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spk02: at IQ Inc. first quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star and zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.
spk00: Good afternoon. Thank you for joining us on PetIQ's first quarter 2021 earnings conference call. On today's call are Cord Christensen, Chairman and Chief Executive Officer, Susan Schultes, President, and John Newland, Chief Financial Officer. Michael Smith, EVP of the product segment, will also be available for Q&A. Before we begin, please remember that during the course of this call, management may make forward-looking statements within the meaning of the federal securities laws. These statements are based on management's current expectations and beliefs and involve risks and uncertainties that could differ materially from actual events or those described in these forward-looking statements. Please refer to the company's annual report on Form 10-K and other reports filed from time to time with the Securities and Exchange Commission and the company's press release issued today for detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Please note on today's call, management will refer to certain non-GAAP financial measures, including adjusted gross profit, adjusted SG&A, adjusted net income, and adjusted EBITDA, among others. While the company believes these non-GAAP financial measures will provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. In addition, Patek has posted a supplemental presentation on his website for reference. And now I'd like to turn the call over to Corey Christensen.
spk10: Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter financial results. Today, I'll begin with an overview of our strategic business and financial highlights. Then Susan will provide greater detail on our services segment, and John will discuss our financial results. Finally, Susan, John, Michael, and I will be available to answer your questions. We are very pleased with our strong start to 2021. We generated record results driven by growth in both our product and services segments. Our team has done well to execute on our strategic objectives, serving our retail and e-commerce partners, to ensure we are serving pet parents and their pets where and when they needed to fulfill their pet health and wellness needs. Net sales increased 36.2% to 254.3 million. Adjusted gross margin expanded 130 basis points and adjusted EBITDA of 26.9 million increased approximately 86% year over year. This demonstrates the strength and momentum across our pet health and wellness business. During the first quarter, we continue to experience robust velocity growth from both our manufactured and distributed pet products across all sales channels. Product segment net sales increased 38.3% to 230 million, and product segment adjusted EBITDA increased approximately 60% to 38.8 million, representing an adjusted EBITDA margin of 16.9%, an increase of 230 basis points compared to Q1 last year. Our services business reached a very important inflection point where we saw headwinds from the pandemic starting to abate. For Q1, services segment net revenues were $24.3 million, an increase of 18.6% compared to the same period last year, an increase 26.6% from Q4. Adjusted EBITDA of $2.1 million for the services segment was up 5% from Q1 last year, and increased 10.5% compared to Q4. We estimate that the services segment would have contributed an additional 3.9 million of net revenue and 2.6 million of adjusted EBITDA, and the total for the quarter would have been approximately 28.4 million of net revenue and adjusted EBITDA of 4.7 million if the service segment did not have COVID-19 related impacts. Through the first half of Q1, our services segment rate of absenteeism was still elevated as we discussed on our earnings call last quarter. However, as we progressed through the first quarter, we started to experience a welcomed improvement in COVID-19-related impacts. As a result, we ended the quarter with single-digit temporary closures week-to-week based on COVID-19-related illnesses compared to 12% to 16% in Q4. The health and safety of our employees remains our top priority, and I want to thank all the members on our team for their hard work and dedication as they continue to be on the front lines helping pet parents and their pets. We are pleased that our service organization improvements we experienced in Q1 have continued into Q2. We believe Pet IQ's mission of delivering smarter options for pet parents to help enrich their pets' lives through convenient and affordable access to veterinarian products and services is increasingly resonating with pet parents. What remains consistent for our business are the robust industry tailwinds, including the humanization of pets and continued significant growth in pet health and wellness categories as pet parents are taking better care of their pets and looking for ways to save money doing it. Taking a closer look at our product segment for the first quarter, sales were led by our e-commerce business that was up over 40% versus Q1 last year. These gains were driven by our manufactured portfolio as our business was up 115%, including Capstar, or up 63%, excluding Capstar for the quarter. Our team's emphasis on winning in both brick and mortar retail and e-commerce continues to pay off, as we also saw strength in our traditional retail partners, largely driven by the pet specialty channel, which was up 48% for the first quarter. From a mix standpoint, Our business in the quarter consisted of 77% distributed and 23% manufactured based on the timing of product shipments