Covetrus, inc (CVET) Q2 2021 Earnings Call Transcript

Image source: The Motley Fool.

Covetrus, inc (CVET)
Q2 2021 Earnings Call
Aug 5, 2021, 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 2Q 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Brian McDonald, Vice President of Financial Planning and Analysis. Please go ahead, sir.

Brian McDonald -- Vice President of Financial Planning and Analysis

Thank you, Grace. Good afternoon, and thank you for joining us for Covetrus' Q2 2021 Earnings Conference Call. Joining me on this afternoon'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 will be happy to take your questions. During today's conference call, we anticipate making projections and forward-looking statements based on our current expectations. All statements other than statements of historical facts 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, believe, 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 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 2021 results and the accompanying slide deck for this call on ir.covetrus.com. The release and presentation also contain further information about the non-GAAP financial measures that we will discuss today. Please refer to those documents for a reconciliation of non-GAAP measures to our GAAP financial results.

With that, I'll now turn it over to Ben to provide highlights beginning on slide three.

Benjamin Wolin -- President and Chief Executive Officer

Thank you, Brian. Good afternoon, everyone, and thank you for joining us today. I hope everyone is safe and well. Before jumping in, I just wanted to recognize that Brian has replaced Nick Jansen for the day. Nick and his wife are delivering a baby today, and we're wishing Nick and Katy a happy and healthy day. We're thinking of you. Now on to the business. I have four items to discuss with you on the call today: one, the health of our business as reflected in our solid Q2 results; the progress we are making in executing our strategy and driving growth within our higher-margin products and services; the enthusiasm and long-term opportunity we have in wellness plan administration through our recent acquisition of the market-leading platform, VCP; and fourth, highlights from the company's first-ever ESG report that was also released today. As you can tell, we have a packed agenda for the call this afternoon, so I will dive right into some of our recent highlights, starting on slide three. Overall, Q2 marked another strong quarter for Covetrus, where we delivered 12% year-over-year non-GAAP organic net sales growth and $66 million in non-GAAP adjusted EBITDA, both of which were a bit ahead of the expectations we have outlined on our Q1 earnings conference call in early May. Our team executed very well, and we once again improved our market position and advanced our value proposition to our veterinary practice customers and their clients in what remains a healthy but dynamic end market. And all of this was done in the face of the unknowns tied to the reopening of the global economy and the impact on consumer behavior and the supply chain in what is also an increasingly tight labor market, which remains a real challenge. Importantly, we continued to make good progress during Q2, executing against our product road map and advancing our strategic objectives.

For example, we launched an SMS or a text-based reminder notification service for pet parents who received a prescription from their veterinary practice. And we also streamlined the e-prescribing experience for our market-leading practice management software solutions. We also added another net 300 practices to our prescription management platform and delivered a 17% sequential increase in net sales and $5 million sequential increase in non-GAAP adjusted EBITDA versus Q1 in prescription management. While prescription management's year-over-year growth rates were modestly below our aggressive aspirations that were set back in January, which was before the significant supply chain difficulties in the diet space, which I'll touch on later, I think it is important to recognize that these sales have nearly doubled over the last two years and actually accelerated on a two-year stack basis to 85% during the second quarter, highlighting our execution and our leadership position. I remain extremely enthusiastic on the opportunity we have in front of us in the context of what is still a vibrant and growing pet prescription end market and the role we can play in helping veterinarians improve clinical and business outcomes for their practice. We also announced in Q2 and subsequently closed in Q3 our acquisition of VCP, the market-leading veterinary software platform for wellness and care plan administration. We see tremendous opportunity to accelerate and scale this solution inside of Covetrus.

Finally, we continue to bring new talent into the organization, which we believe will further accelerate our transformation efforts, including several senior roles over the last several months such as Bekki Kidd as Head of North American Operations and Global Operational Excellence; Andras Bolcskei as President, International; and Drew Coxhead as Vice President, Corporate Controller and Chief Accounting Officer. Overall, I'm very energized by the talent we are attracting as we build upon our leadership position in veterinary healthcare solutions. And this opportunity can be best summarized in how we are still in the early innings in driving growth and a positive shift in our business toward our higher-margin products and services, as seen on slide four. During Q2, we delivered double-digit year-over-year growth in net sales and gross profit in these categories, and I was particularly pleased with the results achieved in our Covetrus-branded and proprietary brands during the second quarter. The collective growth rate of these products and services continued at a pace faster than our overall portfolio, and these products and services now represent 43% of the company's gross profit or a 200 basis point increase versus the prior year and a 600 basis point improvement versus 2019 pro forma levels. We expect this positive shift to continue as our strategic accounts across our segments build momentum, and we see a pathway to more than 50% of the company's gross profit tied to these higher margin products and services over the next 18 to 24 months. This team is doing a great job.

