PetIQ, Inc.

Q1 2022 Earnings Conference Call

5/4/2022

spk09: Greetings and welcome to PetIQ Incorporated first quarter 2022 earnings conference call and webcast. At this time, all participants are on 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Katie Turner, Investor Relations. Thank you. You may begin.
spk03: Good afternoon. Thank you for joining us on PetIQ's first quarter 2022 earnings conference call and webcast. On today's call are Cord Christensen, Chairman and Chief Executive Officer, and Zvi Glassman, Chief Financial Officer. Susan Schultz is 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 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. 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 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, PetIQ has posted a supplemental presentation on its website for reference. And with that, I'd like to turn the call over to Cord Christensen.
spk08: Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our first 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 start to 2022. We reported first quarter net sales ahead of our expectations at $275.7 million, representing an increase of 17.8% on a pro forma basis. We also generated another quarter of solid gross margin improvements. Adjusted EBITDA was $31.6 million and was also ahead of our guidance, resulting in an adjusted EBITDA margin increase of 90 basis points year over year to 11.5%. The strength of our diversified pet products and services offering fueled these results. The product segment posted record results which were stronger than we expected as we benefited from broad-based growth across categories and sales channels with continued strength in our manufactured products and new product innovation. We also had $5 million of fill orders to support the start of the flea and tick season in first quarter of 2022 that was anticipated to happen in the second quarter of 2022. Today, Z will discuss more of what we are seeing in the second quarter to date in the product segment and highlight the consistent growth trajectory of our products business in the context of our reiterated 2022 outlook and our view of our first and second half growth for the year. Our services segment reported its best quarter since the onset of COVID in 2020, posting its fifth consecutive quarter positive adjusted EBITDA on net revenue of $27.9 million. We remain pleased with the services segment's improvement, although we still have a lot of room for growth in future quarters for services to get back to pre-pandemic profitability. This year, we've made modest assumptions for the services segment as we work towards recovery in the segment's growth and profitability over these next several quarters. We've created a unique business model committed to convenient and affordable pet health and wellness care At PetIQ, we're a purpose-built company addressing the large, multibillion-dollar animal health market through our retail and e-commerce partners. We continue to be wherever pet parents choose to purchase their products with our animal health product portfolio and clinics, including mass, grocery, club, pet specialty, pharmacy, and online sales channels. Focusing on our segment results in more detail, the product segment generated a solid start to the year with year-over-year net sales growth of 18.1% on a pro forma basis to 247.8 million. We generated double-digit sales growth across five of our top seven manufactured product categories during the quarter. We continue to have the largest over-the-counter animal health brand portfolio with over 1,000 SKUs and a dominant market share in pet prescription products sold to retail and online. In addition, Both our distributed and manufactured segments also saw double-digit growth despite a softer than normal start to the flea and tick season in the first quarter. Our manufactured OTC flea and tick growth rates continued their strong momentum into the new year, growing 24% compared to Q1 last year. This growth was fueled by strong support of Nexstar, our new premium flea and tick topical product launch, as well as strong contribution from the oral segment, which increased 37% compared to Q1 last year. Our health and wellness portfolio also contributed another exceptional quarter as it continued to sustain strong year-over-year growth, up 36% compared to the prior year period. From a mixed standpoint, our business in the quarter consisted of 73% distributed and 27% manufactured sales. As we look ahead, we believe PetIQ's manufactured items can reach greater than 31% of the 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, focusing on the category growth in more detail. For the 12 weeks ended March 26, 2022, the PetIQ portfolio gained 130 basis points of share within the over-the-counter flea and tick category and now commands the number two market