to one of our largest retail partners in the quarter. Our distributed sales mix was slightly higher than our anticipated full year mix. We expect our manufactured mix to increase for the full year to approximately 26% of sales. PetIQ participates in several of the largest, fastest growing categories within the pet industry, such as flea and tick solutions and health and wellness. As these categories have evolved both in size and sales channel, we are purchasing market data to better reflect our understanding of the categories we compete in. As I've noted previously, our e-commerce data comes from a broader Nielsen report and data from a partner of IRI known as 1010 Data. For the 12 weeks ended March 27, 2021, these data sets show the flea and tick category growing 14%, and is pacing to eclipse a $1.5 billion market across the retail channels we compete in. FedIQ's flea and tick manufacturer brand portfolio outpaced the category by growing 16%, while picking up 31 basis points of share in the first three months of 2021. These share gains were driven by the e-commerce channel, where our brands grew 41% year over year. Our performance in this fast-growing set of customers was fueled by the Capstar brand, which was up 49%, along with PetArmor Plus, which grew 44%. PetIQ continues to lead the fastest-growing form within the flea and tick category, oral treatments. In Q1, this segment grew 27%, with PetIQ's brands growing 33%, and continues to be a growth driver for our portfolio and also for the broader category. This momentum is expected to be maintained as we head into the peak selling season for the year. Q1 was our second full quarter of having Capstar in our portfolio, and once again delivered results that outperformed our expectations. For the first quarter of the year, the Capstar brand grew 35% in consumption across all measured markets, making it the fastest growing offering within the top 10 OTC brands in the industry and is now the number four brand in the flea and tick category. Even as we continue to make investments to strengthen the Capstar brand, we have a clear line of sight to conservatively achieve our stated goal of greater than $20 million of incremental EVA contribution from Capstar in 2021. This will further drive our product segment margin improvement based upon our QM results and full year 2021 projections on the brand. For the 12 weeks ended March 27, 2021, based on the same Nielsen plus 1010 data set, the pet health and wellness category grew 33%, and are now also on pace to eclipse a $1.5 billion market in the OTC product segment for 2021. PetIQ brands grew nicely at 29%, yet we trailed the category due to just beginning to build out our portfolio within the e-commerce segment where the category is growing 47%. We view this as a strong incremental opportunity as we move forward. As discussed in the last quarter's communication, we plan to launch an advanced product line in the back half of 2021, to better position us to compete within the e-commerce and direct-to-consumer channels for pet supplements. These types of premium offerings are what has led e-commerce to become dominant across the market within health and wellness. We are excited to begin participating in this segment and to provide our loyal consumers an even better option to meet the needs of their pets. From a balance sheet and cash perspective, we continue to have ample liquidity and financial flexibility with our cash on hand cash generation, and existing availability under the new credit facility we entered into in mid-April to support our future growth. And although we have suspended formal guidance due to uncertainty from potential COVID-19 related impacts to our business, we do want everyone to understand that, as I stated previously, we continue to maintain an internal budget of approximately $950 million in net sales and over $100 million in adjusted EBITDA, with the only significant variable to this plan being COVID-19 related impacts affecting our services segment results. As we look at the year in total, we expect to generate approximately 57% of our total net sales in the first half of 2021, and approximately 60% of our full year adjusted EBITDA. Similar to years prior, Q2 will continue to be our largest net sales and adjusted EBITDA quarter. The balance of our net sales and adjusted EBITDA will be weighed to the second half of the year, Keep in mind, we begin to lap the addition of Capstar in August of 2021. We maintain great visibility into our products segment and expect it to help us fuel another year of significant margin expansion and adjusted EBITDA margin expansion, demonstrating accelerating profit leverage of PetIQ. We expect to generate further improvements in our services segment as the year progresses, and we are optimistic that with lower or minimal rates of absenteeism, and other COVID-19-related impacts, we will then be in a better position to provide formal annual guidance. In summary, we are off to a strong start in 2021. We believe PetIQ's differentiated position in the animal health industry will continue to fuel our long-term growth. We expect to continue to benefit from rising pet adoption, increases in dollar spend per pet, and an emphasis on affordable, convenient pet health care. All great industry tailwinds for us. We believe PetIQ remains well positioned to capture a disproportionate amount of the industry growth as we move forward with our vertically integrated product manufacturing and distribution platform and a national footprint of convenient and accessible veterinarian services. With that overview, I would like to now turn the call over to Susan.
