions.

Now, turning to our end-market, as seen on Slide 5, after the challenging month of April, especially the first half of April, the US market for veterinary services recovered nicely in May and accelerated in June as COVID-19-related impacts lessened and the pent-up demand from appointments that were postponed during late March and April were scheduled. Additionally, a stronger flea and tick season also contributed to the elevated growth versus the prior year.

June was a particularly strong month for Covetrus as the marketplace and industry segment trends were at or near pre-COVID-19 levels, a dynamic that largely continued through July. While there still is week to week volatility, particularly in markets experiencing a second wave of coronavirus cases, and there are many unknowns as we head into the fall, we have been encouraged by the resiliency of consumer demand and the animal health community at large, keeping us cautiously optimistic about the overall end-market backdrop for our business through the second half of this year. Additionally, the emerging trends tied to the pandemic, including veterinarians embracing technology to stay connected to pet owners, are central to our core strategy, positioning us well for the future.

Turning to Slide 6, we outlined four priorities earlier this year to drive our strategy forward: one, creating a high performing customer-centric culture; two, maximizing effectiveness and efficiency; three, driving proprietary products and solutions; and four, expanding global capabilities and developing sourcing excellence. During Q2, we took substantial steps as an organization to deliver on these priorities. And while there is still a ways to go to realize our potential, I am pleased with the progress to-date, the energy inside our organization and the momentum we are seeing across our business in a number of areas.

First, building a shared culture of success and retaining and recruiting talent has and will continue to be a critical focus of ours, and we made notable progress on this front during the second quarter. For example, our recently completed employee organizational health index survey highlighted the success we have made within the organization over the last eight months, with our health score moving from below the 50th percentile to being just shy of the top quartile among more than 1,000 global companies. This is a rather remarkable increase in such a short period of time. We will harness this momentum and continue to build, grow and improve how we work together and how we coordinate our capabilities as a team. We also added several senior leaders to crucial roles, all of whom have significant experience in driving growth and transformation as we look to accelerate our efforts.

Second, our commitment to improve effectiveness and efficiency, while delivering more consistent and profitable performance in our North America distribution businesses continued during the second quarter despite the COVID-19 headwinds. In Q2, our distribution business delivered 2% organic net sales growth despite a deep -- a steep decline in April. An external third-party data indicates our US market share was relatively stable during the quarter, a testament to the progress we have made as we have refocused our efforts on this business. And this focus has seen not only in US distribution, but across all facets of our organization as we were able to drive organic gross profit dollar growth in Q2, while also reducing our adjusted operating expense versus the prior year. Cost containment and resource allocation remain key priorities for our team.

Another highlight I would point out is the accelerating same-store sales growth and profit contribution delivered by our prescription management business. COVID-19 certainly accelerated the positive trend our internal engagement efforts are delivering. However, the 37% same-store year-over-year net sales growth achieved in Q2 and the robust performance out of our 2019 and 2020 cohorts as compared to prior years showcase the significant opportunity we have in growing our customers' market opportunity and driving incremental demand for our supplier partners. On this point, I would add that we also achieved a significant milestone in mid-July when we served our 1 millionth pet owner in 2020 on behalf of our customers, which compares to 920,000 pet owner clients we served for all of 2019.

Undoubtedly, some of the COVID-19-related growth will subside. But we believe that there has been an incremental positive shift toward the online channel and to our prescription management business. We are enthusiastic about the durability of new clients who are now buying through their veterinarians' online storefronts powered by Covetrus, the sustainability of deeper engagement and awareness of our demand generation capabilities by our customers and the increased partnerships we now have with manufacturers who are embracing the online channel. Importantly, our prescription management business continues to scale their operations during this period of rapid growth, with adjusted EBITDA more than doubling from Q1. With the strong growth we are seeing in this business, we are further investing in service and innovation, while expanding our pharmacy capacity in Q3 to catch up with increased demand.

