Q3 2019 Earnings Call
Good afternoon, and welcome to the pet acute third quarter 2019 earnings conference call all participants will be in listen only mode.
Would you need assistance. Please signal a conference specialist by pressing 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 too. Please note. This event is being recorded I would now like turn the conference over to Jeff Sonic. Please go ahead.
Good afternoon, and thank you for joining us on pet accused third quarter 2019 earnings conference call.
On today's call, our core Christenson, Chairman and Chief Executive Officer, and John Nolan Chief Financial Officer.
Susan Sholtis will also be president and available for QNX.
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 and those described in these forward looking statements.
Please refer to the Companys 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.
Any forward looking statements made today.
Finally, please note on todays call management will refer to certain non-GAAP financial measures, including adjusted gross profit adjusted DNA adjusted net income and adjusted EBITDA among others. While the company believes these non-GAAP financial measures will provide useful information for investors.
He presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with gap.
Please refer to today's release for a reconciliation of the non-GAAP financial measures to the most comparable measures prepared in accordance with gap and in addition that accuse posted its third quarter 2019 supplemental presentation on its website for reference.
Now I would like to turn the call over to Court Christensen, Chairman and Chief Executive Officer.
Thank you Jeff Good afternoon, everyone I will start with an update on our business and the recent acquisition of Parago animal health.
And provide an overview of our financial highlights, including the progress we have made our follow the pets long term growth for him.
John will discuss our Q3 financial results and 2019 Alec in more detail.
Finally, Susan John and I will be available to answer your questions.
I think you a has executed on significant initiatives, including three acquisitions to increasingly evolve our business model and our team since our IPO just two years ago.
Our strong foundation combined with these acquisitions has made our competitive moat significantly deeper and wider.
All of our accomplishments have been focused on our mission of becoming the leading at health and wellness company delivering smarter options for pet parents to help their pets live their best lives through convenient and affordable access to veterinarian services and products.
The first mover and bringing low cost veterinary products and services to over 60000 retail points of distribution and ecommerce sites correct. You helps pet owners of cheap quality veterinary care and save money on all aspects of pet health care.
Our most recent acquisition of Parago Animal Health provides Patrick you greater manufacturing scale, we did state of the art manufacturing and R&D facility located in Omaha, Nebraska.
It also provides a very important addition to the product you business model with its pet health and wellness brands and over 700, pet health and wellness items that manufacturers all with accretive margins for the company.
We are ahead of schedule in our integration plan and already have visibility into sales growth in excess of 15% for 2020 for the acquired Parago business.
Unlike any other companies any industry that act you have the national footprint, what convenient access to veterinarian services and veterinarian prescriptions I know do you see medications added value.
Our differentiated business model and go to market approach has helped I'd like to generate incredible compounded growth and the third quarter is no exception.
We generated record consolidated net sales of $183 million, an increase of 42%.
Or 29% excluding contribution from Parago animal health and adjusted EBITDA of 19.3 million, an increase of 44% versus last year.
Keep in mind.
Reported net income includes certain expenses associated with the acquisition and integration or go out of my hope that we completed earlier in the quarter, which John will discuss in more detail.
Focusing our business segments, our product business demonstrated continued momentum growing at a record 49% for the quarter and 34% excluding contribution from Parago animal health.
We continue to benefit from the strength of our relationships with our animal health pharmaceutical partners, an acceleration of our manufacturer brands and an increasing number of pet parents transitioning their pet health care needs to product use affordable and convenient offerings.
Additionally, through greater access and consumer visibility, we're attracting new customers into the category, which is helping grow the total market.
Our partners across sales channels in animal health pharmaceutical partners are growing with us and all parties are mobile motivated to continue to support the growth and went together.
We continue to experience strong broad based growth at retail, including mass grocery and club sales channels as well benefit from growth in consumer migrations of E Commerce solutions for their pet wellness needs, we're providing access to the largest brands in pet health for our retail partners and supporting their various online strategies.
The third quarter and the 11th consecutive quarter E Commerce generated the highest sales channel growth rate and is growing at a much faster rate than the overall company growth rate. Our prescription drug program also performed well producing the highest growth rate among all of our product categories as pharmacies fill more pet prescriptions several of our large customers have increased their.
Commitments to offerings have prescription drug programs. This is a strong tailwind for US an area of our business that is still in its infancy with a long runway of growth opportunity ahead.
We remain very pleased with our pet Rx rollout and believe this further reinforces our optimism for this category overtime as more of our partners look to expand on line with animal health and wellness using public use it as the preferred vendor of choice.
We also expect our expansion of our veterinary clinics and growth in pets treated from 1.2 million pets, so year to over 6 million Pepsi here will be a significant contributor to our prescription volume.
To be clear.
The crossroads, our prescription drug program and the adoption of E. Commerce solutions is a very dynamic segments of the pet health and wellness industry today.
We view them, both as great strategic businesses for product you, but keep in mind. The success of our company is not be Holden by these engagements and as the lease profit component of our business today.
