Covetrus, inc (CVET) Q3 2021 Earnings Call Transcript

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Covetrus, inc (CVET)
Q3 2021 Earnings Call
Nov 4, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone and thank you for standing by and welcome to the Covetrus third Quarter 2021 Earnings Conference Call. At this time [Operator Instructions]

I would now like to hand the conference over to your speaker today, the Vice President of Investor Relations, Mr Nikolaos Jansen, please go ahead, sir.

Nicholas Jansen -- Vice President of Investor Relations

Thank you. Delfin. Good afternoon and thank you for joining us for Covetrus' is 3 2020 Earnings Conference Call. Let 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 it 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 other 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 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.co-venture.com and on the SEC's website at www.SEC.GOV forward-looking statements speak only as the date of here of and except as required by law, we undertake no obligation to update or revise before looking statements you can and it's afternoon's press release announcing our third quarter 2021 results in 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 will turn it over to Ben to provide the highlights beginning on slide three

Benjamin Wolin -- President And Chief Executive Officer

Thanks, Nick. And welcome back Good afternoon everyone and thanks for joining us today. I hope everyone is staying healthy getting vaccinated and gearing up for hopefully and what normal upcoming holiday season with family on the gasoline call I will briefly discuss some of the highlights from the quarter and then focus the rest of my prepared remarks on Covetrus' is broader technology strategy, which is a key pillar of the Company's overall value proposition to our customers and a long-term driver of value creation for our now turning to the third so that's it delivered solid performance in Q3, with good execution by the team as well as continued healthy end market demand. North America had another great quarter, where non-GAAP organic net sales grew 12% year-over-year, and non-GAAP adjusted EBITDA increased by 22% year-over-year to $55 million as our broader value proposition continues to resonate in the market. With the exception of Germany and the U.K., all other markets, our technology offering a proprietary brands delivered solid results leading to a 10% year-over-year increase in total gross profit and a 110 basis point increase in gross margin.

Unfortunately, we did not have our historical flow-through from gross profit to adjusted EBITDA due to $5 million of intercompany loan FX headwinds year-over-year and $3 million of unanticipated legal fees tied to recent developments, which created an $8 million year-over-year headwind in corporate expense. One of the clear highlights of Q3 was the reacceleration in net sales growth within our prescription management business in North America, where net sales increased 24% year-over-year. This compares favorably to the 19% year-over-year growth delivered in Q2. Encouragingly, the number of proactive prescriptions continues to increase and the visibility we have to increased adoption of our auto-ship service continues to grow. And as of every quarter since going public, all cohorts going back to the original cohort in 2012, continued to grow double digits and our most recent cohorts in 2019 and 2020 have ramped faster than any cohorts before them.

We also saw excellent leverage in this business during Q3, where non-GAAP adjusted EBITDA more than doubled year-over-year and increased 18% sequentially. This business is now on pace to deliver more than $40 million in non-GAAP EBITDA in 2021, which compares to a breakeven business just two short years ago. In the quarter, we delivered a 10% non-GAAP adjusted EBITDA margin in prescription management, which highlights the long-term potential for margin expansion for consolidated Covetrus as this business grows alongside our other high-margin solutions, including Tims, Wellness Plan Administration, Communication Solutions, Payments And Solutions, SmartPack and our proprietary brands. As highlighted in earlier announcement, we took a major step forward on this portfolio during the third quarter through the acquisitions of DCP, the market-leading platform for wellness for wellness and Point Master, a provider of integrated communication solutions for veterinary practices. We are clearly investing in these new capabilities and in our next-generation technology, and we see significant opportunity to scale the total portfolio as we leverage our channel access and our integrated ecosystem of solutions.

Although we often focus on subscription management on these quarterly calls, it is important to note that with our recent growth our combined technology offering across prescription management, global software services and SmartPack is now at nearly $800 million in annual sales and approaching $100 million in non-GAAP adjusted EBITDA. That is a substantial technology business in almost any industry. This provides a great segue to Slide four and the opportunity at Covetrus. At the company, everything we do is centered on helping veterinarians drive better health and business outcomes. While investors have come to appreciate the steady growth and scale of our in-clinic supply chain and proprietary products businesses around the world, our unique value proposition to our customer base stands from our portfolio of technology solutions that drive efficiency, revenue growth and better pet health as we strengthen our relationships with our customers and their pet parents. Let me explain how this actually works. Today, at a Covetrus powered practice, a pet parent begins their journey by booking an appointment via Covetrus' online booking tool. This appointment is followed up with text and email reminders from our communications platform.