Turning to slide five. Given the significant opportunity in our Covetrus-branded and proprietary brand product portfolio and the anticipated benefit that this growing contribution will make to the company's profitability, I thought it would be useful to investors to share some additional color on these products, highlight our recent financial progress during the second quarter and key areas of focus for the company as we think about the second half of 2021 and beyond. Our increased focus on Covetrus-branded products during the second half of last year is starting to drive tangible financial progress in 2021 with non-GAAP organic net sales for these products increasing 21% year-over-year during the second quarter. This includes an even more impressive 25% year-over-year non-GAAP organic net sales growth rate in North America, partly driven by the organizational changes we made last year. We are optimistic that we can deliver continued strong growth during the second half of the year in our Covetrus-branded products, driven by the ramp-up and launch of 75 new products globally this year, including several that are now available through our prescription management platform in North America, emphasizing the synergies between all aspects of our business. We are also entering a couple of new, high-growth geographies in 2021, which we believe can further enhance our opportunities in the years ahead. The company's portfolio of proprietary brands, which includes Kruuse, Vi and Calibra, also saw strong adoption during the second quarter with non-GAAP organic net sales growth of 13% year-over-year, a continuation of recent positive trends.

This growth is being supported by strong commercial execution, and we anticipate new product introductions and geographic expansion to drive further growth. We also continue to actively explore M&A and partnership opportunities in this area as we seek to leverage our unique channel access and scale to accelerate growth. And turning to compounding. We delivered double-digit year-over-year net sales growth during the second quarter of 2021, and with the recent opening of our new, state-of-the-art compounding and 503B outsourcing facility in Phoenix, Arizona this May and the launch of our new e-commerce platform and integration with third-party ordering sites, we are well positioned to build upon our opportunity as we drive innovation and leverage our customer relationships and membership organizations. Moving now to slide six. I'm extremely excited about our recently completed acquisition of VCP, the market leader in veterinary wellness and care plan administration software. As many of you are aware, now more than ever, pet owners need help budgeting for pet care and treatment, and veterinarians are looking for ways to drive compliance, strengthen their relationship with their clients and offer innovative plan solution for all types of treatment needs based on best practices, and that is where VCP comes in. VCP has built a proprietary wellness plan management solution, providing a comprehensive, end-to-end technology platform that simplifies and enables the process of creating, launching and managing a wellness program at the practice. VCP's innovative wellness technology and proprietary Business of Wellness process enables veterinary practice customers in launching successful wellness solutions, care plans and lifestyle programs for their pet parent clientele.

The practices adopting the VCP platform report up to a 10% revenue growth in the first year with significant increases in spending pet -- spending per pet over time. And the pet parents adopting these plans value the convenience and customization of the programs, which has led to strengthened relationship with their veterinarian. VCP is currently experiencing strong demand and has a growing customer base of more than 1,000 veterinary clinics with more than 350,000 pets on plan. Importantly, we currently have a large backlog of signed but not yet onboarded clinics and a significant pipeline of new opportunities, providing visibility into double-digit growth and high-margin recurring revenue in 2022 and beyond. What's even more exciting to us is that this is all before the uplift we anticipate from VCP joining forces with Covetrus as we leverage our customer relationships and membership organizations and build a unique platform that can integrate practice management software, prescription management and wellness into one offering for the practice. By accelerating the adoption of and enhancing the impact from wellness and care plan, we believe we will drive enhanced clinical outcomes, empower veterinarians to run better businesses and deliver an unparalleled experience for the pet parent. We will speak more to this opportunity in the quarters ahead as we work to execute our strategy and deliver the anticipated synergies.

Finally, on slide seven, I wanted to turn investor attention to Covetrus' first-ever ESG report, which was also released this afternoon. Just over two years ago, Covetrus was established as a new company. The company was the result of a merger of a collection of animal health businesses from around the world, many with their own sustainability initiatives and corporate social responsibility commitments. Now as one unified company, we are bringing a more comprehensive focus to our ESG efforts. Our initial progress is demonstrated in today's report through stories of our team's actions around the globe, including our COVID-19 response for our employees, customers, pets and pet owners; a commitment to sustainability to continuous improvement and reduction in plastic consumption; the launch of the diversity and inclusion program; and support for animals around the world. We aspire to lead in everything that we do. This report is both a celebration of where we are today as well as a commitment to where we are going, and we are just getting started. In summary, I'm so pleased with the progress the company has made during the first half of 2021, and I'm energized by the opportunity that still lies ahead as we continue to execute against our strategy. While there's still plenty of work to do as we drive forward our transformation in what remains a dynamic end market, I am confident in our value proposition and market position and anticipate that we will continue to build upon our momentum in the second half of 2021 and beyond.

I will now turn the call over to Matthew to provide details on the financials.