share position at a 19.7% total share of the market. This share gain was led by both PetArmor and Capstar, which both gained significant share over this timeframe. As for health and wellness, we continued our momentum in this high growth segment as we picked up 32 basis points of share. The segment increased 7% across the market while our portfolio grew 9% for the 12 weeks ended March 26. From an R&D perspective, we had strong sell through in the first quarter of a super premium health and wellness line we launched for a large club store operator during the fourth quarter. We expect an even greater benefit from this item in full year 2022 as our activation and support plans continue to play out in the second and third quarters. We have also successfully launched Foster brand super premium health and wellness line this week. You can find it online at fosterpethelp.com. And as we discussed on our Q4 earnings call, we continue to be on track to introduce 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 veterinary and formulated products and services. In terms of inflation, we have continued to experience cost inflation headwinds, particularly in labor, freight, raw materials, and packaging. As a result, we implemented a price increase in Q4 across our manufactured product segment to offset most of these inflationary pressures While these cost pressures have begun to stabilize, we are still evaluating if any further price action is required to offset in the balance of the year. Now focusing on the services segments, we generated another quarter of net revenue growth and positive adjusted EBITDA. We believe our services segments will make sequential and year-over-year improvements as we progress through 2022. In the quarter, we continued to optimize the services segment to maximize the results and minimize disappointing our pet parents. First, we continue to adjust our clinic schedules to reduce labor hours and cancellations when labor is unreliable. Second, we enhance our retention and recruiting programs, which will support an increase in new wellness center openings in Q2 and for the balance of 2022. During the quarter, our recruiting team hired 17 veterinarians. These new hires allowed us to open four new wellness centers and replace unreliable temporary veterinarian labor in 13 existing wellness centers. We will continue to reduce the risk of deploying capital on new wellness centers until we have all the necessary labor in place and optimize our existing centers to gain efficiencies and improve total performance of the segment. We remain prudent with our services growth near term, given the challenges in the vet labor market, but have visibility to a large number of openings in the second quarter 2022 versus first quarter 2022. Before I turn the call over to Zvi, on behalf of our board of directors, and management team, and especially myself, I'd like to thank our president, Susan Schulz. She has decided to leave PetIQ later this month to spend more time with her family in Indiana. Susan has been a tremendous asset and partner in helping to develop the strategies and operating procedures that helped us build PetIQ. Over the last four years, her contributions have been invaluable, including her leadership, guidance, and support of our team throughout the pandemic. As we continue to grow our business, we will leverage the OneIQ Smarter Together culture Susan helped us to create. Susan will continue to be available as needed to ensure a smooth transition through September. Beginning June 1st, Michael Smith, our EVP of the Products Division, will assume the newly created role of President and Chief Operating Officer. I'm excited for Michael to take on this new role. He is a talented, collaborative leader with deep operational experience across pet and consumer packaged goods. Under his leadership since 2019, we have successfully delivered consistent growth in the product segment. His team has added 200 million of incremental products growth with a three-year CAGR of greater of 17%. He has helped us successfully increase our manufacturing scale, expand our product and brand diversity, as well as customer reach while capturing greater sales and profitability. In closing, we believe our differentiated position in the animal health industry will continue to fuel our long-term growth along with robust industry tailwinds including increasing household penetration for pets, dehumanization of pets, an increasing pet population, and more pet parents looking for convenient and affordable pet health and wellness. Our product and service teams executed well on our mission, and we believe PetIQ is well positioned to continue delivering increases in our net sales and profitability, as well as generate solid cash flow. With that overview, I would like to now turn the call over to Z. Thank you, Cord.
