PetIQ, Inc.

Greetings, ladies and gentlemen, and welcome to PetIQ's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should anyone require operator assistance, please press star zero on your telephone keypad. It is now my pleasure to introduce your host, Ms. Katie Turner.

Good afternoon. Thank you for joining us on PetIQ's 2021 second quarter earnings conference call and webcast. On today's call are Cord Christensen, Chairman and Chief Executive Officer, Susan Schultes, President, and John Newlin, Chief Financial Officer. Michael Smith, Executive Vice President of the Product Division, 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 a 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 release for reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. In addition, Pedag Hughes proposed a supplemental presentation on its website for reference. And with that, I'd like to turn the call over to Cord Christensen.

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our second quarter financial results. Today, I will begin with an overview of our strategic business and financial highlights, then Susan will provide greater detail on our services segment, and John will review our financial results. Finally, Susan, John, Michael, and I will be available to answer your questions. We generated record second quarter results demonstrating the strength of our diversified pet products and services offering. It was our highest net sales quarter, the best gross profit, dollar, and gross margin quarter, as well as our highest adjusted EBITDA quarter in the history of the company. We accomplished this even as we continue to operate in a dynamic environment where we are still experiencing impacts from COVID-19. Prior to going through the results, I want to remind everyone that the second quarter was a very unique quarter for the company last year and this year. Last year, we had significant one-time sales increases when pet parents purchased more of their pet prescription drug products via our e-commerce partners due to stay-at-home orders, and our services segment had all community clinics and wellness centers closed. Year-to-date, COVID had additional anomalies that have affected the timing and overall results for the quarter. Our e-commerce customers purchased inventory in Q1, anticipating Q2 volumes closer to the second quarter of last year. However, when the veterinarian channel reopened, our e-commerce customers returned to their pre-COVID growth rates still very strong, but much less than last year. This caused them to have excess inventory from the Q1 purchases. Based on these fluctuations, we think it's important for you to take into account the one-time nature of volume in 2020 and look at our year-to-date and 2019 performance to accurately see our results and growth. Q2 net sales increased 1.5% to 271 million. Year to date net sales increased 15.8% to 525.4 million. And when you compare our year to date net sales to the same period in 2019, our net sales increased 42.3%. Adjusted gross margin expanded 570 basis points and adjusted EBITDA of $34.4 million increased approximately 21% year over year. Our team has done well to execute on our strategic objectives to ensure we are serving pet parents and their pets where and when they need it to fulfill their pet health and wellness needs. Taking a closer look at our product segment, sales were pressured in the quarter by the impact of a pull forward of flea and tick seasonal programs to Q1 from Q2 this year, representing approximately 15 million in net sales, along with lapping unusually high sales in the second quarter last year from the benefit associated with a shift in mix of sales to the e-commerce channel from the veterinarian channel due to COVID-19 and more pet parents purchasing prescription drug products online. However, when looking at our year-to-date results, you see a clearer picture of our performance. For the first six months of 2021, our product segment increased 9.8%. compared to the same period last year. This growth rate is even more impressive when you consider that it is against record volumes associated with the channel shift that occurred in 2020. Taking this a step further for comparison purposes, we also wanted to look back to the first six months of 2019 in a pre-COVID environment. Our product segment net sales increased 47.5% for the first six months of this year on a two-year stacked basis. From a mixed standpoint, Our business in the quarter consisted of 72% distributed and 28% manufactured sales. This compares favorably to our Q1 mix of 77% distributed and 23% manufactured sales and to our 2020 mix of 75% distributed and 25% manufactured sales. This shift in mix towards our own product portfolio drove a significant increase in our overall profitability. Adjusted EBITDA margin expanded 400 basis points to 19.8% from the second quarter last year. Our strong margin profile played a key role in the product segment delivering better profitability than we expected for the second quarter, even with the slightly lower net sales. Our product sales mixed trend of approximately 72% distributed and 28% manufactured sales is more indicative of our go-forward sales model, which we expect to maintain in the second half of the year. helping us to sustain the higher product segment EBITDA margins than we delivered in Q2. PetIQ participates in several of the largest and fastest-growing categories within the pet industry, such as flea and tick solutions along with health and wellness. Our team's emphasis on winning in both brick-and-mortar retail and