PetIQ, Inc.

Greetings. Welcome to the PetIQ, Inc. Fourth Quarter and Full Year 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. And please note that this conference is being recorded. I would now like to turn the conference over to Katie Turner with Investor Relations. Thank you. You may begin.

Good afternoon. Thank you for joining us on PetIQ's fourth quarter and full year 2021 earnings conference call and webcast. On today's call are Cord Christensen, Chairman and Chief Executive Officer, and V. Glassman, Chief Financial Officer. Susan Schultes, President, and 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 to 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. 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 to 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, PedIQ's posted 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 fourth quarter financial results. I'll begin with an overview of our strategic business and financial highlights. Then Zvi will review our financial results and outlook. Finally, Zvi, Susan, Michael, and I will be available to answer your questions. We are very pleased with our strong finish to 2021. we reported fourth quarter record net sales of 196.6 million, an increase of 19.7% compared to Q4 last year. This fueled our record annual results with net sales of 932.5 million, an increase of 19.5% compared to 2020. 2021 product segment net sales were 825.4 million, an increase of 13.7% compared to the prior year, and the services segment, Net revenues were $107.1 million, an increase of 97% compared to 2020. We also generated solid margin improvement. Adjusted gross margin increased 270 basis points to end the year at 22.2%, and our annual adjusted EBITDA margin increased 130 basis points to end the year at 10%. Our financial and operational results demonstrate the strength of our diversified pet products and services offering. The product segment posted record results, which were stronger than we expected as we benefited from a strong flea and tick and health and wellness sales. And our services segment reported its best quarter since the onset of COVID in 2020, posting its fourth consecutive quarter of positive adjusted EBITDA. Although we still have a lot of room for improvement in the future quarters for services to get back to pre-pandemic profitability. At PetIQ, we're a purpose-built company addressing the large, multi-billion dollar animal health market to our retail and e-commerce partners. Wherever pet parents choose to purchase their products, PetIQ has its animal health product portfolio and clinics across sales channels including mass, grocery, club, pet specialty, pharmacy, or online. We've created a unique business model committed to convenient and affordable pet health and wellness care. We continue to have the largest over-the-counter animal health brand portfolio with over 1,200 items and a dominant market share in pet prescription products sold through retail and online. Product segment has been a consistent driver of our annual growth, particularly the last two years as we've operated through the pandemic. As those of you familiar with PetIQ know, we experienced variability in our services segment as a result of having to close and reopen our wellness centers and mobile clinics, then followed by continued vet labor-related headwinds. Today, Zvi will highlight the robust growth trajectory of our product business when he discusses our 2022 outlook and the modest assumptions we've made for the services segment as we work towards recovery in the segment's growth and profitability over the next several quarters. Focusing on our segment results in more detail, in the product segment generated strong fourth quarter year over year sales growth of 17.8% to 170.9 million. We generated double-digit sales growth across six of our top eight product categories during the quarter. In addition, both our distributed and manufactured segments also saw double-digit growth and benefited from a stronger-than-normal end to the flea and tick season in the fourth quarter. Our OTC flea and tick category in the quarter was better than we expected, led by both a topical segment, which includes Pet Armor, that increased 21%, and our emerging brand, within the oral segment Capstar that increased 38%. Our health and wellness portfolio also had an exceptional quarter as it contributed 63% growth versus prior year. We also continue to experience strong growth in the e-commerce channel, which increased 23.4% for the quarter and 20.2% for the full fiscal year. This growth was led by our manufacturer brands, which grew 47.8% in 2021. In terms of inflation, we've experienced cost inflation headwinds, particularly in labor, freight, raw materials, and packaging. As a result, we implemented a price increase November 1st across our manufactured products segment to offset most of these inflationary pressures. From an R&D perspective, we're excited to have finalized and shipped the first orders of our super premium health and wellness line for a large club store operator during the fourth quarter. The first few months of sell-through have been strong, and we expect a greater benefit from this item in full year 2022. From a mixed standpoint, our business in the quarter consisted of 69% distributed and 31% manufactured sales. As we look ahead, we believe Pedicure's manufactured items can reach 32% of product segment sales for 2022. 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. For 2021, the product portfolio gained 67 basis points of share within the flea and tick category. This share gain was led by both Pet Armor and Capstar, which both gained greater than 125 basis points of share in the year. As for health and wellness, we also continued our momentum in this high-growth segment as we picked up 26 basis points of share for the year. The segment increased 12% across the market, while our portfolio increased 15% for the year, driven by VetIQ, an increase of 31%, and PetArmor, an increase of 23%. We have good visibility into our product innovation pipeline and are excited to launch two new products in the first half of 2022 that we expect to help fuel continued momentum in our branded product segment. We also are introducing a direct-to-consumer initiative in the second half of 2022 as we continue to provide smarter options for pet parents to help enrich their pets' lives through convenient and affordable access to veterinarian products and services. We believe our product team's strong operational execution positions us well for continued growth and increasing contribution from our own pet health and wellness brands at an attractive margin in 2022. Now focusing on the services segment, we generated another quarter of net revenue growth and positive adjusted EBITDA. This was fueled by a solid quarter with double digit growth in pets per clinic and dollars per clinic, despite not operating a significant percentage of wellness and mobile clinics due to ongoing labor headwinds. While we expect the current labor situation to continue near term, we believe our services segment will make sequential and year over year improvement as we progress through 2022. During the fourth quarter, we continued to optimize the services segment to maximize the results and minimize the pet parent impacts. First, we continued to adjust our clinic schedules to reduce labor hours and cancellations. Second, we enhanced our retention and recruiting programs. And finally, we increased wages of our staff and new hires to help with recruiting and retention. This cost increase was offset by a price increase of approximately 6% that we took the beginning of September. As we discussed last quarter, we've taken the opportunity to optimize our new wellness center's opening plans and to reduce the risk of deploying capital and starting operating expenses prior to having the labor in place to operate the clinic. As a result, beginning in the fourth quarter, our team 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 begin our recruiting and staffing. In Q4, we opened 26 new wellness centers for a total of 98 wellness centers opened in 2021. While we have full commitments to open with our retail partners across both conversions and greenfield locations, we continue to 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. Longer term, we still believe 1,000 wellness centers are achievable, but we will be prudent with our growth near term given the challenges in the labor market. We have confidence in our model and how valuable it is to pet parents across the country. For example, dollars per clinic and pets per clinic continue to be the strongest KPIs in the company's history. We believe our differentiated position in the animal health industry will continue to fuel our long-term growth, along with the robust industry tailwinds, including increasing household penetration for pets, dehumanization of pets, and increasing pet populations, and more pet parents looking for convenient and affordable pet health and wellness. Going forward, our team will continue to execute on 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. And finally, I'd like to welcome Zvi Glassman to PetIQ. Zvi joined us the first week of January as CFO and has already made quite a positive impact on our entire team and our financial reporting processes with his energy for the business and fresh perspectives. He has 20 years of CFO experience supporting high-growth companies to drive operational improvements and increase profitability. We're excited for our shareholders and members of the investment community to get to know Zvi in the coming weeks and months. We believe he has joined PetIQ at an ideal time as we continue to accelerate our net sales, expand margins, and increase our cash flow generation. With that overview, I'd like to turn the call over to Zvi.