Our aim is to provide value to the entire pet medications eco systems and the Best example of Pedicures back to the industry are delivering the more than 1 million prescriptions that are 1500 veterinarians right to all the industry participants when you combine this with our wellness Center growth initiative I like it was one of the largest drivers of incremental category growth in the entire industry are above.
Moving to penetrate the underserved segment of the pet population is a key differentiator for our business.
Understandably the rapidly shifting dynamics in the industry are causing participants to reassess their competitive position and create alignment with those providing true value to them and pet parents.
Thank you as a company that has relied upon as a trusted partner and our contracts with the largest manufacturing the country, our representative our alignment with them.
With their support we are executing strategic sales initiatives by channel to meet the unique needs of all of our partners both in store and online.
For the third quarter, our flea and tick business performed well with our recent acquisition correct. You now how does the second largest market sure I've any company reporting in the category. According to Nielsen measured channel data through September the flea and tick category was down 3.1% year to date and 3.7% for the third quarter.
Correct use result, outpaced the category in our brands performed better than the overall market non measured channels were up meaningfully and our prescription drug flea and tick was up significantly and inline with the macro trends in a broader veterinarian market.
Keep in mind for product you only 26% of our third quarter sales were a Nielsen measured sales channels. The other 74% of our sales were in I'm measured sales channels, which dramatically outpaced the measured flea and tick sales channels, particularly an e-commerce and Rx sales channel.
We continue to generate solid increases in both skew velocity and distribution.
Our service segment produced another great quarter, we increased net revenues by 7% to to 24.5 million and adjusted EBITDA increased 37% to 7 million.
Our continued progress in this area is coming from the same learnings that is allowing us to increase our pets per clinic and average ticket for pet both are allowing us to leverage our fixed costs and offer customers a more consistent offering.
Susan <unk> President product, you and her team are making continuous improvements and optimizing our model and performance in both our community clinics and our wellness Center models.
We remain on track with our growth initiatives and our team continues to execute on our plans to open 80 wellness centers in 2019.
The company has opened 26 locations year to date for a total of 67 units in operation.
Our 54 locations currently under construction or contracted to start construction with 34 locations opening in November and 20 in December .
We have strong visibility into our pipeline with our team already focusing on our 2020 new locations.
The nine community clinics conversions to wellness centers, we have completed thus far are producing results that are consistent with our stated target operating model, but on an accelerated basis, well they faster ramp to profitability and lower costs. Every conversion. We have completed the past year are either already that EBITDA positive.
For our Annualizing to EBITDA positive with positive EBITDA margins in 46 months post completion.
These results further reinforce our conviction in the services segment opportunity that will drive sustainable long term growth.
We believe converting community clinics into wellness centers supports this plan with a significantly lower risk and cost.
These conversions are done by increasing their days of operation from one day per week to five and has significant operational advantages such as existing labor and engage customer base and strong retail or hosts relationships. As a result, our ramped a positive cash flow is significantly accelerated which we believe reduces complexity and dry.
Lastly, improves our visibility for success.
In terms of our long term target of 1000 units by 2023, we see an opportunity to convert approximately 60% of these locations or 600 of our community clinics, while continuously backfilling the community clinic base to keep our base steady and mitigate any material cannibalization.
Our greenfield opportunities remain extremely robust a new partnerships continue to emerge as we feel our development pipeline with optimal locations that fit our criteria.
Today, our wellness centers are spread across six different retail banners and we're the only veterinarian service provider in the country with the infrastructure to support and National rollout I'm extremely proud of the team. We haven't plays that is executing on this initiative.
To summarize in a very short period of time and I keep has become the leading pet medication and veterinary services company, we believe our operational and financial achievements for the quarter reflect the strength of product is mission to make pets lifes better through improved access to affordable health care.
We are targeting a large underserved segment of the pet population and consumer demand continues to grow for the products and services pad like you brings to pet parents.
We believe we are well positioned to delivery strong finish to 2019, where we will continue to generate incremental sales from distribution and velocity gains across our brands in both new and existing sales channels, we remain committed to executing against our growth strategy and look forward to continued sales and profit growth.
I would like to now turn the call over to job.
Thank you cord and good afternoon.
Consistency of our based products and services business was evident in our third quarter growth. Furthermore, we realized expansion of adjusted gross margins in both segments on a year to date basis. Additionally, the performance of our apparel animal health acquisition that all our expectations and our overall integration efforts are on plan.
As court mentioned this is a business that creates a host of opportunities for us and we are focused on growing it over the long.
We're very pleased with their services based business as well we are seeing consumers respond to our message of smarter pet health with growth of our head counts per clinic and average ticket. This dynamic is driving our community clinic financial performance demonstrated by topline growth continued gross margin expansion of leverage of our fixed.
Cost infrastructure, which is precisely what we aim to achieve.
Our diversified business of products and services are performing very well and we're excited about what the future holds for pad I Q.
Third quarter 2019, consolidated net sales were 186 million, an increase of 54.6 million or 42% over the third quarter of 2018.