Matthew Foulston -- Global Chief Financial Officer

Thanks, Ben. Good afternoon, everyone, and thanks for joining us today. I will now review our second quarter 2021 financial results and provide additional commentary on our full year expectations. 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 2021 GAAP financial results. Additionally, where applicable, we have also provided financial comparisons for our second quarter 2021 results to the second quarter of 2019, given the lumpiness of our performance created by the COVID-19 pandemic during the second quarter of 2020. As Ben mentioned and summarized on slide nine, Q2 was another solid quarter for Covetrus with 12% year-over-year non-GAAP organic net sales growth and $66 million in non-GAAP adjusted EBITDA, which represented a 5% year-over-year increase. We are pleased with our overall performance, which exceeded expectations, particularly given the unknowns we faced and, during the quarter, tied to the global economy reopening during Q2 and the challenging year-over-year comparison we had. As a reminder, last year's results benefited from the COVID-19-driven spike in demand in our prescription management service, which led to a 66% year-over-year growth in low sales during the prior year period and the significant cost-reduction actions we took across our global footprint that approximated $4 million in temporary benefit in anticipation of the uncertainties created by the onset of the COVID-19 pandemic.

As we previously discussed, those temporarily lower costs were progressively reinstated to near prior levels when the impact from COVID-19 on our overall business ended up being less severe than originally anticipated. Importantly, our growth in non-GAAP adjusted EBITDA and the $47 million in free cash flow generated during Q2 led to a sequential improvement in our net debt-to-LTM non-GAAP adjusted EBITDA ratio of 3.6 times at the end of Q2 2021. Now turning to the details on slide 10. Covetrus net sales were $1.2 billion in Q2, an increase of 16% year-over-year. Non-GAAP organic year-over-year net sales growth was 12%, reflecting healthy companion animal end market demand trends across many of the company's markets compared to the COVID-19 disruption experienced in the prior year period and solid sales execution across many of our global markets. The previously disclosed challenges in our U.K. and German markets continued to negatively impact year-over-year results, although these trends have relatively stabilized as compared to Q1 activity. Turning to slide 11. Non-GAAP adjusted EBITDA was $66 million for the second quarter of 2021 compared to $63 million in the prior year period. The 5% year-over-year improvement reflected positive contributions from all three reporting segments as well as a modest FX tailwind, which more than offset growth in corporate overhead and the reversal of the temporary COVID-19-related cost actions implemented last year.

Non-GAAP adjusted EBITDA margins were 5.6% during Q2, a 50 basis point year-over-year decline, which is primarily a reflection of the temporary cost actions taken last year and the spike in prescription management demand, as discussed. Compared to Q2 2019 levels, non-GAAP adjusted EBITDA margins increased 50 basis points, reflecting the margin benefit as we drive growth in our higher-margin products and services. Additionally, when we compare to Q1 2021, our non-GAAP adjusted EBITDA margins improved 40 basis points. Moving to our operating segments, beginning on slide 12. North America net sales increased 18% year-over-year in Q2 on both the reported and non-GAAP organic basis. Segment adjusted EBITDA increased 7% year-over-year in Q2 with segment adjusted EBITDA margins declining 80 basis points versus the prior year, again, a reflection of the temporary COVID-19 cost actions taken in 2020 and the elevated contribution in the prior year from the spike in prescription management demand at a time when we also paused investments due to COVID-19 uncertainty. North America segment margins expanded 50 basis points versus the second quarter of 2019 and 10 basis points versus the first quarter of 2021, reflecting the growing contribution from prescription management and Covetrus-branded products. Drilling deeper into North American segment trends, starting on slide 13.

Our supply chain non-GAAP organic net sales increased 19% year-over-year in Q2, reflective of healthy companion animal end market demand, our fifth consecutive quarter of year-over-year market share growth in distribution, along with continued strength at SmartPak. Supply chain non-GAAP adjusted EBITDA increased to $42 million for the quarter compared to $37 million in the prior year period with a strong top line growth, partially offset by the reversal of the temporary cost-reduction actions implemented last year. Our software services was stable during the second quarter, while we continued to invest in building our next-generation, cloud-based practice management technology solutions. Turning to slide 14 and our prescription management business in North America. The second quarter faced some unique comparative challenges given the demand spike last year tied to initial COVID-19 lockdowns that drove a 66% year-over-year increase in sales in Q2 2020; and the evolving consumer behavior this year tied to the reopening of the economy. Additionally, supply chain constraints for certain product categories, particularly diet food, continues to be a source of pressure. While net sales fell modestly short of the aspirational growth assumptions set in early 2021, primarily during the month of May, net sales of $131 million still increased 19% year-over-year in Q2 or 22% when excluding the 300 basis point headwind from our changing corporate policy related to how we recognize and report certain manufacturer incentives, which are now included as a reduction to cost of goods sold. Additionally, on a sequential basis, Q2 net sales increased 17% and notably are now nearly double where they were just two years ago.