One at the practice, a veterinarian manages this patient using our industry-leading practice information management system or fan, which provide medical meter storage, treatment path and workflow solutions. Straight out of the PIMs and right at the point of care, veterinarians can now proactively prescribe medication and have that medication delivered via our prescription management solution straight to the pet owner's home. Via the same e-commerce solution, pet parents can also sign up to use AutoShip programs and receive personalized medication from our compounding pharmacy. To drive compliance and provide financial visibility to pet parents, a Covetrus practice can now enable care plans via our wellness plan administration solution, creating a subscription relationship with a pet parent. Back at home, pet parents can shop online with their veterinarian, manage their prescription and communicate with their veterinarian via telehealth platform. It is this connected practice that allows the veterinarian to run an effective and profitable business. This portfolio that drives the connected practice has already seen significant upgrades over the last nine months and will continue to improve over the next year.

Some highlights include first, the launch of our next-generation cloud-based SIM solution, which are now live in Australia and launching a beta in the U.S. this quarter. Second, significant enhancements to our integrations with diagnostic and imaging partners. Third, continued improvements to our leading on-premise TIM solutions out-of-market ImproMed. Fourth, tight integration of BCP's wellness plan administration software into TIMs and our e-commerce solutions further strengthening the best pet relationship; and fifth, a complete blending of prescription management and TIMs to support data interoperability, improved workflow and a better standard of care, a truly operating system for the practice. With such a substantial technology business, it's hard to say that we are just at the beginning of our technology journey, but it's true. Over the coming quarters and years, Covetrus will continue to enhance our solutions all with the intent of helping veterinarians succeed. With strong end market growth and the industry's leading technology platform, it's clear that our future is bright.

Now I will turn the call over to Matthew to discuss our Q3 financial results.

Matthew Foulston -- Global Chief Financial Officer

Thanks, Ben. Good afternoon, everyone, and thanks for joining us today. I will now review our third 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. Please refer to today's press release for a more detailed description of our third quarter 2021 GAAP financial results and reconciliations of non-GAAP measures to GAAP results. Starting on Slide six. Consolidated non-GAAP organic net sales increased 3% year-over-year and non-GAAP adjusted EBITDA decreased 2% year-over-year to $58 million. The previously disclosed challenges in our U.K. and German businesses as well as unanticipated FX and legal-related costs in corporate negatively impacted consolidated results and marks another quarter of strong performance in our North America and APAC and emerging market segments.

We encouraging delivered 110 basis points of year-over-year gross margin improvement during the third quarter, including positive trends across all three of the company's operating segments. And we continue to scale prescription management, where non-GAAP adjusted EBITDA more than doubled versus the prior year period. Additionally, underlying cash generation was strong with $45 million of free cash flow in Q3. Net leverage ticked up modestly in Q3 because of the M&A activity that Ben referred to earlier. We anticipate returning to our targeted three times to 3.5 times net leverage range in Q4. Now turning to the details on Slide seven. Covetrus net sales were $1.16 billion in Q3, an increase of 3% year-over-year on both the reported and non-GAAP organic basis, reflecting healthy companion animal end market demand across many of the company's markets against the backdrop of more challenging year-over-year comparisons as we lapped the surge in volume during the second half of last year type of COVID-19 market dynamics.

The previously disclosed challenges in our U.K. and German markets continue to impact year-over-year results with non-GAAP organic net sales growth negatively impacted by approximately 700 basis points. While these markets have stabilized operationally, we have not yet seen a recovery in sales volume, which has impacted profitability. We will be taking further action on this firm near term to better align our cost structure. Moving to Slide eight. Consolidated Q3 Covetrus gross profit increased 10% year-over-year, with gross margin of 18.6%, expanding 110 basis points versus prior year period. Encouragingly, gross margin expanded in all three of the company's segments. The underlying margin strength was driven by healthy growth in the company's technology e-commerce and proprietary products and services, where gross profit increased 23% year-over-year, led by strong performance in prescription management. Collectively, these businesses now represent 45% of the company's consolidated gross profit, an increase of 400 basis points versus the prior year period and approximately 200 basis points from the second quarter of this year.