Excluding contribution comparable animal health net sales increased 29% for the quarter as well as the year to date period, which speaks to the consistency of our growth. This year. Our strong sales reflects growth in existing retail partners. As a result of it expanded item placement and marketing programs. Our services segment was driven.
By same store growth within our community clinic based business and growing contribution from our non same store wellness centers.
In our third quarter segment reporting we're beginning to report same store sales for our service business comp base, which is comprised of our community clinics and wellness centers that have been in operation for at least 18 months. Additionally, we added segment level disclosure of adjusted EBITDA that can be found at the end of our press release.
This aligns our segment reporting to our methodology to utilized at the consolidated level and demonstrates the performance of our base business. This creates a new corporate reporting line, which contains costs that are not allocated.
To the products and services segment and should be considered when analyzing the segment level profitability in absolute terms with that I'll get into the performance of our business.
Hi Tech segment net sales for the third quarter were 161.5 million, an increase of 49% year over year, excluding contribution from perishable animal health products segment net sales increased 34% for the quarter. This performance was consistent with the expectations. We provided during the second quarter, which called for greater.
Our seasonality in the third quarter versus the fourth this year that approximates a 60 40 split respectively.
Segment, adjusted EBITDA was 20.5 million, an increase of 40% compared to the third quarter last year.
We continue to have excellent traction in our distributed manufactured businesses that are focused on driving our prescription drug programs within the retail partner pharmacies, both in store and online as well as greater skew penetration with existing accounts.
This is segment net revenues increased 7.1% for the third quarter to 24.5 million.
Excluding the contributions from our Wellness Center initiative third quarter 2019, adjusted service segment net revenue grew 2.4% versus the prior year to 21.9 million segment. Adjusted EBITDA was 7 million, an increase of 37% compared to third quarter last year.
Service organization has done a great job to enhance the offering and further refine our community and clinic model.
As I mentioned at the outset.
These initiatives are driving a lift in total peck counts across our platform, which will drive long term segment sales growth as well as leverage the significant fixed infrastructure that is already in place.
When excluding the non same store wellness center revenue service the same store revenue increased 2% and 12% for the three and nine months ended September Thirtyth 2019, respectively. The lower same store growth rate as a result of plan conversions at high Pet Count weekly community clinics into wellness centers.
Non same store revenue increased 75.5% at 125.4% to.
The 2.6 million and 6.3 million for the three and nine months ended September Thirtyth 2019, respectively.
Non same store growth as a result of opening additional wellness centers as well as wellness centers opened in the prior year maturing.
Before moving into the same store sales base.
Third quarter 2019, gross profit grew 13% to 27.3 million. However, looking at our base business, whose lens of gross profit we grew 47% to 39 million and realize an expansion of 80 basis points in adjusted gross margin.
Versus the prior year to 21% as we look ahead, we expect gross margin improvement to continue given the higher margin profile associated with a manufacturing business. Following the integration of Parago animal health.
General and administrative expenses increased in the third quarter due to the integration of Paraguay animal health into our consolidated financials.
Absent a step change in our product segment cost structure due to the acquisition, we would have achieved DNA leverage for the quarter.
Third quarter adjusted DNA was 23.3 million, an increased approximately 22 basis points compared to the prior year period. We expect this rate of change to increase in the fourth quarter due to the seasonally softer sales importantly, however, the higher gene a run rate is more than offset by the creative gross margin profile associated with it.
Our goal animal health business.
Third quarter 2019, adjusted EBITDA increased 44% to 19 point Threemillion and adjusted EBITDA margin was 10.5%, which represents a 20 basis point increase from the prior year period.
Interest expense was 5.7 million for third quarter, an increase of 3.6 million compared to the prior year period, while not a component of EBITDA. It's notable that interest expense was influenced by the financing of the Parago animal health acquisition in third quarter.
The higher interest expense, coupled with $12 million of nonrecurring costs related to the acquisition at Paraguay animal health, such as integration expenses, SKU rationalization and inventory purchase accounting adjustment drove the third quarter net loss of 8.8 million, that's compared to net income of 3.9 million in the prior year period.
Adjusted net income which includes the additional interest expense was 9.3 million for the third quarter 2019, compared to 8.2 million in the prior year period.
Turning now to the balance sheet.
The company had cash and cash equivalence of approximately 10.5 million as of September Thirtyth 2019.
In addition to our revolving credit facility, which had $92.5 million available at quarter end. Our total liquidity was approximately 103 million.
At the beginning of third quarter on July eight we closed $185 million acquisition of Parago animal health, which has now reflected in the third quarter balance sheet.
Including the acquisition. The company has net debt of 255 million as of September 32019, which translates to a net leverage ratio of approximately 3.6 times when compared against our full year 2019, Standalone adjusted EBITDA guidance of 56 million.
And including the 15.6 million I'm Synergized pro forma full year estimated 2019 EBITDA contribution of our Parago animal health asset. We're confident that we have a balanced capital structure in place that can support a rapidly growing product and service business to achieve our stated long term growth objectives, while simultaneously.