On a two-year stacked growth basis, which we believe is a better way to look at performance, given last year's 66% comp, our growth rate was 85% and actually accelerated versus recent trends, highlighting the positive fundamentals we are seeing in the business with June marking our highest month of prescription management net sales in company history. Additionally, we added another 300 net new enrollments during Q2, and we ended June with more than 11,700 practices on the platform, demonstrating the continuing demand for our services. For the first six months of 2021, prescription management net sales were up 25% year-over-year or approximately 29% year-over-year, excluding the accounting change. These results include an estimated $5 million to $10 million headwind tied to certain diet constraints, which has resulted in an increase in canceled shipments, given the backorder issues and production challenges at some of the major veterinary diet food suppliers. With this headwind likely to continue through the balance of the year and acknowledging the inherent volatility of the overall e-commerce market alongside the reopening of the economy, we now estimate prescription management net sales to approximate $508 million to $528 million for 2021 or 20% to 25% year-over-year growth, which is equal to 28% to 33%, excluding the accounting change. This range includes the anticipated impact of certain growth initiatives and the contribution from recent enrollments in the second half of the year and is balanced by the negative impact from supply chain disruption in diets in this quarter. Turning to profitability. Q2 prescription management non-GAAP adjusted EBITDA was $11 million, which was flat versus the prior year as we lapped a period when there was a significant spike in demand without a corresponding increase in client acquisition costs or in operating expenses, given the initial uncertainties tied with COVID-19.

I would point out that we did increase non-GAAP adjusted EBITDA by $5 million as compared to last quarter on a $19 million sequential increase in net sales, highlighting the scalability of the business as net sales continue to track higher. Overall, for 2021, we remain focused on converting approximately 15% of the year-over-year dollar growth in prescription management net sales to non-GAAP adjusted EBITDA, recognizing we do have to overcome duplicate costs in 2021 tied to the launching of the new pharmacy in Phoenix as well as the incremental challenges we are currently experiencing in veterinary diet foods. Turning to our Europe business segment on slide 15. Non-GAAP organic net sales increased 1% year-over-year in Q2, reflecting healthy underlying companion animal end market demand and easier comparisons from the prior year due to COVID-19, primarily offset by the previously disclosed year-over-year headwinds we have experienced in our U.K. and German markets. Our businesses operating in Ireland, the Netherlands and Czech Republic were notable contributors to the quarter, and as Ben mentioned, we also had very strong performance in our proprietary brands businesses, our Kruuse and Vi, where non-GAAP organic sales again increased by double digits year-over-year. Turning to profitability. Despite only a modest increase in non-GAAP organic net sales year-over-year, Our Europe segment adjusted EBITDA in Q2 increased 25% year-over-year to $20 million with margins expanding 80 basis points year-over-year to 5.5%. The European team delivered another quarter of disciplined expense management, considering the sales challenges in the U.K. and Germany, and the segment benefited from the strength of higher-margin, Covetrus-branded and proprietary brand sales, as I just described. Moving on to our APAC & Emerging Markets segment on slide 16. Our team delivered a 16% year-over-year increase in non-GAAP organic net sales in Q2, reflecting another quarter of strong sales execution on top of what was an easier comparison from the prior year due to the COVID-19 impact. Brazil, New Zealand and Australia all delivered notable year-over-year growth during the second quarter.

Segment adjusted EBITDA increased 80% year-over-year during Q2, and segment adjusted EBITDA margins expanded by 200 basis points year-over-year, driven by positive gross margin trends and the ongoing operating leverage from better-than-expected net sales, which more than offset the reversal of temporary cost actions taken in the prior year alongside the initial outbreak of the COVID-19 pandemic. Now turning to our balance sheet on slide 17. Our net leverage at the end of Q2 was 3.6 times as compared to 3.7 times at the end of Q1. Our cash balance of $230 million at the end of June was $19 million higher than March 31, 2021, primarily reflecting positive free cash flow generation during the second quarter, which more than offset the $23 million in combined cash outflows primarily tied to the buyout of our Brazilian minority partners during Q2 and the final payment tied to last year's formation of Distrivet. We ended Q2 with $529 million in available liquidity and with approximately two turns of headroom under our net leverage covenant, as defined in our credit agreement. We expect our cash balance to decrease modestly in Q3 tied to our acquisition of VCP in July, but we believe that our liquidity and net leverage ratio will improve in Q4 as we grow non-GAAP adjusted EBITDA in the second half of the year and generate additional cash in line with our available seasonality. Now turning to our 2021 guidance, as outlined on slide 18. We are now forecasting non-GAAP organic net sales growth of 5% to 6%, 100 basis point improvement versus our prior forecast.