Turning to Slide nine. Non-GAAP adjusted EBITDA was $58 million for the third quarter of 2021 compared to $59 million in the prior year period. The 2% year-over-year decrease reflected a decline in profitability in Europe due to a combined $6 million negative impact from the challenges in the U.K. and in Germany as well as higher corporate expenses, including a $5 million negative impact year-over-year from changes in foreign exchange on intercompany loans that are included in our non-GAAP results, and a $3 million year-over-year increase in legal professional fees tied to recent developments. These headwinds more than offset another strong quarter of growth and margin expansion in North America and APAC and emerging markets. Non-GAAP adjusted EBITDA margins were 5% during Q3, a 20 basis point year-over-year decline reflective of the headwinds in corporate just listed. I would also highlight incremental fee headwinds in canceled during the quarter that has now been repriced into our product offerings for Q4, an additional $1 million to $2 million impact year-over-year from the rebound of certain sales and marketing expenses, primarily travel and entertainment as COVID-19 restrictions have eased and trade shows that we started in person once again. Moving to our operating segments, beginning on Slide 10.

North America net sales increased 13% year-over-year in Q3 on a reported basis and 12% year-over-year on a non-GAAP organic basis. Segment adjusted EBITDA increased 22% year-over-year in Q3 with segment adjusted EBITDA margins expanding 60 basis points versus the prior year period, reflecting the increased contribution from higher profitability generating areas of the business, including prescription management and Covetrus-branded products and incremental operating expense leverage. Drilling deeper into the North American segment trends, starting on Slide 11, our supply chain non-GAAP organic net sales increased an impressive 11% year-over-year in Q3 on top of what was a robust panel growth rate reflective of strong sales execution in a healthy companion animal end market as well as continued strength in our equine business smart. Supply chain non-GAAP adjusted EBITDA increased to $34 million for the third quarter compared to $31 million in the prior year period, with the strong top line growth partially offset by increased freight costs and labor pressures.

Moving to software services. The business continues to perform well and now includes a very modest contribution from our big [Indecipherable] acquisition back in July. We expect additional investments near term toward that platform and the building out of our suite of next-generation technology solutions including our new cloud-based practice management software that Ben highlighted earlier in his remarks. With these launches anticipated to accelerate the trajectory of our software net sales in the second half of next year and beyond. Turning to Slide 12 and our prescription management business in North America. While supply chain constraints to certain product categories, particularly done through remaining, we were pleased with the overall reacceleration in growth in that business during Q3 with net sales of $129 million, up 24% year-over-year or 26% when excluding the 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. Same-store sales also bounced back to 20% year-over-year growth, reflecting continued strong engagement by our existing network of veterinary practice customers and the headlines.

Year-to-date, prescription management net sales are up 25% year-over-year or approximately 27% year-over-year when excluding the accounting change. Of note, while excluding prescription [Indecipherable] sales in both periods, prescription management net sales have increased 30% year-over-year, highlighting the underlying health of the business. Encouragingly, we saw signs of stabilization in the prescription diet food category exiting Q3. This, combined with the anticipated sales we're driving for our customers during cyber weekend marketing activities should enable a solid finish to the year. In total, full year 2021 prescription management year-over-year net sales should increase by approximately 25% or 28% excluding the accounting change. Turning to profitability. Q3 Prescription management non-GAAP adjusted EBITDA was $13 million or more than double the $6 million reported in the prior year quarter. This represents a 10% non-GAAP adjusted EBITDA margin during the quarter and reflects the team's overall focus on driving increased profitability after several quarters of increased investment. On an LTM basis and normalizing for the legal charge in Q4 2020, we converted approximately 11% of the year-over-year dollar growth in prescription management net sales to non-GAAP adjusted EBITDA.

We continue to target approximately 15% flow-through for all of '21 despite the duplicate costs from opening our new compounding pharmacy and revenue, on the ongoing diet headwind we have previously discussed. Turning to our Europe business segment on Slide 13. Non-GAAP organic net sales decreased 11% year-over-year in reflecting the previously disclosed challenges we are experiencing in the U.K. and German markets, which negatively impacted organic growth by 19%, and are more than offsetting healthy veterinary demand fundamentals across the rest of our European markets. Our business is operating in Ireland, the Netherlands and Czech Republic, once again were notable contributors to our results with strong performance of proprietary brands in a number of our markets as well. We are taking concrete actions to address the U.K. and German challenges including leadership changes and cost cutting, and expect those markets to return to growth in 2020 -- in 2022, as we anniversary the headwinds and benefit from renewed commercial efforts in these markets.