Okay, reducing leverage by one half turn on an annualized basis now onto our outlook.
The first nine months of 2019 have been exceptional and provides us great confidence in our forecast for the balance of the year, we're maintaining our 2019 guidance, which calls for consolidated net sales in excess of 680 million with it a adjusted EBITDA in excess of 62 million.
This is supported by pet accused Standalone guidance, which calls for consolidated net sales to exceed 650 million representing growth of at least 23% and for adjusted EBITDA to exceed 56 million representing a growth of at least 35% consolidated guidance also continues to assume parago animal health contribution.
One of at least 30 million in that sales at least 6 million of adjusted EBITDA.
As cord mentioned, we remain confident in our plan to open more than 80, new wellness centers in 2019, and we would refer you to our website for details on these locations.
We intend to update our full year 2020 outlook, which was provided in connection with the announcement of the Parago animal health acquisition in conjunction with our 2019 full year earnings release.
We remain confident in our long term 2023 growth objectives on a standalone basis, including net sales of approximately 1 billion adjusted EBITDA margin greater than 15% and a thousand wellness center locations.
In closing, we're very pleased with our year to date performance and remain excited about a future growth prospects with that overview, Susan coordinate I are available for your questions operator.
Thank you we will now begin the question answer session.
You asked a question you May press Star then one on your telephone keypad. If you are using speakerphone. Please pick up your handset buffer pricing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble a roster.
And our first question comes from Bill Chappell Suntrust. Please go ahead.
Thanks, Good afternoon.
Bill.
I I certainly appreciate the the breakout on EBITDA by Division I don't think I've seen that before is there something well I guess, we have availability of that going back maybe a year or two is are making at some point.
John do you want to answer that.
That's a good question bill the prior year will be included in the queue. So you will have visibility to that.
Okay, great. Thank you and then core just on the rollout of wellness centers, just trying to understand.
It seems you would always said it was going to be in the fall, but you know even 20 stores in the key how can a holiday month seems a little type. So just kind of help me understand how that plays out you know is there any risk to it is carrying over to next year and then as I look to next year would you expect the roll out to be similar.
Kind of second half weighted or should you have more doors opening in January and February and March.
Okay, Great question Bill.
We obviously knew when we made the decision to roll out at the time to get the deals ready to go was going to be backend weighted and we worked with all of our partners to put the scheduled together all of a regional partners signed off on the schedule at this point all the locations are under construction or getting ready to be started under construction and right now have.
No risk of all the locations be an opening before the ended the year. So we stand by the 80 locations that will be open in 29 team.
We've also talked about it takes time to get the team up and running in the deal flow running on the construction side of the business and we now have that team running and expected next year, you'll see a normal rollout of of locations opening evenly across all four quarters of next year. So this is a component of of just the timing of getting the program really ramped up.
Running this first year.
And should do not see normal flow next year.
Got it and you don't want to tell me, how many stores you're gonna open next year do you.
Will include the store count when we provide our full guidance in the when we release a full year earnings with from fourth quarter and full year.
Yeah, I'll stay tuned.
The product side.
Can you just has there been any changes to your contracts to your relationships with the with the online, especially retailers because over the past two months.
We have not had any changes to our contracts and the numbers reflect you haven't seen any fall off we're still doing business with all the customers.
And I think the bigger thing to appreciate as we talk about is just how what an important role and how much value we're creating in the market with the script generation that we're doing with the wellness plans and wellness clinics expansion and the number of pets that we're treating and so we're very confident that our relationships are in a very solid place and that we have a very protected model moving forward.
So as of right now we are having no changes to that those contracts.
Got it and then last one for me just as you look to kind of the spring reset. If it is you and did you close parago fairly early in the in the quarter or in.
Or early on you know how does the set up look with especially your brand and pet armor brand and shelf space and distribution I mean is it incremental do you move more to one brand versus the other <unk> do you know what the plans looked like at this point.
Yeah. That's a great question that allows us to address a couple of different points on it I think I think the first one is we organize ourselves very quickly.
After the closing to get our sales strategy and how we manage our customers quickly in a place where all of the line reviews for the year were reviewed as us owning the whole business and presented a unified front and all retailers were able to consider options for next year with five them, knowing who are running the business now the good news is we're.
Happy to report as I said in my script and in the release that we have visibility with the decisions that have been made that the business that we acquired will have growth next year greater than 15% because of that quick work. So we're very excited about the progress that we've made already through doing math.
The second part is we met with all the retailers we looked at what we think the best thing is for us to support the brands and continue to accelerate growth into the future and we are going to a more unified brand strategy, where we will consolidate into a single brands for formulations are retailers that has caused us to deal with some of that what you saw in our in.
Our.
Cost structure related to inventory that will be just continued as we've dealt with that but it's the right thing for the growth rate is the right thing for the long term support and how we're going to be investing our marketing dollars and again, we couldn't be more excited about already the progress we made in the visibility we see going into next year.
Great. Thanks, so much.
Yep.
Our next question comes from Joe Altobello with Raymond James. Please go ahead.