We are also making progress on many of the global initiatives we have embarked on earlier this year in partnership with our third-party advisor, including some promising early returns on our sourcing initiatives. As we further centralize and coordinate purchasing activity and leverage our global scale, we expect to improve our operating efficiency moving forward. We also continue to advance and make progress on the technical development work needed to expand the prescription management platform outside the United States, as we continue to see significant interest from our customers and suppliers in those markets during COVID-19.

Now, turning to Slide 7, let me address how we are investing in our future to further establish our position as the leading technology-enabled services company in the animal health industry. While near-term uncertainty tied to COVID-19 still exists and there's still plenty of work to do to further develop our core product and service offerings, we are using our enhanced teamwork and collaboration, market momentum and strong half results to invest more time and energy planning on the next phase of our three-year plan, the synchronization of our technology-enabled services and products. This includes tighter coordination between our prescription management and practice management software capabilities, as we look to deliver a unified cloud-based product solution to the market. This integration, when coupled with our other investments in e-commerce, inventory management and warehouse systems and enhanced distribution capabilities, will support a coordinated technology-enabled end-to-end experience for our customers with a focus on driving better healthcare outcomes, efficiency and revenue growth for veterinarians across the globe. This complete solution will not only propel our customers' business forward but also drive incremental demand for our manufacturer partners as we seek to further enable their omni-channel strategies and expand their market prospects.

I am enthusiastic about our ability to drive the business forward as we are entering the next phase of our strategic plan with continued focus on building a shared culture of success, driving efficiencies and executing against the core business drivers that are now ingrained into our day-to-day operating model. As we deliver on our objectives and continue to scale our operations, we will have the opportunity to allocate greater resources toward driving our growth agenda with a goal of making it even easier and more profitable to do business with Covetrus. Additionally, with our improved liquidity position, we can now become more opportunistic in our approach to capital deployment, all with the focus of adding scale and deepening our relationships with our customers.

In closing, our team is motivated, our industry is resilient, our strategy is clear and our business has momentum. We are confident in our path forward as we head into the second half of 2020 with visibility and optimism that the foundation we have in place puts us in a position to deliver our long-term opportunity.

I will now turn the call over to Matthew to provide a financial review of our second quarter.

Matthew Foulston -- Global Chief Financial Officer

Good afternoon, everyone. Thanks for joining us today. In my first two-plus months since joining Covetrus, I've had the chance to meet virtually with many of you, looking forward to the day where I can meet with all of our analysts, current and prospective shareholders and other stakeholders in person. I'm really excited by the opportunity we have at Covetrus as we build on the momentum in our business and deliver on our financial commitments for our shareholders.

I will now review our second quarter 2020 results. The focus of my comments will be on our non-GAAP results where 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 second quarter GAAP results.

As Ben mentioned and summarized on Slide 9, Q2 was a strong quarter for Covetrus across nearly all financial metrics, as we significantly exceeded external net sales and adjusted EBITDAR expectations. Our operating execution, measured response to COVID-19 and the accelerating growth within our higher-margin prescription management business drove a significant improvement in adjusted EBITDA and fueled 90 basis points of year-over-year adjusted EBITDA margin expansion. Importantly, our financial condition meaningfully improved as we ended Q2 with more than $700 million in available liquidity and net leverage of 3.5 turns.

Turning to the details and starting at the top of the income statement on Slide 10, Covetrus' net sales were approximately $1.03 billion in Q2. COVID-19 had a negative impact on net sales during the month of April where many of our customers experienced declining client visits tied to certain global measures designed to slow the spread of COVID-19. Additionally, as previously disclosed, certain customer inventory stockpiling activity that occurred in several international markets during the month of March in connection with COVID-19 pulled forward more than $30 million of net sales into Q1 from Q2. However, our customers across most of our geographies began to see an improving operating environment in the latter half of April, and this trend continued through the balance of Q2 with performance during the month of June particularly strong as demand recovered to at or near pre-COVID-19 levels. The end-market recovery, our strong sales execution and the above-trend growth delivered in prescription management enabled us to deliver 5% year-over-year non-GAAP organic net sales growth in one of the more challenging quarters in recent memory of the global business community.

