PetIQ, Inc.

Good afternoon, and welcome to the Pet IQ second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please do note that this event is being recorded. And I would now like to turn the conference over to Katie Turner. Please go ahead.

Good afternoon. Thank you for joining us on PetIQ's second quarter 2022 earnings conference call and webcast. On today's call are Cord Christensen, Chairman and Chief Executive Officer, and C. Glassman, Chief Financial Officer. Michael Smith, President and Chief Operating Officer, will also be available for Q&A. Before I 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 this 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, 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 our reconciliation of non-GAAP financial measures, the most comparable measures prepared in accordance with GAAP. In addition, PetIQ 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 second 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, Michael, and I will be available to answer your questions. First, I'd like to begin by thanking all of our dedicated employees for their hard work and contributions in this dynamic and challenging operating environment. We couldn't provide the access to affordable pet healthcare without you, and pet parents everywhere are grateful too. While net sales of 252 million were below our expectations of 260 million, we still drew consumption of our PetIQ manufacturer brands, launched new products, which we strategically invested behind, and outperformed in the categories which we compete to deliver continued gross margin expansion and adjusted EBITDA in line with our expectations of $28 million. And year-to-date, our net sales are up 7% on an apples-to-apples basis. Like most companies, for Pet IQ, the last few years have provided to be unlike any others in our company's history. Our team has navigated COVID and how pet parents shop for their pet health and wellness needs. This year, while it's less about COVID, we are seeing higher inflation impact consumers and a tighter veterinary labor market. As we discussed last quarter, unfavorable weather trends impacted the start of the flea and tick season in April. While weather was still an issue in May, consumption did improve. However, this increase did not fully offset the decline to the start of the flea and tick season. In addition to weather, late in the quarter, we started to experience changes in consumer shopping habits, evidenced by trade down to smaller pack sizes, and lower cost brands, as well as certain preventative care purchases occurring more closely to the time of need in this economic environment. We also had $5 million of fill orders to support the start of the flea and tick season that shifted to the first quarter of 2022 from the second quarter of 2022. We remain pleased with how our PetIQ manufactured products performed in light of the broader category weakness in Q2. Our own manufactured brands represented 28.9% of product segment net sales up from 28.4% in Q2 last year. And we expect PetIQ manufactured brands to increase to over 30% of product segment net sales in the second half of 2022. We generated sales growth across five of our top seven manufactured product categories during the quarter. A few of the highlights from the quarter were pet supplements grew 62% compared to 2Q last year. Dental was up 23% versus the prior year period, and dog treats increased 80% year over year. We continue to participate and be a leader in several of the largest growing categories within the pet industry, such as flea and tick solutions and health and wellness. Our manufactured flea and tick brands are up 6.5% year to date versus the first half of 2021, but less than the 24% that we expected year to date based on the weather and changes in consumer spending habits I mentioned earlier. In terms of market share, for the 12 weeks ended June 18, 2022, the PetIQ portfolio gained 73 basis points of share within the over-the-counter flea and tick category and continues to command the number two market share position at 20.3% total share of the market. This share gain was led by both PetArmor, Capstar, and Nexstar. In the health and wellness category, we also continued our momentum in this high-growth segment as we picked up 98 basis points of share The segment increased 8% across the market while our portfolio grew 13% for the same 12-week timeframe. Both flea and tick and health and wellness segment growth was fueled by disproportionate gains in the e-commerce and the club channels, which are not Nielsen measured sales channels. 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 through retail and online. Now focusing on the services segment. Our services segment reported its best quarter since the onset of COVID in 2020, posting its sixth consecutive quarter positive adjusted EBITDA on net revenue of 33 million, an increase of 17.2%. This was better than we expected. For the first half of 2022, services segment net revenue is 60.9 million, an increase of 16.2%. We believe our services segment We'll make sequential and year-over-year improvements as we progress through 2022. In Q2, we continue 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 continue to focus on veterinary and retention and recruiting programs to support our future wellness center openings. Due to the challenging vet labor market, we opened six new wellness centers in Q2. and 10 wellness centers in the first half of 2022. We remain prudent with our services growth near term, given the challenges in the vet labor market. We are also very excited to have added John Pearson to the PetIQ team in the second quarter as Senior Vice President, Head of Services Division, reporting to Michael Smith. He is responsible for managing all aspects of PetIQ Services Division, including strategy and operations to fuel growth in revenue and profitability. John is an incredible operator, and strategist with extensive retail experience, including a very strong track record in consumer retail, working across multiple product categories and key leadership roles, having spent much of his career helping to fuel growth at the world's largest retailer. He is here to help us at an important time as we look to further enhance and optimize our services segment to reach more pet parents and their pets with our affordable and convenient access to pet health and wellness products and services. In John's first 60 days, He has already begun to lay out and implement plans with a fresh perspective and constructive ideas to fuel future growth and add stability in our services segment. I look forward to sharing more of his insights and our strategic growth plans with you in future quarters. Finally, I'd like to address our updated annual outlook, which V will cover in more detail. Multiple consumer trends continue to support the long-term growth of the pet industry and PetIQ's unique position in the market, offering convenient and affordable veterinarian products and services. When we provided our annual guidance at the beginning of 2022, we had visibility to consumption patterns across our brands and the categories in which we operate that were growing. We also had planned new Wellness Center openings. At the time, this information fully supported the total company growing net sales at approximately 10% on a like-for-like basis as compared to 2021. Now with a much slower start to the flea and tick season due to weather, the changing consumption patterns of pet parents in this economic environment I previously discussed, and fewer Wellness Center openings than we planned due to the vet labor market, we are taking a more conservative approach to our outlook. We now expect net sales of approximately 4% at the midpoint of our guidance. This reduction in our sales guidance can be broken down into three main areas. approximately one-third of our reduced net sales expectations are due to lower than expected flea and tick sales as a result of weather, which we don't expect to fully recover in the back half of the year. Second, approximately one-third of our guide down is due to the changes in consumer spending that I outlined today and something we continue to closely monitor. We have also seen the trade down in the flea and tick category that I mentioned earlier, which supports PetIQ's manufactured brands, but it also means that in 2022, we expect the total category to be down and smaller than in prior years, even though we expect to capture a disproportionate amount of market share. Third, the final one-third of our net sales guidance reduction is due to us opening fewer wellness centers than we had expected. Based on the labor market, we opened 10 new wellness centers, a much lower number than we had budgeted for 2022. The last area I'd like to cover in our guidance is our sales quarter-to-quarter and the first half to second half of the year. If you take the second quarter and the first half of 2022 financial results and our updated 2022 outlook, it suggests all of our growth happened in the first half of the year. Simply doing this does not tell the full story. In fact, our year-over-year growth is very balanced when you look at consumption by pet parents. Year three to date, consumption has increased compared to the first half of 2022, and we expect this trend to continue for the balance of the year. It is important for us to highlight that a number of our retail customers have been balancing their inventory and reducing the weeks of supply. When you normalize these inventory events, our growth is very balanced across the entire year. 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, and increasing pet population and more pets looking for convenient and affordable pet health and wellness. Our product and services teams continue to execute 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 over the next several years. With that overview, I would like to now turn the call over to Zee.