spk02: We started off 2022 with strong and better than expected results compared to our Q1 guidance, and we're pleased with our team's execution of our growth and efficiency initiatives. We generated solid growth from both the products and services segments, helping us generate record net sales of $275.7 million, an increase of 17.8% on a pro forma basis. As Cord mentioned, we also experienced stronger than normal fill orders for the start of the free and tick season, that resulted in a shift of timing of approximately $5 million of sales to Q1, which were expected to occur in Q2 of this year. First quarter gross profit increased 20.6% to $57.6 million, resulting in a gross margin of 20.9%, an increase of 210 basis points from the first quarter of last year. Adjusted gross profit was $63.3 million, and adjusted gross margin was 23.6%, the first quarter of 2022 representing an improvement of 270 basis points year over year this margin expansion reflects favorable product mix driven by the growth and sales of the company's branded product portfolio including our newly launched next star product we also benefited from services segment optimization stna expenses for the first quarter of 2022 were 48.2 million dollars compared to $40.7 million in the first quarter of the prior year. Adjusted SGA was $38.9 million for the first quarter of 2022, compared to $36.7 million in Q1 of last year. As a percentage of net sales, adjusted SG&A was 14.5%, a decrease of 20 basis points compared to the prior year period. We're pleased with the leverage of our operating expenses, which was better than expected. We achieved this expense leverage even with a planned incremental $2.8 million or 100 basis points of expense to support the launch of our two new brands and continued marketing investments to help accelerate the growth of our manufactured brand product portfolio. Our Q1 net income was $3.2 million, an increase of 32.4%, resulting in EPS of 11 cents. Adjusted net income was $18.3 million, an increase of 66%. compared to the prior year period. This resulted in adjusted EPS of 62 cents compared to 41 cents in the first quarter of 2021. Adjusted EBITDA was $31.6 million, an increase of 17.6% compared to 26.9 million in Q1 of last year. This was ahead of our guidance for Q1 of adjusted EBITDA of approximately $28 million. Adjusted EBITDA margin of 11.5% was 90 basis points higher than Q1 of last year. This solid improvement reflects the operating leverage generated in the quarter as a result of stronger margin on higher sales and the incremental profit. Turning to our balance sheet and liquidity, as of March 31st, 2022, the company had cash and cash equivalent of approximately $51.1 million. During the first quarter, we generated approximately $16 million of operating cash flow, excluding working capital investments. We expect 2022 to be the strongest cash generation year in the history of the company. Our long-term debt, which is comprised of our term loan, ABL, and convertible debt facilities, was $472.9 million as of March 31st, 2022. In addition to our cash on hand of $51.1 million, the company has $100 million of availability on its revolving credit facility, representing total liquidity which we define as cash on hand plus availability of $151 million as of March 31, 2022. We continue to believe our available liquidity, consistent growth, contribution from the product segment, and improvement in the services segment positions the company to drive free cash flow and build cash in the quarters ahead, as well as opportunistically pay down our debt. Now, turning to our guidance. Based on our start to the year, we are pleased to reiterate our annual outlook for 2022 that we previously provided on March 1st, 2022, and as we noted in today's press release. Keep in mind that our annual outlook also assumes very little incremental adjusted EBITDA contribution from the services segment. The services segment has not returned to pre-pandemic levels. when the business contributed approximately 10 to $15 million in additional adjusted EBITDA. While we do expect to eventually return to pre-pandemic levels, based on what we are seeing in the veterinary labor markets, we believe it is prudent to assume the return will not occur in 2022. We continue to believe the services business will be a key driver of long-term EBITDA and sales growth. However, until pandemic-related dislocation in the labor market normalizes, we plan on a slower ramp in clinics, as we take a more disciplined approach to capital allocation. As demonstrated in 2021 and our 2022 guidance and our modeling for 2023, due to the strength in our products business, we are confident that the company will continue to achieve strong growth despite the labor headwinds in the services business. From a seasonality perspective, we are updating our 2022 net sales outlook to reflect the shift in timing of $5 million in orders and sales which occurred in the first quarter of 2022 from the second quarter of 2022 and a slower than normal start in the month of April of the flea and tick season, causing our customers to have inflated inventory levels at the start of the second quarter. However, beginning the last week of April, we experienced a more normalized trend to our seasonal flea and tick sales and our second quarter guidance assumed this trend will continue. With this in mind, we expect second quarter net sales of approximately $260 million. We expect Q2 adjusted EBITDA of approximately $28 million. Q2 adjusted EBITDA assumes adjusted SG&A as a percentage of net sales to be 340 basis points higher than the second quarter of 2021 at 17.5% due to an incremental $7 million or approximately 260 basis points of expense to support our two new manufactured brand introductions and continued marketing investments to help accelerate the growth of our manufactured brands. For the first half of 2022, we expect performance net sales to increase approximately 9% compared to the first half of 2021. We continue to expect most of the net sales growth in the second half of 2022 will be weighted towards the third quarter. In closing, We are pleased with our start to the year and remain optimistic about our growth in 2022 and beyond. We believe we have good visibility into our opportunities for growth and efficiency as our team continues to execute on our mission of delivering smarter options for pet parents. With that, Cord, Susan, Michael, and I are available for your questions. Operator?
