PetIQ, Inc.

Greetings. Welcome to the Pet IQ Inc. Third 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Katie Turner. You may begin.

Good afternoon. Thank you for joining us on PetIQ's third quarter 2021 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 certain non-GAAP financial measures, including adjusted gross profit, adjusted SG&A, adjusted net income, and adjusted EBITDA. 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 a reconciliation of non-GAAP financial measures the most comparable measures prepared in accordance with GAAP. In addition, PetIQ's posted a supplemental presentation on its website for reference. And with that, I'd like to turn the call over to Cory Christensen.

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter financial results. 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. Our team did a great job executing on our strategic initiatives in the third quarter to ensure we are serving pet parents and their pets where and when they need it to fulfill their pet health and wellness needs. Overall for the third quarter, we believe our financial and operational results demonstrate the strength of our diversified pet products and services offering. In the product segment, we had broad-based growth with share gains in every product category led by flea and tick and health and wellness products. This was the first quarter since COVID started in March of 2020 that we experienced a return to a more normal sales cadence in the product segment, and we expanded segment margin for the third consecutive quarter this year. The services segment returned to positive adjusted EBITDA and had a solid quarter with double-digit growth in pets per clinic and dollars per pet. despite not operating a significant percentage of our clinics due to ongoing labor headwinds. Focusing on the consolidated results, we are pleased to report record third quarter net sales of 210.5 million, an increase of approximately 30% year over year. Adjusted gross margin increased 20 basis points to 22.6%. And we reported adjusted EBITDA of 16.4 million for the quarter, which includes a $2 million R&D milestone accrual for a future over-the-counter pet medication launch. Taking a closer look at our product segment, we generated growth across every product category during the third quarter. Our sales of both distributed and manufactured products benefited from a stronger-than-normal seasonality in the quarter. Product segment net sales of 181.6 million increased 21% compared to the third quarter of last year. For comparative purposes, net sales were up 33%, if you exclude sales from a major animal health manufacturer in the third quarter last year that is no longer included in the third quarter 2021 sales base. Our manufacturer brands accelerated, delivering 16% growth in the flea and tick category and 24% growth in the health and wellness category. The growth in flea and tick in the quarter was led by Capstar oral flea and tick, which was up 68%. We experienced strong growth in the e-commerce channel, which increased 51%, led by an increase of 76% in our manufactured products for the third quarter as compared to the prior year. If you exclude sales from a major animal health manufacturer in the third quarter of last year, that is no longer in the third quarter 2021 sales, then our e-commerce growth would have increased 74% year over year versus the 51% growth we achieved in the third quarter of 2021. In terms of inflation, We have experienced cost inflation headwinds, particularly in labor, freight, raw materials, and packaging. As a result, we finalized a price increase beginning November 1st across our product segment to offset all of these inflationary pressures. From an R&D perspective, we're excited to finalize and ship the first orders of a super premium health and wellness line for a large club store operator. We plan this to ship now and provide benefits in the fourth quarter of this year and a greater benefit in full year 2022. In addition, as I mentioned, we accrued a $2 million R&D milestone payment for a future over-the-counter PrEP medication launch. We have been working with a third-party development company and they reached this exciting milestone that triggered this accrual in the quarter. This gives us great visibility on the item being completed and joining our portfolio in 2023. From a MIPS standpoint, Our business in the quarter consisted of 69% distributed and 31% manufactured sales. This compares favorably to our second quarter mix of 72% distributed and 28% manufactured sales. We believe that our Q3 product sales mix trend is more indicative of our go-forward sales model, which we expect to maintain in Q4 and in 2022. The shift in mix towards our own product portfolio has driven a significant increase in our profitability. product segment adjusted EBITDA margin expanded 100 basis points to 18.5% from the third quarter last year. And year to date, product segment adjusted EBITDA margin has increased 250 basis points to 18.4%. We continue to participate 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 fuel our growth. Year-to-date, the PetIQ portfolio gained 84 basis points of share within the flea and tick category. This share gain was led by our brand, Pet Armor, which was up 20% compared for the same period last year. As for health and wellness, we also gained 35 basis points of share as the robust growth in the category continues. This segment increased 16%, while our portfolio increased 22% over the first nine months of the year. We believe these share gains will accelerate in the fourth quarter as we start to ship new programs across the market, leveraging our assets in the space. Shifting to our services segment, our services segment delivered net revenues of $29 million compared to $12 million in the third quarter of 2020, or an increase of $17 million. Services also returned to a positive adjusted EBITDA of 3.8 million for the quarter versus an adjusted EBITDA net loss of 0.2 million. All of these improvements were significant, but they were still less than they would have been if it were not for labor-related headwinds that caused us to run fewer clinics. For example, in the third quarter of 2019, we ran nearly 18,473 community clinics versus approximately 13,529 community clinics in the third quarter of this year. While we expect the current labor situation to continue near term, we believe our services segment will make sequential improvements in all key areas impacted by COVID in 2020. This includes improving sales and operating performance in Q4, similar to the improvements we've generated the last four quarters. And the services team has ramped up retention and recruiting efforts, which Susan will provide more detail on. At the same time, we've taken the opportunity to optimize our new wellness center opening plans and reduce the risk of deploying capital and starting operating expenses prior to having a labor in place to operate the clinic. As a result, beginning in the fourth quarter, our team has started to begin construction on new wellness centers once all required in-center labor has been hired. Previously, we would begin build-out and construction, then began our recruiting and staffing. While we have full commitments to open with our retail partners across both conversions and greenfield locations, we believe this enhanced Wellness Center opening plan will also help ensure the best services experience for pet parents, their pets, our retail partners, and our shareholders. Based on using this opening plan for the remainder of the year, we expect to open approximately 100 new Wellness Centers in 2021 compared to our previously stated plan to open 130 to 170. We have confidence in our model and how valuable it is to pet parents across the country. For example, dollars per pet and pets per clinic continue to be the strongest KPIs in the company's history. 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 mid-April to support our future growth. As we noted in today's earnings release, our outlook remains suspended due to the uncertainty from COVID-19 and Delta variants related impacts to our business. However, we are very pleased with our ability to report record year-over-year net sales and adjusted EBITDA results, and we continue to be optimistic that the services segment will generate significant improvements to its operations in the fourth quarter of 2021. We expect that as the impact to our services segment lessens and becomes more predictable, we will then be in a better position to provide guidance. Also keep in mind, similar to years prior, Q4 represents our smallest net sales in adjusted EBITDA quarter based on the seasonality of the business. We also officially lapped the addition of Capstar in August of this year, which we continue to expect full year 2021 incremental EBITDA contribution of greater than $20 million. We believe that our mission of delivering smarter options for pet parents to help enrich their pet's lives through convenient and affordable access to veterinary 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. With that overview, I would like to now turn the call over to Susan.