PetIQ, Inc.

Good day and welcome to the Pet IQ, Inc. Second Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. 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 note, this event is being recorded. I would now like to turn the conference over to Katie Turner, Investor Relations. Please go ahead.

Good afternoon. Thank you for joining us on PetIQ's second quarter 2023 earnings conference call and webcast. For today's prepared remarks, we'll hear from Cord Christensen, Chairman and Chief Executive Officer, and Zvi Glassman, Chief Financial Officer. 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. 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, 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 Cord Christensen.

Thank you, Katie, and good afternoon, everyone. We appreciate you joining us today to discuss our record second quarter financial results. I'll begin with an overview of key highlights since V will review our financial results for the quarter and outlook. Finally, V, Michael, John and I will be available to answer your questions. Our team did an excellent job during the second quarter executing our operational and strategic growth initiatives. Their hard work and dedication across both our products and services segment enable us to report record net sales and adjusted EBITDA, both of which exceed our expectations for the second quarter of 2023. And as a result of our better than expected Q2 and year-to-date results, we are pleased to be able to raise our full year 2023 outlook. Few key highlights from the second quarter include, we reported net sales of 314.5 million, an increase of approximately 25%. The net sales result was above our second quarter outlook of 270 million to 280 million. We had strong broad-based growth across our business with a solid increase in gross profit dollars and improved leverage of our SG&A expenses even with the key investments in advertising and promotional spend to support the growth of our business. This helped us achieve record quarterly adjusted EBITDA of $32.9 million ahead of our guidance for the second quarter adjusted EBITDA of $24 to $26 million and a 36% increase versus second quarter of 2022. Our higher earnings and improved working capital helped us achieve second quarter record cash from operations and we reduced the company's net leverage to 3.6 times as of June 30th, 2023. Turning to our product segment in more detail, the product segment contributed net sales of $278.2 million, an increase of 27% compared to the prior year period. When you look at all sales channels combined, year-over-year consumption growth in the over-the-counter flea and tick category was the strongest that we've seen in the last 36 months during the second quarter of 2023 at a positive 10.4%. In second quarter of this year, nearly 50% of the over-the-counter flea and tick category sales were generated online. And importantly, PediQ's portfolio of brands continued to capture a disproportionate amount of this growth and dramatically outperformed the broader category as evidenced by our second quarter share results. Turning to our product segment in more detail, As I mentioned, our PetIQ manufactured products outperformed the broader category. The most critical category to enable our financial results is PetIQ's manufactured flea and tick business, which saw its best quarter of winning over pet parents since our acquisition of Parago Animal Health in 2019. When looking at our over-the-counter flea and tick brands, growth in all sales channels for the 12 weeks ended June 17, 2023, our portfolio of OTC flea and tick brands grew a positive 15.3%, versus the market's growth of a positive 10.4%, leading to a gain of a positive 46 basis points of share. These gains were driven by both our Pet Armor Plus and Capstar brands. Our pet supplement segment saw accelerated consumption growth in the second quarter of 2023 as our portfolio grew a positive 19.5% as compared to the prior year. Decatur also continued to see significant expansion in the quarter, gained 16.1% over the prior year period. This fast-growing category has more than doubled over the last four years and has surpassed the OTC flea and tick business as the largest category we compete in within our manufactured portfolio. Strong household penetration trends along with expanded need states in the category gives us confidence that the broader category will continue to maintain high double-digit growth rates for many years to come and Pet IQ is positioned very well to continue to gain share in this important category. In addition, our dog treat business continued to also outperform the category. This growth was led by our dental treat business via the Minty's brand, which grew positive 31% and gained 47 basis points of share within the category. Another growth driver for us in the quarter was our Pet Love Treats brand, which expanded by a positive 23%. The newest member of our portfolio, Rocco and Roxy, which we acquired in January of 2023, also saw double digit growth rates. The Rocco and Roxy brands grew a positive 13.8% in the second quarter, well ahead of our projections. We exited several parts of the business in the first half of 2023 that we determined were not a strategic fit for us and are pleased to still have recovered these lost sales and achieve better than expected growth without their sales contribution. Our core items in the premium pet stain and odor category exceeded our expectations, and we are very encouraged to see the brand begin to expand into other premium pet categories with success. This has also contributed to the share gains we are seeing within the brand. Sales of the PetIQ manufactured products increased 21.2% ahead of our expectations Our own manufactured products represented 29.1% of our product segment net sales in Q2 of 2023 compared to 26.2% in Q1 of 2023. This build and run rate will continue in the back half of the year and will allow our manufactured products to achieve our sales dollar growth for 2023. However, we will likely be below our expectations of 32% of our product segment sales to come from the PetIQ manufacturer brands in 2023 as our distributed product portfolio has significantly recovered from the prior year and is contributing above our model forecast. That said, we do continue to expect outperformance of our PetIQ manufactured product portfolio, but this will be against a larger pie of overall revenue than we previously forecasted. Now focusing on the services segment. Our services segment reported second quarter 2023 net revenue of $36.4 million, an increase of 10.2% as compared to the prior year period and ahead of our expectations. We experienced improved cancellation rates and solid operational improvements, which allowed for increases in average revenue per clinic and average dog or pet served during the second quarter of 2023. We converted four wellness centers to hygiene centers in the quarter, and we will continue to test this exciting new addition to the services segment. Moving forward, we will remain prudent with our new location growth for the remainder of 2023. Importantly, under John Pearson's leadership, the services segment has experienced a significant improvement in the last year since he has joined. Most recently, our services team executed regional pricing and has tested additional services centered around hygiene, with select locations already successfully increasing the number of pet visits as a result of these new services. During second quarter, we also launched a new convenient virtual tool allowing pet parents to book appointments easily or walk in and know when they can see a vet or vet tech. We've been pleased with the innovation and pace of results generated from the services segment in second quarter last year and look forward to the opportunities we have ahead. Before I turn the call to Zvi, I would like to congratulate John Pearson on his promotion to executive vice president services and manufactured products. a newly created role effective August 2nd, 2023. In his new role, John will gain responsibility for PetIQ's manufactured product portfolio, inclusive of the company's sales and marketing teams, while maintaining his current responsibilities for the services segment. He will continue to report directly to Michael Smith, President and Chief Operating Officer. On behalf of the board and our leadership team, we are thrilled for John to step into this new role as we continue to build upon our strong foundation for growth and profitability and deliver a smarter way for pet parents to help their pets live their best lives. We remain optimistic about our opportunities for growth in the second half of 2023, and our data across all sales channels in the product segment for Q3 to date continues to show that PetIQ is performing well across categories. In closing, We appreciate the hard work and dedication of our employees in our manufacturing and distribution facilities, as well as our corporate office. For their commitment to our mission and core values and helping us to achieve these operational and financial results. With that overview, I would like to now turn the call over to Zvi.