spk09: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Steph Winsink with Jefferies. Please proceed with your question.
spk01: Thank you. Good afternoon, everyone. We wanted to start with a question on bricks and mortar versus online for your manufacturer brand specifically. But if you want to talk about in your portfolio in total, that would be helpful as well. Just wanting to understand a little bit about any change in business mix by channel.
spk08: Thanks, Steph. Good to hear your voice. I've got Michael Smith with us today. Michael, would you like to address that? Sure.
spk04: Hey, Steph, can you hear me?
spk01: Yes, can hear you just fine.
spk04: Great. Yeah, so I would say that we continue to see strong results in both our brick and mortar partners business and our e-commerce channel. The one thing that will be unique in Q1 is that we did have a much stronger ship out percentage to our brick and mortar partners because the way that a pipeline for a strong support of a launch like Nexstar works and a brick and mortar channel versus an e-com where there's not quite as much of a load. So probably better to look at consumption trends versus shipments. And when we look at shipments, we see, or I'm sorry, when we look at consumption, we see healthy share gain in both channels, but we're seeing a greater share gain for our portfolio and the e-commerce customers versus the brick and mortar customers.
spk01: That's helpful. And it actually goes to my second question. Zivi, you talked about a step up in marketing in the second quarter. I know you've got some innovations. But is there any way to think about marketing mix, or how are you thinking generally about your go-to-market strategy for some of your own innovation where you're really driving category awareness and uptake?
spk02: Well, look, I'll start with it. Go ahead, Cord.
spk08: Thanks, Steph. I'll take a first stab at it. Typically and historically for our brands that we've matured and got into that we are seeing – consistent performance and they're doing the work for us. We're spending about 15% of sales to support those brands and we've had very good results. We've modified our efforts to continue quarter to quarter to gain share across all those brands and couldn't be happier with their performance. We think that's an adequate spend and something you should consider as normal for our existing portfolio that's in place. When our blended margin is at 55%, it gives us ample room to have contribution margin back to the company and and generate leverage and accretive even on margin going forward in those brands as they grow. When we launch brands like Nexstar or Foster or a new DTC initiative, and depending on the support we get from our customers and a bunch of different variables, we make decisions on leaning in heavier the first year and then starting to pull that back over the out years as we see the performance with the idea we hope to stabilize into the similar rate. This year we specifically had incredible support for next star with virtually all of our customers taking the item and getting significant distribution. And we see because of the margin profile of the item and the amount of placement we got, that it was important for us to make sure we did a consumer awareness at a very significant level. So the 15 million we talked about specifically 7 million in the second quarter, that's really incremental marketing. We're putting into new product launches. That's money that was generated out of our existing portfolio sales that and otherwise could have been brought to the profit or even online of the company to guarantee the success of those brands. And it's an investment for the out years as we think those brands will perform well, become very stable in the categories, and then eventually get to where they're back at nine with that kind of 15% marketing spend and be very accretive and out years for the company. I hope that's what you were asking about.
spk01: Yes, it's very helpful. Thank you very much.
spk09: Thanks, Steph. Our next question is from Elliot Wilbur with Raymond James. Please proceed with your question.
spk10: Thanks. First question for Cord. Just want to ask you about price inflation trends in the distributed business. I know you've previously mentioned that you hadn't seen price increases from some of the distributors along the lines of or some of the manufacturers along the lines that you had expected, which seems a little bit surprising, I guess, in the context of the current environment. I'm wondering if that has changed at all over the past quarter.