spk03: Thank you, Cord. In the first quarter of the year, we continued to shake off the impact of COVID-19 on our services business. As the country welcomed the new year with energy and hope, Q1 remained a roller coaster of COVID uncertainty for many consumer-facing services businesses. COVID infections peaked in mid-December, and death rates peaked in early January. And all the while, our team was operating safely and effectively to fulfill our mission of providing affordable and convenient veterinary services to pet parents. Even though 56% of the U.S. workforce was still working remotely in January and the mobility of the U.S. consumer was 35% below pre-pandemic levels, our clinics were open and serving pet parents. I would be remiss if I didn't thank our team for their incredible energy and drive in Q1. That energy and drive helped us to deliver, once again, sequential improvement in our performance metrics for Q1. As we emerged from COVID related impacts in our services business, we've been focused on generating consistent improvement in our financial results compared to the prior quarter. Keep in mind, historically, our fourth quarter and first quarter typically represent similar veterinary service results based on seasonality. I'm proud to report that we continued to have double digit growth in all of our key KPIs for Q1. Importantly, Our total pet volume was up over 20% versus Q4, and our dollars per clinic were up over 15%. Finally, the number of clinics we operated in the quarter continued to climb, up over 10% versus Q4, as demand for wellness veterinary services grew. Importantly, we saw an inflection point in our results as the key headwinds we experienced as a result of COVID-19 started to abate. Specifically, we experienced a dramatic slowing of absenteeism, which as a percentage of total clinics held has dropped into the single digits for the first time since the pandemic began. This is just another great sign our services business has stabilized and is poised for continued growth. Our growth also continues to outpace the overall veterinary service market. And we are incredibly pleased to see that in total, nationwide, veterinary clinics are busy. This is a great indication of the strong pet industry tailwinds. In Q1, our team also connected with more pet parents virtually than ever before. Call volumes alone skyrocketed in Q1 versus Q4 by over 100%, with most of the callers wanting to find their nearest clinic location. In addition, our telehealth calls grew by 24% versus Q4, with most of our pet parents asking to discuss their pet's symptoms as they continued to manage their pet's health and wellness needs from home. We kicked off our 2021 wellness center build-out in January and celebrated the opening of 13 new centers in Q1. We continue to expect our total wellness center build-out for 2021 to be in a range of 130 to 170 new wellness centers. We expect our new unit growth to be evenly weighted between the first half and the second half of the year. And as I've mentioned previously, with 60% of our new wellness centers representing conversions of our mobile clinics and 40% of our new wellness centers to be greenfield locations. In collaboration with the retail partners in which we operate, we also kicked off our combined marketing plans for the year in March. We spent considerable time during the pandemic developing collaborative plans that tackled geo-marketing at a very local level and leveraging our respective marketing spends to optimize pet parent reach. As mentioned last quarter, there are two initiatives that we are particularly excited about and continue to monitor closely. Our first initiative is focused on attracting new pet parents during these complex times. We are excited to again report that this initiative is working. In Q1, 50% of the pet parents that utilized our services were new to Pet IQ. Recall, we also experienced a similar rate of new pet parents using our services in Q4. Pet parents are clearly coming to Pet IQ for two reasons, affordability and convenience. Our second initiative is focused on our Smart Care Wellness Plans, which we launched nationwide in Q1. We are excited to see the positive initial traction from this program with over 7% of our pet parents purchasing this plan. Smart Care Wellness Plans provide pet parents an affordable way to care for their pet annually for a low monthly fee. Another benefit to our Smart Care Wellness Plans is that we generate three times the revenue and margin when pets are on this program versus our average. We look forward to providing you with more updates on these two key initiatives as the year progresses. Finally, as we get back to more of a pre-pandemic operating environment in our services business, we expect to benefit from greater efficiencies. The health and safety of our employees, our retail partners, our pet parents, and their pets remain our top priority, period. As more of the U.S. population becomes vaccinated and certain COVID-related restrictions and regulations are eased, this means that we can reintroduce certain services that we temporarily suspended and staff our mobile clinics and wellness centers similar to how we did prior to the pandemic. An example, pet nail trims. We removed this service in March of 2020 as it was deemed an inessential service by many states, counties, and the AVMA. By restarting this service, our total pet count will increase dramatically and it will also improve margins. Another example is clinic staffing. During the height of COVID, to help manage crowds and lines and to ensure appropriate social distancing in our retail partner stores, we brought in additional staff to assist with pet parent flow management. This increased staffing, while necessary, was an added cost that we expect to reduce as the year progresses. We believe we have a great opportunity to gain more operational efficiencies like these throughout the year that will benefit our sales and our overall profitability. In closing, Pet IQ is in the right place at the right time. From a pet industry perspective, 32% of dog and cat owners who consider their pets part of the family are concerned about the affordability of routine health care for their pets. We know that pet parents are seeking out solutions for affordable veterinary care at increasing rates. The good news is that at PetIQ, we are open for business and remain focused on our mission of providing millions of pet parents with the affordable veterinary care they desire. With that, I'll pass the call over to John.