This increased net sales forecast factors in our strength in Q2, and the positive end-market conditions that have continued across many of our markets against a slower recovery in our U.K. business and the modest reduction in our prescription management net sales discussed previously. Looking at non-GAAP adjusted EBITDA. Our outlook remains unchanged, and we continue to forecast a range of $245 million to $255 million, which represents 11% year-over-year growth at the midpoint and steady progress against our long-term margin-expansion objectives. An extremely tight labor market; increasing inflation; supply chain disruption in certain product categories, particularly diets; and general uncertainties tied to COVID-19 reopening are offsetting the positive earnings contribution from the higher non-GAAP organic net sales growth forecast. As I take a step back and look at where the company stands today versus where we were less than two years ago, I see a business in 2021 with non-GAAP adjusted EBITDA that is forecasted to be 25% higher than 2019 despite navigating the challenges of the global pandemic, withstanding a significant increase in certain corporate costs tied to becoming a stand-alone public entity while still investing in our capabilities to drive our technology road map. Our team has a lot to be proud of, and I am optimistic on the opportunity in front of us to create additional shareholder value as we work to drive net sales growth, expand non-GAAP adjusted EBITDA margins and improve free cash flow generation.

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

Benjamin Wolin -- President and Chief Executive Officer

Thanks, Matthew, and I want to echo all the points you just made. Our team executed very well in Q2, and it's a lot to be proud of. In closing and outlined on slide 19 of the presentation, we have a solid foundation in place and are investing in our platform to sustain momentum. We have secured new business and are making good progress on driving our strategic initiatives, including increasing the contributions in the company's higher-margin products and services. We are also investing in talent, wellness, proprietary brands and our next-generation software road map to accelerate our opportunity. We remain in the early innings of driving toward the company's long-term potential and are poised to deliver shareholder value as we execute against our strategic plan.

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

Brian McDonald -- Vice President of Financial Planning and Analysis

Thanks, Ben. Now we begin the Q&A section of our conference call. So Grace, please provide instructions, and we're then ready to take the first question.

Questions and Answers:

Operator

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

John Kreger -- William Blair -- Analyst

Thanks very much guys. Ben, can you maybe just, now that we're a year beyond that sort of initial surge of prescription management, kind of reflect on what has been sticky and what has been proven to be a little bit more temporary and, sort of as a result of that, what you view the kind of longer-term growth outlook for prescription management? Is it still sort of in that 30% range?

Benjamin Wolin -- President and Chief Executive Officer

Yes. Thanks, John. Good to hear from you. I think as we look at the business, we continue to see lots of positive momentum and data points. Initiatives like integrating prescription management into PIMS is clearly starting to pay dividends. It's still early days, but what we see in terms of proactive prescriptions that come right out of PIMS at the point of care is starting to drive some velocity in the business. We've also added a bunch of new accounts, which will pay dividends in the future years. I think in terms of the short-term challenges, I think a lot of it really is external to the business. The end market has remained robust. The interest from customers and consumers remain robust. We definitely had challenges on the supply chain and the diet space, probably to the tune of $10 million in Q2, and we definitely are anticipating that to continue in the back half of the year. I think if it weren't for that, we'd probably still be in that 30% to 40% growth range but just to be cognizant of the challenges that is going on in that category, and I think it also got referenced by some of our competitors as a headwind. We feel good about it. But even absent that headwind, which hopefully is short lived, we feel really good about the position of the business.

John Kreger -- William Blair -- Analyst

Great. And a quick follow-up, Germany. Can you give us a sense of where you think that stands? And -- or any sign that you're starting to reclaim any lost share?

Benjamin Wolin -- President and Chief Executive Officer

Yes. So I think Q2, we got back to the service levels that we were premigration and that are on par with the rest of Europe. So we feel really good now about the foundation. Commercial activity is starting to be turned on really now that the foundation is there. But I don't think it's showing up in the numbers quite yet, and we anticipate that to start to show up in Q4 and heading into 2022. And as a reminder, of course, we lap that event in October of this year.

John Kreger -- William Blair -- Analyst

Great, thank you.

Operator

Thank you. Your next question comes from the line of Balaji Prasad from Barclays. Your line is open sir.

Balaji Prasad -- Barclays -- Analyst

Hi, good afternoon. Thanks for taking the question. Maybe first one -- two questions from my side. Firstly, on the prescription management side. You had -- I think you had mentioned last quarter that you exited 1Q at around 40% Y-o-Y growth and that March was at 46% Y-o-Y. So how did things shape up since then? And was there any element of pull-forward from 1Q from 2Q? And just asking also in the context of the revised guidance for the prescription management business. I was expecting that since the integration of PIMS with prescription management, you may probably see better or accelerated revenue growth. While I understand it's not going to be immediate, but the second half of the year seems to be slower than expectations.