spk08: Yeah, we did have some of that change over the past quarter, and we have had some price increases come through from them, of which we've now delivered those price increases on to our customers, and they are timed to be in effect at the same time they take effect for us. And so, We've always had the philosophy to pass through those increases. I will tell you they have taken a more conservative approach to price increases than I would say is normal across the market we've seen. And, again, some of the brands that are more mature that have much higher margin profiles where some of these pharmaceutical brands are carrying 85%, 90% margin based on them reading some of the economic situations going on in the economy and the price points of their items. they opted to take some margin compression during this time versus taking increases. So I would say we've seen about half of their portfolio receive, you know, pretty healthy price increases. And the other half, which is in that category I just described, stay consistent with their current price structure. So no risk to us from a portfolio perspective, from a pricing or inflation standpoint. Again, those are just passed straight through. And we've been doing that now for, you know, over 10 years. And so it's just part of natural and, normal operating procedure.
spk10: Okay. And then I'm going to shift gears and ask a couple questions on the services segment as well. Maybe if you could just provide some general color commentary in terms of KPI performance in the quarter with respect to dollars per clinic and pets per clinic metrics. And then just You know, thinking about the bigger picture here in terms of vet clinic trends, obviously, a lot of data sources reporting has been a fairly significant slowdown in growth year on year, at least within sort of, you know, fixed site locations. And, you know, at the same time, we're looking at, you know, near record levels of vet services inflation. And just you know, how should or how do you think about and how should we think about perhaps kind of, you know, those dynamics impacting, you know, your business model, which, you know, is a little bit more flexible, a little bit more value oriented, I guess, you know, thinking that, you know, are you starting to see at the margin what you call sort of a net benefit maybe picking up share relative to traditional vet clinics based on some of these trends or, You think the factors sort of still kind of most play with respect to your business, just trends in the overall labor market?
spk08: Yeah, I appreciate the question. It's a great question, Elliot. I think first, I think we've told you guys along the way, through 2021, we saw cancellation rates around 25% for the full year due to labor issues that were going on. We had budgeted that same cancellation rate as 2022, and We're fortunate to report that in Q1 of this year, we saw about a 20% improvement from where we had budgeted or more like a 20% cancellation rate versus 25. So the work we're doing is getting better. From a KPI perspective, our pets per clinic on our wellness centers are up 23% year over year from last year and running two full pets more this year than we were running last year. Our community clinics are also running two full pets more, which is a 15% increase over last year. And I think what we've seen is we have had to take price, and our average ticket is also up about 10%. Most of that is in line with what the pricing actually we had to take to cover our cost increases with labor. And so tickets up, pet counts up, all that's up, that stuff's down. And I think what it really tells you is we have a very narrow focus set of services that we do. We are very easy to get people in and out of there. where a lot of you read the commentary and the vet channel issue is they have a lot of complicated things they're doing. The procedures they're taking are taking longer. It's slowing down the time it's taken and it's pushing people away. So I think where we have labor and we have clinics open, people are figuring out and understanding that we're the, you know, the, the option of choice for their basic preventative care vaccinations and minor emergency type stuff. So we feel very good. We're in the right place, right time with our model. And, The only really negative I can report is because of what went on to the pandemic level. We are, even though we're, you know, 30% more clinics run in the wellness centers this year versus last year. And, you know, that being a positive number, we're still gaining where we had our core based business running and we're still negative to what we were in 2019 from a number of clinics run. So we had a better quarter than we expected, made a million dollars more than we expected in that business for the quarter and And I think all indications are we're in the right place. We just need to continue to hire more vets and get more clinics out there and get more recovery because the model is right for what the consumer needs at the right time.
spk10: Okay. And then one last question for Svi. Just wanted to go back to your comments last call with respect to the outlook for cash flow from operations. I think you had indicated you had expected a record year. Just wondering if You know, how things stand after first quarter, and maybe some specific commentary on just receivable and inventory trends in the quarter versus your original expectations. Thanks.