spk06: Thank you, Susan. We are pleased with our strong start to 2021. PetIQ generated record net sales of $254.3 million, an increase of 36.2% compared to Q1 last year. This increase was driven by continued product segment growth, including contribution from Capstar. We also benefited by approximately 15 million from a shift in the timing of a seasonal flea and tick product order to Q1 from the second quarter of this year. Even with this shift in timing, Q1 sales were greater than we anticipated. In total, product segment sales were $230 million, up 38.3% compared to the prior year quarter. The services segment contributed $24.3 million to our consolidated net sales in Q1, an increase of 18.6% from the prior year quarter. This reflects new Wellness Center's sales contribution as we lapped COVID-19 related closures that started in March of 2020. Importantly, As both Court and Susan mentioned, we are very pleased with the significant improvements in the services segment results as the impacts from COVID-19 were the lowest we've experienced since the onset of the pandemic. We estimate the services segment would have contributed an additional $3.9 million of revenue without any COVID-19 related headwinds in the quarter. First quarter gross profit increased 48.7% to $47.8 million and gross margin increased 160 basis points to 18.8%, even as we experienced an estimated 74 basis point temporary headwind from COVID-19-related impacts in the services segment. Adjusted gross profit was 51.8 million, and adjusted gross margin was 20.7% for the first quarter of 2021, representing an improvement of 130 basis points when compared to the same period prior year. First quarter 2021 general and administrative expenses were $40.7 million compared to $31.7 million in the prior year quarter, an increase of $9 million. Adjusted general and administrative expenses were $36.7 million compared to $26.7 million in the prior year period, an increase of $10 million. The company did recognize $3.8 million of amortization expense associated with the one-time non-cash write-off of in-process R&D assets. As a percent of net sales, adjusted SG&A remained flat the prior year. Our strong sales growth combined with our increasing gross profit helped us achieve adjusted EBITDA of $26.9 million, an increase of 85.8% compared to Q1 last year. Our adjusted EBITDA includes the benefit of approximately $1.5 million from the shift in the timing of the seasonal flea and tick order that I previously mentioned. We also had a $2.5 million shift in the timing of R&D and other expenses to the second quarter of 2021 from the first quarter of this year. After taking these two items into account, our consolidated adjusted EBITDA came in better than our plan. Adjusted EBITDA margin expanded 290 basis points to 10.6%. From a segment perspective, product adjusted EBITDA increased 59.8% to 38.8 million. Services segment adjusted EBITDA increased 100,000 from Q1 last year to 2.1 million. We estimate that the services segment would have contributed an additional 2.6 million of adjusted EBITDA if all existing services locations did not have COVID-19-related impacts in the first quarter. Turning to our balance sheet and liquidity, as of March 31st, 2021, the company had cash and cash equivalents of $11.1 million. Our long-term debt balance, which is largely comprised of its revolving credit facility, term loan, and convertible debt, was $442.2 million as of March 31st, 2021, with total liquidity of approximately $66.6 million. before the finalization of the new credit facilities announced in April of $425 million. The credit facilities provide more favorable terms, including 125 basis point decrease in our annual interest rate on the company's term loan and greater flexibility to support future growth, representing total liquidity of $125 million as of April 19, 2021. Working capital increased to $193.2 million as of March 31, 2021, primarily as a result of normal working capital increases in AR and inventory given the seasonality and the success of the business. Our available liquidity, consistent positive contribution from the product segment, and significant improvement in the services segment puts PetIQ in a position to drive free cash flow and build cash in the quarters ahead, as well as opportunistically pay down our debt. From an outlook perspective, we're currently not providing Q2 or annual 2021 guidance due to the uncertainty from potential COVID-19-related impacts on our services business. The solid improvements across our services segment that Susan highlighted continue to give us confidence in our plan to open 130 to 170 wellness centers in 2021. We are optimistic our services business has reached an inflection point, and we will continue to see improvements in Q2. We expect our services segment results will become more predictable, and then we will be in a better position to provide formal annual guidance. Looking at the product segment, we believe we continue to have strong visibility to another year of solid sales growth and adjusted EBITDA margin expansion. We remain confident about the incremental growth potential for Capstar as compared to when we completed the acquisition, and we believe our greater than $20 million of EBITDA contribution from Capstar for 2021 is very achievable. In closing, we're extremely pleased with our strong start to 2021. Our record net sales and adjusted EBITDA are a testament to the strength and agility of our entire team that continues to execute well in a dynamic operating environment as we continue to benefit from the robust pet health and wellness industry tailwinds. With that overview, Cord, Susan, Michael, and I are available for your questions. Operator?
spk11: Thank you. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. One moment, please, for the first question. Our first question comes from the line of David Wessenberg with Guggenheim Securities. Please proceed.
spk04: Hi. Thanks for taking the question, and congrats on a really strong quarter here. So let's first start with clinic opening cadence. I think you said in the commentary that you'd see first half and second half being about the same. That would imply 60 or if there's 60, 130 is the number it would imply, 65 and 65, which would imply something around 50 in Q2. Is that a fair way to look at that? Is that indeed here the case that first half and second half would receive the same or you'd open roughly the same amount of clinics? And I'll wait and that's the next one.