Hey, guys. Good evening. This is actually Adam on for Joe I had a couple of questions on the just a few more in the wellness center build that obviously the jury seems to be out on on where if Walmart fits into the wellness Center Buildout. So I was curious perhaps a tough question, but when will we know kind of it the concept works in Walmart a little bit more broadly.
And then separately I was kind of curious when we would get the first wellness centers.
Terms of rollout into it like us receiving adjusted results.
Okay. A couple of questions are I think I think the first thing we were talking about is one we're extremely excited that were literally opening up 35 locations in Walmart as we speak with a bunch of them already opening in the last 30 days and these are the first locations that we've done the diligence and know that weve used.
Our metrics for opening the locations and so we're excited to get those results started and be able to start talking about the locations that we have.
Our past history and funnel have you made those decisions. So we're extremely excited about that there's another 15 locations will open up right. After the first of the year. So it'll be 50, new Walmart locations essentially in a very condensed period of time with that same level of decision, making enrolling those in our relationship with Walmart is extremely.
The good I think we'll start to get information immediately from those locations and then we will build on that and as we get more confidence in understanding and clarity we'll share that information with you in the broader market on how they're working.
No John if you could take the question relative to when we start including the sales from the locations onto the onto the normal reporting versus the same stores analysis.
Sure based off of our definition of maturity. The first three stores that we opened a last year will be included and.
In our total sales base and earnings basing that Q4, this year and the remaining 17 will come on in Q1 in Q2.
Thanks, guys, that's really helpful and if I could just squeeze one more and I was curious if you could maybe remind us your expectations again for the wellness centers in terms of.
Store economics in terms of average annual revenue per center margins I'm, just some more color on that would be great.
Yeah, we.
We'd be we've actually got you said, we're very excited about what our community clinics are doing and how they're performing as we've converted some of those locations and we quickly seem them ramp to similar volume ranges that we got out of other stores. So we have discussed for different revenue ranges from 400000 500000 $600000 per year in annualized.
All of them.
With EBITDA margins at 13% 20, mid 20% that that 500 range and up in the mid Thirtys one rep at $600000. We are seeing those numbers flow through mature locations. We already operate. So we know there are real and we're running our plc in that flow through in the community clinics and we'd expect that people can.
Model their business in that mid to the high end of that range of those two different store economics.
Great. That's helpful. Good luck rest of your guys.
Thank you.
Our next question comes from Brian Nagel with Oppenheimer. Please go ahead.
Hi, good afternoon, thanks for taking my questions.
So I wanted to our focus first just on on the wellness business and.
Thanks for all the details here, but one question I haven't and maybe Simplistically, but just help me understand better just the rate of sales growth within the within division.
Slowed pretty meaningfully from early this year through a third quarter I understand there's lots going on what really explains that that slowdown in total told the growth.
This growth.
No I, Brian I'll, let Susan answer that question. She is so much closer to it so Susan why don't you got to take that question.
Yes, happy to high Brian and I know there the sales, but the sales growth that you're seeing is really part of our are going forward model. Its part of the conversion of the community clinics.
So you if you remember back in <unk> towards the end of 2018, that's when we started to initiate those conduct community clinic conversion into wellness centers.
When we convert those clinics, we increased pets and we increased revenue. So for example, we go from basically seeing 100 pets per month to somewhere between 250 to 300 pets per month, so pets and revenue grow however, because.
At the end of the day the revenue. It is no longer seems a same store comparison. It goes into the Nonstate same store comparison bucket. So it moved out of that that bucket that at currently resides in today.
I think it's important to note, though their Q2 items that we're very mindful of 'em. We stay focused on number one is that we continued to fill that community clinic funnel because that really is I think cord cord talked about it being our competitive moat. Nobody else has this we take those community clinics, we gotta continued to fill.
That funnel, so that they mature and then as they mature we basically pull them off the top our objective is to maintain our top line, we want our top line to be study and as we've converted those clinics from the end of last year ended this year, we're doing exactly that I think net net though this really is part.
Bringing our services side of the business to half billion dollars over the next five years.
Brian I think that's most important to really understand that we've consciously taken best locations put them in a model that we can accelerate the growth even faster and as those mature that 18 months and we start consistently adding those month after month, you'll see the sales hockey stick happened very quickly and you'll see that 80 plus million in service revenue start to ramp.
Towards the 600 million plus number that we are messaging and our growth rate of that of the services in the company. So it's actually very exciting part of our business model. This investment, we're making now to accelerate to that number we want in the future.
Got it that's helpful. The second question, what asking it's a good calc discussion there but.
No the onset of this the.
Clinic business, there's a lot we talked a lot about benefit or do the potential benefit to product sales good stores, where they would the clinic is operated so now that we're shifting from opening clinics greenfield to more of this conversion from community centers to wellness. How is bad Guy never taking how is that dynamic unfolding or you are you seeing better price.
Sales and these stores as the babies wellness centers ramp resins conversion is taking place.