spk02: Yeah, we're on track. We were about negative $11 million of cash flow last year. We project we're going to have $40 to $50 million of positive cash flow this year. First quarter, we were up around $12 million cash flow year over year, and all of that's around working capital. So as we sit here today, we still expect to be $40, $50 million of cash flow. Now, the big variable, of course, is if you have any shifts in working capital, but we feel really good about the current year cash generation. And moreover, as we think about the cash flow generation of the business potential longer term, We would note that there's a fair bit of investment in there that eventually inures to the benefit of cash flow. For example, we're adding back 20 some odd million dollars of wellness centers. So eventually when we get the wellness centers stabilized, that's cash flow to the bottom line. The EBITDA for the community clinics, we think if it returns to pre-pandemic levels, that's another 10, 15 million dollars. And there's a couple other myths as well. So we're really pleased with the cash flow generation potential for this year. Moreover, longer term.
spk09: Our next question comes from John Anderson with William Blair. Please proceed with your question.
spk06: Hey, good afternoon, everybody. I wanted to ask, of course, the comments on the seasonality or the change in seasonality for the year. Could you talk a little bit more about what caused the late start to the season in April? We've heard some similar commentary from, let's say, a lawn and garden manufacturer, product manufacturer that we cover. But what kind of drove that? And when the season starts later than it typically does, do you lose that business or is it typically shifted? So how you're thinking about the implications of that late start?
spk08: Yeah, thanks for the question, John. And again, I think, you know, we watch a lot of key categories, suntan, lotion, charcoal, lawn and garden. And in general, I think all of us had a slower start to the season than what would be expected. And it really is just tied to the weather that we saw across the country and the weather patterns. And if I was going to be calling you in Chicago or other people in New York, I mean, we were seeing snow, and even at our offices through the month of April, up even to the third week of April, we were seeing, you know, three and four inches of snow in a matter of a couple days and just didn't get that spring weather we typically get, and it's a category that the spring sun kicks off the season. So this is one of those years that the weather was a little bit rougher in April. We did see a seasonal shift and saw an uptick At that last week of April and these last few days of May, that's more in line with what would be typical to the season. We've been in this business over the last 12 years, and we have found that the number of doses sold and the number of boxes sold is very consistent year over year. And if someone doesn't treat themselves in April, it may happen in June. It may happen in July. A lot of the customers, there's a regimented person that's using the product every single month for the year. And then there's that person that's just going to opportunistically use it as they need it for the season. They're going to go out in the mountains and they end up buying one to one and a half boxes a year on average. And so when they buy, they typically recover those sales. So I think as we said in our guidance, you know, we need this trend to continue to meet the guidance that we put out there and we believe it should based on past year's history. And we believe that our full year guidance is intact because that we do believe we will recover those sales over the season, but it'll be more weighted to, you know, the middle to end of the season based on what we've seen the start of the season.
spk06: Okay, that's helpful. I wanted to ask about new products because it seems like it's a big focus this year. From the super premium supplement at the club store, which has already launched, to a couple of the other things you've mentioned, an e-commerce initiative in the second half of the year, I guess Nextar. Could you, I guess, thinking about each of these, could you talk first about the kind of sell-through you're seeing with premium supplement at Club? Because I think that's important. You've talked about that being, I think, a $15 million revenue contributor this year. So initial sell-through and reorders. And could you provide a little bit more detail on these other two items? and what you're seeing in terms of or expecting in terms of distribution and whether there's any kind of early evidence of progress. Obviously the second half initiative is something that we're going to have to wait and see, but even what that is and a little bit more color, because again, it seems like a real exciting year in terms of innovation.