Turning to profitability. Our Europe segment adjusted EBITDA in Q3 decreased 16% year-over-year to $16 million, with margins declining 20 basis points year-over-year to 4.5%. The U.K. and German markets represented a combined $6 million year-over-year negative impact to profitability in Q3. These challenges more than offset the growth seen in the rest of Europe, and the benefits from increased penetration in proprietary brands. Moving on to our APAC and Emerging Markets segment on Slide 14, our team delivered a 4% year-over-year increase in non-GAAP organic net sales in Q3 on top of the exceptional 16% organic growth rate reported in the prior year period, reflecting another quarter of strong sales execution despite the challenging Emerson. Australia and Brazil delivered healthy, high single-digit year-over-year non-GAAP organic net sales growth during Q3. Segment adjusted EBITDA increased 25% year-over-year during and segment adjusted EBITDA margins expanded by 120 basis points year-over-year, driven by 40 basis points of gross margin expansion and the ongoing operating leverage from stronger and service. Now turning to the balance sheet on Slide 15.

We generated $45 million in free cash flow in the third quarter, although our net leverage ticked up to 3.8 churns as a result of the $81 million spent on the two acquisitions completed in Q3. We ended the quarter with $485 million in available liquidity and approximately 1.9 churns of headroom under our net leverage covenant as defining our credit. We expect our net leverage will come back within our targeted range by year-end, driven by growth in adjusted EBITDA during Q4 a normal seasonality of our cash flows. Now turning to our 2021 guidance as outlined on Slide 16. We continue to forecast non-GAAP organic net sales growth of 5% to 6%. The outlook includes slightly higher net sales of previously expected in North America and APAC and emerging markets, with Europe continuing to be impacted by the challenges in U.K. and in Germany. As a reminder, these two markets are expected to negatively impact Quebetrasys consolidated organic net sales growth in 2021 by approximately 600 basis points. Looking at non-GAAP adjusted EBITDA, our outlook also remains unchanged of $245 million to $255 million, but now includes the added legal professional fees and FX headwinds experienced during the third quarter.

As we look at year-over-year growth in adjusted EBITDA for the fourth quarter, we anticipate another quarter of healthy growth in North America, where we expect continued strong performance in prescription management profitability, including the non-repeat of last year's legal expense and improved results in supply chain. This growth is partially offset by increased corporate costs, reflecting the non-repeat of favorable FX in the prior year period. We are also monitoring the vaccine mainly in the U.S. and the potential disruption that may have on our business and our supply chain for us. We have not yet incorporated this into our outlook, given the many unknowns at this stage. Looking ahead, it's too early to comment on our detailed 2022 plans, but based on the available information we have today, we are preliminarily targeting an overall modest acceleration in non-GAAP organic net sales growth and non-GAAP adjusted EBITDA growth in 2022 versus our anticipated 2021 growth rates.

This is driven by the lacking of the specific challenges in our U.K. and German markets, which collectively are expected to negatively impact 2021 non-GAAP adjusted EBITDA and more than $15 million year-over-year. Additionally, we anticipate continued healthy growth in net sales and profitability infrastructure management and an improvement in our software growth outlook with multiple new products coming to market in 2022. We also anticipate general stability in our supply chain businesses around the globe with continued focus on growing our higher-margin proprietary brands. Some of this growth will be offset by higher freight costs, continued labor market tightness and the return of discretionary spend that got economies was over. We will provide additional detail on our 2022 outlook early next year.

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. In closing and outlined on Slide 17, we are aggressively investing in our tech platform to enhance our value proposition to secure new business and to accelerate our market opportunity. We are also very focused on driving our Covetrus branded and proprietary product portfolio and streamlining operations to deliver increased efficiencies and to reinvest back into our platform. While Q3 certainly had some noise in our reported results, I'm confident in our strategy and the momentum we have in the core drivers of our business. We remain in the early innings of driving for the company's long-term potential of above-market net sales growth and adjusted EBITDA margin expansion, and believe we are on the path to sustainable shareholder value creation as we execute our strategic plan.