Turning to Slide 11, total Company consolidated non-GAAP adjusted EBITDA was $63 million for the second quarter of 2020 versus $53 million in the prior year period. The 19% year-over-year improvement was driven by an increasing contribution from our higher margin services, including prescription management, and cost containment measures implemented during the quarter in response to the COVID-19 uncertainties. Excluding the scil animal care business divested on April 1, the deconsolidation of our Spanish business and the negative impact of foreign exchange, non-GAAP adjusted EBITDA increased 25% year-over-year, reflective of the meaningful progress we have made across our businesses, our focus on executing against our strategic initiatives and cost containment measures.

Moving to our operating segment performance, beginning on Slide 12. North America organic net sales increased 10% year-over-year in Q2 and segment adjusted EBITDA increased 28% year-over-year with margins expanding 130 basis points versus the prior year. The combination of above-trend prescription management growth, continued stability in our distribution sales and disciplined expense management drove the improvement during the second quarter.

Drilling deeper into North American segment trends, our distribution business organic net sales increased 2% year-over-year in Q2 with improving trends in May and strong performance in June offsetting the sales decline witnessed in April tied to COVID-19. Notwithstanding the impact of COVID-19 on the market, we believe our quarterly results demonstrated another quarter of stability and underlying business dynamics. And external third-party data indicated that our distribution business market share was unchanged during the quarter, following a more challenging 2018 and 2019. The distribution team continues to execute well, and our focused approach is paying dividends as we work with our customers to drive their businesses forward in these uncertain times.

Our software business in North America also successfully managed through the adversity created by COVID-19 with good outcomes delivered alongside our telemedicine launch in April.

Turning to Slide 13, with the acceleration in growth and profit contribution from prescription management or legacy Vets First Choice, we thought it would be impactful for our investors to better understand the significant progress this business has made since the merger in February of 2019. During the second quarter of 2020, net sales increased 66% year-over-year to $110 million, and we ended June with approximately 10,900 practices [Phonetic] on our prescription management platform.

Prescription management net sales continue to benefit from the launch of new customer and client engagement strategies. And the business further strengthened above its positive trend line in Q2 due to COVID-19 as e-commerce for prescription and medications spiked amid the pandemic. In the aggregate, same-store prescription management platform sales, defined as veterinary practices enrolled on the platform in 2018 or earlier, increased 37% year-over-year during Q2, an acceleration versus the Q1 year-over-year growth rate of 25%.

We are also seeing strong performance out of our 2019 and 2020 cohorts, which are on pace to be our most productive [Phonetic] cohorts based on their current revenue ramp and customer [Technical Issues]. It is clear that the strong relationships that our distribution sales reps have with their clients is resulting in more engaged and productive enrollments. We are also very pleased with how the prescription management business is scaling with Q2 adjusted EBITDA of $11 million, a $12 million improvement versus the modest loss in the prior year and a $7 million improvement sequentially. We plan on investing in this business in the second half of 2020 to position us for further growth in '21 and beyond.

Turning to our European business segment on Slide 14, organic net sales decreased 2% year-over-year in Q2 as COVID-19 disruption and the pull-forward into March of an estimated $27 million of expected April net sales impacted results during the quarter. Organic net sales in the first half of 2020 increased 5% year-over-year, reflecting our healthy market position and the strong sales execution our European team delivered during the first half of the year despite the pandemic.

We had strong Q2 net sales performance from our businesses operating in Romania, Poland and the Netherlands. In the UK, our largest European market, net sales declined 11% organically year-over-year during the second quarter as the country's recovery from COVID-19 has lagged other European markets due to the duration of lockdown measures. However, we did experience better sales late in Q2 and remain optimistic about our prospects in this market, as well as all of the other markets throughout Europe for the balance of the year.

Turning to profitability, European segment adjusted EBITDA decreased 16% year-over-year. Excluding FX and the scil divestiture, segment adjusted EBITDA was relatively unchanged year-over-year as the modest M&A contribution and cost containment efforts offset the COVID-19 sales disruption and the Q1 pull-forward impact of $3 million.