spk08: Yeah, I think we're always pushing innovate. Some years you just have all the right ideas at the right time and you get significant support from your customers and, and deal with that. The first comment I would tell you is, you know, we budgeted from all the initiatives this year to see about $30 million of top line contribution to the company. In that 30 million, we believe we will source about 10 million of that volume from ourselves. And so see a true net gain of about 20 million for the year, which is not insignificant, but in line with our total growth, about 25% of the new growth we'll deliver for the full year. As far as performance, I'll let Michael Smith comment. He's been the person to execute and deal with the customers and is closer to the way to measure that in performance, and so I'll let Michael comment on that part of it.
spk04: Yeah, happy to chime in. I think, you know, to the first one that you mentioned in terms of the super premium product with one of our large warehouse club retailers, that item has been out for a period of time now where we've not only had the chance to read the merchants excitement from the proposition that we built together. But now we've also had a chance to see how their member perceived the item and happy to announce that that item is doing as expected, if not slightly better on the run rate that we've already established. And we still have what I'd say is our largest push of activation or trial driving efforts yet to come. That program will have its biggest event in the back half of Q2. So the early read very strong, yet still have some big activation plans yet to impact it. On Nexstar, I would say the same thing in terms of the feedback and the engagement and then the ultimate support that we got from our retail partners and the merchants that we engage in. They love the quality of the proposition. They're hungry for innovation. We compete in a couple categories, Flantic being one that's been pretty stale in terms of new news and meaningful innovation to the customer. So they've really jumped in. and hopped on board to support this initiative. Now, it's technically been out in the market for four to six weeks. Our large ACV and store count customers have just brought it in over the last two to three weeks. We have our first major promotional push coming at the end of this month, along with our big investments in AMP hitting in May. So I would say it's still too early to get a great read on what the customer thinks of that proposition, but we have gotten immense favorable support from our retail partners.
spk06: Right, that's really helpful. I guess one for Zvi, this was asked earlier. Maybe I'll ask it in a different way. You know, it's been, I guess, a few years since you, a couple of years since you've been free cash flow positive on a full year basis. And to the extent that you can address this, you know, do you expect or plan to be free cash flow positive in 2022, or is that something we should think about as a little bit longer term, longer out?
spk02: Yeah, this is Lee. That was the numbers I was speaking to. I was speaking to being $40 to $50 million of free cash flow positive in 2022, with a longer-term potential significantly higher than that as we build out our wellness centers and return to pre-pandemic levels and so forth.
spk06: Great. I just wanted to be sure I heard that correctly. Thanks so much, and good luck, everybody. Oh, and Susan, it's been great, you know, conversing with you and spending time with you, and good luck in the future.
spk01: Thank you, John.
spk09: Our next question comes from Bill Chappelle with Truist Securities. Please proceed with your question.
spk07: Yeah, thanks. Good afternoon.
spk09: Hey, Bill.
spk07: Hey, just a, and it might have been covered, but On the $5 million pull forward, I guess maybe some more color why that happened. Was that a distributor business? Was it your own product? And then how much EBITDA went with that business in terms of quarter-to-quarter moves?
spk08: Yeah, so thanks, Bill. The reality of it is we're negotiating when retailers are going to bring in the product and do their resets back in the fall. And typically it's accurate. And for the size of business, we are five millions, the biggest intercompany chains then, and we count ourselves lucky, but, but literally it's a order we expected to ship in April that ended up shipping in March, uh, came across the quarters because of that reason. It's tied to the seasonality of when we load in the stores, have their inventory levels brought up to meet the seasonal needs. Um, the mix on that product was heavier towards our own product. Again, part of that's the Nexstar launch having significant fill order implications as well. And the EBITDA margin that we estimate that came forward into Q1 was $2 million.
spk07: Great. And then just on John's question on seasonality, so can you give us an update? I mean, have you seen sell-through pick up in the month of April, early May as the weather has improved? and so I'm just trying to understand, like, from your commentary, do you expect, you know, the overall consumer takeaway to be a little bit lower just because you missed the month of March, per se, or is it too, I mean, it wasn't that bad?