spk03: Hey, David, it's Susan. Thank you for the question. We are absolutely on track towards delivering our commitment for clinics with our target of opening the half of the clinics in the first half and half in the second half. So the way that you're looking at it is absolutely correct. I think that we've proven back in 2019 our ability to open 80 clinics in fourth quarter. So we are well on track to hitting that number. So as you can probably imagine, I'm stating the obvious that we are incredibly busy this quarter. I would also add to that, though, that we're collaborating very closely with our retail partners, probably at an enhanced level, more so than ever before, because of the nationwide challenge of managing building material availability and labor availability. But we continue to work through those challenges together. And what I do want to emphasize is that we have 100% of our clinics committed this year. We have addresses. We have clinics committed. So they're done. Now we've just got to get on to building them. But I think working in collaboration with our partners will get us there. But you're thinking about it correctly. Thank you.
spk04: Okay. No, that's great color. I know traditionally PetIQ has talked about the ramp-up phase where there's marketing spend, et cetera, so you used to like to open them around. I think it was Q4s and Q1s. I think Q2 is a little bit of departure. Can you talk about the seasonality in the services business? Do you think maybe with some of that 7% smart care, maybe you get a little bit more balance than maybe historically you've seen, although I do tend to think of of wellness services being kind of a springtime activity? And I'll wait there. I've got one more.
spk03: Yeah, I think a couple of different things. First of all, you and I both tend to think of wellness as being a springtime event. I think this year is different. I think last year was different. And so I think we're going to continue to see those wellness services pushed out. I think the pet parents are continuing to wait. I think they're also continuing to have a hard time to get into their full-service veterinarians. So I'm not concerned about the build-out in second quarter at all. As we spoke of last quarter, our wellness plans continue to be an incredibly important part of our strategy as an organization and I think are really going to be welcome for pet parents, especially those that are challenged financially coming out of COVID. It provides them with an offering that is going to be beneficial to both them and to their pets.
spk04: Got it. Great. Our data in terms of appointment backups kind of supports that same exact conclusion. So that makes a lot of sense. I guess my last question is on consumer changes around Seresto following the USA Today article. Did you see any changes in terms of customers going from collars to maybe topicals or even orals such as Capstar? Just kind of gauge to see if there was any maybe benefits that could have happened with that, and I'll jump offline after that. Thank you.
spk10: David, I think I'll let Michael take that question. He's closest to watching industry data for the caller specifically. So go ahead, Michael.
spk07: Yeah, David, we monitored both the activity with consumption and feedback from consumers around the initial USA Today article and then the follow-up on CBS and For a couple days, there was some minor noise in the consumption data, especially those partners we get a clear read from basically daily, if not weekly, like our top e-commerce and brick-and-mortar retailers. So they weathered that storm very well. We haven't seen a lot of forms shifting from collars to topicals or candidly within the collar segment out of the Soresto brand into other brands. So I wouldn't say it's a non-event. That's always kind of a continuing development. as those things play out, but to date, they've not seen a significant impact from those publications.
spk04: Thank you so much.
spk11: Our next question comes from the line of Steph Wissink with Jefferies. Please go ahead.
spk01: Thank you. Good afternoon, everyone. I have one follow-up question, Susan, for you on the services segment. I'm wondering if you can just walk us through The step function economically, when you move from a mobile clinic to a health center, just remind us what that benefit is in terms of revenue and volume. And then I think to the prior question is how we should think about the contribution margins as we can come back out of the backside of COVID.
spk03: Yeah, thank you for the question. I'll start just by talking about the conversions. So in the end, the conversion clinics, they ramp faster, for lack of a For something more concise to say, they ramp faster because we've already built the clientele. So when we take a mobile unit, we tend to increase the frequency that we go to that retail outlet. And we'll start out once a month. We then will increase the cadence to once a week. and then sometimes also multiple times a week. Once we get up to a certain pet count, it makes complete sense to convert that into a wellness center because what we see is that we get an immediate impact on pet count because people know that we're there. They're used to us being there, and again, we've built up that complete clientele. In regards to margin improvement, our expectations are that in the second quarter of this year that we will see margin improvements on our business because as we de-layer, I would say, COVID-related items from our processes and our procedures, of course, we're going to continue to focus on keeping our teams safe. But that de-layering process helps us to operate faster. And that's literally where we are right now in regards to pets is we've got to continue to get faster. So as we delay the items that are keeping us from implementing the speed that we usually operate in, that's just it's slowing us down. But it wasn't the time. Now is the time just because of the vaccination rates going up. But prior to this, it was all about just making sure that we continue to keep people safe.
