Portland’s newest publicly traded company, Covetrus Inc., stumbled badly in its first full quarter of operations, with financial results falling far short of analyst expectations.

Covetrus stock lost nearly 40 percent of its value in a massive investor sell-off during pre-market trading Tuesday following the company’s release of its disappointing second-quarter earnings report. The report represents the first full quarter since Covetrus began trading on the Nasdaq Stock Market under the symbol CVET on Feb. 8.

Executives of the animal health technology and services company blamed unexpected costs and a slowdown in North American and U.K. sales for the company’s poor performance, but said their long-term growth strategy remains sound. Covetrus provides software that helps veterinary practices manage their operations, as well as ordering and fulfillment services for veterinary pharmacies and other related products and services.

“We’re in the early innings of this Covetrus journey,” said the company’s president and CEO, Benjamin Shaw, in a Tuesday morning conference call with investors and analysts. “These are early days in our multiyear transformation process.”

Covetrus reported quarterly revenue of $1.01 billion, about $50 million less than what analysts were expecting, according to the investor website Seeking Alpha. The company reported a quarterly net loss of $10 million, or 9 cents per share, about 22 cents per share worse than expectations. It also lowered its earnings forecast for the year to $200 million from a previous estimate of $235 million to $250 million.

Shaw said a recent decline in veterinary visits in North America, increased competition and a Brexit-related sales decline in the U.K. contributed to the lower-than-expected results. He added that Covetrus also experienced some unexpected merger-related costs in the second quarter.

“We have made significant progress over the last six months in creating a new global platform to better support the evolving needs of our veterinary community and to unlock new health and financial outcomes,” Shaw said in a prepared statement. “While end-market factors and the timing of certain infrastructure investments are creating delays to our timeline, my conviction in our ability to drive accelerated growth remains unchanged due to our market opportunity and our differentiated global value proposition.”

Covetrus was formed from the merger of Portland-based Vets First Choice and the animal health division of Melville, New York-based Henry Schein Inc., which was spun off from its former parent company. While Covetrus did not exist in the second quarter of 2018, combined financial results of Vets First and Henry Schein Animal Health for that period totaled revenue of $1.01 billion and net income of $29 million, or 40 cents per share, according to the earnings report.

Shaw told investors Tuesday that the headwinds affecting Covetrus in the second quarter this year did not alter its expectations of adding 3,000 new North American customers on the Vets First Choice prescription management platform in 2019. The company acquired about 1,200 new customers in the first half of the year, he said. Covetrus has a customer base of about 100,000 among all its products and services.

Christine Komola, the company’s executive vice president and chief financial officer, said Covetrus has reduced its sales growth projections for 2019 from the previous estimate of 3-to-5 percent. The revised outlook also includes the impact of a previously announced customer loss in North America prior to the formation of Covetrus, and other factors, she said.

“We continue to believe that the rapid growth in our prescription management platform and the momentum in the number of new customer wins will enable Covetrus to outperform market growth rates in 2019,” Komola said.

Investors did not respond favorably to Tuesday’s earnings report. Covetrus stock fell by 39 percent to $14.04 per share in pre-market trading Tuesday, down from the previous day’s closing price of $23.19 per share. Tuesday’s closing price was $13.89, down 40 percent from the previous day’s close.

Tuesday’s closing share price represented a 66 percent decline in value from the $41.01 per share closing price of Covetrus stock at the end of its first day of trading on Feb. 8.

Some analysts participating in Tuesday’s conference call expressed skepticism that the explanation of a marketwide slowdown in the veterinary sector fully accounted for the company’s unexpectedly poor performance.

“In terms of the pressure you mentioned in North America, it’s seemingly somewhat of a disconnect from other industry constituents,” said analyst Erin Wright of Credit Suisse, who asked whether the company was considering changes to enhance its competitiveness.

Covetrus Vice President of Investor Relations Nicholas Jansen responded, saying there is evidence that other companies relying on the volume of veterinary clinic visits were similarly affected during the quarter.

“We saw other third-party market data which suggests that veterinary clinics did decelerate,” Jansen said. “So I don’t think this is necessarily something that was specific to us. Some of the manufacturers also reported a slowing trend in the U.S. in (the second quarter) relative to (the first quarter).”

Vets First Choice was founded in 2010 by Shaw and his father, David Shaw, co-founder of Idexx Laboratories Inc., a veterinary device manufacturer based in Westbrook. The company received city approval in fall 2018 to build a five-story, 170,000-square-foot headquarters in downtown Portland, which now will become the world headquarters for Covetrus.

The facility is expected to provide office space, a pharmacy, fulfillment center, and software and data science labs. It is designed to have space for 1,500 employees – nearly 1,200 more than the company’s current Portland employee base of 332. Covetrus has about 5,500 employees worldwide.

Covetrus is Maine’s largest publicly traded company in terms of annual sales, with its two merged components generating combined revenue of about $4 billion in 2018. Shaw has said one of the benefits of becoming a publicly traded company is that it cements Covetrus’ future as a Maine-based firm. Several other fast-growing companies in Maine have been acquired recently by larger firms with headquarters outside the state.

 

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