spk08: Yeah, so the month of April was awful, Bill, to historic efforts, and we just did not see the consumer consumption that typically takes place, and a direct reflection of Not seeing that consumption means we have inventory levels that are higher out there, and the reorders didn't come as quickly as expected. And so we believe that it was about a $20 million hit to the month of April and to the quarter. When you look at our historical efforts, typically once we see the season kick off, it returns to normal efforts, orders pick up, and we do see it usually accelerate, and you'll see those doses and units picked up across the season still, and we recover fully. We did see a change in the cadence of sales that took place the last week of April and these first few days of May. And so our guidance reflects the impact that took place in April and the update, assuming that we are now back in the season and we'll run the rest of the season consistent with the normal, you know, normal budgets. And that's what's involved in the guidance as we speak today. But we have, again, left ourselves the ability to still be at our full year guidance based on past years and company history of recovering those doses and those units and the, uh, during the total season. Great.
spk07: Thanks for the color.
spk08: Thanks Bill.
spk09: Our next question is from John Lawrence with benchmark. Please proceed with your question.
spk05: Yeah. Thanks. Good afternoon guys. Congratulations on the quarter. Thanks John. Cord, would you spend just a couple of minutes, um, Obviously, what's happening in the services business, the changes you made last fall to help that profitability a little bit, would you just dig into that a little bit? Zvi, would you talk about maybe those line items and what's happening on that labor side that's generating a little better EBITDA performance there, and do you expect that to continue through the year?
spk08: Yeah, I think, John, obviously we – We projected to have a summer performance full year as last year with not having visibility. That performance would have had us essentially covering all of the bills and necessary G&A to support the business, but having no positive EBITDA contribution to the company. First quarter, the efforts we've taken has allowed us to optimize the schedule, optimize our workflow, and has allowed us to not have as many times where we have staff show up and then not have a veterinarian present. we just reduce wasting money. And ultimately, if we have veterinarians and staff there, we're seeing more people than we do have. So it's really about just getting it right in this environment. I think the message we tried to let people know is when we tell people we hired 17 vets and we used 13 of them to optimize existing centers, that's at the core of it, where we had unreliable temporary labor. Now we get a W-2 employee that is reliable. That's more of a permanent fix that lets us continue to to close that gap in that main issue. And so in the quarter, the efforts we took and the things we're doing allowed us to reduce the cancellation rate from 25 to 20%. And when we run 80% of the stores versus 75, and you hear the pet counts are up 20% of wellness centers, up 15% on that, and the average tickets up on average 10%, the ones we're running are doing well. And so it's just about continued improvement getting back to pre-pandemic, you know, clinic counts and continue to just execute our playbook. But lots of positive going on.
spk05: Great. Thanks. Susan, thanks for all the help and good luck going forward.
spk01: Thank you.
spk09: We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.
spk08: Appreciate everybody joining us today. Obviously, we had an exceptional first quarter as we saw record sales and EBITDA were definitely better than what we had guided as our performance and expected performance for the quarter, so we feel very fortunate to have a good start to this year. Coupled with that, we saw a rough April with the season starting late, which has allowed us to have time to reflect on how to get after the season in a more condensed effort and put plans in place to recapture those sales and margin, but feel very good about our full year guidance and the company's performance and our positioning in the marketplace. We have lots of exciting new items and new opportunities out in the marketplace with the right investments coming at the right time to help support their growth and feel great about PetIQ's position in the marketplace, especially when you have economically strained times. Being a low-cost provider of health care for pets, we believe we're well-positioned for people looking to save money, and our message should never be stronger than right now as we see an economy that's fighting inflation, which has the option to then make major steps in towards our model that provides the same valuable service, the same quality products at a much lower price. And so we hope to reflect those numbers through the rest of the year and the performance and the consumer responding to this great offer we have as a company here at PetIQ. And just thank our people, our employees, all of our partners that helped us deliver the results, and thank all of you as our shareholders for supporting PetIQ time and time again. And we look forward to talking to you very soon. Thank you.
spk09: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-