PetIQ, Inc.

Good day and welcome to the PetIQ Inc. fourth quarter and full year 2023 earnings conference call. All participants will be in listen-only mode. Should you need 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 note that 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 fourth quarter and full year 2023 earnings conference call and webcast. For today's prepared remarks, we'll hear from Ford Christensen, 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 risk that could cause after 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 is a substitute for the financial information presented in accordance with GAAP. Please refer to today's released for definitions and a reconciliation of non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP. And in addition, please reference PetIQ's investor website for a supplemental presentation. 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 a better than expected fourth quarter and full year 2023 financial results. I'll begin with an overview of key highlights then Z will review our financial results for the quarter and outlook. Finally, Z, Michael, John, and I will be available to answer your questions. The team started 2023 with the goal of generating a little over a billion dollars in net sales and adjusted even out of 89 million based on the midpoint of our guidance. I'm proud to report that after consistently exceeding our expectations quarter after quarter in 2023, we finished the year significantly better than we anticipated. When compared to the prior year, our 2023 net sales increased 20% to a record $1.1 billion, and our adjusted EBITDA increased approximately 35% to $105 million. Our stronger-than-expected 2023 net sales led to favorable leverage of our costs and expenses and strong profit contributions, which helped fuel record annual cash from operations of $61.9 million and free cash flow of 52.7 million, much higher than the 30 to 40 million we projected. And finally, our net leverage was a record low 2.9 times as of December 31st, 2023. Looking to our total growth in 2023, I'd like to emphasize the power of the product segment, and most importantly, PetIQ's portfolio brands. As we've discussed in the last few quarters, when you look at all sales channels combined for 2023, we had one of the strongest seasons in the last 10 years for the over-the-counter flea and pig category. For 2023, product segment net sales were $968.2 million, an increase of 21% compared to 2022. And more even impressive are the net sales of PetIQ's brand, which increased 28% and exceeded our growth expectations for the year. These results demonstrate the strength in the planning and execution of our entire team. We are building significant brands in the pet categories that are growing online and at brick-and-mortar retail while capturing disproportionate amount of market share. Across our Pet IQ manufacturer brand, we continue to see great returns on our enhanced advertising and promotional efforts as evidenced by our growth recalls We told you that we plan to spend more on marketing in the second half of 2023. Our marketing budget for 2023 was $40 million. Midway through the year, we communicated that we would spend an incremental $4 million on marketing, $3 million of which we recorded in Q4 of 2023. So in total, for 2023, we spent $44 million to support our brands. We expect this investment to have a longer-term payback for our brands beginning in 2024. Included on 2024 adjusted EVOT guidance which we will review is an incremental $12 million of market expense. This is on top of the $44 million that we spent in 2023. Six million of this we told you on our last earnings call will be funded by the savings from the services segment optimization and the remaining six million we expect to fund some cash from operations. Our team will continue to lean into prioritizing investments and initiatives that we expect to support the long-term success of our brands. We expect these efforts to drive outpaced growth in the coming year and beyond. Now I'd like to discuss our product segments in more detail. For Q4 of 2023, the product segments contributed net sales of 191.3 million, an increase of 22% compared to the prior year period. The growth in Q4 of this year was broad-based across all product categories, In the fourth quarter of 2023, the frequency category grew at a positive 13.2% and PetIQ's brands increased 28.2%. PetIQ's portfolio brands continued to capture a disproportionate amount of the growth online and dramatically outperformed the broader category as evidenced by our market share results. For the 12 weeks ended December 30th, 2023, PetIQ's over-the-counter flea and pig brands captured 17.5% of the category dollars, which is an increase of 205 basis points versus the prior year period. Most of this share growth is driven by gaining unit share as we picked up 190 basis for the quarter. The pet supplement category also maintained its growth trajectory in the quarter, gaining 14.4% over the prior year period. This fast-growing category has now more than doubled over the last four years and has surpassed the over-the-counter flea and pit category. Pet supplements now represent the largest category that we compete in. Our pet supplement products continue to see accelerated consumption and growth in the fourth quarter of 2023, where offerings in this space grew plus 23.5% compared to the prior year period. Our strong household penetration trends along with expanded need states in the pet supplement category, give us confidence that these double-digit growth rates should continue for many years to come, and Pet IQ is positioned very well to continue to gain share in this important category. Recently, we've completed tests for a premium supplement offering under the Rockland Roxy brand and are excited about a full product launch at the end of Q1. We look forward to providing you with more details on the product performance in the coming months. In addition, our pet dental and treat offerings outperformed the category in Q4. The Minty's and Pure Love brands both grew at two times the category leading to meaningful share gains. The Minty's brand grew plus 36% and gained 61 basis points of share in the dental treat category. The Pure Love treat brand also continued to gain momentum as it posted outstanding growth of 184% in Q4 versus a year ago. The newest brand in our product portfolio, Rocco & Rossi, grew at a positive 21.2% for the fourth quarter of 2023, also well ahead of our projections. Remember, we exited several non-core Rocco & Rossi offerings in the first half of 2023 that we determined were not a strategic fit for us. And yet, our team has executed well, and we are very pleased to have grown the base business better than expected for the quarter and full year. Our core... Rocco and Rossi products are focused on the premium pet and stain odor category, and pet parents continue to look to Rocco and Rossi for their stain and odor needs in Q4. We believe the Rocco and Rossi brand can expand its growth in other premium categories like supplements and treats. We are very encouraged about the brand's success thus far. For 2024, we are excited about increasing distribution of Rocco and Rossi's premium pet offerings as we increase advertising, and promotional investments to build brand awareness and consumption over the next several years. Now focusing on the services segment. On an annual basis in 2023, the services segment net revenue increased 10.4% to $133.8 million compared to 2022. And for Q4, the services segment net revenue was $28.6 million, an increase of approximately 7% compared to the prior year period. the segment gross profit dollars and margin showing decreases due to our optimization efforts. We closed 140 wellness centers in the second half of 2024. This includes 45 wellness centers in Q3 and the remaining 104 in Q4 to improve future profitability. We ended 2023 with 133 wellness centers in operation. We believe this is the right decision for our total business. Our optimizations have helped us to better align our investments in the areas of our business where we expect to achieve the highest rate of return. Our collaboration with an existing retail partner on a new pilot wellness center offering continues to go well. We offer a variety of pet services, including veteran services, as well as grooming and hygiene care. We are testing and learning together and remain optimistic about the options for this format in 2024. In closing, I'd like to thank our pediatric employees located in our headquarters, our facilities in Omaha, Springdale, and Daytona, and everyone in the 39 states offering our veterinarian services that always help us to achieve our strong annual results. Your commitment to our mission and core values creates our strong culture for success. With your consistent work and dedication, we are well positioned in 2024 and beyond to capitalize on the robust pet industry tailwinds and provide smarter, more convenient access to affordable pet health and wellness products and veterinary services. With that overview, I'd like to now turn the call over to Vee.