I think Brian it's the ramp in treating more pads and giving advice for those pet owners to buy pet products, whether its prescriptions are over the counter medications creates a tremendous amount of leverage for pad I Q and as part of the most supertex our business for the long term, we are seeing our ability as people see us making investments to grow.
That number into attracts pets into every outlet that we do business with whether it is in a pet specialty retailer or its business. We do with some on one of the online retailers or it's another brick and mortar Greenfield location. In every case, that's part of the leverage is part of the story and we're not just a company selling an item to any of these retailers.
We're bringing entire package of value and we talked about in my script that people are looking for people that are providing more than just an item enterprise and so that leverage we have is something that we are absolutely using everyday and it's why you're seeing some of the growth. We're already caffery next year for the.
Parago business, we acquired because that's the strength of our leverage on top of their business and why that growth is happening quickly and so we're not we're not afraid to ask for a favor in return them, we're providing extra value and I think you're seeing that leverage come through and why we continue to see sales numbers and earning that things go in the direction, they're going and it's going to continue to be leverage we have that not only benefit.
Retailer, but it also benefits the partners, we work with industry before so.
We're very excited about seen how it works so.
Well that answers your question.
Yes. Thanks appreciate it.
Our next question comes from Kevin Grundy with Jefferies. Please go ahead.
Hey, good afternoon guys.
<unk> quarter I wanted to come back to the the whole going direct.
Conversation, because it's coming up a lot in conversations with investors I suspect, it's coming up a lot. When you. When you are speaking with shareholders as well.
Maybe delineate a bit between I guess, the exclusivity that we sort of understood that pet I Q had a with some big drug manufacturers versus what has sort of played out now in terms of what's your selling into online retailers on the Rx side versus what they are now.
Selling direct maybe you could help us out with that a bit and then sort of longer term.
How would you sort of characterize the risk to your Rx business. So said differently I mean, if they're going direct now with some of these products what preclude them if anything what's the value proposition for pet Ifyou in order to maintain its value within within the supply chain and then related to that what do you see is the risks to own ODC outside of.
Right.
Yes. Thanks for the question, Kevin I appreciate the opportunity to answer it.
I will take it backwards.
If I missed one of your questions, let me know.
The LTC part of our business, we see no risk in that business and today. The LTC is 50% of our distribution business. The reason I say that is we do value added manufacturing in every case to help those items be ready for retail includes repackaging. It includes security sagging. It includes a number of different things in different case.
Pack sizes to make the inventory dollars work for retailers.
And what we charge for all that work is something that would be very difficult for someone said to replicate so we feel very safe our contracts or with plenty of term men and went to work, we're doing and the quality job we're doing for.
Our partners, we see that not having an issue renewing is as those contracts come to renewal time period.
On the Rx side of the business. We also have contracts that have terms and does that have retailers name by name and we see no risk of those through that due to the length of those contracts and really have no reason to believe why they would not renew.
At the time because of the amount of value, we're creating for those customers and so when you look at our base business that youre seeing reporting and how it's working it's all in a very good place where you've seen some noise in the market is you have a couple of the major manufacturers that we do not make them a priority in our in our business in other areas.
It's difficult to make them happy and they've chosen to be direct to in some of those retail customers, where we are not under contract.
I don't know of anyone that's been able to keep all four of the major manufacturers happy to that level and so they have been in that way and so it creates a lot of noise out there I think the second component is people. We do distribute for today have added Matt policies or minimum advertise pricing policies with our customers.
And through those policies. They do have contracts with all of our customers were based on the retailers behavior. They get additional marketing fronds from those manufacturers and so some of the retailers have been out there talking about their direct relationships, but today those direct relationships, our marketing funds coming from the manufacturers.
Their purchase orders and their conversion of cash is running through our business into our warehouses and through our trucks.
Okay. So just a core just to be very clear with that let us is exclusively selling through do you guys are in turn selling some of these online retailers. They are by no means selling directly to the online retailers that correct.
Today, there's no direct sales then we're going to online retailers around us for Zoetis, we're handling all of their business. They do have marketing contracts now where they are paying those retailers.
But today there is no change.
Okay.
And then core just an update on how big the Rx business is broadly and then the online piece can you can you frame that are John .
Yeah, we're not going to comment on that right now we've been asked Mike So our customers Inox comment on that the amount of concentrated volume we have with a couple of the retailers. So.
We won't comment on that today Kevin.
Okay Fair enough couple of more cleanups for me.
John free cash flow no. So so cash flow through year to date.
It is down.
And they are it appears to be up quite a bit in some of this I suspect is from a closing of the Parago deal can you help us with cash flow expectations now for the fourth quarter and then presumably based on your comments.
Lets fixation would be that [noise] free cash flow looking out to next year is good. This is levered free cash flow he'd be like in the circa 35 million kind of range.
Based on the comment that Leverages donkey declined by about half a turn a year can you just confirmed both of those things.
Yeah, Kevin Great question, you are correct.
On all accounts.
Our cash flow of free cash flow, we did invest in the changes in working capital as a us specifically the accounts receivable that you called out.
