PetMed Express, Inc.

Welcome to Pet Med's conference call to review the financial results for the fourth quarter and fiscal year end, March 31st, 2022. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference, you need to reach an operator, please press star zero. At the request of the company, this conference call is being recorded. Founded in 1969, PetMeds is your trusted pet health expert and America's most trusted pet pharmacy, delivering prescription and non-prescription pet medications and other health products for dogs, cats, and horses direct to the customer. PetMeds markets its products through a national advertising campaign called which directs customers to order online or by phone, and which are intended to increase the recognition of the PetMeds brand name. PetMeds provides an attractive alternative for obtaining pet medications in terms of convenience, price, ease of ordering, and rapid home delivery. At this time, I would like to turn the call over to the company's Chief Financial Officer, Mr. Bruce Rosenblum.

Thank you, and I'd like to welcome everybody here today. I would also like to remind everyone that the first portion of this conference call will be listened only until the question and answer session, which will be later in the call. Also, certain information that will be included in this press conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 or the Securities and Exchange Commission that may involve a number of risks and uncertainties. These statements are based on our beliefs as well as assumptions we have used based upon information currently available to us. Because these statements reflect our current views concerning future events, these statements involve risks, uncertainties, and assumptions. Actual results could differ materially from those projected. The company undertakes no obligation to update these statements based on subsequent events. We have identified various risk factors associated with our operations in our most recent annual report, and other filings for the Securities and Exchange Commission. Now let me introduce our CEO and President, Matt Hewlett. Matt? Thanks, Bruce.

Good afternoon, and thank you for joining us. This earnings call is the eight-month mark since I started as the new CEO and President of Petmo. Throughout this time, I've remained committed to clarity and transparency with investors and key stakeholders as to the progress of our strategic transformation. To be clear, PetMed pioneered the online pet prescription business over 26 years ago, and that is a legacy of which everyone at PetMed is very proud. However, in recent years, growth has slowed, and outside of a significant 2020 uptick in sales related to the pandemic, our leadership position has slipped. I continue to believe that PetMed is a terrific company with a talented and dedicated workforce, serving a large and loyal customer base. During today's earnings call, we will share with you some early indications regarding the stabilization of our core business, an articulation of our new strategy, and tangible evidence of operating progress towards the execution of that new strategy. I reiterate that my commitment is to be open and transparent as to how we are engineering the transformation of this iconic company. Today, I'm going to divide my prepared remarks between our core prescription business, and our pet health expert strategy, with more time spent on the latter, including some specific steps we have already taken towards executing Thomas Browder's strategy. I have a number of key points I want to communicate to you today, so for clarity, I've organized them into three themes. The first theme is the stabilization of the core business, where the significant revenue declines we've experienced over the past year have begun to moderate. For example, our revenue in the fourth quarter decreased 7.9% year-over-year compared to a decrease of 12.7% for the preceding nine-month period. While January and February had revenue declines and a low single digits, weather in March had a more material impact on our quarter. Specifically, a cooler March in much of the country delayed the start of the fleet in six years, a season which normally represents a ramp-up in customer demand for us. leading to a slower-than-expected final month of the quarter. We expect sales in this category to rebound as higher temperatures return to much of the country and stimulate a more normal flu and sick and heartworm medication demand from pet pounds. Based on historic customer purchase patterns, we expect that the sales impact for this year will be a delay to the start of these seasonal sales rather than a compression or lock of sales over the course of the summer. Adjusted EBITDA for the fourth quarter exceeded our expectations by being down only 8.4% as compared to the 31% decrease reported for the third quarter. Bruce will cover this in more detail, but we achieved these results despite double-digit percent increases in general and administrative expenses year-over-year due to purposeful investments in headcount and infrastructure to stimulate and support our future growth. Notably, we kept our variable marketing spend relatively flat year-over-year As you may recall, last quarter we had a test and learn quarter that resulted in unexpected inefficiency in our marketing spend. We have now settled into a good place with our marketing operations. We are actively testing our key customer learnings from last quarter and remain laser-beam focused on activities to grow our new customer number. While we have not fully cracked the code on new customer growth, we are executing on several strategic steps, having just started our new customer segmentation strategies. and recently bringing on new team members like our new Chief Marketing Officer. The second theme is the acceleration of our subscription business. Today, I am pleased to report that as of the month of March, 37% of our revenue is recurring revenue derived from our auto-ship and save subscription program. This is a