Noving onto our APAC & Emerging Markets segment as presented on Slide 15. Our team delivered a 4% year-over-year increase in organic net sales in Q2 despite an estimated $7 million of customer stocking pull-forward that occurred in March in connection with COVID-19. In the first half of 2020, organic net sales increased 12% YoverY and reflect the momentum the region has generated, as this team continues to execute well and deliver robust financial results. During Q2, we saw notable strength in Australia and Brazil, which offset weakness in New Zealand, given the lockdown measures implemented in that market.

Segment adjusted EBITDA increased 25% year-over-year during Q2, driven by strong operating leverage from better than expected net sales activity and the benefit from cost actions taken in response to COVID-19. Growth was even stronger when normalizing for the estimated $1 million EBITDA pull-forward into Q1 related to the inventory stocking activity.

Our total Company Q2. GAAP net income was $54 million or $0.40 per diluted share, which includes the benefit of a $70 million after-tax gain from the sale of the scil animal care business that closed in early April. Non-GAAP adjusted net income, which excludes the aforementioned gains as well as other special items during the quarter, was $30 million during Q2 versus $24 million in the prior year period.

Turning to our balance sheet on Slide 16, we meaningfully strengthed the Company's financial and liquidity position during the second quarter through the sale of the scil animal healthcare business and the issuance of perpetual convertible preferred stock to CD&R, which combined added almost $350 million in cash to the Company. As a result of these actions and strong working capital management during Q2, net debt at the end of June improved by $440 million compared to the end of the first quarter. Our reported net leverage at the end of the second quarter was 3.5 times compared to 5.9 times at the end of the first quarter. Additionally, we ended the second quarter with more than $700 million in available liquidity compared to $305 million at the end of the first quarter and with 1.7 turns of headroom under our net leverage covenant as defined by our credit agreement.

Finally on Slide 17, as we look ahead, we continue to balance short-term uncertainty tied to COVID-19 and the potential impact on our customers and their clients with our desire to build upon our recent momentum and to make the investments needed to execute our strategy and accelerate our sales and profit trajectory.

With this framework in mind, we now anticipate adjusted EBITDA in the range of $200 million to $210 million for 2020, which is $10 million to $15 million above our pre-COVID-19 outlook issued in early March before we withdrew guidance in April amid the initial uncertain days of the pandemic. This guidance presumes no new major lockdowns tied to COVID-19, any substantial changes to the current environment, and the animal care remains an essential business. It does incorporate the normalization of certain expenses that were either eliminated, reduced or deferred in Q2, given the significant uncertainty at the start of the global pandemic. Additionally, with the growth in prescription management, we are making certain investments in people and capacity to support its trajectory. Our underlying assumptions for second half of the year also includes stability in our global distribution businesses, a gradual return to more normal travel activity and benefits tied to our sourcing initiatives.

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

Benjamin Wolin -- President and Chief Executive Officer

Thanks Matthew. Great first call. Before my closing remarks, I want to take a moment to announce that Nick Jansen, who so many of you on this call have worked with and know so well, has recently been promoted to Vice President, Strategy and Corporate Development. We are extremely enthusiastic that he has decided to take this newly created role where we can leverage his deep understanding of the industry to help shape our path forward. I am excited about the additional contribution Nick will bring to our organization, and we thank him for building out our Investor Relations program as a newly formed public company. Over the next couple of months, Nick will be doing double duty until we recruit and onboard his replacement with the expectation that the transition will be complete by the end of this year.

In closing, and as outlined on Slide 17, I am extremely proud of our team's exceptional efforts and accomplishments during Q2 to support our customers around the globe during COVID-19. Our strong second quarter financial results demonstrate our progress, and our 2020 guidance showcases the confidence we have in our business. While uncertainty tied to the global pandemic and the pace and recovery of our end-market remain, our continued investment in our organizational health, innovation and customer success puts us in a strong position to capitalize on our strategic opportunities and to deliver shareholder value in the quarters and years ahead.

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

Nicholas Jansen -- Vice President of Investor Relation

Thanks Ben for the kind words, and I'm enthusiastic about the newly created role. Now, we'll begin the Q&A section of our conference call. 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 Ian, please provide instructions and we are then ready to take the first question.