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

Questions and Answers:

Operator

[Operator Instructions] Here's our first question, John Kreger of William Blair.

John Kreger -- William Blair -- Analyst

Thanks guys. Maybe my first question, if you guys could just kind of go over some of the noise that had impacted your numbers in the last couple of quarters and where you think those items go in the fourth quarter? It sounded like you think the therapeutic food issue is maybe about to be alleviated. So if you could just clarify that. And what sort of assumptions you're making on that FX and legal cost item?

Benjamin Wolin -- President And Chief Executive Officer

Yes. Thanks, John. On therapeutic diet side, we saw things begin to stabilize as we exited I hate to count my chickens before they hatch because it's a fairly volatile situation. And when you've been as far behind as we have, it doesn't take much of a pun. So not you off track. So I'd say we're mildly positive on the outlook for that, but certainly not a return to normal in the immediate short term. We still have quite a few SKUs on material that order, but better than we were. On the other two items, we had some headwinds in the quarter on FX on the intercompany loans. We assume in our guidance that we will not have a headwind or tailwind in the coming quarter. So we're basically assuming exchange rates stay flat. And then the final one, the legal, we're expecting a sizable reduction in Q4 of legal expense. I think it's down $2 million to $3 million as we pass through those largely onetime items.

John Kreger -- William Blair -- Analyst

That's helpful. And then a quick follow-up. Ben, I think right there at the end, you said you're investing aggressively in the tech platform. Should we assume that, that spend in '22 is sort of tracking with revenue growth or maybe more aggressive? And what sort of specific product or products would you call out that we should be looking for?

Benjamin Wolin -- President And Chief Executive Officer

Yes. Look, what we kind of remain consistent about driving both the top and the bottom line. So I don't think we're backing off of that basic thesis. But obviously, as the business gets bigger and the opportunity it becomes even more robust for us. We want to continue to invest in that platform. So it's going to be a lot of the things that we mentioned in the past here, which is continued investment in our TIM both in the U.S. and internationally. We're excited that we're in market internationally with a cloud or kind of plateau version as well as going to market in Q4 here in beta.

We'll continue to focus on the integration of our prescription management because those students platforms, which we're very excited about. And then some of the more recent areas like our wellness plan administration through the acquisition of BCT, we feel like there's just tremendous runway there and are getting lots of positive support from customers. So the tech business, as I mentioned in the prepared remarks, is almost $800 million in revenue, but we feel like there's just tremendous market opportunity, general secular shift in our favor going online, and it's right to invest in that opportunity. So it was great to see the reacceleration of the business in Q3 versus Q2. So we're feeling pretty bullish about the prospects for the tech platform and all of the things that surround it. Thank you.

Operator

And our next question is from Jon Block from Stifel.

Tom Stephan -- Stifel -- Analyst

Hi guys. This is Tom Stephan on for John. I want to start off with the 2022 preliminary guide on adjusted EBITDA. Matthew, I think you said the guide is for it to accelerate. So if it were to accelerate from -- the 10% growth implied in the guide for 2021 to call it, 12%, 13%, for instance. I think that'd be roughly $30 million of EBITDA dollar growth. And I guess my question is, at a high level, how should we think about the contribution between prescription management and the rest of the business? Is it 50-50? Or do you maybe have confidence in one area of the business over the other?

Matthew Foulston -- Global Chief Financial Officer

Yes. I mean, we were super excited with the reacceleration of growth in prescription management in this quarter compared to the second, we were up from 18 to 24 and has been went through all the cohorts at running double digits. So we're super excited about the potential of that business. We're not ready to peg a number in terms of growth rates for that. But we would anticipate continued solid contribution and continuation. So the only other thing I'd add is if you just look at the two-year performance of that business, it's gone from breakeven to $40 million of EBITDA. So you can just start to extrapolate and look at the growth rates currently and roll forward a year or two, and you could see how the business expands its margins over time.

Tom Stephan -- Stifel -- Analyst

Got it. That's helpful. And then kind of just as a follow-up there on prescription management. The $13 million in EBITDA for the quarter was very solid as were margins. Can you just elaborate a bit more on the drivers there, kind of structurally, to what extent do you feel the business is in the right position to potentially resume maybe that consistent 15% contribution margin? Can we kind of model that out moving forward? Or just any color there?