Through the first three quarters, if you noticed a Q3, we actually had significant cash generation.
And that will continue into Q4 as well you're also correct in your statement regarding next year and beyond and our cash generation F 35.
Yes.
Okay, one last one or court probably for you.
Flea and tick categories, so looks pretty bad in the Nielsen data year to date down 3% for your growth is.
Quite good X parago up 29%, what do you think the flea and tick category is doing all channel and then maybe you can kind to help us a little bit.
In terms of what the channel growth rates are just to sort of better understand what the industry's doing what that looks like broadly by channel.
And then maybe some context in terms of what's your market share looks like or I could stop there. Thank you got.
Thanks, Kevin I think the big thing to understand obviously is what we always talk about is that a significant portion of our businesses in non measured channels and those are measured channels are some of the things that happen in the club channel online.
The name a couple the pharmacy business also is on measured and the flea and tick cadre. Obviously has had a ton of growth in chewable flea and tick that we participate in and and those are all good sales drivers for the company and a good diversification the topical business has been.
Down in the measured channels and it's been primarily because a lot of those topical businesses has been up significantly online.
So our business in the Parago businesses up significantly at the major online retailers and more than offset the declines that we've seen in brick and mortar.
Stores at this point, so it's fun to be at a place where you see lens of the whole market and still see the products doing well, but it's also fund to know that we have a great diversified position across all channels to where we are still seeing good growth in the category, even though the market's measured is down it's why we tell people to be very cautious about how they use that goes without.
No in seat exactly what's happening at some of those major dot coms, you're gonna be difficult to.
Used that as a relevant piece of data for how companies going to perform.
Okay. Thank you guys. Good luck.
Yep.
Once again, if you have a question. Please press Star then one on your telephone keypad.
And our next question is from David Westenberg with Guggenheim Securities. Please go ahead.
Hi, Thanks for taking the questions. So factoring in the year Cabrera I think you've given data in the past about adding one year you can get that 375 is that tracking and just in terms out is there a seasonal component in terms of tracking to that one year. So.
If you open up the clinic say in the middle of the somewhere mid maybe you Miss those months you win track to that that figure just any kind of early gate and how you're thinking about the image or clinics and revenue components that.
So as we'd like to take huh.
Yes sure David Thank you.
The beginning of your question you could cut out and I Didnt hear the beginning of the question you're talking about clinic ramp up yes.
Hi, Jeff you given data in the past that you would stack $375000 in year. One on and then just wondering if that is going to expectation. Then in addition to that if theres a seasonal component to getting that 375, I'm kind of figure in terms of when you open it up during the year, because obviously that if you.
Open up yes, and get that month, it's probably better.
It did they are definitely yes, so I in Europe . The your question is is a good when it goes back to why the questions that was asked earlier really just about the timing of our opening up these wellness clinics because in the end it makes tons of sense for us to be opening these up right around the holiday season, because as you can probably guess people are thinking about their pets in November and.
Remember a whole lot, but when it comes spring you want to be opening you want to have those clinics up and running so that is one of the reasons why we continued to push some of our clinic openings to the back half of this year. So that we can take full advantage of flea and tick season at the beginning of the year. So I am very similar if you take a look at flea and tick season.
I would say that that the veterinary services business follows along with that cadence because that's when people are thinking of their pets. That's when they have issues and that's when they have problems. So it's going to be more heavily weighted to the beginning of year less heavily weighted to the back half Didier.
Having said that well we are seeing with the conversion locations is were up in those ranges within four to six months, which means were well below the 18 months weve message for prior locations. They will continue to mature and continue to grow and we see locations that are opened you know multiple years, it's still attract new pads and pet owners and continued.
To grow beyond that so.
The ramp to the 375 400 and beyond that number happens I'm very easily inside of that six to 12 months and we've seen it so far in that four to six months into conversions. The Greenfield locations. We're excited for these new Walmart locations to get another set of data points to see how fast that can happen when we're using our metrics and in those locations and will.
The report more on that as we get more data.
Okay.
On late So then then animal health company that you distribute for now they are going to be getting 150, there. They think they can get a 150 million in new market share gain how big an opportunity do you think that is is for you in terms of Bob.
Pickup there I don't know sensitivity with customers how much can answer on that but it seems like that would be a pretty interesting opportunistically.
Yes, it's a great question, David we it's always hard for say how much is the number but I will tell you. When you look back to the launch of like a next guard and how the next card business contributed and ramps.
And our participation our channel gets its fair share we have the most and biggest net to catch up on that comes over that's an item thats going to take share, but likely what is going offset we have some from something else because it is moving kind of the chips around on the table by what's good is we have that item. It's an item that we think as a lot of potential to do volume.
And we're going to be in a position to make sure that we get to participate in what are the ever incremental growth. It drives we still get more growth from.
Parents moving their business away from events our channel.
And that's a more that's a larger component of our growth rate and why we continue to have growth like we had this this quarter, where we had 29% organic growth and 42% total growth, which is still a number that we continue to just see just how well people are looking for a way to save money on pet health care impact has been purpose.