Questions and Answers:

Operator

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

John Kreger -- William Blair & Company -- Analyst

Thanks very much. Thanks guys. My question, Ben, is if you think about the -- just kind of the TAM opportunity in home delivery, given the really good growth you guys have seen, can you give us a sense about how much of the market do you think today is still residing within traditional in-clinic purchases versus what's already migrated to home delivery versus what's migrated, let's say, to the full kind of traditional e-commerce channel? Just trying to see how far it's already moved versus where you guys think it could go over the longer term. Thanks.

Benjamin Wolin -- President and Chief Executive Officer

Sure thing, John, and good to hear from you again. I think that predominantly, the market is definitely still in-clinic, and so that there is a tremendous opportunity for prescription -- online prescription management and home delivery. I would point out, however, that all of our data shows that when a customer has implemented prescription management and is utilizing it, we're actually growing the market and that in-clinic sales stay stable and continues to grow and prescription management -- our online prescription management is really expanding their market opportunity or driving compliance with patients. So, our view is it's not really cannibalistic. It's an opportunity to grow the pie and make sure that veterinarians don't get disintermediated by other channels. But in short, tremendous running room from where the business is, both in terms of the number of customers we address, the number of engaged customers that we have and just the adoption of the platform from a global perspective.

John Kreger -- William Blair & Company -- Analyst

Great, thanks. And then one quick follow-up. The chart where you showed the US market, which is very helpful, from your perspective, have we reached a normalization? Or do you think that we're still kind of seeing a little bit of a deceleration as we kind of move from June to July and August? Thank you.

Benjamin Wolin -- President and Chief Executive Officer

Yeah. It's obviously a bit hard to predict with COVID. What we've seen is general stability in July and early August. Obviously, there was some pent-up demand that occurred at the end of June and kind of a burst of activity. But our take on the market is that we are at or slightly above pre-COVID levels.

John Kreger -- William Blair & Company -- Analyst

Great. Thank you.

Nicholas Jansen -- Vice President of Investor Relation

Operator, next question. Operator, can you turn to the next question, please?

Operator

Sorry, my line was on mute. Our next question comes from the line of Jon Block of Stifel. Your line is open.

Jonathan Block -- Stifel Nicolaus and Company, Incorporated -- Analyst

Great. Thanks guys. Good afternoon. Great numbers. Matthew, maybe I'll ask you a little bit of an obvious one, but I still want to dig into it a little bit. The 1H '20 EBITDA was $111 million versus $103 million in 1H '19, so call it up 8%. If I look at your guidance for the year the midpoint of the guidance implies 2H '20 down, I think roughly low single digits versus the back half of '19. Can you just elaborate on it a little bit? Conservatism, I think you alluded to investment, I think skill is obviously rolling off. Maybe if you could just talk to why the implied down 2%, 3% in 2H versus the high-single-digit growth you guys experienced in 1H even against the tough backdrop?

Matthew Foulston -- Global Chief Financial Officer

Yeah, I mean, good question and you hit the nail on the head with the first one, but the sale of skill impacts us quite a bit more in the second half than it did in the first. We'll have, if you round it up, about a $5 million headwind from that missing from our numbers in the second half. So think of compared to flat we're probably up five skill-adjusted. And then in the first quarter, we had some well above trend growth in the Prescription Management business, which we anticipate will return more to trend in the back half. And then we took a lot of cost actions in the first half that included pay cuts, 401(k) matching and almost complete elimination of travel and entertainment. We took the payback at the start of the second half to normal levels, will restore the 401(k) so that will come in. But I think gradually as we go through the back half our anticipation is we start traveling more as the business comes back to a normal footing. So a lot of those things that gave us a nice lift in Q1 won't be quite as impactful in the back half.