Matthew Foulston -- Global Chief Financial Officer

Yes. Balaji, this is Matthew. Let me start by talking about the fourth -- second quarter growth. And I don't think we really saw any timing issue between first and second quarter, but what I think is really important to do is take a look at that two-year stack because the comp is so difficult last year when we were up 66%. So if you take a peek at slide 14 in the deck, you'll see that our two-year stack growth was actually 85%, which represented an acceleration from Q1 and, in fact, where we've been in Q4 and Q3. So I think it was a solid quarter, not quite as good as we thought, but as Ben mentioned, we faced a pretty tough headwind on the diet front. And a lot of diets from AutoShip, and when you lose the AutoShip, it's kind of gone for a while. It's not like a normal supply constraint, but the supply comes back on. So we've got to work hard to win those back. And then if I pivot to full year. Last time, we're guiding in a range of $528 million to $568 million, so $548 million at the midpoint. We've now reduced that to $508 million to $520 million. So we've basically taken $30 million out of the year. $10 million of that is what has happened in Q2, and what we've effectively modeled here is that, that repeats itself in Q3 and Q4, all around the uncertainty of the client situation.

Balaji Prasad -- Barclays -- Analyst

And maybe also just a follow-up there. Can you describe the major categories now available on prescription management? And are there any opportunities for you to introduce newer categories there?

Benjamin Wolin -- President and Chief Executive Officer

Yes. Absolutely. I think as you kind of look out further into the trajectory of the business, there's kind of two vectors that we'll focus on. One is using our access to the consumer through the vet, of course, and doing exactly what you're saying, providing new opportunities to buy products beyond, say, preventatives and diet, and we've started to do that. But it's very early days, and there's absolutely opportunity. So you would start to see that maybe average order value go up or the number of purchases that happen in a period of time. So that definitely is an area of focus of the business. It hasn't been historically, but it will be. The second is really using the technology access that we have to integrate prescription management. So we talked a bit about it on the PIMS side. Wellness is obviously a key area that we're driving at. So as we go into '22 and '23, we would expect those offerings to be really very connected, one consumer experience with the vet regardless of how you're interacting with them. So lots of opportunities to expand share of wallet and strengthen the vet-to-pet bond as we move forward.

Balaji Prasad -- Barclays -- Analyst

Thank you.

Operator

Thank you. Next up, we have Katie Tryhane from Credit Suisse. Your line is open.

Katie Tryhane -- Credit Suisse -- Analyst

Thanks for taking my question. Can you speak to the underlying drivers of strength across the North America supply chain this quarter? And how have you evolved your strategy to drive these market share gains over the past couple of years? And then from there, I mean how should we think about the second half prospects for that business and some of the key factors embedded in your guide?

Benjamin Wolin -- President and Chief Executive Officer

Sure thing. Thank you for the question. So first is obviously just strong end market growth. I think you see that among us and all of our peers in the category. In terms of picking up market share, which we've continued to do, it's clearly coming from two kind of main areas of focus from the business. One was our decision to unify our sales force and have one face the customer. That's starting to pay dividends, and it's really continuing to accelerate across the business. Second is we have an unparalleled collection of assets. There is no player in North America that can walk into a customer and say, "We can help you on distribution and logistics, proprietary brands, compounding, PIMS, prescription management and now wellness." And as you know from probably talking to customers, they have a lot on their plate, and someone can come in and connect all of these different offerings and not just make it easier to be serviced but have really an interoperable environment between them. You really have an opportunity to move the needle on behalf of your customer and for Covetrus.

Katie Tryhane -- Credit Suisse -- Analyst

Yeah, thank you referencing.

Operator

Moving on, we also have a question from Jon Block from Stifel. Your line is open.

Tom Stephan -- Stifel -- Analyst

Great. Hey, guys. This is Tom Stephan on for Jon. If I can start off with prescription management maybe next year. I understand you're working through this year some of the double road costs with the compounding facilities, and then there's been spend around software integration. I guess around 2022, is there incremental spend we should be mindful of? Or do you think we can start to basically see some leverage return to the business?

Matthew Foulston -- Global Chief Financial Officer

I think one thing we've been very mindful of as we've been growing that business is getting the drop down from incremental revenue to adjusted EBITDA in the 15% to 20% range. So that sort of guides us over a 12-month period. So you'll see us largely live within those constraints. It may be a little bit lumpy and bumpy from quarter-to-quarter, but that will really be what guides the growth.