whopping 41% increase from the previous quarter. As mentioned in our last earnings call, we are introducing two new metrics that are strategically important as our business evolves into a subscription e-commerce business. As a result of this evolution, over time we expect to see an increase in our LTV as the subscription program creates a more reliable recurring revenue stream from our customers. Our new customer count for the quarter is approximately 66,000, and our LTV to CAC for the quarter is 2.5x. The new customer count is calculated using the more specific definition of new customers as being those who have not previously purchased from us within the past three years. As I mentioned earlier, we believe LTV to CAC is a more meaningful measure of the marketing value creation versus using our traditional ROAS metrics. We expect to see this LTV to CAC network grow as we migrate more of our returning customers to our auto-ship subscription programs. and expand the basket size for average order value over the life of our customers. The final theme is the rapid acceleration of our pet health expert strategy, with the first building block of the strategic pillar being telemedicine. On April 19th, we announced our initial deployment of an investment and partnership strategy that greatly accelerates our experts in pet health strategy. You may recall on that date, we announced an exclusive partnership with the fastest-growing and industry-leading telemedicine platform, Vester. This is the exciting first of many transactions that will build the strategic pillar of our expert pet health strategy. I hinted at telemedicine during our last call, and to enter this space, we delivered a novel approach to capital allocation that I will talk about a bit later on this call. Now, let us dive deeper into the details with the presentation material. As always, we like to feature pictures of our customers' and employees' pets in our slide deck. You will see many original pictures throughout this presentation. In fact, this slide features my dog, Harry, a pet meds customer since he was eight weeks old. Let us start with a look at the current market and our perspective on the overall opportunity. As we've covered in our previous earnings calls, pet meds operate in a very large and growing addressable market. The U.S. pet market is over $100 billion in annual sales, and it is expected to reach $120 billion by 2024. The addressable pet medication market where we participate today is approximately $10 billion and growing rapidly. We are actively working on improving our core business that has been on the decline while also setting our sights on expanding our addressable market into the broader wellness market, which is estimated to be over $30 billion. Today, we are one of the leading pet pharmacies. Pet meds is also an important part of the strategy of many of the pet platforms and players in the industry. Additionally, as I've learned over these months, since I started in the business, there are not many trusted online prescription providers for these pet platforms and players to partner with, which puts us in an enviable position. Our core asset and demonstrated competency around prescriptions will enable us to move much more quickly to execute on our broader pet health expert strategy, as I will elaborate on in a moment. Not only are we operating in a large addressable market, but we also operate in a market that is growing with underlying behavioral trends that are favorable to digital retailers. U.S. household pet ownership has increased over time, and today, 7 out of 10 U.S. households have a pet. COVID has accelerated this trend, and now more than ever, pet parents are keenly attuned to the health needs of their pet. In a post-COVID world, those pet parents are going to need and will seek out health and wellness care provided by a trusted brand. I believe PetMed is uniquely positioned to take advantage of this trend. Consumers also now expect everything to be real-time, fast, and digital, a trend which has impacted every industry. As we've seen in other digital e-commerce verticals, the ongoing move towards digitization of retail is accelerating. Today, our addressable market is largely dominated by offline sales, but we see the growing trend to purchase online as very favorable to us. pet parents see their pets as an extension of their own families, and they are increasingly demanding more healthy pet care options. We see this as a positive trend for pet meds and an opportunity for growth. Similarly, aligned with the trends in human health, pet parents are thinking through the entire spectrum of their pet's care, from diet to veterinary services, and from infancy through old age, as well as reexamining the channels through which they access those products and services. Lastly, the pandemic accelerated the increasing trend for the digitization of healthcare. Specifically in the pet market, regulations related to in-person veterinary visits and prescription fulfillment were temporarily waived for the first time during COVID, and these services moved online in unprecedented ways. As I mentioned in our previous earnings call, our team has spent a considerable amount of time conducting research with the industry generally, as well as specifically with pet clients. As I noted earlier, in April, we announced an important strategic partnership and investment in pet telemedicine with Dexter. With this groundbreaking partnership, we believe we are enabling the first mainstream pet telemedicine platform and the one that will prove to be an accelerator of widespread adoption of pet telemedicine. It has been over a decade where pet meds has been a first and fast mover, and my commitment is that we will continue to do so. During the last earnings call, we discussed some key pet meds differentiators. I want to reiterate those because they are important, and I believe they provide a real edge for a company's transformation. First, our brand is both widely known and trusted. Our own market research