spk01: Okay, that's helpful. And then, Cord, one for you is just on, you teased out the notion of a health and wellness product range that you have planned for the second half of the year related to supplements. I'm wondering if you can just help us connect that to your comments on 23% of the business in the first quarter in manufacturing, and you expect that to kind of average out around 26 for the year. Is that health and wellness initiative one of the key points of that bridge, or is there something more in the manufacturing side?
spk10: Thanks for the question, Steph. Our budgets for the full year had us at 26%, and we knew with the size of a significant fill order for one of our large retail programs for the clean and fit category in the first quarter, second quarter, that there was a chance that if it was to ship in first quarter, that first quarter could be a little bit softer for that. The 26%, we feel we have great visibility to, and it does not include the launch of that program involved in it. That would be incremental to that. Anytime you have a new launch, you're concerned with outside vendors and their ability to supply various materials to those. And so, we try to let the first quarter or second quarter even sometimes of a new item launching before we can really see its success be an incremental part of our overall projection. So, Without that program, we feel strongly we are still on track to be able to gain a full point of share with our manufactured items based on just how they're growing and contributing. And we see full year being at 26% or better, and it's going to be part of our margin expansion and part of the earnings expansion that we've been talking about all year during 2021.
spk01: Very helpful. Thank you, everyone.
spk10: Thanks, Steph.
spk11: As a reminder, to register for a question, please press the 1 followed by the 4 on your telephone. Our next question comes from the line of John Anderson with William Blair. Please go ahead.
spk05: Hey, good afternoon, everybody. A couple of questions. Maybe starting on the service business, I guess... You know, can you talk a little bit about, you know, what's going, you know, what you're highly confident in, in terms of maybe it's, you know, the 130 to 170 for the year. Maybe it's kind of the, you know, the recovery you're seeing in pet counts, kind of where you're seeing maybe upside or more encouraging trends relative to initial plan. And then also on services, if you could talk a little bit about, are there any things that you're really trying to, you're having to kind of manage more closely? And I'm thinking about things like, you know, vet availability, you know, to staff the new clinics. Or to your point, Susan, earlier, you know, the availability of resources and materials to get, you know, the clinics kind of set up. So just a little bit of, you know, maybe what's working better than thought. and what are you having to kind of maybe manage or watch closely?
spk10: Okay, John, thanks for the question. Good to hear your voice. I'll take some of it, and I'll let Susan fill in. You know, first and foremost, the most exciting thing we saw in the first quarter was an actual inflection point where we saw no longer it basically trending at the bottom of the trough, and we started to see us coming out of the trough and all the key variables that affected our margins that were in the, you know, mid to high thirties that took us down into the low twenties, we could point to each one of those and say, okay, we're seeing improvements. We're able to now manage our way through those items and actually run the business to see those improvements. So what we're excited about is whether it's the number of clinics that we're running, some of the procedures that limits the quantity of pets that we could have seen, um, if it's labor, all the things that are involved with the P&L, we're seeing we can get back to running the business and seeing the results that come from those businesses. So we're excited about a lot of things right now just to have an inflection point where it's time to dig back in and run the business. So the team has put together an extremely good plan to watch those variables, track them weekly. We saw good improvement in Q1. We're already seeing even better improvement in Q2. And I feel like we're on track to get back to our normal schedule kind of KPIs across all, all items, costs and revenue generators over the next couple of quarters. So we're pretty excited about what we're seeing there. Um, challenges are still out there. We're still coming out of COVID and we still have absenteeism, although it's now into a single digit number versus, you know, 12 to 16% we saw before. That's a huge improvement, but until it's back to zero where we were at pre COVID, that's a challenge. Um, Veterinarian labor is always tight, but we do a very good job of managing it would be also a concern. But I think really just seeing that we're having people come to work, that we're not having the absenteeism, it goes to zero, and the vet labor is able to continue to get easier and easier like it was pre-COVID is going to be areas that we're going to be watching closely. I don't know, Susan, anything else you'd like to add?
spk03: No, I think you covered everything, John. I think that overall that our ability to increase the number of pets that we see and improve our margins is really where our focus is. And we will see great improvement moving into Q2.
spk05: That's a super helpful thing. Just a couple of metrics also on the service business. You mentioned that I think half of the customers that you're seeing, PetIQ is seeing, are new to the franchise, new to your business. Do you have any sense for what portion of the customer base is maybe new to the category, meaning they haven't seen a vet regularly? So I'm trying to get kind of a sense for how much of this is maybe incremental versus share shift. And then secondly, on the smart care program, I mean, it's pretty amazing that you see sales and profitability three times that. when you're on smart care versus not. How are you thinking about, like, what are your internal targets for smart care? Is 7% kind of the level that you think you're very happy with and want to see continue, or is there a business case for that to be significantly higher, and how can you, you know, help drive that?