Matthew Foulston -- Global Chief Financial Officer

And I think one thing I sort of say is we do always look at this over a rolling 12-month period because of the lumpiness of the bumpiness in the investments. But we feel pretty good about the 15% for this year and a really strong fourth quarter coming up. And would think we'd be in that 15% to 20% range. As Ben said, there's so much growth opportunity here. I think we're biased toward the lower rather than the high end, but because now is the time to grow. But we feel pretty comfortable about that.

Benjamin Wolin -- President And Chief Executive Officer

Yes. The only thing I would add to, Matthew's comments is you're looking at a total pharmacy spend in the U.S. alone, north of $10 billion, growing very fast, the prescription management business, $500 million this year. We don't want to suboptimize the opportunity. So we are committed to driving profitability out of that business, but we are going to invest when we see opportunity either directly into prescription management or really around the things that we think will drive it like [Indecipherable] and wellness and lime management all of those things contribute to the prescription management here going forward.

Tom Stephan -- Stifel -- Analyst

Got it. Thats all folks. Thanks guys.

Operator

And for our next question from Nathan Rich of Goldman Sachs.

Nathan Rich -- Goldman Sachs -- Analyst

Thanks. Good afternoon, I wanted to stick with the prescription management business. I guess as you've started to see some of these supply issues ease, have you seen impact of customers come back? And Ben, I don't know if you'd be willing to maybe comment on either the September or October sort of exit rates for that business as we think about trajectory into the fourth quarter? And relatedly, was there any impact on practices that you could onboard onto the platform during this period of the supply disruption?

Benjamin Wolin -- President And Chief Executive Officer

Yes. Thanks, Nathan. So a couple of different ways of looking at it. I think the supply disruption was less of a clinic disruptor and more of a consumer disruptor, as you could imagine. And to put it in perspective, our pharma business on the platform this year will grow at double the rate of our diets business. And historically, those things used to grow kind of in line with one another. So you get a sense of the drag that dies has created for the business. I think in terms of exit rates and how we think about the near-term growth here.

We feel like the Q3 growth rates look at a pretty good marker for the Q4 growth rate. There's just good trajectory in the [Indecipherable] and both Matthew and I commented in our prepared remarks, all the cohort data, the repeat purchase data, the proactive prescription data, all of that is really quite positive. So I think if you just look in the short term, we feel pretty good about how the business has performed. And I think there was a lot of questions that are coming out of COVID, was COVID was a onetime phenomenon or how would the business grow. And so to be growing 25% on a year-over-year basis, even after COVID. So like a two-year stack of almost 67% in the quarter. I just -- it just makes us feel really both proud of the work that the team is doing and confident in our prospects going forward.

Nathan Rich -- Goldman Sachs -- Analyst

Great. And then, Matt, maybe a follow-up for you. I just wanted to go back to the EBITDA step-up in the fourth quarter. I think with the onetime items you called out, that would probably get you into the low end of the annual guidance range, if I'm doing the math correctly. So I guess like maybe outside of those items, what are sort of the key factors that kind of would get you to the midpoint or the high end of the range for the year?

Matthew Foulston -- Global Chief Financial Officer

Yes. I think when we look at the improvement, we talked about the noise when I was answering that first question, which was really the FX and the legal stuff. But we've also got a pretty strong improvement in North America, which is a combo of prescription management and supply chain. One of the phenomenons we've got is in Q3, I would say, freight cost inflation gone a bit ahead of pricing. And we took that pricing right on the length in the quarter, and we think those to will be matched up in Q4. So we won't have that it, which will help the sale. And I think we'll be up $1 million or so in Europe and APAC combined. Thanks for the questions.

Operator

And for the next question, Elliott Wilbur of Raymond James.

Elliott Wilbur -- Raymond James -- Analyst

Thanks. Question for Ben. Maybe within the North American supply chain business, can you just talk a little bit more specifically about the performance of CET branded proprietary products with -- in that segment? I know last call, you had talked about fairly significant cadence of new product launches. And also some geographic expansion there, but just wondering how that business performed within the context of the overall segment?

And for Matt, I guess, could you just remind us when we're talking about the U.K. and German challenges, exactly what you're referring to and which of those may have had a more negative impact than the other in terms of performance? And with respect to some of the steps you're taking in terms of cost management, is that something that can be done immediately so that the implementation of those steps will, in fact, start to benefit numbers in the early part of 2022? Or is this something that has to be a little bit more managed so it doesn't impact top line trends?