Built to provide that value.
I think within that.
And our next question comes from Jon Andersen with William Blair. Please go ahead.
Good afternoon everybody.
I'd like to ask about conversions of community clinics.
Could you talk a little bit more about the criteria.
That you use to decide whether to convert a clinic.
To a wellness center and how deep kind of the pipeline of community clinics that meet that criteria.
Today.
Thanks, The question John I'll, let Susan answer that question.
Yes, happy today, Hi, John So if if the model basically follows the cadence of what we do with our community clinics. So if you if you remember what happens with our community clinics, we basically open them up and we had a clinic once a month. We then once once the pet growth basically gets to a certain level. We then make it twice a month.
In three times a month and then we go to weekly once we get to the point, where we're at about 100 pets a per clinic. That's when we tend to take to make the conversion into into a wellness center. So we've got a pipeline of those of those community clinics that are already at that level, but but I would say that pets is number one the second is good.
To be that so if I could if I could develop a mantra, it's all about pets and bats seriously. So we get the number of pets that we need in order to be able to convert that clinic number one but then we also need to make sure that we've got the ability to ramp to victory. That's in the area in order to be able to become full time veterinarians and as well.
Centers. So we've got a laser focus on on those two things another thing that I would want to want to highlight is what we put in place. This year was we separated our teams. So we had an operational team, but what we really needed was a grand opening team as well too. So we we split the team for us.
In order to be able to really have a very well orchestrated model. So we have a grand opening team they're responsible for the pre launch the soft opening up into the point, where we get to that launch. They then turn it over to the operational team. So it's it's all making sure that number one we got the pet sneaked up that and that we've done.
The team basically on the ground in place to make sure that we can absolutely operate moving forward.
Okay. That's helpful. The.
Is there anything.
Are you doing anything different with the 50.
Or so we knew Walmart locations that we'll be opening.
This quarter and and in Q1.
Is it just in your mind is it just come down to location or to try and you'll get a better outcome or are there other.
Levers that you'd marketing levers that you might be pulling back.
Well merchandising levers to build awareness and trial.
Yeah no. It's it's it's it's a good question and you, but you're you're absolutely right location is number one at the end of the day. We have to have you have to have number one. The population you have to have people that that hit that take care of their pets that want the service side of the business and then number three you've got to have that.
So again it comes back to pets in bad so so having a good location, where you've got some when you where you got a population base that's going to take care of their bet. There. Their pet is first and foremost but back to your question on do we do and are we doing anything different with the with the Walmart openings, we actually are working at partner.
Ship with Walmart for this next round of a 50 openings that we have with them, but again it comes back to we do not we're not changing our model from the model that we developed and the team that we put in place at the beginning of this year, which is having a grand opening team, having an operational team, making sure that we've got a very consistent.
I don't Orkin orchestrated cadence around prelaunch soft opening launch and then post launch and that literally prelaunch starts two months before the clinic openings. So we have events that happened in conjunction with our retailers to make sure that they are on board to make sure that we're all in the same page with with the opening of these clinics and walmarts been.
Great that's been a great partner, especially with these next 50 clinics coming up they've been they've been they've been very helpful in enough getting them up and running.
Okay on the the product business.
Can you talk a little bit about the the progress that that you're making on your own you'll manufactured items, which which are obviously.
Critical to the overall margin because of the business and then the second part to that question is just accord you you mentioned a couple times debt.
You see.
Pit the Parago animal health business growing at 15%.
Or more next year.
How about.
Your own base or the legacy manufactured product business will that do you expect that to keep keep kind of a similar pace. Thanks.
Yes. Thanks for the question then yeah right now we are seeing all of our manufactured product growing.
At that similar rage on and like I said, it's something that you always wonder when you close the transaction that late in the year and that close a line reviews. If you can get something.
Implemented as fast and make the progress you're you're going to want to make but yeah. We've definitely been able to get out and see there was business that wasn't being taken care of properly that we could support we'd be able to see where investments were not made properly against the brand were dollars were wasted that investment property will drive the sales and so we definitely visibility to the Parago business.
Will grow at that 15% and we absolutely have beings in play that are working across our other manufactured products that are going to create similar type growth rates and expanded a customer relationships as we talk about as we leverage the total model to get more things done it's working across all aspects of our business and so we still see plenty of room for growth across.
All of it.
That's great. Thanks, so much good luck.
This concludes our question answer session I'd like to turn the conference back over to court Christiansen for any closing remarks.
Thanks, everybody for joining us today and for being part of our Q3, calling and listening to the update on our company in our business. We appreciate everyone's attendance, we're super excited about our sales and our sales growth in our results again for this quarter as we continue to work hard to deliver state admission to delivery smarter way for pet parents to help there.
At.
Live the best lives through convenient access to affordable product is products and services and we know it's working as we continue to see the numbers for the right direction and look forward to interacting with all of you through the next quarter and reporting a full year.
Results. Thanks again for your time will be in touch soon.
Good night.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.