e-commerce continues to pay off, as we have seen strong share gains across our manufactured products in both channels. For the 26 weeks ended June 19, 2021, The PetIQ portfolio gained 85 basis points of share within flea and tick. This share gain was led by our brand PetArmor, which was up 13% for the same period. As for health and wellness, we also gained 21 basis points of share as the robust growth in the category continues. This segment increased 41%, while our portfolio increased 46% over the first six months of the year. We believe these share gains will accelerate in the back half of the year as we start to ship new programs across the market, leveraging our assets in this space. Shifting to our services segment, recall in Q1, we noted that our services business reached a very important inflection point where we saw headwinds from the pandemic starting to abate. We continue to see sequential improvement in our results in Q2 from Q1 with the reopening of our wellness centers and mobile clinics as compared to the prior year when we were closed due to COVID-19. Service segment net revenues increased 15.9% compared to the first quarter of 2021. This growth was partially offset by running fewer than expected community clinics as a result of labor shortages. While our rate of absenteeism improved and resulted in low single digit closures week to week based on COVID-19 related illnesses, a new issue, labor shortages, began to translate into an unexpected number of closures as we started to plan for a more normalized pre-pandemic community clinic schedule. For example, in the second quarter of 2019, we ran nearly 17,500 community clinics versus approximately 15,100 community clinics in the second quarter this year. The number of community clinics open was down mid-teens on a percentage basis compared to our expectations for the second quarter. This impacted both our net revenue and profitability in the quarter, as the missed revenue from the community clinics we were not running reduced our overall operating leverage in the quarter. While services segment adjusted EBITDA increased 42.9% compared to the first quarter of 2021, we estimate that the services segment would have contributed to the second quarter an additional $12.6 million of net revenue and $5.1 million of adjusted EBITDA due to COVID-19-related impacts to the company's community clinics and delay in wellness center build-outs. For the first six months of the year, we estimate that the services segment would have contributed an additional 20 million of net revenue and 7.7 million of adjusted EBITDA when taking into consideration the same impacts. While we expect the labor situation to continue near term, we believe our services segment will make sequential improvements in all key areas impacted by COVID. This includes improving sales and operating performance in Q3 and for Q4, similar to the improvements we've generated the last three quarters. Importantly, our services segment community clinics and wellness centers that are open are delivering the strongest KPIs in the company's history. This gives us a ton of confidence in our model and how valuable it is to pet parents across the country. We believe that our 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 more important than ever. And we expect our differentiated position in the animal health industry will continue to fuel our long-term growth. 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. Our outlook for the year remains suspended due to uncertainty from continued COVID-19 related impacts to our business. As I've stated on calls previously this year, our internal budget for 2021 reflects approximately $950 million in net sales and over $100 million in adjusted EBITDA, with the only significant variable to this plan being potential ongoing headwinds from COVID-19 affecting the company's services segment. To date, we estimate headwinds to our services segment have impacted our 2021 net sales by approximately $20 million and adjusted EBITDA by $7.7 million. Similar to years prior, Q2 represents our largest net sales and adjusted EBITDA quarter. Keep in mind we begin to lap the addition of Capstar this month or in August of this year. We continue to maintain great visibility into our product segment and expect to generate another year of significant margin expansion, demonstrating accelerating profit leverage of PetIQ. Looking ahead, we believe PetIQ remains well-positioned to capture a disproportionate amount of the pet industry growth as we move forward with our vertically integrated product manufacturing and distribution platform and a national footprint of convenience, and accessible veterinarian services. We expect to continue to benefit from rising pet adoption, increases in dollar spend per pet, and an emphasis on affordable, convenient pet healthcare. All great industry tailwinds for us. Before I turn the call over to Susan, on behalf of the entire team at Pet IQ, I'd like to thank John Newland for his seven years of service as CFO and wish him well in his future retirement. John has been an important member of our executive team, having successfully helped us transition our business from privately held to publicly traded company. John's expertise and contributions have been significant to our efforts to grow products and services business, drive sales, and expand margins. John will remain in his role as CFO through March 31st, 2022 to ensure a smooth transition, and we have initiated an executive search to identify a new CFO. With that overview, I'd like to now turn the call over to Susan.