Benjamin Wolin -- President And Chief Executive Officer

Yes. Thanks, Elliot. So you had a couple of questions in there. Why don't I start with the proprietary brand growth in North America and globally. And then Matthew can talk about some of the areas that we need to clearly prove upon. From a North America standpoint, the team just all around did an awesome job, I would say, north of 10% growth in totality. And I think you're really just seeing the benefit of this combined go-to-market team that can sell across proprietary products in clinic third-party technology solutions, wellness plans, etc. Specifically on the proprietary brands, you saw a growth rate 50% higher than the total average, so high teens. And a lot of that just comes from again, strong effort by both the consumer or customer-facing team in North America as well as the global team that manages proprietary brands on a global basis.

So we're super bullish there. There's a great slide in the presentation, Slide eight shows the mix of our business on a year-over-year basis. And you can see that for the products that we control, our technology and our proprietary brand, we had 23% year-over-year growth and it now represents 45% of the total GP in the business versus 41% just a year ago. So to be doing that on such a large scaled number, which is about $215 million, we're just really, really excited and get -- be closer and closer to kind of a 50% magic number that we've been pushing forward of getting our own -- our own products to represent 50% of GP. So just really excellent execution. And I think a sign that we're just picking up share in North America specifically on all in-clinic business, whether it be third-party or our own brands. And then Matt, you can speak about specific challenges and where we're focused on and probably give us a sense of timing on the rebound there.

Matthew Foulston -- Global Chief Financial Officer

Yes. Let me take these separately because they're very separate issues. So I'll talk a bit about Germany first. and it actually occurred first. And just to refresh your memory, Germany was the last of the 72 TSAs that we had to get off as part of the separation from Henry Schein. And we effectively came off of that TSA in October of last year, right in the middle of the pandemic. But what that actually involved was getting out of a shared warehousing situation with Henry Schein into a new third-party logistics provider, supplier and warehouse which was pretty difficult, and done in pretty difficult circumstances.

As we've mentioned on previous calls, the execution of that was port to put it timely and our service levels to customers were really, really unacceptable. It resulted in a lot of lost sales starting last October. So in terms of timing, we are now beginning to lap that. So we'd anticipate going forward, there's not a sales headwind in Germany, although we far from fix the problem and align the cost structure, and I'll come back to that in a second. In the U.K., the situation now really revolves around two things that are related. We lost a manufacturer. And then as a result of losing that manufacturer, we lost a customer and it had a pretty severe impact on revenue, and that started in the first quarter of this year. So the lapping of that is going to take us a little bit longer.

Obviously, big reductions in revenue, and we need to meet corresponding adjustments to our cost structure. We're working on that as we speak. And I would imagine having plans in place by year-end, obviously, in certain markets, the consultative process around making adjustments to the cost structure can take a little bit longer than expected. But certainly, no later than mid first quarter, we ought to have that behind us and be operating in a way we would like to to go forward. In terms of magnitude, I said the U.K. is just a little bit bigger than Germany. It was a much bigger market for us. So that's winning on us just a little more. Hopefully, that got your questions, Eillot.

Elliott Wilbur -- Raymond James -- Analyst

Yes. Great. Then I guess just as a follow-up to the cost question. How do you think about these moves in terms of potentially impacting the top line and sort of manage through that possibility?

Matthew Foulston -- Global Chief Financial Officer

Well, I think we're looking to do two things. One is to recover the top line slowly but we're not going to get all of these customers back immediately. So it's going to take time. So the plan is to adjust the cost base get the returns back toward where they used to be and where we need them to be. And it's the top line response quicker than we expect, that will be growth.

Operator

Our next question is coming from Erin Wright from Morgan Stanley.

Erin Wright -- Morgan Stanley -- Analyst

Great.Thanks. As you head into kind of 2020 or 2022 here and think about vendor negotiations, conversations with your manufacturer kind of partners here. Do you anticipate any major shift in access to product lines by cell versus agency relationships? Do you have any visibility yet on that front? I think you mentioned some access to new products maybe heading into next year, but anything else we should be thinking about?

Benjamin Wolin -- President And Chief Executive Officer

Aaron, we don't anticipate any significant shift here. We're in the beginnings of those conversations with the manufacturers. And I'd say, the general message is I think people are excited about our omnichannel solution and the differentiation that we bring to the marketplace. Obviously, there's always puts a base in these relationships. But I don't believe at this time that there's going to be any significant moves, positive or negative.