Jonathan Block -- Stifel Nicolaus and Company, Incorporated -- Analyst

Got it. That was very helpful. And then Ben for you, do you feel a longer-term question and I mean looking at a couple of years, again EBITDA numbers blew I guess everyone away on our side but all the year-over-year growth unless I'm mistaken, came, actually a little bit over 100% from the Prescription Management business and maybe you can, if you can just talk to your conviction or ability to derive leverage in the supply chain business as we look out over the next couple of years? Is that something where flat is good on year-over-year EBITDA growth and you just derive most of the future EBITDA from Prescription Management or what do you think about your ability to scale supply chain longer term? Thanks guys.

Benjamin Wolin -- President and Chief Executive Officer

Yeah, good question. Thanks, Jon. So I think that when you look at the business, especially in Q2, you had a pretty anomalous quarter with a pretty big divid in April. So you actually did -- if you could look at it on a month-by-month basis as you came out of the trough in North America, Europe and APAC, you did start to see growth on an EBITDA basis and on a top line basis in May and June, and we feel good about our ability to grow that business in the future. I think that from a top line revenue standpoint, we would expect mid-single, low to mid-single digits growth in the out years on the distribution business. And as we get better from an efficiency standpoint, whether that be a cost to serve, our sourcing initiatives or taking advantage of our technology footprint, we believe that we can grow the EBITDA for that business over time.

Jonathan Block -- Stifel Nicolaus and Company, Incorporated -- Analyst

Very helpful. Thanks guys.

Operator

Your next question comes from the line of Nathan Rich of Goldman Sachs. Your line is open.

Nathan Rich -- Goldman Sachs -- Analyst

Good afternoon. Thanks for the question. Ben on the Prescription Management platform, could you talk about how growth kind of trended across the quarter and your expectations for the back half of the year? I think you kind of talked about maybe a little bit of normalization in the growth rate, but I'd just be kind of curious to get a little bit more color on how you're expecting that business to trend over the balance of the year?

Benjamin Wolin -- President and Chief Executive Officer

Yeah. There obviously was a frenzy of activity around April and May where we saw extremely outsized growth. But what we're seeing is that customers on the platform and consumers on the platform are getting retained. And so we would expect not to see those extreme peak levels that we saw in early Q2 but that we would be at a growth rate higher than where we were pre-COVID. So if you think about growth rate in Q1 and Q4 where we were in the '30s percentile range -- we would expect to be above that -- closer to 40% or higher, but certainly not in the 60% that we saw in Q2.

Nathan Rich -- Goldman Sachs -- Analyst

That's helpful. And then just sticking with management on the margin, can you talk about how you feel about capacity and service levels right now? And you talked about needing to invest in that business. I think from a contribution margin standpoint, I think in the second quarter was somewhere in the high 20% range. Do you think you can kind of maintain contribution margins around those levels while investing in the growth of the platform just kind of given the sales that you've seen kind of shift to that channel?

Benjamin Wolin -- President and Chief Executive Officer

Yeah, good question. So I think from a capacity standpoint, while there certainly was a slowdown in early Q2 along with probably every other online retailer out there, whether you are in our category or not, the team really did a great job of catching up from a time from order to actually delivering the product has improved immensely and we're on par with the competition. And really we look at Amazon as the bellwether for any kind of online transaction and feel like we are delivering at similar rates. So we feel good about that. However, the business is continuing to grow. It's not flat lining as I just suggested, and as you asked, and so we need to continue to invest in the business' capacity, not just for the back half of this year but really for 2021 and 2022. So that is what provides a little bit of that drag on back half EBITDA. But we want to take advantage of the momentum we have and really build that business for the long term.

Nathan Rich -- Goldman Sachs -- Analyst

Makes sense. Thanks for the questions.

Operator

Your next question comes from the line of Andrew Cooper of Raymond James. Your line is open.

Andrew Cooper -- Raymond James & Associates -- Analyst

Thanks guys. Just I guess starting with one sort of on Prescription Management here and the growth rates, like you talked about, I mean, is there anything we should think about in terms of folks that are ordering in the 2Q time period that are on maybe six month cycles and we don't have the same pressing move that would imply a little bit of that deceleration because by my math just to stay flat with the 2Q dollar amount, you're talking about something that's into the 50-plus percent range. So any sort of moving parts as we think about the rush of people that maybe ordered in 2Q when they weren't leaving the house versus how we think about what that might look like in 3Q? Any comment there would be useful.