Tom Stephan -- Stifel -- Analyst

Got it. That makes sense. And then more of a longer-term question. Your guidance for full year organic growth of 5% to 6%, I think it's still impressive, given the challenges in Europe are kind of persisting and then some newer headwinds in prescription management in the supply chain. So as those things start to normalize maybe next year, is it unreasonable to think about the total business as maybe a sustainable, high single-digit grower longer term and maybe not just an above-market, mid-single-digit grower?

Benjamin Wolin -- President and Chief Executive Officer

I think a lot of it is predicated on how you view what's going to happen in the end market. Obviously, our market has been robust, and we feel like we'll continue to certainly get above-market growth in those areas like prescription management as we go forward, and as the numbers get larger, it starts to influence the overall growth rate of the business where it might not have in the past. But certainly, we hopefully only have one event in Germany and one U.K., and we're passing those, and we'll be growing above that and we expect to continue to have outsized market growth in North America and Australia. So it really comes back to how you model the end market, but we feel like we're going to be able to continue to grow aggressively and grow at or above the end market in the years to come.

Tom Stephan -- Stifel -- Analyst

Great, thanks.

Operator

Thank you. Moving on, we also have a question from Nathan Rich from Goldman Sachs. Your line is open sir.

Nathan Rich -- Goldman Sachs -- Analyst

Great, thanks for taking my questions. I just wanted to follow up on the supply disruption in the prescription diets. I guess how much visibility do you have on when we might see this normalize? And has there been any impact on attach rates to drugs as a result of this? And can you maybe just talk about the profit implications as well from losing these sales?

Benjamin Wolin -- President and Chief Executive Officer

Yes. Thanks for your question, Nathan. So in terms of visibility into what's going on, we have high visibility. We don't have a lot of control over what's happening, and I don't think we have great visibility to when it will end. I think you spend time with those manufacturers. All of them or half of it being driven by access to API or ingredients and some of it is being driven by access to labor. So if they have the product, they can't get it out the door. So it's been really challenging, and it's been covered in the press, and I think as I said in my earlier remarks, I think some of our competitors are having the exact same issues and called out some of those headwinds as well. In terms of what -- your specific question, it's a really good one. There's both the actual lost revenue of the diet as well as the residual effect or, what we call the attach rate, which is real.

So while we might have only lost, call it, $10 million in the first half related to diet of diet revenue specifically, it just has this downstream or effect, and it goes beyond just the actual diet sale. And that's where it gets challenging, and that's why we kind of adjusted our forecast, be it for the back half of the year because of that -- losing that recurring customer. The diet revenue itself, just to answer your last question, gets lower margin than the overall business, pretty significant, much closer into the 10% to 20% range, depending on the product. So it's not so much the lost revenue. I would say the bigger issue is the residual effect. Now the good news, and then I'll wrap up my answer, is that I think every provider is having this issue, whether it be online or in-person, and so I think we're all equally being affected from access to diet products.

Nathan Rich -- Goldman Sachs -- Analyst

That's really helpful. One of the other dynamics that been talked about recently has been just changes in consumer behavior as some of the restrictions that a lot of vet practices had on in-person visits have lifted. I guess have you seen any impact on channel dynamics or any changes in competitive activity as a result of this like kind of returning to kind of a more normal environment?

Benjamin Wolin -- President and Chief Executive Officer

On the fringes, I would say. But if you just, again, look at the core underlying fundamentals of the prescription management business, Matthew called out the two-year stack of close to 80 -- north of 80%, you basically had this combo of diet plus this year-over-year comp. I mean we still grew 17% sequentially, had our highest quarter ever, grew basically 22% after a year of 66% growth in 2020. So I think I'm sure there are incidences of where someone used to get it delivered at home, and then they've gone back to in-clinic. But all the data points that we have, we just continue to see velocity in that business. And if it weren't for the supply chain stuff, I almost think we wouldn't be having a conversation.

Nathan Rich -- Goldman Sachs -- Analyst

Great. Makes sense. Thanks for the questions.

Operator

Your next question comes from the line of Elliot Wilbur from Raymond James. Your line is open.

Elliot Wilbur -- Raymond James -- Analyst

Thanks, good afternoon. Question for Ben. Just going back to slide five in the deck when you talked about some of the various branded and proprietary product initiatives. Are there significant margin differences between these individual endeavors? And I'm wondering if you could talk a little bit about sort of the relative performance of these efforts within the Rx management platform versus on a stand-alone basis. Then I want to ask you a question on the Rx management business itself in terms of just adding new practices and the relative ease of doing that in the current environment, degree of competitive intensity and just sort of where the new wins are coming from? Is it new practices, competitive wins? Is there still a lot of white space in terms of practices that don't have practice management systems? But just what the incremental opportunity is there.