spk03: Thank you. You know, I'll start at the very top in regards to new pets. We can't quantify it because we've been measuring the 50% that are coming to us are not those pet parents that haven't received veterinary care, which makes sense when you take a look at what's happening in your full-service veterinary clinics that aren't able to see the number of pets that are presented to them every day because of a lot of their curbside service protocols. So we actually, there are full-service veterinarians that are recommending that their clients come to us for their routine care and their vaccinations because they're spending time taking care of the more serious cases. So the new pet parents that are coming to us are actually being referred to us, which is great. It's a great collaboration with veterinary clinics across the country. So we will continue to work on that relationship as well because the service that we provide really helps them to focus on more critical cases. In regards to the smart care plans, I would be ecstatic at 7% the rest of the year because when you take a look at competitive clinics, full-service clinics in the marketplace, their subscription rate is around 4% to 5%. So for us to come out the door at 7% and continue to maintain that, I think is tremendous. It is an important part of what we're doing. And I think it also just answers the need of what COVID pet parents are experiencing in regards to their ability to outlay money financially all at one time. And they prefer to make the smaller monthly payments in order to be able to have their pet cared for.
spk05: Yeah, congrats on the success of that so far. Last one for me is a little bit of housekeeping. John, I think addressed this in the prepared comments, but I want to make sure I'm clear on it. There was a pretty significant step up in DNA sequentially in the quarter. Is that, you know, what's the source of that, and is that just kind of one time in nature related to this write-down, or is that something that, is this level something that will be maintained? Thank you.
spk06: Yeah, there's two different things to take into consideration there. John, I talked about the write-down of the in-process R&D that we did was 3.8 million, and then we also had increased amortization associated with Capstar. And so those are two specifically identifiables that when you factor those out, our dollars are still up, but our percentages are way down as a result. Thank you.
spk05: Appreciate it. Good luck.
spk11: Our next question comes from the line of Joe Altobello with Raymond James. Please go ahead.
spk08: Thanks, you guys. Good afternoon. Just sticking on the services side for a second, obviously it's encouraging to see absenteeism going down. If you could remind us, I know you didn't give official guidance for this year, but in terms of your budget, what were you assuming in terms of absenteeism? I think you were assuming, and correct me if I'm wrong, that you wouldn't see a significant decline in that number until the second half of the year.
spk10: Hey, Joe, it's Cord. If you remember when we gave our original internal budgets, it did not contemplate the negative impact from COVID on our service organization. We would let you know what that impact was that didn't happen in the quarter. So from a budget perspective, We budgeted as if we would run with no impact and then communicate what the impact was against the budget. And we let people know that if we budgeted it to be in the double digits through third quarter that we thought we could see upwards of $10 million plus in revenue impact and $5 million plus of earnings impact. We're seeing trends in a line that says it should be better than that. And so we're excited that's the case this quarter. We saw a $2.5 million impact to earnings that was in the budget for the service organization. We definitely see that being a significantly lower number in Q2 and Q3. Plus, the business is doing better in other areas, so we're overcoming a lot of that negative impact with our product business performance and margin expansion. We're feeling very good about our budget. We're feeling very good about our internal budget of the $950 and the $100. Obviously, the quarter results are fantastic for this quarter.
spk08: Got it. That's helpful. And just secondly, in terms of the number of wellness centers you guys expect to build this year, the 130 to 170, what determines where you end up on that continuum? It sounds like labor is sort of the gating factor, but are there other items that would keep you from being toward the upper end of that range, for example?
spk10: Yeah, I think Susan referenced it in her conversation and comments that the We have great retail partners, but we have a number of our retail partners that are building out the spaces for us. And they've had some challenges delivering the stores to us due to access to building materials and labor on the construction side. They're all working very hard. They want the locations. They want all the locations. So if they're able to deliver the locations, we'll be able to open and operate them. With what is going on out in the marketplace, we are doing everything we can to get to the upper end, but, again, having some challenges in that one area of the business. But we'll be ready from our side with the needed people to operate the locations, and in the locations where we're in control of the construction, we will get them delivered.
spk08: Okay. Just one last one, if I could, for Susan, and I apologize if I missed this, but can you guys talk about the productivity numbers again that you're seeing at your wellness centers and community clinics and how close you are to where you were, you know, pre-COVID, for example, on a pet count basis?