Erin Wright -- Morgan Stanley -- Analyst

Okay. That's helpful. And then in terms of the prescription management business, I mean, should we be thinking about that still as a 30% to 40% grower longer term? And I guess it's more about retention and engagement than it is about adding new platform users, but I did notice it was, I guess, flat on a sequential basis. Was there any sort of reason for that?

Benjamin Wolin -- President And Chief Executive Officer

Yes. So I think we're not modeling or forecasting 30% to 40% growth. I think that the numbers in the mid-20s is kind of what we've been sticking to and what we think is appropriate. Part of it is just a law of large numbers here at the business scales. Growth is going to come from both new adds to the platform and engagement on the platform. If you look at the number of consumers on a practice basis, it's still a very small number. So we feel like there's lots of running room in the existing business. there's lots of running room for us to add new customers to the back.

Matthew Foulston -- Global Chief Financial Officer

And I think if you look at practice adds and you look back at last year, we were flat in the same quarter. It's a tough time to get into practices and make that sell in the holiday season. But we'd expect that to pick back up again.

Elliott Wilbur -- Raymond James -- Analyst

Okay great. Thank you.

Operator

And for our next question, Balaji Prasad of Barclays.

Balaji Prasad -- Barclays -- Analyst

Alright, good evening and thanks for the question. So getting back to prescription management again, can you call out some of the big shifts at least in terms of the conversations that you're having and how we have to think about growth in the net adds? I mean, just called out that you still think that there's going to be significant and what's the pace that we can expect? And secondly, as I look at the EBITDA component on your guidance, did you say that you have taken the inflationary or supply chain headwinds fully into account in your pricing reset and so the guidance incorporates that fully.

Matthew Foulston -- Global Chief Financial Officer

Want me to take the last one first, Ben, on freight pricing.

Benjamin Wolin -- President And Chief Executive Officer

Yes

Matthew Foulston -- Global Chief Financial Officer

Yes. We if there's a massive shock in Q4 in freight rates that we didn't see coming into it, we have a price for that. But we have priced for the rates we're incurring going in. So we think we're pretty cover in the guidance we've provided.

Benjamin Wolin -- President And Chief Executive Officer

And then in terms of the first question about the types of conversations that we're having on prescription management. I think the general tenor in the market as advanced from one where home delivery of prescription management was kind of a defensive solution to now one where veterinarians believe that they need to have a solution in order to compete with retail and other players. So we're excited by just really kind of the general shift in the market on that front, and we think that will be beneficial to the business over the long term, both in terms of the engagement on the platform as well as the new people willing to adopt the platform.

Balaji Prasad -- Barclays -- Analyst

If I can have a follow-up here also on your trial with a lawsuit with Chewy. So some of the response that you provided, you're commenting that Chewy has been suppressing competition. Can you give you any further updates on this? And also let us know if you need to take any provisions to either make for a potential trial or settlement going forward?

Benjamin Wolin -- President And Chief Executive Officer

Yes. Well, Balaji, I obviously won't comment on active litigation. But what I will say is we feel very comfortable in our position. We know that we are well situated and we are the only business that is truly trying to drive a positive outcome for the veterinarian, whether that be a healthcare outcome or a business outcome and that veterinarians are well within their right to promote their own pharmacies. So we are -- have been heartened to see the response in the marketplace from our customers who are waking up to the potential disintermediation that an online retailer like Chewy might be -- might provide.

Balaji Prasad -- Barclays -- Analyst

Got it. Thank you. Thats all folks.

Operator

At this point, we don't only have questions on the queue. And this concludes today's conference call. Thank you, everyone, for your participation. You may now all disconnect.

Benjamin Wolin -- President And Chief Executive Officer

Thank you.

Duration: 55 minutes

Call participants:

Nicholas Jansen -- Vice President of Investor Relations

Benjamin Wolin -- President And Chief Executive Officer

Matthew Foulston -- Global Chief Financial Officer

John Kreger -- William Blair -- Analyst

Tom Stephan -- Stifel -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Elliott Wilbur -- Raymond James -- Analyst

Erin Wright -- Morgan Stanley -- Analyst

Balaji Prasad -- Barclays -- Analyst

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