Benjamin Wolin -- President and Chief Executive Officer

Yes. Let me -- I'll try to go through your questions one by one, and please ask again if I miss them. I just want to make sure I captured them all. So I think your first question was about the margin differential of our proprietary products versus the core business. It is pretty significant if you think about a teens margin for the overall business. These proprietary products can range anywhere from as low as, say, 25% to as high as 50% or 60% on a gross margin basis. Obviously, the things that are more unique to us, like a compounded medication, is going to be higher versus a more commoditized solution in some of the consumables business. So there's a pretty big range, but I would say that it's all substantially better than the rest of the business. And you can see that in the slide actually on the previous page on slide 4, which really shows the gross profit growth inside of the business, some of the things that are proprietary to us, and you can see that on a -- gross profit grew by 20% on the things that are unique to us, and that's why we got that improved balance to 42% of the overall total business. In terms of your second question, I think it was about tying to the prescription management platform, which I think Jon had asked about as well -- or Balaji, I'm sorry. I think it's still early days there.

We're definitely starting to focus on how do we ease that channel to push our own proprietary products as long as it obviously makes sense for our customers and the pet owners that they serve. But it is absolutely an opportunity, and when you think of things like consumables or generics or nutraceuticals, there's definitely a lot of opportunities to expand the average order value that happens on the platform and do it at a much higher margin than some of the third-party products that run on top of the business. In terms of your last question...

Matthew Foulston -- Global Chief Financial Officer

The last one was adding new practices...

Benjamin Wolin -- President and Chief Executive Officer

Adding new practice. Sorry. Thank you, Matthew. The last question, adding new practices, we estimate we're close to 12,000. That's somewhere around 2/3 of the market had some sort of solution, either homegrown or third party. We're obviously the clear leader in the market. So there's definitely opportunity out there. The majority of the new practices are coming actually from a combination of switching as well as white space. So there's a lot of running room, both in the engagement on the existing practice as well as new practices to the platform.

Matthew Foulston -- Global Chief Financial Officer

And I think just to add a little bit more color on that, you only need to go back to Q3 of last year when we were at 10,900 practices in the middle of a pandemic. Now we're 11,700. So the trajectory here is pretty good.

Benjamin Wolin -- President and Chief Executive Officer

It is difficult, and I think this is your last question, in the moment to get a practice to focus. I mean when you spend time with customers, the first thing they're going to tell you is, "I don't have enough veterinarians. I don't have enough vet tech. I don't have enough practice managers. I barely can see the people I have." So the idea of implementing new software or changing workflow is something that they're not eager to do. Yet at the same time, they understand the long-term implications of not having an e-commerce solution, and that's where we get the pickup.

Operator

Thank you. And your next question comes from the line of David Westenberg from Guggenheim Securities. Your line is open.

John Heinbockel -- Guggenheim Securities -- Analyst

Hi, This is John on for David. Thanks for taking my question. So just in relation to the prescription management business, how should we think about net practice adds and whether there's been a significant, like, effect from the COVID environment and the uptick in cases relating to the Delta variant?

Benjamin Wolin -- President and Chief Executive Officer

Sorry, John. Could you repeat the question? I'm not sure I was following what you were asking.

John Heinbockel -- Guggenheim Securities -- Analyst

Has there been a significant effect on your ability to make practice adds during the quarter because of the increase in concern about the COVID environment?

Benjamin Wolin -- President and Chief Executive Officer

No. I don't think so. I think if you just go back to the beginning of the pandemic, ever since then, you have a little bit more of a challenging environment because it is a considered sale, and it is a workflow change for the customer. So I don't think it's really changed from Q4 of '20 to Q1 to Q2. In fact, you've actually seen a little bit of an acceleration of the new practice adds happening. I think until practices are fully open and able to kind of handle a sales call, whether it's because of COVID or just because they're very busy, we'd expect it to kind of continue at a similar pace going forward.

John Heinbockel -- Guggenheim Securities -- Analyst

All right. And how do you feel about Chewy's Petscriptions? Do you think it's a threat? And how should we think about that?

Benjamin Wolin -- President and Chief Executive Officer

I think Chewy is trying to go around the vet, disintermediate them and it's a direct competitor to the vet. And so we don't view it as competition. We have a partnership with our vets to help drive a better outcome and whether that be healthcare or business, and we're not interested in trying to move consumers outside of the veterinary channel.

John Heinbockel -- Guggenheim Securities -- Analyst

Okay, thank you. For the question.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Brian McDonald -- Vice President of Financial Planning and Analysis

Benjamin Wolin -- President and Chief Executive Officer

Matthew Foulston -- Global Chief Financial Officer

John Kreger -- William Blair -- Analyst

Balaji Prasad -- Barclays -- Analyst

Katie Tryhane -- Credit Suisse -- Analyst

Tom Stephan -- Stifel -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Elliot Wilbur -- Raymond James -- Analyst

John Heinbockel -- Guggenheim Securities -- Analyst

More CVET analysis

All earnings call transcripts