spk03: Yeah, no, so I think that I can say that we are back to delivering very solid KPIs versus 2019 because 2020 really becomes almost a useless data point for us at this point. But we're improving in all metrics with the exception of pet count right now, which is relatively flat. But that isn't a surprise to us because of the additional requires that we layered in as we reopened through COVID. and compared to the veterinary industry as a whole, their pet count is down, again, because of the layering and of COVID processes. So we are outperforming the industry, but if you compare to where we were in 2019, we've improved everything double-digit with the exception of that pet count, but that pet count will improve as we de-layer.
spk08: So pet count is flat with 2019 is what you're saying? Correct, yes. Okay, perfect. Thank you.
spk11: Our next question comes from the line of Bill Chappell with Truist Securities. Please go ahead.
spk09: Hey, thanks. Good afternoon. I wanted to, just on the services side, I guess I understand the reason for absenteeism over the past year, and I understand the reason for being conservative going forward, but at what point does absenteeism turn into unemployment? And when I say that, as you know, Vaccinations go higher as things reopen. At what point do you no longer tolerate absenteeism, or should we expect absenteeism to go to zero? Because it seems like it's sooner than later, and I just didn't know. Maybe not. Maybe you're planning on just letting it run as is and run its course. But any commentary there?
spk10: That's a good question, Bill, and good to hear from you. I think you have to first appreciate that most of the absenteeism we're having is in our community clinic business where we have 1099 employees. And definitely without the vaccines out there from our surveying and understand what's going on, we're seeing that those employees that don't feel like they have that strong commitment to the company are able to feel good about taking time off. And then we do feel that the first sign of seeing us take such a significant drop in absenteeism is them getting confident through the vaccinations and other things. But we are confident that we will get back to where all clinics that are scheduled will be staffed. We had years and years of never having a clinic canceled for not having a labor. So we don't think that's the case. We think we've seen the first sign that we're going to be returning back to a good place very soon. And I don't know if Susan, you have anything else to add, but that's how I would see it.
spk03: Yeah, no, I don't. I don't have much to add to that bill. It's a good question, but with absenteeism, the majority of that, especially when you take a look at last year and even into January of this year was due to illness. So an illness is illness and we allow people obviously to go away for the appropriate quarantine time in order to be able to manage through through their COVID-19. So again, I think as the country becomes vaccinated, we're going to see less and less of that. So, bluntly, yes, at some point in time we will get to zero because there will be no COVID illness. Did I say that out loud?
spk09: Let's hope. Second question, just more color on Capstar. I mean, it seems, at least from our checks, that the distribution proliferated through most of the retailers where you were already shipping your own products or distributing third-party products. Can you give us an idea, and I'm sorry if you've already gave this, kind of where we are on ACV and, you know, if the March quarter results were more of kind of fill-in because, you know, it was obviously good growth and good before even the start of the flea and tick season. So just trying to understand what potential there is as we move through the year for that business.
spk10: Michael, do you want to go ahead and take that one, please?
spk07: Yeah, you know, in general, the brain continues to be very healthy. If you look at consumption in the quarter, it was the fastest growing brand of the top 10 brands in the category, largely fueled by success in e-commerce. However, we do continue to pick up points of distribution in retailers that we had some business in. For example, they carried the two burdens of our dog skew, but not the cat skew. We've been adding the cat skew in. as those planograms and modules have been updated and revised in Q1, and some of that's still to play out in Q2. From an ACV perspective, I'd have to get you an exact number, but in measured markets, I would say Capstar is now north of 75%, pushing 80% of ACV, and really the delta between there and 95% to 100% is that CAT skew. And that's been a big focus of our team on the field working with our retail partners is to get that CAT skew added in, and it's shown to be very incremental for those customers who have brought it into their assortment sets.
spk09: Kyle, is that any idea what it was a year ago, or is that fairly similar to the levels of a year ago?
spk07: Yeah, I would say it's slightly up from a year ago. I'd call it from 70% to 75%, 77%. year over year Q1 percent ACV 2020 to 2021. Okay, great.
spk09: Thanks so much.
spk10: Thanks, Bill.
spk11: There are no further questions. I'll turn the call back over to Mr. Christensen. Please go ahead.
spk10: Thank you, everybody, for joining us today. We are extremely excited about the strong start to the year and the momentum it's created as we go into the rest of the year. Our product business accelerated and delivered 38% year-over-year growth. Our service segment saw the inflection point we've been waiting for to be able to start running our business, and it led to us having a 36% increase overall to $254 million in sales, significantly above our expectations for the quarter. And with adjusted EBITDA at $26.9 million, or 85.7% better, again, a fantastic start to the year for the company. We're so grateful for all of our associates, employees, and other participants and partners and retail partners that have helped us deliver these great results and look forward to a very successful season and the rest of our year, and we look forward to interacting with all of you throughout the year. Thank you, everyone.
spk11: Thank you. That does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines.
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