indicates that 55% of U.S. pet parents are aware of the pet meds brand. Having a strong brand takes years to develop, and our customers look to pet meds as their trusted pharmacy and pet medication experts. Second, We have a strong operational and quality efficiency as a pharmacy. Our customer care integration with our pharmacy is world-class, which ensures that customers get their products delivered quickly and accurately. Additionally, our vet partners receive quality service delivered through our vet platform. We will be looking to expand our vet network and provide enhanced service to them with new technology delivered through our partnership with Vetster. Our deep experience with the vet community is a significant competitive advantage. As we discussed in our last earnings call, we currently have one of the largest direct-to-consumer vet networks in the online retail space with over 70,000 veterinarians that we've worked with over the company's history. Currently, our online vet portal has 17,000 active veterinarians and vet clinics. As I said in earlier earnings calls, this is a core capability and a unique asset because it enables us to expand our fulfillment capability as we scale our business. Our intent is to drive incremental revenue through a powerful platform offered to our vet partners in the near future. Unlike other online players, we don't view vets as competitors for revenue. We view vets as partners in jointly providing a greater array of pet health services to pet owners. To that end, we will continue working together holistically to improve vets' ability to care for pets. Because of our industry-leading service relationships with vets, our prescription medication authorization rates are the highest they have ever been, which speaks volumes to the level of veterinarian cooperation we receive on a daily basis. Ultimately, we believe if we help vets, the profits for both the vets and for pet meds will follow. Our pet pharmaceutical category expertise is something that I view as a towering strength. Many retailers can sell dog food, but few can provide medication and sound advice at scale. As I've said before, being a differentiated pet medication provider allows pet meds to excel in our health and wellness offerings and continue to be viewed as pet health experts, especially as the market continues to become even more competitive. Pet meds currently enjoy a close and strategic bond with our many supply partners, and those relationships have developed over time to become even more strategic. We have direct relationships with all of our major suppliers, and we work together closely to effectively market our products to our customer base. Our customer service and overall customer centricity ethos permeates our culture and is demonstrated throughout our team. We provide a 100% satisfaction guarantee to our customers, and we go the extra mile for our customers with truly empathetic and expert service. We don't just have a transactional interaction with our customers. We have built trusting, genuine relationships. Our customers view pet meds as a trusted pet health expert, and we take that responsibility seriously. I recently had the pleasure of listening to a phone interaction from a loyal customer. Here's what they had to say. Quote, I just want to compliment the two people that I spoke with. I called from the parking lot of the emergency clinic, which is open nights and weekends. I told pet meds about my situation. The representative that I talked to named Cindy bent over backwards to get this prescription to me the next day before the hospital even opened Monday morning. And then I called later that day to make sure that I could get the medication. I spoke to Gus, and I explained the situation and how I had to have this medication. And he said, I'm going to make sure that it's in the mail for you. They were both absolutely wonderful. I can't thank you guys enough. They were just fantastic and so sympathetic. and they understood how I was feeling. It's kind of a cultural rehab. You're not selling it, pet meds. This is not like buying food or music. These are our pets, and when they are sick, they are in real need. This is important, unquote. Cindy and Gus are perfect examples of our employees' dedication to our customers and our pets' well-being, and I'm delighted to share this story and recognize them for their exemplary customer service. PetMed has historically been a somewhat low-growth yet high-dividend-based company. We are intent, however, upon becoming a higher-growth company and believe we are in a great position to do that. PetMed is profitable with a pristine balance sheet. We do not have any debt. We have approximately $111 million in cash and cash equivalents as of March 31, 2022, and we are cash flow positive. PetMed is moving much of our business from a transactional direct-to-consumer model to a subscription business. Subscription businesses are clearly compelling business models due to their predictable and stable recurring cash flows. As I mentioned at the beginning of the call, we ended the month of March with approximately 37% of our customers enrolled in ordering via our auto-ship and save subscription program. And we anticipate that this number will continue to rise. We continue to have a large base of returning customers, which is an indication of the quality of service and the value that we deliver. We are fortunate to have a large base of over 2 million pet parents that have purchased from us over the last two years. We have over 26 years of experience as a pure play pet pharmacy, fully licensed in 50 states, delivering outstanding service and value. This domain experience is what I would call the more complicated part of the pet ecosystem. which makes our progression into other segments much easier. Our customers just love our brand and service. Our NPS score is over 80, which puts us in the upper quartile along with some of the most beloved brands in the world. Now, I'd like to have Bruce review our financials for the quarter.