Benjamin Wolin -- President and Chief Executive Officer

Yeah, I think there's a combination of factors. I think there definitely was some pent-up demand and we saw, kind of a rush to stock up by the consumer. We also saw a very healthy companion animal category here in the U.S., which some of our peers like Zoetis and IDEXX talked about in their own results. And I think as we just look forward and look at our kind of near-term July and early August results, we know that it's going to dissipate a bit, but a lot of those -- our expectation and early data as a lot of those consumers from Q2 will perform like previous cohorts of consumers and that will have sustained really positive ahead of kind of pre-COVID performance here in the back half and into 2021.

Andrew Cooper -- Raymond James & Associates -- Analyst

Okay, that's helpful. And then to the distribution side, I guess maybe just the latest thinking and this is probably a question you're tired of answering. But obviously, you've had a big transaction close in terms of the customer base, the manufacturer base for you. And you've had some exciting new products on the preventative side. So kind of the latest update on those two would be great. And if you've seen anything or expect sort of any changes from those, whether it's opportunity with a long co-bear or sort of how you view that as we think about it in the most recent period would be great?

Benjamin Wolin -- President and Chief Executive Officer

Yeah, I think if you look at the first half performance, and we mentioned this in the prepared remarks that we feel like we held our market share here in the first half, which is an improvement from '19 and '18 where we definitely lost market share. It seems like a robust market going forward, a competitive one with some of the new product introductions. Definitely some movements here with some of the suppliers as Elanco has bulked up. But in general, we feel, I would say optimistic about the environment for distributors here in the back half and going into '21.

Andrew Cooper -- Raymond James & Associates -- Analyst

Great. I'll stop there. Thanks Ben.

Operator

[Operator Instructions] And our next question comes from the line of Kevin Kedra of G. Research. Your line is open.

Kevin Kedra -- Gabelli & Company -- Analyst

Hi, thanks for taking the questions. First, wanted to ask about the, you mentioned the international expansion opportunity and really how should we be thinking about that, not only in terms of timelines but geographic rollout? Is that something that you expect to kind of take in a country-by-country basis at this point or could we expect a broader rollout across say Europe?

Benjamin Wolin -- President and Chief Executive Officer

Sure thing. So it will definitely be a country-by-country rollout, focused on both Europe as well as the APAC region. We're building the foundation of that right now and would expect to have some solutions at market in 2021. I think from a P&L impact in '21 it would actually be a slight negative as we continue to invest and build out the commercial capabilities there and would start to contribute in 2022.

Kevin Kedra -- Gabelli & Company -- Analyst

Great, thanks. And then just want a clarification on the slide on liquidity and leverage; traditionally your reported leverage was usually about a half-turn to a turn higher than what it was under the credit agreements that reversed in Q2. I'm wondering if that's just a function of the cash balance, or is there something else going on there?

Matthew Foulston -- Global Chief Financial Officer

Yeah, the definition of leverage caps the contribution from cash. I think it's sort of $125 million. So cash above that doesn't help lower your leverage under the debt covenant. So we get a little different relationship between what I'll call Street calculation and the bank covenant calc.

Kevin Kedra -- Gabelli & Company -- Analyst

Alright, great, thanks.

Operator

There are no further questions over the phone lines at this time. I turn the call back over to the presenters.

Nicholas Jansen -- Vice President of Investor Relation

Thank you for listening in on the conference call. You may now disconnect. Hope everyone is well. Thank you.

Benjamin Wolin -- President and Chief Executive Officer

Thank you, everyone.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Nicholas Jansen -- Vice President of Investor Relation

Benjamin Wolin -- President and Chief Executive Officer

Matthew Foulston -- Global Chief Financial Officer

John Kreger -- William Blair & Company -- Analyst

Jonathan Block -- Stifel Nicolaus and Company, Incorporated -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Andrew Cooper -- Raymond James & Associates -- Analyst

Kevin Kedra -- Gabelli & Company -- Analyst

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